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EXCEL - IDEA: XBRL DOCUMENT - TEKELEC | Financial_Report.xls |
EX-31.1 - EX-31.1 - TEKELEC | g24028exv31w1.htm |
EX-10.1 - EX-10.1 - TEKELEC | g24028exv10w1.htm |
EX-31.2 - EX-31.2 - TEKELEC | g24028exv31w2.htm |
EX-32.1 - EX-32.1 - TEKELEC | g24028exv32w1.htm |
EX-10.2 - EX-10.2 - TEKELEC | g24028exv10w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 0-15135
(Exact name of registrant as specified in its charter)
California | 95-2746131 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
5200 Paramount Parkway
Morrisville, North Carolina 27560
(Address and zip code of principal executive offices)
Morrisville, North Carolina 27560
(Address and zip code of principal executive offices)
(919) 460-5500
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ
No o
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
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of July 30, 2010, there were 68,457,251 shares of the registrants common stock, without par
value, outstanding.
TEKELEC
TABLE OF CONTENTS
FORM 10-Q
TABLE OF CONTENTS
FORM 10-Q
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Thousands, except share data) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 226,291 | $ | 277,259 | ||||
Trading securities, at fair value |
| 81,788 | ||||||
Put right, at fair value |
| 11,069 | ||||||
Accounts receivable, net |
138,346 | 157,369 | ||||||
Inventories |
28,246 | 23,353 | ||||||
Income taxes receivable |
| 1,617 | ||||||
Deferred income taxes, current |
44,354 | 66,758 | ||||||
Deferred costs and prepaid commissions |
45,768 | 56,645 | ||||||
Prepaid expenses |
6,319 | 7,007 | ||||||
Other current assets |
5,846 | 1,943 | ||||||
Total current assets |
495,170 | 684,808 | ||||||
Property and equipment, net |
35,500 | 35,267 | ||||||
Deferred income tax assets, net, noncurrent |
46,236 | 39,153 | ||||||
Other assets |
1,328 | 1,661 | ||||||
Goodwill |
134,119 | 42,102 | ||||||
Intangible assets, net |
107,889 | 31,017 | ||||||
Total assets |
$ | 820,242 | $ | 834,008 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 32,952 | $ | 28,114 | ||||
Accrued expenses |
19,639 | 25,372 | ||||||
Accrued compensation and related expenses |
18,995 | 40,980 | ||||||
Current portion of deferred revenues |
125,961 | 149,065 | ||||||
Income taxes payable, current |
2,161 | | ||||||
Total current liabilities |
199,708 | 243,531 | ||||||
Deferred income tax liabilities, noncurrent |
8,338 | 5,477 | ||||||
Long-term portion of deferred revenues |
5,471 | 5,590 | ||||||
Other long-term liabilities |
5,346 | 4,863 | ||||||
Total liabilities |
218,863 | 259,461 | ||||||
Commitments and Contingencies (Note 9) |
||||||||
Shareholders equity: |
||||||||
Common stock, without par value, 200,000,000 shares authorized;
68,456,639 and 67,382,600 shares issued and outstanding, respectively |
345,030 | 330,909 | ||||||
Retained earnings |
264,960 | 241,820 | ||||||
Accumulated other comprehensive income (loss) |
(8,611 | ) | 1,818 | |||||
Total shareholders equity |
601,379 | 574,547 | ||||||
Total liabilities and shareholders equity |
$ | 820,242 | $ | 834,008 | ||||
See notes to unaudited condensed consolidated financial statements.
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Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Thousands, except per share data) | ||||||||||||||||
Revenues |
$ | 109,507 | $ | 114,183 | $ | 225,498 | $ | 230,841 | ||||||||
Cost of sales: |
||||||||||||||||
Cost of goods sold |
36,586 | 36,364 | 75,190 | 76,713 | ||||||||||||
Amortization of intangible assets |
3,967 | 1,515 | 5,500 | 3,032 | ||||||||||||
Total cost of sales |
40,553 | 37,879 | 80,690 | 79,745 | ||||||||||||
Gross profit |
68,954 | 76,304 | 144,808 | 151,096 | ||||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
21,763 | 25,551 | 44,572 | 51,403 | ||||||||||||
Sales and marketing |
18,229 | 17,110 | 35,666 | 34,406 | ||||||||||||
General and administrative |
12,807 | 13,717 | 25,957 | 27,140 | ||||||||||||
Amortization of intangible assets |
1,021 | 315 | 1,251 | 633 | ||||||||||||
Acquisition-related expenses |
2,484 | | 2,484 | | ||||||||||||
Total operating expenses |
56,304 | 56,693 | 109,930 | 113,582 | ||||||||||||
Income from operations |
12,650 | 19,611 | 34,878 | 37,514 | ||||||||||||
Other income (expense), net: |
||||||||||||||||
Interest income |
127 | 264 | 269 | 634 | ||||||||||||
Interest expense |
(54 | ) | (57 | ) | (121 | ) | (112 | ) | ||||||||
Impairment of investment in privately held company |
| (2,758 | ) | | (2,758 | ) | ||||||||||
Gain on investments carried at fair value, net |
38 | 321 | 118 | 1,435 | ||||||||||||
Foreign currency loss, net and other |
(1,025 | ) | (402 | ) | (2,125 | ) | (1,820 | ) | ||||||||
Total other expense, net |
(914 | ) | (2,632 | ) | (1,859 | ) | (2,621 | ) | ||||||||
Income from operations before provision for income taxes |
11,736 | 16,979 | 33,019 | 34,893 | ||||||||||||
Provision for income taxes |
2,314 | 7,226 | 9,879 | 12,775 | ||||||||||||
Net income |
$ | 9,422 | $ | 9,753 | $ | 23,140 | $ | 22,118 | ||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.14 | $ | 0.15 | $ | 0.34 | $ | 0.33 | ||||||||
Diluted |
0.14 | 0.14 | 0.34 | 0.33 | ||||||||||||
Weighted average number of shares outstanding: |
||||||||||||||||
Basic |
68,374 | 66,744 | 68,005 | 66,514 | ||||||||||||
Diluted |
68,946 | 67,502 | 68,856 | 67,185 |
See notes to unaudited condensed consolidated financial statements.
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Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Thousands) | ||||||||||||||||
Net income |
$ | 9,422 | $ | 9,753 | $ | 23,140 | $ | 22,118 | ||||||||
Other comprehensive
income (loss): |
||||||||||||||||
Foreign currency
translation
adjustments |
(5,889 | ) | 1,535 | (10,429 | ) | 431 | ||||||||||
Comprehensive income |
$ | 3,533 | $ | 11,288 | $ | 12,711 | $ | 22,549 | ||||||||
See notes to unaudited condensed consolidated financial statements.
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Six Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
(Thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 23,140 | $ | 22,118 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Impairment of investment in privately-held company |
| 2,758 | ||||||
Gain on investments carried at fair value, net |
(118 | ) | (1,435 | ) | ||||
Provision for doubtful accounts and sales returns |
244 | 185 | ||||||
Provision for warranty |
(347 | ) | 5,000 | |||||
Inventory write downs |
2,176 | 1,207 | ||||||
Loss on disposal of fixed assets |
13 | 54 | ||||||
Depreciation |
8,258 | 9,358 | ||||||
Amortization of intangible assets |
6,751 | 3,665 | ||||||
Amortization, other |
424 | 375 | ||||||
Deferred income taxes |
4,080 | 5,877 | ||||||
Stock-based compensation |
6,943 | 6,973 | ||||||
Excess tax benefits from stock-based compensation |
(861 | ) | (544 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
18,333 | 46,101 | ||||||
Inventories |
(6,980 | ) | (8,168 | ) | ||||
Deferred costs |
10,474 | 11,133 | ||||||
Prepaid expenses |
568 | 1,175 | ||||||
Other current assets |
(1,102 | ) | 44 | |||||
Accounts payable |
(755 | ) | 3,947 | |||||
Accrued expenses |
(5,525 | ) | (10,663 | ) | ||||
Accrued compensation and related expenses |
(22,555 | ) | (14,219 | ) | ||||
Deferred revenues |
(26,151 | ) | (43,858 | ) | ||||
Income taxes receivable |
1,617 | (777 | ) | |||||
Income taxes payable |
2,608 | (5,725 | ) | |||||
Total adjustments |
(1,905 | ) | 12,463 | |||||
Net cash provided by operating activities continuing operations |
21,235 | 34,581 | ||||||
Net cash used in operating activities discontinued operations |
| (184 | ) | |||||
Net cash provided by operating activities |
21,235 | 34,397 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from sales and maturities of investments |
92,975 | 5,500 | ||||||
Acquisition of Camiant and Blueslice, net of cash acquired |
(161,953 | ) | | |||||
Purchases of property and equipment |
(7,523 | ) | (12,138 | ) | ||||
Net cash used in investing activities |
(76,501 | ) | (6,638 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuances of common stock |
9,863 | 5,987 | ||||||
Payments of net share-settled payroll taxes related to equity awards |
(2,685 | ) | (1,660 | ) | ||||
Excess tax benefits from stock-based compensation |
861 | 544 | ||||||
Net cash provided by financing activities |
8,039 | 4,871 | ||||||
Effect of exchange rate changes on cash |
(3,741 | ) | 834 | |||||
Net change in cash and cash equivalents |
(50,968 | ) | 33,464 | |||||
Cash and cash equivalents, beginning of period |
277,259 | 209,441 | ||||||
Cash and cash equivalents, end of period |
$ | 226,291 | $ | 242,905 | ||||
See notes to unaudited condensed consolidated financial statements.
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TEKELEC
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 Basis of Presentation and Changes in Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the
accounts of Tekelec and our wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The accompanying unaudited condensed consolidated financial
statements have been prepared on substantially the same basis as the audited consolidated financial
statements included in our Annual Report on Form 10-K for the year ended December 31, 2009.
Certain information and footnote disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles in the United States have been
condensed or omitted pursuant to the instructions for Form 10-Q and Article 10 of Regulation S-X.
In the opinion of management, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for
a fair statement of our consolidated financial condition and consolidated results of operations.
The results of operations for the current interim period are not necessarily indicative of results
for the current year. Certain prior period amounts have been reclassified in order to conform to
the current periods presentation.
We operate under a thirteen-week calendar quarter. For financial statement presentation
purposes, the reporting periods are referred to as ended on the last calendar day of the quarter.
The accompanying unaudited condensed consolidated financial statements for the three and six months
ended June 30, 2010 and 2009 are for the thirteen and twenty-six weeks ended July 2, 2010 and July
3, 2009, respectively.
The accompanying unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements for the year ended December 31, 2009 and the
notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2009.
Recent Accounting Pronouncements
Revenue Recognition for Arrangements with Multiple Deliverables
In September 2009, the Financial Accounting Standards Board (FASB) amended the accounting
standards for revenue recognition to remove tangible products containing software components and
non-software components that function together to deliver the products essential functionality
from the scope of industry-specific software revenue recognition guidance. As a result, these
arrangements are accounted for in accordance with the new, non-software guidance for arrangements
with multiple deliverables.
The FASB also amended the accounting standards for revenue recognition for arrangements with
multiple deliverables. The new authoritative guidance for arrangements with multiple deliverables
requires that arrangement consideration be allocated at the inception of an arrangement to all
deliverables using the relative selling price method. It also establishes a selling price
hierarchy for determining the selling price of a deliverable, which includes: (i) vendor-specific
objective evidence (VSOE) if available; (ii) third-party evidence (TPE) if vendor-specific
objective evidence is not available; and (iii) best estimated selling price (BESP) if neither
vendor-specific nor third-party evidence is available. The new guidance eliminates the residual
method of allocation for multiple-deliverable revenue arrangements which we used historically when
we applied the software revenue recognition guidance to our multiple element arrangements.
We elected to early adopt, as permitted, the new authoritative guidance on January 1, 2010, on
a prospective basis for applicable transactions originating or materially modified after January 1,
2010. As substantially all of our telecommunications products include both tangible products and
software elements that function together to deliver the tangible products essential functionality,
the existing software revenue recognition guidance no longer applies to the majority of our
transactions. The adoption of the new, non-software revenue recognition guidance did not have a
material impact on the timing, pattern, or amount of revenue recognized in the second quarter and
first half of 2010, primarily due to (i) a portion of second quarter and first half 2010 revenue
being derived from the backlog of orders which were received prior to January 1, 2010 and therefore
not falling under the new non-software revenue recognition guidance, and (ii) the new, non-software
revenue recognition guidance not differing significantly from the software revenue recognition
guidance when applied to acceptance based arrangements and
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arrangements that are received and
fulfilled within the same quarter. Based on currently available information, we anticipate that
the impact of adopting this guidance on revenue recognition will not be material for our 2010
results. However, this assessment may change because such impacts depend on terms and
conditions of arrangements in effect in those future periods.
The new guidance does not generally change the units of accounting for our revenue
transactions as most of our products and services qualify as separate units of accounting.
Substantially all of our revenues are derived from sales or licensing of our (i) telecommunications
products, (ii) professional services including installation, training, and consulting services, and
(iii) warranty-related support, comprised of telephone support, repair and return of defective
products, and product updates. Our customers generally purchase a combination of our products and
services as part of a multiple deliverable arrangement, and many of our arrangements have both
software and non-software components that function together to deliver the products essential
functionality. Our arrangements generally do not include any provisions for cancellation,
termination, or refunds that would significantly impact recognized revenue.
For substantially all of our arrangements, we defer warranty and professional services
revenue, and recognize revenue for all products in an arrangement when persuasive evidence of an
arrangement exists and delivery of the product has occurred, provided the fee is fixed or
determinable, and collection is deemed probable as discussed in more detail below. In instances
where final acceptance of the product is based on customer specific criteria, revenue is deferred
until the earlier of the receipt of customer acceptance or the expiration of acceptance period.
Warranty revenue is recognized ratably over the term of the standard warranty based on the number
of days of warranty coverage during each period. Professional services revenue is typically
recognized upon completion of the services for fixed-fee service arrangements, as these services
are relatively short-term in nature (typically several weeks, or in limited cases, several months).
For service arrangements that are billed on a time and materials basis, we recognize revenue as
the services are performed.
For transactions entered into prior to January 1, 2010 and not materially modified after that
date, we recognize revenue based on the existing software revenue recognition guidance,
historically referred to as SOP 97-2 Software Revenue Recognition (SOP 97-2). Under this
guidance, the entire fee from the arrangement is required to be allocated to each respective
element based on its relative selling price using VSOE. Sales of our products generally include at
least a year of warranty coverage. Since we do not sell our products separately from this warranty
coverage, and we rarely sell our products on a standalone basis, we are unable to establish VSOE
for our telecommunications products. Accordingly, we utilize the residual method to allocate
revenue to each of the elements of an arrangement. Under the residual method, we allocate the
total fee in an arrangement first to the undelivered elements (typically professional services and
warranty services) based on VSOE of those elements, and the remaining, or residual portion of the
fee to the delivered elements (typically the product or products).
For transactions entered into after January 1, 2010, we recognize revenue based on the new
non-software revenue recognition guidance. We allocate consideration to each deliverable in an
arrangement based on its relative selling price. We follow a hierarchy to allocate the selling
price of VSOE, then TPE and finally BESP. Because we rarely sell our products on a stand-alone
basis or without warranty coverage as discussed above, we are not able to establish VSOE for our
telecommunications products. Additionally, we generally expect that we will not be able to
establish TPE due to the nature of our products and the markets in which we compete. Accordingly,
we expect the selling price of our proprietary hardware and software products to be based on our
BESP. For third party off the shelf hardware products, we utilize TPE, as there is a well
established market price for these products. We have established VSOE for our services and
maintenance offerings and, therefore, we utilize VSOE for these elements.
Since the adoption of the new guidance, we have primarily used the same information used to
set pricing strategy to determine BESP. We have corroborated the BESP with our historical sales
prices, the anticipated margin on the deliverable, the selling price and profit margin for similar
deliverables and the characteristics of the varying geographical markets in which the deliverables
are sold. We plan to analyze the selling prices used in our allocation of arrangement
consideration at least semi-annually. Selling prices will be analyzed more frequently if a
significant change in our business necessitates a more timely analysis.
Each deliverable within our multiple deliverable revenue arrangements is accounted for as
a separate unit of accounting under the new guidance if both of the following criteria are met: (i)
the delivered item or items have value to the customer on a standalone basis; and (ii) for an
arrangement that includes a general right of return relative to the delivered item(s), delivery or
performance of the undelivered item(s) is considered probable and substantially in our control. We
consider a deliverable to have standalone value if the item is sold separately by us
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or another
vendor or if the item could be resold by the customer. Further, our revenue arrangements generally
do not include a general right of return relative to delivered products. Deliverables not meeting
these criteria are combined with a deliverable that does meet that criterion. The appropriate
allocation of arrangement consideration and recognition of revenue is then determined for the
combined unit of accounting.
The following table shows the total revenue for the three and six months ended June 30, 2010
recognized according to the software and the new non-software revenue recognition guidance (in
thousands):
Three Months | Six Months | |||||||
Ended | Ended | |||||||
June 30, 2010 | June 30, 2010 | |||||||
New non-software revenue recognition rules(1) |
$ | 49,993 | $ | 75,528 | ||||
Existing software revenue recognition rules |
59,514 | 149,970 | ||||||
Total |
$ | 109,507 | $ | 225,498 | ||||
(1) | For the reasons discussed above, the timing of the revenue recognized for the three and six months ending June 30, 2010 would not have been materially different if we had recorded it under the existing software revenue guidance. |
The following table shows the total deferred revenue as of June 30, 2010 accounted for
according to the software and the new non-software revenue recognition guidance (in thousands):
June 30, | ||||
2010 | ||||
New non-software revenue recognition rules |
$ | 10,214 | ||
Existing software revenue recognition rules |
121,218 | |||
Total |
$ | 131,432 | ||
Fair Value Measurements and Disclosures
In January 2010, the FASB issued Accounting Standards Update 2010-06 Improving Disclosures
about Fair Value Measurements. This Update amends the authoritative guidance for fair value
measurements and disclosures by adding new disclosure requirements with respect to transfers in and
out of Levels 1 and 2 fair value measurements, as well as by requiring gross basis disclosures for
purchases, sales, issuances, and settlements included in the reconciliation of Level 3 fair value
measurements. This Update also amends the authoritative guidance by providing clarifications to
existing disclosure requirements. The new disclosures and clarifications of existing disclosures
are effective for interim and annual reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements which are effective for fiscal years beginning after
December 15, 2010 and for interim periods within those fiscal years. Early adoption is permitted.
We adopted this new guidance, including the guidance related to the disclosures about
purchases, sales, issuances, and settlements in the roll forwards of activity in Level 3 fair value
measurements, on January 1, 2010. The adoption of this guidance did not have a material impact on
our financial position or results of operations.
Note 2 Acquisitions
In the second quarter of 2010 we completed the acquisition of Camiant, Inc. (Camiant) and
Blueslice Networks, Inc. (Blueslice) for cash consideration of $127.0 million and $35.0 million,
respectively, for an aggregate of $162.0 million. We have included the results of operation of
these acquisitions in our consolidated results from the date of acquisition. Expenses associated
with these acquisitions consist primarily of legal and professional fees and totaled $2.5 million
during the three and six months ended June 30, 2010. These costs were expensed as incurred and are
recorded separately in the accompanying unaudited consolidated statement of operations under the
heading Acquisition-related expenses.
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Acquisition of Camiant
On May 7, 2010, we completed the acquisition of Camiant, a provider of real time policy
control solutions, through a merger with our newly formed wholly-owned subsidiary after which
Camiant was the surviving entity. Camiants multimedia policy solutions allow service providers
to leverage and monetize their network investments by enabling them to allocate network resources
and create services for subscriber preferences in such areas as quality of service and bandwidth
utilization. The products are designed to enable service providers to dynamically manage their
networks, prioritize traffic, and prevent network disruptions.
Under the terms of the merger, we acquired 100% of Camiants stock, vested stock options and
warrants for total cash consideration of $128.9 million, of which $12.5 million was placed into
escrow with a third party escrow agent for fifteen months for the satisfaction of potential
indemnification claims we have the right to make under the merger agreement. Total cash
consideration, net of $2.0 million of cash acquired from Camiant, was $127.0 million.
The fair values of the assets acquired and liabilities assumed were determined primarily using
the income approach, which determines the fair value for the asset based on the present value of
cash flows projected to be generated by the asset. Projected cash flows are discounted at a rate
of return that reflects the relative risk of achieving the cash flow and the time value of money.
Projected cash flows for each asset considered multiple factors, including current revenue from
existing customers; analysis of expected revenue and attrition trends; reasonable contract renewal
assumptions from the perspective of a marketplace participant; expected profit margins giving
consideration to marketplace synergies; and required returns to contributory assets.
The transaction resulted in recording identifiable intangible assets and goodwill at a fair
value of $144.2 million as follows (in thousands):
Total consideration |
$ | 128,933 | ||
Less: Camiant tangible net assets acquired |
(11,882 | ) | ||
Add: Deferred tax liability |
27,121 | |||
Total fair value of Camiant intangible assets and goodwill |
$ | 144,172 | ||
The acquisition resulted in the recognition of a deferred tax liability of approximately $27.1
million related to accounting and tax basis differences in the acquired intangible assets.
Additionally, in determining the purchase price allocation, liabilities were recorded for existing
uncertain tax positions in the amount of $2.5 million and will be added to our annual tabular
reconciliation.
The tangible assets and liabilities acquired were as follows (in thousands):
Cash and investments |
$ | 1,959 | ||
Accounts receivable(1) |
1,862 | |||
Inventories |
350 | |||
Prepaid expenses |
330 | |||
Deferred tax asset |
16,651 | |||
Deferred costs |
655 | |||
Property and equipment, net |
979 | |||
Other long term assets |
22 | |||
Total tangible assets |
22,808 | |||
Accounts payable and accrued expenses |
(6,682 | ) | ||
Deferred revenue |
(4,244 | ) | ||
Total liabilities |
(10,926 | ) | ||
Net tangible assets |
$ | 11,882 | ||
(1) | The gross contractual amount of accounts receivable was $2.3 million which approximated their fair value. |
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The remaining purchase price was allocated among the Camiant intangible assets and goodwill
acquired based on their estimated fair values determined as discussed above and was as follows (in
thousands):
Amortizable intangible assets |
$ | 69,190 | ||
In-process research and development |
2,180 | |||
Goodwill |
72,802 | |||
Total fair value of Camiant intangible assets and goodwill |
$ | 144,172 | ||
This purchase price allocation is preliminary as we are awaiting the receipt of certain
information as a result of Camiants income tax return filings. We expect to finalize these
matters in 2010, and any resulting adjustments may affect income tax related accounts, with the
offset recorded in goodwill.
Based on the purchase price allocation, $2.2 million of the purchase price represented
research and development activities (IPR&D) that had not yet reached technological feasibility.
IPR&D is considered an indefinite lived intangible asset until the completion or abandonment of the
associated research and development efforts. Prior to completion or abandonment, we will not
record amortization but will test for impairment in accordance with the authoritative guidance for
intangibles and goodwill. Upon completion or abandonment, we will determine the useful life of the
assets and record amortization expense over this useful life.
The identifiable amortizable intangible assets created as a result of the acquisition will be
amortized over their respective estimated useful lives as follows (i) existing technology, contract
backlog, trademarks and trade names, and non-compete agreements amortized using the straight-line
method, (ii) customer relationship intangible assets amortized using the greater of the straight
line method or the estimated customer attrition rates:
Estimated | ||||||||
Weighted | ||||||||
Asset | Average Life | |||||||
Amount | in Years | |||||||
Existing technology |
$ | 44,000 | 5 | |||||
Customer relationships |
13,000 | 5 | ||||||
Contract backlog |
6,900 | 1.5 | ||||||
Non-compete agreements |
4,090 | 2 | ||||||
Trademarks and trade names |
1,200 | 3 | ||||||
$ | 69,190 | 4.4 | ||||||
Amortization expense related to the assets above was approximately $2.7 million for the
three and six months ended June 30, 2010, of which $2.0 million was included in cost of sales and
$0.7 million was included in operating expenses.
As noted above, the primary asset acquired from Camiant was the core technology used in the
policy management solution. In addition, we obtained the significant expertise of Camiants
management and technical employees. These factors contributed to a purchase price in excess of
fair market value of Camiants net tangible and intangible assets acquired, and, as a result, we
have recorded goodwill in the amount of $72.8 million in connection with this transaction. The
goodwill and the identifiable amortizable intangible assets are not deductible for income tax
purposes as they contribute to the tax basis of our investment in Camiant.
Acquisition of Blueslice
On May 5, 2010 we completed the acquisition of all issued and outstanding shares of capital
stock of Blueslice, a provider of next generation subscriber data management solutions, through a
share purchase agreement with Tekelec Canada Inc., our wholly-owned subsidiary, and the various
owners of all of the issued and outstanding shares of capital stock of Blueslice. The aggregate
purchase price of $35.0 million consisted of (i) aggregate cash of approximately $33.5 million paid
to Blueslice stockholders and/or their designees, and (ii) the payment of indebtedness of Blueslice
in the amount of $1.5 million. Upon the closing of the transaction, $5.0 million of this
consideration was placed in escrow with a third party escrow agent for fifteen months for the
satisfaction of potential indemnification claims we have the right to make under the share purchase
agreement. Blueslices solution centralizes cross-domain subscriber information in a back-end
database, supporting multiple
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front-end applications, including our next-generation Home Location
Register, Home Subscriber Server, SIP Application Server, and AAA Server.
The fair values of the assets acquired and liabilities assumed were determined primarily using
the income approach, which determines the fair value for the asset based on the present value of
cash flows projected to be generated by the asset. Projected cash flows are discounted at a rate
of return that reflects the relative risk of achieving the cash flow and the time value of money.
Projected cash flows for each asset considered multiple factors, including current revenue from
existing customers; analysis of expected revenue and attrition trends; reasonable contract renewal
assumptions from the perspective of a marketplace participant; expected profit margins giving
consideration to marketplace synergies; and required returns to contributory assets.
The transaction resulted in recording intangible assets and goodwill at a fair value of $36.8
million as follows (in thousands):
Total consideration |
$ | 34,979 | ||
Less: Blueslice tangible net assets acquired |
(2,331 | ) | ||
Add: Deferred tax liability |
4,105 | |||
Total fair value of Blueslice intangible assets and goodwill |
$ | 36,753 | ||
The acquisition resulted in the recognition of a deferred tax liability of approximately $4.1
million related to accounting and tax basis differences in the acquired intangible assets.
Additionally, in determining the purchase price allocation, liabilities were recorded for existing
uncertain tax positions in the amount of $4.0 million and will be added to our annual tabular
reconciliation.
The tangible assets and liabilities acquired were as follows (in thousands):
Accounts receivable(1) |
$ | 1,425 | ||
Inventories |
14 | |||
Prepaid expenses and other current assets |
2,525 | |||
Deferred tax asset |
194 | |||
Deferred costs |
276 | |||
Other current assets |
52 | |||
Property and equipment, net |
86 | |||
Other long term assets |
9 | |||
Total tangible assets |
4,581 | |||
Accounts payable and accrued expenses |
(845 | ) | ||
Deferred revenue |
(1,405 | ) | ||
Total liabilities |
(2,250 | ) | ||
Net tangible assets |
$ | 2,331 | ||
(1) | The gross contractual amount of accounts receivable was $1.5 million which approximated their fair value. |
The remaining purchase price was allocated among the Blueslice identifiable intangible assets
and goodwill acquired based on their estimated fair values determined as discussed above and was as
follows (in thousands):
Amortizable intangible assets |
$ | 13,930 | ||
In-process research and development |
730 | |||
Goodwill |
22,093 | |||
Total fair value of Blueslice intangible assets and goodwill |
$ | 36,753 | ||
This purchase price allocation is preliminary as we are awaiting the receipt of certain
information as a result of Blueslice income tax return filings. We expect to finalize these
matters in 2010, and any resulting adjustments may affect income tax related accounts, with the
offset recorded in goodwill.
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Based on the purchase price allocation, $0.7 million of the purchase price represented
research and development activities (IPR&D) that had not yet reached technological feasibility
and is considered an indefinite lived intangible asset accounted for as discussed above.
The identifiable amortizable intangible assets created as a result of the acquisition will be
amortized over their respective estimated useful lives as follows: (i) existing technology,
contract backlog, trademarks and trade names, and non-compete agreements amortized using the
straight-line method, (ii) customer relationship intangible assets amortized using the greater of
the straight line method or the estimated customer attrition rates.
Estimated | ||||||||
Weighted | ||||||||
Asset | Average Life | |||||||
Amount | in Years | |||||||
Existing technology |
$ | 11,900 | 5 | |||||
Customer relationships |
1,100 | 5 | ||||||
Contract backlog |
600 | 1 | ||||||
Non-compete agreements |
290 | 2 | ||||||
Trademarks and trade names |
40 | 3 | ||||||
$ | 13,930 | 4.8 | ||||||
Amortization expense related to the assets above was approximately $0.6 million for the
three months ended June 30, 2010, of which $0.5 million was included in cost of sales and $0.1
million included in operating expenses.
As noted above, the primary asset acquired from Blueslice was the core technology used in the
subscriber data management solution. In addition, we obtained the significant expertise of
Blueslices technical employees, which we believe we will be able to leverage in maximizing the
benefit of the acquired technology and in assisting us with the development of new technologies.
These factors contributed to a purchase price in excess of the fair market value of Blueslices net
tangible and intangible assets acquired, and, as a result, we have recorded goodwill in the amount
of $22.1 million in connection with this transaction. The goodwill and the identifiable
amortizable intangible assets are not deductible for income tax purposes as they contribute to the
tax basis of our investment in Blueslice.
Select Pro-Forma Financial Information
The following represents our unaudited condensed pro-forma financial results as if the
acquisitions of Camiant and Blueslice had occurred as of the beginning of the earliest period
presented. Unaudited condensed pro-forma results are based upon accounting estimates and judgments
that we believe are reasonable. The condensed pro-forma results are not necessarily indicative of
the actual results of our operations had the acquisitions occurred at the beginning of the periods
presented, nor does it purport to represent the results of operations for future periods.
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
June 30, 2010 | June 30, 2009 | June 30, 2010 | June 30, 2009 | |||||||||||||
Revenues |
$ | 111,234 | $ | 121,156 | $ | 233,964 | $ | 239,812 | ||||||||
Net Income |
$ | 9,063 | $ | 6,284 | $ | 17,626 | $ | 11,136 | ||||||||
Basic earnings per share |
$ | 0.13 | $ | 0.09 | $ | 0.26 | $ | 0.17 | ||||||||
Diluted earnings per share |
$ | 0.13 | $ | 0.09 | $ | 0.26 | $ | 0.17 |
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Our actual operating results for the three and six months ended June 30, 2010 included
revenues and net loss from the acquired businesses as follows (in thousands):
Three and Six Months Ended June 30, 2010 | ||||||||||||
Camiant | Blueslice | Total | ||||||||||
Revenues |
$ | 895 | $ | 388 | $ | 1,283 | ||||||
Net loss |
$ | (3,494 | ) | $ | (1,623 | ) | $ | (5,117 | ) |
Cash and Stock-Based Compensation Expense Related to Acquisitions
In connection with the acquisition of Camiant, we assumed unvested options to purchase
Camiants stock, which were converted into the right to receive an aggregate cash amount of $5.2
million. These rights will vest quarterly according to the original terms and vesting schedules of
the options, and contingent upon individual employees continued employment with us. Payments will
be made quarterly in arrears until such time as the rights are fully vested, the majority of which
will vest by the end of 2014.
In connection with the acquisition of Blueslice, we (i) entered into agreements with certain
Blueslice employees under which we agreed to pay an aggregate cash amount of $1.5 million based on
each employees completion of individual integration milestones, and (ii) granted,
performance-based restricted stock units, with an estimated fair value at the date of the grant of
approximately $2.0 million, to certain Blueslice employees. The performance-based restricted stock
units will be earned based on an individual employees achievement of individual integration
milestones, and thereafter will vest in four equal annual installments based on an individual
employees continued employment with us.
The liability related to the above cash compensation arrangements is recorded under the
Accrued compensation and related expenses heading in the accompanying unaudited condensed
consolidated balance sheet.
The following table shows the cash and equity compensation expense recognized in the three and
six months ended June 30, 2010 related to the agreements discussed above:
Three and Six | ||||
Months Ended | ||||
June 30, 2010 | ||||
(Thousands) | ||||
Camiant cash compensation expense in lieu of unvested options |
$ | 605 | ||
Blueslice cash compensation expense |
491 | |||
Blueslice stock-based compensation expense |
134 | |||
$ | 1,230 | |||
We may be required to recognize future compensation expense pursuant to the above
agreements of up to $7.4 million.
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Note 3 Restructuring and Other Costs
The following table provides a summary of our restructuring activities and the remaining
obligations as of June 30, 2010 (in thousands):
Severance | ||||
Costs and | ||||
Related | ||||
Benefits | ||||
Restructuring obligations, December 31, 2009 |
$ | 3,107 | ||
Cash payments |
(1,098 | ) | ||
Effect of exchange rate changes |
(245 | ) | ||
Restructuring obligations, June 30, 2010 |
$ | 1,764 | ||
Restructuring obligations are included in Accrued expenses in the accompanying
unaudited condensed consolidated balance sheets. We anticipate settling our remaining severance
obligations during 2010. This is based on our current best estimate, which could change if actual
activity differs from what is currently expected.
Note 4 Fair Value of Financial Instruments
Recurring Measurements
We measure certain financial assets and liabilities at fair value on a recurring basis. The
fair value of our cash, cash equivalents, accounts receivable and accounts payable approximate
their respective carrying amounts based on the liquidity and short-term nature of these
instruments. The following table sets forth our financial instruments carried at fair value as of
June 30, 2010 and December 31, 2009 (in thousands):
Financial Instruments | ||||||||
Carried at Fair Value | ||||||||
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Assets: |
||||||||
Cash and cash equivalents |
$ | 226,291 | $ | 277,259 | ||||
Trading securities |
| 81,788 | ||||||
Put right |
| 11,069 | ||||||
Total assets |
$ | 226,291 | $ | 370,116 | ||||
The fair value of our financial instruments as of June 30, 2010 is based on quoted prices
in active markets for identical items and fall under Level 1 of the fair value hierarchy as defined
in the authoritative guidance.
The following tables set forth a summary of changes in the fair value of our Level 3 financial
assets for the three and six months ended June 30, 2010 (in thousands):
Financial Assets | ||||||||
Auction Rate | Put | |||||||
Securities | Right | |||||||
Balance, March 31, 2010 |
$ | 71,008 | $ | 8,529 | ||||
Transfers to Level 3 |
| | ||||||
Purchases and receipts |
| | ||||||
Redemptions |
(79,575 | ) | | |||||
Realized gain on sales |
| | ||||||
Gains (losses) on securities held at period end or redeemed (1) |
8,567 | (8,529 | ) | |||||
Balance, June 30, 2010 |
$ | | $ | | ||||
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Level 3 | ||||||||
Financial Assets | ||||||||
Auction Rate | Put | |||||||
Securities | Right | |||||||
Balance, December 31, 2009 |
$ | 81,788 | $ | 11,069 | ||||
Transfers to Level 3 |
| | ||||||
Purchases and receipts |
| | ||||||
Redemptions |
(92,975 | ) | | |||||
Realized gain on sales |
| | ||||||
Gains (losses) on securities held at period end or redeemed (1) |
11,187 | (11,069 | ) | |||||
Balance, June 30, 2010 |
$ | | $ | | ||||
(1) | Included in Other income (expense), net in the accompanying unaudited consolidated condensed statements of operations. |
Trading Securities and Put Right
As of December 31, 2009, we held $81.8 million of Auction Rate Securities (ARS) recorded at
fair value, which represented a decline of $11.2 million below our cost basis, and an associated
UBS Put right (the Put right), recorded at an estimated fair value of $11.1 million. Throughout
the second quarter of 2010, as in previous quarters, issuers called certain securities which
reduced the investment in our ARS portfolio. On June 30, 2010, we exercised our UBS Put right
requiring UBS to purchase the remaining balance of our ARS portfolio at par value plus accrued
interest. As a result of the issuer calls and exercise of the Put right, we received cash proceeds
of $79.6 million during the quarter, resulting in the liquidation of our ARS portfolio.
Derivative Instruments
Our derivative instruments, primarily foreign currency forward contracts, are recognized as
assets or liabilities at fair value. These forward contracts are not formally designated as hedges.
The fair value of these contracts is based on market prices for comparable contracts. Our foreign
currency forward contracts are structured to expire on the last day of each quarter, and we
immediately enter into new contracts if necessary. Therefore, our derivative instruments
outstanding at period end are outstanding less than one full day when the reporting period ends.
Because of the short duration of these contracts, their fair value was not significant as of June
30, 2010 and December 31, 2009.
Nonrecurring Measurements
We measure certain assets, accounted for under the cost method (such as our former investments
in privately held companies), at fair value on a nonrecurring basis. These assets are recognized
at fair value when they are deemed to be other-than temporarily impaired.
During the second quarter of 2009, we recorded an impairment charge of $2.8 million related to
our investment in a privately held company. This charge, which is included in Other income
(expense), net represented the difference between our $15.0 million cost basis in this investment
and its then estimated fair value of $12.2 million as of June 30, 2009, as we deemed the decline in
the value of this asset to be other-than-temporary. In the fourth quarter of 2009, we sold our
investment for its adjusted carrying value of $1.4 million.
We measure the fair value of our nonfinancial assets and liabilities, including but not
limited to, intangible assets, goodwill and restructuring obligations accounted for under the
authoritative guidance for exit or disposal cost obligations. We perform our annual impairment
test for intangible assets and goodwill on October 1st of each fiscal year and more
frequently upon the occurrence of certain events in accordance with the provisions of the
authoritative guidance for intangible assets and goodwill. Nothing has come to our attention that
would require us to perform this test in the first six months of 2010. Accordingly, as of June 30,
2010 we do not have any required non-recurring measurement disclosures for these nonfinancial
assets.
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Note 5 Derivative Instruments and Hedging Activities
We operate internationally and thus are exposed to potential adverse changes in currency
exchange rates. We use derivative instruments (principally forward contracts to exchange foreign
currency) as a means of reducing our exposure to foreign currency rate changes on receivables and
other net monetary assets denominated in foreign currencies. The foreign currency forward
contracts require us to exchange currencies at rates agreed upon at the contracts inception. In
addition to these foreign exchange contracts, certain of our customer contracts contain provisions
that require our customers to assume the foreign currency exchange risk related to the applicable
transactions. The objective of these contracts is to reduce or eliminate, and efficiently manage,
the economic impact of currency exchange rate movements on our operating results as effectively as
possible. These contracts reduce the exposure to fluctuations in exchange rate movements because
the gains and losses associated with foreign currency balances and transactions are generally
offset with the gains and losses on the related contracts.
Derivative instruments are recognized as either assets or liabilities and are measured at fair
value. The accounting for changes in the fair value of a derivative instrument depends on the
intended use of the derivative instrument and the resulting designation. We do not designate our
foreign currency exchange contracts as accounting hedges as defined by authoritative guidance for
derivatives and hedging, and, accordingly, we adjust these contracts to fair value through
operations (i.e., included in Other income (expense), net). We do not hold or issue financial
instruments for speculative or trading purposes.
We continually monitor our exposure to fluctuations in foreign currency exchange rates. As we
have expanded internationally, an increasing proportion of our revenues, costs and operating
expenses are denominated in foreign currencies, resulting in an increase in our foreign currency
exchange rate exposure. We enter into multiple forward contracts throughout a given month to
mitigate our changing exposure to foreign currency exchange rate fluctuations principally related
to receivables generated from sales denominated in foreign currencies and our remeasurements of
international subsidiaries. Our exposure fluctuates as we generate new sales in foreign currencies
and as existing receivables related to sales in foreign currencies are collected. Additionally, our
exposure related to remeasurements of our subsidiaries financial statements fluctuates with the
underlying activity in those entities. Our foreign currency forward contracts generally will have
terms of one month or less and typically mature on the last day of any given period. We then
immediately enter into new foreign currency forward contracts, if necessary.
The following table shows the notional contract values in local currency and U.S. Dollars of
the foreign exchange forward contracts outstanding as of June 30, 2010, grouped by the underlying
foreign currency:
Contracts Outstanding as of June 30, 2010 | ||||||||||||
In Local Currency | In US Dollars | |||||||||||
Euros (EUR) (contracts to buy EUR/sell US$) |
(EUR) | (24,058,000 | ) | $ | (30,090,544 | ) | ||||||
Indian rupees (INR) (contracts to sell INR/buy US$) |
(INR) | 406,713,000 | 8,642,435 | |||||||||
Canadian dollars (CAD) (contracts to sell CAD/buy US$) |
(CAD) | 310,000 | 289,774 | |||||||||
Singapore dollars (SGD) (contracts to sell SGD/buy US$) |
(SGD) | 645,000 | 464,831 | |||||||||
Malaysian ringgits (MYR) (contracts to sell MYR/buy US) |
(MYR) | 5,849,000 | 1,799,360 | |||||||||
Australian dollars (AUD) (contracts to sell AUD/buy US$) |
(AUD) | 603,000 | 505,616 | |||||||||
Brazilian reais (BRL) (contracts to sell BRL/buy US$) |
(BRL) | 2,562,000 | 1,413,439 | |||||||||
Total |
$ | (16,975,089 | ) | |||||||||
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The following tables show the average notional contract value in the underlying currency
and U.S. Dollars of foreign exchange forward contracts outstanding during the three and six months
ended June 30, 2010, grouped by the underlying foreign currency:
Average Contracts Outstanding | ||||||||||||
during the three months ended June 30, 2010 | ||||||||||||
In Local Currency | In US Dollars | |||||||||||
Euros (EUR) (contracts to buy EUR/sell US$) |
(EUR) | (25,825,868 | ) | $ | (33,476,778 | ) | ||||||
Indian rupees (INR) (contracts to sell INR/buy US$) |
(INR) | 419,272,725 | 9,180,141 | |||||||||
British pound (GBP) (contracts to sell GBP/buy US$) |
(GBP) | 241,341 | 365,048 | |||||||||
Singapore dollars (SGD) (contracts to sell SGD/buy US$) |
(SGD) | 673,000 | 481,018 | |||||||||
Malaysian ringgits (MYR) (contracts to sell MYR/buy US$) |
(MYR) | 5,817,692 | 1,785,679 | |||||||||
Australian dollars (AUD) (contracts to sell AUD/buy US$) |
(AUD) | 633,989 | 564,877 | |||||||||
Canadian dollars (CAD) (contracts to sell CAD/buy US$) |
(CAD) | 83,692 | 82,929 | |||||||||
Brazilian reais (BRL) (contracts to sell BRL/buy US$) |
(BRL) | 2,423,945 | 1,307,617 | |||||||||
Total |
$ | (19,709,469 | ) | |||||||||
Average Contracts Outstanding | ||||||||||||
during the six months ended June 30, 2010 | ||||||||||||
In Local Currency | In US Dollars | |||||||||||
Euros (EUR) (contracts to buy EUR/sell US$) |
(EUR) | (25,621,536 | ) | $ | (34,555,223 | ) | ||||||
Indian rupees (INR) (contracts to sell INR/buy US$) |
(INR) | 414,279,399 | 8,981,621 | |||||||||
British pound (GBP) (contracts to sell GBP/buy US$) |
(GBP) | 185,787 | 282,972 | |||||||||
Singapore dollars (SGD) (contracts to sell SGD/buy US$) |
(SGD) | 344,661 | 239,195 | |||||||||
Malaysian ringgits (MYR) (contracts to sell MYR/buy US$) |
(MYR) | 5,871,639 | 1,758,427 | |||||||||
Australian dollars (AUD) (contracts to sell AUD/buy US$) |
(AUD) | 467,415 | 419,866 | |||||||||
Canadian dollars (CAD) (contracts to sell CAD/buy US$) |
(CAD) | 825,787 | 780,282 | |||||||||
Brazilian reais (BRL) (contracts to sell BRL/buy US$) |
(BRL) | 9,042,066 | 4,950,772 | |||||||||
Total |
$ | (17,142,088 | ) | |||||||||
As of June 30, 2010, all of our derivative instruments are maintained with Wells Fargo
Bank and potentially subject us to a concentration of credit risk, which may result in credit
related losses in the event of the banks nonperformance. We mitigate this risk by monitoring
Wells Fargos credit ratings published by major rating firms (Fitch, Standard & Poors, and
Moodys). In addition, we monitor Wells Fargos Credit Default Swap spread on a quarterly basis to
assess the banks default risk relative to its peers.
As discussed above, our foreign currency forward contracts are structured to expire on the
last day of the accounting period, and we immediately enter into new contracts if necessary.
Therefore, our derivative instruments outstanding at period end are outstanding less than one full
day when the reporting period ends, and, accordingly, their fair value was not significant as of
June 30, 2010 and December 31, 2009.
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The tables below provide a summary of the effect of derivative instruments on the unaudited
condensed consolidated statements of operations for the three and six months ended June 30, 2010
and 2009 (in thousands):
Amount of Loss | ||||||||||
Recognized in Results | ||||||||||
Location of Loss | of Operations | |||||||||
Derivatives Not Designated | Recognized in Results | Three months ended June 30, | ||||||||
as Hedging Instruments | of Operations | 2010 | 2009 | |||||||
Foreign currency forward contracts |
Other income (expense), net | $ | (2,650 | ) | $ | (1,191 | ) | |||
Amount of Gain or (Loss) | ||||||||||
Recognized in Results | ||||||||||
Location of Gain or (Loss) | of Operations | |||||||||
Derivatives Not Designated | Recognized in Results | Six months ended June 30, | ||||||||
as Hedging Instruments | of Operations | 2010 | 2009 | |||||||
Foreign currency forward contracts |
Other income (expense), net | $ | (5,066 | ) | $ | 172 |
The above gains or losses on the derivative instruments are generally offset or partially
offset by a corresponding foreign currency gain or loss on the underlying hedged transaction (e.g.,
customer accounts receivable). The gain or loss on both the derivative instrument and the
corresponding hedged transaction are reflected in Other income (expense), net in the accompanying
unaudited condensed consolidated statements of operations.
Note 6 Financial Statement Details
Accounts Receivable, net
Accounts receivable, net consists of the following (in thousands):
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Accounts receivable |
$ | 145,907 | $ | 165,572 | ||||
Less: Allowance for doubtful accounts and sales returns |
7,561 | 8,203 | ||||||
$ | 138,346 | $ | 157,369 | |||||
Inventories
Inventories consist of the following (in thousands):
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Raw materials |
$ | 22,938 | $ | 16,367 | ||||
Work in process |
| 132 | ||||||
Finished goods |
5,308 | 6,854 | ||||||
Total inventories |
$ | 28,246 | $ | 23,353 | ||||
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Note 7 Intangible Assets and Goodwill
Intangible Assets
The following table represents the details of intangible assets (in thousands):
Accumulated | ||||||||||||
June 30, 2010 | Gross | Amortization | Net | |||||||||
Intangible assets with finite lives: |
||||||||||||
Purchased technology |
$ | 98,620 | $ | (20,640 | ) | $ | 77,980 | |||||
Customer relationships |
19,830 | (2,873 | ) | 16,957 | ||||||||
Contract backlog |
7,500 | (792 | ) | 6,708 | ||||||||
Non-compete agreements |
4,380 | (326 | ) | 4,054 | ||||||||
Trademarks and trade names |
1,240 | (61 | ) | 1,179 | ||||||||
Gross intangible assets with finite lives |
131,570 | (24,692 | ) | 106,878 | ||||||||
Effect of exchange rate changes |
(2,624 | ) | 725 | (1,899 | ) | |||||||
Total intangible assets with finite lives |
128,946 | (23,967 | ) | 104,979 | ||||||||
IPR&D, with indefinite lives |
2,910 | | 2,910 | |||||||||
Total intangible assets |
$ | 131,856 | $ | (23,967 | ) | $ | 107,889 | |||||
Accumulated | ||||||||||||
December 31, 2009 | Gross | Amortization | Net | |||||||||
Intangible assets with finite lives: |
||||||||||||
Purchased technology |
$ | 42,490 | $ | (15,933 | ) | $ | 26,557 | |||||
Customer relationships |
5,730 | (2,009 | ) | 3,721 | ||||||||
Gross intangible assets with finite lives |
48,220 | (17,942 | ) | 30,278 | ||||||||
Effect of exchange rate changes |
1,079 | (340 | ) | 739 | ||||||||
Total intangible assets with finite lives |
49,299 | (18,282 | ) | 31,017 | ||||||||
Total intangible assets |
$ | 49,299 | $ | (18,282 | ) | $ | 31,017 | |||||
Under recently revised accounting guidance for business combinations, IPR&D is
capitalized at fair value as an intangible asset with an indefinite life and assessed for
impairment until completion of the underlying development. Upon the completion of the underlying
development, the capitalized IPR&D asset will be amortized over its estimated useful life. Prior
to the adoption of the revised accounting guidance, IPR&D was expensed upon acquisition.
The estimated future amortization expense of purchased intangible assets with finite lives as
of June 30, 2010 is as follows:
For the Years Ending December 31, | ||||
2010 (remaining six months) |
$ | 13,999 | ||
2011 |
26,078 | |||
2012 |
20,572 | |||
2013 |
17,557 | |||
2014 |
17,221 | |||
Thereafter |
9,552 | |||
Total |
$ | 104,979 | ||
Goodwill
As required by the authoritative guidance for intangibles and goodwill, we do not amortize our
goodwill balances, but instead test our goodwill for impairment annually on October 1st
and more frequently upon the occurrence of certain events in accordance with the provisions of the
authoritative guidance for intangibles and goodwill. As of June 30, 2010, no impairment losses
were recognized with respect to goodwill.
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The changes in the carrying amount of goodwill for the six months ended June 30, 2010 are as
follows (in thousands):
Balance at December 31, 2009 |
$ | 42,102 | ||
Addition due to the acquisition of Camiant |
72,802 | |||
Addition due to the acquisition of Blueslice |
22,093 | |||
Effect of exchange rate changes |
(2,878 | ) | ||
Balance at June 30, 2010 |
$ | 134,119 | ||
Note 8 Income Taxes
As part of the process of preparing our unaudited condensed consolidated financial statements,
we are required to estimate our full-year income and the related income tax expense in each
jurisdiction in which we operate. Changes in the geographical mix or estimated level of annual
pretax income can impact our effective tax rate or income taxes as a percentage of pretax income
(the Effective Rate). This process involves estimating our current tax liabilities in each
jurisdiction in which we operate, including the impact, if any, of additional taxes resulting from
tax examinations, as well as making judgments regarding the recoverability of deferred tax assets.
Tax liabilities can involve complex issues and may require an extended period to resolve. To
the extent that the recovery of deferred tax assets does not reach the threshold of more likely
than not based on our estimate of future taxable income in each jurisdiction, a valuation
allowance is established. While we have considered future taxable income and the existence of
prudent and feasible tax planning strategies in assessing the need for a valuation allowance, in
the event we were to determine that we would not be able to realize all or part of our net deferred
tax assets in the future, we would charge to income an adjustment resulting from the establishment
of a valuation allowance in the period such a determination was made.
We conduct business globally, and as a result, one or more of our subsidiaries file income tax
returns in various domestic and foreign jurisdictions. In the normal course of business we are
subject to examination by taxing authorities throughout the world. During 2008, the Internal
Revenue Service (IRS) completed an examination of tax years 2004 through 2006; therefore, our
U.S. federal income tax returns for tax years prior to 2007 are generally no longer subject to
adjustment. For our U.S. state tax returns, we are generally no longer subject to examination of
tax years prior to 2007 in our primary state tax jurisdictions. Our foreign income tax returns are
generally no longer subject to examination for tax periods 2003 and prior.
With respect to tax years that remain open to federal, state and foreign examination, we
believe that we have made adequate provision in the accompanying unaudited condensed consolidated
financial statements for any potential adjustments the IRS or other taxing authority may propose
with respect to income tax returns filed. We may, however, receive an assessment related to an
audit of our U.S. federal, state or foreign income tax returns that exceeds amounts provided for by
us. In the event of such an assessment, there exists the possibility of a material adverse impact
on our results of operations for the period in which the matter is ultimately resolved or an
unfavorable outcome is determined to be more likely than not to occur.
For the three and six months ended June 30, 2010 our effective tax rate was 20% and 30%,
respectively. The effective rate for the three months ended June 30, 2010 differs from the
statutory rate of 35% primarily due to (i) a higher percentage of our projected income for the full
year being derived from international locations with lower tax rates than the U.S., (ii) the
cumulative effect of reducing our full year estimated effective tax rate as a result of the shift
of income to lower tax jurisdictions discussed in item (i), and (iii) a discrete tax benefit of
$1.0 million recognized as the result of certain amended state tax filings. These tax benefits
were partially offset by (i) state income tax expense, (ii) tax expense resulting from employee
stock option cancellations and the required tax treatment under the authoritative guidance for
stock-based compensation as discussed in detail below, and (iii) tax expense resulting from
nondeductible acquisition expenses incurred during the second quarter of 2010 in the acquisition of
Camiant and Blueslice. For the six months ended June 30, 2010 the effective rate differs from the
statutory rate of 35% primarily due to the international impact and discrete items discussed above.
For the three and six months ended June 30, 2009, our effective tax rate was 43% and 37%
respectively. The rate for the three months ended June 30, 2009 differs from the statutory rate of
35% primarily due to (i) the cumulative effect of increasing our full year estimated effective tax
rate to approximately 37%, and (ii) establishment of a valuation allowance of $1.0 million for a
deferred tax item created by the impairment of our
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investment in a privately held company. The rate for the six months ended June 30, 2009
differs from the statutory rate of 35% primarily due to the establishment of the valuation
allowance discussed above, offset by the recognition during the first quarter of 2009 of certain
previously unrecognized tax benefits of approximately $0.9 million associated with the settlement
of two state examinations for tax years 2004 through 2006.
As a result of the acquisition of Camiant and Blueslice, liabilities were established in the
amount of $6.5 million related to existing uncertain tax positions. These liabilities were
recorded through purchase accounting and therefore impacted the level of goodwill recorded as a
result of the transactions. These liabilities will be reflected in our annual tabular
reconciliation for the fiscal year 2010.
We no longer have a pool of windfall tax benefits as defined by the authoritative guidance
for stock-based compensation. As a result, future cancellations or exercises that result in a tax
deduction that is less than the related deferred tax asset recognized under the authoritative
guidance will negatively impact our effective tax rate and increase its volatility, resulting in a
reduction of our earnings. The authoritative guidance for stock compensation requires that the
impact of such events be recorded as discrete items in the quarter in which the event occurs.
Note 9 Commitments and Contingencies
Indemnities, Commitments and Guarantees
In the normal course of our business, we provide certain indemnities, commitments and
guarantees under which we may be required to make payments in relation to certain transactions.
These indemnities, commitments and guarantees include, among others, intellectual property
indemnities to our customers in connection with the sale of our products and licensing of our
technology, indemnities for liabilities associated with the infringement of other parties
technology based upon our products and technology, guarantees of timely performance of our
obligations, indemnities related to the reliability of our equipment, and indemnities to our
directors and officers to the maximum extent permitted by law. The duration of these indemnities,
commitments and guarantees varies, and, in certain cases, is indefinite. Many of these indemnities,
commitments and guarantees do not provide for any limitation of the maximum potential future
payments that we could be obligated to make. We have not recorded a liability for these
indemnities, commitments or guarantees in the accompanying balance sheets because future payment is
not probable.
From time to time, various claims and litigation are asserted or commenced against us arising
from or related to contractual matters, intellectual property matters, product warranties and
personnel and employment disputes. As to such claims and litigation, we can give no assurance that
we will prevail. However, we currently do not believe that the ultimate outcome of any pending
matters will have a material adverse effect on our consolidated financial position, results of
operations or cash flows.
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Note 10 Stock-Based Compensation
Stock-Based Compensation Expense
Total stock-based compensation expense recognized in our unaudited condensed consolidated
statements of operations for the three and six months ended June 30, 2010 and 2009 is as follows
(in thousands):
Option and | ||||||||||||
SAR Grants | ||||||||||||
and Stock | ||||||||||||
Purchase | ||||||||||||
Income Statement Classifications | Rights | RSUs | Total | |||||||||
Three months ended June 30, 2010 |
||||||||||||
Cost of goods sold |
$ | 78 | $ | 235 | $ | 313 | ||||||
Research and development |
69 | 330 | 399 | |||||||||
Sales and marketing |
120 | 750 | 870 | |||||||||
General and administrative |
152 | 1,913 | 2,065 | |||||||||
Total |
$ | 419 | $ | 3,228 | $ | 3,647 | ||||||
Three months ended June 30, 2009 |
||||||||||||
Cost of goods sold |
$ | 85 | $ | 187 | $ | 272 | ||||||
Research and development |
244 | 266 | 510 | |||||||||
Sales and marketing |
177 | 619 | 796 | |||||||||
General and administrative |
579 | 1,504 | 2,083 | |||||||||
Total |
$ | 1,085 | $ | 2,576 | $ | 3,661 | ||||||
Option and | ||||||||||||
SAR Grants | ||||||||||||
and Stock | ||||||||||||
Purchase | ||||||||||||
Income Statement Classifications | Rights | RSUs | Total | |||||||||
Six months ended June 30, 2010 |
||||||||||||
Cost of goods sold |
$ | 155 | $ | 510 | $ | 665 | ||||||
Research and development |
144 | 596 | 740 | |||||||||
Sales and marketing |
218 | 1,461 | 1,679 | |||||||||
General and administrative |
673 | 3,186 | 3,859 | |||||||||
Total |
$ | 1,190 | $ | 5,753 | $ | 6,943 | ||||||
Six months ended June 30, 2009 |
||||||||||||
Cost of goods sold |
$ | 224 | $ | 274 | $ | 498 | ||||||
Research and development |
522 | 525 | 1,047 | |||||||||
Sales and marketing |
406 | 1,130 | 1,536 | |||||||||
General and administrative |
1,251 | 2,641 | 3,892 | |||||||||
Total |
$ | 2,403 | $ | 4,570 | $ | 6,973 | ||||||
Stock-based compensation expense was recorded net of estimated forfeitures for the three
and six months ended June 30, 2010 and 2009 such that expense was recorded only for those
stock-based awards that are expected to vest.
Note 11 Operating Segment Information
We consider ourselves to be in a single reportable segment under the authoritative guidance
for segment reporting, specifically the development and sale of signaling and session management
telecommunications and related value added applications and services.
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Enterprise-Wide Disclosures
The following table sets forth, for the periods indicated, revenues from external customers by
our principal product lines (in thousands):
For the Three Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Product revenues: |
||||||||
Eagle, number portability, and other session management products |
$ | 68,319 | $ | 73,548 | ||||
Performance management products |
6,570 | 4,942 | ||||||
Total product revenues |
74,889 | 78,490 | ||||||
Warranty revenues |
21,691 | 20,814 | ||||||
Professional and other services revenues |
12,927 | 14,879 | ||||||
Total revenues |
$ | 109,507 | $ | 114,183 | ||||
For the Six Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Product revenues: |
||||||||
Eagle, number portability, and other session management products |
$ | 134,433 | $ | 143,124 | ||||
Performance management products |
16,995 | 15,064 | ||||||
Total product revenues |
151,428 | 158,188 | ||||||
Warranty revenues |
40,693 | 42,081 | ||||||
Professional and other services revenues |
33,377 | 30,572 | ||||||
Total revenues |
$ | 225,498 | $ | 230,841 | ||||
Revenues from External Customers | ||||||||||||||||
By Geographic Region | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
United States |
$ | 45,055 | $ | 50,648 | $ | 80,623 | $ | 87,403 | ||||||||
International |
64,452 | 63,535 | 144,875 | 143,438 | ||||||||||||
Total revenues from external customers |
$ | 109,507 | $ | 114,183 | $ | 225,498 | $ | 230,841 | ||||||||
For the three months ended June 30, 2010, sales to AT&T and Verizon represented 14% and
12% of our revenues, respectively. For the three months ended June 30, 2009, sales to AT&T and
Deutsche Telecom AG Group each represented 15% of our revenues.
For the six months ended June 30, 2010, sales to AT&T represented 14% of our revenues. For
the six months ended June 30, 2009, sales to Carso Global Telecom represented 14% of our revenues,
and sales to AT&T represented 13% of our revenues.
For the three and six months ended June 30, 2010, revenues from India accounted for 14% and
12% of our revenues, respectively. For the three and six months ended June 30, 2009, revenues from
India accounted for 12% and 7% of our revenues, respectively.
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The following table sets forth, for the periods indicated, our long-lived assets including net
property and equipment, and other assets by geographic region (in thousands):
Long-Lived Assets | ||||||||
By Geographic Region | ||||||||
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
United States |
$ | 29,599 | $ | 29,587 | ||||
Other |
7,229 | 7,341 | ||||||
Total long-lived assets |
$ | 36,828 | $ | 36,928 | ||||
Note 12 Earnings Per Share
The following table provides a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computations for the three and six months ended June 30, 2010 and
2009 (in thousands, except per share amounts):
Income from | ||||||||||||
Operations | Shares | Per-Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
For the Three Months Ended June 30, 2010: |
||||||||||||
Basic income from operations per share |
$ | 9,422 | 68,374 | $ | 0.14 | |||||||
Effect of dilutive securities |
| 572 | ||||||||||
Diluted income from operations per share |
$ | 9,422 | 68,946 | $ | 0.14 | |||||||
For the Three Months Ended June 30, 2009: |
||||||||||||
Basic income from operations per share |
$ | 9,753 | 66,744 | $ | 0.15 | |||||||
Effect of dilutive securities |
| 758 | ||||||||||
Diluted income from operations per share |
$ | 9,753 | 67,502 | $ | 0.14 | |||||||
For the Six Months Ended June 30, 2010: |
||||||||||||
Basic income from operations per share |
$ | 23,140 | 68,005 | $ | 0.34 | |||||||
Effect of dilutive securities |
| 851 | ||||||||||
Diluted income from operations per share |
$ | 23,140 | 68,856 | $ | 0.34 | |||||||
For the Six Months Ended June 30, 2009: |
||||||||||||
Basic income from operations per share |
$ | 22,118 | 66,514 | $ | 0.33 | |||||||
Effect of dilutive securities |
| 671 | ||||||||||
Diluted income from operations per share |
$ | 22,118 | 67,185 | $ | 0.33 | |||||||
The computation of diluted earnings per share excludes unexercised stock options, and
unvested restricted stock units that are anti-dilutive. The following common stock equivalents
were excluded from the earnings per share computation, as their inclusion would have been
anti-dilutive (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Weighted average number of stock options and SARs excluded
due to the exercise price exceeding the average fair value of our
common stock during the period |
3,679 | 5,235 | 3,806 | 5,801 |
There were no transactions subsequent to June 30, 2010, which, had they occurred prior to
the end of our second quarter, would have changed materially the number of shares in the basic or
diluted earnings per share computations.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is designed to provide a better understanding of our unaudited
condensed consolidated financial statements, including a brief discussion of our business and
products, key factors that impacted our performance, and a summary of our operating results. The
following discussion should be read in conjunction with the unaudited condensed consolidated
financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form
10-Q, and the consolidated financial statements and notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form
10-K for the year ended December 31, 2009. Historical results and percentage relationships among
any amounts in the unaudited condensed consolidated financial statements are not necessarily
indicative of trends in operating results for any future periods.
Overview of Our Business and Products
We are a leading global provider of communication network software and systems that enable our
customers to effectively and efficiently deliver an array of communications services including
voice, text messaging, and broadband data services. Our customers predominantly include mobile (or
wireless) and fixed (or wireline) service providers (collectively, service providers), including
many of the largest service providers in the world. Our software and systems are designed to
enable our customers to optimize their network efficiency, ensure quality of service and quality of
experience, establish network, service and subscriber policies, create unified subscriber
identities, and capture additional revenue opportunities. Our systems generally provide high
performance capabilities such as high transaction rates, reliability and routing intelligence, and
are designed to enable our customers to address the scalability and complexity issues inherent in
the implementation of all-IP networks. Our solutions are comprised of software elements from our
portfolio of proprietary software that is increasingly integrated with commercially available
hardware, operating systems and database technologies. By taking advantage of advances in
technology, like multi-core processors, virtualization software and browser-based cloud computing,
our software and systems deliver significant processing power, flexibility, and in-memory storage.
We believe that our solutions are cost effective for our customers and enable them to provide value
to their subscribers.
We derive our revenues primarily from the sale or license of these network systems and
software applications and related professional services (for example, installation and training
services) and customer support services, including customer post-warranty services. Payment terms
for contracts with our customers are negotiated with each customer and are based on a variety of
factors, including the customers credit standing and our history with the customer. As we
continue to expand internationally, we expect that our billing and payment terms may lengthen, as a
higher percentage of our billing and/or payment terms may be tied to the achievement of milestones,
such as shipment, installation and customer acceptance.
Our corporate headquarters are located in Morrisville, North Carolina, with research and
development facilities, sales offices and customer support facilities located throughout the world.
Internal Control and Corporate Governance
We consider our internal control over financial reporting a high priority and continually
review all aspects of and make improvements in our internal control. Our executive management is
committed to ensuring that our internal control over financial reporting is complete, effective and
appropriately documented. In the course of our evaluation of our internal control, we seek to
identify material errors or control problems and to confirm that the appropriate corrective
actions, including process improvements, are being undertaken. We also seek to deal with any
control matters in this evaluation, and in each case if a problem is identified, we consider what
revision, improvement or correction to make in accordance with our ongoing procedures. Our
continued objective is to maintain our internal control as a set of dynamic systems that change
(including improvements and corrections) as conditions warrant.
In addition to striving to maintain an effective system of internal control over financial
reporting, we also strive to follow the highest ethical and professional standards in measuring and
reporting our financial performance. Specifically, we have adopted a code of conduct for all of
our employees and directors that requires a high level of professionalism and ethical behavior. We
believe that our accounting policies are prudent and provide a clear view of our financial
performance. We utilize our internal audit function to help ensure that we follow these accounting
policies and to independently test our internal control. Further, our Disclosure Committee,
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composed primarily of senior financial and legal personnel, helps ensure the completeness and
accuracy of the reporting of our financial results and our other disclosures. In performing its
duties, the Disclosure Committee consults with and obtains relevant information from key functional
areas such as operations, finance, customer
service and sales, including the utilization of an internal certification process that
solicits responses from these functional areas. Prior to the release of our financial results, key
members of our management review our operating results and significant accounting policies and
estimates with our Audit Committee, which consists solely of independent members of our Board of
Directors.
Operating Environment and Key Factors Impacting our Results
Although economic conditions are generally improving around the world, we believe
telecommunication service providers have been and will continue to be cautious in their spending
for the foreseeable future. This is particularly the case in certain emerging markets, as these
markets continue to be disproportionately affected by the current economic conditions.
Despite these weak economic conditions, we continue to see progress with our next-generation
product portfolio, which we define as our performance management, session management applications
on Eagle XG, mobile messaging, policy control, and subscriber data management products. As of June
30, 2010, on a trailing twelve months basis, orders for these products have grown by nearly 40% to
$86.8 million and now represent over 50% of our sales pipeline for the remainder of 2010. We
recognize that these products have a longer sales cycle than our Eagle 5 products and our
expectations are tempered as a result.
Despite this progress with our next generation product portfolio, the growth in these products
did not offset the decline in our Eagle 5 related products, as orders for this product line
continued to experience year-over-year declines on a quarterly, year-to-date, and trailing twelve
months basis. Accordingly, the weakness in Eagle 5 related product orders more than offset the
growth in our next generation products, resulting in a year-over-year decline in total orders of
31% during the current quarter and 25% on a year-to-date basis. The decline in Eagle 5 related
product orders was particularly pronounced in the emerging markets and Western Europe, which are
down in aggregate by nearly 50% in the first half of 2010. The decline in emerging markets and
Western Europe was partially offset by continued strength in North America, where orders were up
15% year-over-year during the first half of 2010.
In order to understand the trends within our Eagle 5 business, we believe it is important to
understand the varying dynamics across geographical regions, particularly between developed and
emerging markets. With respect to developed markets, such as North America and Western Europe, we
believe our customers are increasing their focus on investing in their next-generation networks,
such as Long-Term Evolution (LTE). While this shift negatively impacts our Eagle 5 business, it
continues to create opportunities for our next generation products. With respect to our Eagle 5
products, we believe customers have and will continue to limit their investments to only meet their
current needs.
With respect to certain emerging markets, such as the Middle East and Africa, we believe the
year-over-year decline in orders is due in part to the continued cautiousness in spending resulting
from the current economic conditions. In addition, orders in Brazil and India are down
substantially year-over-year during the first half of 2010. With respect to Brazil, we believe the
decline is primarily due to approximately $25.0 million of 2009 orders that we do not expect to
repeat. With respect to India, our second largest market overall and our largest emerging market,
orders are down by over 50% year-over-year. A significant portion of this decline is due to the
ongoing implementation of security regulations by the Indian government, and these regulations
continue to be revised and updated. While we began to see a return of order flow during the second
quarter, these new regulations continue to negatively impact orders. In addition, the timing of
number portability purchases in 2009, coupled with the continued delay by the Indian government of
the actual implementation of the number portability mandate, currently expected in late 2010 or
early 2011, resulted in the delay of Eagle 5 extension orders previously expected in mid 2010.
Further, as we have previously discussed, a series of security regulations were implemented by the Indian
government in 2010, which caused delays in our orders from Indian customers. While we began to see a return of order flow during
the second quarter, these new regulations continue to negatively impact orders. We are reviewing the most
recent security-related regulations imposed by the Indian government, and although the impacts of such
regulations on our operations and order flows is uncertain, we expect improved order flow in the second half of
2010.
We are also continuing to experience a shift in the timing of customer orders, such that a
substantial majority of orders were obtained in the last weeks of each of the quarters during 2009
and in the first half of 2010. We anticipate that this trend may continue and, accordingly, we may
continue to experience volatility in our quarterly orders, revenues and earnings going forward.
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In the second quarter of 2010, our revenues declined by 4% from $114.2 million to $109.5
million as compared to the second quarter of 2009, and on a year-to-date basis, our revenues
declined by 2%, from $230.8 million in the first half of 2009 to $225.5 million in the first half
of 2010. Historically, a substantial portion of our revenues were derived from existing backlog,
and trends in our orders have not been reflected in our revenues in the same period. However,
given the recent declines in our orders and resulting backlog, our revenues are beginning to be
negatively impacted by the recent trend in orders. Our revenues and operating results may become
more sensitive to, and more closely follow recent order trends in the future if our existing
backlog continues to decline as a result of several sequential periods with lower than anticipated
orders.
Foreign currency fluctuations had a negative year-over-year impact on second quarter and
year-to-date 2010 revenues of approximately $4.0 million and $2.0 million, respectively. Including
this impact, our operating results during the second quarter and year-to-date 2010 were negatively
impacted by approximately $3.0 million due to year-over-year foreign currency fluctuations.
Summary of Operating Results and Key Financial Metrics
The following is a summary of our performance relative to certain key financial metrics
for our operations as of and for the three and six months ended June 30, 2010 compared to the three
and six months ended June 30, 2009 (in thousands, except earnings per share):
Three Months Ended June 30, | Year-Over-Year Change | |||||||||||||||
2010 | 2009 | |||||||||||||||
Statement of operations statistics: |
||||||||||||||||
Orders |
$ | 72,068 | $ | 104,701 | $ | (32,633 | ) | (31 | )% | |||||||
Revenues |
$ | 109,507 | $ | 114,183 | $ | (4,676 | ) | (4 | )% | |||||||
Operating income |
$ | 12,650 | $ | 19,611 | $ | (6,961 | ) | (35 | )% | |||||||
Diluted earnings per share |
$ | 0.14 | $ | 0.14 | $ | | | % | ||||||||
Cash flows from operations for continuing operations |
$ | 6,359 | $ | 12,758 | $ | (6,399 | ) | (50 | )% | |||||||
Six Months Ended June 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Statement of operations statistics: |
||||||||||||||||
Orders |
$ | 128,792 | $ | 172,655 | $ | (43,863 | ) | (25 | )% | |||||||
Revenues |
$ | 225,498 | $ | 230,841 | $ | (5,343 | ) | (2 | )% | |||||||
Operating income |
$ | 34,878 | $ | 37,514 | $ | (2,636 | ) | (7 | )% | |||||||
Diluted earnings per share |
$ | 0.34 | $ | 0.33 | $ | 0.01 | 2 | % | ||||||||
Cash flows from operations for continuing operations |
$ | 21,235 | $ | 34,581 | $ | (13,346 | ) | (39 | )% | |||||||
June 30, | December 31, | |||||||||||||||
2010 | 2009 | |||||||||||||||
Balance sheet statistics: |
||||||||||||||||
Cash and cash equivalents and short-term investments |
$ | 226,291 | $ | 370,116 | $ | (143,825 | ) | (39 | )% | |||||||
Accounts receivable, net |
$ | 138,346 | $ | 157,369 | $ | (19,023 | ) | (12 | )% | |||||||
Backlog |
$ | 271,641 | $ | 373,639 | $ | (101,998 | ) | (27 | )% | |||||||
Deferred revenue |
$ | 131,432 | $ | 154,655 | $ | (23,223 | ) | (15 | )% | |||||||
Working capital |
$ | 295,462 | $ | 441,277 | $ | (145,815 | ) | (33 | )% | |||||||
Shareholders equity |
$ | 601,379 | $ | 574,547 | $ | 26,832 | 5 | % |
Orders decreased by 31% to $72.1 million in the second quarter of 2010 from
$104.7 million in the second quarter of 2009, and decreased by 25% to $128.8 million for the six
months ended June 30, 2010 from $172.7 million for the same period in 2009. The year-over-year
declines are primarily due to the reasons discussed above.
Revenues decreased on a quarter-over-quarter and year-over-year basis, to
$109.5 million and $225.5 million in the second quarter and first half of 2010, respectively, from
$114.2 million and $230.8 million in the second quarter and first half of 2009, respectively. As
mentioned previously, our revenues have been negatively impacted by the recent trend in orders for
our Eagle 5 products and the resulting lower backlog.
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Operating Income decreased by $7.0 million from $19.6 million in the second quarter of
2009 to $12.7 million in the second quarter of 2010, primarily due to a reduction in revenues of
$4.7 million and an increase in amortization expense of $2.5 million as a result of the additions
of intangible assets following acquisitions of Camiant, Inc. (Camiant) and Blueslice Networks
Inc. (Blueslice) completed in the second quarter of 2010. Partially offsetting these items was a
decrease in incentive compensation in line with lower orders and operating performance as compared
to our incentive targets for the period.
For the six months ended June 30, 2010, operating income decreased by $2.6 million from $37.5
million for the six months ended June 30, 2009 to $34.9 million for the six months ended June 30,
2010. The year-over-year decrease was primarily due to the reasons discussed above, partially
offset by a reduction of incentive compensation in line with lower orders and operating performance
as compared to our incentive targets for the period, as well as our emphasis on cost controls.
Diluted Earnings per Share remained comparable at $0.14 per share in the second
quarter of 2010 and 2009, and at $0.34 per share in 2010 and $0.33 per share in 2009 on a
year-to-date basis, primarily due to the decreases in operating income during the three and six
months ended June 30, 2010 discussed above being offset by lower income tax expense, as well as
first half 2009 including an impairment charge of $2.8 million related to investments in privately
held company recorded during the second quarter of 2009.
Cash Flow from Operations decreased during the three and six months ended June 30,
2010, primarily as a result of lower accounts receivable cash collections in the first half of 2010
as compared to the first half of 2009, resulting from a year-over-year decline in orders and
associated billing activity.
Cash and Cash Equivalents and Short Term Investments decreased during the six months
ended June 30, 2010 by $143.8 million, or 39%, primarily due to the acquisitions of Camiant and
Blueslice for total net cash consideration of $162.0 million. These cash outflows were partially
offset by cash flows from operating activities of $21.2 million.
Accounts Receivable decreased by $19.0 million during the six months ended June 30,
2010 to $138.3 million primarily due to lower billings as a result of lower orders.
Backlog decreased by $102.0 million, or 27%, from December 31, 2009 to June 30, 2010,
primarily due to lower orders resulting in a reduction in backlog during the first half of 2010.
Additionally, the negative impact of foreign exchange fluctuations (primarily related to the Euro)
resulted in a $13.3 million decrease in backlog.
Deferred Revenue decreased by $23.2 million, or 15%, from $154.7 million as of
December 31, 2009 to $131.4 million as of June 30, 2010, primarily due to the decline in our orders
and billings in the first half of 2010, as discussed above.
Working Capital decreased by $145.8 million, or 33%, from $441.3 million as of
December 31, 2009 to $295.5 million as of June 30, 2010, primarily due to the reduction in our cash
balances as a result of acquiring Camiant and Blueslice in the second quarter of 2010 for total net
cash consideration of $162.0 million, partially offset by cash inflow from operating activities of
$21.2 million.
Shareholders Equity increased by $26.8 million in the six months ended June 30, 2010
from $574.6 million as of December 31, 2009 to $601.4 million as of June 30, 2010, primarily due to
net income of $23.1 million for the period and $9.9 million of proceeds from the issuance of common
stock pursuant to the exercise of employee stock options and purchase under our employee stock
purchase plan, offset by foreign currency translation adjustments of $10.4 million.
Results of Operations
Revenues
As discussed further in Note 1 to the accompanying unaudited condensed consolidated financial
statements and in Recent Accounting Pronouncements below, in the first quarter of 2010 we adopted
new accounting guidance with respect to revenue recognition for arrangements with multiple
deliverables. These new revenue recognition rules only apply to transactions entered into and
pre-existing arrangements materially modified subsequent to adoption. As substantially all of our
telecommunications products include both tangible products
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and software elements that function together to deliver the tangible products essential
functionality, the existing software revenue recognition guidance will no longer apply to the
majority of our arrangements.
The adoption of the new, non-software revenue recognition guidance did not have a material
impact on the timing, pattern, or amount of revenue recognized in the second quarter and first half
of 2010, primarily due to (i) a portion of second quarter and first half 2010 revenue being
derived from the backlog of orders which were received prior to January 1, 2010 and therefore not
falling under the new non-software revenue recognition guidance, and (ii) the new, non-software
revenue recognition guidance not differing significantly from the software revenue recognition
guidance when applied to acceptance based arrangements and arrangements that are received and
fulfilled within the same quarter. In the three and six months ended June 30, 2010, we recognized
$50.0 million and $75.5 million of revenue, respectively, under the new non-software revenue
recognition guidance, and we had $10.2 million of deferred revenue under such rules at June 30,
2010. Our June 30, 2010 backlog included an additional $41.0 million of unbilled orders recorded
under the new guidance. Based on the currently available information, we anticipate that the
effect of adopting this guidance on future periods will not be material. However, this assessment
may change as the impact depends on the substance of arrangements entered into or materially
modified in future periods.
Revenues decreased by 4% to $109.5 million in the second quarter of 2010 from $114.2 million
in the second quarter of 2009. On a year-to-date basis, revenue decreased by 2% to $225.5 million
for the six months ended June 30, 2010 as compared to $230.8 million for the six months ended June
30, 2009. Foreign currency fluctuations had a negative year-over-year impact on second quarter and
year-to-date 2010 revenues of approximately $4.0 million and $2.0 million, respectively. The
following discussion provides a more detailed analysis of changes in revenues by product line.
Revenues by Product Line
In order to provide a better understanding of the year-over-year changes and the underlying
trends in our revenues, we have provided a discussion of revenues from each of our product lines.
Revenues from each of our product lines for the three and six months ended June, 30 2010 and 2009
are as follows (in thousands, except percentages):
For the Three Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
Product revenues: |
||||||||||||||||
Eagle, number portability, and other session management products |
$ | 68,319 | $ | 73,548 | $ | (5,229 | ) | (7 | )% | |||||||
Performance management products |
6,570 | 4,942 | 1,628 | 33 | % | |||||||||||
Total product revenues |
74,889 | 78,490 | (3,601 | ) | (5 | )% | ||||||||||
Warranty revenues |
21,691 | 20,814 | 877 | 4 | % | |||||||||||
Professional and other services revenues |
12,927 | 14,879 | (1,952 | ) | (13 | )% | ||||||||||
Total revenues |
$ | 109,507 | $ | 114,183 | $ | (4,676 | ) | (4 | )% | |||||||
For the Six Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
Product revenues: |
||||||||||||||||
Eagle, number portability, and other session management products |
$ | 134,433 | $ | 143,124 | $ | (8,691 | ) | (6 | )% | |||||||
Performance management products |
16,995 | 15,064 | 1,931 | 13 | % | |||||||||||
Total product revenues |
151,428 | 158,188 | (6,760 | ) | (4 | )% | ||||||||||
Warranty revenues |
40,693 | 42,081 | (1,388 | ) | (3 | )% | ||||||||||
Professional and other services revenues |
33,377 | 30,572 | 2,805 | 9 | % | |||||||||||
Total revenues |
$ | 225,498 | $ | 230,841 | $ | (5,343 | ) | (2 | )% | |||||||
Product Revenues
Our product revenues decreased by $3.6 million, or 5%, in the second quarter of 2010
compared to the second quarter of 2009 due to the decrease in Eagle 5, number portability, and
other session management products revenues. This decrease was primarily due to the decline in
sales of our Eagle 5 product line
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outpacing the growth in sales of our newer Eagle XG and other session management products.
Partially offsetting this decrease was an increase in performance management products revenues
following our new software releases and the continued progress we have made in gaining customer
acceptances of our next generation carrier grade Linux products.
Product revenues for the first six months of 2010 decreased by $6.8 million, or 4%, as
compared to the same period in 2009, primarily due to the overall decrease in Eagle 5 revenues
as discussed above, as well as lower international revenues as a result of the timing of
completion of a number of large acceptance based projects in South America during the first
quarter of 2009. From a product mix perspective, we continue to expect a year-over-year growth
in orders and revenues from our Eagle XG, performance management and mobile messaging products,
and a decline in orders and revenues for our Eagle 5 product line. With the addition of the
policy management and subscriber data management products obtained in our acquisitions of
Camiant and Blueslice, we expect our next generation products to represent an increasing
percentage of our overall orders and revenues.
Worldwide, our product revenues have been impacted by a variety of factors in addition to
those discussed above, including: (i) industry consolidation resulting in delay and/or decline
in our customer orders; (ii) competitive pricing pressure, particularly with respect to our
Eagle 5 product line; (iii) the pricing of our SIGTRAN-based products, which are typically at a
significantly lower price per equivalent link or unit of throughput than our traditional
SS7-based products, resulting in reductions in our order value and revenues; (iv) the ability
to sell our next generation products, such as performance management, Eagle XG, policy
management, subscriber data management, and mobile messaging, to our existing customer base and
(v) the amount of signaling traffic generated on our customers networks, impacting our volume
of orders. We derive the majority of our product revenues from wireless operators, and
wireless networks generate significantly more signaling traffic than wireline networks. As a
result, these networks require significantly more signaling infrastructure than wireline
networks. Signaling traffic on our wireless customers networks may be impacted by several
factors, including growth in the number of subscribers, the number of calls made per
subscriber, roaming and the use of additional features, such as text messaging.
Warranty Revenues
Warranty revenues include revenues from (i) our standard warranty coverage, which is
typically provided at no charge for the first year but is allocated a portion of the arrangement
fee in accordance with the authoritative guidance for revenue recognition and (ii) our extended
warranty offerings. After the first year warranty, our customers typically purchase warranty
services for periods of up to a year in advance, which we reflect in deferred revenues. We
recognize the revenue associated with our warranty services ratably over the term of the
warranty arrangement based on the number of days the contract is outstanding during the period.
Warranty revenues increased by 4% in the second quarter of 2010 as compared to the second
quarter of 2009. This increase was primarily due to the increase in our extended warranty
revenues primarily due to (i) the timing of order renewals, and (ii) the expansion of the
maintenance base as a result of our recent acquisitions. Partially offsetting the above increase
was a decrease in the standard warranty revenues, principally due to the timing of revenue
recognition related to the initial warranty term that accompanied the product sale.
On a year-to-date basis, warranty revenues decreased by 3% in the first six months of 2010
as compared to the same period of 2009, primarily as a result of a decrease in the standard
warranty revenues for the reasons discussed above and to a lesser extent, pricing pressure from
our customers related to our extended warranty offering as they try to reduce their operating
expenses.
The timing of recognition of our warranty revenues may be impacted by, among other
factors: (i) delays in receiving purchase orders from our customers; (ii) the inability to
recognize any revenue, including revenue associated with first year warranty, until the
delivery of all product deliverables associated with an order is complete; and (iii) receipt of
cash payments from the customer in cases where the customer is deemed a credit risk.
Professional and Other Services Revenues
Professional and other services revenues primarily consist of installation services,
database migration and training services. Substantially all of our professional service
arrangements are billed on a fixed-fee basis.
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We typically recognize the revenue related to our fixed-fee service arrangements upon
completion of the services, as these services are relatively short-term in nature (typically
several weeks, or in limited cases, several months). Our professional and other services are
typically initiated and provided to the customer within a three to nine month period after the
shipment of the product, with the timing depending on, among other factors, the customers
schedule and site availability.
Professional and other services revenues for the second quarter of 2010 decreased by $2.0
million, or 13%, as compared to the second quarter of 2009, primarily due to a decrease in
service related revenues in Europe associated with the completion of Eagle projects in the
second quarter of 2009, which was partially offset by growth in services associated with
performance management products.
On a year-to-date basis, professional and other services revenues increased by $2.8
million, or 9%, in the first half of 2010 as compared to the same period of 2009. The increase
is primarily attributable to the recognition of revenue for a number of projects in Europe
across our product portfolio that included large service components in the first quarter of
2010 as compared to the mix of deliverables in the first quarter of 2009. Also contributing to
the increase is an increase in professional services revenue associated with performance
management products, which typically require a higher level of services than our Eagle 5
related products.
Regardless of the mix of products purchased, new customers require a greater amount of
installation, training and other professional services at the initial stages of deployment of
our products. As our customers gain more knowledge of our products, the follow-on orders
generally do not require the same levels of services and training, as our customers tend to
either: (i) perform the services themselves; (ii) require limited services, such as
installation only; or (iii) require no services, and, in particular, no database migration or
training services.
Cost of Sales
In order to better understand our cost structure, we analyze and present our costs and
expenses in the categories discussed below:
Cost of goods sold
Cost of goods sold includes: (i) materials, labor, and overhead costs incurred internally and
paid to contract manufacturers to produce our products; (ii) personnel and other costs incurred to
install our products; and (iii) customer service costs to provide continuing support to our
customers under our warranty offerings. Cost of goods sold in dollars and as a percentage of
revenues for the three and six months ended June 30, 2010 and 2009 were as follows (in thousands,
except percentages):
For the Three Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
Cost of good sold |
$ | 36,586 | $ | 36,364 | $ | 222 | 1 | % | ||||||||
Revenues |
109,507 | 114,183 | (4,676 | ) | (4 | )% | ||||||||||
Cost of good sold as a percentage of revenues |
33 | % | 32 | % | ||||||||||||
For the Six Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
Cost of good sold |
$ | 75,190 | $ | 76,713 | $ | (1,523 | ) | (2 | )% | |||||||
Revenues |
225,498 | 230,841 | (5,343 | ) | (2 | )% | ||||||||||
Cost of good sold as a percentage of revenues |
33 | % | 33 | % |
Cost of goods sold increased slightly in both absolute dollars and as a percentage of
revenues in the three months ended June 30, 2010 as compared to the same period in 2009. Cost of
goods sold for the second quarter of 2009 included a warranty charge associated with a Class A
warranty event related to our performance management product line of $5.0 million, or 4% of
revenues. Thus, cost of goods sold excluding this charge increased $5.2 million in 2010. The
increase in terms of absolute dollars and as a percentage of revenue was primarily attributable to
a higher percentage of our revenues being derived from emerging markets, particularly India, which
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are typically at lower gross margins. Partially offsetting this increase was lower incentive
compensation resulting from lower orders and operating performance as compared to our incentive
targets for the period.
For the six months ended June 30, 2010 our cost of goods sold decreased by 2% in absolute
dollars and remained comparable as a percentage of revenues as compared to the same period in 2009.
As mentioned previously, cost of goods sold during the first half of 2009 included a $5.0 million
warranty charge, representing 2% of 2009 year-to-date revenues. Excluding the impact of this
charge, cost of goods sold increased by $3.5 million during the six months ended June 30, 2010,
with the increase principally due to a higher percentage of our revenues being derived from
emerging markets, particularly India, partially offset by (i) a proportionate decline in cost in
line with the decline in revenues and (ii) lower incentive compensation resulting from lower orders
and operating performance as compared to our incentive targets for the period.
As we continue to expand our international presence, our cost of goods sold as a percentage of
revenues may be negatively impacted as the result of our decision to develop new sales channels and
customer relationships in new markets, and also due to price competition. Further, many of our
next generation products are initial system sales, which are typically at lower gross margins than
our corporate average. However, as we seed these products in our installed base, the follow on
orders in many cases will be software only and therefore at margins significantly above our
corporate average. In addition, changes in the following factors may also affect margins: product
mix; competition; customer discounts; supply and demand conditions in the electronic components
industry; internal and outsourced manufacturing capabilities and efficiencies; foreign currency
fluctuations; pricing pressure as we expand internationally; and general economic conditions.
Amortization of Intangible Assets
Amortization of intangible assets for the three and six months ended June 30, 2010 and 2009
was as follows (in thousands):
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Amortization of intangible assets related to: |
||||||||||||||||
Camiant |
$ | 1,954 | $ | | $ | 1,954 | $ | | ||||||||
mBalance |
858 | 916 | 1,789 | 1,843 | ||||||||||||
Steleus |
482 | 483 | 965 | 965 | ||||||||||||
Blueslice |
556 | | 556 | | ||||||||||||
iptelorg |
109 | 116 | 228 | 224 | ||||||||||||
Other |
8 | | 8 | | ||||||||||||
Total |
$ | 3,967 | $ | 1,515 | $ | 5,500 | $ | 3,032 | ||||||||
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Research and Development Expenses
Research and development expenses include costs associated with the development of new
products, enhancements of existing products and quality assurance activities. These costs consist
primarily of employee salaries and benefits, occupancy costs, consulting costs and the cost of
development equipment and supplies. The following sets forth our research and development expenses
in dollars and as a percentage of revenues for the three and six months ended June 30, 2010 and
2009 (in thousands, except percentages):
For the Three Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
Research and development |
$ | 21,763 | $ | 25,551 | $ | (3,788 | ) | (15) | % | |||||||
Percentage of revenues |
20 | % | 22 | % | ||||||||||||
For the Six Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
Research and development |
$ | 44,572 | $ | 51,403 | $ | (6,831 | ) | (13) | % | |||||||
Percentage of revenues |
20 | % | 22 | % |
The following is a summary of the year-over-year fluctuations in our research and
development expenses during the three and six months ended June 30, 2010 as compared to the three
and six months ended June 30, 2009 (in thousands):
Three Months | Six Months | |||||||
Ended | Ended | |||||||
June 30, | June 30, | |||||||
2009 to 2010 | 2009 to 2010 | |||||||
Increase (decrease) in: |
||||||||
Salaries, benefits and incentive compensation |
$ | (2,080 | ) | $ | (3,642 | ) | ||
Stock-based compensation |
(112 | ) | (308 | ) | ||||
Integration-related compensation |
(32 | ) | (179 | ) | ||||
Consulting and professional services |
(1,099 | ) | (1,974 | ) | ||||
Facilities and depreciation |
(586 | ) | (877 | ) | ||||
Other |
121 | 149 | ||||||
Total |
$ | (3,788 | ) | $ | (6,831 | ) | ||
The decrease in research and development expenses, both on a quarter-over-quarter and
year-over year basis, was principally due to decreased expenses related to our employees,
consulting services, and facilities and depreciation. In particular, salaries, benefits and
incentive compensation decreased as a result of lower incentive compensation recorded in the first
half of 2010 resulting from lower orders and operating performance as compared to our incentive
targets. Also affecting our research and development expenses across all categories was a
reduction in our spending as a result of (i) completing many of the International Telecommunication
Union and local feature development projects necessary to win new Eagle 5 customers in
international markets, and (ii) our continued efforts to obtain better efficiencies across our
research and development activities. In particular, we are beginning to see reductions in
personnel and consulting costs associated with our Eagle 5 development efforts, as we shift
resources to our next generation products. Further, we have been able to reduce our depreciation
expense as a result of (i) our focus on deploying newer technologies that allowed us to centralize
and share our development equipment, and (ii) lower capital expenditures required to support the
development efforts of our next generation products, as they are compatible with off the shelf
hardware versus our Eagle 5 platform, which is on proprietary hardware.
Partially offsetting these decreases in research and development costs is a $2.1 million
increase for the three and six months ended June 30, 2010 associated with our recent acquisitions,
principally within salaries, benefits and incentive compensation category.
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Sales and Marketing Expenses
Sales and marketing expenses consist primarily of costs associated with our sales force and
marketing personnel, including: (i) salaries, commissions and related costs; (ii) outside contract
personnel; (iii) facilities costs; (iv) advertising and other marketing costs, such as tradeshows;
and (v) travel and other costs. The following table sets forth our sales and marketing expenses in
dollars and as a percentage of revenues for the three and six months ended June 30, 2010 and 2009
(in thousands, except percentages):
For the Three Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
Sales and marketing expenses |
$ | 18,229 | $ | 17,110 | $ | 1,119 | 7 | % | ||||||||
Percentage of revenues |
17 | % | 15 | % | ||||||||||||
For the Six Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
Sales and marketing expenses |
$ | 35,666 | $ | 34,406 | $ | 1,260 | 4 | % | ||||||||
Percentage of revenues |
16 | % | 15 | % |
The following is a summary of the year-over-year fluctuation in our sales and marketing
expenses during the three and six months ended June 30, 2010 as compared to the three and six
months ended June 30, 2009 (in thousands):
Three Months | Six Months | |||||||
Ended | Ended | |||||||
June 30, | June 30, | |||||||
2009 to 2010 | 2009 to 2010 | |||||||
Increase (decrease) in: |
||||||||
Salaries, benefits and incentive compensation |
$ | 74 | $ | 410 | ||||
Stock-based compensation |
74 | 143 | ||||||
Integration-related compensation |
493 | 493 | ||||||
Sales commissions |
(346 | ) | (856 | ) | ||||
Marketing and advertising |
223 | (103 | ) | |||||
Travel |
284 | 1,021 | ||||||
Other |
317 | 152 | ||||||
Total |
$ | 1,119 | $ | 1,260 | ||||
The increase in sales and marketing expenses in the second quarter and first half of 2010
as compared to the same periods of 2009 was primarily attributable to additional sales and
marketing related personnel costs associated with the recent acquisitions of Camiant and Blueslice.
Specifically, our sales and marketing costs increased by $1.8 million during the second quarter
and six months ended June 30, 2010 as a result of these acquisitions. Included in this increase is
integration-related compensation of $0.5 million associated with certain employees of Camiant and
Blueslice receiving cash compensation in lieu of stock options that were not assumed as part of the
acquisitions, along with certain stay-on and integration related bonuses. Also, impacting our
sales and marketing expenses were increases in our travel and employee related expenses as a result
of increased customer oriented activities. Partially offsetting these increases were (i) lower
incentive compensation recorded in the first half of 2010 resulting from lower orders and operating
performance as compared to our incentive targets, and (ii) decreased sales commissions, primarily
due to lower revenues. We expect the size of our sales and marketing workforce and related
expenses will continue to vary to a greater degree in response to our orders than to revenues.
General and Administrative Expenses
General and administrative expenses are composed primarily of costs associated with our
executive and administrative personnel (e.g., legal, business development, finance, information
technology and human resources personnel) and consist of: (i) salaries and related compensation
costs; (ii) consulting and other professional
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services (e.g., litigtion and other outside counsel fees, and audit fees); (iii) facilities and
insurance costs; and (iv) travel and other costs. The following table sets forth our general and
administrative expenses in dollars and as a percentage of revenues for the three and six months
ended June 30, 2010 and 2009 (in thousands, except percentages):
For the Three Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
General and administrative expenses |
$ | 12,807 | $ | 13,717 | $ | (910 | ) | (7) | % | |||||||
Percentage of revenues |
12 | % | 12 | % | ||||||||||||
For the Six Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
General and administrative expenses |
$ | 25,957 | $ | 27,140 | $ | (1,183 | ) | (4) | % | |||||||
Percentage of revenues |
12 | % | 12 | % |
The following is a summary of the year-over-year fluctuation in our general and
administrative expenses during the three and six months ended June 30, 2010 as compared to the
three and six months ended June 30, 2009 (in thousands):
Three Months | Six Months | |||||||
Ended | Ended | |||||||
June 30, | June 30, | |||||||
2009 to 2010 | 2009 to 2010 | |||||||
Increase (decrease) in: |
||||||||
Salaries, benefits and incentive compensation |
$ | (1,104 | ) | $ | (1,150 | ) | ||
Stock-based compensation |
(18 | ) | (33 | ) | ||||
Integration-related compensation |
349 | 349 | ||||||
Consulting and professional services |
249 | 163 | ||||||
Facilities and depreciation |
(118 | ) | (77 | ) | ||||
Bad debt expense |
(379 | ) | (475 | ) | ||||
Other |
111 | 40 | ||||||
Total |
$ | (910 | ) | $ | (1,183 | ) | ||
The decrease in general and administrative expenses in the first quarter and first half
of 2010 was primarily due to a reduction in employee related costs and a reduction in bad debt
expense. Our employee related costs decreased as a result of (i) reduced incentive compensation
recorded in the first half of 2010 resulting from lower orders and operating performance as
compared to our incentive targets for the period, and (ii) realizing the benefits our cost control
initiatives. Bad debt expense was lower in 2010 due to our collection efforts and lower overall
orders and revenues, and the resulting accounts receivable balances. Partially offsetting these
decreases were increases of approximately $0.8 million associated with the addition of Camiant and
Blueslice employees to our management team. Included in this increase is $0.3 million associated
with certain employees of Camiant and Blueslice receiving cash compensation in lieu of stock
options that were not assumed as part of the acquisitions, along with certain stay-on and
integration related bonuses.
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Amortization of Intangible Assets
As a result of our acquisitions, we have recorded various intangible assets including
trademarks, customer relationships and non-compete agreements. Amortization of intangible assets
related to our acquisitions is as follows (in thousands):
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Camiant |
$ | 736 | $ | | $ | 736 | $ | | ||||||||
mBalance |
212 | 226 | 442 | 455 | ||||||||||||
Blueslice |
73 | | 73 | | ||||||||||||
Steleus |
| 89 | | 178 | ||||||||||||
Total |
$ | 1,021 | $ | 315 | $ | 1,251 | $ | 633 | ||||||||
In the second quarter of 2010, amortization of intangible assets increased by $0.7
million, primarily due to the increase in our intangible assets as a result of acquiring Camiant
and Blueslice in the second quarter of 2010, offset by a reduction due to having fully amortized
the intangibles related to Steleus in 2009.
Other Income and Expense
For the three and six months ended June 30, 2010 and 2009, other income and expenses were
as follows (in thousands, except percentages):
For the Three Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
Interest income |
$ | 127 | $ | 264 | $ | (137 | ) | (52 | )% | |||||||
Interest expense |
(54 | ) | (57 | ) | 3 | (5 | )% | |||||||||
Impairment of investment in privately held company |
| (2,758 | ) | 2,758 | (100 | )% | ||||||||||
Gain on investments carried at fair value, net |
38 | 321 | (283 | ) | (88 | )% | ||||||||||
Foreign currency loss, net and other |
(1,025 | ) | (402 | ) | (623 | ) | 155 | % | ||||||||
Other income (expense), net |
$ | (914 | ) | $ | (2,632 | ) | $ | 1,718 | (65 | )% | ||||||
For the Six Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
Interest income |
$ | 269 | $ | 634 | $ | (365 | ) | (58 | )% | |||||||
Interest expense |
(121 | ) | (112 | ) | (9 | ) | 8 | % | ||||||||
Impairment of investment in privately held company |
| (2,758 | ) | 2,758 | (100 | )% | ||||||||||
Gain on investments carried at fair value, net |
118 | 1,435 | (1,317 | ) | (92 | )% | ||||||||||
Foreign currency loss, net and other |
(2,125 | ) | (1,820 | ) | (305 | ) | 17 | % | ||||||||
Other income (expense), net |
$ | (1,859 | ) | $ | (2,621 | ) | $ | 762 | (29 | )% | ||||||
Interest Income and Expense. Interest income decreased during the three and six months
ended June 30, 2010 due to (i) a shift during 2009 from higher yielding investments into lower
yielding cash and cash equivalents as we sought to reduce our exposure to the credit and liquidity
crisis in the financial markets, and (ii) our purchase of Camiant and Blueslice in May 2010 for
approximately $162.0 million and the resulting reduction of our interest bearing cash balances.
Impairment of investment in privately held company. During the second quarter of 2009, we
recorded an impairment charge of $2.8 million related to our investment in a privately held
company. This charge represented the difference between our $15.0 million cost basis in this
investment and its then estimated fair value of $12.2 million as of June 30, 2009 as we deemed the
decline in the value of this asset to be other-than-temporary.
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Gain on investments carried at fair value, net. Gain on investments carried at fair value,
net represents the net gain resulting from changes in the fair value of our ARS portfolio and the
related Put right. Our ARS portfolio was classified as trading securities and, accordingly,
changes in its fair value were recorded in the corresponding period earnings (i.e., marked to
market). The UBS Put right was recorded at fair value in accordance with the provisions of the
authoritative guidance for investments, and changes in the fair value were also recorded in the
corresponding period earnings. We exercised the Put right on June 30, 2010, requiring UBS to
purchase our remaining ARS portfolio at par value plus accrued interest.
Foreign currency loss, net and other. Foreign currency loss, net and other for the three and
six months ended June 30, 2010 and 2009 consists primarily of (i) the net cost of our hedging
program related to foreign currency risk, including the gains and losses on forward contracts on
foreign currency exchange rates used to hedge our exposure to foreign currency risks, (ii) foreign
currency gains and losses associated with the underlying hedged item (principally accounts
receivable), and (iii) remeasurement adjustments from consolidating our international subsidiaries.
As we expand our international business further, we will continue to enter into a greater number
of transactions denominated in currencies other than the U.S. Dollar and will be exposed to greater
risk related to exchange rate foreign currency fluctuations and translation adjustments.
Provision for Income Taxes
The income tax provisions for the three months ended June 30, 2010 and 2009 were approximately
$2.3 million and $7.2 million, respectively, resulting in income tax expense as a percentage of
pre-tax income, or an effective tax rate, of 20% and 43%, respectively. The income tax provisions
for the six months ended June 30, 2010 and 2009 were approximately $9.9 million and $12.8 million,
resulting in income tax expense as a percentage of pre-tax income, or an effective tax rate, of 30%
and 37% respectively.
The differences in the effective rates for the three and six months ended June 30, 2010, as
compared to the same periods in 2009, are primarily due to (i) a higher percentage of our projected
income for the full year being derived from international locations with lower tax rates than the
U.S., (ii) the cumulative effect of reducing our full year estimated effective tax rate as a result
of the shift of income to lower tax jurisdictions discussed in item (i), and (iii) the
establishment of a valuation allowance of $1.0 million in the second quarter of 2009 for a deferred
tax item resulting from the impairment of our investment in a privately held company.
Additionally, we did not reflect a benefit for the U.S. federal research and development tax credit
as part of our anticipated annual effective rate for the second quarter of 2010 because the U.S.
Congress had not extended this tax credit as of June 30, 2010. A benefit of this credit was
reflected in the projected annual effective rate as of the end of the second quarter of 2009. A
cumulative benefit resulting from this credit will be recognized in the quarter, if any, in which
the U.S. Congress enacts the related legislation. Please refer to Note 8 of the accompanying
unaudited condensed consolidated financial statements for a discussion of the reconciliations of
our effective tax rates for the three and six months ended June 30, 2010 and 2009 to the statutory
rate of 35%.
We no longer have a pool of windfall tax benefits as defined by the authoritative guidance
for stock-based compensation. As a result, future cancellations or exercises that result in a tax
deduction that is less than the related deferred tax asset recognized under the authoritative
guidance will negatively impact our effective tax rate and increase its volatility, resulting in a
reduction of our earnings. The authoritative guidance for stock compensation requires that the
impact of such events be recorded as discrete items in the quarter in which the event occurs.
Liquidity and Capital Resources
Overview
We derive our liquidity and capital resources primarily from our cash flows from operations
and from our working capital. Our working capital decreased by $145.8 million, from $441.3 million
as of December 31, 2009 to $295.5 million as of June 30, 2010, primarily due to the reduction in
our cash balances from the acquisition of Camiant and Blueslice in the second quarter of 2010 for
total net cash consideration of $162.0 million. This decrease in working capital was partially
offset by cash inflow from operating activities of $21.2 million. The significant components of
our working capital are liquid assets such as cash and cash equivalents and accounts receivable,
and deferred costs and commissions, reduced by trade accounts payable, accrued expenses, accrued
compensation and related expenses, and the current portion of deferred revenues.
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We have a line of credit facility of $50.0 million and a letter of credit facility of $10.0
million with Wells Fargo Bank, National Association that was originally with Wachovia Bank,
National Association. The line of credit is unsecured except for our pledge of 65% of the
outstanding stock of certain subsidiaries, while the letter of credit facility requires certain
levels of cash collateral for outstanding letters of credit. There were no outstanding borrowings
under the line of credit facility at either June 30, 2010 or 2009. As of June 30, 2010, there were
approximately $0.5 million of borrowings outstanding under the letter of credit facility, all of
which were fully collateralized by us.
We also utilized a letter of credit facility in the maximum amount of $5.0 million with Wells
Fargo which also required cash collateral. This letter of credit facility expired on December 31,
2009 and can no longer be used to issue new letters of credit. As of June 30, 2010, there were
letters of credit of approximately $1.4 million outstanding under this facility, all of which were
fully collateralized by us.
As of December 31, 2009, we held $81.8 million of ARS recorded at fair value, which
represented a decline of $11.2 million below our cost basis, and associated UBS Put right, at an
estimated fair value of $11.1 million. Throughout the second quarter of 2010, as in previous
quarters, issuers called certain securities which reduced the investment in our ARS portfolio. On
June 30, 2010, we exercised our UBS Put right requiring UBS to purchase the remaining balance of
our ARS portfolio at par value plus accrued interest. As a result of the issuer calls and our
exercising the UBS Put right, we received cash proceeds of $79.6 million during the quarter, which
liquidated our ARS portfolio.
We believe that our current working capital position, available line of credit and anticipated
cash flow from operations will be adequate to meet our cash needs for our daily operations and
capital expenditures for at least the next 12 months. Additionally, we believe these resources
allow us to continue to invest in further development of our technology and, when necessary or
appropriate, make selective acquisitions to continue to strengthen our product portfolio. Our
liquidity could be negatively impacted by a decrease in revenues resulting from a decline in demand
for our products or a reduction of capital expenditures by our customers.
Cash Flows
As discussed above, one of the primary sources of our liquidity is our ability to generate
positive cash flows from operations. The following is a discussion of our primary sources and uses
of cash in our operating, investing and financing activities:
Cash Flows from Operating Activities
Net cash provided by operating activities from continuing operations was $21.2 million and
$34.6 million for the six months ended June 30, 2010 and 2009, respectively. The decrease in our
cash flows from continuing operations was primarily the result of lower cash collections of
accounts receivable in the first half of 2010 as compared to the first half of 2009, resulting from
year-over-year decline in orders and associated billing activity.
Our cash flows from continuing operations were primarily derived from (i) our earnings from
ongoing operations prior to non-cash expenses such as stock-based compensation, depreciation,
amortization, bad debt, write-downs of inventory, warranty reserve charges, and deferred income
taxes, and (ii) changes in our working capital, which are primarily composed of changes in accounts
receivable, inventories, deferred revenue and associated deferred costs, accounts payable, accrued
expenses and accrued payroll and related expenses.
We currently anticipate that we will continue to operate our business with positive cash flows
from operations. Our ability to meet these expectations depends on our ability to achieve positive
earnings. Our ability to generate future cash flows from operations could be negatively impacted
by a decrease in demand for our products, which are subject to technological changes and increasing
competition, or a reduction of capital expenditures by our customers should they continue to remain
cautious with their spending despite generally improving economic conditions, among other factors.
Cash Flows from Investing Activities
Net cash used in investing activities was ($76.5) million and ($6.6) million for the six
months ended June 30, 2010 and 2009, respectively. Our cash flows from investing activities
primarily relate to (i) purchases and sales of investments, (ii) strategic acquisitions, and (iii)
purchases of property and equipment.
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In the first half of 2010, acquisition related net cash outflows were $162.0 million for the
purchase of Camiant and Blueslice. Our investment in property and equipment was $7.5 million.
Offsetting these investing cash outflows was $93.0 million in proceeds from calls and the exercise
of our UBS Put right discussed previously.
For the six months ended June 30, 2009, our investing activities consisted of property and
equipment purchases of $12.1 million, offset in part by the call of $5.5 million of ARS by the
issuers.
We continue to closely monitor our capital expenditures, while making strategic investments in
the development of our existing products and the replacement of certain older computer and
information technology infrastructure to meet the needs of our workforce. Accordingly, we expect
our total capital expenditures to be between $18.0 million and $20.0 million for 2010.
Cash Flows from Financing Activities
Net cash provided by financing activities was $8.0 million and $4.9 million for the six months
ended June 30, 2010 and 2009, respectively. For the six months ended June 30, 2010, our financing
activities primarily consisted of proceeds of $10.7 million from net issuances of common stock
pursuant to the exercise of employee stock options and purchase under our employee stock purchase
plan, including the excess tax benefit on those exercises, partially offset by $2.7 million of
employee withholding tax payments made as a result of net share settlements of equity awards.
For the six months ended June 30, 2009, our financing activities consisted primarily of the
proceeds of $6.5 million from the issuance of common stock pursuant to the exercise of employee
stock options and purchases under our employee stock purchase plan, including the excess tax
benefit on those exercises, partially offset by $1.7 million of employee withholding tax payments
made as a result of net share settlements of equity awards.
Critical Accounting Policies and Estimates
For information about our critical accounting policies and estimates, see the Critical
Accounting Policies and Estimates section of Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations in our 2009 Form 10-K. In addition, please refer to
Note 1 of the accompanying unaudited condensed consolidated financial statements for information
regarding our adoption of new revenue recognition guidance.
Recent Accounting Pronouncements
Revenue Recognition for Arrangements with Multiple Deliverables
In September 2009, the Financial Accounting Standards Board (FASB) amended the accounting
standards for revenue recognition to remove tangible products containing software components and
non-software components that function together to deliver the products essential functionality
from the scope of industry-specific software revenue recognition guidance. As a result, these
arrangements are accounted for in accordance with the new, non-software guidance for arrangements
with multiple deliverables.
The FASB also amended the accounting standards for revenue recognition for arrangements with
multiple deliverables. The new authoritative guidance for arrangements with multiple deliverables
requires that arrangement consideration be allocated at the inception of an arrangement to all
deliverables using the relative selling price method. It also establishes a selling price
hierarchy for determining the selling price of a deliverable, which includes: (i) vendor-specific
objective evidence (VSOE) if available; (ii) third-party evidence (TPE) if vendor-specific
objective evidence is not available; and (iii) best estimated selling price (BESP) if neither
vendor-specific nor third-party evidence is available. The new guidance eliminates the residual
method of allocation for multiple-deliverable revenue arrangements which we used historically when
we applied the software revenue recognition guidance to our multiple element arrangements.
We elected to early adopt, as permitted, the new authoritative guidance on January 1, 2010, on
a prospective basis for applicable transactions originating or materially modified after January 1,
2010. As substantially all of our telecommunications products include both tangible products and
software elements that function together to deliver the tangible products essential functionality,
the existing software revenue recognition guidance no longer applies to the majority of our
transactions. The adoption of the new, non-software revenue recognition guidance did not have a
material impact on the timing, pattern, or amount of revenue recognized in the second quarter and
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first half of 2010, primarily due to (i) a portion of second quarter and first half 2010
revenue being derived from the backlog of orders which were received prior to January 1, 2010 and
therefore not falling under the new non-software revenue recognition guidance, and (ii) the new,
non-software revenue recognition guidance not differing significantly from the software revenue
recognition guidance when applied to acceptance based arrangements and arrangements that are
received and fulfilled within the same quarter. Based on currently available information, we
anticipate that the impact of adopting this guidance on revenue recognition will not be material
for our 2010 results. However, this assessment may change because such impacts depend on terms and
conditions of arrangements in effect in those future periods.
Please refer to Note 1 to the accompanying unaudited condensed consolidated financial
statements for additional information about this new revenue recognition guidance.
Fair Value Measurements and Disclosures
In January 2010, the FASB issued Accounting Standards Update 2010-06 Improving Disclosures
about Fair Value Measurements. This Update amends the authoritative guidance for fair value
measurements and disclosures by adding new disclosure requirements with respect to transfers in and
out of Levels 1 and 2 fair value measurements, as well as by requiring gross basis disclosures for
purchases, sales, issuances, and settlements included in the reconciliation of Level 3 fair value
measurements. This Update also amends the authoritative guidance by providing clarifications to
existing disclosure requirements. The new disclosures and clarifications of existing disclosures
are effective for interim and annual reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements which are effective for fiscal years beginning after
December 15, 2010 and for interim periods within those fiscal years. Early adoption is permitted.
We adopted this new guidance, including the guidance related to the disclosures about
purchases, sales, issuances, and settlements in the roll forwards of activity in Level 3 fair value
measurements, on January 1, 2010. The adoption of this guidance did not have a material impact on
our financial position or results of operations.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
The statements that are not historical facts contained in this Managements Discussion and
Analysis of Financial Condition and Results of Operations and other sections of this Quarterly
Report on Form 10-Q are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Words such as may, will, intend, should, could, would,
expect, plan, anticipate, believe, estimate, project, predict, potential, and
variations of these words and similar expressions are sometimes used to identify forward-looking
statements. These statements reflect the current belief, expectations, estimates, forecasts or
intent of our management and are subject to and involve certain risks and uncertainties. There can
be no assurance that our actual future performance will meet managements expectations. As
discussed in our Annual Report on Form 10-K for the year ended December 31, 2009 and our other
filings with the SEC, our future operating results are difficult to predict and subject to
significant fluctuations. Factors that may cause future results to differ materially from
managements current expectations include, among others:
| the effect of the recent economic crisis on overall spending by our customers, including increasing pressure from our customers for us to lower prices for our products and warranty services, further changes in general economic conditions, such as debt crises in European countries, and other unexpected changes in economic, social, or political conditions in the countries in which we operate; | ||
| the continued decline in sales of our Eagle 5 related products; | ||
| risks related to our international sales, markets and operations, including among others, import regulations, limited intellectual property protection, including protection of our software source code, increased costs and potential liabilities related to compliance with current and future security provisions in customer contracts and regulations, and security restrictions and access requirements imposed by governments, including in particular the government of India; | ||
| access to credit markets by our customers and the impact of tightening credit on capital spending; | ||
| exposure to increased bad debt expense and product and service disputes as a result of general economic conditions and the uncertain credit markets worldwide; | ||
| our ability to gain the benefits we anticipate from our acquisitions, including our acquisitions of Camiant and Blueslice, including expected sales of new products and synergies between the companies products and operations; | ||
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| our ability to successfully integrate the businesses we acquire, including Camiant and Blueslice; | ||
| continuing financial weakness in the telecommunications equipment sector, resulting in pricing pressure on our products and services, as certain of our competitors reduce their prices, lengthen their payment terms and enter into terms and conditions that are generally less favorable to them; | ||
| the effect on our customers and our sales and operations of security restrictions related to telecommunications equipment imposed by governments, including the risk that source code escrows required by such government requirements could be released to our competitors; | ||
| the timely development and introduction of new products and services, our product mix and the geographic mix of our revenues and the associated impact on gross margins and operating expenses; | ||
| market acceptance and delivery of our new products and technologies, and the effect of any product that fails to meet one customers expectations on the sale of that or any other products to that or other customers; | ||
| our ability to compete with other manufacturers that have lower cost bases than ours and/or are partially supported by foreign government subsidies or employ unfair trade practices; | ||
| the risk that continued service provider consolidation or outsourcing of network maintenance and operations functions will insert a potential competitor between Tekelec and its customers and/or erode our level of service to such service providers and/or negatively affect our margins; | ||
| uncertainties related to the timing of revenue recognition due to the increasing percentage of international and new customers in our backlog; | ||
| the risk that our financial results for the full year 2010 will not meet our expectations; | ||
| the timing of significant orders and shipments, the timing of revenue recognition under the residual method of accounting as well as new non-software revenue recognition guidance adopted in the first quarter of 2010, and the lengthy sales cycles for our products; | ||
| the availability and success or failure of advantageous strategic and vendor relationships; | ||
| litigation, including patent-related litigation, and regulatory matters and the costs and expenses associated therewith; | ||
| the ability of carriers to utilize excess capacity of signaling infrastructure and related products in their networks, the capital spending patterns of customers, and our dependence on wireless customers for a significant percentage and growth of our revenues; and | ||
| other risks described in this Form 10-Q and in our Form 10-K for 2009 and in our other Securities and Exchange Commission filings. |
Many of these risks and uncertainties are outside of our control and are difficult for us to
forecast or mitigate. Actual results may differ materially from those expressed or implied in such
forward-looking statements. We do not assume any responsibility for updating or revising these
forward-looking statements. Undue emphasis or reliance should not be placed on any forward-looking
statements contained herein or made elsewhere by or on behalf of us.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For quantitative and qualitative disclosures about market risk, see Item 7A, Quantitative and
Qualitative Disclosures about Market Risk, included in our 2009 Form 10-K. Our exposures to
market risk have not changed materially since December 31, 2009 other than as discussed in Note 4
Fair Value of Financial Instruments to the accompanying unaudited condensed consolidated
financial statements and under the caption Critical Accounting Policies and Estimates in Part I,
Item 2 of this Form 10-Q.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on our managements evaluation (with the participation of our Chief Executive Officer
and Chief Financial Officer), as of the end of the quarter covered by this report, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the Exchange Act)), are effective in that they provide reasonable assurance that
information required to be disclosed by us in reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms and is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the period covered
by this report that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and our Chief Financial Officer, does
not expect that our disclosure controls and procedures or our internal control over financial
reporting are or will be capable of preventing or detecting all errors and all fraud. Any control
system, no matter how well designed and operated, can provide only reasonable, not absolute,
assurance that the control systems objectives will be met. The design of a control system must
reflect the fact that there are resource constraints and the benefits of controls must be
considered relative to their costs. Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that misstatements due to error
or fraud will not occur or that all control issues and instances of fraud, if any, within the
company have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by collusion of two or
more people, or by management override of the controls. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential future
conditions.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in the description of material legal proceedings as
reported in Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2009.
Item 1A. Risk Factors
There have been no material changes from the risk factors as previously disclosed in Part 1,
Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009.
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Item 6. Exhibits
Exhibit | Description | |||
2.1 | Agreement and Plan of Merger dated as of May 5, 2010, by and among the
Registrant, Camiant, Inc., SPAN Corp., Inc. and Steven Van Beaver, as
representative of the stockholders of Camiant, Inc. (schedules to this
agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K, and
the Registrant agrees to furnish a copy of any such schedule supplementally
to the Commission upon request)(1) |
|||
2.2 | Share Purchase Agreement dated as of May 5, 2010, by and among the
Registrant, Tekelec Canada Inc., Stephan Ouaknine, Edie Ledany, Winvest Inc.,
9129-2144 Québec Inc., 9129-2136 Québec Inc., Michael Rosenthal, John
Grobstein, 171033 Canada Inc., 171036 Canada Inc., Capital Brinvest Inc. and
Positron Inc. (schedules to this agreement have been omitted pursuant to Item
601(b)(2) of Regulation S-K, and the Registrant agrees to furnish a copy of
any such schedule supplementally to the Commission upon request)(1) |
|||
10.1 | Amendment No. 1 to Officer Severance Plan effective May 14, 2010(2) |
|||
10.2 | Sixth Amendment, dated as of May 3, 2010, to Credit Agreement dated as of
October 2, 2008 by and among Tekelec, Tekelec International, SPRL, the
lenders from time to time parties thereto, and Wells Fargo Bank, N.A. (as
successor to Wachovia Bank, National Association), as Administrative Agent,
Swingline Lender, Issuing Lender and Lender(2) |
|||
31.1 | Certification of Chief Executive Officer of Tekelec pursuant to
Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002(2) |
|||
31.2 | Certification of Chief Financial Officer of Tekelec pursuant to
Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002(2) |
|||
32.1 | Certifications of Chief Executive Officer and Chief Financial Officer of
Tekelec pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002(2) |
(1) | Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 0-15135) dated May 5, 2010, as filed with the Commission on May 6, 2010. | |
(2) | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TEKELEC | ||
Date: August 5, 2010
|
/s/ FRANCO PLASTINA | |
Franco Plastina | ||
President and Chief Executive Officer | ||
Date: August 5, 2010
|
/s/ GREGORY S. RUSH | |
Gregory S. Rush | ||
Senior Vice President and Chief Financial Officer | ||
(Principal Financial and Accounting Officer) | ||
Date: August 5, 2010
|
/s/ PAUL J. ARMSTRONG | |
Paul J. Armstrong | ||
Vice President and Corporate Controller |
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EXHIBIT INDEX
Exhibit No. | Description | |||
10.1 | Amendment No. 1 to Officer Severance Plan effective May 14, 2010 |
|||
10.2 | Sixth Amendment, dated as of May 3, 2010, to Credit Agreement
dated as of October 2, 2008 by and among Tekelec, Tekelec
International, SPRL, the lenders from time to time parties
thereto, and Wells Fargo Bank, N.A. (as successor to Wachovia
Bank, National Association), as Administrative Agent, Swingline
Lender, Issuing Lender and Lender |
|||
31.1 | Certification of Chief Executive Officer of Tekelec pursuant to
Rule 13a-14(a) under the Exchange Act, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification of Chief Financial Officer of Tekelec pursuant to
Rule 13a-14(a) under the Exchange Act, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
32.1 | Certifications of Chief Executive Officer and Chief Financial
Officer of Tekelec pursuant to U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |