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EX-23.1 - EX-23.1 - IXIA | v58868exv23w1.htm |
EX-31.2 - EX-31.2 - IXIA | v58868exv31w2.htm |
EX-32.1 - EX-32.1 - IXIA | v58868exv32w1.htm |
EX-21.1 - EX-21.1 - IXIA | v58868exv21w1.htm |
EX-31.1 - EX-31.1 - IXIA | v58868exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-31523
IXIA
(Exact name of Registrant as specified in its charter)
California | 95-4635982 | |
(State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) | |
organization) |
26601 West Agoura Road, Calabasas, CA 91302
(Address of principal executive offices, including zip code)
(Address of principal executive offices, including zip code)
Registrants telephone number, including area code: (818) 871-1800
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, without par value | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.
Yes o No þ
Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the Registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the shares of the Registrants Common Stock held by nonaffiliates of
the Registrant as of June 30, 2010, computed by reference to the closing sales price on the Nasdaq
Global Select Market on that date, was approximately $287,891,883.
As of March 1, 2011, the number of shares of the Registrants Common Stock outstanding was
68,465,345.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement delivered to shareholders in connection with the
Annual Meeting of Shareholders to be held on May 19, 2011 are incorporated by reference into Part
III of this Annual Report.
IXIA
FORM 10-K
TABLE OF CONTENTS
Page | ||||||||
PART I |
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Item 1. | 3 | |||||||
Item 1A. | 17 | |||||||
Item 1B. | 31 | |||||||
Item 2. | 31 | |||||||
Item 3. | 31 | |||||||
Item 4. | 32 | |||||||
PART II |
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Item 5. | 33 | |||||||
Item 6. | 34 | |||||||
Item 7. | 37 | |||||||
Item 7A. | 52 | |||||||
Item 8. | 52 | |||||||
Item 9. | 53 | |||||||
Item 9A. | 53 | |||||||
Item 9B. | 54 | |||||||
PART III |
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Item 10. | 55 | |||||||
Item 11. | 55 | |||||||
Item 12. | 55 | |||||||
Item 13. | 55 | |||||||
Item 14. | 55 | |||||||
PART IV |
||||||||
Item 15. | 56 | |||||||
SIGNATURES | 59 | |||||||
EX-21.1 | ||||||||
EX-23.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 |
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PART I
Item 1. Business
Overview
We are a leading provider of converged test systems and services for wireless and wired
infrastructures and services. Our hardware and software products allow our customers to test and
measure the performance, functionality, service quality and conformance of wireless and wired
Internet Protocol (IP) equipment and networks, and the applications that run over them. Our
solutions generate, capture, characterize and analyze high volumes of realistic network and
application traffic, identifying problems, assessing performance, ensuring functionality and
interoperability, and verifying conformance to industry specifications. We offer hardware
platforms with interchangeable media interfaces, utilizing a common set of applications,
Application Programming Interfaces (APIs) and automation tools that allow our customers to create
integrated, easy-to-use automated test environments. The networks that our systems analyze
primarily include Ethernet networks operating at speeds of up to 100 Gigabits per second and
wireless networks that carry data traffic over optical fiber, electrical cable and airwaves. We
also offer hardware platforms and equipment that test wireless equipment, especially those
associated with 3G (third generation), 4G (fourth generation) and Long-Term Evolution (LTE)
networks. Customers also use our suite of software applications to test and verify web, Internet,
security and business applications.
During the year ended December 31, 2010, we received orders from approximately 900 new and
existing customers. Based on product shipments for the year ended December 31, 2010, our
significant customers by category included:
| Leading network equipment manufacturers such as Cisco Systems, Juniper Networks and Alcatel-Lucent; | ||
| Semiconductor manufacturers such as Broadcom, HSL and LSI Corporation; | ||
| Telecommunications equipment manufacturers such as Ericsson, Nokia Siemens Networks and ZTE Corporation; | ||
| Voice, broadband and/or wireless service providers such as NTT, AT&T and Verizon; | ||
| Cable operators such as Comcast Cable, Time Warner and Charter Communications; | ||
| Enterprises such as Wells Fargo, Morgan Stanley and Oracle; and | ||
| Government contractors, departments and agencies such as General Dynamics, U.S. Navy and Deutsche Bahn. |
The delivery of communications and entertainment (e.g., video) traffic is rapidly moving to an
all IP infrastructure. To achieve utility grade quality, this infrastructure must be thoroughly
tested under realistic conditions prior to deployment. Our vision is to accelerate the convergence
of all networks to IP by providing the most comprehensive, easy-to-use and automated test systems
in the industry. Key growth drivers include the development and deployment of 10, 40 and 100
Gigabit Ethernet network equipment, the build-out of global wired and wireless carrier networks,
the proliferation of video and media-rich applications, data center convergence and cloud
computing, security devices and applications, and converged IP services such as voice, video and
data (multiplay) to the home and wireless devices. We intend to maintain our focus on technology
leadership, expand and further penetrate our customer base, leverage our strengths into adjacent
areas, acquire key technologies, businesses and assets, and expand our international presence.
In June 2009, we acquired Catapult Communications Corporation (Catapult) and have continued
to integrate its products into Ixias IxCatapult product line. The IxCatapult product line adds
in-depth testing of wireless network components. In particular, these products include test
hardware and software that address 3G, 4G, and
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Long-Term Evolution (LTE) wireless network access and core components. We have also
integrated wireless Catapult technology into our IxLoad product to test the mobile core network.
In October 2009, we acquired from Agilent Technologies, Inc. (Agilent) its N2X Data Network
Testing Product Line (N2X) to enrich our portfolio with the IxN2X test solution. In addition to
broadband and carrier access protocol expertise, the IxN2X product line is known in the industry
for its intuitive and powerful user interface and excellent quality. IxN2X best practices are being
integrated into the IxNetwork system architecture, and IxN2X customers are taking advantage of
Ixias layer 4-7 and wireless testing on new, high-density Gigabit and 10 Gigabit Ethernet hardware
that support both the IxN2X and Ixia applications.
The Increasing Need for Network and Application Testing and Measurement
The measurement and analysis of performance, functionality, service quality and conformance of
networks, applications, and communication devices is important to the following groups:
| Communications Chip Manufacturers. At the early stages of development of new components, communications chip manufacturers use our test systems to evaluate and analyze the conformance, interoperability, and performance of their components. This occurs during the design and development phase typically prior to integration by network equipment manufacturers. | ||
| Network/Telecommunications Equipment Manufacturers (NEMs/TEMs). NEMs and TEMs provide voice, video, and data service infrastructure equipment to customer network operators, service providers, and network users, who specify high standards of functionality, performance and reliability. To meet these higher standards, NEMs and TEMs must ensure the quality of their products during development and manufacturing and prior to shipping. Failure to ensure the consistent functionality and performance of their products may result in the loss of customers, increased research and development costs, increased support costs and losses resulting from the return of products. NEMs use our test systems to run large-scale subscriber and service emulations, generating extreme traffic loads to verify the performance and capacity of their wired and wireless devices prior to deployment in production networks. Our systems are also used by NEMs and TEMs in the sales and acceptance process to demonstrate to their customers (e.g., service providers and enterprises) how their products will operate under real-world conditions. Our conformance test suites are used by NEMs and TEMs to ensure that their devices conform to published standards ensuring that they will be interoperable with other equipment. | ||
| Network Operators and Service Providers (Service Providers). Service Providers seek to provide their customers with a growing variety of high quality, advanced network services. Failure to provide satisfactory service can be costly and may result in high subscriber churn rates and reduced Average Revenue per User (ARPU). To ensure desired service levels and overall quality of experience are acceptable, Service Provider R&D and network engineering groups must verify the performance and functionality of staged networks during the equipment selection and network design process prior to deployment. Service Providers use our test systems to emulate millions of subscribers to realistically predict end-user quality of experience delivered by their wired and wireless infrastructure and services. | ||
| Enterprises and Government. These large Service Provider customers spend significant amounts on networks and network services. They deploy LANs and WANs that rival some Service Provider networks in size and complexity. These customers use Ixias solutions in much the same way as Service Providers, verifying the performance and functionality of network equipment and making sure that new networks, services and applications will perform as expected. They also use our products to test the performance and scalability of their internal applications, often based on proprietary protocols. |
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Characteristics Demanded of Network and Application Test and Measurement Equipment
As networks and network devices become more intelligent and service-aware, performance,
functionality, interoperability, and conformance testing solutions must reproduce subscriber
traffic with increasing fidelity. Network testing solutions must also be highly scalable and
capable of generating and analyzing large amounts of data at high speeds over increasingly complex
configurations. Comprehensive, integrated testing must occur throughout network design,
development, production, deployment, and operation stages. Because this testing and verification
must take place across multiple layers of the network infrastructure and for all network protocols,
network testing solutions are also required to be highly flexible, extensible and modular. This
rapid evolution of complex network technologies and protocols, including leading-edge technologies
such as 40 and 100 Gigabit Ethernet, Metro Ethernet, Carrier Ethernet, and Data Center Ethernet,
voice over IP, video over IP, and LTE wireless networks, has resulted in the need for an integrated
platform solution that is easy to use with minimal training and set-up.
The Ixia Solution
We are a leading provider of converged test systems and services for wireless and wired
infrastructures and services. Our hardware and software allow our customers to test and measure the
performance, functionality, service quality and conformance of wireless and wired Internet Protocol
(IP) equipment and networks, and the applications that run over them. Our solutions generate,
capture, characterize and analyze high volumes of realistic network and application traffic,
identifying problems, assessing performance, ensuring functionality and interoperability, and
verifying conformance to industry specifications. We offer hardware platforms with interchangeable
media interfaces, utilizing a common set of applications, Application Programming Interfaces (APIs)
and automation tools that allow our customers to create integrated, easy-to-use automated test
environments. The networks that our systems analyze primarily include Ethernet networks operating
at speeds of up to 100 Gigabits per second and wireless networks that carry data traffic over
optical fiber, electrical cable and airwaves. We also offer hardware platforms and equipment that
test wireless equipment, especially those associated with 3G (third generation) and 4G (fourth
generation) LTE networks. Customers also use our suite of software applications to test and verify
web, Internet, security and business applications.
Our test systems provide the following key benefits to our customers:
Versatile High Performance. Our test systems generate and receive data traffic at full line
rate, which is the maximum rate that data traffic can be transmitted over a network medium. Our
systems provide accurate analysis across multiple layers of the overall network and of individual
network components in real time. Our systems can be configured to either generate programmed
packets of data or conduct complete sessions.
Our systems analyze each discrete packet of information, thereby allowing our customers to
precisely measure the performance of their networks and individual network components. This
precision allows customers to accurately measure critical quality of service parameters such as
throughput, latency, loss and jitter and to check data integrity, packet sequencing throughout the
network, and quality of service (QoS) as well as to locate various network problems.
When used for meaningful application sessions, or conversations between network endpoints, our
systems emulate highly complex and specialized applications such as those used to transfer
electronic mail, browse the Internet, convey voice and video information, manage databases, and
establish wireless calls. This emulation allows our customers to accurately measure critical
characteristics of their networks such as session setup rate, session tear down rate, and session
capacity. By analyzing the content of these sessions, our customers can also accurately measure
QoS and media quality.
Highly Scalable. Each of our interface cards provides one or more ports through which our
systems generate and receive data traffic. Each physical port contains its own dedicated logic
circuits, with substantial memory and compute resources. Our customers can easily scale the size
of their test bed or the amount of data traffic generated
by inserting additional interface cards. By connecting multiple chassis and synchronizing
hundreds of ports to
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operate simultaneously, our customers can simulate extremely large-scale
networks. Our GPS-based components even allow our chassis to be distributed throughout the world,
while maintaining the close time synchronization necessary for precision tests. We believe that our
systems can offer our customers one of the highest port density and scalable space efficient
systems available. In addition, our client-server architecture allows multiple users in the same
or different geographic locations to simultaneously access and operate different ports contained in
the same chassis to run independent tests.
Hardware Platform. We offer hardware platforms with interchangeable interfaces, utilizing a
common set of applications and Application Programming Interfaces (APIs). Our architectures enable
the emulation of millions of network users on scalable platforms, with a mixture of both network
and application layer traffic. These architectures offer our customers an integrated test
environment that might otherwise require multiple products to cover the same test scenarios. We
believe that our hardware platform solutions decrease the overall cost while increasing
productivity and scalability, and reducing training requirements for our customers.
Highly Modular. Our hardware products consist of stackable and portable chassis, which,
depending on the chassis model, can be configured with a mix of interface cards. This modular
design allows our customers to quickly and easily create realistic, customized test configurations.
Our open architecture accelerates integration of additional network technologies into existing
systems through the addition of new interface cards and distributed software.
Flexible. Our customers can easily expand the use of our systems to address changing
technologies, protocols and applications without changing system hardware or replacing interface
cards. This protects and optimizes the customers investment by eliminating the need for forklift
upgrades or the purchase of additional niche products.
Ease of Automation. Our systems make it easy to create automated tests that can run
unattended. We offer our customers a growing library of automated tests that simplify and
streamline the test process. These tests are repeatable and the results are presented in a
structured format for easy analysis. Ixias Tool Command Language (Tcl) Application Programming
Interface (API) is a comprehensive programming interface to our hardware, as well as to our
software applications. The Tcl API enables libraries of automated tests to be quickly built with
specificity to a customers environment. We also offer a utility that exports configurations
created in our graphical user interface (GUI) as Tcl scripts.
Ease of Use. We have designed our systems so that users can install and operate them with
minimal training and setup. Our systems are easy to use and offer our customers a wide range of
readily accessible pre-designed test configurations. These tests include industry standard and use
case-specific tests. Users can easily configure and operate our systems to generate and analyze
data traffic over any combination of interface cards or ports through our graphical user interface
that features a familiar Microsoft Windows point-and-click environment. Once tests are designed
in our GUIs, they can be saved for reuse or in Tcl script form for customization and even greater
levels of automation.
Strategy
Our objective is to be the industry leader in providing performance, functionality, service
quality, interoperability and conformance testing solutions for wireless and wired IP networks and
IP-based services. Our strategy includes being at the forefront of emerging and next generation
technologies such as 40/100 Gigabit Ethernet and LTE, growing our portfolio of products and
addressable markets through acquisitions of technologies, businesses and assets, expanding our
international presence and customer base, and continuing to deliver high quality products and
support to our customers. Key elements of our strategy to achieve this objective include the
following:
Continue to Expand our Addressable Markets. We plan to further expand our addressable markets
into areas of growth for wireless and wired IP-based products and services, such as content-aware
routing and switching, networks that carry voice, video and data over IP (commonly referred to in
the aggregate as multiplay), wireless devices, network and application security, and
next-generation networking technologies. We also plan to continue
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to apply our knowledge of these advanced communication technologies to develop tools for
monitoring traffic in live networks.
Maintain Focus on Technology Leadership. We intend to continue to focus on research and
development in order to maintain our technology leadership position and to offer test systems that
address new and evolving network technologies. We intend to maintain an active role in industry
standards committees such as IEEE and the Internet Engineering Task Force, and to continue our
active involvement in industry forums and alliances, such as the Ethernet Alliance, Metro Ethernet
Forum, TesLA Alliance (Test Lab Automation), Network Test Automation Forum (NTAF), Multi Service
Forum (MSF), IMS Forum, WiFi Alliance, WiMAX Forum and 3GPP. We also plan to continue to work
closely with some of our established customers who are developing emerging network technologies, as
well as leading edge start-up companies, to enhance the performance and functionality of our
existing systems and to design future products that specifically address our customers needs as
they evolve.
Expand and Further Penetrate Customer Base. We plan to strengthen and further penetrate our
existing customer relationships, particularly those with network/telecommunications equipment
manufacturers, network operators and service providers, and to pursue sales to new customers. We
plan to strengthen our customer relationships and to expand our customer base by:
| Continuing to develop and offer new and innovative systems that meet our existing and potential customers needs, | ||
| Expanding our sales and marketing efforts to increase penetration in under-represented vertical and geographic market segments, and | ||
| Building upon and further strengthening our reputation and brand name recognition. |
We also plan to continue our focus on customer support by maintaining and expanding the
capabilities of our highly qualified and specialized internal personnel.
License and Acquire Key Technologies. We plan to continue our strategy of acquiring key
technologies that expand our product offerings, address customer needs, and enhance the breadth of
our evolving product portfolio. Any such acquisitions may be made in the form of partnering with
industry leaders, acquiring or licensing technology assets associated with product lines, or
acquiring other companies.
Expand International Market Presence. We plan to further pursue sales in key international
markets, including the Europe, Middle East and Africa regions (EMEA), and the Asia Pacific region.
In order to pursue sales in these markets, we intend to develop and expand our relationships with
key customers and distributors, as well as expand our direct sales and marketing presence within
these markets.
Products
Our test systems consist of hardware and software products that allow our customers to test
and measure the performance, functionality, interoperability, service quality and conformance of
their wireless and wired IP equipment and networks, and the applications that run over them. Our
hardware platform consists largely of interchangeable interface cards which fit into multi-slot
chassis. Our chassis are metal cases that incorporate a computer, a power supply, and a backplane
which connects the interface cards to the chassis. The interface cards generate, receive and
analyze a wide variety of traffic types at multiple network layers. Our software applications and
APIs allow our customers to create and manage integrated, easy-to-use automated test environments.
Our customers can utilize our systems either in test labs or within live networks. Our
systems are operated through standard computer peripheral devices, including a monitor, keyboard
and mouse. The operator of our systems establishes test parameters for the performance analysis by
inputting data using the keyboard and mouse. The operator observes the results of the performance
analysis using the monitor and may log results to files for post-analysis or archival. All
operations that can be done interactively may also be automated through a variety of scripting
interfaces and automation tools.
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Our customers configure our systems based on the specific interfaces of the equipment being
tested. For example, if our customer wants to analyze the performance of a router with Ethernet
interfaces, the customer would insert Ethernet interface cards into our system.
Chassis
Our primary chassis, the 12-slot XM12, provides a high density, highly flexible test platform.
Operating in conjunction with our test applications, the XM12 provides the foundation for a
complete, high performance test environment. A wide array of interface modules is available for
the XM12. The chassis supports up to 192 Gigabit and 10 Gigabit Ethernet ports, twelve 40 Gigabit
Ethernet ports and six 100 Gigabit Ethernet ports, and 24 Packet over SONET (POS) or Asynchronous
Transfer Mode (ATM) ports. These modules provide the network interfaces and distributed processing
resources needed for executing a broad range of data, signaling, voice, video, and application
testing from layers 1-7 of the network stack. Each chassis supports an integrated test controller
that manages all system and testing resources. Resource ownership down to a per-port level,
coupled with hot-swappable interface modules ensures a highly flexible, multi-user testing
environment. Backward compatibility is maintained with key existing Ixia interface modules and
test applications to provide seamless migration from and integration with existing Ixia test
installations.
The IxN2X product line includes legacy N2X hardware chassis (up to four slots) and interface
cards as well as new, high-density Gigabit and 10 Gigabit Ethernet load modules for the XM12
chassis that support both the IxN2X and other Ixia applications. The new, high density load modules
work seamlessly with legacy N2X hardware and supports IxN2X applications with no changes to the API
and GUI, offering legacy N2X users excellent investment protection. Hardware interfaces are
available for 10 Mbps through 10 Gbps Ethernet, SONET/SDH, POS, ATM and Frame Relay.
The IxCatapult product line utilizes three different chassis types. The m500 chassis offers 16
slots for testing 2G, 3G, SS7 and LTE network components. The t600 chassis holds specialized cards
used for LTE sector testing. The optional radio heads can be used to generate radio frequency (RF)
signals for LTE base station (eNode B) testing.
Interface Cards
We offer a number of optical and electrical interface cards. Each one of our interface cards
contains from one to 16 independent traffic generation and analysis ports. These ports operate at
line rate. Each port on most interface cards has a unique transmit stream engine that is used to
generate packets of information and a real-time receive analysis engine capable of analyzing the
packets as they are received. The transmit stream engine generates millions of data packets or
continuous test sequences at line rate that are transmitted through the network and received by the
analysis engine. When data packets have been generated, the analysis engine then measures
throughput, latency, loss and jitter, and checks data integrity and packet sequence on a
packet-by-packet basis. In addition, our systems measure the effectiveness of networks in
prioritizing different types of traffic. Each of our current generation interface cards also
includes a microprocessor per port to generate and analyze sophisticated routing protocols, such as
BGP and MPLS, as well as application traffic such as TCP/IP, HTTP and SSL.
Interface cards used with IxCatapult are specialized processors that handle wireless signaling
and user data. Small numbers of test ports are typically used for wireless node testing. The t600
chassis holds specialized cards used for LTE sector testing; three to six card sets are used to
test each wireless sector.
System Management Software
Our systems are managed through graphical user interfaces that allow users to configure our
chassis and interface cards to generate and analyze traffic. Each port can be independently
configured to meet specific testing requirements, and results can be viewed using both tables and
graphs. We also allow users to create custom and automated test applications tailored to meet
their specific requirements with the commonly used Tcl programming environment.
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Application Specific Test Suites
We have a comprehensive suite of software applications to address specific technologies. These
applications measure and analyze the performance, functionality, interoperability, service quality,
and conformance of networks, network equipment and applications that run on these networks. These
measurements enable network and telephony equipment manufacturers, enterprises, network operators
and service providers, and governments to evaluate the performance of their equipment and networks
during the design, manufacture, and pre-deployment stages, as well as after the equipment are
deployed in a network. Our technology-specific test suites are targeted at a wide range of popular
testing requirements:
Video Testing
Ixias IxLoad tests the performance of video servers, multicast routers and the IP video
delivery network. This is accomplished by emulating video servers and millions of video
subscribers in video on demand and multicast video scenarios. Protocols supported include MPEG,
IGMP, RTP and RTSP. IxLoad likewise emulates Internet video clients, including Adobe Flash and HLS
and Microsoft Silverlight.
IxChariot tests video transport networks. This is accomplished by emulating video traffic,
and measuring end-to-end video quality. Measurements include throughput, latency, loss, jitter and
media delivery index (MDI).
Voice Testing
IxLoad tests the functionality of VoIP and PSTN devices and services by emulating end devices
and servers. Testing areas supported include SIP, SCCP (Skinny), H.323, MGCP and H.248 (MEGACO),
as well as TDM and analog telephony services. Performance testing of SIP devices and infrastructure
is accomplished by emulating thousands of SIP callers and callees in performance testing scenarios.
In 2010, we introduced a PSTN-E1/T1 interface that allows direct testing of telecommunications
equipment.
IxChariot tests the voice transport network. This is accomplished by emulating voice traffic
and measuring end-to-end voice quality. Measurements include throughput, latency, loss, jitter and
mean opinion score (MOS).
Intelligent Network Testing
IxLoad tests the performance of content-aware networks and devices including server load
balancers (SLB), deep packet inspection (DPI) devices, firewalls, web servers and mail servers.
This is accomplished by emulating millions of clients and a variety of servers in realistic
performance testing scenarios. Protocols supported include TCP, HTTP, SSL, FTP, SMTP, POP3, IMAP,
RTP, RTSP, Telnet, DNS, LDAP, DHCP, SIP, MPEG and IGMP.
Conformance Testing
IxANVL provides automated network/protocol validation. Developers and manufacturers of
networking equipment and Internet devices can use IxANVL to validate protocol compliance and
interoperability. IxANVL supports all industry standard test interfaces including
10Mbps/100Mpbs/1Gbps/10Gbps Ethernet, ATM, Serial, Async, T1/E1 and POS. It provides conformance,
negative and regression testing on a large selection of protocols including bridging, routing, PPP,
TCP/IP, IPv6, IP storage, RMON, VPN, MPLS, voice over IP, Metro Ethernet and multicast.
Security Testing
IxLoad tests the performance of stateful and deep packet inspection security devices,
including firewalls, SSL gateways, virus scanners, spam filters, and intrusion detection systems
(IDS). This is accomplished by emulating clients and servers, as well as through the use of
distributed denial of service (DDoS) attacks. Key capabilities include the ability to mix valid
user traffic with malicious traffic and to attach viruses to emails.
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Application Testing
IxLoad tests the performance of enterprise applications. This is accomplished by emulating a
large number of real users accessing applications. Technologies supported include JavaScript, XML,
Java, Document Object Model (DOM) and databases (e.g., Oracle, SQL, Access).
Router Testing
IxNetwork and IxN2X tests core/edge/customer routers and layer 3 switches. This is
accomplished by emulating entire network infrastructures and generating high traffic loads across
these emulated topologies to verify performance. Protocols supported include IGPs (OSPF, IS-IS,
RIP), BGP, MPLS (including layer 2 and 3 VPNs) and IP multicast.
IxAutomate is an automated test harness that can run turnkey tests using Ixias underlying
APIs. Multiple turnkey test suites are available to execute control and data plane performance and
functionality testing. Tests include route capacity, route convergence, session scalability,
tunnel scalability and data plane performance.
Layer 2-3 Security Testing
IxLoad tests IPSec VPN gateways and systems. This is accomplished by establishing and
authenticating IPSec tunnels, and then generating traffic load over the tunnels to verify
performance. Site-to-site and remote access VPN testing is supported, as well as DES, 3DES and AES
encryption.
IxNetwork, IxLoad and IxN2X test broadband access devices supporting 802.1x authentication.
This is accomplished by high scalable emulation of 802.1x clients (supplicants). Authentication
modes supported include MD5, TLS, TTLS and PEAP.
Switch Testing
IxNetwork and IxN2X test layer 2-3 switches and forwarding devices. This is accomplished by
generating traffic load across a mesh of interfaces, and then measuring results down to a per flow
basis. Protocols supported include spanning tree, multicast and IP routing.
IxAutomate tests layer 2-3 switches in an automated fashion. A set of predefined test suites
is used to execute performance and functionality tests. Tests include data plane performance, QoS
functionality, address cache tests, error filtering and VLAN functionality.
IxExplorer tests layer 2-3 switches and forwarding devices. This is accomplished by
generating traffic load with very granular control of packet parameters and detailed results
analysis. Measurements include throughput, latency, inter-arrival time, data integrity and
sequence checking.
Wireless Testing
IxCatapult tests legacy and wireless network protocols associated with 2G, 3G and 4G/LTE
wireless networks. This is accomplished through emulation of each network component. These
emulations are used in combinations to isolate and test each component or group of components.
IxLoad tests 3G and 4G/LTE core networks, including the new evolved packet core (EPC) network.
This is accomplished by emulating application traffic whether data, voice, or video and measuring
end-to-end performance and quality. Measurements include throughput, latency, jitter, mean opinion
score (MOS) and media delivery index (MDI).
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Broadband Testing
IxNetwork, IxLoad and IxN2X test broadband aggregation devices including B-RAS, DSLAMs, CMTSs
and edge routers. This is accomplished by emulating millions of broadband clients and generating
traffic load over those connections. Protocol support includes PPPoE, PPPoA, L2TPv2 and L2TPv3.
IxChariot tests the broadband access transport network. This is accomplished by emulating
application traffic whether data, voice, or video and measuring end-to-end performance and
quality. Measurements include throughput, latency, jitter, mean opinion score (MOS) and media
delivery index (MDI).
Automated Testing
IxAutomate provides a complete automation environment for testing layer 2-3 routers, switches
and similar devices. A set of predefined test suites is used to execute performance and
functionality tests. Multiple tests, whether predefined or custom developed, can be scheduled for
execution together with configuration of the device under test.
Test Conductor is a comprehensive, highly scalable regression harness that is compatible with
some our other key network testing tools. Test Conductor imports tests, associates them with a
named regression test sequences, and allows detailed scheduling. Tests can be scheduled in series
or in parallel based on a Windows Outlook-like calendar tool. At-a-glance logs and summary
reports display color-coded pass/fail results, as well as the progress of the tests within each
regression. Automated device under test (DUT) configuration scripts can be scheduled to run in
synchronization with the individual tests or with complete regression runs.
Our Tcl automation environment provides a comprehensive set of tools and APIs for automating
testing with our hardware and software applications. Custom test libraries covering all of a
customers layer 2-7 testing requirements can be created in a single automation environment.
Most test applications contain a ScriptGen feature that automatically generates Tcl script
code from test configurations. This accelerates the development of automation code and helps train
new users in the Ixia Tcl API.
Converged Monitoring Testing
As carriers deploy additional multiplay services over advanced Ethernet networks, their
existing support systems are less capable of diagnosing application layer problems. Ixias IxRave
(Remote Access Verification Engine) solution allows carriers and service providers to execute
active network tests using Ixias applications from a web-based control system that can be
integrated into their existing infrastructure.
Products in Development
We continue to develop our IP testing capabilities, and throughout 2011 we intend to remain
focused on improving our position in performance, functional, interoperability, service quality and
conformance testing in the following technology areas:
| 10, 40 and 100 Gigabit Ethernet | ||
| Carrier, Metro and Data Center Ethernet | ||
| Security | ||
| MPLS and MPLS-TP | ||
| IPv6 | ||
| Voice and Video over IP | ||
| IPSec | ||
| Test Automation | ||
| LTE/EPC | ||
| Femtocell | ||
| Energy efficiency |
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We may delay or cancel the introduction of new products to the market as a result of a number
of factors, some of which are beyond our control. For more information regarding these factors,
see Business Research and Development and Risk Factors If we are unable to successfully
develop or introduce new products to keep pace with the rapid technological changes that
characterize our market, our results of operations will be significantly harmed.
Technology
The design of all of our systems requires a combination of sophisticated technical
competencies, including design of field programmable gate arrays, or FPGAs, which are integrated
circuits that can be repeatedly reprogrammed to perform different sets of functions as required.
The design of all of our systems also requires high-speed digital hardware design, software
engineering and optical and mechanical engineering. We have built an organization of professional
staff with skills in all of these areas. The integration of these technical competencies enables
us to design and manufacture test systems which are highly scalable to meet the needs of our
customers.
Complex Logic Design. Our systems use FPGAs that are programmed by the host computer and
therefore can be reconfigured for different applications. Our newest products have clock
frequencies, which are the timing signals that synchronize all components within our system, and
logic densities, which are the number of individual switching components, or gates, of more than
four million gates per chip. Our customers may obtain updates and enhancements from our website,
thereby allowing rapid updates of the system. Almost all of our logic chips are designed in the
VHDL hardware description language, a unique programming language tailored to the development of
logic chips. This language enables the easy migration of the hardware design to application
specific integrated circuits as volumes warrant. We develop VHDL code in a modular fashion for
reuse in logic design, which comprises a critical portion of our intellectual property. This
reusable technology allows us to reduce the time-to-market for our new and enhanced products.
Software Technology. We devote substantial engineering resources to the development of
software technology for use in our product lines. We have developed software to control our
systems, analyze data collected by our systems, and monitor, maintain and self-test our hardware
and field programmable gate array subsystems. A majority of our software technology and expertise
is focused on the use of object-oriented development techniques to design software subsystems that
can be reused across multiple product lines. These objects are client and server independent
allowing for distributed network applications. This software architecture allows all of the
software tools developed for our existing products to be utilized in all of our new products with
very little modification. Another important component of our software technology is our graphical
user interface design. Customer experience with our test products has enabled us to design a
simple yet effective method to display complex configurations in clear and concise graphical user
interfaces for intuitive use by engineers.
Customers
Since our incorporation in May 1997 through December 31, 2010, we have shipped our systems to
over 2,400 customers. No customer other than Cisco Systems has accounted for more than 10% of our
total revenues in 2010, 2009 or 2008. Cisco Systems accounted for 13.5% of our total revenues in
2010, 15.6% of our total revenues in 2009 and 21.0% of our total revenues in 2008.
We do not have long-term or volume purchase contracts that commit our customers to future
product purchases, and as a result they may reduce or discontinue purchasing from us at any time.
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Competition
The market for providing wireless and wired network performance measurement and analysis
systems is highly competitive, and we expect this competition to continue in the future. We
currently compete with test solution vendors such as Spirent Communications, BreakingPoint Systems,
JDS Uniphase, EXFO and Anritsu. We also compete with a number of small companies which are focused
on network performance measurement, video and rich media, wireless and IMS, high speed Ethernet and
converged monitoring test. Additionally, some of our significant customers have developed, or may
develop, in-house performance analysis products for their own use or for sale to others.
We believe that the principal competitive factors in our market include:
| Breadth of product offerings and features on a single platform, | ||
| Timeliness of new product introductions, | ||
| Product quality, reliability and performance, | ||
| Price and overall cost of product ownership, | ||
| Ease of installation, integration and use, | ||
| Customer service and technical support, and | ||
| Company reputation and size. |
We believe that we compete favorably in the key competitive factors that impact our markets.
We intend to remain competitive through ongoing research and development efforts that enhance
existing systems and to develop new systems. We will also seek to expand our market presence
through marketing and sales efforts. However, our market is still evolving and we may not be able
to compete successfully against current or future competitors.
We expect to continue to experience significant competition from our existing competitors and
from companies that may enter our existing or future markets. And, as we move into new market
segments within the broader testing arena, we will be challenged by new competitors. These
companies may develop similar or substitute solutions that may be more cost-effective or provide
better performance or functionality than our systems. Also, as we broaden our product offerings,
we may move into new markets in which we will have to compete against companies already established
in those markets. Some of our existing and potential competitors have longer operating histories,
substantially greater financial, product development, marketing, service, support, technical and
other resources, significantly greater name recognition, and a larger installed base of customers
than we do. In addition, many of our competitors have well established relationships with our
current and potential customers and have extensive knowledge of our industry. It is possible that
new competitors or alliances among competitors will emerge and rapidly acquire market share.
Moreover, our competitors may consolidate with each other, or with other companies, giving them
even greater capabilities with which to compete against us.
To be successful, we must continue to respond promptly and effectively to the challenges of
changing customer requirements, technological advances and competitors innovations. Accordingly,
we cannot predict what our relative competitive position will be as the market evolves for wireless
and wired network performance measurement and analysis systems.
Sales, Marketing and Technical Support
Sales. We use our global direct sales force to market and sell our systems. In addition, we
use distributors to complement our direct sales and marketing efforts in certain international
markets. Our direct sales force maintains close contact with our customers and supports our
distributors.
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Marketing. We have a number of programs to support the sale and distribution of our systems
and to inform existing and potential customers and distributors about the capabilities and benefits
of our systems. Our marketing efforts also include promoting our business in the following ways:
| Sponsoring technical seminars and webinars that highlight our solutions, | ||
| Participating in industry trade shows and technical conferences, | ||
| Writing and distribution of various forms of collateral, including brochures, white papers, and application notes, | ||
| Demonstrating the performance and scalability of our products at our iSimCity proof-of-concept labs, | ||
| Communicating through our corporate website, and | ||
| Writing online and print trade journals. |
Technical Support. We maintain a technically knowledgeable and responsive customer service
and support staff that is critical to our development of long-term customer relationships. Our
staff can:
| Offer solutions for performance validation needs, | ||
| Develop custom applications, | ||
| Deploy to customer sites on short notice, and | ||
| Provide guidance to optimally utilize our systems. |
Manufacturing and Supply Operations
Our supply operations consist primarily of supply chain planning and procurement, quality
control, logistics, final assembly, configuration testing and distribution. We outsource the
manufacture, assembly and testing of printed circuit board assemblies, certain interface cards and
certain chassis to third party contract manufacturers and assembly companies, the most significant
of which are located in Malaysia. This manufacturing process enables us to operate without
substantial space and personnel dedicated to solely manufacturing operations. As a result, we can
leverage a significant portion of the working capital and capital expenditures that may be required
for other operating needs.
We are dependent upon sole or limited source suppliers for some key components and parts used
in our systems, including, but not limited to, field programmable gate arrays, processors,
oscillators and optical modules. We and our contract manufacturers forecast consumption and
purchase components through purchase orders. We have no guaranteed or long-term supply arrangements
with our respective suppliers. In addition, the availability of many components is dependent in
part on our ability and the ability of our contract manufacturers and assembly companies to provide
suppliers with accurate forecasts of future requirements, as well as the global commodity market.
Any extended interruption in the supply of any of the key components currently obtained from a sole
or limited source or delay in transitioning to a replacement suppliers product or replacement
component into our systems could disrupt our operations and significantly harm our business in any
given period.
Lead times for materials and components ordered by us and by our contract manufacturers vary
and depend on factors such as the specific supplier, purchase terms, global allocations and demand
for a component at a given time. We and our contract manufacturers acquire materials, complete
standard subassemblies and assemble fully-configured systems based on sales forecasts and
historical purchasing patterns. If orders do not match forecasts or
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substantially deviate from
historical patterns, we and our contract manufacturers and assembly companies may have excess or
inadequate supply of materials and components.
Research and Development
We believe that research and development is critical to our business. Our development efforts
include anticipating and addressing the performance analysis needs of network and
telecommunications equipment manufacturers, network operators and service providers, communications
chip manufacturers and network users, large enterprises and government customers, and focusing on
emerging high growth network technologies.
Our future success depends on our ability to continue to enhance our existing products and to
develop new products that address the test and measurement needs of our customers. We closely
monitor changing customer needs by communicating and working directly with our customers and
distributors. We also receive input from our active participation in industry groups responsible
for establishing technical standards.
Development schedules for technology products are inherently difficult to predict, and there
can be no assurance that we will introduce any proposed new products in a timely fashion. Also, we
cannot be certain that our product development efforts will result in commercially successful
products or that our products will not contain software errors or other performance problems or be
rendered obsolete by changing technology or new product announcements by other companies.
We plan to continue to make significant investments in research and development, such as our
investments in our overseas development facilities, including those in India and Romania. Our
research and development expenses were $72.5 million in 2010, $54.0 million in 2009, and $49.2
million in 2008. These costs included stock-based compensation expense of $5.2 million in 2010,
$4.5 million in 2009, and $4.2 million in 2008.
Intellectual Property and Proprietary Rights
Our success and ability to compete are dependent in part upon our ability to protect and
maintain our proprietary rights to our intellectual property rights. We currently rely on a
combination of patent, trademark, trade secret and copyright laws and restrictions on disclosure
and use to establish and protect our intellectual property. We have patent applications and
existing patents in the United States and in other jurisdictions. We cannot be certain that these
applications will result in the issuance of any patents, or that any such patents, if they are
issued, or our existing patents, will be upheld. We also cannot be certain that such patents, if
issued, or our existing patents, will be effective in protecting our proprietary technology. We
have registered the Ixia name, the Ixia logo and certain other trademarks in the United States, the
European Union and other jurisdictions, and have filed for registration of additional trademarks.
We generally enter into confidentiality agreements with our officers, employees, consultants,
and vendors, and in many instances, our customers. We also generally limit access to and
distribution of our source code and further limit the disclosure and use of other proprietary
information. However, these measures provide only limited protection of our intellectual property
rights. In addition, we may not have signed agreements containing adequate protective provisions
in every case, and the contractual provisions that are in place may not provide us with adequate
protection in all circumstances.
Despite our efforts to protect our intellectual property rights, unauthorized parties may
attempt to copy or otherwise obtain or use technology or information such as trade secrets that we
regard as confidential and proprietary. We cannot be certain that the steps taken by us to protect
our intellectual property rights will be adequate to prevent misappropriation of our technology or
that our competitors will not independently develop
technologies that are similar or superior to our technology. In addition, the laws of some
foreign countries do not protect our proprietary rights to the same extent as do the laws of the
United States. Any infringement of our intellectual property rights could result in significant
litigation costs, and any failure to adequately protect our intellectual property rights could
result in our competitors offering similar products, potentially resulting in loss of
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competitive
advantage, loss of market share and decreased revenues. Litigation may be necessary to enforce our
intellectual property rights or to determine the validity and scope of the proprietary rights of
others. Litigation of this type could result in substantial costs and diversion of resources and
could significantly harm our business.
The telecommunication and data communications industries are characterized by the existence of
a large number of patents and frequent litigation based on allegations of patent infringement.
From time to time, third parties may assert patent, copyright, trademark and other intellectual
property rights to technologies or related standards that are important to our business. We have
not conducted searches to determine whether the technology we have in our products infringes upon
or misappropriates intellectual property rights held by third parties. Any claims asserting that
our systems infringe or may infringe proprietary rights of third parties, if determined adversely
to us, could significantly harm our business. See Part I, Item 3 of this Form 10-K for additional
information.
Employees
As of December 31, 2010, we had approximately 1,100 full-time employees. We also from time to
time hire temporary and part-time employees and independent contractors. Our future performance
depends, to a significant degree, on our continued ability to attract and retain highly skilled and
qualified technical, sales and marketing, and senior management personnel. Our employees are not
represented by any labor unions. We consider our relations with our employees to be good.
Available Information
Our website address is www.ixiacom.com. We make available free of charge through a link
provided at such website our Forms 10-K, 10-Q and 8-K as well as any amendments thereto. Such
reports are available as soon as reasonably practicable after they are filed with the Securities
and Exchange Commission.
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Item 1A. Risk Factors
The statements that are not historical facts contained in this Form 10-K are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. These
statements reflect the current belief, expectations or intent of our management and are subject to
and involve certain risks and uncertainties. Many of these risks and uncertainties are outside of
our control and are difficult for us to forecast or mitigate. In addition to the risks described
elsewhere in this Form 10-K and in certain of our other Securities and Exchange Act Commission
filings, the following important factors, among others, could cause our actual results to differ
materially from those expressed or implied by us in any forward-looking statements contained herein
or made elsewhere by or on behalf of us.
Our business may be adversely affected by unfavorable general economic and market conditions
Our business is subject to the effects of general economic conditions in the United States and
globally and, in particular, market conditions in the communications and networking industries. Our
operating results have been adversely affected as a result of unfavorable economic conditions and
reduced or deferred capital spending in the United States, Europe, Asia and other parts of the
world. The recent global financial crisis included, among other things, significant reductions in
available capital and liquidity from banks and other credit providers, substantial reductions
and/or fluctuations in equity and currency values worldwide, and concerns that the worldwide
economy may be in a prolonged recessionary period. Unfavorable economic and market conditions such
as these could likely result in lower capital spending by our customers on test and measurement
solutions, and therefore demand for our products could decline, adversely impacting our revenue.
Challenging economic and market conditions may also impair the ability of our customers to pay for
the products and services they have purchased. As a result, our reserves for doubtful accounts and
write-offs of accounts receivable may increase.
In addition, prolonged unfavorable economic conditions and market turbulence may also
negatively impact our contract manufacturers and suppliers capability to timely supply and
manufacture our products, thereby impairing our ability to meet our contractual obligations to our
customers. These effects, as well as any other currently unforeseeable effects, are difficult to
forecast and mitigate. As a result, we may experience material adverse impacts on our business,
operating results, financial condition and stock price.
Acquisitions undertaken and any that we may undertake could be difficult to integrate, disrupt our
business, dilute shareholder value and significantly harm our operating results
Acquisitions are inherently risky and no assurance can be given that our previous or future
acquisitions will be successful or will not materially and adversely affect our business, operating
results or financial condition. We expect to continue to review opportunities to acquire other
businesses or technologies that would add to our existing product line, complement and enhance our
current products, expand the breadth of our markets, enhance our technical capabilities or
otherwise offer growth opportunities. While we are not currently a party to any pending acquisition
agreements, we may acquire additional businesses, products or technologies in the future. If we
make any further acquisitions, we could issue stock that would dilute existing shareholders
percentage ownership, and we could incur substantial debt or assume liabilities. We have limited
experience in acquiring and integrating other businesses and technologies, and as a result, we may
not fully realize the expected benefits of an acquisition. During 2009, we completed the
acquisitions of Catapult Communications Corporation and Agilents N2X Product Line. See Note 3 to
the Financial Statements included in this Annual Report on Form 10-K for the year ended December
31, 2010. Acquisitions involve numerous risks, including the following:
| problems or delays in assimilating or transitioning to Ixia the acquired operations, systems, processes, controls, technologies, products or personnel; | ||
| loss of acquired customer accounts; | ||
| unanticipated costs associated with the acquisition; |
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| our failure to identify in the due diligence process significant issues with product quality or development; | ||
| multiple and overlapping product lines as a result of our acquisitions that are offered, priced and supported differently, which could cause customer confusion and delays; | ||
| higher than anticipated costs in continuing support and development of acquired products; | ||
| diversion of managements attention from our core business and the challenges of managing larger and more widespread operations resulting from acquisitions; | ||
| adverse effects on existing business relationships of Ixia or the acquired business with its suppliers, licensors, contract manufacturers, customers, distributors and industry experts; | ||
| significant impairment, exit and/or restructuring charges if the products or technologies acquired in an acquisition do not meet our sales expectations or are unsuccessful; | ||
| insufficient revenue to offset increased expenses associated with acquisitions; | ||
| risks associated with entering markets in which we have no or limited prior experience; and | ||
| potential loss of the acquired organizations or our own key employees. |
Mergers and acquisitions are inherently risky and subject to many factors outside of our
control, and we cannot be certain that we would be successful in overcoming problems in connection
with our past or future acquisitions. Our inability to do so could significantly harm our business,
revenues and results of operations.
Competition in our market could significantly harm our results of operations
The market for our products is highly competitive. We face competition primarily from wireline
and wireless test equipment manufacturers such as Spirent Communications, JDS Uniphase, EXFO and
Anritsu. We also compete with a number of other small companies which are focused on network
performance analysis and measurement. Additionally, some of our significant customers have
developed, or may develop, in-house performance analysis products for their own use or for sale to
others. For example, Cisco Systems, our largest
customer, has used internally developed test products for a number of years. Although Cisco
Systems has in the past accounted for a significant portion of our revenues, we cannot be certain
that it will continue to do so.
As we broaden our product offerings, we may move into new markets and face additional
competition. Moreover, our competitors may have more experience operating in these new markets and
be better established with the customers in these new markets.
Some of our competitors and potential competitors have greater brand name recognition and
greater financial, technical, marketing, sales and distribution capabilities than we do. Moreover,
our competitors may consolidate with each other, or with other companies, giving them even greater
capabilities with which to compete against us.
Increased competition in the wireless and wired network performance analysis and measurement
markets could result in increased pressure on us to reduce prices and could result in a reduction
in our revenues and/or a decrease in our profit margins, each of which could significantly harm our
results of operations. In addition, increased competition could prevent us from increasing our
market share, or cause us to lose our existing market share, either of which would harm our
revenues and profitability.
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We cannot predict whether our current or future competitors will develop or market
technologies and products that offer higher performance or more features, or that are more
cost-effective than our current or future products. To remain competitive, we must continue to
develop cost-effective products and product enhancements which offer higher performance and more
functionality. Our failure to do so will harm our revenues and results of operations.
If we are unable to successfully develop or introduce new products to keep pace with the rapid
technological changes that characterize our market, our results of operations will be significantly
harmed
The market for our products is characterized by:
| rapid technological change such as the recent advancements of IP-based networks and wireless technologies (e.g., LTE); | ||
| frequent new product introductions such as higher speed and more complex routers; | ||
| evolving industry standards; | ||
| changing customer needs such as the increase in advanced IP services agreed to between network service providers and their customers; and | ||
| short product life cycles as a result of rapid changes in our customers products. |
Our performance will depend on our successful development, introduction and market acceptance
of new and enhanced performance analysis products that address new technologies and changes in
customer requirements. If we experience any delay in the development or introduction of new
products or enhancements to our existing products, our operating results may suffer. For instance,
undetected software or hardware errors, which frequently occur when new products are first
introduced, could result in the delay or loss of market acceptance of our products and the loss of
credibility with our customers. In addition, if we are not able to develop, or license or acquire
from third parties, the underlying core technologies necessary to create new products and
enhancements, our existing products are likely to become technologically obsolete over time and our
operating results will suffer. If the rate of
development of new technologies and transmission protocols by our customers is delayed, the
growth of the market for our products and therefore our sales and operating results may be harmed.
Our ability to successfully introduce new products in a timely fashion will depend on multiple
factors, including our ability to:
| anticipate technological changes and industry trends; | ||
| properly identify customer needs; | ||
| innovate and develop and license or acquire new technologies and applications; | ||
| hire and retain necessary technical personnel; | ||
| successfully commercialize new technologies in a timely manner; | ||
| timely obtain key components for the manufacture of new products; | ||
| manufacture and deliver our products in sufficient volumes and on time; | ||
| price our products competitively; | ||
| provide high quality, timely technical support; and | ||
| differentiate our offerings from our competitors offerings. |
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The development of new, technologically advanced products is a complex and uncertain process
requiring high levels of innovation and highly skilled engineering and development personnel, as
well as the accurate anticipation of technology and market trends. We cannot be certain that we
will be able to identify, develop, manufacture, market or support new or enhanced products
successfully, if at all, or on a timely or cost-effective basis. Further, we cannot be certain
that our new products will gain market acceptance or that we will be able to respond effectively to
technological changes, emerging industry standards or product announcements by our competitors. If
we fail to respond to technological change and the needs of our markets, we will lose revenues and
our competitive position will suffer.
We depend on sales of a narrow range of products and, if customers do not purchase our products,
our revenues and results of operations would be significantly harmed
Our business and products are concentrated in the market for systems that analyze and measure
the performance of wired and wireless IP-based network equipment and systems. This market is an
evolving market, and there is uncertainty regarding its size and scope. Our performance will depend
on increased sales of our existing systems and the successful development, introduction and market
acceptance of new and enhanced products. We cannot be certain that we will be successful in
increasing these sales or in developing and introducing new products. Our failure to do so would
significantly harm our revenues and results of operations.
Because we depend on a limited number of customers for a majority of our revenues, any
cancellation, reduction or delay in purchases by one of these customers could significantly harm
our revenues and results of operations
Historically, a small number of customers has accounted for a significant portion of our total
revenues. Sales to our top five customers accounted for between 30% and 40% of total revenues for
each of the three years ended December 31, 2010, 2009 and 2008. Additionally, sales to our largest
customer, Cisco Systems, accounted for 13.5% of our total revenues in 2010, 15.6% of our total
revenues in 2009 and 21.0% of our total revenues in 2008. We expect that significant customer
concentration will continue for the foreseeable future and that our operating results will continue
to depend to a significant extent upon revenues from a small number of customers. Our dependence on
large orders from a limited number of customers makes our relationships with these customers
critical to the success of our business. We cannot be certain that we will be able to retain our
largest customers, that we will be able to increase our sales to our other existing customers or
that we will be able to attract additional customers. From time to time, we have experienced delays
and reductions in orders from some of our major customers. In addition, our customers have sought
price reductions or other concessions from us and will likely continue to do so. We typically do
not have long-term or volume purchase contracts with our customers, and our customers can stop
purchasing our products at any time without penalty and are free to purchase products from our
competitors. The loss of one or more of our largest customers, any reduction or delay in sales to
one of these customers, our inability to successfully develop and maintain relationships with
existing and new customers, or requirements that we make price reductions or other concessions
could significantly harm our revenues and results of operations.
Our large customers have substantial negotiating leverage, which may require that we agree to terms
and conditions that may have an adverse effect on our business
Large network equipment manufacturers and service providers have substantial purchasing power
and leverage in negotiating contractual arrangements with us. These customers may require us to
develop additional features, reduce our prices or grant other concessions. As we seek to sell more
products to these large network equipment manufacturers and service providers, we may be required
to agree to such terms and conditions. These terms may affect the amounts and timing of revenue
recognition and our margins, which may adversely affect our profitability and financial condition
in the affected periods.
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If we do not diversify our customer base, we may not be able to grow our business or increase our
profitability
To date, the majority of our total revenues have been generated from sales to network
equipment manufacturers. Our growth depends, in part, on our ability to diversify our customer base
by increasing sales to enterprises, government departments and agencies, network operators and
service providers, and communications chip manufacturers. To effectively compete for the business
of these customers, we must develop new products and enhancements to existing products and expand
our sales, marketing and customer service capabilities, which will result in increases in operating
costs. If we cannot offset these increases in costs with an increase in our revenues, our operating
results may be adversely affected. Some of our existing and potential competitors have existing
relationships with many enterprises, government departments and agencies, network operators and
service providers, and communications chip manufacturers. We cannot be certain that we will be
successful in increasing our sales presence in these markets. Any failure by us to increase sales
in these markets would adversely affect our growth.
Our quarterly and annual operating results have historically fluctuated or may fluctuate
significantly in the future as a result of new product introductions and other factors, which
fluctuations could cause our stock price to decline significantly
Our quarterly and annual operating results are difficult to predict and have fluctuated and
may fluctuate significantly due to a variety of factors, many of which are outside of our control.
Some of the factors that could cause our quarterly and annual operating results to fluctuate
include the other risks discussed in this Risk Factors section.
We may experience a shortfall or delay in generating or recognizing revenues for a number of
reasons. Orders on hand at the beginning of a quarter and orders generated in a quarter do not
always result in the shipment of products and the recognition of revenues for that quarter. Failure
to ship products by the end of the quarter in which they are ordered or our inability to recognize
revenue for products shipped in a quarter may adversely affect our operating results for that
quarter. Our agreements with customers typically provide that the customer may delay scheduled
delivery dates and cancel orders prior to shipment without penalty. Because we incur operating
expenses based on anticipated revenues and a high percentage of our expenses are fixed in the short
term, any delay in generating or recognizing forecasted revenues could significantly harm our
results of operations.
In addition, a significant portion of our orders generated and product shipments in each
quarter occurs near the end of the quarter. Since individual orders can represent a meaningful
percentage of our revenues and net income in any quarter, the deferral or cancellation of or
failure to ship an order in a quarter can result in a revenue and net income shortfall that causes
us to fail to meet securities analysts expectations, our business plan or financial guidance
provided by us to investors for that period, and may cause fluctuations in our revenue in
subsequent periods.
Our operating results may also vary as a result of the timing of our release of new products.
The introduction of a new product in any quarter may cause an increase in revenues in that quarter
that may not be sustainable in subsequent quarters. Conversely, a delay in introducing a new
product in a quarter may result in a decrease in revenues in that quarter and lost sales.
Further, actual events, circumstances, outcomes, and amounts differing from judgments,
assumptions and estimates used in determining the values of certain assets (including the amounts
of related valuation allowances), liabilities and other items reflected in our consolidated
financial statements could significantly harm our results of operations.
The factors described above are difficult to forecast and mitigate. As a consequence,
operating results for a particular period are difficult to predict, and therefore, prior results
are not necessarily indicative of results to be expected in future periods. Any of the foregoing
factors, or any other factors discussed elsewhere herein, could have a material adverse effect on
our business, results of operations and financial condition and could adversely affect our stock
price.
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We expect our gross margins to vary over time and our recent level of gross margins may not be
sustainable, which may have a material adverse effect on our future profitability
Our recent level of gross margins may not be sustainable and may continue to be adversely
affected by numerous factors, including:
| increased price competition; | ||
| changes in customer, geographic or product mix (such as the mix of software versus hardware product sales); | ||
| the pricing we are able to obtain from our component suppliers and contract manufacturers; | ||
| increases in material or labor costs; | ||
| new product introductions by us and by our competitors: | ||
| changes in shipment volume; | ||
| excess or obsolete inventory costs; and | ||
| increased industry consolidation among our customers, which may lead to decreased demand for, and downward pricing pressure on, our products. |
Each of the above factors may be exacerbated by the decrease in demand for our established
products and our transition to our next-generation products. Our failure to sustain our recent
level of gross margins due to these or other factors may have a material adverse effect on our
results of operations.
The loss of any of our key personnel could significantly harm our results of operations and
competitive position
Our success depends to a significant degree upon the continuing contributions of our key
management, technical, marketing and sales employees. There can be no assurance that we will be
successful in retaining our key employees or that we can attract or retain additional skilled
personnel as required. Competition for highly skilled employees in our industry is intense, and the
cost to recruit and train new technical personnel is significant. Moreover, companies in our
industry whose employees accept positions with competitors frequently claim that those competitors
have engaged in unfair hiring practices. We may be subject to such claims as we seek to retain or
hire qualified personnel, some of whom may currently be working for our competitors.
Some of these claims may result in material litigation. We could incur substantial costs in
defending ourselves against these claims, regardless of their merits. Such claims could also
discourage potential employees who currently work for our competitors from joining us. In addition,
volatility or lack of positive performance in our stock price may also adversely affect our ability
to attract and retain highly skilled employees who may look to stock-based awards as a key
component of their compensation. The loss of the services of any of our key employees, the
inability to attract or retain qualified personnel in the future or delays in hiring required
personnel could hinder the development and introduction of new and enhanced products and harm our
ability to sell our products. As a result, failure to retain or attract key personnel could
significantly harm our results of operations and competitive position.
Continued growth will strain our operations and require us to incur costs to maintain and upgrade
our management and operational resources
We have experienced growth in our operations, including number of employees, sales, products,
facility locations and customers. Unless we manage our growth effectively, we may have difficulty
in operating our business. As a result, we may inaccurately forecast sales and materials
requirements, fail to integrate new personnel or fail to maintain adequate internal controls or
systems, which may result in fluctuations in our operating results
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and cause the price of our stock
to decline. We may continue to expand our operations to enhance our product development efforts
and broaden our sales reach, which may place a significant strain on our management and operational
resources. In order to manage our growth effectively, we must implement and improve our operational
systems, procedures and controls on a timely basis. If we cannot manage growth effectively, our
profitability could be significantly harmed.
If we are unable to expand our sales and distribution channels or are unable to successfully manage
our expanded sales organization, our revenues and results of operations will be harmed
Historically, we have relied primarily on a direct sales organization, supported by
distributors and other resellers, to sell our products. Our distribution strategy focuses
primarily on developing and expanding our direct sales organization and our network of distributors
and other resellers. We may not be able to successfully expand our sales and distribution
channels, and the cost of any expansion may exceed the revenues that we generate as a result of the
expansion. To the extent that we are successful in expanding our sales and distribution channels,
we
cannot be certain that we will be able to compete successfully against the significantly
larger and better-funded sales and marketing operations of many of our current or potential
competitors. In some cases, we have granted exclusive rights to our distributors to market our
products in their specified territories. Our distributors may not market our products effectively
or devote the resources necessary to provide us with effective sales, marketing and technical
support. Our inability to effectively manage the expansion of our sales and support staff, or to
maintain existing or establish new relationships with successful distributors, would harm our
business, revenues and results of operations.
If we are unable to expand our international sales and distribution channels or manage them
effectively, our results of operations would be harmed
Historically, distributors have generated a significant portion of our international sales. In
the past, we have had distributors who entered bankruptcy and were therefore terminated as
distributors of our products. Moreover, if we terminate a distribution relationship for
performance-related or other reasons, we may be subject to wrongful termination claims which may
result in material litigation. We could incur substantial costs in defending ourselves against
these claims, regardless of their merits, which could adversely impact our profitability.
Losses of one or more of our international distributors or their failure to sell our products
would limit our ability to sustain and grow our revenues in international markets. We intend to
expand our operations in the Asia Pacific and EMEA regions by adding distributors and international
sales and support personnel. Our failure in these efforts could significantly harm our revenues and
results of operations, and decrease the value of our stock.
Changes in industry and market conditions could lead to charges related to discontinuances of
certain of our products and asset impairments
In response to changes in industry and market conditions, we may be required to strategically
realign our resources by restructuring our operations and/or our product offerings. Any decision to
limit investment in or dispose of a product offering may result in the recording of special charges
to earnings, such as inventory, fixed asset and technology-related write-offs and charges relating
to consolidation of excess facilities, which could adversely impact our business, results of
operations and financial position.
Restructuring our workforce can be disruptive
We have in the past restructured or made other adjustments to our workforce in response to the
economic environment, performance issues, recent acquisitions and other internal and external
considerations. During 2009 and 2010, we completed two restructurings related to our 2009
acquisitions and in 2009 we completed a restructuring as a result of the economic downturn (See
Note 4 to the Consolidated Financial Statements). Restructurings, among other things, can result in
a temporary lack of focus and reduced productivity. These effects could recur in connection with
future acquisitions and other restructurings and, as a result, our operating results and financial
condition could be negatively affected.
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Some key components in our products come from sole or limited sources of supply, which exposes us
to potential supply shortages that could disrupt the manufacture and sale of our products
We and our contract manufacturers currently purchase a number of key components used to
manufacture our products from sole or limited sources of supply for which alternative sources may
not be available. From time to time, we have experienced shortages of key components, including
chips, oscillators and optical modules. We and our contract manufacturers have no guaranteed or
long-term supply arrangements for these or other components, including field programmable gate
arrays, or FPGAs, which are integrated circuits that can be repeatedly reprogrammed to perform
different sets of functions as required. Financial or other difficulties faced by our suppliers or
significant changes in market demand for necessary components could limit the availability to us
and our contract manufacturers of these components. Any interruption or delay in the supply of any
of these components could significantly harm our ability to meet scheduled product deliveries to
our customers and cause us to lose sales.
In addition, the purchase of these components on a sole or limited source basis subjects us to
risks of price increases and potential quality assurance problems. Consolidation involving
suppliers could further reduce the number of alternatives available to us and affect the
availability and cost of components. An increase in the cost of components could make our products
less competitive and result in lower gross margins.
There are limited substitute supplies available for many of these components, including field
programmable gate arrays. All of these components are critical to the production of our products,
and competition exists with other manufacturers for these key components. In the event that we can
no longer obtain materials from a sole source supplier, we might not be able to qualify or identify
alternative suppliers in a timely fashion, or at all. Any extended interruption in the supply of
any of the key components currently obtained from a sole or limited source or delay in
transitioning to a replacement suppliers product or replacement component into our systems could
disrupt our operations and significantly harm our business in any given period.
Our reported financial results could suffer if there is an impairment of goodwill or acquired
intangible assets
We are required (i) to test annually, and review when circumstances warrant, the value of our
goodwill associated with past acquisitions and any future acquisitions, and (ii) to test the value
of our acquisition-related intangible assets when circumstances warrant to determine if an
impairment has occurred. If such assets are deemed impaired, an impairment loss equal to the
amount by which the applicable carrying amount exceeds (i) the implied fair value of the goodwill
or (ii) the estimated fair value of acquired intangible assets would be recognized. This would
result in an incremental charge for that quarter which would adversely impact our earnings for the
period in which the impairment was determined to have occurred. For example, such impairment could
occur if the market value of our common stock falls below the carrying value of our net assets for
a sustained period. The recent economic downturn contributed to extreme price and volume
fluctuations in global stock markets that reduced the market price of many technology company
stocks, including ours. Such declines in our stock price or the failure of our stock price to
recover from these declines, as well as any marked decline in our level of revenues or margins,
increase the risk that goodwill may become impaired in future periods. We cannot accurately
predict the amount and timing of any impairment of our goodwill or acquired intangible assets.
International activity may increase our cost of doing business or disrupt our business
We plan to continue to maintain or expand our international operations and sales activities.
Operating internationally involves inherent risks that we may not be able to control, including:
| difficulties in recruiting, hiring, training and retaining international personnel; | ||
| increased complexity and costs of managing international operations; | ||
| growing demand for and cost of technical personnel; |
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| changing governmental laws and regulations, including those related to income taxes; | ||
| increased exposure to foreign currency exchange rate fluctuations; | ||
| political and economic instability, including military conflict and social unrest; | ||
| commercial laws and business practices that favor local competition; | ||
| differing labor and employment laws; | ||
| supporting multiple languages; | ||
| reduced or limited protections of intellectual property rights; | ||
| more complicated logistical and distribution arrangements; and | ||
| longer accounts receivable cycles and difficulties in collecting receivables. |
The above risks associated with our international operations and sales activities can restrict
or adversely affect our ability to sell in international markets, disrupt our business and subject
us to additional costs of doing business.
Adverse resolution of legal proceedings may harm our results of operations or financial condition
We are a party to lawsuits and other legal proceedings in the normal course of our business.
Litigation and other legal proceedings can be expensive, lengthy and disruptive to normal business
operations. Moreover, the results of complex legal proceedings are difficult to predict. We cannot
provide assurance that we will not be a party to additional legal proceedings in the future or that
we will be able to favorably resolve our current lawsuits. To the extent legal proceedings continue
for long time periods or are adversely resolved, our business, results of operations and financial
position could be significantly harmed. For additional information regarding certain of the matters
in which we are involved, see Item 3, Legal Proceedings, contained in Part I of this report.
Claims that we infringe third-party intellectual property rights could result in significant
expenses or restrictions on our ability to sell our products
From time to time, other parties may assert patent, copyright, trademark and other
intellectual property rights to technologies that are important to our business. For example, in
November 2008, IneoQuest filed a complaint against us alleging that we make and sell products that
infringe a patent owned by IneoQuest and that we misappropriated certain of IneoQuests trade
secrets, in addition to numerous other related claims. We cannot provide assurance that others will
not claim that we are infringing their intellectual property rights or that we do not in fact
infringe those intellectual property rights. We have not conducted searches to determine whether
the technology we have in our products infringes or misappropriates intellectual property rights
held by third parties.
Any claims asserting that our products infringe or may infringe proprietary rights of third
parties, if determined adversely to us, could significantly harm our results of operations. Any
such claims, with or without merit, could:
| be time-consuming; | ||
| result in costly litigation; | ||
| divert the efforts of our technical and management personnel; |
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| require us to modify the products at issue or to develop alternative technology, thereby causing product shipment delays and the loss or deferral of revenues; | ||
| require us to cease selling the products at issue; | ||
| require us to pay substantial damage awards; | ||
| expose us to indemnity claims from our customers; | ||
| damage our reputation; or | ||
| require us to enter into royalty or licensing agreements which, if required, may not be available on terms acceptable to us, if at all. |
In the event any such claim against us was successful and we could not obtain a license to the
relevant technology on acceptable terms or license a substitute technology or redesign our products
to avoid infringement, our revenues, results of operations and competitive position could be
harmed.
If we fail to accurately forecast our manufacturing requirements, we could incur additional costs
and experience manufacturing delays
We provide our contract manufacturers with rolling forecasts based on anticipated product
orders to determine our manufacturing requirements. Some of the components used in our products
have significant lead times or lead times which may unexpectedly increase depending on factors such
as the specific supplier, contract terms and the demand for components at a given time. Because of
these long lead times, we are often required to forecast and order products before we know what our
specific manufacturing requirements will be. If we overestimate our product orders, our contract
manufacturers may have excess inventory of completed products which we would be obligated to
purchase. This will lead to increased costs and the risk of obsolescence. If we underestimate our
product orders, our contract manufacturers may have inadequate inventory, which could result in
delays in shipments, the loss or deferral of revenues and/or higher costs of sales. Costs are also
added to our products when we are required to expedite delivery of our products to customers or of
components with long lead times to our contract manufacturers. We cannot be certain that we will
be able to accurately forecast our product orders and may in the future carry excess or obsolete
inventory, be unable to fulfill customer demand, or both, thereby harming our revenues, results of
operations and customer relationships.
Failure by our contract manufacturers to provide us with adequate supplies of high quality products
could harm our revenues, results of operations, competitive position and reputation
We currently rely on a limited number of contract manufacturers to manufacture and assemble
our products. We may experience delays in receiving product shipments from contract manufacturers
or other problems, such as
inferior quality and insufficient quantity of product. We cannot be certain that we will be
able to effectively manage our contract manufacturers or that these manufacturers will meet our
future requirements for timely delivery of products of sufficient quality and quantity. We intend
to introduce new products and product enhancements, which will require that we rapidly achieve
adequate production volumes by effectively coordinating with our suppliers and contract
manufacturers. The inability of our contract manufacturers to provide us with adequate supplies of
high-quality products or the loss of any of our contract manufacturers would cause a delay in our
ability to fulfill customer orders while we obtain a replacement manufacturer and would harm our
revenues, results of operations, competitive position and reputation.
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To the extent that our customers consolidate, they may reduce purchases of our products and demand
more favorable terms and conditions from us, which would harm our revenues and profitability
Consolidation of our customers could reduce the number of customers to whom our products could
be sold. These merged customers could obtain products from a source other than us or demand more
favorable terms and conditions from us, which would harm our revenues and profitability. In
addition, our significant customers may merge with or acquire our competitors and discontinue their
relationships with us.
Our products may contain defects which may cause us to incur significant costs, divert our
attention from product development efforts and result in a loss of customers
Our existing products and any new or enhanced products we introduce may contain undetected
software or hardware defects when they are first introduced or as new versions are released. These
problems may cause us to incur significant damages or warranty and repair costs, divert the
attention of our engineering personnel from our product development efforts and cause significant
customer relation problems or loss of customers and reputation, all of which would harm our results
of operations. A successful claim against us for an amount exceeding the limit on our product
liability insurance policy would force us to use our own resources, to the extent available, to pay
the claim, which could result in an increase in our expenses and a reduction of our working capital
available for other uses, thereby harming our profitability and capital resources.
Our failure to protect our intellectual property may significantly harm our results of operations
and reputation
Our success and ability to compete is dependent in part on our ability to protect and maintain
our proprietary rights to our intellectual property. We currently rely on a combination of patent,
trade secret, trademark and copyright laws to establish and protect our intellectual property. To
date, we have relied primarily on trade secret laws to protect our proprietary processes and
know-how. We have patent applications and existing patents in the United States and other
jurisdictions. We cannot be certain that any of these applications will be approved or that any
such patents, if issued, or our existing patents, will be upheld. We also cannot be certain that
our existing patents and any such additional patents, if issued, will be effective in protecting
our proprietary technology.
We generally enter into assignment of rights and confidentiality agreements with our officers,
employees and consultants. We also generally limit access to and distribution of our source code
and further limit the disclosure and use of our other proprietary information. However, these
measures provide only limited protection of our intellectual property rights. In addition, we may
not have signed agreements containing adequate protective provisions in every case, and the
contractual provisions that are in place may not provide us with adequate protection in all
circumstances. Any infringement of our proprietary rights could result in significant litigation
costs, and any failure to adequately protect our proprietary rights could result in our
competitors offering similar products, potentially resulting in loss of one or more competitive
advantages, loss of market share and decreased revenues.
Despite our efforts to protect our proprietary rights, existing trade secret, copyright,
patent and trademark laws afford us only limited protection. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as do the laws of the United
States. Accordingly, we may not be able to prevent misappropriation of our technologies or to
deter others from developing similar technologies. Others may attempt to copy or reverse engineer
aspects of our products or to obtain and use information that we regard as proprietary. Further,
monitoring the unauthorized use of our products and our proprietary rights is difficult.
Litigation may be necessary to enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others. Litigation of this type could result in
substantial costs and diversion of resources and could significantly harm our results of operations
and reputation.
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The inability to successfully defend claims from taxing authorities or the adoption of new tax
legislation could adversely affect our operating results and financial position
We conduct business in many countries, which requires us to interpret the income tax laws and
rulings in each of those jurisdictions. Due to the complexity of tax laws in those jurisdictions
as well as the subjectivity of factual interpretations, our estimates of income tax liabilities may
differ from actual payments or assessments. Claims from tax authorities related to these
differences could have an adverse impact on our results of operations, financial condition and cash
flows. In addition, legislative bodies in the various countries in which we do business may from
time to time adopt new tax legislation that could have a material adverse effect on our results of
operations, financial condition and cash flows.
Servicing our debt will require a significant amount of cash, and we may not have sufficient cash
flow from our business to service our existing debt or debt we may incur
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance
our existing or new indebtedness depends on our future performance, which is subject to economic,
financial, competitive and other factors beyond our control. Our business may not continue to
generate cash flow from operations in the future sufficient to service our indebtedness and make
necessary capital expenditures. If we are unable to generate such cash flow, we may be required to
adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional
equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our
indebtedness will depend on the capital markets and our financial condition at such time. We may
not be able to engage in any of these activities or engage in these activities on desirable terms,
which could result in a default on our existing or future debt obligations.
When we issue shares of our common stock upon conversion of the Convertible Senior Notes, such
issuance will dilute the ownership interest of our existing shareholders, including holders who had
previously converted their Convertible Senior Notes
When we issue shares of our common stock upon conversion of our Convertible Senior Notes (the
Notes), including the effect on the conversion rate should a make whole adjustment event occur,
such issuance will dilute the ownership interests of our existing shareholders. Any sales in the
public market of our common stock issuable upon such conversion could adversely affect prevailing
market prices of our common stock. In addition, the existence of the Notes may encourage short
selling by market participants because the conversion of the Notes could depress the price of our
common stock.
The fundamental change repurchase feature of the Convertible Senior Notes may delay or prevent an
otherwise beneficial attempt to take over our company
The terms of the Notes require us to offer to repurchase the Notes for cash in the event of a
fundamental change (such as a change in control event or if our common stock ceases to be listed or
quoted on any of the New York Stock Exchange, the Nasdaq Global Select Market or the Nasdaq Global
Market or any of their respective successors). A non-stock takeover of our company may trigger the
requirement that we repurchase the Notes. This feature may have the effect of delaying or
preventing a takeover of our company that would otherwise be beneficial to investors.
Our investment portfolio may become impaired by deterioration of the financial markets
We follow an established investment policy and set of objectives designed to preserve
principal and liquidity, to generate a market return given the policys guidelines and to avoid
certain investment concentrations. The policy also sets forth credit quality standards and limits
our exposure to any one non-government issuer. Our cash equivalent and short- and long-term
investment portfolio as of December 31, 2010 consisted of money market funds, U.S. government and
government agency debt securities, corporate debt securities and auction rate securities.
Although the remainder of our investment portfolios carrying value approximated fair value as
of December 31, 2010, we cannot predict future market conditions or market liquidity, or the future
value of our investments. As a
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result, we can provide no assurance that our investment portfolio
will not be impaired in the future and that any such impairment will not materially and adversely
impact our financial condition, results of operations and cash flows.
Changes in laws, regulations and financial accounting standards may affect our reported results of
operations
Changes in accounting regulations and standards, such as the new revenue recognition guidance
implemented by us in the first quarter of 2011, increased use of fair value measures and the
potential requirement that U.S. registrants prepare financial statements in accordance with
International Financial Reporting Standards, could have a significant effect on our results of
operations. New pronouncements and varying interpretations of pronouncements have occurred in the
past and are likely to occur in the future as a result of recent Congressional and regulatory
actions. New laws, regulations and accounting standards, as well as the questioning of, or changes
to, currently accepted accounting practices in the technology industry may adversely affect our
financial results, may also require significant resources to implement and these resources may not
be available or may have a premium attached, may divert existing resources from operational
initiatives to financial reporting compliance, one or all of which could have an adverse effect on
our stock price.
Our business is subject to changing regulation that has resulted in increased costs and may
continue to result in additional costs in the future
We are subject to laws, rules and regulations of federal and state regulatory authorities,
including The Nasdaq Stock Market LLC (Nasdaq) and financial market entities charged with the
protection of investors and the oversight of companies whose securities are publicly traded. During
the past few years, these entities, including the Public Company Accounting Oversight Board, the
SEC and Nasdaq, have issued new requirements and regulations and continue to develop additional
regulations and requirements partly in response to laws enacted by Congress, most notably the
Sarbanes-Oxley Act of 2002 (SOX) and, more recently, the Dodd-Frank Wall Street Reform and
Consumer Protection Act. Our efforts to comply with these requirements and regulations have
resulted in, and are likely to continue to result in, increased general and administrative expenses
and a diversion of substantial management time and attention from revenue-generating activities to
compliance activities.
In particular, our efforts to comply with Section 404 of SOX and the related regulations
regarding our required assessment of our internal control over financial reporting and our
independent registered public accounting firms audit of the effectiveness of our internal control
over financial reporting, have required, and continue to require, the commitment of significant
financial and managerial resources. Moreover, because these laws, regulations and standards are
subject to varying interpretations, their application in practice may evolve over time as new
guidance becomes available. This evolution may result in continuing uncertainty regarding
compliance matters and additional costs necessitated by ongoing revisions to our disclosure and
governance practices.
We are also subject to laws, rules and regulations of authorities in other countries where we
do business, and these laws, rules and regulations are also subject to change and uncertainty
regarding their application and interpretation. The growth of our operations, both domestically and
internationally, has resulted in and is likely to continue to result in increased expense,
resources and time spent on matters relating to compliance, including monitoring and training
activities.
If we fail to maintain our relationships with industry experts, our products may lose industry and
market recognition and sales could decline
Our relationships with industry experts in the field of performance analysis and measurement
of networks and network equipment are critical for maintaining our industry credibility and for
developing new products and testing methodologies in a timely fashion. These experts have
established standard testing methodologies that evaluate new network equipment products and
technologies. We provide these experts and their testing labs with our products and engineering
assistance to perform tests on these new network equipment products and technologies. These
industry experts refer to our products in their publications which has given our products industry
recognition. In addition, these labs offer us the opportunity to test our products on the newest
network equipment and technologies, thereby
assisting us in developing new products that are designed to meet evolving technological
needs. We cannot be certain that we will be able to maintain our relationships with industry
experts or that our competitors will not
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maintain similar or superior relationships with industry
experts. If we are unable to maintain our relationships with industry experts or if competitors
have superior relationships with them, our products may lose industry and market recognition which
could harm our reputation and competitive position and cause our sales to decline.
Our business and operations are subject to the risks of earthquakes, floods, hurricanes and other
natural disasters
Our operations could be subject to natural disasters and other business disruptions, which
could adversely affect our business and financial results. A number of our facilities and those of
our suppliers, our contract manufacturers, and our customers are located in areas that have been
affected by natural disasters such as ice and snow storms, earthquakes, floods or hurricanes in the
past. For example, currently, our corporate headquarters and many of our customers are located in
California. California historically has been vulnerable to natural disasters and other risks, such
as earthquakes, fires and floods, which at times have disrupted the local economy and posed
physical risks to our property. To mitigate some of this risk, certain of our U.S. and
international locations are insured up to certain levels against losses and interruptions caused by
earthquakes, floods and/or other natural disasters. However, a significant natural disaster could
have a material adverse impact on our business, operating results and financial condition.
Man-made problems such as computer viruses or terrorism may disrupt our operations and harm our
operating results
Despite our implementation of network security measures, our network may be vulnerable to
computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer
systems. Any such event could have a material adverse effect on our business, operating results and
financial condition. In addition, the effects of war or acts of terrorism could have a material
adverse effect on our business, operating results and financial condition. The continued threat of
terrorism and heightened security and military action in response to this threat, or any future
acts of terrorism, may cause further disruption to the economy and create further uncertainties in
the economy. Energy shortages, such as gas or electricity shortages, could have similar negative
impacts. To the extent that such disruptions or uncertainties result in delays or cancellations of
customer orders, or the manufacture or shipment of our products, our business, operating results
and financial condition could be materially and adversely affected.
Provisions of our articles of incorporation and bylaws may make it difficult for a third party to
acquire us, despite the possible benefits to our shareholders
Our Board of Directors has the authority to issue up to 1,000,000 shares of preferred stock
and to determine the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the shareholders. The rights of the
holders of our common stock are subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that we may issue. The issuance of preferred stock could have the
effect of making it more difficult for a third party to acquire a majority of our outstanding
voting stock. Furthermore, some provisions of our articles of incorporation and bylaws could delay
or make more difficult a merger, tender offer or proxy contest involving us. Our articles of
incorporation include provisions that limit the persons who may call special meetings of
shareholders and establish advance notice requirements for nominations for election to our Board of
Directors or for proposing matters that can be acted on by shareholders at shareholder meetings.
These and other provisions of our articles of incorporation and bylaws may have the effect of
delaying, deferring or preventing a change in our control despite possible benefits to our
shareholders, may discourage bids at a premium over the market price of our common stock and may
harm the market price of our common stock and the voting and other rights of our shareholders.
Our stock price may continue to be volatile
The trading price of our common stock has fluctuated substantially in recent years. The
trading price may be subject to future fluctuations in response to, among other events and factors:
(i) global economic environment; (ii)
variations in our quarterly operating results; (iii) the gain or loss of significant orders;
(iv) changes in earnings estimates by analysts who cover our stock; (v) changes in our revenue
and/or earnings guidance as periodically
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announced in our earnings calls or press releases; (vi)
announcements of technological innovations and new products by us or our competitors; (vii) changes
in domestic and international economic, political and business conditions; (viii) consolidation and
general conditions in our industry; and (ix) changes in our executive management team. In addition,
the stock market in general has experienced extreme price and volume fluctuations that have
affected the market prices for many companies in our industry that have been unrelated to the
operating performance of these companies. These market fluctuations have affected and may continue
to affect the market price of our common stock.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
As of December 31, 2010, all of our properties are leased and we do not own any real property.
Our corporate headquarters are located in Calabasas, California, where we currently lease
approximately 84,100 square feet of space which houses our research and development, sales and
marketing, finance and administration and manufacturing operations. This lease terminates on May
31, 2013, and we have an option to extend the term of the lease for an additional five-year period.
We also lease office space for sales, support, marketing, operations and administration in the
United Kingdom, Ireland, Germany, France, Finland, Sweden, Canada, South Korea, Japan, China,
Singapore, India and Malaysia, and in various states throughout the United States. Additionally,
we have leased research and development facilities in Romania, India, Australia, the United Kingdom
and Canada. We believe that our current facilities will be adequate to meet our needs for the next
12 months, or that we will be able to obtain additional space when and as needed on acceptable
terms.
Item 3. Legal Proceedings
We are involved from time to time in claims, proceedings and litigation, including the
following:
IneoQuest Technologies, Inc. vs. Ixia. In November 2008, IneoQuest filed a complaint against
Ixia in the United States District Court for the Central District of California. The complaint
alleges that Ixia makes and sells products that infringe a patent owned by IneoQuest, and that Ixia
misappropriated IneoQuests trade secrets, in addition to numerous other related claims. The patent
at issue allegedly relates to a system and method for analyzing the performance of multiple
transportation streams of streaming media in packet-based networks. IneoQuest seeks a permanent
injunction enjoining Ixia from infringing the patent at issue and from using IneoQuests trade
secrets and confidential information, unspecified general and exemplary damages, and attorneys
fees and costs.
In January 2009, Ixia filed an answer and counterclaim to IneoQuests complaint denying
IneoQuests claims and raising several affirmative defenses. Ixia has also asserted a counterclaim
against IneoQuest seeking declaratory relief that Ixia has not infringed the IneoQuest patent and
that such patent is invalid. In April 2009, Ixia filed an amended answer and counterclaim to
IneoQuests complaint in which Ixia asserted that IneoQuest has infringed four patents owned by
Ixia. Although the Company cannot predict the outcome of this matter, Ixia believes that it has
strong defenses to IneoQuests claims and is defending the action vigorously. The parties commenced
discovery in this matter in the 2009 second quarter. The parties filed a Joint Claim Construction
brief on November 30, 2009. On July 27, 2010, the Court issued a claim construction ruling relating
to certain terms within the claims of IneoQuests patent and ordered the parties to further brief
claim construction issues related to Ixias four asserted patents. Fact discovery is set to
conclude 90 days after the issuance of the claim construction ruling related to Ixias four
asserted patents. Expert discovery is set to conclude 150 days after the issuance of the claim
construction ruling. As yet, a trial date has not been set.
Tucana Telecom NV vs. Catapult. On May 22, 2007, the Antwerp Court of Appeal heard an appeal
by Tucana Telecom NV, a Belgian company, of the previous dismissal by the Antwerp Commercial Court
of an action by
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Tucana against Catapult. Tucana had sought damages of 10.4 million Euros
(approximately $13.8 million as of December 31, 2010) for the alleged improper termination in 2002
by Catapult of Tucanas distribution agreement with Catapult. On June 19, 2007, the Antwerp Court
of Appeal confirmed the Commercial Courts dismissal of Tucanas action and assessed the costs of
the appeal against Tucana. On July 22, 2008, Catapult was notified by its Belgian counsel that
Tucana had appealed the judgment of the Antwerp Court of Appeal to the Belgian Supreme Court. In a
decision dated January 14, 2010, the Belgium Supreme Court set aside the decision of the Antwerp
Court of Appeal and remanded the matter for trial to the Ghent Court of Appeal. Catapults Belgian
counsel was informed by Tucanas counsel on January 19, 2011 that Tucana has sent out for service a
writ scheduling an introductory hearing before the Ghent Court of Appeals. Catapults counsel was
informed that Tucana now asserts that it is entitled to additional compensation of approximately
2.7 million Euros (approximately $3.6 million as of December 31, 2010). Once Catapult is served
and learns the proposed date for the introductory hearing, a briefing schedule will be established
for the exchange of trial briefs.
In June 2010, Catapult filed a complaint against Tucana in the Superior Court of the State of
California, County of Los Angeles, seeking declaratory and injunctive relief and damages for breach
of the distribution agreement. Catapult filed its First Amended Complaint on September 8, 2010 to
address a statute of limitations issue raised by Tucanas initial response. Catapult seeks a
declaration that the distribution agreement is a valid and enforceable agreement, and that the
distribution agreements mandatory forum selection and choice of law provisions are enforceable and
require that the litigation of any dispute involving the agreement be brought in a court located in
the County of Los Angeles. Catapult also seeks an order permanently enjoining Tucana from
prosecuting any claims arising out of Tucanas distribution relationship with Catapult in any
judicial forum outside the County of Los Angeles. Catapult also seeks compensatory damages of not
less than $200,000 for damages suffered by Catapult arising out of Tucanas breach of the
distribution agreement. Tucana filed a demurrer to the First Amended Complaint on October 12, 2010
seeking dismissal of the action based on the statute of limitations and the doctrine of laches.
Catapult filed its opposition to the demurrer on November 23, 2010. The hearing on the demurrer
has been scheduled by the Court for April 18, 2011. While awaiting the hearing on the demurrer,
Catapult has begun discovery in the California proceeding by requesting Tucana to produce documents
relevant to Tucanas underlying claims. Tucana has not yet responded to that request.
Catapult believes that it properly terminated any contract it had with Tucana and that Tucana
is not entitled to any damages in this matter. Catapult has defended the action vigorously to date
and will continue to do so. Catapult may be able to seek indemnification from Tekelec for any
damages assessed against Catapult in this matter under the terms of the Asset Purchase Agreement
that Catapult entered into with Tekelec, although there is no assurance that such indemnification
would be available. On March 30, 2010, Tekelecs legal counsel in Belgium informed Catapults
Belgian counsel that its client is considering intervening voluntarily in the Ghent appeal
proceedings but that no final decision has been taken in this respect. It is not possible to
determine the amount of any loss that might be incurred in this matter.
We are not aware of any other pending legal proceedings than the matters mentioned above that,
individually or in the aggregate, would have a material adverse effect on our business, results of
operations or financial position. We may in the future be party to litigation arising in the
ordinary course of business, including claims that we allegedly infringe upon third party
trademarks or other intellectual property rights. Such claims, even if without merit, could result
in the expenditure of significant financial and managerial resources.
Item 4. Reserved
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PART II
Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
(a) Market Price, Dividends and Related Matters
Ixias Common Stock is traded on the Nasdaq Global Select Market under the symbol XXIA. The
following table sets forth the high and low closing sales prices of our Common Stock as reported on
the Nasdaq Global Select Market for the following time periods.
High | Low | |||||||
2010 |
||||||||
Fourth quarter |
$ | 18.21 | $ | 12.48 | ||||
Third quarter |
12.75 | 8.47 | ||||||
Second quarter |
10.81 | 8.53 | ||||||
First quarter |
9.59 | 7.00 | ||||||
2009 |
||||||||
Fourth quarter |
$ | 8.22 | $ | 6.33 | ||||
Third quarter |
7.70 | 6.08 | ||||||
Second quarter |
7.03 | 4.98 | ||||||
First quarter |
6.00 | 4.36 |
On February 18, 2011, the closing sales price reported for our Common Stock was $18.83 per
share, and as of that date there were approximately 23 shareholders of record.
We have never declared or paid cash dividends on our Common Stock and do not anticipate paying
any dividends in the foreseeable future.
The following graph compares the cumulative total return on the Companys Common Stock with
the cumulative total return of the Nasdaq Composite Index and the Nasdaq Telecommunications Index
for the five-year period commencing January 1, 2006. Ixia is one of the companies that makes up
the Nasdaq Telecommunications Index. The stock price performance shown on the graph below is not
necessarily indicative of future price performance.
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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Ixia, the NASDAQ Composite Index
and the NASDAQ Tclecommunications Index
Among Ixia, the NASDAQ Composite Index
and the NASDAQ Tclecommunications Index
* | $100 invested on 12/31/05 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. |
12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | 12/31/10 | |||||||||||||||||||||||||||
Ixia |
$ | 100 | $ | 64.86 | $ | 64.05 | $ | 39.05 | $ | 50.34 | $ | 113.38 | ||||||||||||||||||||
Nasdaq Composite Index |
100 | 111.74 | 124.67 | 73.77 | 107.12 | 125.93 | ||||||||||||||||||||||||||
Nasdaq
Telecommunications Index |
100 | 131.50 | 146.22 | 85.43 | 118.25 | 129.78 | ||||||||||||||||||||||||||
* | Assumes (i) $100 invested on December 31, 2005 in Ixia Common Stock, the Nasdaq Composite Index and the Nasdaq Telecommunications Index and (ii) immediate reinvestment of all dividends. | |
(b) | Use of Proceeds | |
None. | ||
(c) | Issuer Repurchases of Equity Securities | |
None. |
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of Operations and our
consolidated financial statements and the notes to those consolidated financial statements. The
consolidated statement of operations data
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set forth below for the years ended December 31, 2010, 2009 and 2008 and the consolidated
balance sheet data as of December 31, 2010 and 2009 are derived from, and are qualified in their
entirety by reference to, the Companys audited consolidated financial statements included
elsewhere in this Form 10-K. The consolidated statements of operations data set forth below for
the years ended December 31, 2007 and 2006 and the consolidated balance sheet data as of December
31, 2008, 2007 and 2006 are derived from the audited consolidated financial statements not included
herein, but which were previously filed with the SEC.
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Consolidated Statement of Operations Data (in
thousands, except per share data): |
||||||||||||||||||||
Revenues: |
||||||||||||||||||||
Products |
$ | 227,880 | $ | 142,871 | $ | 146,802 | $ | 148,226 | $ | 155,388 | ||||||||||
Services |
48,935 | 35,123 | 29,065 | 25,895 | 24,744 | |||||||||||||||
Total revenues |
276,815 | 177,994 | 175,867 | 174,121 | 180,132 | |||||||||||||||
Costs and operating expenses: (1) |
||||||||||||||||||||
Cost of revenues products |
54,378 | 36,722 | 32,411 | 32,724 | 29,437 | |||||||||||||||
Cost of revenues services |
6,327 | 3,859 | 4,475 | 3,870 | 2,681 | |||||||||||||||
Research and development |
72,488 | 53,977 | 49,167 | 47,407 | 43,450 | |||||||||||||||
Sales and marketing |
79,986 | 60,374 | 59,374 | 57,420 | 59,020 | |||||||||||||||
General and administrative |
35,142 | 28,061 | 25,502 | 24,927 | 23,800 | |||||||||||||||
Amortization of intangible assets |
17,545 | 11,391 | 5,664 | 7,108 | 6,450 | |||||||||||||||
Acquisition and other related(5) |
2,991 | 6,179 | 1,479 | | | |||||||||||||||
Restructuring |
3,587 | 4,637 | | | | |||||||||||||||
Impairment of purchased technology and
intangible assets(4) |
| | | 3,263 | | |||||||||||||||
Total costs and operating expenses |
272,444 | 205,200 | 178,072 | 176,719 | 164,838 | |||||||||||||||
Income (loss) from operations |
4,371 | (27,206 | ) | (2,205 | ) | (2,598 | ) | 15,294 | ||||||||||||
Interest income and other, net(6) |
10,970 | 2,160 | 6,574 | 11,723 | 9,409 | |||||||||||||||
Interest expense |
(480 | ) | | | | | ||||||||||||||
Other-than-temporary impairment on
investments(2) |
| (2,761 | ) | (20,243 | ) | | | |||||||||||||
Income (loss) before income taxes |
14,861 | (27,807 | ) | (15,874 | ) | 9,125 | 24,703 | |||||||||||||
Income tax expense(3) |
3,653 | 16,396 | 21 | 2,119 | 11,222 | |||||||||||||||
Net income (loss) |
$ | 11,208 | $ | (44,203 | ) | $ | (15,895 | ) | $ | 7,006 | $ | 13,481 | ||||||||
Earnings (loss) per share: |
||||||||||||||||||||
Basic |
$ | 0.17 | $ | (0.70 | ) | $ | (0.24 | ) | $ | 0.10 | $ | 0.20 | ||||||||
Diluted |
$ | 0.17 | $ | (0.70 | ) | $ | (0.24 | ) | $ | 0.10 | $ | 0.20 | ||||||||
Weighted average number of common and common
equivalent shares outstanding: |
||||||||||||||||||||
Basic |
65,157 | 62,710 | 65,087 | 67,936 | 67,005 | |||||||||||||||
Diluted |
67,769 | 62,710 | 65,087 | 69,386 | 68,792 | |||||||||||||||
(1) Stock-based compensation
included in: |
||||||||||||||||||||
Cost of revenues products |
$ | 524 | $ | 478 | $ | 513 | $ | 519 | $ | 590 | ||||||||||
Cost of revenues services |
198 | 182 | 195 | 197 | 224 | |||||||||||||||
Research and development |
5,195 | 4,491 | 4,166 | 5,243 | 6,481 | |||||||||||||||
Sales and marketing |
3,592 | 2,989 | 3,411 | 4,416 | 7,838 | |||||||||||||||
General and administrative |
3,406 | 2,395 | 2,360 | 2,659 | 2,890 |
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(2) | Our 2009 and 2008 results include a pre-tax other-than-temporary impairment charge of $2.8 million and $15.8 million, respectively, to earnings related to our investments in auction rate securities. Our 2008 results also include a pre-tax other-than-temporary impairment charge of $4.4 million to earnings related to our investments in bonds issued by Lehman Brothers Holdings, Inc. | |
(3) | In 2009, our income tax expense includes a $28.1 million charge related primarily to the establishment of a valuation allowance against our remaining net U.S. deferred tax assets. In 2008, our income tax expense includes a $7.9 million charge related primarily to the establishment of a valuation allowance against our deferred tax assets associated with the unrealized impairment (capital) losses as discussed above. | |
(4) | Our 2007 results include a pre-tax impairment charge of $3.3 million, which consists of the impairment of purchased technology of $1.5 million and the impairment of certain intangible assets of $1.8 million related to the acquisition of Communication Machinery Corporation in July 2005 and to the acquisition of the mobile video test product line from Dilithium Networks in January 2006. | |
(5) | In 2009, we adopted new accounting guidance for business combinations. As a result, transactions costs related to our acquisitions of Catapult and N2X were expensed as incurred rather than treated as part of the purchase price. | |
(6) | In 2010, we recorded $8.9 million and $1.0 million, respectively, relating to (i) settlement proceeds received for claims asserted by us against our former investment manager for damages and losses relating to our previous investments in auction rate securities with an aggregate par value of $19.0 million, and (ii) proceeds received for the sale of certain of these auction rate securities that were previously written-off. |
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Consolidated Balance Sheet Data (in thousands): |
||||||||||||||||||||
Cash and cash equivalents |
$ | 76,082 | $ | 15,061 | $ | 192,791 | $ | 188,892 | $ | 64,644 | ||||||||||
Short-term investments in marketable
securities |
151,696 | 10,337 | 9,850 | 4,999 | 152,703 | |||||||||||||||
Working capital |
254,373 | 46,937 | 217,882 | 206,059 | 235,168 | |||||||||||||||
Long-term investments in marketable securities |
111,440 | 53,582 | 3,657 | 54,609 | 4,354 | |||||||||||||||
Total assets |
589,883 | 309,088 | 328,426 | 369,440 | 349,059 | |||||||||||||||
Convertible senior notes |
200,000 | | | | | |||||||||||||||
Total liabilities |
298,403 | 72,423 | 55,230 | 52,940 | 48,270 | |||||||||||||||
Total shareholders equity |
291,480 | 236,665 | 273,196 | 316,500 | 300,789 |
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of many factors. The consolidated results of operations for
the years ended December 31, 2010, 2009 and 2008 are not necessarily indicative of the results that
may be expected for any future period. The following discussion should be read in conjunction with
the consolidated financial statements and the notes thereto included in Part IV, Item 15 of this
Form 10-K and in conjunction with the Risk Factors included in Part I, Item 1A of this Form 10-K.
Business Overview
We are a leading provider of converged test systems and services for wireless and wired
infrastructures and services. Our hardware and software products allow our customers to test and
measure the performance, functionality, service quality and conformance of wireless and wired
Internet Protocol (IP) equipment and networks, and the applications that run over them. Our
solutions generate, capture, characterize and analyze high volumes of realistic network and
application traffic, identifying problems, assessing performance, ensuring functionality and
interoperability, and verifying conformance to industry specifications. We offer hardware
platforms with interchangeable media interfaces, utilizing a common set of applications,
Application Programming Interfaces (APIs) and automation tools that allow our customers to create
integrated, easy-to-use automated test environments. The networks that our systems analyze
primarily include Ethernet networks operating at speeds of up to 100 Gigabits per second and
wireless networks that carry data traffic over optical fiber, electrical cable and airwaves. We
also offer hardware platforms and equipment that test wireless equipment, especially those
associated with 3G (third generation), 4G (fourth generation) and Long-Term Evolution (LTE)
networks. Customers also use our suite of software applications to test and verify web, Internet,
security and business applications.
Issuance
of Convertible Senior Notes. On December 7, 2010, we completed our offering of $200.0
million in aggregate principal amount of 3.0% Convertible Senior Notes (the Notes) due December
15, 2015. The net proceeds from the offering after deducting debt
issuance costs were $194.0 million,
which we intend to use for general corporate purposes, potential acquisitions and strategic
transactions. See Note 2 to the Consolidated Financial Statements included in this Form 10-K.
Acquisition of Agilent Technologies N2X Data Network Testing Product Line. On October 30,
2009, we completed our acquisition from Agilent Technologies, Inc. (Agilent) of its N2X Data
Network Testing Product Line (N2X) for $42.8 million in cash and the assumption of certain
liabilities of N2X. In return for the consideration paid, we acquired certain assets and
liabilities of N2X, including inventory, accounts receivables, fixed assets, accounts payable,
customer relationships, certain intellectual property rights, and other assets. The N2X products
provide network equipment manufacturers and service providers with solutions to validate the
performance and scalability characteristics of next-generation network equipment for voice, video
and data (multiplay) services. The acquisition was funded from our existing cash and investments.
The results of operations of N2X have been included in the consolidated statements of operations
and cash flows since the date of the acquisition. See Note 3 to the Consolidated Financial
Statements included in this Form 10-K.
Acquisition of Catapult Communications Corporation. On June 23, 2009, we completed our
acquisition of all of the outstanding shares of common stock of Catapult Communications Corporation
(Catapult). Catapult provides advanced wireless test systems to network equipment manufacturers
and service providers worldwide. Catapults 3G and 4G wireless networking test solutions
complement our IP performance test systems and service verification platforms. With this
acquisition, we will be able to broaden our product portfolio and provide a single source solution
for testing converged multiplay IP services over wireless and wireline networks to new and existing
customers. The purchase price for Catapult totaled $106.6 million, or $65.4 million net of
Catapults existing cash and investment balances at the time of the acquisition. The acquisition
was funded from our existing cash and cash equivalents. The results of operations of Catapult have
been included in the consolidated statements of operations and cash flows since the date of the
acquisition. See Note 3 to the Consolidated Financial Statements included in this Form 10-K.
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Revenues. Our revenues are principally derived from the sale and support of our test systems.
Product revenues primarily consist of sales of our hardware and software products. Our service
revenues primarily consist of the provision of post contract customer support and maintenance
(PCS) related to the initial period provided with the product purchase (generally for 90-day or
12-month periods) and separately purchased extended PCS contracts, and to our implied PCS
obligations. Service revenues also include separately purchased extended hardware warranty support
for certain of our products, training and other professional services. PCS on our software
products includes unspecified when and if available software upgrades and customer technical
support services. Our hardware products primarily consist of chassis and interface cards, and
during the three years ended December 31, 2010, our Ethernet interface cards have represented the
majority of our product revenues. In general, our Ethernet interface cards are used to test
equipment and advanced IP services in the core and at the edge of the Internet at network speeds of
up to 100 Gigabits per second. During 2010, we have seen increased sales for our testing solutions
across our Gigabit Ethernet, 10 Gigabit Ethernet and 40/100 Gigabit Ethernet interface cards, with
our 10 Gigabit Ethernet interface cards continuing to be our strongest seller, as our customers
upgraded and added capacity to their test environments. Over the next 12 months, we expect that the
sale of our Ethernet interface cards will continue to represent the majority of our revenues with
10 Gigabit Ethernet interface cards continuing to be our top selling product category. During 2010,
our business stabilized across nearly all of our product categories and our revenues grew
significantly over the revenues generated in 2009. While we were encouraged by our 2010
performance, we remain cautiously optimistic about the extent and length of the economic recovery
and about some of our customers willingness to continue spending at the levels we experienced
during 2010.
Sales to our largest customer accounted for $37.5 million, or 13.5%, of our total revenues in
2010, $27.8 million, or 15.6%, of our total revenues in 2009 and $36.9 million, or 21.0%, of our
total revenues in 2008. To date, we have generated the majority of our revenues from network
equipment manufacturers. While we expect that we will continue to have some customer concentration
for the foreseeable future, we continue to sell our products to a wider variety and increasing
number of customers. To the extent that we develop a broader and more diverse customer base, our
reliance on any one customer or customer type should diminish. From a geographic perspective, our
revenues from sales to customer locations outside of the United States continues to grow,
especially in Europe and the Asia Pacific region. We generated revenues from product shipments and
services to international locations of $136.0 million, or 49.1% of our total revenues, in 2010,
$76.3 million, or 42.9% of our total revenues, in 2009, and $63.0 million, or 35.8% of our total
revenues, in 2008. During 2010, our total revenues generated from international locations
increased both in dollars and as a percentage of revenues when compared to the same periods in 2009
and 2008, respectively, due in part to additional international sales arising from our acquisitions
of Catapult in June 2009 and N2X in October 2009. We intend to continue increasing our sales
efforts internationally with specific focus on Europe and the Asia Pacific region. Looking
forward, we expect our international revenues to be approximately 50% of our total revenues on an
annualized basis.
In some instances our software products may be installed and operated independently from our
hardware products. At other times, our software products are installed on and work with our
hardware products to enhance the functionality of the overall test system. As our software is
generally more than incidental to the sale of our test systems, we recognize revenue by applying
software revenue recognition guidance.
Our test systems are generally fully functional at the time of shipment and do not require us
to perform any significant production, modification, customization or installation after shipment.
As such, revenue from hardware and software product sales to customers, including distributors, is
recognized upon shipment provided that (i) evidence of an arrangement exists, which is typically in
the form of a customer purchase order; (ii) delivery has occurred (i.e., risks and rewards of
ownership have passed to the customer); (iii) the sales price is fixed or determinable; and (iv)
collection is deemed probable.
When sales arrangements involve multiple elements, or multiple products, and we have
vendor-specific objective evidence (VSOE) of fair value for each element in the arrangement, we
recognize revenue based on the relative fair value of all elements within the arrangement. We
determine VSOE based on sales prices charged to customers when the same element is sold separately
or based upon stated substantive PCS renewal rates for certain arrangements. Many of our products,
such as our software products, typically include an initial period (generally 90-day or 12month
periods) of free PCS, which is not sold separately. Accordingly, we are unable to establish VSOE
for these products.
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In cases where VSOE only exists for the undelivered elements such as PCS, we apply the
residual method to recognize revenue. Under the residual method, the total arrangement fee is
allocated first to the undelivered elements, typically PCS, based on their VSOE, and the residual
portion of the fee is allocated to the delivered elements, typically our hardware and software
products, and is recognized as revenue assuming all other revenue recognition criteria as described
above have been met.
If VSOE cannot be determined for all undelivered elements of an arrangement, we defer revenue
until the earlier of (i) the delivery of all elements or (ii) the establishment of VSOE for all
undelivered elements, provided that if the only undelivered element is PCS or a service, the total
arrangement fee is recognized as revenue over the PCS or service term.
Services revenues from our initial and separately purchased extended PCS arrangements
(generally offered for 12-month periods) are recognized ratably over the contractual coverage
period. In addition, for implied PCS obligations we defer revenues from product sales and allocate
these amounts to PCS revenues to account for the circumstances in which we provide PCS after the
expiration of the customers contractual PCS period. Deferred revenues for these implied PCS
obligations are recognized ratably over the implied PCS period, which is typically based on the
expected economic life of our software products of four years. To the extent we determine that
implied PCS is no longer being provided after the expiration of the customers contractual PCS
period, the remaining deferred revenue balance related to the implied PCS obligation is reversed
and recognized as revenue in the period of cessation of the implied PCS obligation.
Revenues from our separately purchased extended hardware warranty arrangements are recognized
ratably over the contractual coverage period. We recognize revenues from training and other
professional services at the time the services are provided or completed, as applicable.
We use distributors to complement our direct sales and marketing efforts in certain
international markets. Due to the broad range of features and options available with our hardware
and software products, distributors generally do not stock our products and typically place orders
with us after receiving an order from an end customer. These distributors receive business terms
of sale generally similar to those received by our other customers.
Stock-Based Compensation. Share-based payments, including grants of stock options, restricted
stock units and employee stock purchase rights, are required to be recognized in the financial
statements based on the estimated fair values for accounting purposes on the grant date. We use
the Black-Scholes option pricing model to estimate the fair value for accounting purposes of our
share-based awards. The determination of the fair value for accounting purposes of share-based
awards using the Black-Scholes model is affected by our stock price and a number of assumptions,
including expected volatility, expected life and risk-free interest rate. The expected life and
expected volatility are estimated based on historical data. The risk-free interest rate assumption
is based on observed interest rates appropriate for the terms of our share-based awards.
Stock-based compensation expense recognized in our consolidated financial statements is based on
awards that are ultimately expected to vest. The amount of stock-based compensation expense is
reduced for estimated forfeitures based on historical experience as well as future expectations.
Forfeitures are required to be estimated at the time of grant and revised, if necessary, in
subsequent periods if estimated and actual forfeitures differ from these initial estimates. We
evaluate the assumptions used to value share-based awards on a periodic basis. If factors change
and we employ different assumptions, stock-based compensation expense may differ significantly from
what we have recorded in the past. If there are any modifications or cancellations of the
underlying unvested securities, we may be required to accelerate, increase or cancel any remaining
unrecognized stock-based compensation expense. Consistent with our past practice, we attribute the
value of stock-based compensation to expense based on the graded, or accelerated multiple-option,
approach.
We have outstanding share-based awards that have performance-based vesting conditions. Awards
with performance-based vesting conditions require the achievement of certain financial or other
performance criteria as a condition to the vesting. We recognize the estimated fair value of
performance-based awards, net of estimated forfeitures, as stock-based compensation expense over
the performance period, using graded approach, based upon our determination of whether it is
probable that the performance targets will be achieved. At each reporting period,
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we reassess the probability of achieving the performance criteria and the performance period
required to meet those targets. Determining whether the performance criteria will be achieved
involves judgment, and the estimate of stock-based compensation expense may be revised periodically
based on changes in the probability of achieving the performance criteria. Revisions are reflected
in the period in which the estimate is changed. If performance goals are not met, no stock-based
compensation expense is recognized, and, to the extent stock-based compensation was previously
recognized, such stock-based compensation is reversed.
For the years ended December 31, 2010, 2009 and 2008, stock-based compensation expense was
$12.9 million, $10.5 million and $10.6 million, respectively. Our stock-based compensation expense
increased for the year ended December 31, 2010 as compared to the comparable prior period in 2009
due in part to (i) the incremental impact of the share-based awards granted to the employees
related to our 2009 acquisitions of Catapult and N2X, (ii) a decrease in estimated and actual
forfeitures, and (iii) the increase in the price of our common stock and weighted grant date fair
values for new awards in 2010 when compared to 2009. The aggregate balance of gross unrecognized
stock-based compensation to be expensed in the years 2011 through 2014 related to unvested
share-based awards as of December 31, 2010 was approximately $18.0 million. To the extent that we
grant additional share-based awards, future expense may increase by the additional unearned
compensation resulting from those grants. We anticipate that we will continue to grant additional
share-based awards in the future as part of our long-term incentive compensation programs. The
impact of future grants cannot be estimated at this time because it will depend on a number of
factors, including the amount of share-based awards granted and the then current fair values of
such awards for accounting purposes.
Cost of Revenues. Our cost of revenues related to the sale of our hardware and software
products includes materials, payments to third party contract manufacturers, royalties, and
salaries and other expenses related to our manufacturing and supply operations, technical support
and professional service personnel. We outsource the majority of our manufacturing operations, and
we conduct supply chain management, quality assurance, documentation control, shipping and some
final assembly and testing at our facility in Calabasas, California and/or in Penang, Malaysia.
Accordingly, a significant portion of our cost of revenues related to our products consists of
payments to our contract manufacturers. Cost of revenues related to the provision of services
includes salaries and other expenses associated with technical support services, professional
services and the warranty cost of hardware that is replaced or repaired during the warranty
coverage period. Cost of revenues does not include the amortization of purchased technology
related to our acquisitions of certain businesses, product lines and technologies of $12.8 million,
$9.2 million and $4.8 million for the years ended December 31, 2010, 2009 and 2008, respectively,
which are included within our Amortization of Intangible Assets line item on our consolidated
statements of operations.
Our cost of revenues as a percentage of total revenues is primarily affected by the following
factors:
| our pricing policies and those of our competitors; | ||
| the pricing we are able to obtain from our component suppliers and contract manufacturers; | ||
| the mix of customers and sales channels through which our products are sold; | ||
| the mix of our products sold, such as the mix of software versus hardware product sales; | ||
| new product introductions by us and by our competitors; | ||
| demand for and quality of our products; and | ||
| production volume. |
In the near term, although we anticipate that our cost of revenues as a percentage of total
revenues will remain relatively flat, we expect to continue to experience pricing pressure on
larger transactions and from larger customers as a result of competition.
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Operating Expenses. Our operating expenses are generally recognized when incurred and consist
of research and development, sales and marketing, general and administrative, amortization of
intangible assets, acquisition and other related costs and restructuring expenses. In dollar
terms, we expect total operating expenses, excluding stock-based compensation expense discussed
above and amortization of intangible assets, acquisition and other related and restructuring
expenses discussed below, to increase modestly in 2011 when compared to 2010 to achieve our sales
growth goals and product initiatives.
| Research and development expenses consist primarily of salaries and other personnel costs related to the design, development, testing and enhancement of our products. We expense our research and development costs as they are incurred. We also capitalize and depreciate over a five-year period costs of our products used for internal purposes. |
| Sales and marketing expenses consist primarily of compensation and related costs for personnel engaged in direct sales, sales support and marketing functions, as well as promotional and advertising expenditures. We also capitalize and depreciate over a two-year period costs of our products used for sales and marketing activities, including product demonstrations for potential customers. |
| General and administrative expenses consist primarily of salaries and related expenses for certain executive, finance, legal, human resources, information technology and administrative personnel, as well as professional fees (e.g., legal and accounting), facility costs related to our corporate headquarters, insurance costs and other general corporate expenses. |
| Amortization of intangible assets consists of the amortization of the purchase price of the various intangible assets over their estimated useful lives. Periodically we review goodwill and other intangible assets for impairment. An impairment charge would be recorded to the extent that the carrying value exceeds its estimated fair value in the period that the impairment circumstances occurred. The future amortization of acquired intangible assets depends on a number of factors, including the extent to which we acquire additional businesses, technologies or product lines, or if we are required to record impairment charges related to our acquired intangible assets. See Note 8 to the Consolidated Financial Statements included in this Form 10-K. |
| Acquisition and other related costs are expensed as incurred and consist primarily of transaction and integration related costs such as success-based banking fees, professional fees for legal, accounting, tax, due diligence, valuation and other related services, change in control payments, consulting fees, required regulatory costs, certain employee, facility and infrastructure transition costs, and other related expenses. We expect our acquisition and other related expenses to fluctuate over time based on the timing of our acquisitions and related integration activities. |
| Restructuring expenses consist primarily of employee severance costs and related charges, as well as facility-related charges to exit certain locations. |
Interest income and other, net represents interest on cash and a variety of securities,
including money market funds, U.S. government and government agency debt securities, corporate debt
securities and auction rate securities, realized gains/losses on the sale of investment securities,
certain foreign currency gains and losses, and other non-operating items such as legal settlement
proceeds.
Interest expense consists of interest due to the holders of our 3.00% convertible senior notes
issued in December 2010, as well as the amortization of the associated debt issuance costs. See
Note 2 to the Consolidated Financial Statements included in this Form 10-K.
Income Tax is determined based on the amount of earnings and enacted federal, state and
foreign tax rates, adjusted for allowable credits and deductions, and for other effects of equity
compensation plans. Our income tax provision may be significantly affected by changes to our
estimates for tax in jurisdictions in which we operate and other estimates utilized in determining
the global effective tax rate. Actual results may also differ from our estimates based on changes
in economic conditions. Such changes could have a substantial impact on the income tax
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provision. Our income tax provision could also be significantly impacted by estimates
surrounding our uncertain tax positions and the recording of valuation allowances against certain
deferred tax assets and changes to these valuation allowances in future periods. We reevaluate the
judgments surrounding our estimates and make adjustments as appropriate each reporting period.
Critical Accounting Policies and Estimates
Managements discussion and analysis of financial condition and results of operations is based
upon our consolidated financial statements which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue
recognition, allowance for doubtful accounts, write-downs for obsolete inventory, income taxes,
acquisition purchase price allocation, impairments of long-lived assets and marketable securities,
stock-based compensation, and contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ materially from these estimates.
We apply the following critical accounting policies in the preparation of our consolidated
financial statements:
| Revenue Recognition Policy. We recognize revenue as discussed in Revenues in the Business Overview section of Item 7. |
| Acquisition Purchase Price Allocation. When we acquire a business, product line or rights to a product or technology, we allocate the purchase price to the various tangible and intangible assets acquired and the liabilities assumed, based on their estimated fair values. Determining the fair value of certain assets and liabilities acquired is subjective in nature and often involves the use of significant estimates and assumptions, some of which may be based in part on historical experience and information obtained from the management of the acquired business, and are inherently uncertain. Many of the estimates and assumptions used to determine fair values, such as those for purchased technologies and customer relationships, are made based on forecasted information and discount rates. To assist in the purchase price allocation process, as well as the determination of estimated useful lives of acquired intangible assets, we may obtain appraisals from valuation specialists. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates and assumptions. |
| Write-Down of Obsolete Inventory. We write down inventory for estimated obsolescence, excessive quantities or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand is less favorable than our initial estimate, additional inventory write-downs may be required. Once written down, the reserves are not reversed until inventory is sold or disposed of. |
| Income Taxes. We operate in numerous states and countries through our various subsidiaries, and must allocate our income, expenses, and earnings under the various laws and regulations of each of these taxing jurisdictions. Accordingly, our provision for income taxes represents our total estimate of the liability that we have incurred in doing business each year in all of our locations. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. In determining whether we need to record a valuation allowance against our deferred tax assets, management must make a number of estimates, assumptions and judgments, including estimates of future earnings and taxable income. We establish a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized. The determination to record or release valuation allowance requires significant judgment. During 2010 and 2009, we concluded that a full valuation allowance against our net U.S. deferred tax assets was |
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warranted due to, among other reasons, (i) the recently realized cumulative accounting losses sustained in the U.S., (ii) the taxable losses incurred in the U.S. in 2010 and 2009 and (iii) our uncertainty with respect to generating future U.S. taxable income in the near term given our recently completed U.S. projections and a number of inherent uncertainties such as the future level of U.S. tax deductions from our share-based awards. To the extent these circumstances change we may need to release the valuation allowance. |
Annually, we file tax returns that represent our filing positions with each jurisdiction and settle our return liabilities. Each jurisdiction has the right to audit those returns and may take different positions with respect to income and expense allocations and taxable earnings determinations. We may provide for estimated liabilities in our consolidated financial statements associated with uncertain tax return filing positions that are subject to audit by various tax authorities. Because the determinations of our annual provisions are subject to assumptions, judgments and estimates, it is likely that actual results may vary from those recognized in our consolidated financial statements. As a result, additions to, or reductions of, income tax expense will occur each year for prior reporting periods as our estimates or judgments change, or as actual tax returns and tax audits are settled. We recognize any such prior year adjustment in the discrete quarterly period in which it is determined. |
| Impairment of Long-Lived Assets. We evaluate our identifiable definite life intangible assets and other long-lived assets for impairment, when events or changes in circumstances indicate that a potential impairment may exist. We first estimate the undiscounted cash flows to be generated from the use and ultimate disposition of the applicable asset. To the extent that the estimated undiscounted cash flows fall below the carrying value of the related intangible or other long lived asset, we write-down the asset to its estimated fair value. Fair value is generally determined based on discounted cash flows. Determining the fair value based on discounted cash flows is subjective in nature and often involves the use of significant estimates and assumptions about future results and discount rates. We evaluate the recoverability of our goodwill on an annual basis or if events or changes in circumstances indicate that an impairment in the value of goodwill recorded on our balance sheet may exist. Impairment losses are recorded to the extent that the carrying value of the goodwill exceeds its estimated fair value. We completed our annual goodwill impairment test of our single reporting unit in the fourth quarter of 2010 and determined that there was no impairment. |
| Stock-Based Compensation. We record stock-based compensation as discussed in Stock-based Compensation in the Business Overview section of Item 7. |
| Impairment of Marketable Securities. We periodically review our marketable securities for impairment. If we conclude that any of our investments are impaired, we determine whether such impairment is other-than-temporary. Factors we consider to make such a determination include, among others, the severity of the impairment, the reason for the decline in value and the potential recovery period. If any impairment is considered other-than-temporary, we write down the asset to its fair value and take a charge to earnings for the portion of the write-down related to credit losses with the balance, if any, recorded to other comprehensive income. |
| Contingencies and Litigation. We evaluate contingent liabilities, including threatened or pending litigation, and record accruals when the loss is deemed probable and the liability can reasonably be estimated. We make these assessments based on the facts and circumstances of each situation and in some instances based in part on the advice of outside legal counsel. |
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Results of Operations
The following table sets forth certain statement of operations data as a percentage of total
revenues for the periods indicated:
2010 | 2009 | 2008 | |||||||||||
Revenues: |
|||||||||||||
Products |
82.3 | % | 80.3 | % | 83.5 | % | |||||||
Services |
17.7 | 19.7 | 16.5 | ||||||||||
Total revenues |
100.0 | 100.0 | 100.0 | ||||||||||
Costs and operating expenses: (1) |
|||||||||||||
Cost of revenues products |
19.6 | 20.6 | 18.4 | ||||||||||
Cost of revenues services |
2.3 | 2.2 | 2.5 | ||||||||||
Research and development |
26.2 | 30.3 | 28.0 | ||||||||||
Sales and marketing |
28.9 | 33.9 | 33.8 | ||||||||||
General and administrative |
12.7 | 15.7 | 14.6 | ||||||||||
Amortization of intangible assets |
6.3 | 6.4 | 3.2 | ||||||||||
Acquisition and other related |
1.1 | 3.5 | 0.8 | ||||||||||
Restructuring |
1.3 | 2.6 | | ||||||||||
Total costs and operating expenses |
98.4 | 115.2 | 101.3 | ||||||||||
Income (loss) from operations |
1.6 | (15.2 | ) | (1.3 | ) | ||||||||
Interest income and other, net |
3.9 | 1.2 | 3.7 | ||||||||||
Interest expense |
(0.2 | ) | | | |||||||||
Other-than-temporary impairment on investments |
| (1.6 | ) | (11.4 | ) | ||||||||
Income (loss) before income taxes |
5.3 | (15.6 | ) | (9.0 | ) | ||||||||
Income tax expense |
1.3 | 9.2 | | ||||||||||
Net income (loss) |
4.0 | % | (24.8 | )% | (9.0 | )% | |||||||
(1) Stock-based compensation included in: |
|||||||||||||
Cost of revenues products |
0.2 | % | 0.3 | % | 0.3 | % | |||||||
Cost of revenues services |
0.1 | 0.1 | 0.1 | ||||||||||
Research and development |
1.9 | 2.5 | 2.4 | ||||||||||
Sales and marketing |
1.3 | 1.7 | 1.9 | ||||||||||
General and administrative |
1.2 | 1.3 | 1.3 |
Comparison of the Years Ended December 31, 2010 and 2009
As a result of our acquisitions of Catapult Communications Corporation (Catapult) on June
23, 2009 and of the N2X Data Network Testing Product Line business (N2X) of Agilent Technologies,
Inc. on October 30, 2009 (collectively the 2009 Acquisitions), our 2010 consolidated results of
operations include the results of these operations. Our consolidated results of operations include
the results of operations of our 2009 Acquisitions from the respective acquisition dates. The
integration of Catapult and its processes was substantially completed as of December 31, 2009,
while the integration activities with respect to N2X were substantially completed as of September
30, 2010. To assist the readers of our financial statements in reviewing our year over year
consolidated operating results, we have estimated the impacts of the 2009 Acquisitions in the
statement of operations sections below, although some activities cannot be reasonably extracted and
identified as either a Catapult or N2X activity. Revenues and expenses attributable to our 2009
Acquisitions generally increased (other than general and administrative expenses) in the current
year as compared to the prior year primarily as a result of 2010 representing a full year of
acquisition related revenues and expenses. General and administrative expenses declined over the
same time period as a result of operational synergies and the Catapult restructuring.
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Revenues. In 2010, total revenues increased 55.5% to $276.8 million from $178.0 million in
2009. As a result of our 2009 Acquisitions, revenues for 2010 and 2009 included $70.0 million and
$24.1 million, respectively, of revenue related to the 2009 Acquisitions. Excluding the revenues
from our 2009 Acquisitions, the increase in total revenues was principally due to a $44.1 million
increase in shipments of our hardware products (primarily our 10 Gigabit and 40/100 Gigabit
Ethernet interface cards) in 2010 over 2009 and a $7.9 million increase in shipments of our
software products (primarily our IxLoad and IxNetwork software products) in 2010 over 2009.
Cost of Revenues. As a percentage of total revenues, our total cost of revenues decreased by
0.9% to 21.9% in 2010 from 22.8% in 2009. This was primarily due to certain inventory-related
charges aggregating $1.6 million for slow moving and excess inventory that were incurred in 2009
that did not recur in the 2010 period.
Research and Development Expenses. In 2010, research and development expenses increased 34.3%
to $72.5 million from $54.0 million in 2009. As a result of our 2009 Acquisitions, our research and
development expenditures in 2010 and 2009 included approximately $21.1 million and $8.5 million,
respectively, related to the research and development activities of the acquired operations.
Excluding the incremental research and development costs related to the 2009 Acquisitions, research
and development expenses in 2010 were $51.4 million compared to $45.5 million in 2009. This
increase was primarily due to an increase in compensation and related employee costs, including
travel, of $4.8 million. The increase in compensation and related employee costs was primarily due
to the reinstatement of our company-wide bonus plan in 2010.
Sales and Marketing Expenses. In 2010, sales and marketing expenses increased 32.5% to $80.0
million from $60.4 million in 2009. As a result of our 2009 Acquisitions, our sales and marketing
costs in 2010 and 2009 included approximately $21.9 million and $8.6 million, respectively, related
to the sales and marketing activities of the acquired operations. Excluding the incremental sales
and marketing costs related to the 2009 Acquisitions, sales and marketing expense in 2010 increased
to $58.1 million from $51.8 million in 2009 principally due to an increase in compensation and
related employee costs, including travel, of $6.2 million. The increase in compensation and
related employee costs was primarily due to higher sales commissions as revenue levels increased in
2010 over the prior year.
General and Administrative Expenses. In 2010, general and administrative expenses increased
25.2% to $35.1 million from $28.1 million in 2009. As a result of our 2009 Acquisitions, our
general and administrative costs in 2010 and 2009 included approximately $0.9 million and $2.9
million, respectively, of general and administrative costs of the acquired operations. Excluding
the incremental general and administrative costs related to the 2009 Acquisitions, general and
administrative expenses in 2010 were $34.2 million compared to $25.2 million in 2009. The increase
was primarily due to an increase in compensation and related employee costs of $4.1 million, higher
legal fees and expenses of $1.2 million and an increase in stock-based compensation expense of $1.0
million. The increase in compensation and related employee costs was primarily due to the
reinstatement of our company-wide bonus plan in 2010.
Amortization of Intangible Assets. In 2010, amortization of intangible assets increased to
$17.5 million from $11.4 million in 2009. The increase primarily related to the incremental
amortization of intangibles related to our 2009 Acquisitions, partially offset by the completion of
amortization periods for certain intangible assets.
Acquisition and Other Related Expenses. Acquisition and other related expenses for 2010 and
2009 were $3.0 million and $6.2 million, respectively. For 2010, acquisition and other related
expenses consisted primarily of employee, facility and infrastructure transition costs, as well as
professional fees attributable to our 2009 Acquisitions. For 2009, acquisition and other related
expenses consisted primarily of success-based banking fees and professional fees. For additional
information, see Note 3 to Consolidated Financial Statements.
Restructuring. Restructuring expenses for 2010 and 2009 were $3.6 million and $4.6 million,
respectively. Restructuring expenses in 2009 relate to the Ixia and Catapult restructuring plans,
which were substantially completed in 2009, and the restructuring expenses in 2010 primarily relate
to the N2X restructuring plan, which was substantially completed in the first quarter of 2010. For
additional information, see Note 4 to Consolidated Financial Statements.
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Interest Income and Other, Net. Interest and other income, net increased to $11.0 million in
2010 from $2.2 million in 2009. This increase was due to an $8.9 million favorable settlement with
a former investment manager in the first quarter of 2010 related to our purchase in prior periods
of certain investments in auction rate securities with an aggregate par value of $19.0 million that
had been substantially written down and due to approximately $1.0 million of proceeds received in
the fourth quarter of 2010 for the sale of certain of these auction rate securities that were
previously written off.
Interest expense. Interest expense for 2010 was $480,000, including the amortization of debt
issuance costs, and related to convertible senior notes issued during December 2010. There was no
interest expense in 2009. For additional information, see Note 2 to Consolidated Financial
Statements.
Other-than-temporary Impairment on Investments. For 2009, other-than-temporary impairments on
investments totaled $2.8 million. When, in the opinion of management, a decline in the fair value
of an investment is considered to be other-than -temporary, such investment is written down to its
fair value. During 2009, other-than-temporary impairments on investments included impairment
charges of $2.8 million (pre-tax) to earnings related to our illiquid auction rate securities.
There were no such charges for 2010. For additional information, see Note 6 to Consolidated
Financial Statements.
Income Tax Expense. Income tax expense decreased to $3.7 million, or an effective rate of
24.6%, in 2010 from $16.4 million, or an effective rate of -59.0%, in 2009. The decrease in our
overall tax expense was primarily due to the establishment of a full valuation allowance during
2009.
Our effective tax rate differs from the federal statutory rate due to state taxes and
significant permanent differences. Significant permanent differences arise due to research and
development credits and stock-based compensation expense that is not expected to generate a tax
deduction, such as stock-based compensation expense on grants to foreign employees, offset by tax
benefits from disqualifying dispositions. For additional information, see Note 9 to Consolidated
Financial Statements.
Realization of our deferred tax assets is dependent primarily on the generation of future
taxable income. In considering the need for a valuation allowance we consider our historical, as
well as future projected taxable income along with other objectively verifiable evidence.
Comparison of the Years Ended December 31, 2009 and 2008
As a result of our 2009 Acquisitions, our 2009 consolidated results of operations include the
results of Catapult and N2X from their respective acquisition dates. To assist the readers of our
financial statements in reviewing our year over year consolidated operating results, we have
estimated the impacts of the 2009 Acquisitions in the related statement of operations sections
below.
Revenues. In 2009, total revenues increased 1.2% to $178.0 million from $175.9 million in
2008. As a result of our 2009 Acquisitions, revenues for 2009 included $24.1 million of revenue
related to the 2009 Acquisitions. Revenues from products decreased to $142.9 million in 2009 from
$146.8 million in 2008. Excluding the product revenues from our 2009 Acquisitions of approximately
$19.2 million, the decrease in product revenue was primarily due to a $20.1 million decrease in
shipments of our hardware products (primarily our Ethernet interface cards) in 2009 over 2008 and
by a $2.3 million decrease in shipments of our software products (primarily our IxLoad and
IxChariot software products) in 2009 over 2008. Excluding the service revenues from our 2009
Acquisitions of approximately $4.9 million, service revenues increased $1.2 million in 2009
compared to 2008 primarily due to a net increase in the ratable recognition of our PCS arrangements
and extended warranty contracts. In 2009, total revenues from Cisco Systems, our largest account,
decreased to $27.8 million, or 15.6% of our total revenue, from $36.9 million, or 21.0% of our
total revenue, in 2008.
Cost of Revenues. As a percentage of total revenues, our total cost of revenues increased to
22.8% in 2009 from 20.9% in 2008. Our 2009 cost of revenues included approximately $5.3 million of
cost of goods sold attributable to our 2009 Acquisitions. Excluding the cost of product revenues of
approximately $4.4 million related to our 2009 Acquisitions, our cost of product revenues decreased
to $32.3 million in 2009 from $32.4 million in 2008 primarily
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due to the decrease in the costs of product shipped of approximately $2.2 million attributable
to the decline in product revenues, partially offset by higher royalty payments of $1.4 million and
higher inventory related charges for slow moving and excess inventory. Excluding the cost of
service revenues of approximately $844,000 related to our 2009 Acquisitions, our cost of service
revenues decreased to $3.0 million in 2009 from $4.5 million in 2008 primarily due to a decline in
technical support costs, including warranty expenses, of approximately $1.1 million.
Research and Development Expenses. In 2009, research and development expenses increased 9.8%
to $54.0 million from $49.2 million in 2008. As a result of our 2009 Acquisitions, our research and
development expenditures in 2009 included approximately $8.5 million related to the research and
development activities of the acquired operations. Excluding the incremental research and
development costs related to the 2009 Acquisitions, the decrease in research and development
expenses in 2009 as compared to 2008 was primarily due to lower compensation and related employee
costs, including travel, of $4.4 million. The decrease in compensation and related employee costs
was primarily due to the elimination of our company-wide bonus plan in 2009, lower compensation due
to the Ixia Restructuring announced in the second quarter of 2009 and favorable foreign currency
exchange rates, particularly in Romania and India where the local currencies weakened against the
U.S. Dollar in 2009 as compared to 2008. These expense decreases were partially offset by higher
consulting costs of $1.2 million (primarily in India and the United States) in 2009 compared to
2008.
Sales and Marketing Expenses. In 2009, sales and marketing expenses increased 1.7% to $60.4
million from $59.4 million in 2008. As a result of our 2009 Acquisitions, our sales and marketing
costs in 2009 included approximately $8.6 million related to these acquisitions. Excluding the
incremental sales and marketing costs related to the 2009 Acquisitions, the decrease of $7.6
million was primarily due to lower compensation and related employee costs, including travel, of
$5.0 million, lower facilities and depreciation costs of $1.3 million and lower training and
marketing programs of $705,000. The decrease in compensation and related employee costs in 2009 as
compared to the same period of 2008 was primarily due to lower commissions related to the year over
year decline in sales, the Ixia Restructuring announced in the second quarter of 2009 and the
elimination of our company-wide bonus plan in 2009.
General and Administrative Expenses. In 2009, general and administrative expenses increased
10.0% to $28.1 million from $25.5 million in 2008. As a result of our 2009 Acquisitions, our
general and administrative costs in 2009 included approximately $2.9 million related to these
acquisitions. Excluding the incremental general and administrative costs related to the 2009
Acquisitions, the decrease of $316,000 was primarily due to lower compensation and related employee
costs, including travel, of $986,000, lower recruiting fees of $559,000 and lower facilities and
depreciation costs of $471,000, partially offset by higher legal fees and expenses of $1.5 million
related primarily to litigation. The decrease in compensation and related employee costs in 2009 as
compared to the same period of 2008 was primarily due to the elimination of our company-wide bonus
plan in 2009.
Amortization of Intangible Assets. In 2009, amortization of intangible assets increased to
$11.4 million from $5.7 million in 2008. The increase primarily related to the incremental
amortization of intangibles related to our 2009 Acquisitions, partially offset by the completion of
amortization periods for certain intangible assets.
Acquisition and Other Related Expenses. Acquisition related expenses for 2009 and 2008 were
$6.2 million and $1.5 million, respectively. Acquisition related expenses incurred in 2009
increased over the same periods in 2008 primarily due to our acquisitions of Catapult in June 2009
and N2X in October 2009. As a result of our
adoption of the new accounting guidance for business combinations on January 1, 2009,
acquisition-related costs in 2009 were expensed rather than capitalized and treated as part of the
applicable purchase price. Acquisition costs expensed in 2008 related to transactions that were not
consummated as of December 31, 2008. For additional information, see Note 3 to Consolidated
Financial Statements.
Restructuring. Restructuring expenses for 2009 were $4.6 million and consisted primarily of
employee severance costs related to the Ixia Restructuring initiated during the second quarter of
2009 and the Catapult Restructuring initiated during the third quarter of 2009. There were no
restructuring expenses incurred in 2008. The Ixia Restructuring included a net reduction in force
of approximately 80 positions, which represented approximately 10% of our worldwide work force,
including contractors, prior to the announcement of the restructuring. The Catapult Restructuring
included a net reduction in force of approximately 45 positions, which represented
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approximately 4% of our worldwide work force, including contractors, prior to the announcement
of the restructuring.
In January 2010, our management approved, committed to and initiated a plan to restructure our
operations in light of our acquisition of N2X in the fourth quarter of 2010 (N2X Restructuring).
The N2X Restructuring included a net reduction in force of approximately 80 positions, which
represented approximately 7% of our worldwide work force, including contractors, at the end of the
fourth quarter of 2009. During 2010, we recorded restructuring charges for severance and other
related costs of $3.6 million on a pre-tax basis related to the N2X Restructuring.
Interest Income and Other, Net. Interest and other income, net decreased to $2.2 million in
2009 from $6.6 million in 2008. This decrease was primarily due to lower average cash and
investment balances in the aggregate and lower effective yields in 2009 compared to 2008. The lower
average cash and investment balance in the aggregate was primarily due to the payments for our 2009
Acquisitions.
Other-than-temporary Impairment on Investments. For 2009 and 2008, other-than-temporary
impairments on investments were $2.8 million and $20.2 million, respectively. When, in the opinion
of management, a decline in the fair value of an investment is considered to be
other-than-temporary, such investment is written down to its fair value. During 2009,
other-than-temporary impairments on investments included impairment charges of $2.8 million
(pre-tax) to earnings related to our illiquid auction rate securities (ARS). During 2008,
other-than-temporary impairments on investments included impairment charges of $15.8 million
(pre-tax) to earnings related to our ARS and an impairment charge of $4.4 million (pre-tax) to
earnings related to our investments in bonds issued by Lehman Brothers Holdings, Inc. As of
December 31, 2009, the estimated fair values of our ARS approximated $5.7 million. See Note 6 to
Consolidated Financial Statements.
Income Tax Expense. Income tax expense increased to $16.4 million, or an effective rate of
-59.0%, in 2009 from $21,000, or an effective rate of -0.1%, in 2008. The increase in our overall
tax expense was primarily due to the detriment associated with recording a full valuation allowance
against our net U.S. deferred tax assets.
Our effective tax rate differs from the federal statutory rate due to state taxes, significant
permanent differences and the change in our valuation allowance on our net U.S. deferred tax
assets. Significant permanent differences arise due to research and development credits and stock
based compensation expense that is not expected to generate a tax deduction, such as stock
compensation expense on grants to foreign employees, offset by tax benefits in the current period
from disqualifying dispositions.
Realization of our deferred tax assets is dependent primarily on the generation of future
taxable income. In considering the need for a valuation allowance we consider our historical, as
well as future projected taxable income along with other objectively verifiable evidence.
During 2009, management evaluated the need for a valuation allowance against our net U.S.
deferred tax assets and concluded that a full valuation allowance against our net U.S. deferred tax
assets was warranted in the fourth quarter of 2009 due to, among other reasons, (i) the recently
realized cumulative accounting losses sustained in the U.S., (ii) the recently completed three-year
projections in which we expect to realize additional accounting losses in the U.S., (iii) the
determination that we would be in a U.S. taxable loss position in 2009 and (iv) our uncertainty
with respect to generating future U.S. taxable income in the near term given our recently completed
U.S. projections and a number of inherent uncertainties such as the future level of U.S. tax
deductions from our share-based awards. As a result, a non-cash income tax charge of $28.1 million
was recorded to increase our valuation allowance in 2009. During 2008, we recorded an $8.1 million
valuation allowance to fully offset the deferred tax assets primarily related to the unrealized
loss recorded as a result of the impairment of certain marketable securities. See Note 9 to
Consolidated Financial Statements.
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Liquidity and Capital Resources
We have funded our operations with our cash balances, cash generated from operations and
proceeds from our initial public offering, from our convertible debt offering and from stock option
exercises. The following table sets forth our cash and short- and long-term investments as of
December 31, 2010, 2009 and 2008 (in thousands):
As of December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Cash and cash equivalents |
$ | 76,082 | $ | 15,061 | $ | 192,791 | ||||||
Short-term marketable securities |
151,696 | 10,337 | 9,850 | |||||||||
Long-term marketable securities |
111,440 | 53,582 | 3,657 | |||||||||
$ | 339,218 | $ | 78,980 | $ | 206,298 | |||||||
Our cash, cash equivalents and short- and long-term investments, when viewed as a whole,
increased to $339.2 million as of December 31, 2010 from $79.0 million as of December 31, 2009
primarily due to (i) $194.0 million of net proceeds received from the issuance of convertible
senior notes in December 2010, (ii) $50.4 million in net cash provided by our operating activities
and (iii) $28.3 million cash generated from exercises of share-based awards. Our cash, cash
equivalents and short- and long-term investments, when viewed as a whole, decreased to $79.0
million as of December 31, 2009 from $206.3 million as of December 31, 2008 primarily due to
payments in connection with acquisitions, net of cash acquired, of $122.4 million and the
repurchase of $8.4 million of our common stock pursuant to our stock buyback programs.
As of December 31, 2010, 2009 and 2008, we held investments in illiquid auction rate
securities with estimated fair values of $5.3 million, $5.7 million and $3.2 million, respectively
(See Note 6 to Consolidated Financial Statements).
The following table sets forth our summary cash flows for the years ended December 31, 2010,
2009 and 2008 (in thousands):
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Cash provided by (used in) operating activities |
$ | 50,429 | $ | (4,725 | ) | $ | 24,335 | |||||
Cash (used in) provided by investing activities |
(213,789 | ) | (168,005 | ) | 19,082 | |||||||
Cash provided by (used in) financing activities |
224,381 | (5,000 | ) | (39,518 | ) |
Cash Flows from Operating Activities
Operating cash inflows are principally provided by cash collections on sales to our customers.
Our primary uses of cash from operating activities are for personnel-related expenditures, product
costs and facility-related payments. Going forward, our cash flows from operating activities will
be impacted by (i) the extent to which we grow our customer sales, (ii) increase our headcount and
enhance our infrastructure to generate additional business, develop new products and features and
to support our growth, (iii) by our working capital management, and (iv) interest paid to service
our convertible senior notes (See Note 2 to Consolidated Financial Statements).
Cash provided by operating activities was $50.4 million for the year ended December 31, 2010
compared to cash used in operating activities of $4.7 million for the year ended December 31, 2009.
This increase in cash flow generated from operations was primarily due to better overall net
operating results in 2010 as compared to 2009 as earnings increased by $55.4 million in 2010 when
compared to 2009 driven by our 56% sales growth in 2010 over
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2009. Our 2010 earnings growth over 2009 was also due to the $8.9 million receipt of
settlement proceeds from a former investment manager in the first quarter of 2010 related to our
previous purchase of certain investments in auction rate securities.
Cash used in operating activities was $4.7 million for the year ended December 31, 2009
compared to cash provided by operating activities of $24.3 million for the year ended December 31,
2008. This decline in cash flow generated from operations was primarily due to (i) a $14.3 million
increase of net working capital changes in 2009 when compared to 2008 that adversely impacted cash
flow due in part to an $11.8 million increase in accounts receivable as of December 31, 2009 when
compared to December 31, 2008 related to an increased amount of shipments at the end of 2009 when
compared to the end of 2008, and (ii) an increase of approximately $9.0 million of restructuring
and acquisition and other related costs in 2009 when compared to 2008 due to the acquisitions of
Catapult and N2X, as well as the two restructuring programs implemented during 2009.
Cash Flows from Investing Activities
Our cash inflow from investing activities principally relate to proceeds from the sale and
maturities of our investments in marketable securities. Our primary uses of cash from investing
activities are for payments to acquire products, technologies and businesses, purchases of
marketable security investments and capital expenditures to support our growth. Going forward, we
expect our cash flows from investing activities to fluctuate based on the number of product,
technology and/or business acquisitions we close using cash, if any, and the timing of our sales,
maturities and purchases of marketable securities.
Cash used in investing activities was $213.8 million and $168.0 million for the years ended
December 31, 2010 and 2009, respectively. This increase in cash flow used in investing activities
was primarily due to (i) a $161.5 million increase in net purchases of marketable securities, as we
invested the proceeds from the December 2010 issuance of our convertible senior notes, and (ii) a
$6.8 million increase in capital expenditures due in part to meet the facility and equipment needs
of our expanded workforce after our 2009 Acquisitions. These increases were partially offset by the
$122.4 million in payments made in connection with our 2009 Acquisitions that did not recur.
Cash used in investing activities was $168.0 million for the year ended December 31, 2009
compared to cash provided by investing activities of $19.1 million for the year ended December 31,
2008. This decline in cash flow provided by investing activities was primarily due to a $120.2
million increase in cash used to acquire businesses in 2009 when compared to 2008 due to the
acquisitions of Catapult and N2X in 2009. In addition, during 2009, $37.2 million of cash was used
for net purchases of marketable securities compared to $30.2 million of net proceeds from
marketable securities in 2008.
Cash Flows from Financing Activities
Prior to December 2010, our cash inflow from financing activities over the past three years
has principally related to proceeds from the exercise of stock options and employee stock purchase
plan options. On December 7, 2010, we raised $194.0 million in net proceeds from the issuance of
convertible senior notes. Our primary uses of cash from financing activities over the past three
years related to the repurchase of our common stock pursuant to approved stock buyback plans.
Going forward, we expect our cash flows from financing activities to fluctuate based on the number
of exercises of share-based awards which is dependent on the performance of our stock price. If
deemed appropriate and approved by our Board of Directors, we may raise additional capital through
a debt or equity financing, refinance our existing debt or initiate further stock buyback programs.
Cash provided by financing activities was $224.4 million for the year ended December 31, 2010
compared to cash used in financing activities of $5.0 million for the year ended December 31, 2009.
This increase in cash flow provided by financing activities was primarily due to (i) $194.0 million
of net proceeds received from the issuance of senior convertible notes during December 2010, (ii) a
$25.0 million increase in proceeds received from exercises of share-based awards and (iii) there
being no stock repurchases in 2010 due to the expiration of our stock buyback plan in May 2009 as
compared to stock repurchases of $8.4 million in 2009 under the stock buyback plan.
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Cash used in financing activities was $5.0 million and $39.5 million for the years ended
December 31, 2009 and 2008, respectively. This decline in cash flow used in financing activities
was primarily due to a $35.2 million decline in stock repurchases in 2009 when compared to 2008.
We believe that our existing balances of cash and cash equivalents, investments and cash flows
expected to be generated from our operations will be sufficient to satisfy our operating
requirements for at least the next twelve months. Nonetheless, we may seek additional sources of
capital as necessary or appropriate to fund acquisitions or to otherwise finance our growth or
operations; however, there can be no assurance that such funds, if needed, will be available on
favorable terms, if at all. In addition, our $200 million convertible senior notes have various
default provisions, which could accelerate repayment and adversely impact our liquidity. Our
access to the capital markets to raise funds, through the sale of equity or debt securities, is
subject to various factors, including the conditions in the U.S. capital markets and the timely
filing of our periodic reports with the Commission.
Financial Commitments
Our significant financial commitments at December 31, 2010 are as follows (in thousands):
Less than | More than | |||||||||||||||||||
Total | 1 year | 1 3 years | 3 5 years | 5 years | ||||||||||||||||
Operating leases (1) |
$ | 16,727 | $ | 6,919 | $ | 9,160 | $ | 648 | $ | | ||||||||||
Purchase obligations (2) |
9,833 | 9,833 | | | | |||||||||||||||
Convertible senior notes
(Principal and Interest)
(3) |
230,000 | 6,000 | 12,000 | 212,000 | | |||||||||||||||
$ | 256,560 | $ | 22,752 | $ | 21,160 | $ | 212,648 | $ | | |||||||||||
(1) | See Note 10 Commitments and Contingencies as disclosed in the Notes to the Financial Statements. | |
(2) | Purchase obligations in the table above consist of purchase orders issued to certain of our contract manufacturers in the normal course of business to purchase specified quantities of certain interface cards and chassis. It is not our intent, nor is it reasonably likely, that we would cancel these executed purchase orders. | |
(3) | In December 2010, we issued $200.0 million in aggregate principal amount of 3.00% convertible senior notes that mature on December 15, 2015, if not converted. The interest is payable semi-annually on June 15 and December 15 of each year, beginning on June 15, 2011. |
As of December 31, 2010, we had a net liability for uncertain tax positions of
approximately $5.3 million, which may be payable by us in the future. We are not able to
reasonably estimate the timing of the payments or the amount by which the liability for uncertain
tax positions will increase or decrease over time; therefore, the liability of $5.3 million is
excluded from the table above. See Note 9 to Consolidated Financial Statements.
Recent Accounting Pronouncements
See Note 1 to Consolidated Financial Statements.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
Investment Activities
The primary objective of our investment activities is to maintain the safety of principal and
preserve liquidity while maximizing yields without significantly increasing risk. Some of the
fixed rate securities that we have invested in may be subject to market risk. This means that a
change in prevailing interest rates may cause the principal amount of the investment to fluctuate.
We do not enter into investments for trading or speculative purposes. We maintain our portfolio of
cash equivalents and investments in a variety of securities, including U.S. government and federal
agency securities, corporate debt securities, auction rate securities and money market funds. Our
cash equivalents and investments consist of both fixed and variable rate securities. We do not use
any derivatives or similar instruments to manage our interest rate risk. Fixed-rate securities may
have their fair market value adversely impacted due to a rise in interest rates. Our fixed rate
securities are currently classified as available-for-sale securities. While we do not intend to
sell these fixed rate securities prior to maturity based on a sudden change in market interest
rates, should we choose to sell these securities in the future, our consolidated operating results
or cash flows may be adversely affected. A smaller portion of our cash equivalents and investments
portfolio consists of variable interest rate securities. Accordingly, we also have interest rate
risk with these variable rate securities as the income produced may decrease if interest rates
fall.
Convertible Senior Notes
On December 7, 2010, we closed our offering of $200.0 million aggregate principal amount of
3.00% convertible senior notes (the Notes). The Notes bear a fixed interest rate of 3.00% per
year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June
15, 2011. Our Notes are not subject to interest rate risk as the coupon rate is fixed.
Exchange Rate Sensitivity
The majority of our revenue and expenses are denominated in U.S. dollars. However, since we
have sales, research and development, and other operations outside of the United States, we do
incur operating expenses in foreign currencies, primarily the Japanese Yen, Romanian Lei, Indian
Rupee, Chinese Yuan, Australian Dollar, Canadian Dollar, Euro and British Pound. If these
currencies strengthen against the U.S. dollar, our costs reported in U.S. dollars will increase,
which would adversely affect our operating expenses. Approximately 30% of our operating expenses
are exposed to foreign currency movements, and historically, we have not entered into foreign
currency forward contracts to hedge our operating expense exposure to foreign currencies, but we
may do so in the future. We do utilize foreign currency forward contracts to hedge certain accounts
receivable amounts that are denominated in Japanese Yen, Euros and British Pounds. These contracts
are used to reduce our risk associated with exchange rate movements, as gains and losses on these
contracts are intended to offset exchange losses and gains on underlying exposures. Changes in the
fair value of these forward contracts are recorded immediately in earnings. We do not enter into
these foreign exchange forward contracts for speculative or trading purposes and we do not expect
net gains or losses on these derivative instruments to have a material impact on our results of
operations or cash flows.
Item 8. Financial Statements and Supplementary Data
Our financial statements and supplementary data required by this Item are provided in the
consolidated financial statements of the Company included in this Form 10-K as listed in Item 15(a)
of this Form 10-K.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on our managements evaluation (with the participation of our Chief Executive Officer
and Chief Financial Officer), as of the end of the period covered by this Annual Report, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the Exchange Act)),were effective to ensure that information required to be disclosed
by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange Commission rules and
forms and is accumulated and communicated to our management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act. Our internal control over financial reporting is a process designed by, or under the
supervision of, our Chief Executive Officer and our Chief Financial Officer, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of our financial
statements for external purposes in accordance with U.S. generally accepted accounting principles
(GAAP). Because of its inherent limitations, our internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with policies or procedures may deteriorate.
As of December 31, 2010, our management (with the participation of our Chief Executive Officer
and our Chief Financial Officer) conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on
this evaluation, management concluded that our internal control over financial reporting was
effective as of December 31, 2010 based on criteria in Internal Control Integrated Framework
issued by the COSO.
The effectiveness of our internal control over financial reporting as of December 31, 2010 has
been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, as
stated in its report which is included elsewhere herein.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended
December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and our Chief Financial Officer, does
not expect that our disclosure controls and procedures or our internal control over financial
reporting are or will be capable of preventing or detecting all errors and all fraud. Any controls,
no matter how well designed and operated, can provide only reasonable, not absolute, assurance that
the objectives of the controls will be met. The design of controls must
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reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Further, because of the inherent limitations in all controls,
no evaluation of controls can provide absolute assurance that misstatements due to error or fraud
will not occur or that all control issues and instances of fraud, if any, within the Company have
been detected. These inherent limitations include the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also
be circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of controls is based in part on certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions.
Item 9B. Other Information
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Certain information required by this Item is incorporated herein by reference to information
appearing in our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on
May 19, 2011, which information will appear under the captions entitled Proposal 1 Election of
Directors, Executive Officers and Section 16(a) Beneficial Ownership Reporting Compliance.
The Proxy Statement will be filed with the Commission within 120 days after our last fiscal
year-end which was December 31, 2010.
The Registrant has adopted a Code of Ethics for its Chief Executive and Senior Financial
Officers, a copy of which is included as Exhibit 14.1 to this Annual Report on Form 10-K.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference to information
appearing in our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on
May 19, 2011, which information will appear under the captions Proposal 1 Election of Directors
Compensation of Directors, Executive Compensation and Other Information, Compensation
Discussion and Analysis and Compensation Committee Report. The Proxy Statement will be filed
with the Commission within 120 days after our last fiscal year-end which was December 31, 2010.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this Item is incorporated herein by reference to information
appearing in our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on
May 19, 2011, which information will appear under the captions Common Stock Ownership of Principal
Shareholders and Management and Executive Compensation and Other Information Equity
Compensation Plan Information. The Proxy Statement will be filed with the Commission within 120
days after our last fiscal year-end which was December 31, 2010.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Any information required by this Item is incorporated herein by reference to information
appearing in our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on
May 19, 2011, which information will appear under the caption entitled Certain Relationships and
Related Transactions, and Proposal 1 Election of Directors. The Proxy Statement will be
filed with the Commission within 120 days after our last fiscal year-end which was December 31,
2010.
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated herein by reference to information
appearing in our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on
May 19, 2011, which information will appear under the caption Proposal 5 Ratification of
Appointment of Independent Registered Public Accounting Firm. The Proxy Statement will be filed
with the Commission within 120 days after our last fiscal year-end which was December 31, 2010.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) | The following documents are filed as part of this Report: |
(1) | Consolidated Financial Statements |
The consolidated financial statements listed in the accompanying Index to Consolidated
Financial Statements are filed as part of this report.
(2) | Financial Statement Schedule |
The financial statement schedules have been omitted because they are not applicable or the
information required to be set forth therein is included in the consolidated financial statements
or notes thereto.
(3) | Exhibits |
2.1
|
Agreement and Plan of Merger dated as of May 11, 2009 among the Company, Catapult Communications Corporation and Josie Acquisition Company(1) | |
2.2
|
Asset Purchase Agreement, dated October 21, 2009, by and between the Company and Agilent Technologies, Inc. (2) | |
3.1
|
Amended and Restated Articles of Incorporation, as amended(3) | |
3.2
|
Bylaws, as amended(4) | |
4.1
|
Indenture dated as of December 7, 2010 between the Company and Wells Fargo Bank, National Association, as trustee, including the form of 3.00% Convertible Senior Notes due 2015 (included as Exhibit A to the Indenture)(5) | |
10.1*
|
Amended and Restated 1997 Equity Incentive Plan(6) | |
10.2*
|
Amended and Restated Non-Employee Director Stock Option Plan(7) | |
10.3*
|
2010 Employee Stock Purchase Plan(8) | |
10.4*
|
Officer Severance Plan(9), together with Amendment to the Officer Severance Plan(10) | |
10.5*
|
Ixia Officer Severance Plan (as Amended and Restated effective January 1, 2009)(11) | |
10.6*
|
Form of Indemnity Agreement between Ixia and its directors and executive officers(12) | |
10.7
|
Office Lease Agreement dated September 14, 2007 between MS LPC Malibu Property Holdings, LLC and Ixia(13) | |
10.7.1
|
First Amendment to Office Lease dated February 11, 2010, between MS LPC Malibu Property Holdings, LLC and Ixia | |
10.7.2
|
Second Amendment to Office Lease dated November 15, 2010, between MS LPC Malibu Property Holdings, LLC and Ixia | |
10.8
|
License, Distribution and Option Agreement, dated July 7, 2003, between NetIQ Corporation and Ixia(14) | |
10.9
|
First Amendment to License, Distribution and Option Agreement dated as of January 6, 2005 between the Company and NetIQ Corporation(15) | |
10.10
|
Second Amendment to License, Distribution and Option Agreement dated as of June 16, 2005 between the Company and NetIQ Corporation(16)(17) | |
10.12*
|
Compensation of Named Executive Officers and Chief Executive Officer effective April 1, 2010 | |
10.13*
|
Summary of Compensation for the Companys Non-Employee Directors(18) | |
10.14*
|
Ixia 2010 Executive Officer Bonus Plan(19) | |
10.15*
|
Employment Offer Letter Agreement dated as of August 8, 2007 between the Company and Atul Bhatnagar(20) | |
10.16*
|
Amended and Restated Ixia 2008 Equity Incentive Plan (21) | |
10.17
|
Master Services Agreement dated as of January 26, 2009 between the Company and Plexus Services Corp and its affiliates and subsidiaries(22) | |
14.1
|
Code of Ethics for Chief Executive and Senior Financial Officers(23) |
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21.1
|
Subsidiaries of the Company | |
23.1
|
Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm | |
31.1
|
Certificate of Chief Executive Officer of Ixia pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certificate of Chief Financial Officer of Ixia pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certificate of Chief Executive Officer and Chief Financial Officer of Ixia pursuant to Rule 13a-14(b) under the Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Constitutes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K. | |
(1) | Incorporated by reference to Exhibit 2.1 to Ixias Current Report on Form 8-K (File No. 000-31523), as filed with the Commission on May 12, 2009. | |
(2) | Incorporated by reference to Exhibit 2.1 to Ixias Current Report on Form 8-K (File No. 000-31523), as filed with the Commission on October 27, 2009. | |
(3) | Incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Companys Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on September 5, 2000. | |
(4) | Incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K (File No. 000-31523) filed with the Commission on November 16, 2007. | |
(5) | Incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K (File No. 000-31523) filed with the Commission on December 8, 2010. | |
(6) | Incorporated by reference to Exhibit 4.1 to the Companys Registration Statement on Form S-8 (Reg. No. 333-117969) filed with the Commission on August 5, 2004. | |
(7) | Incorporated by reference to Exhibit 4.2 to the Companys Registration Statement on Form S-8 (Reg. No. 333-117969) filed with the Commission on August 5, 2004. | |
(8) | Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (File No. 000-31523) filed with the Commission on June 3, 2010. | |
(9) | Incorporated by reference to Exhibit 10.4 to Amendment No. 1 to the Companys Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on September 5, 2000. | |
(10) | Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K (File No. 000-31523) filed with the Commission on January 7, 2009. | |
(11) | Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (File No. 000-31523) filed with the Commission on January 7, 2009. | |
(12) | Incorporated by reference to Exhibit 10.5 to Amendment No. 1 to the Companys Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on September 5, 2000. | |
(13) | Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (File No. 000-31523) filed with the Commission on September 25, 2007. | |
(14) | Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (File No. 000-31523) filed with the Commission on August 19, 2003. | |
(15) | Incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q (File No. 000-31523) for the fiscal quarter ended June 30, 2005. | |
(16) | Incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q (File No. 000-31523) for the fiscal quarter ended June 30, 2005. |
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(17) | Confidential treatment has been requested with respect to a portion of this exhibit, which portion has been omitted and filed separately with the Commission. | |
(18) | Incorporated by reference to Exhibit 10.17 to the Companys Annual Report on Form 10-K (File No. 000-31523) for the fiscal year ended December 31, 2006. | |
(19) | Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (File No. 000-31523) filed with the Commission on April 27, 2010. | |
(20) | Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (File No. 000-31523) filed with the Commission on September 4, 2007. | |
(21) | Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K (File No. 000-31523) filed with the Commission on June 3, 2010. | |
(22) | Incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10 Q (File No. 000 31523) for the fiscal quarter ended March 31, 2009. | |
(23) | Incorporated by reference to Exhibit 14.1 to the Annual Report on Form 10-K (File No. 000-31523) for the fiscal year ended December 31, 2003. |
(b) | Exhibits | |
See the list of Exhibits under Item 15(a)(3) of this Annual Report on Form 10-K. | ||
(c) | Financial Statement Schedules | |
See the Schedule under Item 15(a)(2) of this Annual Report on Form 10-K. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 4, 2011 | IXIA |
|||
/s/ Atul Bhatnagar | ||||
Atul Bhatnagar | ||||
Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Name | Title | Date | ||
/s/ Atul Bhatnagar
|
President, Chief Executive Officer
and Director (Principal Executive Officer) |
March 4, 2011 | ||
/s/ Thomas B. Miller
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
March 4, 2011 | ||
/s/ Errol Ginsberg
|
Chief Innovation Officer and Chairman of the Board | March 4, 2011 | ||
/s/ Jon F. Rager
|
Director | March 4, 2011 | ||
/s/ Gail Hamilton
|
Director | March 4, 2011 | ||
/s/ Jonathan Fram
|
Director | March 4, 2011 | ||
/s/ Laurent Asscher
|
Director | March 4, 2011 | ||
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||
61 | ||||
62 | ||||
63 | ||||
64 | ||||
66 | ||||
67 |
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Report of Independent Registered Public Accounting Firm
To Board of Directors and Stockholders of Ixia:
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, shareholders equity and cash flows present fairly, in all material
respects, the financial position of Ixia and its subsidiaries at December 31, 2010 and 2009, and
the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2010 in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2010, based on criteria
established in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys management is responsible for these
financial statements, for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting, included in
Managements Report on Internal Control over Financial Reporting appearing under Item 9A. Our
responsibility is to express opinions on these financial statements and on the Companys internal
control over financial reporting based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
March 4, 2011
March 4, 2011
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IXIA
Consolidated Balance Sheets
(in thousands)
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 76,082 | $ | 15,061 | ||||
Short-term investments in marketable securities |
151,696 | 10,337 | ||||||
Accounts receivable, net |
67,838 | 55,765 | ||||||
Inventories |
28,965 | 14,541 | ||||||
Prepaid expenses and other current assets |
12,647 | 9,727 | ||||||
Total current assets |
337,228 | 105,431 | ||||||
Investments in marketable securities |
111,440 | 53,582 | ||||||
Property and equipment, net |
22,745 | 18,693 | ||||||
Intangible assets, net |
52,778 | 69,132 | ||||||
Goodwill |
59,384 | 60,121 | ||||||
Other assets |
6,308 | 2,129 | ||||||
Total assets |
$ | 589,883 | $ | 309,088 | ||||
Liabilities and Shareholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 9,924 | $ | 6,136 | ||||
Accrued expenses |
33,778 | 21,253 | ||||||
Deferred revenues |
37,505 | 29,842 | ||||||
Income taxes payable |
1,648 | 1,263 | ||||||
Total current liabilities |
82,855 | 58,494 | ||||||
Deferred revenues |
9,170 | 7,309 | ||||||
Other liabilities |
6,378 | 6,620 | ||||||
Convertible senior notes |
200,000 | | ||||||
Total liabilities |
298,403 | 72,423 | ||||||
Commitments and contingencies (Note 10) |
||||||||
Shareholders equity: |
||||||||
Preferred stock, without par value; 1,000
shares authorized and none outstanding |
| | ||||||
Common stock, without par value; 200,000
shares authorized at December 31, 2010 and
2009; 67,613 and 63,062 shares issued and
outstanding as of December 31, 2010 and 2009,
respectively |
115,590 | 87,283 | ||||||
Additional paid-in capital |
133,249 | 118,754 | ||||||
Retained earnings |
40,187 | 28,979 | ||||||
Accumulated other comprehensive income |
2,454 | 1,649 | ||||||
Total shareholders equity |
291,480 | 236,665 | ||||||
Total liabilities and shareholders equity |
$ | 589,883 | $ | 309,088 | ||||
The accompanying notes are an integral part of these consolidated financial statements
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IXIA
Consolidated Statements of Operations
(in thousands, except per share data)
Year Ended December 31, | ||||||||||||||||
2010 | 2009 | 2008 | ||||||||||||||
Revenues: |
||||||||||||||||
Products |
$ | 227,880 | $ | 142,871 | $ | 146,802 | ||||||||||
Services |
48,935 | 35,123 | 29,065 | |||||||||||||
Total revenues |
276,815 | 177,994 | 175,867 | |||||||||||||
Costs and operating expenses: (1) |
||||||||||||||||
Cost of revenues products |
54,378 | 36,722 | 32,411 | |||||||||||||
Cost of revenues services |
6,327 | 3,859 | 4,475 | |||||||||||||
Research and development |
72,488 | 53,977 | 49,167 | |||||||||||||
Sales and marketing |
79,986 | 60,374 | 59,374 | |||||||||||||
General and administrative |
35,142 | 28,061 | 25,502 | |||||||||||||
Amortization of intangible assets |
17,545 | 11,391 | 5,664 | |||||||||||||
Acquisition and other related |
2,991 | 6,179 | 1,479 | |||||||||||||
Restructuring |
3,587 | 4,637 | | |||||||||||||
Total costs and operating expenses |
272,444 | 205,200 | 178,072 | |||||||||||||
Income (loss) from operations |
4,371 | (27,206 | ) | (2,205 | ) | |||||||||||
Interest income and other, net |
10,970 | 2,160 | 6,574 | |||||||||||||
Interest expense |
(480 | ) | | | ||||||||||||
Other-than-temporary impairment on investments |
| (2,761 | ) | (20,243 | ) | |||||||||||
Income (loss) before income taxes |
14,861 | (27,807 | ) | (15,874 | ) | |||||||||||
Income tax expense |
3,653 | 16,396 | 21 | |||||||||||||
Net income (loss) |
$ | 11,208 | $ | (44,203 | ) | $ | (15,895 | ) | ||||||||
Earnings (loss) per share: |
||||||||||||||||
Basic |
$ | 0.17 | $ | (0.70 | ) | $ | (0.24 | ) | ||||||||
Diluted |
$ | 0.17 | $ | (0.70 | ) | $ | (0.24 | ) | ||||||||
Weighted average number of common and common
equivalent shares outstanding: |
||||||||||||||||
Basic |
65,157 | 62,710 | 65,087 | |||||||||||||
Diluted |
67,769 | 62,710 | 65,087 | |||||||||||||
(1) Stock-based compensation included in:
|
||||||||||||||||
Cost of revenues products |
$ | 524 | $ | 478 | $ | 513 | ||||||||||
Cost of revenues services |
198 | 182 | 195 | |||||||||||||
Research and development |
5,195 | 4,491 | 4,166 | |||||||||||||
Sales and marketing |
3,592 | 2,989 | 3,411 | |||||||||||||
General and administrative |
3,406 | 2,395 | 2,360 |
The accompanying notes are an integral part of these consolidated financial statements
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IXIA
Consolidated Statements of Shareholders Equity
(in thousands)
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | |||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (loss) | Total | |||||||||||||||||||
Balance as of December 31,
2007 |
68,171 | $ | 132,092 | $ | 98,157 | $ | 89,077 | $ | (2,826 | ) | $ | 316,500 | ||||||||||||
Net loss |
(15,895 | ) | (15,895 | ) | ||||||||||||||||||||
Change in unrealized
gains and losses on
investments, net of tax |
(1,680 | ) | (1,680 | ) | ||||||||||||||||||||
Reclassification
adjustment for
investment losses
recognized in net loss,
net of tax |
4,191 | 4,191 | ||||||||||||||||||||||
Cumulative translation
adjustment |
61 | 61 | ||||||||||||||||||||||
Comprehensive loss |
(13,323 | ) | ||||||||||||||||||||||
Shares issued pursuant
to stock incentive plans
and employee stock
purchase plan options |
1,029 | 3,897 | 3,897 | |||||||||||||||||||||
Repurchase of shares
pursuant to stock
buyback programs |
(5,809 | ) | (43,603 | ) | (43,603 | ) | ||||||||||||||||||
Stock-based compensation |
10,645 | 10,645 | ||||||||||||||||||||||
Stock award tax shortfall |
(920 | ) | (920 | ) | ||||||||||||||||||||
Balance as of December 31,
2008 |
63,391 | 92,386 | 107,882 | 73,182 | (254 | ) | 273,196 | |||||||||||||||||
Net loss |
(44,203 | ) | (44,203 | ) | ||||||||||||||||||||
Change in unrealized
gains and losses on
investments, net of tax |
1,959 | 1,959 | ||||||||||||||||||||||
Cumulative translation
adjustment |
(56 | ) | (56 | ) | ||||||||||||||||||||
Comprehensive loss |
(42,300 | ) | ||||||||||||||||||||||
Shares issued pursuant
to stock incentive plans
and employee stock
purchase plan options |
1,294 | 3,321 | 3,321 | |||||||||||||||||||||
Repurchase of shares
pursuant to stock
buyback programs |
(1,623 | ) | (8,424 | ) | (8,424 | ) | ||||||||||||||||||
Stock-based compensation |
10,535 | 10,535 | ||||||||||||||||||||||
Stock award tax benefit |
337 | 337 | ||||||||||||||||||||||
Balance as of December 31,
2009 |
63,062 | 87,283 | 118,754 | 28,979 | 1,649 | 236,665 | ||||||||||||||||||
Net income |
11,208 | 11,208 | ||||||||||||||||||||||
Change in unrealized
gains and losses on
investments, net of tax |
314 | 314 | ||||||||||||||||||||||
Cumulative translation
adjustment |
491 | 491 | ||||||||||||||||||||||
Comprehensive income |
12,013 |
The accompanying notes are an integral part of these consolidated financial statements
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Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | |||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (loss) | Total | |||||||||||||||||||
Shares issued pursuant
to stock incentive plans
and employee stock
purchase plan options |
4,551 | 28,307 | 28,307 | |||||||||||||||||||||
Stock-based compensation |
12,915 | 12,915 | ||||||||||||||||||||||
Stock award tax benefit |
1,580 | 1,580 | ||||||||||||||||||||||
Balance as of December 31,
2010 |
67,613 | $ | 115,590 | $ | 133,249 | $ | 40,187 | $ | 2,454 | $ | 291,480 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
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IXIA
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income (loss) |
$ | 11,208 | $ | (44,203 | ) | $ | (15,895 | ) | ||||
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
||||||||||||
Depreciation |
11,295 | 10,195 | 11,527 | |||||||||
Amortization of intangible assets |
17,545 | 11,391 | 5,664 | |||||||||
Impairment on investments |
| 2,761 | 20,243 | |||||||||
Stock-based compensation |
12,915 | 10,535 | 10,645 | |||||||||
Deferred income taxes |
(65 | ) | 22,955 | (2,455 | ) | |||||||
Tax benefit (shortfall) from stock award transactions |
1,580 | 337 | (920 | ) | ||||||||
Excess tax benefits from stock-based compensation |
(2,074 | ) | (103 | ) | (188 | ) | ||||||
Changes in operating assets and liabilities, net of
effect of acquisitions: |
||||||||||||
Accounts receivable, net |
(12,073 | ) | (11,819 | ) | (1,596 | ) | ||||||
Inventories |
(14,424 | ) | 5,606 | (2,235 | ) | |||||||
Prepaid expenses and other current assets |
(1,640 | ) | (2,589 | ) | (1,596 | ) | ||||||
Other assets |
541 | 1,560 | (1,599 | ) | ||||||||
Accounts payable |
3,388 | (240 | ) | 2,255 | ||||||||
Accrued expenses |
12,700 | (6,494 | ) | (167 | ) | |||||||
Deferred revenues |
9,524 | 361 | (248 | ) | ||||||||
Income taxes payable and other liabilities |
9 | (4,978 | ) | 900 | ||||||||
Net cash provided by (used in) operating activities |
50,429 | (4,725 | ) | 24,335 | ||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of property and equipment |
(14,857 | ) | (8,025 | ) | (8,540 | ) | ||||||
Purchases of available-for-sale securities |
(267,919 | ) | (262,704 | ) | | |||||||
Proceeds from available-for-sale securities |
69,216 | 225,529 | 2,001 | |||||||||
Purchases of held-to-maturity securities |
| | (8,924 | ) | ||||||||
Proceeds from held-to-maturity securities |
| | 37,104 | |||||||||
Purchases of other intangible assets |
(441 | ) | (362 | ) | (314 | ) | ||||||
Proceeds (payments) in connection with acquisitions, net
of cash acquired |
212 | (122,443 | ) | (2,245 | ) | |||||||
Net cash (used in) provided by investing activities |
(213,789 | ) | (168,005 | ) | 19,082 | |||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of convertible senior notes |
200,000 | | | |||||||||
Debt issuance costs |
(6,000 | ) | | | ||||||||
Proceeds from exercise of stock options and employee
stock purchase plan options |
28,307 | 3,321 | 3,897 | |||||||||
Repurchase of common stock |
| (8,424 | ) | (43,603 | ) | |||||||
Excess tax benefits from stock-based compensation |
2,074 | 103 | 188 | |||||||||
Net cash provided by (used) in financing activities |
224,381 | (5,000 | ) | (39,518 | ) | |||||||
Net increase (decrease) in cash and cash equivalents |
61,021 | (177,730 | ) | 3,899 | ||||||||
Cash and cash equivalents at beginning of year |
15,061 | 192,791 | 188,892 | |||||||||
Cash and cash equivalents at end of year |
$ | 76,082 | $ | 15,061 | $ | 192,791 | ||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Cash paid during the year for: |
||||||||||||
Income taxes |
$ | 2,076 | $ | 1,326 | $ | 5,443 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
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IXIA
Notes to Consolidated Financial Statements
1. Business and Summary of Significant Accounting Policies
Business
We are a leading provider of converged test systems and services for wireless and wired
infrastructures and services. Our hardware and software products allow our customers to test and
measure the performance, functionality, service quality and conformance of wireless and wired
Internet Protocol (IP) equipment and networks, and the applications that run over them. Our
solutions generate, capture, characterize and analyze high volumes of realistic network and
application traffic, identifying problems, assessing performance, ensuring functionality and
interoperability, and verifying conformance to industry specifications. We offer hardware
platforms with interchangeable media interfaces, utilizing a common set of applications,
Application Programming Interfaces (APIs) and automation tools that allow our customers to create
integrated, easy-to-use automated test environments. The networks that our systems analyze
primarily include Ethernet networks operating at speeds of up to 100 gigabits per second and
wireless networks that carry data traffic over optical fiber, electrical cable and airwaves. We
also offer hardware platforms and equipment that test wireless equipment, especially those
associated with 3G (third generation), 4G (fourth generation) and Long-Term Evolution (LTE)
networks. Customers also use our suite of software applications to test and verify web, Internet,
security and business applications.
Use of Estimates
In the normal course of preparing financial statements in conformity with accounting
principles generally accepted in the United States, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
Consolidation
All subsidiaries are consolidated as they are 100% owned by us. All significant intercompany
transactions and accounts are eliminated in consolidation.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less at the date
of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which
approximates fair value. We generally place funds that are in excess of current needs in high
credit quality instruments such as money market funds. There are no restrictions on the use of
cash and investments.
Fair Value of Financial Instruments
Our financial instruments, including cash and cash equivalents, accounts receivable, accounts
payable and other liabilities are carried at cost, which approximates their fair values because of
the short-term maturity of these instruments and the relative stability of interest rates.
We utilize foreign currency forward contracts to hedge certain accounts receivable amounts
that are denominated in Japanese Yen. These contracts are used to reduce the risk associated with
exchange rate movements, as gains and losses on these contracts are intended to offset exchange
losses and gains on underlying exposures. Changes in the fair value of these forward contracts are
recorded immediately in earnings. We do not enter into foreign exchange forward contracts for
speculative or trading purposes. To date, net gains and losses on the above transactions have not
been significant. As of December 31, 2010, we did not have any significant foreign currency
forward contracts outstanding.
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Investments in Marketable Securities
We determine the appropriate classification of investments in marketable securities at the
time of purchase and reevaluate such determination at each balance sheet date. Accretion and
amortization of purchase discounts and premiums are included in interest income and other, net.
Available-for-sale securities are stated at fair value. The net unrealized gains or losses on
available-for-sale securities are reported as a separate component of accumulated other
comprehensive income or loss, net of tax. The specific identification method is used to compute
realized gains and losses on our marketable securities. In 2010, we had gross realized gains of
$1.1 million (principally attributable to the sale in the fourth quarter of 2010 of certain of our
auction rate securities that were previously written-off resulting in proceeds of approximately
$1.0 million) and gross realized losses of $70,000. Gross realized gains and gross realized losses
on our marketable securities were not significant for the years ended December 31, 2009 and 2008.
As of December 31, 2010 and 2009, our available-for-sale securities consisted of U.S.
government and government agency debt securities, corporate debt securities and auction rate
securities, and had a weighted contractual maturity of 1.19 and 1.24 years, respectively.
We periodically review our marketable securities for impairment. If we conclude that any of
our investments are impaired, we determine whether such impairment is other-than-temporary.
Factors we consider to make such a determination include, among others, the severity of the
impairment, the reason for the decline in value and the potential recovery period. In April 2009,
we adopted accounting guidance which amended the other-than-temporary impairment model for debt
securities. Under the accounting guidance, declines in the fair value of held-to-maturity and
available-for-sale debt securities below their cost that are deemed to be other-than-temporary are
reflected in earnings to the extent the impairment is related to credit losses. The amount of the
impairment related to other factors is recognized in other comprehensive income.
During 2009 and 2008, we recorded an unrealized other-than-temporary impairment charge of $2.8
million (pre-tax) and $20.2 million (pre-tax), respectively to earnings related to our auction rate
securities and our investments in bonds issued by Lehman Brothers Holdings, Inc. (See Note 6 for
additional information).
It is possible that we could recognize future impairment charges on our auction rate
securities or our other investment securities we currently own if future events, new information or
the passage of time cause us to determine that a decline in our carrying value is
other-than-temporary. We will continue to review and analyze these securities for triggering events
each reporting period.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The
allowance for doubtful accounts is based on our best estimate of the amount of probable credit
losses in existing accounts receivable. We review the allowance for doubtful accounts monthly and
provisions are made upon a specific review of all significant past due receivables. For those
receivables not specifically reviewed, provisions are provided at a general rate that is determined
based on historical write-off experience, our assessment of current customer information and other
relevant data. Account balances are charged off against the allowance when we believe it is
probable the receivable will not be recovered. We do not have any off-balance-sheet credit
exposure related to our customers.
Inventories
Inventories are goods held for sale in the normal course of business. Inventories are stated
at the lower of cost (first-in, first-out) or market. The inventory balance is segregated between
raw materials, work in process (WIP) and finished goods. Raw materials are low level components,
many of which are purchased from vendors, WIP is partially assembled products and finished goods
are products that are ready to be shipped to end customers. Consideration is given to inventory
shipped and received near the end of a period and the transaction is recorded when transfer of
title occurs. We evaluate inventory for obsolescence and adjust to net realizable value based on
inventory that is obsolete or in excess of current demand.
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Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation of our
computer software and equipment is computed using the straight-line method based upon the estimated
useful lives of the applicable assets, ranging from two to five years. Leasehold improvements are
amortized over the lesser of the lease term or the estimated useful lives of the improvements.
Useful lives are evaluated regularly by management in order to determine recoverability in light of
current technological conditions. Property and equipment also includes the cost of our products
used for research and development and sales and marketing activities, including product
demonstrations for potential customers. Repairs and maintenance are charged to expense as incurred
while renewals and improvements are capitalized. Upon the sale or retirement of property and
equipment, the accounts are relieved of the cost and the related accumulated depreciation, with any
resulting gain or loss included in the statements of operations.
Goodwill, Purchased Intangible and Other Long-Lived Assets
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for
an acquisition and the fair value of the acquired net tangible and intangible assets. Although
goodwill is not amortized, we review our goodwill for impairment annually, or more frequently, if
events or changes in circumstances warrant a review. We completed our annual impairment test of our
single reporting unit in the fourth quarter of 2010 and determined that there was no impairment.
Acquired intangible assets with finite lives, including purchased technology and customer
relationships, are amortized over their estimated useful lives and reflected in the Amortization of
Intangible Assets line item on our statements of operations. Our acquired intangible assets are
reviewed for impairment whenever an impairment indicator exists. We continually monitor events or
changes in circumstances that could indicate that the carrying amounts of our long-lived assets,
including our intangible assets, may not be recoverable. When such events or changes in
circumstances occur, we assess recoverability by determining whether the carrying value of such
assets will be recovered through the undiscounted expected future cash flows. If the future
undiscounted cash flows are less than the carrying amount of these assets, we recognize an
impairment loss based on the excess of the carrying amount over the fair value of the assets. Fair
value is determined using a discounted cash flow analysis that involves the use of significant
estimates and assumptions, some of which may be based in part on historical experience, forecasted
information and discount rates. No such impairment charges were recorded during the years ended
December 31, 2010, 2009 and 2008.
Litigation
We are currently involved in certain legal proceedings. We accrue for losses when the loss is
deemed probable and the liability can reasonably be estimated. Where a liability is probable and
there is a range of estimated loss with no best estimate in the range, we record the minimum
estimated liability related to the claim. As additional information becomes available, we assess
the potential liability related to our pending litigation and revise our estimates. See Note 10
for additional information.
Product Warranty
We generally provide an initial standard warranty (generally for 90-day or 12-month periods)on
our hardware products after product shipment and accrue for estimated future warranty costs based
on actual historical experience and other relevant data, as appropriate, at the time product
revenue is recognized. All product warranty expenses are reflected within cost of sales in the
accompanying consolidated statements of operations. Accrued product warranty costs are included as
a component of accrued expenses in the accompanying consolidated balance sheets.
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Activity in the product warranty liability account for the years presented is as follows (in
thousands):
December 31, | December 31, | December 31, | ||||||||||
2010 | 2009 | 2008 | ||||||||||
Balance at beginning of year |
$ | 501 | $ | 933 | $ | 577 | ||||||
Current year provision |
841 | 533 | 619 | |||||||||
Expenditures |
(645 | ) | (544 | ) | (263 | ) | ||||||
Adjustments relating to pre-existing warranties |
| (421 | ) | | ||||||||
Balance at end of year |
$ | 697 | $ | 501 | $ | 933 | ||||||
Revenue Recognition
Our revenues are principally derived from the sale and support of our test systems. Product
revenues primarily consist of sales of our hardware and software products. Our service revenues
primarily consist of the provision of post contract customer support and maintenance (PCS)
related to the initial period provided with the product purchase (generally for 90-day or 12-month
periods) and separately purchased extended PCS contracts, and to our implied PCS obligations.
Service revenues also include separately purchased extended hardware warranty support for certain
of our products, training and other professional services. PCS on our software products includes
unspecified when and if available software upgrades and customer technical support services. In
some instances our software products may be installed and operated independently from our hardware
products. At other times, our software products are installed on and work with our hardware
products to enhance the functionality of the overall test system. As our software is generally
more than incidental to the sale of our test systems, we recognize revenue by applying software
revenue recognition guidance.
Our test systems are generally fully functional at the time of shipment and do not require us
to perform any significant production, modification, customization or installation after shipment.
As such, revenue from hardware and software product sales to customers, including distributors, is
recognized upon shipment provided that (i) evidence of an arrangement exists, which is typically in
the form of a customer purchase order; (ii) delivery has occurred (i.e., risks and rewards of
ownership have passed to the customer); (iii) the sales price is fixed or determinable; and (iv)
collection is deemed probable.
When sales arrangements involve multiple elements, or multiple products, and we have
vendor-specific objective evidence (VSOE) of fair value for each element in the arrangement, we
recognize revenue based on the relative fair value of all elements within the arrangement. We
determine VSOE based on sales prices charged to customers when the same element is sold separately
or based upon stated substantive PCS renewal rates for certain arrangements. Many of our products,
such as our software products, typically include an initial period (generally 90-day or 12-month
periods) of free PCS, which is not sold separately. Accordingly, we are unable to establish VSOE
for these products.
In cases where VSOE only exists for the undelivered elements such as PCS, we apply the
residual method to recognize revenue. Under the residual method, the total arrangement fee is
allocated first to the undelivered elements, typically PCS, based on their VSOE, and the residual
portion of the fee is allocated to the delivered elements, typically our hardware and software
products, and is recognized as revenue assuming all other revenue recognition criteria as described
above have been met.
If VSOE cannot be determined for all undelivered elements of an arrangement, we defer revenue
until the earlier of (i) the delivery of all elements or (ii) the establishment of VSOE for all
undelivered elements, provided that if the only undelivered element is PCS or a service, the total
arrangement fee is recognized as revenue over the PCS or service term.
Services revenues from our initial and separately purchased extended PCS arrangements
(generally offered for 12-month periods) are recognized ratably over the contractual coverage
period. In addition, for implied PCS obligations, we defer revenues from product sales and
allocate these amounts to PCS revenues to account for the circumstances in which we provide PCS
after the expiration of the customers contractual PCS period. Deferred
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revenues for these implied PCS obligations are recognized ratably over the implied PCS period,
which is typically based on the expected economic life of our software products of four years. To
the extent we determine that implied PCS is no longer being provided after the expiration of the
customers contractual PCS period, the remaining deferred revenue balance related to the implied
PCS obligation is reversed and recognized as revenue in the period of cessation of the implied PCS
obligation.
Revenues from our separately purchased extended hardware warranty arrangements are recognized
ratably over the contractual coverage period. We recognize revenues from training and other
professional services at the time the services are provided or completed, as applicable.
We use distributors to complement our direct sales and marketing efforts in certain
international markets. Due to the broad range of features and options available with our hardware
and software products, distributors generally do not stock our products and typically place orders
with us after receiving an order from an end customer. These distributors receive business terms
of sale generally similar to those received by our other customers.
Cost of Revenues
Our cost of revenues related to the sale of our hardware and software products includes
materials, payments to third party contract manufacturers, royalties, and salaries and other
expenses related to our manufacturing and supply operations, technical support and professional
service personnel. We outsource the majority of our manufacturing operations, and we conduct
supply chain management, quality assurance, documentation control, shipping and some final assembly
and testing at our facility in Calabasas, California and/or in Penang, Malaysia. Accordingly, a
significant portion of our cost of revenues related to our products consists of payments to our
contract manufacturers. Cost of revenues related to the provision of services includes salaries
and other expenses associated with technical support services, professional services and the
warranty cost of hardware that is replaced or repaired during the warranty coverage period. Cost
of revenues does not include the amortization of purchased technology related to our acquisitions
of certain businesses, product lines and technologies of $12.8 million, $9.2 million and $4.8
million for the years ended December 31, 2010, 2009 and 2008, respectively, which are included
within our Amortization of Intangible Assets line item on our consolidated statements of
operations.
Research and Development
Research and development expenses consist primarily of salaries and other personnel costs
related to the design, development, testing and enhancement of our products. Costs related to
research and development activities, including those incurred to establish the technological
feasibility of a software product, are expensed as incurred. If technological feasibility is
established, all development costs incurred until general product release are subject to
capitalization. To date, the establishment of technological feasibility of our products and
general release have substantially coincided. As a result, we have not capitalized any development
costs.
Software Developed for Internal Use
We capitalize costs of software, consulting services, hardware and payroll-related costs
incurred to purchase or develop internal-use software. We expense costs incurred during
preliminary project assessment, research and development, re-engineering, training and application
maintenance phases. To date, internal costs incurred to develop software for internal use have not
been significant.
Advertising
Advertising costs are expensed as incurred. Advertising costs were $1.1 million, $1.0 million
and $1.0 million for the years ended December 31, 2010, 2009 and 2008, respectively.
Stock-Based Compensation
Share-based payments, including grants of stock options, restricted stock units and employee
stock purchase rights, are required to be recognized in the financial statements based on the
estimated fair values for accounting
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purposes on the grant date. We use the Black-Scholes option pricing model to estimate the
fair value for accounting purposes of share-based awards. The determination of the fair value of
share-based awards utilizing the Black-Scholes model is affected by our stock price and a number of
assumptions, including expected volatility, expected life and risk-free interest rate. The
expected life and expected volatility are estimated based on historical data. The risk-free
interest rate assumption is based on observed interest rates appropriate for the terms of our
share-based awards. Stock-based compensation expense recognized in our consolidated financial
statements is based on awards that are ultimately expected to vest. The amount of stock-based
compensation expense is reduced for estimated forfeitures based on historical experience as well as
future expectations. Forfeitures are required to be estimated at the time of grant and revised, if
necessary, in subsequent periods if estimated and actual forfeitures differ from these initial
estimates. We evaluate the assumptions used to value share-based awards on a periodic basis. If
factors change and we employ different assumptions, stock-based compensation expense may differ
significantly from what we have recorded in the past. If there are any modifications or
cancellations of the underlying unvested share-based awards, we may be required to accelerate,
increase or cancel any remaining unrecognized stock-based compensation expense. We attribute the
value of stock-based compensation to expense based on the graded, or accelerated multiple-option,
approach.
We have outstanding share-based awards that have performance-based vesting conditions. Awards
with performance-based vesting conditions require the achievement of certain financial or other
performance criteria as a condition to the vesting. We recognize the estimated fair value of
performance-based awards, net of estimated forfeitures, as stock-based compensation expense over
the performance period, using graded approach, based upon our determination of whether it is
probable that the performance targets will be achieved. At each reporting period, we reassess the
probability of achieving the performance criteria and the performance period required to meet those
targets. Determining whether the performance criteria will be achieved involves judgment, and the
estimate of stock-based compensation expense may be revised periodically based on changes in the
probability of achieving the performance criteria. Revisions are reflected in the period in which
the estimate is changed. If performance goals are not met, no stock-based compensation expense is
recognized, and, to the extent stock-based compensation was previously recognized, such stock-based
compensation is reversed.
Income Taxes
We account for income taxes using the liability method. Deferred taxes are determined based
on the differences between the financial statement and tax bases of assets and liabilities, using
enacted tax rates in effect for the year in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
We recognize, in our consolidated financial statements, the impact of tax positions that are
more likely than not to be sustained upon examination based on the technical merits of the
positions.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed using the weighted-average number of common shares
outstanding during the period. Diluted earnings per share is computed using the weighted-average
number of common shares and dilutive potential common shares outstanding during the period.
Dilutive potential common shares primarily consist of shares underlying our convertible senior
notes, employee stock options and restricted stock units. See Note 13 for additional information.
Foreign Currency Translation and Transactions
Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment
are translated to U.S. Dollars at exchange rates in effect at the balance sheet date, with the
resulting translation adjustments included as a separate component in accumulated other
comprehensive income (loss). Income and expense accounts are translated at average exchange rates
during the year. Where the U.S. Dollar is the functional currency, certain balance sheet and
income statement accounts are remeasured at historical exchange rates and translation adjustments
from the remeasurement of the local currency amounts to U.S. Dollars are included in interest
income and other, net. In 2010, we had a net foreign currency loss of $1.0 million attributable to
our foreign subsidiaries, and foreign
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currency gains and losses were not significant for the years ended December 31, 2009 and 2008.
Foreign currency gains and losses are included in interest income and other, net.
Comprehensive Income
Comprehensive income (loss) includes all changes in equity (net assets) during a period from
non-owner sources. Accumulated other comprehensive income (loss) includes unrealized gains and
losses on investments and foreign currency translation adjustments.
Segments
Operating segments are defined as components of an enterprise engaged in business activities
for which discrete financial information is available and regularly reviewed by the chief operating
decision maker (CODM) of the enterprise to make decisions about resources to be allocated to the
segment and to assess its performance. Our CODM is our Chief Executive Officer who reviews
operating budgets and results presented on a consolidated basis for the purposes of allocating
resources and evaluating financial performance. Accordingly, we have determined that we operated
within one separately reportable business segment as of, and for the years ended, December 31,
2010, 2009 and 2008. Future changes to our organizational structure or our business, or changes in
the way our CODM manages our business, may result in changes to our reportable segments.
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (FASB) issued authoritative
guidance for the accounting of multiple-deliverable revenue arrangements, which establishes the
accounting and reporting guidance for arrangements including multiple revenue-generating
activities. This guidance provides amendments to the criteria for separating deliverables, and
measuring and allocating arrangement consideration to one or more units of accounting. The
amendments also establish a selling price hierarchy for determining the selling price of a
deliverable. Significantly enhanced disclosures are also required to provide information about a
vendors multiple-deliverable revenue arrangements, including information about the nature and
terms, significant deliverables, and its performance within arrangements. This guidance also
requires providing information about the significant judgments made and changes to those judgments
and about how the application of the relative selling-price method affects the timing or amount of
revenue recognition. This guidance is effective prospectively for revenue arrangements entered
into or materially modified in the fiscal years beginning on or after June 15, 2010 or on a
retrospective basis. Early application is permitted.
In October 2009, the FASB issued authoritative guidance for the accounting of certain revenue
arrangements that include software elements, which changes the accounting model for revenue
arrangements that include both tangible products and software elements that are essential to the
functionality, and scopes these products out of current software revenue accounting guidance. The
new guidance includes factors to help companies determine the software elements that are considered
essential to the functionality. The amendments will now subject software-enabled products to
other revenue guidance and disclosure requirements, such as guidance surrounding revenue
arrangements with multiple deliverables. The amendments are effective prospectively for revenue
arrangements entered into or materially modified in the fiscal years beginning on or after June 15,
2010 or on a retrospective basis. Early application is permitted.
We have adopted the above guidance on revenue recognition in the first quarter of 2011, and
had we adopted this guidance in the first quarter of 2010, we estimate that our 2010 total revenues
would have increased by less than one percent.
In January 2010, the FASB issued authoritative guidance for the accounting of fair value
measurements and disclosures, which amends the disclosure requirements, related to recurring and
nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of
assets and liabilities between Level 1 (quoted prices in active market for identical assets or
liabilities) and Level 2 (significant other observable inputs) of the fair value measurement
hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance
requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets
and
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liabilities measured using significant unobservable inputs (Level 3 fair value measurements).
The guidance became effective for us with the reporting period beginning January 1, 2010, except
for the disclosure on the roll forward activities for Level 3 fair value measurements, which will
become effective for us with the reporting period beginning January 1, 2011. Adoption of this new
guidance required additional disclosures that did not have a material impact on our consolidated
financial position, results of operations and cash flows.
2. Convertible Senior Notes
On December 7, 2010, we issued $200.0 million in aggregate principal amount of 3.00%
Convertible Senior Notes due December 15, 2015 unless earlier repurchased or converted (the
Notes). The unsecured Notes were offered and sold only to qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as amended (the Securities Act). The
Notes are governed by the terms of an indenture agreement (the Indenture) dated December 7,
2010, which was previously filed with the Securities and Exchange Commission (the SEC) on December
8, 2010.
The Notes bear interest at a rate of 3.00% per year, payable semiannually in arrears on June
15 and December 15 of each year, beginning on June 15, 2011. We may in certain instances be
required to pay additional interest if the Notes are not freely tradable by the holders thereof
(other than our affiliates) beginning six months after the date of issuance and in connection with
events of default relating to our failure to comply with our reporting obligations to the trustee
and the SEC.
Debt issuance costs were approximately $6.0 million, which were capitalized to deferred
issuance costs and are being amortized to interest expense over the five year term of the Notes.
The Notes are convertible at any time prior to the close of business on the third business day
immediately preceding the maturity date at the holders option, into shares of our common stock at
an initial conversion rate of 51.4536 shares per $1,000 principal amount of Notes, which represents
an initial conversion price of approximately $19.43 per share. The conversion rate is subject to
adjustment for certain events that occur prior to maturity, such as a change in control
transaction.
We may not redeem the Notes prior to the maturity date. If a fundamental change (such as a
change in control event or if our common stock ceases to be listed or quoted on any of the New York
Stock Exchange, the Nasdaq Global Select Market or the Nasdaq Global Market or any of their
respective successors) occurs prior to the maturity date, holders may require us to repurchase for
cash all or part of their Notes at a repurchase price equal to 100% of the principal amount of the
Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change
repurchase date.
The Indenture provides for customary events of default (subject in certain cases to grace and
cure periods) including, without limitation, (i) the failure to pay amounts due under the Notes,
(ii) the failure to deliver the shares of our common stock due upon conversion of any Note, (iii)
our failure to comply with other agreements contained in the Indenture or in the Notes, (iv)
payment defaults on, or acceleration of, other indebtedness, (v) the failure to pay certain
judgments, and (vi) certain events of bankruptcy, insolvency or reorganization with respect to the
Company. An event of default under the Indenture (other than an event of default related to certain
events of bankruptcy, insolvency or reorganization) will allow either the trustee or the holders of
at least 25% in aggregate principal amount of the then outstanding Notes to cause the acceleration
of the Notes. An event of default related to certain events of bankruptcy, insolvency or
reorganization with respect to the Company will automatically cause the acceleration of the Notes.
As of December 31, 2010, the estimated fair value of our $200.0 million principal convertible
senior notes approximated $222.0 million. The estimated fair value of the Notes was determined
based on the market price of the Notes as of December 31, 2010.
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3. Acquisitions
On January 1, 2009, we adopted the new accounting guidance for accounting for business
combinations, which established principles and requirements for how the acquirer of a business
recognizes, measures and discloses in its financial statements the identifiable assets acquired,
the liabilities assumed and any noncontrolling interest in the acquiree. The new accounting
guidance for business combinations also requires that transaction costs be expensed as incurred.
Prior to adoption of the new accounting guidance, transactions costs were recorded as part of the
purchase price. The guidance required prospective application for all acquisitions after January
1, 2009.
We acquired Catapult Communications Corporation (Catapult) on June 23, 2009 and Agilent
Technologies, Inc.s (Agilent) N2X Data Network Testing Product Line business (N2X) on October
30, 2009 and have included the results of these acquisitions in our consolidated results of
operations since the acquisition dates.
Catapult Communications Corporation
The aggregate consideration totaled $106.6 million and consisted of (i) $104.6 million paid
for the outstanding shares of common stock of Catapult and (ii) $2.0 million paid to holders of
options to purchase Catapult common stock that were cancelled in connection with the acquisition
and that had exercise prices lower than the per share purchase price. For the years ended December
31, 2010, 2009 and 2008, acquisition and other related costs related to the Catapult transaction,
including integration activities, were $1.1 million, $4.0 million and $741,000, respectively.
These acquisition related costs have been expensed as incurred, and have been included within the
Acquisition and other related expenses line item on our consolidated statements of operations. The
acquisition was funded from our existing cash and cash equivalents.
The following table summarizes the allocation of the purchase price to the estimated fair
values of the assets acquired and liabilities assumed at the date of the Catapult acquisition (in
thousands):
Cash and cash equivalents |
$ | 28,190 | ||
Short-term investments in marketable securities |
8,638 | |||
Accounts receivable |
3,815 | |||
Inventories |
3,950 | |||
Other current assets |
3,331 | |||
Long-term investments in marketable securities |
4,366 | |||
Deferred income taxes (non-current) |
2,490 | |||
Other non-current assets |
2,108 | |||
Identifiable intangible assets |
48,790 | |||
Goodwill |
22,466 | |||
Total assets acquired |
128,144 | |||
Accounts payable and accrued expenses |
(9,116 | ) | ||
Deferred revenues |
(5,900 | ) | ||
Other liabilities (non-current) |
(6,570 | ) | ||
Net assets acquired |
$ | 106,558 | ||
The identifiable intangible assets of $48.8 million consist of $26.7 million of acquired
technology, $13.4 million of customer relationships, $6.1 million of service agreements, $1.0
million related to a non-compete agreement and $1.6 million of other identifiable intangible
assets. These intangible assets are amortized using a straight-line method over their expected
useful lives ranging from three to six years. The goodwill recorded in connection with this
transaction is not deductible for income tax purposes.
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Agilent Technologies N2X Data Networks Product Line
We completed our acquisition from Agilent Technologies, Inc. (Agilent) of its N2X Data
Network Testing Product Line business (N2X) for $42.8 million in cash and the assumption of
certain liabilities of N2X. The aggregate purchase price was funded from our existing cash and
cash equivalents. In return for the consideration paid, we acquired certain assets and liabilities
of N2X, including inventory, accounts receivables, fixed assets, accounts payable, customer
relationships, certain intellectual property rights, and other assets. The assembled workforce of
N2X was comprised of approximately 200 individuals engaged primarily in research and development
and sales activities. As part of the transaction, we also entered into a Transition Services
Agreement with Agilent whereby Agilent assisted in the operation of certain portions of N2X for the
first several months of 2010 as we worked to transition the employees and operations to Ixia. For
the year ended December 31, 2010 and 2009, acquisition and other related costs related to this
transaction totaled $1.9 million and $2.2 million, respectively. These acquisition and other
related costs have been expensed as incurred, and have been included within the Acquisition Related
expenses line item on our consolidated statements of operations.
The following table summarizes the allocation of the purchase price to the estimated fair
values of the assets acquired and liabilities assumed at the date of the N2X acquisition (in
thousands):
Accounts receivable |
$ | 6,130 | ||
Inventories |
1,231 | |||
Property and equipment |
1,439 | |||
Identifiable intangible assets |
21,800 | |||
Goodwill |
20,190 | |||
Total assets acquired |
50,790 | |||
Accounts payable and accrued expenses |
(2,757 | ) | ||
Deferred revenues |
(5,223 | ) | ||
Net assets acquired |
$ | 42,810 | ||
During the fourth quarter of 2010, we were reimbursed by Agilent for certain employee related
liabilities in the amount of $737,000. As a result, the purchase price was reduced from $43.5
million to $42.8 million.
The identifiable intangible assets of $21.8 million consist of $10.4 million of acquired
technology, $10.0 million of customer relationships, $0.4 million related to a non-compete
agreement and $1.0 million related to order backlog. These intangible assets are amortized using a
straight-line method over their expected economic lives ranging from six months to six years. We
currently estimate that approximately $8.2 million of the goodwill recorded in connection with this
transaction will be tax deductible for income tax purposes.
Pro Forma Results
The following table summarizes the unaudited proforma total revenues and net loss of the
combined entities had the acquisitions of Catapult and N2X occurred on January 1, 2009 (in
thousands):
Year Ended | ||||
December 31, 2009 | ||||
(Proforma) | ||||
Total revenues |
$ | 229,978 | ||
Net loss |
(67,625 | ) |
The combined results in the table above have been prepared for comparative purposes only and
include acquisition related adjustments for, among others items, amortization of identifiable
intangible assets and reductions in revenues related to the estimated fair value adjustment to
deferred revenues. The combined results do not purport to be indicative of the results of
operations which would have resulted had the acquisition been effective at the beginning of the
applicable periods noted above, or the future results of operations of the combined entities.
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4. Restructuring Costs
During the first quarter of 2010, our management approved, committed to and initiated a plan
to restructure our operations in light of our acquisition of N2X (the N2X Restructuring). The N2X
Restructuring included a net reduction in force of approximately 80 positions, which represented
approximately 7% of our worldwide work force, including contractors, at the beginning of the first
quarter of 2010. The restructuring was completed during the first quarter of 2010.
During the third quarter of 2009, our management approved, committed to and initiated a plan
to restructure our operations in light of our acquisition of Catapult (Catapult Restructuring).
The Catapult Restructuring included a net reduction in force of approximately 45 positions, which
represented approximately 4% of our worldwide work force, including contractors, at the beginning
of the third quarter of 2009. The restructuring was substantially completed during the fourth
quarter of 2009.
During the second quarter of 2009 and prior to the acquisition of Catapult, our management
approved, committed to and initiated a plan to restructure our operations (Ixia Restructuring).
The Ixia Restructuring included a net reduction in force of approximately 80 positions, which
represented approximately 10% of our worldwide work force, including contractors, prior to the June
2009 announcement of the restructuring. The restructuring was substantially completed during the
third quarter of 2009.
Activity related to our restructuring plans is as follows (in thousands):
N2X | Catapult | Ixia | ||||||||||||||
Total | Restructuring | Restructuring | Restructuring | |||||||||||||
Accrual at January 1, 2009 |
$ | | $ | | $ | | $ | | ||||||||
Charges |
4,637 | | 3,517 | 1,120 | ||||||||||||
Payments |
(3,662 | ) | | (2,584 | ) | (1,078 | ) | |||||||||
Non-cash items |
(96 | ) | | (96 | ) | | ||||||||||
Accrual at December 31,
2009 |
$ | 879 | $ | | $ | 837 | $ | 42 | ||||||||
Charges |
3,587 | 3,538 | 49 | | ||||||||||||
Payments |
(4,466 | ) | (3,538 | ) | (886 | ) | (42 | ) | ||||||||
Accrual at December 31,
2010 |
$ | | $ | | $ | | $ | | ||||||||
5. Concentrations
Credit Risk
Financial instruments that subject us to concentrations of credit risk consist primarily of
cash and cash equivalents, investments and trade accounts receivable. We maintain our cash and
cash equivalents with reputable financial institutions, and at times, cash balances may be in
excess of FDIC insurance limits. We extend differing levels of credit to customers, typically do
not require collateral, and maintain reserves for potential credit losses based upon the expected
collectability of accounts receivable.
Significant Customer
For the years ended December 31, 2010, 2009 and 2008, only one customer comprised more than
10% of total revenues as follows (in thousands, except percentages):
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Amount of total revenues |
$ | 37,508 | $ | 27,792 | $ | 36,857 | ||||||
As a percentage of total revenues |
13.5 | % | 15.6 | % | 21.0 | % |
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As of December 31, 2010 and 2009, we had receivable balances from this customer approximating
6.5% and 14.2%, respectively, of total accounts receivable. As of December 31, 2010, we had a
receivable balance from a second significant customer that approximated 14.6% of total accounts
receivable, compared to approximately 14.2% of total accounts receivable as of December 31, 2009.
International Data
For the years ended December 31, 2010, 2009 and 2008, total international revenues based on
customer location consisted of the following (in thousands, except percentages):
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Amount of total revenues |
$ | 136,032 | $ | 76,325 | $ | 63,045 | ||||||
As a percentage of total revenues |
49.1 | % | 42.9 | % | 35.8 | % |
As of December 31, 2010 and 2009, our property and equipment were geographically located as
follows (in thousands):
As of December 31, | ||||||||
2010 | 2009 | |||||||
United States |
$ | 11,235 | $ | 10,874 | ||||
Romania |
2,286 | 2,647 | ||||||
India |
3,268 | 2,506 | ||||||
Other |
5,956 | 2,666 | ||||||
$ | 22,745 | $ | 18,693 | |||||
Sources of Supply
We outsource the manufacture, assembly and testing of printed circuit board assemblies,
certain interface cards and certain chassis to a limited number of third party contract
manufacturers and assembly companies. We cannot be certain that we will be able to effectively
manage or retain our contract manufacturers, or that these contract manufacturers will continue to
operate as going concerns or to meet our future requirements for timely delivery of products of
sufficient quality and quantity. We and our contract manufacturers currently buy some key
components of our products from a limited number of suppliers, which are manufactured by a limited
number of companies. Although we believe that other contract manufacturers and suppliers could
provide similar services and components on comparable terms, a change in one of our key contract
manufacturers or suppliers could cause a delay in manufacturing, additional cost inefficiencies and
a possible loss of sales, which could adversely affect our consolidated operating results.
6. Selected Balance Sheet Data
Accounts Receivable, Net
Accounts receivable, net consisted of the following (in thousands):
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Trade accounts receivable |
$ | 68,911 | $ | 56,419 | ||||
Allowance for doubtful accounts |
(1,073 | ) | (654 | ) | ||||
$ | 67,838 | $ | 55,765 | |||||
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Activity in the allowance for doubtful accounts during the years presented is as follows (in
thousands):
December 31, | December 31, | December 31, | ||||||||||
2010 | 2009 | 2008 | ||||||||||
Balance at beginning of year |
$ | 654 | $ | 764 | $ | 614 | ||||||
Charged to cost and expenses |
519 | 372 | 300 | |||||||||
Reversal of cost and expenses |
| | | |||||||||
Deductions |
(100 | ) | (482 | ) | (150 | ) | ||||||
Balance at end of year |
$ | 1,073 | $ | 654 | $ | 764 | ||||||
Investments in Marketable Securities
Investments in marketable securities as of December 31, 2010 consisted of the following (in
thousands):
Amortized | Fair | |||||||
Cost | Value | |||||||
Available-for-sale short-term: |
||||||||
U.S. government and agency debt securities |
$ | 123,495 | $ | 123,619 | ||||
Corporate debt securities |
28,057 | 28,077 | ||||||
151,552 | 151,696 | |||||||
Available-for-sale long-term: |
||||||||
U.S. government and agency debt securities |
55,572 | 55,584 | ||||||
Corporate debt securities |
49,861 | 50,605 | ||||||
Auction rate securities |
2,975 | 5,251 | ||||||
108,408 | 111,440 | |||||||
$ | 259,960 | $ | 263,136 | |||||
Investments in marketable securities as of December 31, 2009 consisted of the following (in
thousands):
Amortized | Fair | |||||||
Cost | Value | |||||||
Available-for-sale short-term: |
||||||||
U.S. government and agency debt securities |
$ | 5,711 | $ | 5,713 | ||||
Corporate debt securities |
4,584 | 4,624 | ||||||
10,295 | 10,337 | |||||||
Available-for-sale long-term: |
||||||||
U.S. government and agency debt securities |
34,534 | 34,673 | ||||||
Corporate debt securities |
12,605 | 13,236 | ||||||
Auction rate securities |
3,823 | 5,673 | ||||||
50,962 | 53,582 | |||||||
$ | 61,257 | $ | 63,919 | |||||
During 2009 and 2008, we recorded an unrealized other-than-temporary impairment charge of $2.8
million (pre-tax) and $20.2 million (pre-tax), respectively, to earnings related to our auction
rate securities and our investments in bonds issued by Lehman Brothers Holdings, Inc.
During the first quarter of 2010, we entered into an $8.9 million favorable legal settlement
with a former investment manager attributable to our auction rate securities that were
substantially written down in 2009 and 2008. As part of the settlement, we retained the auction
rate securities at issue, which had an aggregate par value of $19.0 million. During the fourth
quarter of 2010, we sold certain of our auction rate securities that were previously written-off
and received proceeds of approximately $1.0 million. The settlement and sales proceeds were
recorded to the interest income and other, net line item within our consolidated statement of
operations.
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As of December 31, 2010, we currently hold illiquid auction rate securities with an estimated
fair value of $5.3 million ($6.5 million at par value or original cost). Based on the general lack of
liquidity for our auction rate securities portfolio as of December 31, 2010, we continue to
classify these investments as long-term on our consolidated balance sheet.
Inventories
Inventories consisted of the following (in thousands):
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Raw materials |
$ | 8,173 | $ | 3,674 | ||||
Work in process |
7,745 | 4,731 | ||||||
Finished goods |
13,047 | 6,136 | ||||||
$ | 28,965 | $ | 14,541 | |||||
Property and Equipment, Net
Property and equipment, net consisted of the following (dollars in thousands):
December 31, | December 31, | |||||||||
Useful Life | 2010 | 2009 | ||||||||
(in years) | ||||||||||
Computer equipment |
3 | $ | 11,356 | $ | 10,178 | |||||
Computer software |
3-5 | 11,944 | 9,725 | |||||||
Demonstration equipment |
2 | 17,437 | 13,382 | |||||||
Development equipment |
5 | 19,756 | 16,872 | |||||||
Furniture and other equipment |
5 | 17,196 | 16,751 | |||||||
Leasehold improvements |
1-5 | 8,799 | 6,645 | |||||||
86,488 | 73,553 | |||||||||
Accumulated depreciation |
(63,743 | ) | (54,860 | ) | ||||||
$ | 22,745 | $ | 18,693 | |||||||
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Accrued bonuses |
$ | 9,928 | $ | 915 | ||||
Accrued vacation |
5,395 | 4,990 | ||||||
Accrued payroll |
4,814 | 3,457 | ||||||
Accrued commissions |
2,633 | 1,203 | ||||||
Accrued legal and professional fees |
2,377 | 2,395 | ||||||
Accrued property and sales tax payable |
1,174 | 734 | ||||||
Employee stock purchase plan payroll deductions |
1,057 | 689 | ||||||
Deferred rent |
985 | 412 | ||||||
Accrued royalties |
794 | 727 | ||||||
Accrued warranty |
697 | 501 | ||||||
Accrued travel |
363 | 349 | ||||||
Due to third parties for technology and certain assets |
150 | 949 | ||||||
Other |
3,411 | 3,932 | ||||||
$ | 33,778 | $ | 21,253 | |||||
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7. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability in the principal or most advantageous market for an asset or liability in an orderly
transaction between market participants at the measurement date. The hierarchy below lists three
levels of fair value based on the extent to which inputs used in measuring fair value are
observable in the market. We categorize each of our fair value measurements in one of these three
levels based on the lowest level input that is significant to the fair value measurement in its
entirety. This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1. | Observable inputs such as quoted prices in active markets; | |||
Level 2. | Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and | |||
Level 3. | Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Financial assets carried at fair value as of December 31, 2010 and 2009 are classified in the
table below in one of the three categories described above (in thousands):
December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||||
Quoted | ||||||||||||||||||||||||||||||||
Quoted Prices | Prices in | |||||||||||||||||||||||||||||||
in Active | Significant | Active | Significant | |||||||||||||||||||||||||||||
Markets for | Other | Significant | Markets for | Other | Significant | |||||||||||||||||||||||||||
Identical | Observable | Unobservable | Identical | Observable | Unobservable | |||||||||||||||||||||||||||
Assets | Inputs | Inputs | Assets | Inputs | Inputs | |||||||||||||||||||||||||||
Fair Value | (Level 1) | (Level 2) | (Level 3) | Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||||||
Cash equivalents:(1) |
||||||||||||||||||||||||||||||||
Money market funds |
$ | 6,037 | $ | 6,037 | $ | | $ | | $ | 241 | $ | 241 | $ | | $ | | ||||||||||||||||
U.S. Treasury, government
and agency debt securities |
30,419 | | 30,419 | | | | | | ||||||||||||||||||||||||
Corporate debt securities |
9,997 | | 9,997 | | | | | | ||||||||||||||||||||||||
Short-term investments:(1) |
||||||||||||||||||||||||||||||||
U.S. Treasury, government
and agency debt securities |
123,619 | | 123,619 | | 5,713 | | 5,713 | | ||||||||||||||||||||||||
Corporate debt securities |
28,077 | | 28,077 | | 4,624 | | 4,624 | | ||||||||||||||||||||||||
Long-term investments: |
||||||||||||||||||||||||||||||||
U.S. Treasury, government
and agency debt securities |
55,584 | | 55,584 | | 34,673 | | 34,673 | | ||||||||||||||||||||||||
Corporate debt securities |
50,605 | | 50,605 | | 13,236 | | 13,236 | | ||||||||||||||||||||||||
Auction rate securities (2) |
5,251 | | | 5,251 | 5,673 | | | 5,673 | ||||||||||||||||||||||||
Total financial assets |
$ | 309,589 | $ | 6,037 | $ | 298,301 | $ | 5,251 | $ | 64,160 | $ | 241 | $ | 58,246 | $ | 5,673 | ||||||||||||||||
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(1) | To estimate the fair value of our money market funds, U.S. government and agency debt securities, and corporate debt securities, we use the estimated fair value per our investment brokerage/custodial statements. To the extent deemed necessary, we may also obtain non-binding market quotes to corroborate the estimated fair values reflected in our investment brokerage/custodial statements. | |
(2) | Given the disruption in the auction process, there is no longer an actively quoted market price for these securities. Accordingly, we utilized models to estimate the fair values of these auction rate securities based on, among other items: (i) the underlying structure of each security; (ii) the present value of future principal, interest and/or dividend payments discounted at the appropriate rate considering the market rate and conditions; (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period; and (iv) credit quality and estimates of the recovery rates in the event of default for each security. These estimated fair values could change significantly based on, among other events: (i) a further deterioration in market conditions for these securities; (ii) further declines in the credit quality of our auction rate securities or of the issuers of our auction rate securities; or (iii) a cessation of dividend payments or default on interest or principal payments by the issuer of the securities. |
The following table summarizes the activity for the years ended December 31, 2010 and
2009 for those financial assets (primarily our auction rate securities) where fair value
measurements are estimated utilizing Level 3 inputs (in thousands):
Year Ended December 31, | ||||||||
2010 | 2009 | |||||||
Beginning balance |
$ | 5,673 | $ | 3,211 | ||||
Unrealized gain recorded in other comprehensive income |
421 | 1,849 | ||||||
Unrealized loss recorded in earnings (See Note 6) |
| (2,761 | ) | |||||
Settlements |
(843 | ) | (992 | ) | ||||
Additions from Catapult acquisition (See Note 3) |
| 4,366 | ||||||
Ending balance |
$ | 5,251 | $ | 5,673 | ||||
Unrealized losses recorded in earnings for Level 3 assets
still held at December 31 |
$ | | $ | (2,761 | ) | |||
8. Goodwill and Other Intangible Assets
The following table presents 2010 details of our total purchased intangible assets (in
thousands):
Weighted | ||||||||||||||||
Average | Accumulated | |||||||||||||||
Useful Life | Gross | Amortization | Net | |||||||||||||
(in years) | ||||||||||||||||
Goodwill |
$ | 59,384 | $ | | $ | 59,384 | ||||||||||
Other intangible assets: |
||||||||||||||||
Technology |
5.4 | $ | 71,492 | $ | (43,883 | ) | $ | 27,609 | ||||||||
Customer relationships |
5.9 | 24,910 | (6,843 | ) | 18,067 | |||||||||||
Service agreements |
4.7 | 6,770 | (2,456 | ) | 4,314 | |||||||||||
Non-compete |
3.8 | 2,338 | (1,359 | ) | 979 | |||||||||||
Trademark |
4.7 | 1,576 | (1,133 | ) | 443 | |||||||||||
Workforce |
4.0 | 395 | (395 | ) | | |||||||||||
Other |
0.7 | 4,424 | (3,058 | ) | 1,366 | |||||||||||
$ | 111,905 | $ | (59,127 | ) | $ | 52,778 | ||||||||||
The following table presents 2009 details of our total purchased intangible assets (in
thousands):
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Weighted | ||||||||||||||||
Average | Accumulated | |||||||||||||||
Useful Life | Gross | Amortization | Net | |||||||||||||
(in years) | ||||||||||||||||
Goodwill |
$ | 60,121 | $ | | $ | 60,121 | ||||||||||
Other intangible assets: |
||||||||||||||||
Technology |
5.4 | $ | 70,742 | $ | (33,031 | ) | $ | 37,711 | ||||||||
Customer relationships |
5.9 | 24,910 | (2,943 | ) | 21,967 | |||||||||||
Service agreements |
4.7 | 6,770 | (1,144 | ) | 5,626 | |||||||||||
Non-compete |
3.8 | 2,338 | (1,059 | ) | 1,279 | |||||||||||
Trademark |
4.7 | 1,576 | (783 | ) | 793 | |||||||||||
Workforce |
4.0 | 395 | (395 | ) | | |||||||||||
Other |
0.8 | 4,038 | (2,282 | ) | 1,756 | |||||||||||
$ | 110,769 | $ | (41,637 | ) | $ | 69,132 | ||||||||||
The estimated future amortization expense of purchased intangible assets as of December
31, 2010 is as follows (in thousands):
2011 |
$ | 14,731 | ||
2012 |
14,242 | |||
2013 |
13,620 | |||
2014 |
7,783 | |||
2015 |
2,171 | |||
Thereafter |
231 | |||
$ | 52,778 | |||
9. Income Taxes
The components of income (loss) before income taxes were (in thousands):
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
U.S. |
$ | 2,518 | $ | (33,246 | ) | $ | (19,992 | ) | ||||
Foreign |
12,343 | 5,439 | 4,118 | |||||||||
$ | 14,861 | $ | (27,807 | ) | $ | (15,874 | ) | |||||
Income tax expense consisted of the following (in thousands):
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 697 | $ | (3,549 | ) | $ | 856 | |||||
State |
409 | 670 | 594 | |||||||||
Foreign |
2,613 | 1,692 | 1,025 | |||||||||
Deferred: |
||||||||||||
Federal |
211 | 17,112 | (1,171 | ) | ||||||||
State |
38 | 558 | (1,418 | ) | ||||||||
Foreign |
(315 | ) | (87 | ) | 135 | |||||||
Income tax expense |
$ | 3,653 | $ | 16,396 | $ | 21 | ||||||
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The net effective income tax rate differed from the federal statutory income tax rate as
follows (dollars in thousands):
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Federal statutory expense |
$ | 5,203 | $ | (9,733 | ) | $ | (5,556 | ) | ||||
State taxes, net of federal benefit |
291 | (2,017 | ) | (1,393 | ) | |||||||
Research and development credits |
(1,356 | ) | (1,292 | ) | (813 | ) | ||||||
Stock-based compensation |
936 | 633 | 543 | |||||||||
Foreign tax rate differential |
(2,022 | ) | (298 | ) | (282 | ) | ||||||
Acquisition related costs |
| 702 | | |||||||||
Valuation allowance |
328 | 28,078 | 7,942 | |||||||||
Other |
273 | 323 | (420 | ) | ||||||||
Income tax expense |
$ | 3,653 | $ | 16,396 | $ | 21 | ||||||
Net effective income tax rate |
24.6 | % | (59.0 | )% | (0.1 | )% |
The primary components of temporary differences that gave rise to deferred taxes were as
follows (in thousands):
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Deferred tax assets: |
||||||||
Allowance for doubtful accounts |
$ | 274 | $ | 307 | ||||
Research and development credit carryforward |
13,679 | 10,732 | ||||||
Foreign tax credit carryforward |
1,418 | 1,418 | ||||||
Deferred revenue |
2,895 | 3,078 | ||||||
Stock-based compensation |
6,949 | 8,635 | ||||||
Inventory adjustments |
3,679 | 2,796 | ||||||
Net operating loss carryforward |
5,557 | 6,035 | ||||||
Unrealized loss on investments |
4,054 | 7,913 | ||||||
Accrued liabilities and other |
3,314 | 2,986 | ||||||
41,819 | 43,900 | |||||||
Valuation allowance |
(37,694 | ) | (36,150 | ) | ||||
4,125 | 7,750 | |||||||
Deferred tax liabilities: |
||||||||
Depreciation and amortization |
(4,330 | ) | (8,020 | ) | ||||
Net deferred tax liabilities |
$ | (205 | ) | $ | (270 | ) | ||
The realizability of deferred income tax assets is based on a more likely than not standard.
If it is determined that it is more likely than not that deferred income tax assets will not be
realized, a valuation allowance must be established against the deferred income tax assets.
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Realization of our deferred tax assets is dependent primarily on the generation of future
taxable income. In considering the need for a valuation allowance we consider our historical, as
well as, future projected taxable income along with other positive and negative evidence in
assessing the realizability of our deferred tax assets.
During 2010 and 2009, management evaluated the need for a full valuation allowance of $37.7
million and $36.2 million respectively, against our net U.S. deferred tax assets and concluded that
a full valuation allowance against our net U.S. deferred tax assets was warranted due to, among
other reasons, (i) the recently realized cumulative accounting losses sustained in the U.S., (ii)
the taxable losses incurred in the U.S. in 2010 and 2009 and (iii) our uncertainty with respect to
generating future U.S. taxable income in the near term given our recently completed U.S.
projections and a number of inherent uncertainties such as the future level of U.S. tax deductions
from our share-based awards.
For the years ended December 31, 2010, 2009 and 2008, we recorded changes in our valuation
allowance of $1.5 million, $28.1 million and $8.1 million, respectively.
As of December 31, 2010, we have gross federal and state research and development credit
carryforwards of approximately $9.3 million and $14.3 million, respectively. The federal
carryovers begin to expire 2021, while the state carryovers have an indefinite carryover period.
As of December 31, 2010, we have gross federal foreign tax credit carryforwards of
approximately $1.4 million which begin to expire 2013.
At December 31, 2010, we have gross federal and state net operating loss (NOLs)
carryforwards of approximately $18.6 million and $24.6 million, respectively. The federal NOLs
expire beginning 2022, and the state NOLs begin to expire 2012. Section 382 of the Internal
Revenue Code imposes an annual limitation on the utilization of net operating loss carryforwards
related to acquired corporations based on a statutory rate of return (usually the applicable
federal funds rate as defined in the Internal Revenue Code) and the value of the corporation at
the time of a change in ownership as defined by Section 382. We estimate that our annual
limitation under Section 382 of the Internal Revenue Code is approximately $5.1 million.
Cumulative undistributed earnings of foreign subsidiaries for which no deferred income taxes
have been provided approximated $56.8 million and $48.7 million at December 31, 2010 and December
31, 2009, respectively. Deferred income taxes on these earnings have not been provided as these
amounts are considered to be permanently undistributed to the parent corporation.
At December 31, 2010, we had gross unrecognized tax benefits of approximately $12.3 million.
Of this total, approximately $5.3 million (net of the federal benefit on state issues) would affect
our effective tax rate if recognized. We classify liabilities for unrecognized tax benefits for
which we do not anticipate payment or receipt of cash within one year in noncurrent other
liabilities.
We recognize interest and penalties related to uncertain tax positions in income tax expense.
During the years ended December 31, 2010, 2009, and 2008, we recognized approximately $43,000,
$101,000, and $25,000, net of federal benefit, of interest within our statements of operations. We
had accrued interest, net of federal benefit, of $1.4 million and $1.3 million at December 31, 2010
and December 31, 2009, respectively. We file income tax returns in the U.S. federal jurisdiction
and in various state and foreign jurisdictions. With few minor exceptions, we are no longer
subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities in
material jurisdictions for the tax years ended prior to 2006.
A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits is as
follows (in thousands):
2010 | 2009 | 2008 | ||||||||||
Unrecognized Tax Benefits beginning balance |
$ | 10,629 | $ | 4,320 | $ | 4,367 | ||||||
Acquired unrecognized tax benefits |
| 5,655 | | |||||||||
Gross increases Tax positions taken in prior period |
243 | 6 | 18 |
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2010 | 2009 | 2008 | ||||||||||
Gross decreases Tax positions taken in prior period |
(70 | ) | | (13 | ) | |||||||
Gross increases Tax positions taken in current period |
1,868 | 878 | 617 | |||||||||
Lapse of statute of limitations |
(367 | ) | (230 | ) | (669 | ) | ||||||
Unrecognized Tax Benefits ending balance |
$ | 12,303 | $ | 10,629 | $ | 4,320 | ||||||
At December 31, 2010, we expect approximately $1.1 million in reductions to our recorded
liability for unrecognized tax benefits to occur over the next 12 months.
10. Commitments and Contingencies
We lease our facilities under noncancelable operating leases for varying periods through May
2015, excluding options to renew. The following are the future minimum commitments under these
leases (in thousands):
Year Ending | ||||
December 31, | ||||
2011 |
$ | 6,919 | ||
2012 |
6,210 | |||
2013 |
2,950 | |||
2014 |
458 | |||
2015 |
190 | |||
Thereafter |
| |||
$ | 16,727 | |||
Rent expense for the years ended December 31, 2010, 2009 and 2008 was approximately $8.4
million, $6.5 million and $6.1 million, respectively.
Litigation
IneoQuest Technologies, Inc. vs. Ixia. In November 2008, IneoQuest filed a complaint against
Ixia in the United States District Court for the Central District of California. The complaint
alleges that Ixia makes and sells products that infringe a patent owned by IneoQuest, and that Ixia
misappropriated IneoQuests trade secrets, in addition to numerous other related claims. The patent
at issue allegedly relates to a system and method for analyzing the performance of multiple
transportation streams of streaming media in packet-based networks. IneoQuest seeks a permanent
injunction enjoining Ixia from infringing the patent at issue and from using IneoQuests trade
secrets and confidential information, unspecified general and exemplary damages, and attorneys
fees and costs.
In January 2009, Ixia filed an answer and counterclaim to IneoQuests complaint denying
IneoQuests claims and raising several affirmative defenses. Ixia has also asserted a counterclaim
against IneoQuest seeking declaratory relief that Ixia has not infringed the IneoQuest patent and
that such patent is invalid. In April 2009, Ixia filed an amended answer and counterclaim to
IneoQuests complaint in which Ixia asserted that IneoQuest has infringed four patents owned by
Ixia. Although the Company cannot predict the outcome of this matter, Ixia believes that it has
strong defenses to IneoQuests claims and is defending the action vigorously. The parties commenced
discovery in this matter in the 2009 second quarter. The parties filed a Joint Claim Construction
brief on November 30, 2009. On July 27, 2010, the Court issued a claim construction ruling relating
to certain terms within the claims of IneoQuests patent and ordered the parties to further brief
claim construction issues related to Ixias four asserted patents. Fact discovery is set to
conclude 90 days after the issuance of the claim construction ruling related to Ixias four
asserted patents. Expert discovery is set to conclude 150 days after the issuance of the claim
construction ruling. As yet, a trial date has not been set.
Tucana Telecom NV vs. Catapult. On May 22, 2007, the Antwerp Court of Appeal heard an appeal
by Tucana Telecom NV, a Belgian company, of the previous dismissal by the Antwerp Commercial Court
of an action by Tucana against Catapult. Tucana had sought damages of 10.4 million Euros
(approximately $13.8 million as of December 31, 2010) for the alleged improper termination in 2002
by Catapult of Tucanas distribution agreement with Catapult. On June 19, 2007, the Antwerp Court
of Appeal confirmed the Commercial Courts dismissal of
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Tucanas action and assessed the costs of the appeal against Tucana. On July 22, 2008,
Catapult was notified by its Belgian counsel that Tucana had appealed the judgment of the Antwerp
Court of Appeal to the Belgian Supreme Court. In a decision dated January 14, 2010, the Belgium
Supreme Court set aside the decision of the Antwerp Court of Appeal and remanded the matter for
trial to the Ghent Court of Appeal. Catapults Belgian counsel was informed by Tucanas counsel on
January 19, 2011 that Tucana has sent out for service a writ scheduling an introductory hearing
before the Ghent Court of Appeals. Catapults counsel was informed that Tucana now asserts that it
is entitled to additional compensation of approximately 2.7 million Euros (approximately $3.6
million as of December 31, 2010). Once Catapult is served and learns the proposed date for the
introductory hearing, a briefing schedule will be established for the exchange of trial briefs.
In June 2010, Catapult filed a complaint against Tucana in the Superior Court of the State of
California, County of Los Angeles, seeking declaratory and injunctive relief and damages for breach
of the distribution agreement. Catapult filed its First Amended Complaint on September 8, 2010 to
address a statute of limitations issue raised by Tucanas initial response. Catapult seeks a
declaration that the distribution agreement is a valid and enforceable agreement, and that the
distribution agreements mandatory forum selection and choice of law provisions are enforceable and
require that the litigation of any dispute involving the agreement be brought in a court located in
the County of Los Angeles. Catapult also seeks an order permanently enjoining Tucana from
prosecuting any claims arising out of Tucanas distribution relationship with Catapult in any
judicial forum outside the County of Los Angeles. Catapult also seeks compensatory damages of not
less than $200,000 for damages suffered by Catapult arising out of Tucanas breach of the
distribution agreement. Tucana filed a demurrer to the First Amended Complaint on October 12, 2010
seeking dismissal of the action based on the statute of limitations and the doctrine of laches.
Catapult filed its opposition to the demurrer on November 23, 2010. The hearing on the demurrer
has been scheduled by the Court for April 18, 2011. While awaiting the hearing on the demurrer,
Catapult has begun discovery in the California proceeding by requesting Tucana to produce documents
relevant to Tucanas underlying claims. Tucana has not yet responded to that request.
Catapult believes that it properly terminated any contract it had with Tucana and that Tucana
is not entitled to any damages in this matter. Catapult has defended the action vigorously to date
and will continue to do so. Catapult may be able to seek indemnification from Tekelec for any
damages assessed against Catapult in this matter under the terms of the Asset Purchase Agreement
that Catapult entered into with Tekelec, although there is no assurance that such indemnification
would be available. On March 30, 2010, Tekelecs legal counsel in Belgium informed Catapults
Belgian counsel that its client is considering intervening voluntarily in the Ghent appeal
proceedings but that no final decision has been taken in this respect. It is not possible to
determine the amount of any loss that might be incurred in this matter.
We are not aware of any other pending legal proceedings than the matters mentioned above that,
individually or in the aggregate, would have a material adverse effect on our business, results of
operations or financial position. We may in the future be party to litigation arising in the
ordinary course of business, including claims that we allegedly infringe upon third party
trademarks or other intellectual property rights. Such claims, even if without merit, could result
in the expenditure of significant financial and managerial resources.
Indemnifications
In the normal course of business, we provide certain indemnifications, commitments and
guarantees of varying scope to customers, including against claims of intellectual property
infringement made by third parties arising from the use of our products. We also have certain
obligations to indemnify our officers, directors and employees for certain events or occurrences
while the officer, director or employee is or was serving at our request in such capacity. The
duration of these indemnifications, commitments and guarantees varies and in certain cases, is
indefinite. Many of these indemnifications, commitments and guarantees do not provide for any
limitation of the maximum potential future payments that we could be obligated to make. However,
our director and officer insurance policy may enable us to recover a portion of any future payments
related to our officer, director or employee indemnifications. Historically, costs related to these
indemnifications, commitments and guarantees have not been significant and accordingly, we believe
the estimated fair value of these indemnifications, commitments and guarantees are not material.
With the exception of the product warranty accrual (see Note 1), no liabilities have been recorded
for these indemnifications, commitments and guarantees.
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11. Shareholders Equity
Stock Award Plans
Our Amended and Restated 1997 Equity and Incentive Plan, as amended (the 1997 Plan),
provides for the issuance of share-based awards to our eligible employees and consultants. The
share-based awards may include incentive stock options (ISO), nonstatutory stock options,
restricted stock units (RSU) or restricted stock awards. Options become exercisable over a
vesting period as determined by the Board of Directors and expire over terms not exceeding 10 years
from the date of grant. The exercise price for options granted under the 1997 Plan may not be
granted at less than 100% of the fair market value of our Common Stock on the date of grant (110%
for ISOs granted to an employee who owns more than 10% of the voting shares of the outstanding
stock). Options generally vest over a four-year period. In the event the holder ceases to be
employed by us, all unvested options are forfeited and all vested options may be exercised within a
period of up to 30 days after the optionees termination for cause, up to three months after
termination other than for cause or as a result of death or disability, or up to six months after
termination as a result of disability or death. The 1997 Plan terminated in May 2008 and as such,
no shares are available for future grant. As of December 31, 2010, 2.1 million awards remained
outstanding under the 1997 Plan.
Our 2008 Equity Incentive Plan, as amended (the 2008 Plan), provides for the issuance of
share-based awards to our eligible employees, directors and consultants. The share-based awards may
include ISOs, nonstatutory stock options, stock appreciation rights, restricted stock units (RSU)
or restricted stock awards. Options become exercisable over a vesting period as determined by the
Board of Directors and expire over terms not exceeding 10 years from the date of grant. The
exercise price for options granted under the 2008 Plan may not be granted at less than 100% of the
fair market value of our Common Stock on the date of grant (110% for ISOs granted to an employee
who owns more than 10% of the voting shares of the outstanding stock). Options generally vest over
a four-year period. In the event the holder ceases to be employed by us, all unvested options are
forfeited and all vested options may be exercised within a period of up to 90 days after
termination other than (i) for termination for cause for which the vested options are forfeited on
the termination date or (ii) as a result of death or disability for which vested options may be
exercised for up to 180 days after termination. The 2008 Plan will terminate in May 2018, unless
terminated sooner by the Board of Directors. In May 2010, the 2008 Plan was amended to add our
non-employee directors to the categories of persons to whom equity incentive awards may be granted
under the 2008 Plan. As of December 31, 2010, we have reserved 11.6 million shares of our Common
Stock for issuance under the 2008 Plan, 2.3 million shares of which were available for future grant
as of such date.
Our Amended and Restated Non-Employee Director Equity Incentive Plan (the Director Plan)
provided for the issuance of share-based awards to our non-employee directors. The Director Plan
terminated in September 2010. Upon the termination of the Director Plan, share-based awards will
now be granted to our non-employee directors under the 2008 Plan.
The following table summarizes stock option activity for the year ended December 31, 2010 (in
thousands, except per share and contractual life data):
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number | Exercise Price | Contractual | Intrinsic | |||||||||||||
of Options | Per Share | Life (in years) | Value | |||||||||||||
Outstanding as of December 31, 2009 |
9,227 | $ | 7.98 | 3.74 | $ | 5,534 | ||||||||||
Granted |
2,299 | $ | 9.01 | |||||||||||||
Exercised |
(3,243 | ) | $ | 7.61 | ||||||||||||
Forfeited/canceled |
(1,011 | ) | $ | 9.24 | ||||||||||||
Outstanding as of December 31, 2010 |
7,272 | $ | 8.29 | 4.18 | $ | 61,772 | ||||||||||
Vested and expected to vest as of December 31, 2010 |
6,946 | $ | 8.30 | 4.08 | $ | 58,949 | ||||||||||
Exercisable as of December 31, 2010 |
3,532 | $ | 8.59 | 2.66 | $ | 28,973 | ||||||||||
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Excluding the effects of the incremental gross stock-based compensation related to the Stock
Option Exchange Program in August of 2008 discussed below, the weighted average grant-date fair
value of options granted for the years ended December 31, 2010, 2009 and 2008 was $3.19, $2.15 and
$2.96 per share, respectively. The total intrinsic value of options exercised during the years
ended December 31, 2010, 2009 and 2008 was $14.2 million, $1.4 million and $1.7 million,
respectively. As of December 31, 2010, the remaining unrecognized compensation expense related to
stock options is expected to be recognized over a weighted average period of 1.45 years.
The following table summarizes RSU activity for the year ended December 31, 2010 (in
thousands, except per share data):
Weighted | ||||||||
Average Grant | ||||||||
Number | Date Fair Value | |||||||
of Awards | Per Share | |||||||
Outstanding as of December 31, 2009 |
2,084 | $ | 6.53 | |||||
Awarded |
605 | $ | 11.81 | |||||
Released |
(741 | ) | $ | 6.99 | ||||
Forfeited/canceled |
(173 | ) | $ | 6.91 | ||||
Outstanding as of December 31, 2010 |
1,775 | $ | 8.10 | |||||
The weighted average remaining contractual life and expense recognition period of the
outstanding RSUs as of December 31, 2010 was 1.45 years.
Employee Stock Purchase Plan
The employee stock purchase plan (the 2000 Purchase Plan) was adopted and approved in
September 2000. The 2000 Purchase Plan became effective upon the closing of our initial public
offering in October 2000 and was amended in May 2003 and in April 2006. The 2000 Purchase Plan
permits eligible employees to purchase Common Stock, subject to limitations as set forth in the
2000 Purchase Plan, through payroll deductions which may not exceed the lesser of 15% of an
employees compensation or $21,250 per annum. The 2000 Purchase Plan is implemented in a series of
consecutive, overlapping 24-month offering periods, with each offering period consisting of four
six-month purchase periods. Offering periods begin on the first trading day on or after May 1 and
November 1 of each year. During each 24-month offering period under the 2000 Purchase Plan,
participants accumulate payroll deductions which on the last trading day of each six-month purchase
period within the offering period are applied toward the purchase of shares of our Common Stock at
a purchase price equal to 85% of the lower of (i) the fair market value of a share of our Common
Stock as of the first trading day of the 24-month offering period and (ii) the fair market value of
a share of Common Stock on the last trading day of the six-month purchase period. The 2000
Purchase Plan expired in September 2010. The last offering period under the 2000 Purchase Plan
commenced on May 1, 2010 and will end on April 30, 2012. We had reserved a total of 4.5 million
shares of Common Stock for issuance under the 2000 Purchase Plan, 568,000 shares of which are
available for future issuance for the existing offering periods. For the years ended December 31,
2010 and 2009, 567,000 and 559,000 shares, respectively, were issued under the 2000 Purchase Plan.
During the second quarter of 2010, our shareholders approved the 2010 Employee Stock Purchase
Plan (the 2010 Purchase Plan). The 2010 Purchase Plan replaced the Plan (i.e., no new 24-month
offering periods will be offered under the 2000 Purchase Plan, although the open offering periods
prior to the September 2010 expiration will continue until the applicable 24-month offering periods
end). We have reserved a total of 500,000 shares of Common Stock for issuance under the 2010
Purchase Plan, together with the potential for an annual increase in the number of shares reserved
under the 2010 Purchase Plan on May 1 of each year. The 2010 Purchase Plan is implemented in a
series of consecutive, overlapping 24-month offering periods, with each offering period consisting
of four six-month purchase periods. Offering periods begin on the first trading day on or after May
1 and November
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1 of each year. The first 24-month offering period under the 2010 Purchase Plan began on
November 1, 2010 and is scheduled to end on October 31, 2012. The 2010 Purchase Plan will terminate
in March 2020, unless it is earlier terminated by the Board of Directors.
Stock-Based Compensation Expense
We calculated the estimated fair value for accounting purposes of each share-based award on
the respective dates of grant using the Black-Scholes option-pricing model using the following
weighted average assumptions:
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Expected lives (in years) |
3.6 | 3.6 | 4.0 | |||||||||
Risk-free interest rates |
1.6 | % | 1.7 | % | 2.4 | % | ||||||
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
Expected volatility |
46.1 | % | 46.5 | % | 48.2 | % |
The aggregate balance of gross unrecognized stock-based compensation to be expensed in the
years 2011 through 2014 related to unvested share-based awards as of December 31, 2010 was
approximately $18.0 million.
Option Exchange Program
During the second quarter of 2008, our shareholders approved a Stock Option Exchange Program
(the Program), which allowed current employees, other than executive officers and members of our
Board of Directors, to exchange certain underwater options for fewer new options. On August 7,
2008, we completed the Program by canceling 3.7 million old options and granting 2.6 million new
options. The canceled old options had per share exercise prices ranging from $9.30 to $21.50, and
the new options were granted with an exercise price of $8.58 per share, the closing price of our
common stock on August 7, 2008 as reported on the Nasdaq Global Select Market. The new options
have vesting schedules ranging from approximately one to four years and have contractual terms
ranging from approximately three to six years. The additional gross stock-based compensation
expense of $3.1 million related to this Program will be recognized over the vesting periods of one
to four years from the date of grant of the new options.
Stock Buyback Programs
We announced a six-month stock buyback program in November 2008 to repurchase up to $25
million of our common stock. This program expired in May 2009 and was in addition to the $50
million repurchase program, which was announced in August 2007 and completed in June 2008. From
January 1, 2009 through the May 2009 expiration date, we repurchased 1.6 million shares of our
common stock for $8.4 million, or approximately $5.19 per share. During 2008, we repurchased 5.8
million shares of our common stock for $43.6 million, or approximately $7.51 per share. These
repurchased shares remain authorized, but are no longer issued and outstanding.
Accumulated Other Comprehensive Income
The following table summarizes, as of each balance sheet date, the components of our
accumulated other comprehensive income, net of income taxes (in thousands):
December 31, | ||||||||
2010 | 2009 | |||||||
Unrealized gains on marketable securities |
$ | 1,941 | $ | 1,627 | ||||
Foreign currency translation gains |
513 | 22 | ||||||
Total accumulated other comprehensive income |
$ | 2,454 | $ | 1,649 | ||||
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12. Retirement Plan
We provide a 401(k) Retirement Plan (the Plan) to eligible employees who may authorize
contributions up to IRS annual deferral limits to be invested in employee elected investment funds.
As determined annually by the Board of Directors, we may contribute matching funds of 50% of the
employee contributions up to $2,500. These matching contributions vest based on the employees
years of service with us. For the years ended December 31, 2010, 2009 and 2008, we expensed and
made contributions to the Plan in the amount of approximately $820,000, $70,000 and $741,000,
respectively. The matching of employee 401(k) contributions was suspended in January 2009 and
reinstated in January 2010.
13. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings (loss) per share
for the periods indicated (in thousands, except per share data):
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Basic Presentation |
||||||||||||
Numerator for basic earnings (loss) per share: |
||||||||||||
Net income (loss) |
$ | 11,208 | $ | (44,203 | ) | $ | (15,895 | ) | ||||
Denominator for basic earnings (loss) per share: |
||||||||||||
Weighted average common shares outstanding |
65,157 | 62,710 | 65,087 | |||||||||
Basic (loss) earnings per share |
$ | 0.17 | $ | (0.70 | ) | $ | (0.24 | ) | ||||
Diluted Presentation |
||||||||||||
Numerator for diluted earnings (loss) per share: |
||||||||||||
Net income (loss) |
$ | 11,208 | $ | (44,203 | ) | $ | (15,895 | ) | ||||
Interest expense on convertible senior notes, net of tax |
| | | |||||||||
Net income (loss) used for diluted earnings (loss) per
share |
$ | 11,208 | $ | (44,203 | ) | $ | (15,895 | ) | ||||
Denominator for dilutive earnings (loss) per share: |
||||||||||||
Weighted average common shares outstanding |
65,157 | 62,710 | 65,087 | |||||||||
Effect of dilutive securities: |
||||||||||||
Stock options and other share-based awards |
2,612 | | | |||||||||
Convertible senior notes |
| | | |||||||||
Dilutive potential common shares |
67,769 | 62,710 | 65,087 | |||||||||
Diluted
earnings (loss) per share |
$ | 0.17 | $ | (0.70 | ) | $ | (0.24 | ) | ||||
The
diluted earnings per share computation for the year ended December 31, 2010 excludes (i)
the weighted average number of shares underlying our outstanding convertible senior notes, of
676,000, as they are considered anti-dilutive because the related interest expense on a per common
share if converted basis exceeds basic earnings per share, and (ii) the weighted average number
of shares underlying our employee stock options and other share-based awards of 1.4 million shares,
which were anti-dilutive because, in general, the exercise price of these awards exceeded the
average closing price per share of our common stock during 2010. The diluted earnings per share
computations for the years ended December 31, 2009 and 2008, exclude employee stock options and
other share-based awards to purchase or otherwise acquire 10.5 million and 7.0 million shares,
respectively, which were anti-dilutive because of our net loss position.
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14. Quarterly Financial Summary (Unaudited)
Three Months Ended | ||||||||||||||||||||||||||||||||
Dec. 31 | Sep. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sep. 30 | Jun. 30 | Mar. 31 | |||||||||||||||||||||||||
2010(1) | 2010 | 2010 | 2010(1) | 2009 | 2009 | 2009 | 2009 | |||||||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||||||||||||||
Total revenues |
$ | 77,780 | $ | 70,890 | $ | 66,104 | $ | 62,041 | $ | 56,091 | $ | 46,374 | $ | 38,405 | $ | 37,124 | ||||||||||||||||
Total cost of revenues(2) |
19,420 | 18,126 | 19,184 | 16,798 | 15,820 | 14,324 | 9,983 | 9,674 | ||||||||||||||||||||||||
Gross profit |
58,360 | 52,764 | 46,920 | 45,243 | 40,271 | 32,050 | 28,422 | 27,450 | ||||||||||||||||||||||||
Income (loss) before income taxes |
8,392 | 5,918 | (986 | ) | 1,537 | (6,470 | ) | (9,388 | ) | (5,906 | ) | (6,043 | ) | |||||||||||||||||||
Net income (loss)(3) |
5,826 | 4,874 | (361 | ) | 869 | (31,335 | ) | (6,223 | ) | (2,654 | ) | (3,991 | ) | |||||||||||||||||||
Earnings (loss) per share: |
||||||||||||||||||||||||||||||||
Basic |
$ | 0.09 | $ | 0.07 | $ | (0.01 | ) | $ | 0.01 | $ | (0.50 | ) | $ | (0.10 | ) | $ | (0.04 | ) | $ | (0.06 | ) | |||||||||||
Diluted |
$ | 0.08 | $ | 0.07 | $ | (0.01 | ) | $ | 0.01 | $ | (0.50 | ) | $ | (0.10 | ) | $ | (0.04 | ) | $ | (0.06 | ) |
(1) | In the first and fourth quarters of 2010, we recorded $8.9 million and $1.0 million, respectively, to interest income and other, net related to (i) settlement proceeds received during the 2010 first quarter for claims asserted by us against our former investment manager for damages and losses relating to our previous investments in auction rate securities with an aggregate par value of $19.0 million, and (ii) proceeds received during the 2010 fourth quarter for the sale of certain of our auction rate securities that were previously written-off. | |
(2) | For the quarters ended December 31, 2010, September 30, 2010, June 30, 2010, March 31, 2010, December 31, 2009, September 30, 2009, June 30, 2009, March 31, 2009, total cost of revenues include charges related to amortization of intangible assets of $2.7 million, $2.4 million, $3.9 million, $3.8 million, $3.8 million, $3.0 million, $1.2 million and $1.2 million, respectively. | |
(3) | In the fourth quarter of 2009, our income tax expense includes a $27.6 million charge related primarily to the establishment of a valuation allowance against our net U.S. deferred tax assets. |
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EXHIBIT INDEX
Exhibit No. | Description | |
21.1
|
Subsidiaries of the Registrant | |
23.1
|
Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm | |
31.1
|
Certification of Chief Executive Officer of Ixia pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Chief Financial Officer of Ixia pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certifications of Chief Executive Officer and Chief Financial Officer of Ixia pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
93