SUBSCRIBE TO TMCnet
TMCnet - World's Largest Communications and Technology Community
 
| More

TMCNet:  IXIA - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[November 08, 2012]

IXIA - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2012, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011 ("2011 Form 10-K"), including the "Risk Factors" section and the consolidated financial statements and notes included therein.



BUSINESS OVERVIEW We were incorporated on May 27, 1997 as a California corporation. We are a leading provider of converged Internet Protocol (IP) network validation and network visibility solutions. Equipment manufacturers, service providers, enterprises, and government agencies use our solutions to design, verify, and monitor a broad range of Ethernet, Wi-Fi, and 3G/LTE equipment and networks. Our test solutions emulate realistic media-rich traffic and network conditions so that customers can optimize and validate the design, performance, and security of their pre-deployment networks. Our intelligent network visibility solutions provide clarity into physical and virtual production networks for improved performance, security, resiliency, and application delivery of cloud, data center, and service provider networks. Our product solutions consist of our hardware platforms, such as our chassis, interface cards and appliances, software application tools, and services, including our warranty and maintenance offerings and professional services.

Acquisition of BreakingPoint Systems, Inc. On August 24, 2012, we completed our acquisition of all of the outstanding shares of common stock of BreakingPoint Systems, Inc. ("BreakingPoint"). The aggregate cash consideration paid totaled $164.1 million, or $150.7 million net of BreakingPoint's existing cash and investment balances at the time of the acquisition, and is subject to certain post-closing adjustments, including a potential adjustment based on the final amount of BreakingPoint's closing net working capital. The acquisition was funded from our existing cash and investments. BreakingPoint is a leader in security testing, and its solutions provide global visibility into emerging threats and applications, along with advance insight into the resiliency of an organization's information technology infrastructure under operationally relevant conditions and malicious attacks. With this acquisition, we have expanded our addressable market, broadened our product portfolio and grown our customer base. In addition, we expect to leverage BreakingPoint's existing sales channels and assembled workforce, including its experienced product development and sales teams. The results of operations of BreakingPoint have been included in our 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-Q.

Acquisition of Anue Systems, Inc. On June 1, 2012, we completed our acquisition of all of the outstanding shares of common stock of Anue Systems, Inc. ("Anue").

The aggregate consideration paid totaled $151.9 million, or $148.3 million net of Anue's existing cash and investment balances at the time of the acquisition, and is subject to certain adjustments including an adjustment based on the final amount of Anue's net working capital on the closing date. The acquisition was funded from our existing cash and investments. Anue provides solutions to monitor and test complicated networks, including Anue's Net Tool Optimizer solution that efficiently aggregates and filters network traffic to help optimize network monitoring tool usage. With this acquisition, we have expanded our addressable market, broadened our product portfolio and grown our customer base. In addition, we expect to leverage Anue's existing sales channels and assembled workforce, including its experienced product development team. The results of operations of Anue have been included in our 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-Q.

19 -------------------------------------------------------------------------------- Acquisition of VeriWave, Inc. On July 18, 2011, we completed our acquisition of all of the outstanding stock of VeriWave, Inc. ("VeriWave"). The purchase price for VeriWave totaled $15.8 million, or $15.6 million net of VeriWave's existing cash and investment balances at the time of the acquisition. The acquisition was funded from our existing cash and cash equivalents. VeriWave's test solutions validate wireless networks, devices, and applications by benchmarking and measuring speed, quality, interoperability, compliance, and other pivotal aspects of mobile performance. The results of operations of VeriWave have been included in our consolidated statements of operations and cash flows since the date of the acquisition.

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 hardware products primarily relate to our traffic generation and analysis hardware platform consisting of a multi-slot chassis and interface cards. Our primary hardware platform is enabled by our operating system software that is essential to the functionality of the hardware platform.

Our software products consist of a comprehensive suite of technology-specific test applications. Our software products are typically installed on and work with our hardware products to further enhance the core functionality of the overall test system, although some of our software products can be operated independently from our hardware products.

Our service revenues primarily consist of post contract customer support and maintenance ("PCS") related to the initial period of service provided with the purchase of our software or software-related (i.e., our operating system software) products and separately purchased extended PCS contracts. PCS on our software and software-related products includes unspecified when and if available software upgrades and customer technical support services. Service revenues also include separately purchased extended hardware warranty support, implied PCS and hardware warranty support, training and other professional services.

For the nine months ended September 30, 2012, sales of our Ethernet interface cards, including our 1 Gigabit Ethernet, 10 Gigabit Ethernet and 40/100 Gigabit Ethernet interface cards represented the majority of our total revenues. Over the longer term, while we expect the sale of our Ethernet interface cards to represent a significant amount of our revenues going forward, we expect to see some decline as a percentage of total revenues as the sales of our network visibility solutions, and other appliances increase. Sales to our largest customer, Cisco Systems, accounted for approximately $13.1 million, or 12.0%, and $42.5 million, or 14.8%, of our total revenues for the three and nine months ended September 30, 2012, respectively, and $8.6 million, or 11.1%, and $30.3 million, or 13.5%, of our total revenues for the three and nine months ended September 30, 2011, respectively. Sales to AT&T were approximately $12.3 million, or 11.2%, and $15.2 million, or 5.3%, of our total revenues for the three and nine months ended September 30, 2012, respectively, and $3.9 million, or 5.0%, and $8.6 million, or 3.8%, of our total revenues for the three and nine months ended September 30, 2011, respectively. To date, we have generated the majority of our revenues from sales to network and telecommunication equipment manufacturers. While we expect that we will continue to have some customer concentration with network and telecommunication equipment manufacturers for the foreseeable future, we expect to see some decline as a percentage of total revenues as 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. We also expect that our 2012 acquisitions of Anue and BreakingPoint (the "2012 Acquisitions") will further diversify our customer base. From a geographic perspective, we generated revenues from shipments to international locations of $41.5 million, or 37.9%, and $123.9 million, or 43.1%, of our total revenues for the three and nine months ended September 30, 2012, respectively, compared to $37.4 million, or 48.5%, and $113.9 million, or 50.7%, of our total revenues for the three and nine months ended September 30, 2011, respectively.

The decline in the percentage of our revenue from shipments to international locations was primarily due to our 2012 Acquisitions, which have a higher concentration of revenue in the United States as compared to Ixia. Over the next 12 months, we expect to leverage and expand our international sales force to sell our products related to our 2012 Acquisitions, and as a result, we expect to increase our percentage of revenue from shipments to international locations.

Total revenues from product shipments to Japan, were $8.6 million, or 7.8%, and $33.5 million, or 11.7%, for the three and nine months ended September 30, 2012, respectively, compared with $9.8 million, or 12.7%, and $21.7 million, or 9.7%, for the three and nine months ended September 30, 2011, respectively.

20 -------------------------------------------------------------------------------- Stock-Based Compensation. For the three and nine months ended September 30, 2012, stock-based compensation expense was $4.2 million and $12.0 million, respectively. Stock-based compensation for the three and nine months ended September 30, 2011 was $2.9 million and $10.0 million, respectively. The increase in stock-based compensation expense in the three and nine months ended September 30, 2012 as compared to the same periods in 2011 was primarily due to (i) an increase in the number of participants in our employee stock purchase plan, (ii) the incremental impact of the share-based awards granted to the employees of Anue following the Anue acquisition, and (iii) the partial recognition during the 2012 periods of expense for certain performance-based awards which had no comparable cost in 2011 (i.e., In the comparable 2011 periods, these performance-based awards were previously not expected to be earned). The aggregate amount of gross unrecognized stock-based compensation to be expensed in the years 2012 through 2016 related to unvested share-based awards as of September 30, 2012 was approximately $17.8 million. In October 2012, we granted annual share-based awards to our employees as well as awards to BreakingPoint employees following the BreakingPoint acquisition, which increased our aggregate balance of gross unearned stock-based compensation by an estimated $15.5 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 facilities in Calabasas, California, Austin, Texas and 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 $7.0 million and $13.3 million for the three and nine months ended September 30, 2012, respectively, and $2.9 million and $7.9 million for the three and nine months ended September 30, 2011, respectively, which are included within our Amortization of Intangible Assets line item on our condensed 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 · shipment volume.

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

21-------------------------------------------------------------------------------- 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 costs discussed below, to increase for the remainder of 2012 due primarily to the recently completed acquisition of BreakingPoint.

· 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 purchase price of various intangible assets over their estimated useful lives. We evaluate our identifiable definite-lived intangible assets and other long-lived assets for impairment when events or changes in circumstances indicate that a potential impairment may exist. An impairment charge would be recorded to the extent that the carrying value of the intangible asset exceeds its undiscounted cash flows and its estimated fair value in the period that the impairment circumstances occurred. We also 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. The future amortization expense of acquired intangible assets depends on a number of factors, including the extent to which we acquire additional businesses, technologies or product lines or are required to record impairment charges related to our acquired intangible assets.

· Acquisition and other related costs are expensed as incurred and consist primarily of transaction and integration related costs such as success-based banking fees, professional fees for legal, accounting, tax, due diligence, valuation and other related services, change in control payments, amortization of deferred consideration, 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 other related charges. We expect to incur additional restructuring expenses in the fourth quarter of 2012 primarily consisting of facility-related charges for the closure of our Melbourne, Australia office. See Note 4 to the Consolidated Financial Statements included in this Form 10-Q.

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.

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 5 to the Consolidated Financial Statements included in this Form 10-Q.

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 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.

22 -------------------------------------------------------------------------------- During the three months ended September 30, 2012 and June 30, 2012, we released $12.7 million and $22.6 million, respectively, of our valuation allowance previously established against our U.S. deferred tax assets. The partial releases were the result of a net deferred tax liability recorded as part of both the Anue and BreakingPoint acquisitions. While we continue to maintain a valuation allowance against our remaining U.S. deferred tax assets, the release of the remaining valuation allowance, or a portion thereof, will have a favorable impact on our effective tax rate. We will continue to monitor the need for a valuation allowance each reporting period, and at this time, it is uncertain when such a release may occur.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements included in our Form 10-Q which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts, write-downs for obsolete 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. None of these accounting policies and estimates have significantly changed since our Annual Report on Form 10-K for the year ended December 31, 2011. Critical accounting policies and estimates are more fully described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2011 Form 10-K. Actual results may differ from these estimates under different assumptions or conditions.

23 --------------------------------------------------------------------------------RESULTS OF OPERATIONS The following table sets forth certain statement of operations data as a percentage of total revenues for the periods indicated: Three months ended Nine months ended September 30, September 30, 2012 2011 2012 2011 Revenues: Products 80.9 % 80.3 % 81.3 % 81.0 % Services 19.1 19.7 18.7 19.0 Total revenues 100.0 100.0 100.0 100.0 Costs and operating expenses:(1) Cost of revenues - products 18.7 18.3 17.2 18.3 Cost of revenues - services 2.5 2.0 2.6 2.1 Research and development 23.5 24.5 24.1 24.9 Sales and marketing 28.0 26.4 27.9 28.8 General and administrative 10.1 12.2 11.7 11.5 Amortization of intangible assets 9.1 5.5 6.7 5.2 Acquisition and other related 3.9 0.5 2.9 0.4 Restructuring 1.9 - 0.7 - Total costs and operating expenses 97.7 89.4 93.8 91.2 Income from operations 2.3 10.6 6.2 8.8 Interest income and other, net 0.8 1.2 0.6 0.8 Interest expense (1.6 ) (2.3 ) (1.9 ) (2.4 ) Income before income taxes 1.5 9.5 4.9 7.2 Income tax (benefit) expense (8.9 ) 1.2 (9.9 ) 1.0 Net income 10.4 % 8.3 % 14.8 % 6.2 % (1) Stock-based compensation included in: Cost of revenues - products 0.1 % 0.1 % 0.1 % 0.1 % Cost of revenues - services 0.0 0.0 0.0 0.1 Research and development 1.2 1.2 1.2 1.5 Sales and marketing 1.0 0.9 1.0 1.1 General and administrative 1.5 1.5 1.8 1.6 Comparison of Three and Nine Months Ended September 30, 2012 and 2011 As a result of our acquisitions of Anue Systems, Inc. ("Anue") on June 1, 2012 and BreakingPoint Systems, Inc. ("BreakingPoint) on August 24, 2012 (the "2012 Acquisitions"), our 2012 consolidated results of operations include the financial results of these acquisitions 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 these acquisitions for the applicable periods in the related statement of operations sections below.

Revenues. In the third quarter of 2012, total revenues increased 41.8% to $109.6 million from the $77.3 million recorded in the third quarter of 2011. As a result of our 2012 Acquisitions, the third quarter of 2012 included revenues of $20.8 million related to the 2012 acquisitions. Excluding the revenues from our 2012 Acquisitions, revenues increased to $88.8 million in the third quarter of 2012 primarily due to a $14.7 million increase in shipments of our hardware products (primarily our 10 and 40/100 Gigabit Ethernet interface cards and IxVeriwave products), partially offset by decreases in shipments of our software products (primarily our IxCatapult software).

24 -------------------------------------------------------------------------------- In the first nine months of 2012, total revenues increased 28.0% to $287.5 million from $224.7 million recorded in the same period of 2011. Excluding revenues of $24.6 million related to the 2012 Acquisitions, revenues increased to $262.9 million in the first nine months of 2012 primarily due to a $32.0 million increase in shipments of our hardware products (primarily our 10 and 40/100 Gigabit Ethernet interface cards and our IxVeriwave products).

Cost of Revenues. As a percentage of total revenues, our total cost of revenues increased to 21.2% in the third quarter of 2012 from 20.3% in the third quarter of 2011. Excluding the impact of our 2012 Acquisitions, our cost of revenues as a percentage of total revenues in the third quarter of 2012 increased to 22.8%.

This increase was primarily due to increases in personnel-related costs attributable to professional services and technical support. As a percentage of total revenues, our total cost of revenues decreased to 19.8% in the first nine months of 2012 from 20.4% in the first nine months of 2011. Excluding the impact of our 2012 Acquisitions, our cost of revenues as a percentage of total revenues for the first nine months of 2012 was also 20.4%.

Research and Development Expenses. In the third quarter of 2012, research and development expenses increased 36.1% to $25.8 million from $18.9 million in the third quarter of 2011. As a result of our 2012 Acquisitions, our research and development expenditures in the third quarter of 2012 included approximately $4.6 million related to the research and development activities of the acquired operations. Excluding the incremental research and development costs related to the 2012 Acquisitions, research and development expenses in the third quarter of 2012 were $21.2 million compared to $18.9 million in the third quarter of 2011.

This increase was primarily due to an increase in compensation and related employee costs of $1.4 million as a result of additional investments in our product development teams in the United States and Romania, and higher stock-based compensation expense of $414,000.

Research and development expenses for the first nine months of 2012 increased 23.5% to $69.2 million from $56.0 million in the same period of 2011. As a result of our 2012 Acquisitions, our research and development expenditures in the first nine months of 2012 included approximately $5.5 million related to the research and development activities of the acquired operations. Excluding the incremental research and development costs related to the 2012 Acquisitions, research and development expenses for the first nine months of 2012 were $63.7 million compared to $56.0 million for the first nine months of 2011. This increase was primarily due to an increase in compensation and related employee costs of $7.5 million that was primarily a result of (i) additional investments in our product development teams, including the Wi-Fi development team added as part of our acquisition of VeriWave in July 2011 and our teams in the United States, Romania and India, and (ii) higher bonus expense as we expect our 2012 performance to exceed that of 2011 when compared to the applicable annual company-wide objectives. This increase was partially offset by a one-time charge of $900,000 incurred in the first quarter of 2011 to terminate and settle a product development contract.

Sales and Marketing Expenses. In the third quarter of 2012, sales and marketing expenses increased 50.2% to $30.6 million from $20.4 million in the third quarter of 2011. As a result of our 2012 Acquisitions, our sales and marketing expenditures in the third quarter of 2012 included approximately $6.8 million related to the sales and marketing activities of Anue and BreakingPoint. Excluding the incremental sales and marketing costs related to the 2012 Acquisitions, sales and marketing expenses in the third quarter of 2012 were $23.8 million compared to $20.4 million in the third quarter of 2011. This increase was primarily due to an increase in compensation and related employee costs, including travel, of $2.1 million and higher stock-based compensation expense of $363,000. The net increase in compensation and related employee costs was primarily due to higher sales commissions as revenue levels increased in the third quarter of 2012 over the same period in the prior year and higher salaries due, in part, to annual merit increases in 2012.

Sales and marketing expenses for the first nine months of 2012 increased 23.7% to $79.8 million from $64.5 million in the same period of 2011. As a result of our 2012 Acquisitions, our sales and marketing expenditures in the first nine months of 2012 included approximately $8.2 million related to the sales and marketing activities of Anue and BreakingPoint. Excluding the incremental sales and marketing costs related to the 2012 Acquisitions, sales and marketing expenses for the first nine months of 2012 were $71.6 million compared to $64.5 million for the first nine months of 2011. This increase was primarily due to an increase in compensation and related employee costs, including travel, of $5.3 million, higher depreciation expense of $839,000 primarily related to an increase in the number of our demonstration units in the field, and higher stock-based compensation expense of $432,000. The increase in compensation and related employee costs was primarily due to higher sales commissions as revenue levels increased in the first nine months of 2012 over the same period in the prior year, and higher salaries due, in part, to annual merit increases in 2012.

25 -------------------------------------------------------------------------------- General and Administrative Expenses. In the third quarter of 2012, general and administrative expenses increased 17.4% to $11.1 million from $9.4 million in the third quarter of 2011. As a result of our 2012 Acquisitions, our general and administrative expenses in the third quarter of 2012 included approximately $1.1 million related to the general and administrative activities of Anue and BreakingPoint. Excluding the incremental general and administrative costs related to the 2012 Acquisitions, general and administrative expenses in the third quarter of 2012 were $10.0 million compared to $9.4 million in the third quarter of 2011. This increase was primarily due to an increase in compensation and related employee costs of $575,000 and higher stock-based compensation expense of $498,000, partially offset by lower litigation and other legal fees.

The net increase in compensation and related employee costs was primarily due to higher bonus expense as we expect our 2012 performance to exceed that of 2011 when compared to the applicable annual company-wide objectives.

For the first nine months of 2012, general and administrative expenses increased 30.0% to $33.7 million from $25.9 million in the same period of 2011. As a result of our 2012 Acquisitions, our general and administrative expenses in the first nine months of 2012 included approximately $1.4 million related to the general and administrative activities of Anue and BreakingPoint. Our general and administrative expenditures in the first nine months of 2012 included one-time charges of $1.7 million incurred in the first quarter of 2012 in connection with the departure of our former CEO and $401,000 incurred in the second quarter of 2012 to settle a legal matter. Excluding these one-time charges and the incremental general and administrative costs related to the 2012 Acquisitions, general and administrative expenses for the first nine months of 2012 were $30.2 million compared to $25.9 million for the first nine months of 2011. This increase was primarily due to an increase in compensation and related employee costs of $1.9 million, higher stock-based compensation expense of $1.5 million, and higher information technology infrastructure and services costs, offset by lower litigation and other legal fees of $531,000. The net increase in compensation and related employee costs was due, in part, to higher bonus expense in the 2012 period as we expect our 2012 performance to exceed that of 2011 when compared to the applicable annual company-wide objectives.

Amortization of Intangible Assets. In the third quarter of 2012, amortization of intangible assets increased to $10.0 million from $4.2 million in the third quarter of 2011. In the first nine months of 2012, amortization of intangible assets increased to $19.4 million from the $11.7 million recorded in the first nine months of 2011. These increases were primarily due to the incremental amortization of intangibles related to our acquisitions of VeriWave in July 2011, Anue in June 2012 and BreakingPoint in August 2012.

Acquisition and Other Related Expenses. Acquisition and other related expenses for the three and nine months ended September 30, 2012 were $4.3 million and $8.5 million, respectively, and related to our acquisitions of Anue and BreakingPoint. Acquisition and other related expenses for the three and nine months ended September 30, 2011 were $377,000 and $851,000, respectively, and related to our acquisition of VeriWave. Acquisition and other related costs primarily consisted of transaction and integration related costs such as success-based banking fees, professional fees for legal, accounting and tax services, integration related consulting fees, amortization of deferred consideration payable to certain pre-acquisition employees of BreakingPoint, certain employee, facility and infrastructure costs, and other acquisition-related costs.

Restructuring. There were no restructuring expenses incurred in 2011.

Restructuring expenses for each of the three and nine months ended September 30, 2012 were $2.1 million and primarily related to one-time employee termination benefits consisting of severance and other related costs. During the third quarter of 2012, our management approved, committed to and initiated a plan to restructure our operations following our recent acquisition of BreakingPoint.

The BreakingPoint restructuring included a net reduction in force of approximately 29 positions (primarily impacting our research and development team in Melbourne, Australia). We expect that the BreakingPoint restructuring will produce cost savings of $7.0 million to $8.0 million on an annualized basis. However, we expect that this will be offset as we make additional investments in certain new or existing initiatives. See Note 4 to the Consolidated Financial Statements included in this Form 10-Q.

Interest Income and Other, Net. Interest income and other, net decreased to $928,000 in the third quarter of 2012 from the $1.0 million recorded in the third quarter of 2011. Interest income and other, net decreased to $1.6 million in the first nine months of 2012 from the $1.8 million recorded in the first nine months of 2011.

26-------------------------------------------------------------------------------- Interest Expense. Interest expense, including the amortization of debt issuance costs, was $1.8 million for the third quarter of each of 2012 and 2011, and $5.4 million for each of the nine months ended September 30, 2012 and the nine months ended September 30, 2011. Interest expense relates to our convertible senior notes, which were issued in December 2010. For additional information, see Note 5 to Consolidated Financial Statements included in this Form 10-Q.

Income Tax. Income tax benefit was $9.8 million, or an effective rate of (605.5%), for the third quarter of 2012 as compared to an income tax expense of $943,000, or an effective rate of 12.8%, for the third quarter of 2011. The overall decrease in the effective rate for the third quarter of 2012 as compared to the same period in 2011 was primarily due to the tax benefit realized from the $12.7 million partial release of our valuation allowance (previously established against our U.S. net deferred tax assets) resulting from the net deferred tax liabilities recorded as part of the BreakingPoint acquisition. See Note 12 to the Consolidated Financial Statements included in this Form 10-Q.

Income tax benefit was $28.5 million, or an effective rate of (202.0%), for the first nine months of 2012 as compared to an income tax expense of $2.2 million, or an effective rate of 13.8%, for the first nine months of 2011. The overall decrease in the effective rate for the first nine months of 2012 as compared to the same period in 2011 was primarily due to the income tax benefit realized from the partial releases of the Company's valuation allowance for the Anue and BreakingPoint acquisitions. The 2011 effective tax rates differs from (i.e., are lower than) our federal statutory tax rate primarily due to our foreign earnings being taxed at lower rates than in the U.S.

Our effective tax rate also differs from the federal statutory rate due to state taxes, significant permanent differences and adjustments to our valuation allowance. Significant permanent differences arise due to research and development credits, foreign tax rate benefits, and stock-based compensation expense that are not expected to generate a tax deduction, such as stock-based compensation expenses on grants to foreign employees, offset by tax benefits from disqualifying dispositions.

Realization of our deferred tax assets is dependent primarily on the generation of future taxable income. In considering the need for a valuation allowance we consider our historical, as well as future, projected taxable income along with other objectively verifiable evidence.

27 --------------------------------------------------------------------------------LIQUIDITY AND CAPITAL RESOURCES We have funded our operations with our cash balances generated primarily from operations and proceeds from our initial public offering, our convertible debt offering and exercises of share-based awards. Our cash, cash equivalents and short- and long-term investments, when viewed as a whole, decreased to $154.3 million as of September 30, 2012 from $385.0 million as of December 31, 2011 primarily due to the cash and investments used in the acquisitions of Anue in the second quarter of 2012 of $148.3 million and BreakingPoint in the third quarter of 2012, which used cash and investments of $150.7 million, and capital expenditures of $12.9 million. These amounts were partially offset by the $58.3 million in net cash provided by our operating activities and $20.7 million of cash generated from the exercises of share-based option awards.

Of our total cash, cash equivalents and short- and long-term investments, $21.7 million and $26.9 million was held outside of the United States in various foreign subsidiaries as of September 30, 2012 and December 31, 2011, respectively. Under current tax laws and regulations, if our cash, cash equivalents or investments associated with the subsidiaries' undistributed earnings were to be repatriated in the form of dividends or deemed distributions, we would be subject to additional U.S. income taxes and foreign withholding taxes. However, barring unforeseen circumstances, we consider these funds permanently invested in our foreign operations and do not intend to repatriate them. We had no exposure to European sovereign debt as of September 30, 2012.

The following table sets forth our summary cash flows for the nine months ended September 30, 2012 and 2011 (in thousands): Nine Months Ended September 30, 2012 2011 Net cash provided by operating activities $ 58,259 $ 42,303 Net cash used in investing activities (72,427 ) (83,673 ) Net cash provided by financing activities 22,627 13,704 Cash Flows from Operating Activities Net cash provided by operating activities was $58.3 million in the first nine months of 2012 and $42.3 million in the same period of 2011. This increase in cash flow generated from operations was primarily due to an $11.3 million increase related to net working capital changes in the first nine months of 2012 over the first nine months of 2011. The working capital changes were principally due to the timing of payments of accounts payable and accrued liabilities, such as the 2011 year-end bonuses of approximately $5.7 million paid in 2012 compared to the 2010 year-end bonuses of approximately $9.3 million paid in 2011, partially offset by the increase in our accounts receivable balances in the first nine months of 2012 when compared to the same period in 2011 (due primarily to our higher sales, as well as the higher percentage of our third quarter sales occurring in the last month of the quarter (i.e., September 2012) in 2012 as compared to 2011).

Cash Flows from Investing Activities Net cash used in investing activities was $72.4 million and $83.7 million for the first nine months of 2012 and 2011, respectively. Excluding marketable security purchases and proceeds, net cash used in investing activities was $312.5 million and $27.0 million for the first nine months of 2012 and 2011, respectively. The increase in net cash used in the first nine months of 2012 was primarily due to the acquisitions of Anue in the second quarter of 2012 and BreakingPoint in the third quarter of 2012, which resulted in cash paid, net of cash acquired, of $148.3 million and $150.7 million, respectively.

28 --------------------------------------------------------------------------------Cash Flows from Financing Activities Net cash provided by financing activities was $22.6 million and $13.7 million for the first nine months of 2012 and 2011, respectively. This increase in cash provided by financing activities was primarily due to a $7.0 million increase in proceeds from the exercises of share-based awards for the first nine months of 2012 when compared to the first nine months of 2011.

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 12 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. 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, our financial condition, and the timely filing of our periodic reports with the Commission. In addition, our $200 million convertible senior notes have various default provisions, which could accelerate repayment and adversely impact our liquidity.

29--------------------------------------------------------------------------------SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Statements that are not historical facts in this Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report on Form 10-Q may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are subject to the safe harbor created by that Section. Words such as "may," "will," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "project," "predict," "potential," and variations of these words and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. These risks, uncertainties and other factors may cause our future results, performances or achievements to be materially different from those expressed or implied by our forward-looking statements and include, among other things: anticipated benefits and synergies of our recent acquisitions of Anue Systems, Inc. and BreakingPoint Systems, Inc.

will not be realized, changes in the global economy, competition, consistency of orders from significant customers, our success in developing and producing new products, market acceptance of our products, war, terrorism, political unrest, natural disasters and other circumstances that could, among other consequences, reduce the demand for our products, disrupt our supply chain and/or impact the delivery of our products. The factors that may cause future results to differ materially from our current expectations also include, without limitation, the risks identified in our Annual Report on Form 10-K for the year ended December 31, 2011, and in our other filings with the Securities and Exchange Commission.

[ Back To LatinAmerica.tmcnet.com's Homepage's Homepage ]






Technology Marketing Corporation

800 Connecticut Ave, 1st Floor East, Norwalk, CT 06854 USA
Ph: 800-243-6002, 203-852-6800
Fx: 203-866-3326

General comments: tmc@tmcnet.com.
Comments about this site: webmaster@tmcnet.com.

STAY CURRENT YOUR WAY

© 2014 Technology Marketing Corporation. All rights reserved.