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LIONBRIDGE TECHNOLOGIES INC /DE/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The matters discussed in this Form 10-Q include forward-looking statements that involve risks or uncertainties. These statements are neither promises nor guarantees, but are based on various assumptions by management regarding future circumstances many of which Lionbridge has little or no control over. A number of important risks and uncertainties, including those identified under the caption "Risk Factors" in Lionbridge's Annual Report on Form 10-K, filed March 15, 2011 (SEC File No. 000-26933) and subsequent filings as well as risks and uncertainties discussed elsewhere in this Form 10-Q could cause Lionbridge's actual results to differ materially from those in the forward-looking statements. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The forward-looking statements in this Form 10-Q are made as of the date of this filing only, and Lionbridge does not undertake to update or supplement these statements due to changes in circumstances or otherwise, except as required by law. Introduction Lionbridge is a leading provider of language, development and testing solutions that enable clients to develop, release, manage and maintain their technology applications and content globally. Lionbridge Global Language and Content ("GLC") solutions enable the translation, localization and worldwide multilingual release of clients' products, content and related technical support, training materials, and sales and marketing information. Lionbridge GLC solutions involve translating, localizing and adapting content and products to meet the language and cultural requirements of users throughout the world. As part of its GLC solutions, Lionbridge also develops technical documentation and eLearning content. Lionbridge GLC solutions are based on the Company's Web-based language technology platforms and global service delivery model which make the translation and localization processes more efficient for Lionbridge clients and translators. Certain of these Web-based language technologies are also available on a subscription basis to translators, enterprises and other third parties. Through its Global Development and Testing ("GDT") solutions, Lionbridge develops, optimizes and maintains IT applications and performs testing to ensure the quality, interoperability, usability, relevance and performance of clients' software, consumer technology products, web sites and content. Lionbridge has deep domain experience developing, testing and maintaining applications in a cost-efficient, blended on-site and offshore model. Lionbridge also provides professional global crowdsourcing including specialized search relevance testing, keyword optimization and related services for clients with global search engines and online marketing initiatives. 15-------------------------------------------------------------------------------- Table of Contents Lionbridge also provides interpretation services to government organizations and businesses that require human interpreters for non-English speaking individuals. Lionbridge provides a full suite of language, testing and development solutions to businesses in diverse end markets including technology, mobile and telecommunications, internet and media, life sciences, government, automotive, retail and aerospace. Lionbridge's solutions include: translation and localization; interpretation; language technology; technical authoring and eLearning; product engineering; application development and maintenance and testing; and global professional crowdsourcing. Lionbridge's services enable global organizations to increase market penetration and speed adoption of global content and products, enhance return on enterprise application investments, increase workforce productivity and reduce costs. During 2010 and the first nine months of 2011, Lionbridge has invested in technology development, infrastructure, sales and marketing to support the development and commercialization of GeoFluent™, a SaaS-based, customizable, real-time automated translation technology that instantly translates content and communications into multiple languages. GeoFluent is based on IBM's machine translation engine and is the result of a technology partnership between Lionbridge and IBM. GeoFluent offers enterprises the ability to increase their multilingual communications through an easy-to-use application that translates online chat sessions, Websites and documents in real-time. In May 2011 the Company announced general availability of the GeoFluent application and expects to enter into subscription agreements for the technology in the coming quarters. The Company has also continued to develop and market Translation Workspace™, its SaaS-based translation productivity technology for translators and agencies. By introducing GeoFluent as a real-time automated translation application and continuing to enhance Translation Workspace, Lionbridge believes it will effectively reach its goals of transforming the Lionbridge business to incorporate both services and technology, which in turn may allow it to expand its market leadership and increase growth opportunities. For the nine-month period ended September 30, 2011, Lionbridge's income from operations was $901,000, with a net loss of $1.3 million. For the year ended December 31, 2010, the Company's income from operations was $3.0 million with a net loss of $1.3 million. As of September 30, 2011, the Company had an accumulated deficit of $238.0 million. Certain segments of Lionbridge's business, its GLC segment in particular, are sensitive to fluctuations in the value of the U.S. Dollar relative to the Euro and other currencies, as a large portion of its cost of revenue and general and administrative expenses are payable in Euros and other currencies, while the majority of its revenues are recorded in U.S. Dollars. During the three and nine months ended September 30, 2011, the value of the U.S. Dollar relative to other currencies weakened by approximately 9.6% and 7.2%, respectively, from the corresponding periods of 2010. This resulted in favorable foreign currency impact on revenue for the three and nine months ended September 30, 2011, particularly in the GLC segment. In addition, the Company's operating income and net income (loss) for the three and nine-month periods ended September 30, 2011 were negatively impacted by weakening in the U.S. Dollar against other currencies as compared to the corresponding period of 2010, particularly in the GLC segment. Revenue Recognition Lionbridge recognizes revenue as services are performed and amounts are earned in accordance with ASC 605-20, "Services" ("ASC 605-20"). Lionbridge considers amounts to be earned when (1) persuasive evidence of an arrangement has been obtained; (2) services are delivered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectibility of those fees. Lionbridge's revenue is recorded from the provision of services to customers for GLC, GDT and Interpretation services which include content development, product and content globalization, interpretation, software and hardware testing, product certification and application development and maintenance. Content development, software and hardware testing, interpretations and application development and maintenance projects are normally time and expense priced contracts, and revenue is recognized using a time and expense basis over the period of performance, primarily based on labor costs incurred to date. Product and content globalization and product certification projects are fixed price contracts and revenue is recognized as services are delivered. Depending on specific contractual provisions and the nature of the deliverable, revenue is recognized (1) on a proportional performance model based on level of effort, (2) as milestones are achieved or (3) when final deliverables have been met. Amounts billed in excess of revenue recognized are recorded as deferred revenue. The delivery of Lionbridge's GLC services involves and is dependent on the translation and development of content by subcontractors and in-house employees. As the time and cost to translate or produce each word of content within a project is relatively uniform, labor input is reflective of the delivery of the contracted service and an appropriate metric for the measurement of proportional performance in delivering such services. The use of a proportional performance assessment of service delivery requires significant judgment relative to estimating total contract costs, including assumptions relative to the length of time to complete the 16 -------------------------------------------------------------------------------- Table of Contents project, the nature and complexity of the work to be performed, anticipated increases in employee wages and prices for subcontractor services, and the availability of subcontractor services. When adjustments in estimated project costs are identified, anticipated losses, if any, are recognized in the period in which they are determined. Lionbridge's GLC agreements with its customers may provide the customer with a fixed and limited time period following delivery during which Lionbridge will attempt to address any non-conformity to previously agreed upon objective specifications relating to the work, either in the form of a limited acceptance period or a post-delivery warranty period. Management believes recognition of revenue at the time the services are delivered is appropriate, because its obligations under such provisions are limited in time, limited in scope, and historically have not involved significant costs. In the future, if the post delivery acceptance or warranty provisions become more complex or include subjective acceptance criteria, Lionbridge may have to revise its revenue recognition policy appropriately, which could affect the timing of revenue recognition. Lionbridge's GLC segment includes Translation Workspace, the Company's hosted proprietary, internet-architected translation memory application that simplifies translation management. This SaaS-based application is available to translators on a subscription basis. Access revenue is billed in advance and generally recognized over the subscription period. Incremental overage fees are recognized in the period incurred. Lionbridge provides integrated full-service offerings throughout a client's product and content lifecycle, including GLC and GDT services. Such multiple-element service offerings are governed by ASC 605-25, "Multiple-Element Arrangements" ("ASC 605-25"). For these arrangements where the GLC and GDT services have independent value to the customer, and there is evidence of fair value for each service, the combined service arrangement is bifurcated into separate units for accounting treatment. In instances where it is not possible to bifurcate a project, direct and incremental costs attributable to each component are deferred and recognized together with the service revenue upon delivery. The determination of fair value requires the use of significant judgment. Lionbridge determines the fair value of service revenues based upon its recent pricing for those services when sold separately and/or prevailing market rates for similar services. Upon adoption of ASU 2009-13, "Revenue Recognition: Multiple-Deliverable Revenue Arrangements", there has been no material change to the determination of units of accounting or timing of revenue recognition. Revenue includes reimbursement of travel and out-of-pocket expenses and certain facilities costs with equivalent amounts of expense recorded in cost of revenue. Estimates for incentive rebates and other allowances are recorded as a reduction of revenues in the period the related revenues are recorded. These estimates are based upon contracted terms, historical experience and information currently available to management with respect to business and economic trends. Revisions of these estimates are recorded in the period in which the facts that give rise to the revision become known. Valuation of Goodwill and Other Intangible Assets Lionbridge assesses the impairment of goodwill and other intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Such events or conditions could include: an economic downturn in the industries to which Lionbridge provides services; increased competition; an increase in operating or other costs; additional volatility in international currencies; the pace of technological improvements; or other information regarding Lionbridge's market value, such as a reduction in stock price to a price near or below the book value of the Company for an extended period of time. When Lionbridge determines that the carrying value of goodwill may not be recoverable based upon one or more of these indicators of impairment, the Company initially assesses any impairment using fair value measurements based on projected discounted cash flow valuation models. In addition, in accordance with ASC 350, "Intangibles-Goodwill and Other" ("ASC 350"), goodwill is reviewed for impairment on an annual basis. At December 31, 2010, the Company performed its annual test of goodwill to determine if an impairment existed. This test determined that each reporting unit's fair value exceeded the carrying value of the net assets of each respective reporting unit, using projected discounted cash flow modeling. As a result, no impairment was recorded for the year ended December 31, 2010. Estimating future cash flows requires management to make projections that can materially differ from actual results. There were no events or changes in circumstances during the nine months ended September 30, 2011 which indicated that an assessment of the impairment of goodwill and other intangible assets was required. The Company evaluates whether there has been an impairment in the carrying value of its long-lived assets in accordance with ASC 360, "Property, Plant and Equipment" ("ASC 360"), if circumstances indicate that a possible impairment may exist. An impairment in the carrying value of an asset is assessed when the undiscounted expected future operating cash flows derived from the asset grouping are less than its carrying value. If it is determined that the asset is impaired then it is written down to its estimated fair value. Factors that could lead to an impairment of acquired customer relationships (recorded with the acquisition of BGS in September 2005) include a worsening in customer attrition rates compared to historical attrition rates, or lower than initially anticipated cash flows associated with customer relationships. 17-------------------------------------------------------------------------------- Table of Contents Restructuring Charges During the nine-month period ended September 30, 2011, Lionbridge recorded $3.3 million of restructuring charges. The $3.3 million of restructuring charges recorded in the nine-month period ended September 30, 2011 included $2.9 million for workforce reductions in Europe, the Americas and Asia consisting of 50 technical staff, 5 administrative staff and 1 sales staff, $171,000 recorded for vacated facilities and associated site closure costs, $271,000 of additional costs recorded for a previously vacated facility in order to reflect changes in initial estimates of a sublease arrangement due to current economic conditions, recorded pursuant to the guidance of ASC 420, "Exit or Disposal Cost Obligations" ("ASC 420") and ASC 712, "Compensation-Nonretirement Postemployment Benefits" ("ASC 712"), and related literature. Of these charges, $3.3 million related to the Company's Global Language and Content ("GLC") segment, $8,000 related to the Global Development and Testing ("GDT") segment and $9,000 related to the Interpretation segment. The Company made $6.1 million of cash payments in the nine-month period ended September 30, 2011 with $6.1 million, $8,000 and $9,000 related to the GLC, GDT and Interpretation segments, respectively. During the nine-month period ended September 30, 2010, Lionbridge recorded $5.9 million of restructuring charges. The $5.9 million of restructuring charges recorded in the nine-month period ended September 30, 2010 included $4.0 million for workforce reductions in Europe, the United States and Asia consisting of 65 technical staff, 1 administrative staff and 1 sales staff, $654,000 recorded for vacated facilities and associated site closure costs, $895,000 of additional costs recorded for a previously vacated facility in order to reflect changes in initial estimates of a sublease arrangement, and $331,000 for the accelerated amortization of long-lived assets in connection with vacated facilities, recorded pursuant to the guidance of ASC 420 and ASC 712, and related literature. Of these charges, $5.7 million related to the Company's GLC segment and $171,000 related to the GDT segment. The Company made $3.1 million of cash payments in the nine-month period ended September 30, 2010 with $3.1 million and $81,000 related to the GLC and GDT segments, respectively. Stock Option Plans The Company has stock-based compensation plans for salaried employees and non-employee members of the Board of Directors. The plans provide for discretionary grants of stock options, restricted stock and stock units, and other stock-based awards. The plans are administered by the Nominating and Compensation Committee of the Board of Directors, which consists of non-employee directors. On May 3, 2011, the stockholders of Lionbridge Technologies, Inc. approved the Lionbridge 2011 Stock Incentive Plan (the "2011 Plan"), which had been previously adopted by the Lionbridge Board of Directors on January 27, 2011 and replaces the Lionbridge 2005 Stock Incentive Plan (the "2005 Plan"). The 2011 Plan provides for the issuance of 4,500,000 shares of common stock to officers, employees, non-employee directors and other key persons of Lionbridge and its subsidiaries in the form of stock options, shares of restricted stock, restricted stock units and other forms of equity. Options to purchase common stock under the 2011 Plan are granted at the discretion of the Board of Directors and the Nominating and Compensation Committee. Generally, stock options granted under the 2011 Plan vest over a four-year period: 25% of the option shares vest one year from the date of grant and the remaining option shares vest at the rate of 12.5% each six month period thereafter. Stock options generally expire five to seven years from the date of grant under the 2011 Plan. Under the terms of the 2011 Plan, the exercise price of incentive and non-qualified stock option grants must not be less than 100% of the fair market value of the common stock on the date of grant. Options granted under the 2011 Plan are amortized using a straight-line basis over the option vesting period. At September 30, 2011, there were 4,377,924 options available for future grant under the 2011 Plan. In November 2005, the stockholders of Lionbridge Technologies, Inc. approved the 2005 Plan, which had been previously adopted by the Lionbridge Board of Directors on October 7, 2005, for officers, employees, non-employee directors and other key persons of Lionbridge and its subsidiaries. On May 1, 2009, the stockholders of the Company approved an amendment to the 2005 Plan increasing the maximum number of shares of common stock available for issuance under the 2005 Plan by 4,500,000 shares to 8,500,000 shares. There are no options available for future grant under the 2005 Plan because, in connection with the approval of the 2011 Plan, no further grants of equity under the 2005 Plan are to be made on or after May 3, 2011. Options to purchase common stock under the 2005 Plan are granted at the discretion of the Board of Directors and the Nominating and Compensation Committee. Generally, stock options granted under the 2005 Plan vest over a four-year period: 25% of the option shares vest one year from the date of grant and the remaining option shares vest at the rate of 12.5% each six month period thereafter. Stock options generally expire five to seven years from the date of grant under the 2005 Plan. Under the terms of the 2005 Plan, the exercise price of incentive and non-qualified stock option grants must not be less than 100% of the fair market value of the common stock on the date of grant. Options are amortized using a straight-line basis over the option vesting period. Lionbridge's 1998 Stock Plan (the "1998 Plan") provides for the issuance of incentive and nonqualified stock options. The maximum number of shares of common stock available for issuance under the 1998 Plan is 11,722,032 shares and the 1998 Plan expired on January 26, 2008. There are no options available for future grant under the 1998 Plan. Options to purchase common stock under the 1998 Plan had been granted at the discretion of the Board of Directors and the Nominating and Compensation Committee. Generally, stock options granted under the 1998 Plan vested over a four-year period: 25% of the option shares vested one year from the date of grant and the remaining option shares vested at the rate of 12.5% each six month period thereafter. Stock options granted under the 1998 Plan generally expire ten years (five years in certain cases) from the date of grant. 18 -------------------------------------------------------------------------------- Table of Contents Under the terms of the 1998 Plan, the exercise price of incentive stock options granted must not be less than 100% (110% in certain cases) of the fair market value of the common stock on the date of grant, as determined by the Board of Directors. The exercise price of nonqualified stock options granted under the 1998 Plan may be less than the fair market value of the common stock on the date of grant, as determined by the Board of Directors, but in no case may the exercise price be less than the statutory minimum, the par value per share of Lionbridge's common stock. Restricted Stock Awards Lionbridge issued 1,797,000 and 231,826 shares of restricted common stock and restricted stock units, respectively, under the 2005 Plan and the 2011 Plan, during the nine-month period ended September 30, 2011 with a fair market value of $7.4 million. Of the total 2,028,826 shares of restricted common stock and restricted stock units issued in the nine-month period ended September 30, 2011, 1,632,750 have restrictions on disposition which lapse over four years from the date of grant, 56,076 have restrictions on disposition which lapse over thirteen months from the date of grant, and 340,000 restricted shares were granted to certain employees through the long-term incentive plan (the "LTIP") as long-term performance-based stock incentive awards under the 2005 Plan. Pursuant to the terms of the LTIP, restrictions with respect to the stock will lapse upon the achievement of revenue and/or profitability targets within the two calendar years from and including the year of grant. The grant date fair value of the shares is recognized over the requisite period of performance once achievement of criteria is deemed probable. On a quarterly basis, the Company estimates the likelihood of achieving performance goals and records expense accordingly. Actual results, and future changes in estimates, may differ substantially from the Company's current estimates. If the targets are not achieved, the shares will be forfeited by the employee. Stock-based Compensation The Company recognizes expense for stock options, performance-based restricted stock awards and time-based restricted stock awards pursuant to the authoritative guidance of Accounting Standards Codification ("ASC") 718, "Compensation - Stock Compensation". Total compensation expense related to stock options, performance-based restricted stock awards and time-based restricted stock awards was $1.7 million and $970,000 for the three-month periods ended September 30, 2011 and 2010, respectively, and $4.2 million and $3.0 million for the nine-month periods ended September 30, 2011 and 2010, respectively, classified in the statement of operations line items as follows: Three Months Ended Nine Months Ended September 30, September 30, 2011 2010 2011 2010 Cost of revenue $ 31,000 $ 23,000 $ 83,000 $ 62,000 Sales and marketing 311,000 181,000 754,000 495,000 General and administrative 1,380,000 741,000 3,330,000 2,333,000 Research and development 14,000 25,000 48,000 74,000 Total stock-based compensation expense $ 1,736,000 $ 970,000 $ 4,215,000 $ 2,964,000 As of September 30, 2011, future compensation cost related to non-vested stock options, less estimated forfeitures, is approximately $1.1 million and will be recognized over an estimated weighted average period of approximately 2.7 years. Lionbridge currently expects to amortize $8.4 million of unamortized compensation in connection with restricted stock awards outstanding as of September 30, 2011 over an estimated weighted average period of approximately 2.5 years. 19 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth for the periods indicated certain unaudited consolidated financial data as a percentage of total revenue. Three Months Ended Nine Months Ended September 30, September 30, 2011 2010 2011 2010 Revenue 100.0 % 100.0 % 100.0 % 100.0 % Operating expenses: Cost of revenue (exclusive of depreciation and amortization included below) 68.5 68.1 70.0 67.6 Sales and marketing 7.4 8.3 7.8 7.4 General and administrative 18.1 18.1 17.7 18.2 Research and development 1.3 1.0 1.3 0.9 Depreciation and amortization 1.5 1.3 1.3 1.2 Amortization of acquisition-related intangible assets 0.5 1.2 0.6 1.2 Restructuring charges 0.5 4.1 1.0 1.9 Total operating expenses 97.8 102.1 99.7 98.4 Income (loss) from operations 2.2 (2.1 ) 0.3 1.6 Interest expense: Interest on outstanding debt 0.2 0.2 0.2 0.3 Amortization of deferred financing costs - 0.2 - 0.1 Interest income - - - - Other (income) expense, net (0.2 ) 1.6 0.2 0.4 Income (loss) before income taxes 2.2 (4.1 ) (0.1 ) 0.8 Provision for (benefit from) income taxes - (0.3 ) 0.3 0.4 Net income (loss) 2.2 % (3.8 )% (0.4 )% 0.4 % Revenue. The following table shows GLC, GDT, and Interpretation revenues in dollars and as a percentage of total revenue for the three and nine months ended September 30, 2011 and 2010, respectively: Three Months Ended Nine Months Ended September 30, September 30, 2011 2010 2011 2010 GLC $ 73,624,000 68 % $ 69,479,000 70 % $ 222,254,000 69 % $ 217,219,000 71 % GDT 28,413,000 26 % 25,105,000 25 % 80,712,000 25 % 73,033,000 24 % Interpretation 5,537,000 6 % 4,637,000 5 % 17,505,000 6 % 14,621,000 5 % Total revenue $ 107,574,000 100 % $ 99,221,000 100 % $ 320,471,000 100 % $ 304,873,000 100 % Revenue for the quarter ended September 30, 2011 was $107.6 million, an increase of $8.4 million, or 8.4%, from $99.2 million for the quarter ended September 30, 2010. The increase of $8.4 million consists of $4.1 million, $3.3 million and $900,000 of revenue growth in GLC, GDT, and Interpretation, respectively. As compared to the three months ended September 30, 2010, revenue increased approximately $4.7 million, or 4.7%, as the result of organic growth and approximately $3.7 million, or 3.7%, due to the significant decline in the exchange rate of the U.S. Dollar against most foreign currencies period-over-period. Lionbridge conducts a large portion of its business in international markets. Approximately 38.2% of its revenue for the quarter ended September 30, 2011 is denominated in foreign currencies. The principal foreign currency applicable to Lionbridge's business is the Euro. Approximately 28.0% of revenue for the quarter ended September 30, 2011 was denominated in Euro, and a majority of this revenue is concentrated in the GLC business. Accordingly, volatility in foreign currency exchange rates primarily affects the GLC business. During the quarter ended September 30, 2011, the U.S. Dollar was significantly weaker against most foreign currencies, in particular the Euro, as compared to the quarter ended September 30, 2010. Revenue for the nine months ended September 30, 2011 was $320.5 million, an increase of $15.6 million, or 5.1%, from $304.9 million for the nine months ended September 30, 2010. The increase of $15.6 million consists of $5.0 million, $7.7 million and $2.9 million of revenue growth in GLC, GDT, and Interpretation, respectively. As compared to the nine months ended September 30, 2010, revenue increased approximately $7.2 million, or 2.4%, as the result of organic growth, and approximately $8.4 million, or 2.7%, due to the impact of foreign exchange rate fluctuations. A significant portion of Lionbridge's revenue is linked to the product release cycles and production schedules of a limited number of large clients in the technology sector. During the nine months ended September 30, 2011, the Company's year-over-year revenue growth was negatively 20-------------------------------------------------------------------------------- Table of Contents impacted by a decline in the scope and number of projects from a certain large customer in the technology sector, particularly impacting its GLC segment during the first quarter of 2011. This decline was offset by an increase in revenue related services for other new and existing customers, particularly customers in the manufacturing and life sciences sectors in the Company's GLC segment. Revenue from the Company's GLC business for the quarter ended September 30, 2011 increased $4.1 million, or 6.0%, to $73.6 million from $69.5 million for the quarter ended September 30, 2010. The increase of $4.1 million consists of approximately $700,000, or 1.0%, as the result of organic growth and approximately $3.4 million, or 5.0%, due to the significant decline in the exchange rate of the U.S. Dollar against most foreign currencies period-over-period. For the nine months ended September 30, 2011, revenue from the Company's GLC business was $222.3 million, an increase of $5.0 million, or 2.3%, from $217.2 million for the nine months ended September 30, 2010. As compared to the nine months ended September 30, 2010, revenue increased approximately $7.9 million due to the impact of the weakened U.S. Dollar against most foreign currencies, while organic growth declined by approximately $2.9 million during the nine months ended September 30, 2011 due to decreased revenue from a certain large customer in the technology sector primarily during the first quarter of 2011. Revenue from the Company's GDT segment was $28.4 million for the quarter ended September 30, 2011, an increase of $3.3 million, or 13.2%, from $25.1 million for the quarter ended September 30, 2010. For the nine months ended September 30, 2011, revenue from the Company's GDT segment was $80.7 million, an increase of $7.7 million, or 10.5%, from $73.0 million for the nine months ended September 30, 2010. The period-over-period increases in GDT revenue in both the three and nine-month periods were primarily due to expanded customer engagements with a large client in the technology sector and new customer engagements. Revenue in the GDT segment is not materially impacted by fluctuations in foreign currency exchange rates. Revenue from the Company's Interpretation segment was $5.5 million for the quarter ended September 30, 2011, an increase of $900,000, or 19.4%, from $4.6 million for the quarter ended September 30, 2010. For the nine months ended September 30, 2011 revenue from the Company's Interpretation business was $17.5 million, an increase of $2.9 million, or 19.7%, from $14.6 million for the nine months ended September 30, 2010. The period-over-period increases in Interpretation revenue were primarily due to increased revenue and more favorable terms from one large customer engagement. Revenue in the Interpretation segment is not materially impacted by fluctuations in foreign currency exchange rates. Cost of Revenue. Cost of revenue, excluding depreciation and amortization, consists primarily of expenses incurred for translation services provided by third parties as well as salaries and associated employee benefits for personnel related to client engagements. The following table shows GLC, GDT and Interpretation cost of revenues, the percentage change from the three and nine-month period of the prior year and as a percentage of revenue for the three and nine months ended September 30, 2011 and 2010, respectively: Three Months Three Months Nine Months % Change Nine Months Ended Ended Ended Nine Months Ended September 30, % Change September 30, September 30, 10 to Nine September 30, 2011 Q3 10 to Q3 11 2010 2011 Months 11 2010 GLC: Cost of revenue $ 49,135,000 5.4 % $ 46,598,000 $ 151,935,000 4.9 % $ 144,912,000 Percentage of revenue 66.7 % 67.1 % 68.4 % 66.7 % GDT: Cost of revenue 19,897,000 17.0 % 17,004,000 57,140,000 17.7 % 48,534,000 Percentage of revenue 70.0 % 67.7 % 70.8 % 66.5 % Interpretation: Cost of revenue 4,630,000 16.9 % 3,962,000 15,131,000 19.1 % 12,706,000 Percentage of revenue 83.6 % 85.4 % 86.4 % 86.9 % Total cost of revenue $ 73,662,000 $ 67,564,000 $ 224,206,000 $ 206,152,000 Percentage of revenue 68.5 % 68.1 % 70.0 % 67.6 % For the quarter ended September 30, 2011, as a percentage of revenue, cost of revenue increased to 68.5% as compared to 68.1% for the quarter ended September 30, 2010 primarily due revenue and service mix changes in the GDT business, partially offset by lower cost of revenue percentages in the GLC and Interpretation businesses. For the quarter ended September 30, 2011, cost of revenue increased $6.1 million, or 9.0%, to $73.7 million as compared to $67.6 million for the corresponding period of the prior year. The increase was primarily in support of the $8.4 million increase of incremental revenue as compared to the corresponding period of the prior year and is inclusive of approximately $4.3 million attributable to the depreciation of the U.S. Dollar against certain foreign currencies. Cost of revenue during the quarter ended September 30, 2011 was also impacted by revenue and service mix changes period-over-period. For the nine months ended September 30, 2011, cost of revenue was $224.2 million, an increase of $18.1 million, or 8.8%, as compared to $206.2 million for the same period of 21-------------------------------------------------------------------------------- Table of Contents 2010. This increase was primarily in support of the $15.6 million increase of incremental revenue as compared to the corresponding period of the prior year and is inclusive of approximately $10.3 million attributable to depreciation of the U.S. Dollar against certain currencies, with the balance due to revenue and service mix changes period-over-period. For the quarter ended September 30, 2011, cost of revenue as a percentage of revenue in the Company's GLC business decreased to 66.7% as compared to 67.1% for the quarter ended September 30, 2010. This decrease is primarily the result of the $4.1 million increase in revenue, as well as cost saving initiatives in the Company's GLC segment. For the quarter ended September 30, 2011, GLC cost of revenue increased $2.5 million, or 5.4%, to $49.1 million as compared to $46.6 million for the same quarter of the prior year. This increase is primarily due to the negative impact of approximately $3.6 million due to the decline in the exchange rate of the U.S. Dollar against certain foreign currencies, partially offset by cost saving initiatives implemented during 2010 in the Company's GLC segment, and continued benefits realized from the deployment and use of Lionbridge's language management technology platform. For the nine months ended September 30, 2011, cost of revenue as a percentage of revenue in the Company's GLC business increased to 68.4% as compared to 66.7% for the nine months ended September 30, 2010. This increase is primarily due to the negative impact of approximately $8.8 million due to the decline in the exchange rate of the U.S. Dollar against certain foreign currencies and increased translation costs due to service mix changes. The negative foreign currency impact was partially offset by the benefit of a $5.0 million increase in revenue, period-over-period, as well as cost saving initiatives implemented in 2010 in the Company's GLC segment and continued benefits realized from the deployment and use of Lionbridge's language management technology platform. For the nine months ended September 30, 2011, GLC cost of revenue increased $7.0 million, or 4.9%, to $151.9 million as compared to $144.9 million for the corresponding period of the prior year. This increase is primarily attributable to the negative impact of approximately $8.8 million due to the depreciation of the U.S. Dollar against certain foreign currencies and increased translation costs due to service mix changes, partially offset by cost saving initiatives implemented in 2010 in the Company's GLC segment and continued benefits realized from the deployment and use of Lionbridge's language management technology platform. For the quarter ended September 30, 2011, cost of revenue as a percentage of revenue in the Company's GDT segment increased to 70.0% as compared to 67.7% for the quarter ended September 30, 2010. This increase is primarily due to the negative impact of approximately $655,000 due to the decline in the exchange rate of the U.S. Dollar against certain foreign currencies, and to a lesser extent the impact of service mix changes, partially offset by the benefit of the $3.3 million increase in revenue period-over-period. For the quarter ended September 30, 2011, GDT cost of revenue increased $2.9 million, or 17.0%, to $19.9 million as compared to $17.0 million for the corresponding period of the prior year. This increase is primarily in support of the $3.3 million increase in revenue, period-over-period, and is inclusive of the negative impact of approximately $655,000 due to the decline in the exchange rate of the U.S. Dollar against certain foreign currencies, and to a lesser extent the impact of changes in service mix. For the nine months ended September 30, 2011, cost of revenue as a percentage of revenue in the Company's GDT segment increased to 70.8% as compared to 66.5% for the nine months ended September 30, 2010. This increase is primarily due to the negative impact of approximately $1.4 million due to the decline in the exchange rate of the U.S. Dollar against certain foreign currencies, and to a lesser extent the impact of service mix changes, partially offset by the benefit of the $7.7 million increase in revenue period-over-period. For the nine months ended September 30, 2011, cost of revenue was $57.1 million, an increase of $8.6 million, or 17.7%, as compared to $48.5 million for the same period of 2010. This increase is primarily in support of the $7.7 million increase in revenue period-over-period, and is inclusive of the negative impact of approximately $1.4 million due to the decline in the exchange rate of the U.S. Dollar against certain foreign currencies, and to a lesser extent the impact of changes in service mix. For the quarter ended September 30, 2011, cost of revenue as a percentage of revenue in the Company's Interpretation segment decreased to 83.6% as compared to 85.4% for the quarter ended September 30, 2010. This decrease is primarily due to higher pricing for a certain large customer, cost savings as a result of service process improvements and increased revenue period-over-period. For the quarter ended September 30, 2011, Interpretation cost of revenue increased $668,000, or 16.9%, to $4.6 million as compared to $4.0 million for the corresponding period of the prior year, primarily due to increased revenue period-over-period. For the nine months ended September 30, 2011, cost of revenue as a percentage of revenue in the Company's Interpretation segment decreased to 86.4% as compared to 86.9% for the corresponding period of the prior year. This decrease is primarily due to higher pricing for a certain large customer, cost savings as a result of service process improvements and increased revenue period-over-period. For the nine months ended September 30, 2011, Interpretation cost of revenue increased $2.4 million, or 19.1%, to $15.1 million as compared to $12.7 million for the corresponding period of the prior year, primarily due to increased revenue year-over-year. The Company's Interpretation segment is not materially impacted by foreign currency exchange rate fluctuations. Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and associated employee benefits, travel expenses of sales and marketing personnel, promotional expenses, sales force automation expense, training, and the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs. The following table shows sales and marketing expenses in dollars, the dollar change from the three and nine-month period of the prior year and as a percentage of revenue for the three and nine months ended September 30, 2011 and 2010, respectively: Three Months Ended September 30, Nine Months Ended September 30, 2011 2010 2011 2010 Total sales and marketing expenses $ 7,976,000 $ 8,190,000 $ 24,955,000 $ 22,623,000 Increase (decrease) from prior year (214,000 ) 2,332,000 Percentage of revenue 7.4 % 8.3 % 7.8 % 7.4 % Sales and marketing expenses decreased $214,000, or 2.6%, for the three months ended September 30, 2011 as compared to the corresponding period of 2010. This decrease is due to lower employee compensation, partially offset by the negative impact of approximately $241,000 attributable to the depreciation of the U.S. Dollar's exchange rate against certain foreign currencies period-over-period. As a percentage of revenue, sales and marketing expenses decreased to 7.4% for the three months 22 -------------------------------------------------------------------------------- Table of Contents ended September 30, 2011 as compared to 8.3% for the three months ended September 30, 2010, primarily due to the $8.4 million increase in revenue as compared to the corresponding period of the prior year. Sales and marketing expenses increased $2.3 million, or 10.3%, for the nine months ended September 30, 2011 as compared to the corresponding period of 2010. As a percentage of revenue, sales and marketing expenses increased to 7.8% for the nine months ended September 30, 2011 as compared to 7.4% for the nine months ended September 30, 2010. These increases are in support of the $15.6 million increase in revenue, period-over-period, and are primarily attributable to increased employee compensation and marketing campaign expenses. In addition, approximately $630,000 of the increase is attributable to the negative impact of the depreciation of the U.S. Dollar's exchange rate against certain foreign currencies year-over-year. General and Administrative. General and administrative expenses consist of salaries of the management, purchasing, process and technology, finance and administrative groups, and associated employee benefits and travel; facilities costs; information systems costs; professional fees; business reconfiguration costs and all other site and corporate costs. The following table shows general and administrative expenses in dollars, the dollar change from the three and nine-month periods of the prior year and as a percentage of revenue for the three and nine months ended September 30, 2011 and 2010, respectively: Three Months Ended September 30, Nine Months Ended September 30, 2011 2010 2011 2010 Total general and administrative expenses $ 19,438,000 $ 18,032,000 $ 56,720,000 $ 55,522,000 Increase from prior year 1,406,000 1,198,000 Percentage of revenue 18.1 % 18.1 % 17.7 % 18.2 % General and administrative expenses increased $1.4 million, or 7.8%, for the three months ended September 30, 2011 as compared to the corresponding period of 2010. Approximately $776,000 of this increase is due to the negative impact of the depreciation of the U.S. Dollar against certain foreign exchange currencies, with the balance due to increased employee compensation and stock-based compensation as compared to the corresponding period of 2010. As a percentage of revenue, general and administrative expenses were 18.1% for the quarter ended September 30, 2011, consistent with the corresponding period of the prior year. General and administrative expenses increased $1.2 million, or 2.2%, for the nine months ended September 30, 2011 as compared to the corresponding period of 2010. Approximately $2.0 million of this increase was due to the negative impact of the depreciation of the U.S. Dollar against certain foreign exchange currencies as compared to the corresponding period of 2010. These increases were partially offset by reduced expenses as the result of cost initiatives implemented in 2010, primarily reductions in rent expense. Approximately 54.6% of general and administrative expenses are denominated in non-U.S. Dollars and of that amount a majority of these expenses related to rent and compensation expense. As a percentage of revenue, general and administrative expenses decreased to 17.7% for the nine months ended September 30, 2011, as compared to 18.2%, for the same period of the prior year. This decrease is primarily associated with the $15.6 million increase in revenue for the nine months ended September 30, 2011 as compared to the corresponding period of the prior year. Research and Development. Research and development expenses relate primarily to the Company's web-based hosted language management technology platform used in the globalization process and the research and development of a globalization management system, its Translation Workspace SaaS-based offering, and development of GeoFluent based on automated machine translation technology licensed from IBM. The cost consists primarily of salaries and associated employee benefits and third-party contractor expenses. The following table shows research and development expense in dollars, the dollar change from the three and nine-month periods of the prior year and as a percentage of revenue for the three and nine months ended September 30, 2011 and 2010, respectively: Three Months Ended September 30, Nine Months Ended September 30, 2011 2010 2011 2010 Total research and development expense $ 1,383,000 $ 1,021,000 $ 4,297,000 $ 2,731,000 Increase from prior year 362,000 1,566,000 Percentage of revenue 1.3 % 1.0 % 1.3 % 0.9 % Research and development expenses increased $362,000 for the three months ended September 30, 2011 as compared to the corresponding period of 2010. This increase is primarily attributable to an increase in headcount to support the development of the Company's web-based hosted language management technology platform, its Translation Workspace SaaS-based offering and development of automated machine translation technology licensed from IBM (known as GeoFluent). Approximately $72,000 of the increase is due to the depreciation of the U.S. Dollar against most foreign currencies period-over-period. 23-------------------------------------------------------------------------------- Table of Contents Research and development expenses increased $1.6 million for the nine months ended September 30, 2011 as compared to the corresponding period of 2010. This increase is primarily attributable to increase headcount to support the development of the Company's web-based hosted language management technology platform, its Translation Workspace SaaS-based offering and its GeoFluent real-time machine translation technology offering. Approximately $164,000 of the increase is due to the depreciation of the U.S. Dollar against most foreign currencies, year-over-year. Depreciation and Amortization. Depreciation and amortization consist of the expense related to property and equipment that is being depreciated over the estimated useful lives of the assets using the straight-line method. The following table shows depreciation and amortization expense in dollars, the dollar change from the three and nine-month periods of the prior year and as a percentage of revenue for the three and nine months ended September 30, 2011 and 2010, respectively: Three Months Ended September 30, Nine Months Ended September 30, 2011 2010 2011 2010 Total depreciation and amortization expense $ 1,615,000 $ 1,266,000 $ 4,341,000 $ 3,571,000 Increase from prior year 349,000 770,000 Percentage of revenue 1.5 % 1.3 % 1.3 % 1.2 % Depreciation and amortization expense increased by $349,000 for the three months ended September 30, 2011 as compared to the corresponding period of 2010. This increase is primarily the result of depreciation of the increased investment in internal and external capitalized costs for the Company's web-based hosted management technology platform and SaaS-based offering. During the second quarter of 2011, the Company announced general availability of its customizable real-time automated machine translation technology known as GeoFluent. Amortization of capitalized costs related to GeoFluent was initiated during the second quarter of 2011. Approximately $56,000 of the increase is due to the depreciation of the U.S. Dollar against most foreign currencies, period-over-period. Depreciation and amortization expense increased by $770,000 for the nine months ended September 30, 2011 as compared to the corresponding period of 2010. This increase is primarily the result of depreciation of the increased investment in internal and external capitalized costs for the Company's web-based hosted management technology platform and SaaS-based offering and the amortization of capitalized costs related to the Company's customizable real-time automated machine translation technology as noted above. Approximately $129,000 of the increase is due to the depreciation of the U.S. Dollar against most foreign currencies, year-over-year. Amortization of Acquisition-related Intangible Assets. Amortization of acquisition-related intangible assets consists of the amortization of identifiable intangible assets resulting from acquired businesses. Amortization expense for the three months ended September 30, 2011 and 2010 of $583,000 and $1.2 million, respectively, and for the nine months ended September 30, 2011 and 2010 of $1.7 million and $3.7 million, respectively, relate solely to the amortization of identifiable intangible assets acquired from BGS in 2005. Interest Expense. Interest expense primarily represents interest paid or payable on debt and the amortization of deferred financing costs. Interest expense for the quarter ended September 30, 2011 of $217,000 decreased $173,000 from $390,000 for the quarter ended September 30, 2010. The decrease reflects the impact of lower amortization of deferred financing costs for the quarter ended September 30, 2011 as compared to the quarter ended September 30, 2010. This decrease also reflects the impact of the maturity of the Company's interest rate swap in July 2010. Interest expense for the quarter ended September 30, 2010 included $41,000 for the Company's interest rate swap. Interest expense for the nine months ended September 30, 2011 of $601,000 decreased $456,000 from $1.1 million for the nine months ended September 30, 2010. The decrease reflects the impact of lower interest rates and lower amortization of deferred financing costs during the nine-month period, year-over-year. This decrease also reflects the impact of the maturity of the Company's interest rate swap in July 2010. Interest expense for the nine months ended September 30, 2010 included $251,000 for the Company's interest rate swap. Other (Income) Expense, Net. Other (income) expense, net primarily reflects the foreign currency transaction gains or losses arising from exchange rate fluctuations on transactions denominated in currencies other than the functional currencies of the countries in which the transactions are recorded. The Company recognized $231,000 in other income, net, in the three months ended September 30, 2011 as compared to $1.6 million in other expense, net, in the corresponding period of 2010 and $650,000 in other expense net, in the nine months ended September 30, 2011 as compared to $1.2 million in the corresponding period of 2010. The variations are primarily attributable to differences among the Euro and other currencies against the U.S. Dollar in the periods, as compared to the net position and variance during the corresponding periods of the prior year. In addition, there were no forward contracts in place during the three months ended September 30, 2011, and as a result no net realized and unrealized foreign currency gains or losses as compared to net realized and unrealized foreign currency losses of $384,000 on forward contracts recorded in the three-month period ended September 30, 2010. The nine-month periods ended September 30, 2011 and 2010 include net realized and 24-------------------------------------------------------------------------------- Table of Contents unrealized foreign currency losses of $607,000 on forward contracts and $523,000 net realized and unrealized foreign currency gains on forward contracts, respectively. In addition, other income, net in the three and nine-month periods ended September 30, 2011 includes $434,000 for the release of reserves related to uncertain pre-BGS acquisition property-related tax risks. In addition, other (income) expense, net in the three-month periods ended September 30, 2011 and 2010 include $17,000 and $186,000, respectively, and in the nine-month periods ended September 30, 2011 and 2010 include $50,000 and $186,000, respectively, relating to the reduction of an indemnification receivable related to indemnified reserves for uncertain tax positions related to the BGS acquisition. Provision for Income Taxes. The following table shows the provision for (benefit from) income taxes expense in dollars, the dollar change from the three and nine-month periods of the prior year and as a percentage of revenue for the three and nine months ended September 30, 2011 and 2010, respectively: Three Months Ended September 30, Nine Months Ended September 30, 2011 2010 2011 2010 Total provision for (benefit from) income taxes $ (23,000 ) $ (295,000 ) $ 1,008,000 $ 1,318,000 Increase (decrease) from prior year 272,000 (310,000 ) Percentage of revenue - (0.3 )% 0.3 % 0.4 % The provision for (benefit from) income taxes consists primarily of taxes resulting from profits in foreign jurisdictions, taxes, interest and penalties associated with uncertain tax positions, a deferred tax benefit for the recognition of deferred tax assets and a reduction of deferred tax liabilities related to the intangible assets from the BGS acquisition. The tax provision increased $272,000 to $(23,000) for the quarter ended September 30, 2011 from $(295,000) in the corresponding period of 2010 and decreased $310,000 to $1.0 million for the nine months ended September 30, 2011 from $1.3 million in the corresponding period of the prior year. The three-month increase is primarily due to certain nonrecurring discrete tax benefits that were recorded in 2010 as a result of the filing of tax returns and release of reserves due to the lapse of statutes of limitations. The nine-month decrease is primarily due a foreign tax benefit of $415,000 related to a refund received for an amended 2008 tax filing, and the release of certain existing reserves for uncertain tax positions, primarily due to expiration of statutes of limitations. Out of Period Adjustment During the three-month interim period ended March 31, 2011, the Company identified certain out of period immaterial errors related to revenue recognition in the fourth quarter of 2010 and certain gross receipts taxes for the period of fiscal years 2007 through 2010. The Company corrected these errors during the three-month interim period ended March 31, 2011, which had the effect of reducing net income by $320,000, comprised of a $108,000 reduction in revenue, a $30,000 increase in cost of revenue and a $182,000 increase in general and administrative expenses. During the three-month interim period ended June 30, 2011, the Company identified certain out of period immaterial errors related to revenue recognition in the fourth quarter of 2010 and first quarter of 2011 and certain property tax accruals for the period of fiscal year 2007 through the first quarter of 2011. The Company corrected these errors during the three-month interim period ended June 30, 2011, which had the effect of decreasing net income by $16,000, comprised of a $210,000 reduction in revenue and a $194,000 decrease in general and administrative expenses. The Company has evaluated these errors and does not believe the amounts are material to any periods impacted and the correction of these errors is not material to the condensed consolidated financial statements for the nine months ended September 30, 2011 or to the projected annual results for the fiscal 2011 year. Liquidity and Capital Resources On September 30, 2010, the Company entered into Amendment No. 3 (the "Amendment") with HSBC Bank USA, National Association ("HSBC") to extend the term for an additional four years to 2014 on its revolving credit agreement dated as of December 31, 2006, as the amended to date (the "Credit Agreement"), which had been scheduled to expire in December 2011. In addition, under the terms of the Amendment, the Credit Agreement was amended to reflect that HSBC is the sole lender under the Credit Agreement. The Credit Agreement provides for a $50.0 million revolving credit facility and establishes interest rates in the range of LIBOR plus 1.75% - 2.50%, depending on certain conditions. At September 30, 2011, $24.7 million was outstanding with an interest rate of 2.5%. The Company is required to maintain leverage and fixed charge coverage ratios and to comply with other covenants in its revolving credit agreement. The leverage ratio is calculated by dividing the Company's total outstanding indebtedness at each quarter end by its adjusted earnings before interest, taxes, depreciation and certain other non-cash expenses during the four consecutive quarterly periods then ended. The fixed charge coverage ratio is calculated by dividing the Company's adjusted earnings before interest, taxes, depreciation and certain other non-cash expenses minus capital expenditures for each consecutive four quarterly periods by its interest paid and cash paid on taxes during each such consecutive four quarterly periods. The Company was in compliance with both of these ratios as well as all other bank covenants as of September 30, 2011. 25 -------------------------------------------------------------------------------- Table of Contents The following table shows cash and cash equivalents and working capital at September 30, 2011 and at December 31, 2010: September 30, 2011 December 31, 2010 Cash and cash equivalents $ 20,797,000 $ 28,206,000 Working capital 40,905,000 40,795,000 Lionbridge's working capital increased $110,000 to $40.9 million at September 30, 2011, as compared to $40.8 million at December 31, 2010; accounts receivable and unbilled receivables totaled $80.1 million, an increase of $4.9 million as compared to December 31, 2010; and other current assets increased by $1.8 million as compared to December 31, 2010. Current liabilities totaled $71.3 million at September 30, 2011, a decrease of $911,000 from December 31, 2010. The following table shows the net cash provided by (used in) operating activities, net cash used in investing activities, and net cash provided by financing activities for the nine months ended September 30, 2011 and 2010, respectively: Nine Months Ended September 30, 2011 2010 Net cash provided by operating activities $ 1,533,000 $ 9,960,000 Net cash used in investing activities (10,650,000 ) (7,624,000 ) Net cash provided by financing activities 87,000 340,000 Net cash provided by operating activities was $1.5 million for the nine months ended September 30, 2011 as compared to $10.0 million for the corresponding period of 2010. The $1.5 million net cash provided by operating activities was due to a net loss of $1.3 million (inclusive of $11.1 million in depreciation, amortization, stock-based compensation and other non-cash expenses), a $3.9 million net increase in accounts receivable and unbilled receivables, a $2.2 million increase in other operating assets, a $706,000 increase in accounts payable, accrued expenses and other operating liabilities, and a $2.9 million decrease in deferred revenue. Lionbridge has not experienced any significant trends in accounts receivable and unbilled receivables other than changes relative to the change in revenue, as previously noted. Fluctuations in accounts receivable from period to period relative to changes in revenue are a result of timing of customer invoicing. In the nine months ended September 30, 2010, net cash provided by operating activities was $10.0 million. Net cash provided by operating activities was due to net income of $1.3 million (inclusive of $10.6 million in depreciation, amortization, stock-based compensation and other non-cash expenses), a $2.1 million net increase in accounts receivable and unbilled receivables, a $2.4 million increase in other operating assets, a $5.4 million increase in accounts payable, accrued expenses and other operating liabilities, and a $2.6 million decrease in deferred revenue. Net cash used in investing activities increased $3.0 million to $10.7 million for the nine months ended September 30, 2011, as compared to $7.6 million for the corresponding period of 2010. The primary investing activity in the nine months ended September 30, 2011 was $10.0 million for the purchase of property and equipment and $607,000 for payments of forward contracts. In the nine months ended September 30, 2010, net cash used in investing activities was $7.6 million, which included $8.2 million for the purchase of property and equipment, partially offset by $527,000 in net proceeds from forward contracts. Net cash provided by financing activities for the nine months ended September 30, 2011 was $87,000, a decrease of $253,000 as compared to $340,000 for the corresponding period of 2010. Net cash provided by financing activities consisted of $98,000 of proceeds from the issuance of common stock under option plans, $11,000 for payments of capital lease obligations, $13.0 million proceeds from the issuance of short-term debt and $13.0 million payments of short-term debt. In the nine months ended September 30, 2010, net cash provided by financing activities was $340,000. Net cash provided by financing activities consisted of $348,000 of proceeds from the issuance of common stock under option plans and $8,000 for payments of capital lease obligations. On May 5, 2010, Lionbridge filed with the Securities and Exchange Commission a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended (SEC File No. 333-166529), covering the registration of debt and equity securities (the "Securities"), in an aggregate amount of $100.0 million. The registration statement was declared effective by the Commission on May 13, 2010. The Company may offer these Securities from time to time in amounts, at prices and on terms to be determined at the time of sale. The Company believes that with this Registration Statement, it has additional financing flexibility to meet potential future funding requirements and the ability to take advantage of potentially attractive capital market conditions. 26-------------------------------------------------------------------------------- Table of Contents Lionbridge anticipates that its present cash and cash equivalents position and available financing under its Credit Agreement should provide adequate cash to fund its currently anticipated cash needs for the at least the next twelve months. Contractual Obligations As of September 30, 2011, there were no material changes in Lionbridge's contractual obligations as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2010. Tax provisions (benefits) during the nine months ended September 30, 2011, primarily related to taxes, accrued interest, and the release of existing reserves for uncertain tax positions, have increased the balance of unrecognized tax benefits by an insignificant amount to $8.3 million. Approximately $2.0 million of this balance is related to tax liabilities accruing on or prior to the acquisition of BGS on September 1, 2005. Bowne & Co., Inc. (which has since been acquired by R.R. Donnelley & Sons Co.) agreed to indemnify Lionbridge for these amounts. The Company believes that it is reasonably possible that approximately $1.2 million of its unrecognized tax benefits, consisting of several items in various jurisdictions, may be recognized within the next twelve months. Off-Balance Sheet Arrangements The Company does not have any special purpose entities or off-balance sheet financing arrangements. Recent Accounting Pronouncements In September 2011, the Financial Accounting Standards Board ("FASB") issued ASU 2011-09, "Compensation - Retirement Benefits - Multiemployer Plans" ("ASU 2011-09") which pertains to an employer's participation in multiemployer benefit plans, amending ASC Subtopic 715-80, "Disclosures About an Employer's Participation in a Multiemployer Plan". The amendment enhances the disclosures about significant multiemployer plans in which an employer participates, the level of the employer's participation, the financial health of the plans and the nature of the employer's commitments to the plans. The new disclosure requirements are required for fiscal years ending after December 15, 2011. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements. In September 2011, the FASB issued ASU 2011-08, "Testing Goodwill for Impairment" ("ASU 2011-08"), authoritative guidance which simplifies how entities test goodwill for impairment and permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This authoritative guidance is to be applied for goodwill impairment testing performed for fiscal years beginning after December 15, 2011. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements. In June 2011, the FASB issued ASU 2011-05, "Comprehensive Income: Presentation of Comprehensive Income" ("ASU 2011-05"), authoritative guidance which allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This authoritative guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholder's equity. This authoritative guidance is to be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Although the Company will need to modify the presentation of certain information to comply with the requirements of this guidance, the Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements. In May 2011, the FASB issued ASU 2011-04, "Fair Value Measurement" ("ASU 2011-04"), an amendment to achieve common fair value measurement and disclosure requirements in GAAP and international financial reporting standards ("IFRS"). The amendments explain how to measure fair value and will improve the comparability of fair value measurement presented and disclosed in financial statements prepared in accordance with GAAP and IFRS. This authoritative guidance is to be applied prospectively and is effective during interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements. In December 2010, the FASB issued ASU 2010-28, "Intangibles - Goodwill and Other" "(ASU 2010-28")", an amendment to goodwill impairment testing. The amendment modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments were first effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The adoption of this guidance did not have an impact on the Company's consolidated financial statements since it did not have any reporting units with zero or negative carrying amounts. 27 -------------------------------------------------------------------------------- Table of Contents In January 2010, the FASB issued ASU 2010-06, "Value Measurements and Disclosures - Improving Disclosures about Fair Value Measurements" ("ASU 2010-06"), that amends ASC Subtopic 820-10, "Fair Value Measurements and Disclosures - Overall", and requires reporting entities to disclose (1) the amount of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, and (2) separate information about purchases, sales, issuance and settlements in the reconciliation of fair value measurements using significant unobservable inputs (Level 3). ASU 2010-06 also requires reporting entities to provide fair value measurement disclosures for each class of assets and liabilities and disclose the inputs and valuation techniques for fair value measurements that fall within Levels 2 and 3 of the fair value hierarchy. These disclosures and clarification were effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuance, and settlements in the rollforward of activity in Level 3 fair value measurements. These additional disclosures were effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company adopted the further provisions of ASU 2010-06 on January 1, 2011 which did not have a material impact on its consolidated financial statements. In October 2009, the Emerging Issues Task Force ("EITF") reached final consensus on ASU 2009-13, "Revenue Recognition: Multiple-Deliverable Revenue Arrangements" ("ASU 2009-13"), which addresses the issue related to revenue arrangements with multiple deliverables. This issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting. This issue is effective for the Company's revenue arrangements entered into or materially modified on or after January 1, 2011. The Company adopted this guidance and concluded it did not have a material impact on its consolidated financial statements. |