Attached files

file filename
EX-31.2 - SECTION 302 CFO CERTIFICATION - LIONBRIDGE TECHNOLOGIES INC /DE/dex312.htm
EX-10.3 - LEASE DATED AS OF MAY 31, 2010 - LIONBRIDGE TECHNOLOGIES INC /DE/dex103.htm
EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - LIONBRIDGE TECHNOLOGIES INC /DE/dex321.htm
EX-10.4 - LEASE DATED AS OF JUNE 22, 2010 - LIONBRIDGE TECHNOLOGIES INC /DE/dex104.htm
EX-10.2 - LEASE DATED AS OF MAY 12, 2010 - LIONBRIDGE TECHNOLOGIES INC /DE/dex102.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - LIONBRIDGE TECHNOLOGIES INC /DE/dex311.htm
EX-10.1 - LEASE DATED AS OF APRIL 26, 2010 - LIONBRIDGE TECHNOLOGIES INC /DE/dex101.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2010

OR

 

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

For the transition period from              to             

Commission File Number 000-26933

 

 

LIONBRIDGE TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

  

 

 

Delaware   04-3398462
(State of Incorporation)   (I.R.S. Employer Identification No.)

1050 Winter Street, Waltham, MA 02451

(Address of Principal Executive Offices)

Registrant’s Telephone Number, Including Area Code: 781-434-6000

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes    ¨    No  x

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of July 31, 2010 was 60,206,361.

 

 

 


Table of Contents

LIONBRIDGE TECHNOLOGIES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010

TABLE OF CONTENTS

 

         Page

PART I: FINANCIAL INFORMATION

  
ITEM 1   Condensed Consolidated Financial Statements:    3
  Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2010 and December 31, 2009    3
  Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2010 and 2009    4
  Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2010 and 2009    5
  Notes to Condensed Consolidated Financial Statements (unaudited)    6
ITEM 2   Management’s Discussion and Analysis of Financial Condition and Results of Operations    15
ITEM 3   Quantitative and Qualitative Disclosures About Market Risk    26
ITEM 4   Controls and Procedures    27

PART II: OTHER INFORMATION

  
ITEM 1   Legal Proceedings    28
ITEM 1A   Risk Factors    29
ITEM 2   Unregistered Sales of Equity Securities and Use of Proceeds    29
ITEM 6   Exhibits    29
SIGNATURE    30
EXHIBIT INDEX    31

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

LIONBRIDGE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

 

     June 30,
2010
    December 31,
2009
 
     (unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 28,852      $ 27,432   

Accounts receivable, net of allowance of $500 at June 30, 2010 and December 31, 2009

     55,043        55,501   

Unbilled receivables

     19,180        17,246   

Other current assets

     9,972        8,290   
                

Total current assets

     113,047        108,469   

Property and equipment, net

     15,003        12,681   

Goodwill

     9,675        9,675   

Other intangible assets, net

     12,034        14,480   

Other assets

     7,786        7,414   
                

Total assets

   $ 157,545      $ 152,719   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 18,158      $ 20,831   

Accrued compensation and benefits

     18,827        16,524   

Accrued outsourcing

     11,058        9,539   

Accrued merger and restructuring

     1,103        1,773   

Income taxes payable

     379        1,421   

Accrued expenses and other current liabilities

     12,453        10,715   

Deferred revenue

     9,908        11,484   
                

Total current liabilities

     71,886        72,287   
                

Long-term debt

     24,700        24,700   

Deferred income taxes, long-term

     643        643   

Other long-term liabilities

     13,977        14,060   

Contingencies (Note 11)

    

Stockholders’ equity:

    

Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued and outstanding

     —          —     

Common stock, $0.01 par value; 100,000,000 shares authorized; 60,209,338 and 58,192,394 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively

     602        582   

Additional paid-in capital

     260,069        258,449   

Accumulated deficit

     (230,379     (235,414

Accumulated other comprehensive income

     16,047        17,412   
                

Total stockholders’ equity

     46,339        41,029   
                

Total liabilities and stockholders’ equity

   $ 157,545      $ 152,719   
                

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

 

3


Table of Contents

LIONBRIDGE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in thousands, except per share data)

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
     2010     2009     2010     2009  

Revenue

   $ 104,872      $ 98,028      $ 205,652      $ 186,431   

Operating expenses:

        

Cost of revenue (exclusive of depreciation and amortization included below)

     69,643        65,703        138,588        126,876   

Sales and marketing

     7,465        7,022        14,433        14,715   

General and administrative

     18,698        18,442        37,490        37,245   

Research and development

     952        1,096        1,710        2,281   

Depreciation and amortization

     1,175        1,154        2,305        2,295   

Amortization of acquisition-related intangible assets

     1,223        1,380        2,446        2,760   

Merger, restructuring and other charges

     666        1,645        1,855        2,638   
                                

Total operating expenses

     99,822        96,442        198,827        188,810   
                                

Income (loss) from operations

     5,050        1,586        6,825        (2,379

Interest expense:

        

Interest on outstanding debt

     282        465        579        1,002   

Amortization of deferred financing costs and discount on debt

     44        45        88        89   

Interest income

     8        20        33        79   

Other (income) expense, net

     (731     720        (457     725   
                                

Income (loss) before income taxes

     5,463        376        6,648        (4,116

Provision for income taxes

     905        624        1,613        1,208   
                                

Net income (loss)

   $ 4,558      $ (248   $ 5,035      $ (5,324
                                

Net income (loss) per share of common stock:

        

Basic

   $ 0.08      $ (0.00   $ 0.09      $ (0.10

Diluted

   $ 0.08      $ (0.00   $ 0.09      $ (0.10

Weighted average number of common shares outstanding:

        

Basic

     56,619        56,011        56,495        55,935   

Diluted

     59,854        56,011        59,191        55,935   

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

 

4


Table of Contents

LIONBRIDGE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)

 

     Six Months Ended
June 30,
 
     2010     2009  

Cash flows from operating activities:

    

Net income (loss)

   $ 5,035      $ (5,324

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Stock-based compensation

     1,994        2,083   

Amortization of deferred financing charges

     88        89   

Depreciation and amortization

     2,305        2,295   

Amortization of acquisition-related intangible assets

     2,446        2,760   

Non-cash merger, restructuring and other charges

     331        —     

Deferred income taxes

     —          (222

Net realized and unrealized foreign currency gains on forward contracts

     (911     —     

Other

     28        24   

Changes in operating assets and liabilities:

    

Accounts receivable

     (2,949     11,995   

Unbilled receivables

     (2,678     270   

Other current assets

     (1,451     1,238   

Other assets

     (597     (345

Accounts payable

     (335     922   

Income tax payable

     (1,105     (649

Accrued compensation and benefits

     2,272        (782

Accrued outsourcing

     2,171        (245

Accrued merger and restructuring

     (93     642   

Accrued expenses and other liabilities

     3,677        (2,125

Deferred revenue

     (1,068     (2,424
                

Net cash provided by operating activities

     9,160        10,202   
                

Cash flows from investing activities:

    

Purchases of property and equipment

     (5,891     (1,165

Proceeds from sale of property and equipment

     —          2   
                

Net cash used in investing activities

     (5,891     (1,163
                

Cash flows from financing activities:

    

Proceeds from issuance of short-term debt

     —          3,500   

Payments of short-term debt

     —          (3,500

Payments of long-term debt

     —          (19,000

Proceeds from issuance of common stock under stock option plans

     198        —     

Payments of capital lease obligations

     (5     (88
                

Net cash provided by (used in) financing activities

     193        (19,088
                

Net increase (decrease) in cash and cash equivalents

     3,462        (10,049

Effects of exchange rate changes on cash and cash equivalents

     (2,042     69   

Cash and cash equivalents at beginning of period

     27,432        37,978   
                

Cash and cash equivalents at end of period

   $ 28,852      $ 27,998   
                

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

 

5


Table of Contents

LIONBRIDGE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements include the accounts of Lionbridge Technologies, Inc. and its wholly owned subsidiaries (collectively, “Lionbridge” or the “Company”). These financial statements are unaudited. However, in the opinion of management, the consolidated financial statements include all adjustments, all of a normal nature, necessary for their fair presentation. Interim results are not necessarily indicative of results expected for a full year. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of the operations, financial position and cash flows of the Company in conformity with U.S. generally accepted accounting principles. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the U.S. These statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

The Company’s preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Estimates are used when accounting for collectibility of receivables, calculating service revenue using a proportional performance assessment and valuing intangible assets and deferred tax assets. Actual results could differ from these estimates.

2. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

Stock Option Plans

The Company has stock-based compensation plans for salaried employees and non-employee members of the Board of Directors. The plans provide for discretionary grants of stock options, restricted stock and stock units, and other stock-based awards. The plans are administered by the Nominating and Compensation Committee of the Board of Directors, which consists of non-employee directors.

In November 2005, the stockholders of Lionbridge Technologies, Inc. approved the Lionbridge 2005 Stock Incentive Plan (the “2005 Plan”), which had been previously adopted by the Lionbridge Board of Directors on October 7, 2005, for officers, employees, non-employee directors and other key persons of Lionbridge and its subsidiaries. On May 1, 2009, the stockholders of the Company approved an amendment to the 2005 Plan increasing the maximum number of shares of common stock available for issuance under the 2005 Plan by 4,500,000 shares to 8,500,000 shares. At June 30, 2010, there were 1,527,068 options available for future grant under the 2005 Plan. Options to purchase common stock are granted at the discretion of the Board of Directors and the Nominating and Compensation Committee. Generally, stock options vest over a four-year period: 25% of the option shares vest one year from the date of grant and the remaining option shares vest at the rate of 12.5% each six month period thereafter. Stock options generally expire five to seven years from the date of grant under the 2005 Plan. Under the terms of the 2005 Plan, the exercise price of incentive and non-qualified stock option grants must not be less than 100% of the fair market value of the common stock on the date of grant. Options are amortized using a straight-line basis over the option vesting period.

Lionbridge’s 1998 Stock Plan (the “1998 Plan”) provides for the issuance of incentive and nonqualified stock options. The maximum number of shares of common stock available for issuance under the Plan is 11,722,032 shares and the 1998 Plan expired on January 26, 2008. At June 30, 2010 there were no options available for future grant under the 1998 Plan. Options to purchase common stock under the 1998 Plan had been granted at the discretion of the Board of Directors and the Nominating and Compensation Committee. Generally, stock options granted under the 1998 Plan vested over a four-year period: 25% of the option shares vested one year from the date of grant and the remaining option shares vested at the rate of 12.5% each six month period thereafter. Stock options granted under the 1998 Plan generally expire ten years (five years in certain cases) from the date of grant. Under the terms of the 1998 Plan, the exercise price of incentive stock options granted must not be less than 100% (110% in certain cases) of the fair market value of the common stock on the date of grant, as determined by the Board of Directors. The exercise price of nonqualified stock options may be less than the fair market value of the common stock on the date of grant, as determined by the Board of Directors, but in no case may the exercise price be less than the statutory minimum, the par value per share of Lionbridge’s common stock.

 

6


Table of Contents

Restricted Stock Awards

Lionbridge issued 1,943,500 and 69,511 shares of restricted common stock and restricted stock units, respectively, under the Company’s 2005 Stock Incentive Plan, in the six-month period ended June 30, 2010 with a fair market value of $6.0 million. Of the total 2,013,011 shares of restricted common stock and restricted stock units issued in the six-month period ended June 30, 2010, 1,144,500 have restrictions on disposition which lapse over four years from the date of grant and 26,511 have restrictions on disposition which lapse over thirteen months from the date of grant, and 842,000 restricted shares were granted to certain employees as long-term performance based stock incentive awards (the “LTIP”) under the Corporation’s 2005 Stock Incentive Plan. Pursuant to the terms of the LTIP, restrictions with respect to the stock will lapse upon the achievement of revenue and/or profitability targets within the two or three calendar years from and including the year of grant. The grant date fair value of the shares is recognized over the requisite period of performance once achievement of criteria is deemed probable. On a quarterly basis, the Company estimates the likelihood of achieving performance goals. Actual results, and future changes in estimates, may differ substantially from the Company’s current estimates. If the targets are not achieved, the shares will be forfeited by the employee.

Stock-based Compensation

The Company recognizes expense for stock options, performance-based restricted stock awards and time-based restricted stock awards pursuant to the authoritative guidance of Accounting Standards Codification (“ASC”) 718, “Compensation – Stock Compensation”. Total compensation expense related to stock options, market-based restricted stock awards and time-based restricted stock awards was $1.1 million and $960,000 for the three-month periods ended June 30, 2010 and 2009, respectively, and $2.0 million and $2.1 million for the six-month periods ended June 30, 2010 and 2009, respectively, classified in the statement of operations line items as follows:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009

Cost of revenue

   $ 19,000    $ 24,000    $ 39,000    $ 47,000

Sales and marketing

     163,000      136,000      314,000      309,000

General and administrative

     893,000      768,000      1,592,000      1,660,000

Research and development

     24,000      32,000      49,000      67,000
                           

Total stock-based compensation expense

   $ 1,099,000    $ 960,000    $ 1,994,000    $ 2,083,000
                           

As of June 30, 2010, future compensation cost related to non-vested stock options, less estimated forfeitures, is approximately $1.2 million and will be recognized over an estimated weighted average period of approximately 2.1 years. Lionbridge currently expects to amortize $7.4 million of unamortized compensation in connection with restricted stock awards outstanding as of June 30, 2010 over an estimated weighted average period of approximately 2.5 years.

3. UNBILLED RECEIVABLES

Unbilled receivables represent revenue not yet billed. Unbilled receivables are calculated for each individual project based on the proportional delivery of services at the balance sheet date. Billing of amounts in unbilled receivables occurs according to customer-agreed payment schedules or upon completion of specified project milestones. All of Lionbridge’s projects in unbilled receivables are expected to be billed and collected within one year.

4. DEBT

On December 21, 2006, the Company entered into a revolving credit facility (the “Credit Agreement”) with HSBC Bank USA, National Association. The Credit Agreement was subsequently amended in 2007 and 2009 to add certain additional non-U.S. subsidiaries of the Company as Borrowers or Guarantors. The Credit Agreement replaced the Company’s Term Loan B and Revolving Credit Facility with Wachovia Bank, National Association that had been in place since September 1, 2005. The Credit Agreement provides for a five-year $100.0 million revolving credit facility. At June 30, 2010, $24.7 million was outstanding with an interest rate of 1.6%. The Company is required to maintain leverage and fixed charge coverage ratios and to comply with other covenants in its revolving credit agreement. The leverage ratio is calculated by dividing the Company’s total outstanding indebtedness at each quarter end by its adjusted earnings before interest, taxes, depreciation and certain other non-cash expenses during the four consecutive quarterly periods then ended. The fixed charge coverage ratio is calculated by dividing the Company’s adjusted earnings before interest, taxes, depreciation and certain other non-cash expenses minus capital expenditures for each consecutive four quarterly periods by its interest paid or payable and cash paid on taxes during each such consecutive four quarterly periods. The Company was in compliance with both of these ratios as well as all other bank covenants as of June 30, 2010.

 

7


Table of Contents

5. COMPREHENSIVE INCOME (LOSS)

Total comprehensive income (loss) consists of net income (loss), the net change in the funded status of defined benefit postretirement plans, unrealized losses on a cash flow hedge and the net change in foreign currency translation adjustment. Total comprehensive income was $3.7 million and $1.6 million for the three-month periods ended June 30, 2010 and 2009, respectively. Total comprehensive income was $3.7 million for the six-month period ended June 30, 2010 and total comprehensive loss for the six-month period ended June 30, 2009 was $4.9 million.

6. NET INCOME (LOSS) PER SHARE

Basic earnings per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. For the purposes of calculating diluted earnings per share, the denominator includes both the weighted average number of shares of common stock outstanding and the number of dilutive common stock equivalents such as stock options and unvested restricted stock, as determined using the treasury stock method.

Shares used in calculating basic and diluted earnings per share for the three and six-month periods ended June 30, 2010 and 2009, respectively, are as follows:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009

Weighted average number of shares of common stock outstanding—basic

   56,619,000    56,011,000    56,495,000    55,935,000

Dilutive common stock equivalents relating to options and restricted stock

   3,235,000    —      2,696,000    —  
                   

Weighted average number of shares of common stock outstanding—diluted

   59,854,000    56,011,000    59,191,000    55,935,000
                   

Options and unvested restricted stock to purchase 9,154,000 and 7,725,000 shares of common stock for the three-month periods ended June 30, 2010 and 2009, respectively, and 8,545,000 and 7,415,000 for the six-month periods ended June 30, 2010 and 2009, respectively, were not included in the calculation of diluted net income per share, as their effect would be anti-dilutive.

7. MERGER, RESTRUCTURING AND OTHER CHARGES

During the six-month period ended June 30, 2010 Lionbridge recorded $1.9 million of restructuring and other charges. The $1.9 million of restructuring and other charges recorded in the six-month period ended June 30, 2010 included $1.1 million for workforce reductions in Europe and the United States consisting of 11 technical staff, 1 administrative staff and 1 sales staff, $362,000 recorded for vacated facilities and $331,000 for the accelerated amortization of long-lived assets in connection with vacated facilities, recorded pursuant to the guidance of ASC 420, “Exit or Disposal Cost Obligations” (“ASC 420”) and ASC 712, “Compensation—Nonretirement Postemployment Benefits” (“ASC 712”), and related literature. Of these charges, $1.6 million related to the Company’s Global Language and Content (“GLC”) segment and $171,000 related to the Global Development and Testing (“GDT”) segment. The Company made $2.4 million of cash payments in the six-month period ended June 30, 2010 with $2.3 million and $81,000 related to the GLC and GDT segments, respectively.

During the six-month period ended June 30, 2009 Lionbridge recorded $2.6 million of restructuring and other charges. The $2.6 million recorded in the six-month period ended June 30, 2009 included $2.0 million for workforce reductions in Europe, the United States and Asia consisting of 123 technical staff, 15 administrative staff and 14 sales staff and $662,000 recorded for vacated facilities, recorded pursuant to the guidance of ASC 420, and related literature. Of these charges, $2.3 million related to the Company’s GLC segment, $280,000 related to the GDT segment, $32,000 related to Corporate and Other and $12,000 related to the Interpretation segment. The Company made $1.9 million of cash payments in the six-month period ended June 30, 2009, with $1.6 million, $277,000, $12,000 and $11,000 related to the GLC, GDT, Interpretation and Corporate and Other segments, respectively.

 

8


Table of Contents

The following table summarizes the accrual activity (excluding the $331,000 long-lived asset accelerated amortization in the six-month period ended June 30, 2010) for the six months ended June 30, 2010 and 2009, respectively, by initiative:

 

     2010     2009  

Beginning balance, January 1

   $ 3,261,000      $ 933,000   

Employee severance:

    

Merger and restructuring charges recorded

     1,111,000        1,970,000   

Cash payments related to liabilities recorded on exit or disposal activities

     (1,682,000     (1,414,000
                
     (571,000     556,000   
                

Vacated facility/Lease termination:

    

Merger and restructuring charges recorded

     362,000        662,000   

Cash payments related to liabilities assumed and recorded on business combinations

     (60,000     (139,000

Cash payments related to liabilities recorded on exit or disposal activities

     (680,000     (309,000
                
     (378,000     214,000   
                

Ending balance, June 30

   $ 2,312,000      $ 1,703,000   
                

At June 30, 2010, the Company’s consolidated balance sheet includes accruals totaling $2.3 million primarily related to employee termination costs and vacated facilities. Lionbridge currently anticipates that $1.1 million of these will be fully paid within twelve months. The remaining $1.2 million relates to lease obligations on unused facilities expiring through 2026 and is included in long-term liabilities.

8. INCOME TAXES

The provisions for income taxes for the three-month periods ended June 30, 2010 and 2009 were $905,000 and $624,000, respectively. The provisions for income taxes for the six-month periods ended June 30, 2010 and 2009 were $1.6 million and $1.2 million, respectively.

The tax provisions for the three and six-month periods ended June 30, 2010 consisted primarily of taxes on income in foreign jurisdictions, a deferred tax benefit related to the recognition of deferred tax assets and reduction in deferred tax liabilities in certain foreign jurisdictions, and taxes, interest and penalties recorded in relation to the Company’s uncertain tax positions.

The tax provisions for the three and six-month periods ended June 30, 2009 consisted primarily of taxes on income in foreign jurisdictions, deferred tax benefits of $25,000 and $222,000, respectively, related to the recognition of deferred tax assets in certain foreign jurisdictions, and taxes, interest and penalties recorded in relation to the Company’s uncertain tax positions. Also, during the three and six-month periods ended June 30, 2009, Lionbridge recorded foreign tax expense of $889,000, net of related reserves, as a result of assessments made by local tax authorities, as well as a foreign tax benefit of $246,000 related to a refund received for tax filings in 2003 and 2004 and the release of a reserve for an uncertain tax position due to the lapse of a statute of limitation.

The balance of unrecognized tax benefits at June 30, 2010, not including interest and penalties, was $6.1 million, which, if recognized, would affect the effective income tax rate in future periods. Lionbridge also recognizes interest and penalties related to unrecognized tax benefits in tax expense. At June 30, 2010, Lionbridge had approximately $2.1 million of interest and penalties accrued related to unrecognized tax benefits.

In connection with the Company’s 2005 acquisition of Bowne Global Solutions (“BGS”), Bowne & Co., Inc. (“Bowne”) agreed to indemnify the Company for any tax liabilities accruing on or prior to the acquisition date of September 1, 2005. At June 30, 2010 $1.6 million of the gross unrecognized tax benefits and $569,000 of the accrued interest and penalties related to the acquisition of BGS and are subject to indemnification. The Company believes that it is reasonably possible that approximately $634,000 of its unrecognized tax benefits, consisting of several items in various jurisdictions, may be recognized within the next twelve months.

The Company conducts business globally and in the normal course of business is subject to examination by local, state and federal jurisdictions in the United States as well as in multiple foreign jurisdictions. Currently, no Internal Revenue Service audits are underway and audits in foreign jurisdictions are in varying stages of completion. Open audit years are dependent upon the tax jurisdiction and range from 2003 to 2009.

At June 30, 2010, no provision for U.S. income and foreign withholding taxes has been made for unrepatriated foreign earnings because it is expected that such earnings will be reinvested indefinitely.

At June 30, 2010, Lionbridge’s Indian subsidiary has a tax holiday granted by the Indian government and is exempt from corporate income tax on its operating profits. This tax holiday expires at the end of the Indian subsidiary’s March 31, 2011 tax year.

 

9


Table of Contents

Under the provisions of the Internal Revenue Code, certain substantial changes in Lionbridge’s ownership may limit in the future the amount of net operating loss carryforwards that could be used annually to offset future taxable income and income tax liability.

9. SEGMENT INFORMATION

Lionbridge has determined that its operating segments are those that are based on its method of internal reporting, which separately presents its business based on the service performed by individual geographical location. The Company is reporting its results among the following three business segments:

Global Language and Content (“GLC”)—this segment includes solutions that enable the translation, localization and worldwide multilingual release of clients’ products, content and related technical support, training materials, and sales and marketing information. Lionbridge GLC solutions involve translating, localizing and adapting content and products to meet the language and cultural requirements of users throughout the world. As part of its GLC solutions, Lionbridge also develops eLearning content and technical documentation. Lionbridge GLC solutions are based on the Company’s internet-architected language technology platform and global service delivery model which make the translation and localization processes more efficient for Lionbridge clients and translators.

Global Development and Testing (“GDT”)—this segment includes Lionbridge’s development, engineering and testing services for software, hardware, websites, search engines and content. Specifically, through its GDT solutions, Lionbridge develops, re-engineers and optimizes IT applications and performs testing to ensure the quality, interoperability, usability and performance of clients’ software, search engines, consumer technology products, web sites, and content. Lionbridge’s testing services, which are offered under the VeriTest brand, also include product certification and competitive analysis. Lionbridge has deep domain experience developing, testing and maintaining applications in a cost-efficient, blended on-site and offshore model.

Interpretation—this segment includes interpretation services for government and business organizations that require experienced linguists to facilitate communication. Lionbridge provides interpretation communication services in more than 360 languages and dialects, including onsite interpretation, over-the-phone interpretation and interpreter testing, training, and assessment services.

The Company’s internal reporting does not include the allocation of certain expenses to the operating segments but instead includes those other expenses in unallocated other expense. Unallocated expenses consist of depreciation and amortization, interest expense and income tax. Other unallocated items primarily include corporate expenses, such as merger and restructuring, foreign exchange gains and losses and governance expenses, as well as finance, information technology, human resources, legal, treasury and marketing expenses. The Company determines whether a cost is charged to a particular business segment or is retained as an unallocated cost based on whether the cost relates to a corporate function or to a direct expense associated with the particular business segment. For example, corporate finance, corporate information technology and corporate human resource expenses are unallocated, whereas operating segment finance, information technology and human resource expenses are charged to the applicable operating segment.

The table below presents information about the reported net income (loss) of the Company for the three and six-month periods ended June 30, 2010 and 2009. Asset information by reportable segment is not reported, since the Company does not produce such information internally.

 

     GLC    GDT    Interpretation    Corporate and
Other
    Total  

Three Months Ended June 30, 2010

             

External revenue

   $ 75,202,000    $ 24,582,000    $ 5,088,000    $ —        $ 104,872,000   

Cost of revenue (exclusive of depreciation and amortization)

     49,131,000      16,242,000      4,270,000      —          69,643,000   

Depreciation and amortization

     806,000      226,000      34,000      1,332,000        2,398,000   

Other operating expenses

     17,823,000      2,835,000      578,000      —          21,236,000   
                                     

Segment contribution

     7,442,000      5,279,000      206,000      (1,332,000     11,595,000   

Interest expense and other unallocated items

     —        —        —        (6,132,000     (6,132,000
                                     

Income (loss) before income taxes

     7,442,000      5,279,000      206,000      (7,464,000     5,463,000   

Provision for income taxes

     —        —        —        (905,000     (905,000
                                     

Net income (loss)

     7,442,000      5,279,000      206,000      (8,369,000     4,558,000   
                                     

 

10


Table of Contents
     GLC    GDT    Interpretation    Corporate and
Other
    Total  

Three Months Ended June 30, 2009

             

External revenue

   $ 70,429,000    $ 21,105,000    $ 6,494,000    $ —        $ 98,028,000   

Cost of revenue (exclusive of depreciation and amortization)

     46,941,000      13,924,000      4,838,000      —          65,703,000   

Depreciation and amortization

     735,000      257,000      36,000      1,506,000        2,534,000   

Other operating expenses

     17,560,000      2,986,000      557,000      —          21,103,000   
                                     

Segment contribution

     5,193,000      3,938,000      1,063,000      (1,506,000     8,688,000   

Interest expense and other unallocated items

     —        —        —        (8,312,000     (8,312,000
                                     

Income (loss) before income taxes

     5,193,000      3,938,000      1,063,000      (9,818,000     376,000   

Provision for income taxes

     —        —        —        (624,000     (624,000
                                     

Net income (loss)

     5,193,000      3,938,000      1,063,000      (10,442,000     (248,000
                                     

Six Months Ended June 30, 2010

             

External revenue

   $ 147,740,000    $ 47,928,000    $ 9,984,000    $ —        $ 205,652,000   

Cost of revenue (exclusive of depreciation and amortization)

     98,314,000      31,530,000      8,744,000      —          138,588,000   

Depreciation and amortization

     1,562,000      463,000      69,000      2,657,000        4,751,000   

Other operating expenses

     35,615,000      5,702,000      1,114,000      —          42,431,000   
                                     

Segment contribution

     12,249,000      10,233,000      57,000      (2,657,000     19,882,000   

Interest expense and other unallocated items

     —        —        —        (13,234,000     (13,234,000
                                     

Income (loss) before income taxes

     12,249,000      10,233,000      57,000      (15,891,000     6,648,000   

Provision for income taxes

     —        —        —        (1,613,000     (1,613,000
                                     

Net income (loss)

     12,249,000      10,233,000      57,000      (17,504,000     5,035,000   
                                     

Six Months Ended June 30, 2009

             

External revenue

   $ 133,096,000    $ 40,436,000    $ 12,899,000    $ —        $ 186,431,000   

Cost of revenue (exclusive of depreciation and amortization)

     90,809,000      26,591,000      9,476,000      —          126,876,000   

Depreciation and amortization

     1,456,000      503,000      72,000      3,024,000        5,055,000   

Other operating expenses

     35,276,000      6,631,000      1,427,000      —          43,334,000   
                                     

Segment contribution

     5,555,000      6,711,000      1,924,000      (3,024,000     11,166,000   

Interest expense and other unallocated items

     —        —        —        (15,282,000     (15,282,000
                                     

Income (loss) before income taxes

     5,555,000      6,711,000      1,924,000      (18,306,000     (4,116,000

Provision for income taxes

     —        —        —        (1,208,000     (1,208,000
                                     

Net income (loss)

     5,555,000      6,711,000      1,924,000      (19,514,000     (5,324,000
                                     

10. GOODWILL AND OTHER INTANGIBLE ASSETS

Lionbridge assesses the impairment of goodwill and other intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Such events or conditions could include an economic downturn in the industries to which Lionbridge provides services; increased competition; an increase in operating or other costs; additional volatility in international currencies; the pace of technological improvements; or other information regarding Lionbridge’s market value, such as a reduction in stock price to a price near or below the book value of the Company for an

 

11


Table of Contents

extended period of time. When Lionbridge determines that the carrying value of goodwill may not be recoverable based upon one or more of these indicators of impairment, the Company initially assesses any impairment using fair value measurements based on projected discounted cash flow valuation models. In addition, in accordance with ASC 350, “Intangibles—Goodwill and Other” (“ASC 350”), goodwill is reviewed for impairment on an annual basis. At December 31, 2009, the Company performed its annual test of goodwill to determine if an impairment existed. This test determined that each reporting unit’s fair value exceeded the carrying value of the net assets of each respective reporting unit, using projected discounted cash flow modeling. As a result, no impairment was recorded for the year ended December 31, 2009. At June 30, 2010, the balance of goodwill was $9.7 million and related solely to the Company’s GDT segment.

The Company evaluates whether there has been an impairment in the carrying value of its long-lived assets in accordance with ASC 360, “Property, Plant and Equipment” (“ASC 360”), if circumstances indicate that a possible impairment may exist. An impairment in the carrying value of an asset is assessed when the undiscounted expected future operating cash flows derived from the asset grouping are less than its carrying value. If it is determined that the asset is impaired then it is written down to its estimated fair value. Factors that could lead to an impairment of acquired customer relationships (recorded with the acquisition of BGS in September 2005) include a worsening in customer attrition rates compared to historical attrition rates, or lower than initially anticipated cash flows associated with customer relationships.

Other intangible assets arose from the acquisition of BGS and consist of the following, which are being amortized on a straight-line basis over the following estimated useful lives, except for the BGS customer relationships, of which a portion is being amortized using an economic consumption method:

 

     Estimated
Useful Life

BGS:

  

Customer relationships

   3 to 12 years

Customer contracts

   3 to 5 years

The following table summarizes other intangible assets at June 30, 2010 and December 31, 2009, respectively.

 

     June 30, 2010    December 31, 2009
     Gross
Carrying
Value
   Accumulated
Amortization
   Balance    Gross
Carrying
Value
   Accumulated
Amortization
   Balance

BGS acquired customer relationships

   $ 32,000,000    $ 20,998,000    $ 11,002,000    $ 32,000,000    $ 19,583,000    $ 12,417,000

BGS acquired customer contracts

     14,000,000      12,968,000      1,032,000      14,000,000      11,937,000      2,063,000
                                         
   $ 46,000,000    $ 33,966,000    $ 12,034,000    $ 46,000,000    $ 31,520,000    $ 14,480,000
                                         

Lionbridge currently expects to amortize the following remaining amounts of intangible assets held at June 30, 2010 in the fiscal periods as follows:

 

Year ending December 31,

    

2010

   $ 2,447,000

2011

     2,332,000

2012

     1,921,000

2013

     1,583,000

2014

     1,304,000

Thereafter

     2,447,000
      
   $ 12,034,000
      

11. CONTINGENCIES

On or about July 24, 2001, a purported securities class action lawsuit captioned “Samet v. Lionbridge Technologies, Inc. et al.” (01-CV-6770) was filed in the United States District Court for the Southern District of New York (the “Court”) against the Company, certain of its officers and directors, and certain underwriters involved in the Company’s initial public offering. The complaint in this action asserted, among other things, that omissions regarding the underwriters’ alleged conduct in allocating shares in Lionbridge’s initial public offering to the underwriters’ customers. In March 2002, the United States District Court for the Southern District of New York entered an order dismissing without prejudice the claims against Lionbridge and its officers and directors (the case remained pending against the underwriter defendants).

 

12


Table of Contents

On April 19, 2002, the plaintiffs filed an amended complaint naming as defendants not only the underwriter defendants but also Lionbridge and certain of its officers and directors. The amended complaint asserts claims under both the registration and antifraud provisions of the federal securities laws relating to, among other allegations, the underwriters’ alleged conduct in allocating shares in the Company’s initial public offering and the disclosures contained in the Company’s registration statement. On July 15, 2002, the Company, together with the other issuers named as defendants in these coordinated proceedings, filed a collective motion to dismiss the complaint on various legal grounds common to all or most of the issuer defendants. In October 2002, the claims against officers and directors were dismissed without prejudice. In February 2003, the Court issued its ruling on the motion to dismiss, ruling that the claims under the antifraud provisions of the securities laws could proceed against the Company and a majority of the other issuer defendants.

In June 2003, Lionbridge elected to participate in a proposed settlement agreement with the plaintiffs in this litigation. If the proposed settlement had been approved by the Court, it would have resulted in the dismissal, with prejudice, of all claims in the litigation against Lionbridge and against any other of the issuer defendants who elected to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. This proposed issuer settlement was conditioned on, among other things, a ruling by the District Court that the claims against Lionbridge and against the other issuers who had agreed to the settlement would be certified for class action treatment for purposes of the proposed settlement, such that all investors included in the proposed classes in these cases would be bound by the terms of the settlement unless an investor opted to be excluded from the settlement.

On December 5, 2006, the U.S. Court of Appeals for the Second Circuit issued a decision in In re Initial Public Offering Securities Litigation that six purported class action lawsuits containing allegations substantially similar to those asserted against the Company may not be certified as class actions due, in part, to the Appeals Court’s determination that individual issues of reliance and knowledge would predominate over issues common to the proposed classes. On January 8, 2007, the plaintiffs filed a petition seeking rehearing en banc of the Second Circuit Court of Appeals’ decision. On April 6, 2007 the Court of Appeals denied the plaintiffs’ petition for rehearing of the Court’s December 5, 2006 ruling but noted that the plaintiffs remained free to ask the District Court to certify classes different from the ones originally proposed which might meet the standards for class certification that the Court of Appeals articulated in its December 5, 2006 decision. In light of the Court of Appeals’ December 5, 2006 decision regarding certification of the plaintiffs’ claims, the District Court entered an order on June 25, 2007 terminating the proposed settlement between the plaintiffs and the issuers, including Lionbridge.

On August 14, 2007, the plaintiffs filed amended complaints in the six focus cases. The issuer defendants and the underwriter defendants separately moved to dismiss the claims against them in the amended complaints in the six focus cases. On March 26, 2008, the District Court issued an order in which it denied in substantial part the motions to dismiss the amended complaints in the six focus cases.

On February 25, 2009, the parties advised the District Court that they had reached an agreement-in-principle to settle the litigation in its entirety. A stipulation of settlement was filed with the District Court on April 2, 2009. On June 9, 2009, the District Court preliminarily approved the proposed global settlement. Notice was provided to the class and scheduled a settlement fairness hearing, at which members of the class had an opportunity to object to the proposed settlement was held on September 10, 2009. On October 6, 2009, the District Court issued an order granting final approval to the settlement. Several appeals have been filed objecting to the definition of the settlement class and fairness of the settlement, and those appeals remain pending. The litigation process is inherently uncertain and unpredictable, however, and there can be no guarantee as to the ultimate outcome of this pending lawsuit. While Lionbridge cannot guarantee the outcome of these proceedings, the Company believes that the final result of this lawsuit will have no material effect on its consolidated financial condition, results of operations, or cash flows.

12. FAIR VALUE MEASUREMENTS

ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. ASC 820 defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required by the standard that Lionbridge uses to measure fair value, as well as the assets and liabilities that the Company values using those levels of inputs.

 

  Level 1: Quoted prices in active markets for identical assets or liabilities.

 

13


Table of Contents
  Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Lionbridge’s Level 2 assets and liabilities are an interest rate swap and foreign exchange forward contracts whose fair value were determined using pricing models predicated upon observable market spot and forward rates. The notional amount of the Company’s interest rate swap at June 30, 2010 is $10.0 million and the fair value of the interest rate derivative is a liability of $41,000 which is included in the Company’s consolidated balance sheet in other long-term liabilities. The interest rate swap is designated as a cash flow hedge under the guidance of ASC 815, “Derivatives and Hedging” (“ASC 815”) and changes in the fair value are recorded to other comprehensive income. The notional amount of the Company’s foreign exchange forward contracts is $7.6 million at June 30, 2010 and the fair value is an asset of $911,000 which is included in the Company’s consolidated balance sheet in other current assets. Changes in the fair value of foreign exchange forward contracts are recorded in the Company’s earnings.

 

  Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Lionbridge does not have any financial assets and liabilities as of June 30, 2010 designated as Level 3.

The following tables set forth the financial assets and liabilities as of June 30, 2010 and December 31, 2009 that Lionbridge measured at fair value on a recurring basis by level within the fair value hierarchy. As required by ASC 820, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.

 

 

     Level 1    Level 2    Level 3    Balance as of
June 30, 2010

Assets:

           

Money market accounts

   $ 124,000    $ —      $ —      $ 124,000

Foreign exchange forward contracts

     —        911,000      —        911,000

Liabilities:

           

Interest rate swap

   $ —      $ 41,000    $ —      $ 41,000
     Level 1    Level 2    Level 3    Balance as of
December 31, 2009

Assets:

           

Money market accounts

   $ 123,000    $ —      $ —      $ 123,000

Liabilities:

           

Interest rate swap

   $ —      $ 292,000    $ —      $ 292,000

13. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (“FASB”) issued ASU 2010-06, “Value Measurements and Disclosures – Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”), that amends ASC Subtopic 820-10, “Fair Value Measurements and Disclosures – Overall”, and requires reporting entities to disclose (1) the amount of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, and (2) separate information about purchases, sales, issuance and settlements in the reconciliation of fair value measurements using significant unobservable inputs (Level 3). ASU 2010-06 also requires reporting entities to provide fair value measurement disclosures for each class of assets and liabilities and disclose the inputs and valuation techniques for fair value measurements that fall within Levels 2 and 3 of the fair value hierarchy. These disclosures and clarification are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuance, and settlements in the rollforward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company adopted the provisions of ASU 2010-06 and the provisions of ASU 2010-06 and the adoption of these provisions does not have a material impact on its consolidated financial statements.

In February 2010, the FASB issued ASU 2010-09, “Subsequent Events – Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”), that amends ASC Subtopic 855-10, “Subsequent Events – Overall” (“ASC 855-10”). ASU 2010-09 requires an SEC filer to evaluate subsequent events through the date that the financial statements are issued but removed the requirement to disclose this date in the notes to the entity’s financial statements. The amendments are effective upon issuance of the final update and accordingly, the Company has adopted the provisions of ASU 2010-09. The adoption of these provisions does not have a material impact on its consolidated financial statements.

 

14


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

The matters discussed in this Form 10-Q include forward-looking statements that involve risks or uncertainties. These statements are neither promises nor guarantees, but are based on various assumptions by management regarding future circumstances many of which Lionbridge has little or no control over. A number of important risks and uncertainties, including those identified under the caption “Risk Factors” in Lionbridge’s Annual Report on Form 10-K, filed March 16, 2010 (SEC File No. 000-26933) and subsequent filings as well as risks and uncertainties discussed elsewhere in this Form 10-Q could cause Lionbridge’s actual results to differ materially from those in the forward-looking statements. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The forward-looking statements in this Form 10-Q are made as of the date of this filing only, and Lionbridge does not undertake to update or supplement these statements due to changes in circumstances or otherwise, except as required by law.

Introduction

Lionbridge is a leading provider of globalization, development and testing services that enable clients to develop, release, manage and maintain their enterprise content and technology applications globally. The Company reports financial performance in the following three segments: Global Language and Content (“GLC”), Global Development and Testing (“GDT”) and Interpretation.

Lionbridge GLC solutions enable the translation, localization and worldwide multilingual release of clients’ products, content and related technical support, training materials, and sales and marketing information. Lionbridge GLC solutions involve translating, localizing and adapting content and products to meet the language and cultural requirements of users throughout the world. As part of its GLC solutions, Lionbridge also develops eLearning content and technical documentation. Lionbridge GLC solutions are based on the Company’s internet-architected language technology platform and global service delivery model which make the translation and localization processes more efficient for Lionbridge clients and translators.

Through its GDT solutions, Lionbridge develops, re-engineers and optimizes IT applications and performs testing to ensure the quality, interoperability, usability and performance of clients’ software, consumer technology products, web sites, and content. Lionbridge’s testing services, which are offered under the VeriTest brand, also include product certification and competitive analysis. Lionbridge has deep domain experience developing, testing and maintaining applications in a cost-efficient, blended on-site and offshore model.

Lionbridge’s interpretation business (“Interpretation”) pertains to the Company’s interpretation services for government organizations and businesses that require human interpreters for non-English speaking individuals.

Lionbridge provides a full suite of language, testing and development outsourcing services to businesses in diverse end markets including technology, mobile and electronics, life sciences, consumer, publishing, manufacturing, automotive and government. Lionbridge’s solutions include product localization and content translation; content and eLearning courseware development; technical writing services; interpretation services; application development and maintenance; software and hardware testing; global search relevance and sourcing; product certification and competitive analysis. Lionbridge’s services enable global organizations to increase market penetration and speed adoption of global content and products, enhance return on enterprise application investments, increase workforce productivity and reduce costs.

During 2009, the Company commenced an initiative to commercialize its language technologies and offer them to subscribers on a Software-as-a-Service (SaaS)-based language technology platform. As part of this initiative, the Company re-architected its internal Logoport® translation memory technology into a secure, multi-tenant platform that can be purchased and used over the Web by individual translators and agencies in over 100 countries. In April 2010, the Company announced general availability of this technology as Translation Workspace™, a Software-as-a-Service (SaaS)-based language technology platform, through GeoWorkz.com, Lionbridge’s eCommerce platform. Also in April 2010, the Company announced a partnership agreement with IBM to accelerate development and commercialization of automated translation technology. As part of that agreement, Lionbridge will become the only provider to offer Software-as-a-Service (SaaS)-based, text-to-text language automation solutions to commercial clients based on IBM’s Real Time Translation Service (RTTS) technology. The Company expects that, by making Translation Workspace generally available to customers and by developing real-time translation automation technology with IBM, it can expand the Company’s market opportunities while bringing innovative technology solutions to new markets.

For the six-month period ended June 30, 2010, Lionbridge’s income from operations was $6.8 million, with a net income of $5.0 million. For the year ended December 31, 2009, the Company’s income from operations was $1.4 million with a net loss of $4.0 million. As of June 30, 2010, the Company had an accumulated deficit of $230.4 million.

 

15


Table of Contents

The Company believes that during the first six months of 2010 there have been continued indications of improvement and increased stability in worldwide economic conditions and a related increased demand for the Company’s services by certain customers and in certain market segments. The Company believes that if there is substantial continued improvement in worldwide economic and market conditions and with a related increased demand for the Company’s service offerings, the Company’s overall financial performance for the 2010 year may improve. During the first six months of 2010, certain customers resumed previously delayed or postponed projects, although other customers continued to delay previously scheduled projects. In addition, in many cases, such projects were resumed with reduced scope. Customers continue to enter into new engagements cautiously and conservatively, likely due to uncertain economic conditions and their internal cost-containment directives. The Company has a concentration of revenue among relatively few customers across all segments. Despite some improvement in worldwide economic conditions and increased customer demand for the Company’s services, the Company has continued its cost-cutting and restructuring activities to adjust its cost structure and respond to the variable demand for the Company’s services. The Company expects that demand for the Company’s services from certain customers will continue to stabilize and possibly strengthen during the remainder of 2010, although it is unclear as to whether, when and to what extent demand will resume to pre-2009 levels.

Certain segments of Lionbridge’s business, its GLC segment in particular, are sensitive to fluctuations in the value of the U.S. Dollar relative to the Euro, as a large portion of its cost of revenue and general and administrative expenses are payable in Euros, while the majority of its revenues are recorded in U.S. Dollars. During the quarter ended June 30, 2010, the value of the U.S. Dollar relative to the Euro strengthened by 5.6% from the quarter ended June 30, 2009. This strengthening had an unfavorable foreign currency impact on revenue for the quarter ended June 30, 2010, particularly in the GLC segment. In addition, the Company’s operating income and net income for the three months ended June 30, 2010 were negatively impacted by foreign currency translation due to the strengthening of the U.S. Dollar relative to the Euro partially offset by the weakening of the U.S. Dollar against other currencies. For the six months ended June 30, 2010, foreign currency translation increased revenue when compared to the six months ended June 30, 2009 as the U.S. Dollar strengthened by 0.6% relative to the Euro which was more than offset by weakening in the U.S. Dollar against other currencies. The Company’s operating income and net income for the six-month period ended June 30, 2010 were negatively impacted by weakening in the U.S. Dollar against most currencies partially offset by strengthening of the U.S. Dollar relative to the Euro when compared to the corresponding period of 2009.

Revenue Recognition

Lionbridge recognizes revenue as services are performed and amounts are earned in accordance with ASC 605-20, “Services” (“ASC 605-20”). Lionbridge considers amounts to be earned when (1) persuasive evidence of an arrangement has been obtained; (2) services are delivered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectibility of those fees.

Lionbridge’s revenue is recorded from the provision of services to customers for GLC, GDT and Interpretation services which include content development, product and content globalization, interpretation, software and hardware testing, product certification and application development and maintenance.

Content development, software and hardware testing, interpretations and application development and maintenance projects are normally time and expense priced contracts, and revenue is recognized using a time and expense basis over the period of performance, primarily based on labor costs incurred to date.

Product and content globalization and product certification projects are fixed price contracts and revenue is recognized as services are delivered. Depending on specific contractual provisions and nature of the deliverable, revenue is recognized on (1) a proportional performance model based on level of effort, (2) as milestones are achieved or (3) when final deliverables have been met. Amounts billed in excess of revenue recognized are recorded as deferred revenue.

The delivery of Lionbridge’s GLC services involves and is dependent on the translation and development of content by subcontractors and in-house employees. As the time and cost to translate or produce each word of content within a project is relatively uniform, labor input is reflective of the delivery of the contracted service and an appropriate metric for the measurement of proportional performance in delivering such services. The use of a proportional performance assessment of service delivery requires significant judgment relative to estimating total contract costs, including assumptions relative to the length of time to complete the project, the nature and complexity of the work to be performed, anticipated increases in employee wages and prices for subcontractor services, and the availability of subcontractor services. When adjustments in estimated project costs are identified, anticipated losses, if any, are recognized in the period in which they are determined.

Lionbridge’s GLC agreements with its customers may provide the customer with a fixed and limited time period following delivery during which Lionbridge will attempt to address any non-conformity to previously agreed upon objective specifications relating to the work, either in the form of a limited acceptance period or a post-delivery warranty period. Management believes recognition of revenue at the time the services are delivered is appropriate, because its obligations under such provisions are limited in time, limited in scope, and historically have not involved significant costs. In the future,

 

16


Table of Contents

if the post delivery acceptance or warranty provisions become more complex or include subjective acceptance criteria, Lionbridge may have to revise its revenue recognition policy appropriately, which could affect the timing of revenue recognition.

Lionbridge provides integrated full-service offerings throughout a client’s product and content lifecycle, including GLC and GDT services. Such multiple-element service offerings are governed by ASC 605-25, “Multiple-Element Arrangements” (“ASC 605-25”). For these arrangements where the GLC and GDT services have independent value to the customer, and there is evidence of fair value for each service, the combined service arrangement is bifurcated into separate units for accounting treatment. In instances where it is not possible to bifurcate a project, direct and incremental costs attributable to each component are deferred and recognized together with the service revenue upon delivery. The determination of fair value requires the use of significant judgment. Lionbridge determines the fair value of service revenues based upon its recent pricing for those services when sold separately and/or prevailing market rates for similar services.

Revenue includes reimbursement of travel and out-of-pocket expenses with equivalent amounts of expense recorded in cost of revenue.

Estimates for incentive rebates and other allowances are recorded as a reduction of revenues in the period the related revenues are recorded. These estimates are based upon contracted terms, historical experience and information currently available to management with respect to business and economic trends. Revisions of these estimates are recorded in the period in which the facts that give rise to the revision become known.

Valuation of Goodwill and Other Intangible Assets

Lionbridge assesses the impairment of goodwill and other intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Such events or conditions could include an economic downturn in the industries to which Lionbridge provides services; increased competition; an increase in operating or other costs; additional volatility in international currencies; the pace of technological improvements; or other information regarding Lionbridge’s market value, such as a reduction in stock price to a price near or below the book value of the Company for an extended period of time. When Lionbridge determines that the carrying value of goodwill may not be recoverable based upon one or more of these indicators of impairment, the Company initially assesses any impairment using fair value measurements based on projected discounted cash flow valuation models. In addition, in accordance with ASC 350, “Intangibles—Goodwill and Other” (“ASC 350”), goodwill is reviewed for impairment on an annual basis. At December 31, 2009, the Company performed its annual test of goodwill to determine if an impairment existed. This test determined that each reporting unit’s fair value exceeded the carrying value of the net assets of each respective reporting unit, using projected discounted cash flow modeling. As a result, no impairment was recorded for the year ended December 31, 2009.

The Company evaluates whether there has been an impairment in the carrying value of its long-lived assets in accordance with ASC 360, “Property, Plant and Equipment” (“ASC 360”), if circumstances indicate that a possible impairment may exist. An impairment in the carrying value of an asset is assessed when the undiscounted expected future operating cash flows derived from the asset grouping are less than its carrying value. If it is determined that the asset is impaired then it is written down to its estimated fair value. Factors that could lead to an impairment of acquired customer relationships (recorded with the acquisition of Bowne Global Solutions (“BGS”) in September 2005) include a worsening in customer attrition rates compared to historical attrition rates, or lower than initially anticipated cash flows associated with customer relationships.

Merger, Restructuring and Other Charges

During the six-month period ended June 30, 2010 Lionbridge recorded $1.9 million of restructuring and other charges. The $1.9 million of restructuring and other charges recorded in the six-month period ended June 30, 2010 included $1.1 million for workforce reductions in Europe and the United States consisting of 11 technical staff, 1 administrative staff and 1 sales staff, $362,000 recorded for vacated facilities and $331,000 for the accelerated amortization of long-lived assets in connection with vacated facilities, recorded pursuant to the guidance of ASC 420, “Exit or Disposal Cost Obligations” (“ASC 420”) and ASC 712, “Compensation—Nonretirement Postemployment Benefits” (“ASC 712”), and related literature. Of these charges, $1.6 million related to the Company’s Global Language and Content (“GLC”) segment and $171,000 related to the Global Development and Testing (“GDT”) segment. The Company made $2.4 million of cash payments in the six-month period ended June 30, 2010 with $2.3 million and $81,000 related to the GLC and GDT segments, respectively.

During the six-month period ended June 30, 2009 Lionbridge recorded $2.6 million of restructuring and other charges. The $2.6 million recorded in the six-month period ended June 30, 2009 included $2.0 million for workforce reductions in Europe, the United States and Asia consisting of 123 technical staff, 15 administrative staff and 14 sales staff and $662,000

 

17


Table of Contents

recorded for vacated facilities, recorded pursuant to the guidance of ASC 420, and related literature. Of these charges, $2.3 million related to the Company’s GLC segment, $280,000 related to the GDT segment, $32,000 related to Corporate and Other and $12,000 related to the Interpretation segment. The Company made $1.9 million of cash payments in the six-month period ended June 30, 2009, with $1.6 million, $277,000, $12,000 and $11,000 related to the GLC, GDT, Interpretation and Corporate and Other segments, respectively.

Stock Option Plans

The Company has stock-based compensation plans for salaried employees and non-employee members of the Board of Directors. The plans provide for discretionary grants of stock options, restricted stock and stock units, and other stock-based awards. The plans are administered by the Nominating and Compensation Committee of the Board of Directors, which consists of non-employee directors.

In November 2005, the stockholders of Lionbridge Technologies, Inc. approved the Lionbridge 2005 Stock Incentive Plan (the “2005 Plan”), which had been previously adopted by the Lionbridge Board of Directors on October 7, 2005, for officers, employees, non-employee directors and other key persons of Lionbridge and its subsidiaries. On May 1, 2009, the stockholders of the Company approved an amendment to the 2005 Plan increasing the maximum number of shares of common stock available for issuance under the 2005 Plan by 4,500,000 shares to 8,500,000 shares. At June 30, 2010, there were 1,527,068 options available for future grant under the 2005 Plan. Options to purchase common stock are granted at the discretion of the Board of Directors and the Nominating and Compensation Committee. Generally, stock options vest over a four-year period: 25% of the option shares vest one year from the date of grant and the remaining option shares vest at the rate of 12.5% each six month period thereafter. Stock options generally expire five to seven years from the date of grant under the 2005 Plan. Under the terms of the 2005 Plan, the exercise price of incentive and non-qualified stock option grants must not be less than 100% of the fair market value of the common stock on the date of grant. Options are amortized using a straight-line basis over the option vesting period.

Lionbridge’s 1998 Stock Plan (the “1998 Plan”) provides for the issuance of incentive and nonqualified stock options. The maximum number of shares of common stock available for issuance under the Plan is 11,722,032 shares and the 1998 Plan expired on January 26, 2008. At June 30, 2010 there were no options available for future grant under the 1998 Plan. Options to purchase common stock under the 1998 Plan had been granted at the discretion of the Board of Directors and the Nominating and Compensation Committee. Generally, stock options granted under the 1998 Plan vested over a four-year period: 25% of the option shares vested one year from the date of grant and the remaining option shares vested at the rate of 12.5% each six month period thereafter. Stock options granted under the 1998 Plan generally expire ten years (five years in certain cases) from the date of grant. Under the terms of the 1998 Plan, the exercise price of incentive stock options granted must not be less than 100% (110% in certain cases) of the fair market value of the common stock on the date of grant, as determined by the Board of Directors. The exercise price of nonqualified stock options may be less than the fair market value of the common stock on the date of grant, as determined by the Board of Directors, but in no case may the exercise price be less than the statutory minimum, the par value per share of Lionbridge’s common stock.

Restricted Stock Awards

Lionbridge issued 1,943,500 and 69,511 shares of restricted common stock and restricted stock units, respectively, under the Company’s 2005 Stock Incentive Plan, in the six-month period ended June 30, 2010 with a fair market value of $6.0 million. Of the total 2,013,011 shares of restricted common stock and restricted stock units issued in the six-month period ended June 30, 2010, 1,144,500 have restrictions on disposition which lapse over four years from the date of grant and 26,511 have restrictions on disposition which lapse over thirteen months from the date of grant, and 842,000 restricted shares were granted to certain employees as long-term performance based stock incentive awards (the “LTIP”) under the Corporation’s 2005 Stock Incentive Plan. Pursuant to the terms of the LTIP, restrictions with respect to the stock will lapse upon the achievement of revenue and/or profitability targets within the two or three calendar years from and including the year of grant. The grant date fair value of the shares is recognized over the requisite period of performance once achievement of criteria is deemed probable. On a quarterly basis, the Company estimates the likelihood of achieving performance goals. Actual results, and future changes in estimates, may differ substantially from the Company’s current estimates. If the targets are not achieved, the shares will be forfeited by the employee.

 

18


Table of Contents

Stock-based Compensation

The Company recognizes expense for stock options, performance-based restricted stock awards and time-based restricted stock awards pursuant to the authoritative guidance of Accounting Standards Codification (“ASC”) 718, “Compensation – Stock Compensation”. Total compensation expense related to stock options, market-based restricted stock awards and time-based restricted stock awards was $1.1 million and $960,000 for the three-month periods ended June 30, 2010 and 2009, respectively, and $2.0 million and $2.1 million for the six-month periods ended June 30, 2010 and 2009, respectively, classified in the statement of operations line items as follows:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009

Cost of revenue

   $ 19,000    $ 24,000    $ 39,000    $ 47,000

Sales and marketing

     163,000      136,000      314,000      309,000

General and administrative

     893,000      768,000      1,592,000      1,660,000

Research and development

     24,000      32,000      49,000      67,000
                           

Total stock-based compensation expense

   $ 1,099,000    $ 960,000    $ 1,994,000    $ 2,083,000
                           

As of June 30, 2010, future compensation cost related to non-vested stock options, less estimated forfeitures, is approximately $1.2 million and will be recognized over an estimated weighted average period of approximately 2.1 years. Lionbridge currently expects to amortize $7.4 million of unamortized compensation in connection with restricted stock awards outstanding as of June 30, 2010 over an estimated weighted average period of approximately 2.5 years.

Results of Operations

The following table sets forth for the periods indicated certain unaudited consolidated financial data as a percentage of total revenue.

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
     2010     2009     2010     2009  

Revenue

   100.0   100.0   100.0   100.0

Operating expenses:

        

Cost of revenue (exclusive of depreciation and amortization included below)

   66.4      67.0      67.4      68.1   

Sales and marketing

   7.1      7.2      7.0      7.9   

General and administrative

   17.9      18.8      18.3      20.0   

Research and development

   0.9      1.1      0.8      1.2   

Depreciation and amortization

   1.1      1.2      1.1      1.2   

Amortization of acquisition-related intangible assets

   1.2      1.4      1.2      1.5   

Merger, restructuring and other charges

   0.6      1.7      0.9      1.4   
                        

Total operating expenses

   95.2      98.4      96.7      101.3   
                        

Income (loss) from operations

   4.8      1.6      3.3      (1.3

Interest expense:

        

Interest on outstanding debt

   0.3      0.5      0.3      0.5   

Amortization of deferred financing costs

   —        —        —        —     

Interest income

   —        —        —        —     

Other (income) expense, net

   (0.7   0.7      (0.2   0.4   
                        

Income (loss) before income taxes

   5.2      0.4      3.2      (2.2

Provision for income taxes

   0.9      0.6      0.8      0.7   
                        

Net income (loss)

   4.3   (0.2 )%    2.4   (2.9 )% 
                        

 

19


Table of Contents

Revenue. The following table shows Global Language and Content (“GLC”), Global Development and Testing (“GDT”), and Interpretation revenues in dollars and as a percentage of total revenue for the three and six months ended June 30, 2010 and 2009, respectively:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

GLC

   $ 75,202,000    72   $ 70,429,000    72   $ 147,740,000    72   $ 133,096,000    71

GDT

     24,582,000    23     21,105,000    22     47,928,000    23     40,436,000    22

Interpretation

     5,088,000    5     6,494,000    6     9,984,000    5     12,899,000    7
                                                    

Total revenue

   $ 104,872,000    100   $ 98,028,000    100   $ 205,652,000    100   $ 186,431,000    100
                                                    

Revenue for the quarter ended June 30, 2010 was $104.9 million, an increase of $6.9 million, or 7.0%, from $98.0 million for the quarter ended June 30, 2009. Revenue increases during the quarter ended June 30, 2010 in the GLC and GDT segments were $4.8 million and $3.5 million, respectively, as compared to the quarter ended June 30, 2009. Revenue decline during the quarter ended June 30, 2010 in the Interpretation segment was $1.4 million as compared to the quarter ended June 30, 2009. This period-over-period increase in total revenue was primarily due to approximately $8.5 million of organic growth, partially offset by decreased revenue of $1.7 million as a result of the U.S. Dollar strengthening against most foreign currencies, in particular the Euro, as compared to the corresponding quarter of the prior year. Lionbridge conducts a large portion of its business in international markets. Approximately 41% of its revenue for the quarter ended June 30, 2010 is denominated in foreign currencies, primarily the Euro. A fluctuation in foreign currency exchange rates primarily affects the GLC segment. Total revenue for the six months ended June 30, 2010 was $205.7 million, an increase of $19.2 million, or 10.3%, from $186.4 million for the six months ended June 30, 2009. Revenue increases during the six months ended June 30, 2010 in the GLC and GDT segments were $14.6 million and $7.5 million, respectively, as compared to the quarter ended June 30, 2009. Revenue decline during the six months ended June 30, 2010 in the Interpretation segment was $2.9 million as compared to the six months ended June 30, 2009. This period-over-period increase in total revenue was primarily due to approximately $18.5 million of organic growth and approximately $726,000 as a result of the U.S. Dollar weakening against most foreign currencies, as compared to the corresponding quarter of the prior year.

Revenue from the Company’s GLC segment was $75.2 million for the quarter ended June 30, 2010, an increase of $4.8 million, or 6.8%, from $70.4 million for the quarter ended June 30, 2009. As compared to the quarter ended June 30, 2009, revenues increased approximately $6.4 million due to the organic growth, as certain global markets stabilize, resulting in increased demand for the Company’s services, particularly from existing customers, partially offset by approximately $1.6 million as a result of the U.S. Dollar strengthening against most foreign currencies, in particular against the Euro. For the six months ended June 30, 2010, revenue from the Company’s GLC segment was $147.7 million, an increase of $14.6 million, or 11.0%, from $133.1 million for the six months ended June 30, 2009. As compared to the six months ended June 30, 2009, GLC revenues increased approximately $13.9 million due to organic growth, as certain global markets stabilize, resulting in increased demand for the Company’s services, particularly from existing customers and approximately $705,000 due to the weakening of the U.S. Dollar against most foreign currencies.

Revenue from the Company’s GDT segment was $24.6 million for the quarter ended June 30, 2010, an increase of $3.5 million, or 16.5%, from $21.1 million for the quarter ended June 30, 2009. For the six months ended June 30, 2010, revenue from the Company’s GDT segment was $47.9 million, an increase of $7.5 million, or 18.5%, from $40.4 million for the six months ended June 30, 2009. The period-over-period increases in GDT revenue were primarily due to increased revenue from large programs and new engagements from existing customers. Revenue in the GDT segment is not materially impacted by fluctuations in foreign currency exchange rates.

Revenue from the Company’s Interpretation segment was $5.1 million for the quarter ended June 30, 2010, a decrease of $1.4 million, or 21.7%, from $6.5 million for the quarter ended June 30, 2009. For the six months ended June 30, 2010, revenue from the Company’s Interpretation segment was $10.0 million, a decrease of $2.9 million, or 22.6%, from $12.9 million for the six months ended June 30, 2009. The decrease in Interpretation revenue for the quarter and six months ended June 30, 2010 was primarily due to decreased revenue from one large customer engagement. Revenue in the Interpretation segment is not materially impacted by fluctuations in foreign currency exchange rates.

 

20


Table of Contents

Cost of Revenue. Cost of revenue, excluding depreciation and amortization, consists primarily of expenses incurred for translation services provided by third parties as well as salaries and associated employee benefits for personnel related to client engagements. The following table shows GLC, GDT and Interpretation cost of revenues, the percentage change from the three and six-month periods of the prior year and as a percentage of revenue for the three and six months ended June 30, 2010 and 2009, respectively:

 

     Three  Months
Ended
June  30,
2010
    % Change
Q2 09 to Q2 10
    Three  Months
Ended
June  30,
2009
    Six  Months
Ended
June  30,
2010
    % Change
Six  Months
09 to Six
Months 10
    Six  Months
Ended
June  30,
2009
 

GLC:

            

Cost of revenue

   $ 49,131,000      4.7   $ 46,941,000      $ 98,314,000      8.3   $ 90,809,000   

Percentage of revenue

     65.3       66.7     66.5       68.2

GDT:

            

Cost of revenue

     16,242,000      16.6     13,924,000        31,530,000      18.6     26,591,000   

Percentage of revenue

     66.1       66.0     65.8       65.8

Interpretation:

            

Cost of revenue

     4,270,000      (11.7 )%      4,838,000        8,744,000      (7.7 )%      9,476,000   

Percentage of revenue

     83.9       74.5     87.6       73.5
                                    

Total cost of revenue

   $ 69,643,000        $ 65,703,000      $ 138,588,000        $ 126,876,000   
                                    

Percentage of revenue

     66.4       67.0     67.4       68.1

For the quarter ended June 30, 2010, as a percentage of revenue, cost of revenue decreased to 66.4% as compared to 67.0% for the quarter ended June 30, 2009. The decrease was primarily the result of an increase in revenue, supplemented by the benefit of cost saving initiatives implemented in 2009 and the first six months of 2010, and continued benefits realized from the deployment and use of Lionbridge’s language management technology platform, in addition to the strengthening of the U.S. Dollar against most foreign currencies, particularly the Euro, as compared to the corresponding period of 2009.

Each segment provides distinctive services with different gross margins. For the quarter ended June 30, 2010, GLC, GDT and Interpretation accounted for approximately 71.7%, 23.4% and 4.9% of the total revenue. For the quarter ended June 30, 2009 GLC, GDT and Interpretation accounted for approximately 71.8%, 21.5% and 6.6% of the total revenue.

For the quarter ended June 30, 2010, cost of revenue increased $3.9 million, or 6.0%, to $69.6 million as compared to $65.7 million for the corresponding period of the prior year. This increase was primarily associated with the $6.8 million increase in revenue as compared to the corresponding period of the prior year, offset by approximately $807,000 of reduced expenses attributable to the strengthening of the U.S. Dollar’s exchange rate against most foreign currencies, in particular the Euro. For the six months ended June 30, 2010, cost of revenue was $138.6 million, an increase of $11.7 million, or 9.2 %, as compared to $126.9 million for the same period of 2009. This increase was primarily associated with the $19.2 million increase in revenue as compared to the six months ended June 30, 2009. Approximately $2.1 million of the increase is attributable to the depreciation of the U.S. Dollar’s exchange rate against most foreign currencies as compared to the six months ended June 30, 2009.

For the quarter ended June 30, 2010, cost of revenue as a percentage of revenue in the Company’s GLC segment decreased to 65.3% as compared to 66.7% for the quarter ended June 30, 2009. Cost of revenue increased $2.2 million to $49.1 million compared to $46.9 million for the same quarter of the prior year. The increase in cost is primarily associated with the $4.8 million increase in revenue as compared to the corresponding period of the prior year. Approximately $712,000 of the increase is offset by reduced expenses attributable to the strengthening of the U.S. Dollar’s exchange rate against most foreign currencies, in particular the Euro. For the six months ended June 30, 2010, cost of revenue as a percentage of revenue in the Company’s GLC segment decreased to 66.5% as compared to 68.2% for the six months ended June 30, 2009. For the six months ended June 30, 2010, GLC cost of revenue increased $7.5 million to $98.3 million as compared to $90.8 million for the corresponding period of the prior year. This increase is primarily associated with the $14.6 million increase in revenue as compared to the corresponding period of the prior year. Approximately $1.9 million of the increase is attributable to the depreciation of the U.S. Dollar’s exchange rate against most foreign currencies, as compared to the six months ended June 30, 2009.

 

21


Table of Contents

For the quarter ended June 30, 2010, cost of revenue as a percentage of revenue in the Company’s GDT segment increased to 66.1% as compared to 66.0% for the quarter ended June 30, 2009. For the quarter ended June 30, 2010, GDT cost of revenue increased $2.3 million, or 16.6%, to $16.2 million as compared to $13.9 million for the corresponding quarter of the prior year. This increase was primarily associated with the $3.5 million increase in revenue period-over-period. For the six months ended June 30, 2010, cost of revenue as a percentage of revenue in the Company’s GDT segment remained consistent at 65.8% as compared to the six months ended June 30, 2009. For the six months ended June 30, 2010, cost of revenue was $31.5 million, an increase of $4.9 million, or 18.6%, as compared to $26.6 million for the same period of 2009. This increase was primarily associated with the $7.5 million increase in revenue as compared to the six months ended June 30, 2009.

For the quarter ended June 30, 2010, cost of revenue as a percentage of revenue in the Company’s Interpretation segment increased to 83.9% as compared to 74.5% for the quarter ended June 30, 2009. The increase is primarily due to decreased revenue levels, pricing and work mix variations in services as compared to the corresponding quarter of the prior year. For the quarter ended June 30, 2010, Interpretation cost of revenue decreased $568,000, or 11.7%, to $4.3 million as compared to $4.8 million for the corresponding quarter of the prior year. This decrease was primarily associated with the $1.4 million decrease in revenue period-over-period. For the six months ended June 30, 2010, cost of revenue as a percentage of revenue in the Company’s Interpretation segment increased to 87.6% as compared to 73.5% for the six months ended June 30, 2009. For the six months ended June 30, 2010, cost of revenue was $8.7 million, a decrease of $732,000, or 7.7%, as compared to $9.5 million for the same period of 2009. This decrease was primarily associated with the $2.9 million decrease in revenue as compared to the six months ended June 30, 2009. The Company’s Interpretation segment is not materially impacted by foreign currency exchange rate fluctuations.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and associated employee benefits, travel expenses of sales and marketing personnel, promotional expenses, sales force automation/CRM system expense, training, and the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs. The following table shows sales and marketing expenses in dollars, the dollar change from the three and six-month periods of the prior year and as a percentage of revenue for the three and six months ended June 30, 2010 and 2009, respectively:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  

Total sales and marketing expenses

   $ 7,465,000      $ 7,022,000      $ 14,433,000      $ 14,715,000   

Increase (decrease) from prior year

     443,000          (282,000  

Percentage of revenue

     7.1     7.2     7.0     7.9

Sales and marketing expenses increased $443,000, or 6.3%, for the three months ended June 30, 2010 as compared to the corresponding period of 2009. This increase is primarily attributable to increased compensation to support the $6.9 million increase in revenue, year-over-year. Approximately $43,000 of the increase is offset by reduced expenses attributable to the strengthening of the U.S. Dollar’s exchange rate against most foreign currencies, in particular the Euro.

Sales and marketing expenses decreased $282,000, or 1.9%, for the six months ended June 30, 2010 as compared to the corresponding period of 2009. This decrease reflects approximately $454,000 of reduced expenses as the result of cost saving initiatives implemented during 2009 and the first six months of 2010, primarily employee compensation and benefits, and external consulting fees. This decrease was partially offset by $172,000 increased expenses attributable to the depreciation of the U.S. Dollar’s exchange rate against most foreign currencies. As a percentage of revenue, sales and marketing expenses decreased to 7.1% and 7.0% as compared to 7.2% and 7.9% for the three and six months ended June 30, 2009. This decrease is primarily associated with the $6.9 million and $19.2 million increase in revenue for the three and six months ended June 30, 2010, respectively, as compared to the corresponding periods of the prior year.

 

22


Table of Contents

General and Administrative. General and administrative expenses consist of salaries of the management, purchasing, process and technology, finance and administrative groups, and associated employee benefits and travel; facilities costs; information systems costs; professional fees; business reconfiguration costs and all other site and corporate costs. The following table shows general and administrative expenses in dollars, the dollar change from the three and six-month periods of the prior year and as a percentage of revenue for the three and six months ended June 30, 2010 and 2009, respectively:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  

Total general and administrative expenses

   $ 18,698,000      $ 18,442,000      $ 37,490,000      $ 37,245,000   

Increase from prior year

     256,000          245,000     

Percentage of revenue

     17.9     18.8     18.3     20.0

General and administrative expenses increased $256,000, or 1.4%, for the three months ended June 30, 2010 as compared to the corresponding period of 2009. The majority of this increase is primarily due to increased employee compensation and benefits and stock-based compensation expense. Approximately $93,000 of the increase is offset by reduced expenses attributable to the strengthening of the U.S. Dollar’s exchange rate against most foreign currencies, in particular the Euro. As a percentage of revenue, general and administrative expenses decreased to 17.9% for the quarter ended June 30, 2010, as compared to 18.8%, for the same period of the prior year. This decrease is primarily associated with the $6.9 million increase in revenue for the quarter ended June 30, 2010, as compared to the corresponding period of the prior year and the result of the cost saving initiatives implemented during 2009 and the first six months of 2010.

General and administrative expenses increased $245,000, or 0.7%, respectively, for the six months ended June 30, 2010 as compared to the corresponding period of 2009. The depreciation of the U.S. Dollar against most foreign currencies increased general and administrative expense by $575,000 as compared to the corresponding period of 2009. Approximately 57% of general and administrative expenses are denominated in non-U.S. Dollars, primarily the Euro, and of that amount a majority of these expenses related to rent and compensation expense in the six months June 30, 2010, as compared to the six months ended June 30, 2009. This increase was offset by $330,000 reduced expenses as the result of cost saving initiatives implemented during 2009 and the first six months of 2010, primarily employee compensation and benefits, and lower stock-based compensation expense. As a percentage of revenue, general and administrative expenses decreased to 18.3% for the six months ended June 30, 2010, as compared to 20.0%, for the same period of the prior year. This decrease is primarily associated with the $19.2 million increase in revenue for the six months ended June 30, 2010, as compared to the corresponding period of the prior year and the result of the cost saving initiatives implemented during 2009 and the first six months of 2010.

Research and Development. Research and development expenses relate primarily to the Company’s web-based hosted language management technology platform used in the globalization process and the research and development of a globalization management system. The cost consists primarily of salaries and associated employee benefits and third-party contractor expenses. The following table shows research and development expense in dollars, the dollar change from the three and six-month periods of the prior year and as a percentage of revenue for the three and six months ended June 30, 2010 and 2009, respectively:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  

Total research and development expense

   $ 952,000      $ 1,096,000      $ 1,710,000      $ 2,281,000   

Decrease from prior year

     144,000          571,000     

Percentage of revenue

     0.9     1.1     0.8     1.2

Research and development expenses decreased $144,000 and $571,000 for the three and six months ended June 30, 2010, respectively, as compared to the corresponding periods of 2009. The decrease in research and development expenses is primarily the result of an increase in the internal and external capitalized costs for the development of the Company’s web-based hosted language management technology platform and new software-as-a-service offering.

 

23


Table of Contents

Depreciation and Amortization. Depreciation and amortization consist of the expense related to property and equipment that is being depreciated over the estimated useful lives of the assets using the straight-line method. The following table shows depreciation and amortization expense in dollars, the dollar change from the three and six-month periods of the prior year and as a percentage of revenue for the three and six months ended June 30, 2010 and 2009, respectively:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  

Total depreciation and amortization expense

   $ 1,175,000      $ 1,154,000      $ 2,305,000      $ 2,295,000   

Increase from prior year

     21,000          10,000     

Percentage of revenue

     1.1     1.2     1.1     1.2

Depreciation and amortization expense remained flat at $1.2 million and $2.3 million for the three and six-month periods ended June 30, 2010, respectively, as compared to the same period of the prior year.

Amortization of Acquisition-related Intangible Assets. Amortization of acquisition-related intangible assets consists of the amortization of identifiable intangible assets resulting from acquired businesses. Amortization expense for the three months ended June 30, 2010 and 2009 of $1.2 million and $1.4 million, respectively, and for the six months ended June 30, 2010 and 2009 of $2.4 million and $2.8 million, respectively, relates solely to the amortization of identifiable intangible assets acquired from BGS in 2005.

Interest Expense. Interest expense primarily represents interest paid or payable on debt and the amortization of deferred financing costs. Interest expense for the quarter ended June 30, 2010 of $326,000 decreased $184,000 from $510,000 for the quarter ended June 30, 2009. The decrease reflects the impact of an approximately $16.9 million lower average borrowings during the quarter, year-over-year, coupled with lower interest rates. Interest expense for the six months ended June 30, 2010 of $667,000 decreased $424,000 from $1.1 million for the six months ended June 30, 2009. The decrease reflects the impact of an approximately $23.9 million lower average borrowings during the six month period year-over-year coupled with lower interest rates.

Other (Income) Expense, Net. Other (income) expense, net primarily reflects the foreign currency transaction gains or losses arising from exchange rate fluctuations on transactions denominated in currencies other than the functional currencies of the countries in which the transactions are recorded. The Company recognized $731,000 and $457,000 in other income, net, in the three and six months ended June 30, 2010, respectively, as compared to $720,000 and $725,000 in other expense, net, in the corresponding periods of the prior year. The variations are primarily attributable to net realized and unrealized foreign currency gains of $911,000 and $910,000 on forward contracts recorded in the three and six-month periods ended June 30, 2010, respectively, in addition to the variances among the Euro and other currencies against the U.S. Dollar in the periods, as compared to the net position and variance during the corresponding periods of the prior year.

Provision for Income Taxes. The following table shows the provision for income taxes expense in dollars, the dollar change from the three and six-month periods of the prior year and as a percentage of revenue for the three and six months ended June 30, 2010 and 2009, respectively:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  

Total provision for income taxes

   $ 905,000      $ 624,000      $ 1,613,000      $ 1,208,000   

Increase from prior year

     281,000          405,000     

Percentage of revenue

     0.9     0.6     0.8     0.7

The provision for income taxes consists primarily of taxes resulting from profits in foreign jurisdictions, interest and penalties associated with uncertain tax positions, and a deferred tax benefit for the reduction of deferred tax liabilities related to the intangible assets from the BGS acquisition. The tax provision increased $281,000 to $905,000 for the quarter ended June 30, 2010 from $624,000 in the corresponding quarter of the prior year and $405,000 to $1.6 million for the six months ended June 30, 2010 from $1.2 million in the corresponding period of the prior year. These increases are primarily due to higher foreign profits which are subject to tax by the foreign jurisdictions due to treatment of the foreign subsidiaries as service providers that earn a profit based on a cost-plus model.

Liquidity and Capital Resources

On December 21, 2006, the Company entered into a revolving credit facility (the “Credit Agreement”) with HSBC Bank USA, National Association. The Credit Agreement was subsequently amended in 2007 and 2009 to add certain additional non-U.S. subsidiaries of the Company as Borrowers or Guarantors. The Credit Agreement provides for a five-year $100.0 million revolving credit facility. At June 30, 2010, $24.7 million was outstanding with an interest rate of 1.6%.

 

24


Table of Contents

The following table shows cash and cash equivalents and working capital at June 30, 2010 and at December 31, 2009:

 

     June 30, 2010    December 31, 2009

Cash and cash equivalents

   $ 28,852,000    $ 27,432,000

Working capital

     41,161,000      36,182,000

Lionbridge’s working capital increased $5.0 million to $41.2 million at June 30, 2010, as compared to $36.2 million at December 31, 2009; accounts receivable and unbilled receivables totaled $74.2 million, an increase of $1.5 million as compared to December 31, 2009; and other current assets increased by $1.7 million as compared to December 31, 2009. Current liabilities totaled $71.9 million at June 30, 2010, a decrease of $401,000 from December 31, 2009.

The following table shows the net cash provided by operating activities, net cash used in investing activities, and net cash provided by (used in) financing activities for the six months ended June 30, 2010 and 2009, respectively:

 

     Six Months Ended June 30,  
     2010     2009  

Net cash provided by operating activities

   $ 9,160,000      $ 10,202,000   

Net cash used in investing activities

     (5,891,000     (1,163,000

Net cash provided by (used in) financing activities

     193,000        (19,088,000

Net cash provided by operating activities was $9.2 million for the six months ended June 30, 2010, as compared to $10.2 million for the corresponding period of the prior year. The $9.2 million cash provided by operating activities was due to net income of $5.0 million (inclusive of $6.3 million in depreciation, amortization, stock-based compensation and other non-cash expenses), a $5.6 million net increase in accounts receivable and unbilled receivables, a $2.0 million increase in other operating assets, a $6.6 million increase in accounts payable, accrued expenses and other operating liabilities, and a $1.1 million decrease in deferred revenue.

In the six months ended June 30, 2009, net cash provided by operating activities was $10.2 million. Cash provided by operating activities was due to a net loss of $5.3 million (inclusive of $7.0 million in depreciation, amortization, stock-based compensation and other non-cash expenses), a $12.3 million net decrease in accounts receivable and unbilled receivables, reflecting improved cash management in the six-month period ended June 30, 2009 as compared to the corresponding period of 2008, a $893,000 decrease in other operating assets, a $2.2 million decrease in accounts payable, accrued expenses and other operating liabilities, and a $2.4 million decrease in deferred revenue. Lionbridge has not experienced any significant trends in accounts receivable and unbilled receivables other than changes relative to the change in revenue, as previously noted. Fluctuations in accounts receivable from period to period relative to changes in revenue are a result of timing of customer invoicing and receipt of payments from customers.

Net cash used in investing activities increased $4.7 million to $5.9 million for the six months ended June 30, 2010, as compared to $1.2 million for the corresponding period of the prior year. The primary investing activity in the six months ended June 30, 2010 was for the purchase of property and equipment.

In the six months ended June 30, 2009, net cash used in investing activities was $1.2 million, primarily for the purchase of property and equipment.

Net cash provided by financing activities for the three months ended June 30, 2010 was $193,000, an increase of $19.3 million as compared to $19.1 million of net cash used in financing activities for the corresponding period of 2009. Cash provided by financing activities consisted of $198,000 of proceeds from the issuance of common stock under option plans and $5,000 for payments of capital lease obligations.

In the six months ended June 30, 2009, net cash used in financing activities was $19.1 million. Cash used in financing activities consisted of $19.0 million of payments of long-term debt, $3.5 million of payments of short-term debt, $88,000 for payments of capital lease obligations and $3.5 million of proceeds from the issuance of short-term debt.

On May 5, 2010, Lionbridge filed with the Securities and Exchange Commission a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended (SEC File No. 333-166529), covering the registration of debt and equity securities (the “Securities”), in an aggregate amount of $100.0 million. The registration statement was declared effective by the Commission on May 13, 2010. The Company may offer these Securities from time to time in amounts, at prices and on terms to be determined at the time of sale. The Company believes that with this Registration Statement, it has additional financing flexibility to meet potential future funding requirements and the ability to take advantage of potentially attractive capital market conditions.

 

25


Table of Contents

Lionbridge anticipates that its present cash and short-term investments position and available financing should provide adequate cash to fund its currently anticipated cash needs for the next twelve months and foreseeable future.

Contractual Obligations

As of June 30, 2010, there were no material changes in Lionbridge’s contractual obligations as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Tax provisions during the six months ended June 30, 2010, primarily related to taxes and accrued interest, have increased the balance of unrecognized tax benefits by $376,000 to $8.2 million.

Approximately $2.2 million of this balance is related to tax liabilities accruing on or prior to the acquisition of BGS on September 1, 2005. Bowne & Co., Inc. has agreed to indemnify Lionbridge for these amounts. The Company believes that it is reasonably possible that approximately $634,000 of its unrecognized tax benefits, consisting of several items in various jurisdictions, may be recognized within the next twelve months.

Off-Balance Sheet Arrangements

The Company does not have any special purpose entities or off-balance sheet financing arrangements.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued ASU 2010-06, “Value Measurements and Disclosures – Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”), that amends ASC Subtopic 820-10, “Fair Value Measurements and Disclosures – Overall”, and requires reporting entities to disclose (1) the amount of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, and (2) separate information about purchases, sales, issuance and settlements in the reconciliation of fair value measurements using significant unobservable inputs (Level 3). ASU 2010-06 also requires reporting entities to provide fair value measurement disclosures for each class of assets and liabilities and disclose the inputs and valuation techniques for fair value measurements that fall within Levels 2 and 3 of the fair value hierarchy. These disclosures and clarification are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuance, and settlements in the rollforward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company adopted the provisions of ASU 2010-06 and the provisions of ASU 2010-06 and the adoption of these provisions does not have a material impact on its consolidated financial statements.

In February 2010, the FASB issued ASU 2010-09, “Subsequent Events – Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”), that amends ASC Subtopic 855-10, “Subsequent Events – Overall” (“ASC 855-10”). ASU 2010-09 requires an SEC filer to evaluate subsequent events through the date that the financial statements are issued but removed the requirement to disclose this date in the notes to the entity’s financial statements. The amendments are effective upon issuance of the final update and accordingly, the Company has adopted the provisions of ASU 2010-09. The adoption of these provisions does not have a material impact on its consolidated financial statements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Lionbridge conducts its business globally and its earnings and cash flows are exposed to market risk from changes in interest rates and currency exchange rates. The Company manages its risk to foreign currency transaction exposure and interest rates through risk management programs that include the use of derivative financial instruments. Lionbridge operates these programs pursuant to documented corporate risk management policies. Lionbridge does not enter into any derivative transactions for speculative purposes. Gains and losses on derivative financial instruments substantially offset gains and losses on underlying hedged exposures.

Interest Rate Risk. Lionbridge is exposed to market risk from changes in interest rates with respect to its revolving loan facility which bears interest at Prime or LIBOR (at the Company’s discretion) plus an applicable margin based on certain financial covenants. As of June 30, 2010, $24.7 million was outstanding under this facility. A hypothetical 10% increase or decrease in interest rates would have approximately a $39,000 impact on the Company’s interest expense based on the $24.7 million outstanding at June 30, 2010 with an interest rate of 1.6%. On July 20, 2007, the Company entered into a three-year amortizing interest rate swap with a notional amount of $20.0 million that corresponds to a portion of the Company’s floating

 

26


Table of Contents

rate credit facility. On July 31, 2008, the notional amount decreased to $15.0 million and on July 31, 2009, the notional amount decreased to $10.0 million. The notional amount effectively converted that portion of the Company’s total floating rate credit facility to fixed rate debt. The fair value of the interest rate derivative was a liability of $41,000 at June 30, 2010. A hypothetical 10% increase or decrease in interest rates would not have a material impact on the derivative’s fair value. The interest rate swap is designated as a cash flow hedge under ASC 815 and there is no hedge ineffectiveness at June 30, 2010. Additionally, Lionbridge is exposed to market risk through its investing activities. The Company’s portfolio consists primarily of short-term time deposits and investments in money market funds that have maturities less than 90 days. A hypothetical 10% increase or decrease in interest rates would not have a material impact on the carrying value of Lionbridge’s investments due to their immediately available liquidity.

Foreign Currency Exchange Rate Risk. Lionbridge conducts a large portion of its business in international markets. Although a majority of Lionbridge’s contracts with clients are denominated in U.S. Dollars, 65% and 66% of its costs and expenses for the three-month periods ended June 30, 2010 and 2009, respectively, were denominated in foreign currencies, primarily operating expenses associated with cost of revenue, sales and marketing and general and administrative. In addition, 16% and 13% of the Company’s consolidated tangible assets were subject to foreign currency exchange fluctuations as of June 30, 2010 and December 31, 2009, respectively, while 10% and 10% of its consolidated liabilities were exposed to foreign currency exchange fluctuations as of June 30, 2010 and December 31, 2009, respectively. In addition, net inter-company balances denominated in currencies other than the functional currency of the respective entity were approximately $40.3 million and $34.0 million as of June 30, 2010 and December 31, 2009, respectively. The principal foreign currency applicable to our business is the Euro. The Company has implemented a risk management program that partially mitigates its exposure to assets or liabilities (primarily cash and cash equivalents, accounts receivable and accounts payable) denominated in currencies other than the functional currency of the respective entity which includes the use of derivative financial instruments, principally foreign exchange forward contracts. These foreign exchange forward contracts do not qualify for hedge accounting under the ASC 815 guidance. The Company had forward contracts outstanding in the notional amount of $7.6 million at June 30, 2010 and recorded a net of $911,000 in assets to recognize the fair value of these forward contracts. A 10% appreciation in the U.S. dollar’s value relative to the hedged currencies would decrease the forward contracts’ fair value by approximately $91,000 at June 30, 2010. A 10% depreciation in the U.S. dollar’s value relative to the hedge currencies would increase the forward contract’s fair value by approximately $91,000. Any increase or decrease in the fair value of the Company’s currency exchange rate sensitive forward contracts would be substantially offset by a corresponding decrease or increase in the fair value of the hedged underlying asset or liability.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Lionbridge maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the Company’s filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported accurately within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (pursuant to Exchange Act Rule 13a-15). Based upon this evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2010.

Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2010 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

27


Table of Contents

LIONBRIDGE TECHNOLOGIES, INC.

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

On or about July 24, 2001, a purported securities class action lawsuit captioned “Samet v. Lionbridge Technologies, Inc. et al.” (01-CV-6770) was filed in the United States District Court for the Southern District of New York (the “Court”) against the Company, certain of its officers and directors, and certain underwriters involved in the Company’s initial public offering. The complaint in this action asserted, among other things, that omissions regarding the underwriters’ alleged conduct in allocating shares in Lionbridge’s initial public offering to the underwriters’ customers. In March 2002, the United States District Court for the Southern District of New York entered an order dismissing without prejudice the claims against Lionbridge and its officers and directors (the case remained pending against the underwriter defendants).

On April 19, 2002, the plaintiffs filed an amended complaint naming as defendants not only the underwriter defendants but also Lionbridge and certain of its officers and directors. The amended complaint asserts claims under both the registration and antifraud provisions of the federal securities laws relating to, among other allegations, the underwriters’ alleged conduct in allocating shares in the Company’s initial public offering and the disclosures contained in the Company’s registration statement. On July 15, 2002, the Company, together with the other issuers named as defendants in these coordinated proceedings, filed a collective motion to dismiss the complaint on various legal grounds common to all or most of the issuer defendants. In October 2002, the claims against officers and directors were dismissed without prejudice. In February 2003, the Court issued its ruling on the motion to dismiss, ruling that the claims under the antifraud provisions of the securities laws could proceed against the Company and a majority of the other issuer defendants.

In June 2003, Lionbridge elected to participate in a proposed settlement agreement with the plaintiffs in this litigation. If the proposed settlement had been approved by the Court, it would have resulted in the dismissal, with prejudice, of all claims in the litigation against Lionbridge and against any other of the issuer defendants who elected to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. This proposed issuer settlement was conditioned on, among other things, a ruling by the District Court that the claims against Lionbridge and against the other issuers who had agreed to the settlement would be certified for class action treatment for purposes of the proposed settlement, such that all investors included in the proposed classes in these cases would be bound by the terms of the settlement unless an investor opted to be excluded from the settlement.

On December 5, 2006, the U.S. Court of Appeals for the Second Circuit issued a decision in In re Initial Public Offering Securities Litigation that six purported class action lawsuits containing allegations substantially similar to those asserted against the Company may not be certified as class actions due, in part, to the Appeals Court’s determination that individual issues of reliance and knowledge would predominate over issues common to the proposed classes. On January 8, 2007, the plaintiffs filed a petition seeking rehearing en banc of the Second Circuit Court of Appeals’ decision. On April 6, 2007 the Court of Appeals denied the plaintiffs’ petition for rehearing of the Court’s December 5, 2006 ruling but noted that the plaintiffs remained free to ask the District Court to certify classes different from the ones originally proposed which might meet the standards for class certification that the Court of Appeals articulated in its December 5, 2006 decision. In light of the Court of Appeals’ December 5, 2006 decision regarding certification of the plaintiffs’ claims, the District Court entered an order on June 25, 2007 terminating the proposed settlement between the plaintiffs and the issuers, including Lionbridge.

On August 14, 2007, the plaintiffs filed amended complaints in the six focus cases. The issuer defendants and the underwriter defendants separately moved to dismiss the claims against them in the amended complaints in the six focus cases. On March 26, 2008, the District Court issued an order in which it denied in substantial part the motions to dismiss the amended complaints in the six focus cases.

On February 25, 2009, the parties advised the District Court that they had reached an agreement-in-principle to settle the litigation in its entirety. A stipulation of settlement was filed with the District Court on April 2, 2009. On June 9, 2009, the District Court preliminarily approved the proposed global settlement. Notice was provided to the class and a settlement fairness hearing, at which members of the class had an opportunity to object to the proposed settlement, was held on September 10, 2009. On October 6, 2009, the District Court issued an order granting final approval to the settlement. Several appeals have been filed objecting to the definition of the settlement class and fairness of the settlement, and those appeals remain pending. The litigation process is inherently uncertain and unpredictable, however, and there can be no guarantee as to the ultimate outcome of this pending lawsuit. While Lionbridge cannot guarantee the outcome of these proceedings, the Company believes that the final result of this lawsuit will have no material effect on its consolidated financial condition, results of operations, or cash flows.

 

28


Table of Contents
Item 1A. Risk Factors

The matters discussed in this Form 10-Q include forward-looking statements that involve risks or uncertainties. These statements are neither promises nor guarantees, but are based on various assumptions by management regarding future circumstances many of which Lionbridge has little or no control over. A number of important risks and uncertainties, including those identified under the caption “Risk Factors” in Lionbridge’s Annual Report on Form 10-K, filed March 16, 2010 (SEC File No. 000-26933) (the “2009 Annual Report”) and subsequent filings as well as risks and uncertainties discussed elsewhere in this Form 10-Q, could cause Lionbridge’s actual results to differ materially from those in the forward-looking statements. There have been no material changes in Lionbridge’s risk factors from those disclosed in Lionbridge’s 2009 Annual Report.

 

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

During the quarter ended June 30, 2010, the Company withheld 67,236 restricted shares from certain employees to cover certain withholding taxes due from the employees at the time the shares vested. The following table provides information about Lionbridge’s purchases of equity securities for the quarter ended June 30, 2010:

 

Period

   Total Number of
Shares Purchased
   Average Price
Paid Per  Share

May 1, 2010 – May 31, 2010

   66,761    $ 5.31

June 1, 2010 – June 30, 2010

   475    $ 5.21
           

Total

   67,236    $ 5.31
           

In addition, upon the termination of employees during the quarter ended June 30, 2010, 1,000 unvested restricted shares were forfeited. The following table provides information about Lionbridge’s forfeited restricted shares for the quarter ended June 30, 2010:

 

Period

   Total Number of
Shares Forfeited

April 1, 2010 – April 30, 2010

   1,000

 

Item 6. Exhibits

 

  (a) Exhibits.

 

10.1 *    Lease dated as of April 26, 2010 between ADF Properties, L.L.C. and Lionbridge Technologies, Inc.
10.2*    Lease dated as of May 12, 2010 between and Promociones Inmobiliaries Capital 7, S.L. and Lionbridge Espana, S.L.
10.3*    Lease dated as of May 31, 2010 between Beijing Tongshun Real Estate Development Co., Ltd and Beijing Lionbridge Global Solutions Technologies, Inc.
10.4 *    Lease dated as of June 22, 2010 between Dominion Corporate Trustees Limited and Dominion Trust Limited and Lionbridge (UK) Limited.
10.5    Form of Long-Term Performance Restricted Stock Award Agreement (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A (file No. 000-26933) filed on June 18, 2010, as amended, and incorporated herein by reference).
31.1 *    Certification of Rory J. Cowan, the Company’s principal executive officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 *    Certification of Donald M. Muir, the Company’s principal financial officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 *    Certifications of Rory J. Cowan, the Company’s principal executive officer, and Donald M. Muir, the Company’s principal financial officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

* Filed herewith.

 

29


Table of Contents

LIONBRIDGE TECHNOLOGIES, INC.

SIGNATURE

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.

 

LIONBRIDGE TECHNOLOGIES, INC.
By:  

/S/ DONALD M. MUIR

 

Donald M. Muir

Chief Financial Officer

(Duly Authorized Officer and Principal

Financial Officer)

Dated: August 6, 2010

 

30


Table of Contents

Exhibit Index

 

Exhibit
Number

  

Description

10.1 *

   Lease dated as of April 26, 2010 between ADF Properties, L.L.C. and Lionbridge Technologies, Inc.

10.2 *

   Lease dated as of May 12, 2010 between Promociones Inmobiliaries Capital 7, S.L. and Lionbridge Espana, S.L.

10.3 *

   Lease dated as of May 31, 2010 between Beijing Tongshun Real Estate Development Co., Ltd and Beijing Lionbridge Global Solutions Technologies, Inc.

10.4 *

   Lease dated as of June 22, 2010 between and Dominion Corporate Trustees Limited and Dominion Trust Limited and Lionbridge (UK) Limited.

10.5

   Form of Long-Term Performance Restricted Stock Award Agreement (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A (file No. 000-26933) filed on June 18, 2010, as amended, and incorporated herein by reference).

31.1 *

   Certification of Rory J. Cowan, the Company’s principal executive officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 *

   Certification of Donald M. Muir, the Company’s principal financial officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 *

   Certifications of Rory J. Cowan, the Company’s principal executive officer, and Donald M. Muir, the Company’s principal financial officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

* Filed herewith.

 

31