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NOVATEL WIRELESS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) The following information should be read in conjunction with the condensed
consolidated financial statements and the accompanying notes included in Item 1
of this report, as well as the audited consolidated financial statements and
accompanying notes and Management's Discussion and Analysis of Financial
Condition and Results of Operations for the year ended December 31, 2011
contained in our Annual Report on Form 10-K for the year ended December 31,
2011.
Overview and Background
We are a provider of intelligent wireless solutions for the worldwide mobile
communications market. Our broad range of products principally includes
intelligent mobile hotspots, USB modems, embedded PCI and wireless PC-card
modems, and communications and applications software. In addition, our Enfora
division provides asset-management solutions utilizing intelligent platforms,
customized service-delivery software, and machine-to-machine, or M2M,
communications devices.
Our products currently operate on every major cellular wireless technology
platform. Our mobile hotspots, embedded modules, and modems provide subscribers
with secure and convenient high-speed access to corporate, public and personal
information through the Internet and enterprise networks. Our M2M products
enable devices to communicate with each other and with server- or cloud-based
application infrastructure.
Our mobile-hotspot and modem customer base is comprised of wireless operators,
including AT&T, Sprint Nextel, and Verizon Wireless; laptop PC and other
original equipment manufacturers, or OEMs, including Dell and Hewlett-Packard;
as well as distributors and various companies in other vertical markets. Our M2M
customer base is comprised of transportation companies, industrial companies,
manufacturers of medical devices and geographical-location devices and providers
of security systems. We have strategic relationships with several of these
customers for technology development and marketing.
We sell our wireless broadband solutions primarily to wireless operators either
directly or through strategic relationships, as well as to OEM partners and
distributors located worldwide. Most of our mobile-computing product sales to
wireless operators and OEM partners are sold directly by our sales force, or to
a lesser degree, through distributors. We sell our M2M solutions primarily to
enterprises in the following industries: transportation; energy and industrial
automation; security and safety; and medical monitoring. We sell our M2M
solutions through our direct sales force and through distributors.
We intend to continue to identify and respond to our customers' needs by
introducing new product designs with an emphasis on supporting cutting-edge,
wide area network, or WAN, technology; ease-of-use; performance; size; weight;
cost; and power consumption. We manage our products through a structured
life-cycle process, from identifying initial customer requirements through
development and commercial introduction to eventual phase-out. During product
development, emphasis is placed on innovation, time-to-market, performance,
meeting industry standards and customer product specifications, ease of
integration, cost reduction, manufacturability, quality and reliability.
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The hardware used in our solutions is produced by contract manufacturers. Their
services include component procurement, assembly, testing, quality control, and
fulfillment. We have agreements with Inventec Appliances Corporation, or IAC;
Hon Hai Precision Industry Co., LTD; and Benchmark Electronics for the
outsourced manufacturing of our products. In addition, we have an agreement with
Mobiltron for certain distribution, fulfillment and repair services related to
our business in Europe, the Middle East and Africa, or EMEA.
Factors Which May Influence Future Results of Operations
Net Revenues. We believe that our future net revenues will be influenced largely
by the growth and breadth of the demand for wireless access to data through the
use of next generation networks including demand for 3G and 4G products, 3G and
4G data access services, particularly in North America, Europe and Asia;
customer acceptance for our new products that address these markets, including
our MiFi line of Intelligent Mobile Hotspots; and our ability to meet customer
demand. Factors that could potentially affect customer demand for our products
include the following:
• economic environment and related market conditions;
• increased competition from other wireless data modem suppliers as well as
suppliers of emerging devices that contain a wireless data access feature;
• demand for broadband access services and networks;
• rate of change to new products;
• timing of deployment of 4G networks by wireless operators;
• decreased demand for EV-DO and HSPA products; and
• changes in technologies.
We anticipate introducing additional products during the next 12 months,
including 4G broadband-access products, M2M solutions and software applications
and platforms. We continue to develop and maintain strategic relationships with
wireless and computing industry leaders like, Dell, QUALCOMM, Sprint Nextel,
Verizon Wireless, AT&T and major software vendors. Through strategic
relationships, we have been able to increase market penetration by leveraging
the resources of our channel partners, including their access to distribution
resources, increased sales opportunities and market opportunities.
As a result of the extremely competitive market for wireless devices, we have
experienced significant downward pressure on the average selling price of our
products. This pressure has the potential to materially adversely affect our
results of operations and financial condition in future periods and we cannot
predict the magnitude or timing of future reductions in the average selling
price of our products.
Cost of Net Revenues. All costs associated with our contract manufacturers, as
well as distribution, fulfillment and repair services are included in our cost
of net revenues. Cost of net revenues also includes warranty costs, amortization
of intangible assets, royalties, operations group expenses, costs associated
with the Company's cancellation of purchase orders, costs related to outside
services and costs related to inventory adjustments, including write downs for
excess and obsolete inventory. Inventory adjustments are impacted primarily by
demand for our products, which is influenced by the factors discussed above.
Operating Costs and Expenses. Many of our products target wireless operators and
other customers in North America, Europe, and Asia. We will likely develop new
products to serve these markets, resulting in increased research and development
expenses. We have in the past and expect to continue to incur these expenses in
future periods prior to recognizing net revenues from sales of these products.
Our operating costs consist of four primary categories: research and development
costs; sales and marketing expense; general and administrative costs; and
amortization of purchased intangibles.
Research and development is at the core of our ability to produce innovative,
leading-edge products. This category consists primarily of engineers and
technicians who design and test our highly complex products. As we work to
expand our portfolio of products and remain competitive, it may be necessary to
increase our research and development costs in the future.
Sales and marketing expense consists primarily of our sales force and
product-marketing professionals. In order to maintain strong sales
relationships, we provide co-marketing, trade show support, product training and
demo units for merchandising. We are also engaged in a wide variety of
activities, such as awareness and lead generation programs as well as product
marketing. Other marketing initiatives include public relations, seminars and
co-branding with partners.
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General and administrative expenses include primarily corporate functions such
as accounting, human resources, legal, administrative support, and professional
fees. This category also includes the expenses needed to operate as a
publicly-traded company, including Sarbanes-Oxley compliance, Securities and
Exchange Commission ("SEC") filings, stock-exchange fees, and investor-relations
expense. General and administrative expenses have been relatively stable and are
not directly related to revenue levels.
Amortization of purchased intangibles includes the amortization of customer
relationships, covenant-not-to-compete agreements and trade name intangible
assets purchased through the acquisition of Enfora.
We also subject our intangible assets and goodwill to impairment assessments
when required which can result in charges when impairment occurs.
As part of our business strategy, we review, and intend to continue to review,
acquisition opportunities that we believe would be advantageous or complementary
to the development of our business. If we make any acquisitions, we may incur
substantial expenditures in conjunction with the acquisition process and the
subsequent assimilation of any acquired business, products, technologies or
personnel.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets, liabilities, revenues, expenses and disclosures of
contingent assets and liabilities. Actual results could differ from these
estimates. Critical accounting policies and significant estimates include
revenue recognition, allowance for doubtful accounts receivable, provision for
excess and obsolete inventory, valuation of intangible and long-lived assets,
valuation of goodwill, litigation, provision for warranty costs, income taxes,
and share-based compensation expense.
Valuation of Intangible and Long-Lived Assets. We periodically assess the
valuation of intangible and long-lived assets, which requires us to make
assumptions and judgments regarding the carrying value of these assets. We
consider assets to be impaired if the carrying value may not be recoverable
based upon our assessment of the following events or changes in circumstances:
the asset's ability to continue to generate income from operations and positive
cash flow in future periods; loss of legal ownership or title to the asset;
significant changes in our strategic business objectives and utilization of the
asset; or significant negative industry or economic trends.
Our assessment includes comparing the carrying amounts of intangible and
long-lived assets to their associated undiscounted expected future cash flows,
which are determined using an expected cash flow model. This model requires
estimates of our future revenues, profits, capital expenditures, working capital
and other relevant factors. We estimate these amounts by evaluating our
historical trends, current budgets, operating plans and other industry data. If
the assets are considered to be impaired, the impairment charge recognized is
the amount by which the asset's carrying value exceeds its estimated fair value.
The timing and frequency of our impairment test is based on an ongoing
assessment of triggering events that could reduce the fair value of our
long-lived assets below their carrying value. We monitor our intangible and
long-lived asset balances and conduct formal tests on at least an annual basis
or earlier when impairment indicators are present. We believe that the
assumptions and estimates we used to value intangible and long-lived assets were
appropriate based on the information available to management. The majority of
our long-lived assets are being amortized or depreciated over two to ten years.
As most of these assets are associated with technology or trade conditions that
may change rapidly; such changes could have an immediate impact on our
impairment analysis.
Goodwill. Our goodwill resulted from the acquisition of Enfora (M2M Products and
Solutions) in the fourth quarter of 2010. In accordance with the FASB Accounting
Standards Codification ("ASC") Topic 350, Intangibles - Goodwill and Other ("ASC
Topic 350"), we will review goodwill for impairment at least annually at the
beginning of the fourth quarter of each year, and more frequently if events or
changes in circumstances occur that indicate a potential reduction in the fair
value of the reporting unit below its carrying value.
ASC Topic 350 requires that goodwill and certain intangible assets be assessed
for impairment using fair value measurement techniques. The goodwill impairment
test compares the implied fair value of the reporting unit's goodwill with the
carrying amount of that goodwill to measure the amount of the impairment loss,
if any. The implied fair value of goodwill is determined in the same manner as
in a business combination. Determining the fair value of the implied goodwill is
judgmental in nature and often involves the use of significant estimates and
assumptions. These estimates and assumptions could have a significant impact on
whether or not an impairment charge is recognized and also the magnitude of any
such charge.
In order to perform the annual goodwill impairment analysis, we are required
to estimate the fair value of our M2M Products reporting unit. The fair value is
calculated as though the M2M Products and Solutions reporting unit were to be
sold in its entirety in an orderly transaction between market participants,
using an estimate of fair value based on a blended sum resulting from the use of
two valuation methods. First, we use the guideline public company method
utilizing a multiple of the reporting unit's revenue. Second, we perform a
discounted cash flow analysis using forward looking projections of an estimate
of our future operating results. These approaches use significant estimates and
assumptions, including the size and timing of product deployments by our
customers and related projections and timing of future cash flows, discount
rates reflecting the risk inherent in future cash flows, perpetual growth rates,
stage of products in development, determination of appropriate market
comparables and determination of whether a premium or discount should be applied
to comparables. The resultant estimated fair value of our M2M Products and
Solutions reporting unit is compared to the net book value of the reporting unit
to assess whether any impairment exists.
The significant accounting policies used in preparation of these consolidated
financial statements for the three and nine months ended September 30, 2012 are
consistent with those discussed in Note 1 to the consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2011 in all material respects and in Note I to the consolidated
financial statements included in this report. The critical accounting policies
and the significant judgments and estimates used in the preparation of our
condensed consolidated financial statements for the three and nine months ended
September 30, 2012 are consistent with those discussed in our Annual Report on
Form 10-K for the year ended December 31, 2011 in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies and Estimates."
Results of Operations
Three Months Ended September 30, 2012 Compared to Three Months Ended
September 30, 2011
Net revenues. Net revenues for the three months ended September 30, 2012 were
$71.0 million, a decrease of $42.2 million or 37.3% compared to the same period
in 2011.
The following table summarizes net revenues by reportable segment and net
revenues by product categories during the three months ended September 30, 2012
and September 30, 2011 (in thousands):
Three Months Ended September 30,
2012 2011
Net revenues by reportable segment:
Mobile Computing Products $ 65,189 $ 102,691
M2M Products and Solutions 5,828 10,572
Total $ 71,017 $ 113,263
Net revenues by product categories:
Mobile Broadband Devices $ 58,275 $ 93,250
Embedded Solutions 7,666 13,769
Asset Management Solutions & Services 5,076 6,244
Total $ 71,017 $ 113,263
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Mobile Computing Products. Net revenues from our Mobile Computing Products
segment for the three months ended September 30, 2012 were $65.2 million, a
decrease of $37.5 million or 36.5% compared to the same period in 2011. The
decrease is primarily attributable to lower sales of Mobile Broadband devices
caused by increased market competition at our largest customer.
M2M Products and Solutions. Net revenues from our M2M Products and Solutions
segment for the three months ended September 30, 2012 were $5.8 million,
compared with $10.6 million for the same period last year. The decrease is
primarily due to the reduced sales volume and pricing of our 2G GPRS M2M modules
in the North American market as it transitions away from 2G GSM networks. We are
currently developing CDMA and 3G GSM modules and integrated solutions to address
this market. These products are expected to launch in the fourth quarter of 2012
and the first half of 2013.
Product Categories. We have categorized the combined product portfolios of the
mobile computing and M2M businesses into three categories (1) Mobile Broadband
Devices, (2) Embedded Solutions and (3) Asset Management Solutions and Services.
These categories were established due to the different markets and sales
channels served. We believe this product categorization facilitates the analysis
of our operating trends and enhances our segment disclosures.
The Mobile Broadband Devices category includes all external data modems
including MiFi intelligent hotspots, USB modems and PC cards. These devices are
sold primarily through wireless operator enterprise and retail channels, telecom
equipment distributors and consumer retail chains.
Embedded Solutions products include wireless-broadband modules and related
software and services sold to manufacturers of laptop computers, tablets, and
other wireless computer devices. This product category also includes M2M modules
sold to manufacturers of various asset tracking and monitoring products. Our
products are sold directly to OEMs or through distributor channels.
Asset Management Solutions and Services are mobile intelligent wireless
broadband terminal devices and communication management software, or CMS, that
transmit information about the assets into which these products are integrated.
These hardware and software products can be bundled or sold separately. The CMS
software activates the terminal device onto the wireless network and manages its
functionality.
Cost of net revenues. Cost of net revenues for the three months ended
September 30, 2012 was $56.4 million, or 79.4% of net revenues, as compared to
$86.6 million, or 76.4% of net revenues, for the same period in 2011. During the
third quarter of 2012, the cost of net revenues as a percentage of net revenues
increased due to higher inventory obsolescence charges and lower average pricing
on 4G MiFi products sold, partially offset by lower quarter over quarter
purchased intangible amortization expense decreasing to $289,000 during the
quarter ended September 30, 2012 as compared to $705,000 in the comparable
quarter of 2011. The cost of net revenues as a percentage of revenues is
expected to fluctuate in future quarters depending on revenue levels, the mix of
products sold, competitive pricing, new product introduction costs and other
factors.
Increased competitive pressures may continue to negatively impact the average
sales prices and volume sales of our products. This may require us in future
periods to record inventory write downs to reflect lower of cost or market
adjustments and revalue certain assets that may become impaired.
Gross profit. Gross profit for the three months ended September 30, 2012 was
$14.6 million, or a gross margin of 20.6% of net revenues, compared to $26.7
million, or a gross margin of 23.6% of net revenues for the same period in 2011.
The gross margin decrease was primarily attributable to the changes in net
revenues and cost of net revenues as discussed above. We expect that our gross
margin percentage will continue to fluctuate from quarter to quarter depending
on revenue levels, product mix, competitive selling prices, our ability to
reduce product costs and changes in unit volumes.
Research and development expenses. Research and development expenses for the
three months ended September 30, 2012 were $14.7 million, or 20.7% of net
revenues, compared to $15.1 million, or 13.4% of net revenues, for the same
period in 2011. Research and development expenses for the three months ended
September 30, 2012 were lower as compared to the same period in 2011, due to
reduced labor cost attributed to headcount reductions and lower software
amortization costs.
We expect to maintain our investment in research and development to continue to
provide innovative products and services. Research and development expenses as a
percentage of net revenues are expected to fluctuate in future quarters
depending on the amount of net revenues recognized, and potential variation in
the costs associated with the development of the Company's products, including
the number and complexity of the products under development and the progress of
the development activities with respect to those products.
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Sales and marketing expenses. Sales and marketing expenses for the three months
ended September 30, 2012 were $6.3 million, or 8.8% of net revenues, compared to
$7.2 million, or 6.4% of net revenues, for the same period in 2011. The $900,000
decrease for the three months ended September 30, 2012 compared to the same
period in 2011 was primarily due to reductions in outside consulting expenses,
and a decrease in salaries and related expenditures.
While managing sales and marketing expenses relative to net revenues, we expect
to continue to make selected investments in sales and marketing as we introduce
new products, market existing products, expand our distribution channels and
focus on key customers around the world.
General and administrative expenses. General and administrative expenses for the
three months ended September 30, 2012 were $4.8 million, or 6.8% of net
revenues, compared to $6.2 million, or 5.5% of net revenues, for the same period
in 2011. General and administrative expenses for the three months ended
September 30, 2012 were lower as compared to the same period in 2011 primarily
due to reduced outside consulting and legal expenses, and a decrease in salaries
and related expenditures. While we are closely monitoring and working to control
general and administrative costs, we expect these costs to be negatively
impacted by legal fees to defend the claims described in Note 9 to our
consolidated financial statements included in this report. During the third
quarter periods in 2012 and 2011, the Company incurred $941,000 and $1.3 million
in legal expenses, respectively.
Goodwill and intangible assets impairments. During the third quarter of 2012,
based on actual operating results, and reductions in management's estimates of
forecasted operating results of the M2M Products and Solutions reporting unit
principally due to an updated view of competitive pressures impacting average
selling prices and forecased sales volumes, customer product and technology
selections, and the loss of certain customers, the Company determined there were
sufficient indicators of impairment present to require an interim impairment
analysis. Based on the fair value tests performed, during the third quarter of
2012 the Company recorded a preliminary pre-tax goodwill impairment charge of
$13.2 million and a preliminary purchased intangible asset charge of $7.3
million. Based on the fair value tests performed, during the third quarter of
2011 the Company recorded a pre-tax goodwill impairment charge of $3.5 million.
See Note 4 in the condensed consolidated financial statements included in this
report.
Amortization of purchased intangible assets. The amortization of purchased
intangible assets for the three months ended September 30, 2012 was $227,000,
compared to $644,000 for the same period 2011. The decrease in amortization
expense for the three months ended September 30, 2012 was caused by the lower
net asset value of the intangible assets resulting from an impairment charge in
the first quarter of 2012.
Interest income, net. Interest income, net, for the three months ended
September 30, 2012 was $72,000 as compared to $60,000 for the same period in
2011. The weighted-average interest rate earned by the Company on its cash, cash
equivalents and marketable securities was 0.46% and 0.37% in the third quarter
of 2012 and 2011, respectively.
Other expense, net. Other expense, net, for the three months ended September 30,
2012 was $45,000 as compared to $679,000 for the same period in 2011. This other
expense in 2011 was related to foreign currency losses on South Korean won
denominated trade payables, foreign exchange currency losses on foreign
denominated bank accounts and trade receivables, and other-than-temporary loss
recognized on our marketable equity securities.
Income tax expense (benefit). Income tax expense for the three months ended
September 30, 2012 was $107,000, as compared to $11.2 million benefit for the
same period in 2011. The income tax benefit in 2011 related to the release of
$11.8 million of the Company's liability related to uncertain tax positions due
to the expiration of the applicable statutes of limitations for certain tax
years.
The effective tax rate for the three months ended September 30, 2012 is
different than the U.S. statutory rate primarily due to a valuation allowance
recorded against additional tax assets generated in the third quarter of 2012.
Net loss. For the three months ended September 30, 2012, we reported a net loss
of $31.9 million, as compared to net income of $4.5 million for the same period
in 2011. Net income was negatively impacted due to the impairment charges
recognized in the third quarter of 2012.
Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30,
2011
Net revenues. Net revenues for the nine months ended September 30, 2012 were
$273.6 million, a decrease of $19.5 million or 6.6% compared to the same period
in 2011.
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The following table summarizes net revenues by reportable segment and net
revenues by product categories during the nine months ended September 30, 2012
and September 30, 2011 (in thousands):
Nine Months EndedSeptember 30,
2012 2011
Net revenues by reportable segment:
Mobile Computing Products $ 248,620 $ 258,268
M2M Products and Solutions 24,993 34,800
Total $ 273,613 $ 293,068
Net revenues by product categories:
Mobile Broadband Devices $ 231,033 $ 242,797
Embedded Solutions 22,618 32,073
Asset Management Solutions & Services 19,962 18,198
Total $ 273,613 $ 293,068
Mobile Computing Products. Net revenues from our Mobile Computing Products
segment for the nine months ended September 30, 2012 were $248.6 million, a
decrease of $9.6 million or 3.7% compared to the same period in 2011. The
decrease is primarily attributable to lower sales of Mobile Broadband devices
caused by increased market competition at our largest customer.
M2M Products and Solutions. Net revenues from our M2M Products and Solutions
segment for the nine months ended September 30, 2012 were $25.0 million,
compared with $34.8 million net revenues from the same period last year. The
decrease is primarily due to the reduced sales volume and pricing of our 2G GPRS
M2M modules in the North American market as it transitions away from 2G GSM
networks. We are currently developing CDMA and 3G GSM modules and integrated
solutions to address this market. These products are expected to launch in the
fourth quarter of 2012 and the first half of 2013.
Cost of net revenues. Cost of net revenues for the nine months ended
September 30, 2012 was $214.7 million, or 78.5% of net revenues, as compared to
$234.2 million, or 79.9% of net revenues, for the same period in 2011. The
improvement in cost of net revenues as a percentage of net revenues in 2012
resulted from higher sales of 4G products in our Mobile Computing Products
segment during the first nine months of 2012. The cost of net revenues as a
percentage of revenues also benefitted from lower amortization costs associated
with purchased intangible assets. Cost of net revenues as a percentage of net
revenues is expected to fluctuate in future quarters depending on revenue
levels, the mix of products sold, competitive pricing, new product introduction
costs and other factors.
Gross profit. Gross profit for the nine months ended September 30, 2012 was
$58.9 million, or a gross margin of 21.5% of net revenues, compared to $58.9
million, or a gross margin of 20.1% of net revenues, for the same period in
2011. The gross margin percentage increase was primarily attributable to the
changes in net revenues and cost of net revenues as discussed above. We expect
that our gross margin will continue to fluctuate from quarter to quarter
depending on revenue levels, product mix, competitive selling prices, our
ability to reduce product costs and changes in unit volumes.
Research and development expenses. Research and development expenses for the
nine months ended September 30, 2012 were $45.0 million, or 16.4% of net
revenues, compared to $45.5 million, or 15.5% of net revenues, for the same
period in 2011. Research and development expenses for the nine months ended
September 30, 2012 were lower as compared to the same period in 2011, due to
reduced labor cost attributed to headcount reductions and lower software
amortization costs.
Sales and marketing expenses. Sales and marketing expenses for the nine months
ended September 30, 2012 were $21.3 million, or 7.8% of net revenues, compared
to $22.8 million, or 7.8% of net revenues, for the same period in 2011. The
decrease for the nine months ended September 30, 2012 compared to the same
period in 2011 was due primarily to lower labor cost and decreased cooperative
advertising and joint marketing expenses.
General and administrative expenses. General and administrative expenses for the
nine months ended September 30, 2012 were $16.1 million, or 5.9% of net
revenues, compared to $16.6 million, or 5.6% of net revenues, for the same
period in 2011. General and administrative expenses for the nine months ended
September 30, 2012 decreased as compared to the same period in 2011, as there
was a focus to contain operational costs. While we are closely monitoring and
working to control general and administrative costs, we expect these costs to be
negatively impacted by legal fees to defend the claims described in Note 9 to
our condensed consolidated financial statements included in this report. During
the nine months ended September 30, 2012 and 2011, the Company incurred $3.7 and
$3.8 million in legal expenses, respectively.
Goodwill and intangible assets impairments. During the first and third
quarters of 2012, based on actual operating results, and reductions in
management's estimates of forecasted operating results of the M2M Products and
Solutions reporting unit principally due to an updated view of competitive
pressures impacting average selling prices and forecasted sales volumes,
customer product and technology selections, and the loss of certain customers,
the Company determined there were sufficient indicators of impairment present to
require an interim impairment analysis. Based on the fair value tests performed,
during the first quarter of 2012 the Company recorded a pre-tax goodwill
impairment charge of $6.5 million and a purchased intangible asset charge of
$22.8 million. Based on the fair value tests performed, during the third quarter
of 2012 the Company recorded a preliminary pre-tax goodwill impairment charge of
$13.2 million and a preliminary purchased intangible asset charge of $7.3
million. Based on the fair value tests performed, during the third quarter of
2011 the Company recorded a pre-tax goodwill impairment charge of $3.5 million.
See Note 4 in the condensed consolidated financial statements included in this
report.
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Amortization of purchased intangible assets. Amortization of purchased
intangible assets for the nine months ended September 30, 2012 was $891,000, as
compared to $1.7 million for the same period in 2011. The decrease in
amortization expense for the nine months ended September 30, 2012 was due to
reduced amortization of purchased intangible assets from Enfora caused by the
impairment charge recognized in the first quarter of 2012.
Interest income, net. Interest income, net, for the nine months ended
September 30, 2012 was $238,000 as compared to $303,000 for the same period in
2011. The weighted-average interest rate earned by the Company on its cash, cash
equivalents and marketable securities was 0.42% and 0.51% in the first nine
months of 2012 and 2011, respectively.
Other expense, net. Other expense, net, for the nine months ended September 30,
2012 was $191,000 as compared to $1.2 million for the same period in 2011. The
other expense in 2011 related to foreign currency losses on South Korean won
denominated trade payables, and an other-than-temporary loss realized on
marketable equity securities.
Income tax expense (benefit). Income tax expense for the nine months ended
September 30, 2012 was $276,000, as compared to income tax benefit of $10.6
million for the same period in 2011. The income tax benefit in 2011 related to
the release of $11.8 million of the Company's liability related to uncertain tax
positions due to the expiration of the applicable statutes of limitations for
certain tax years.
The effective tax rate for the nine months ended September 30, 2012 is different
than the U.S. statutory rate primarily due to a valuation allowance recorded
against additional U.S.-based deferred tax assets generated in the first nine
months of 2012, and expenses attributable to foreign operations.
Net loss. For the nine months ended September 30, 2012, we reported a net loss
of $74.4 million, as compared to a net loss of $21.5 million for the same period
in 2011. Net income was significantly impacted due to the impairment charges
recognized in the first quarter of 2012 and the third quarter of 2012.
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash, cash equivalents and
marketable securities and cash generated from operations.
To address short term liquidity requirements resulting from working capital
changes the Company entered into a margin credit facility with a bank in 2011.
The use of this margin credit facility allows the Company to meet short-term
cash requirements and avoid selling cash equivalents and marketable securities.
Borrowings under this facility are collateralized by Company cash equivalents
and marketable securities on deposit at the bank. During the three months ended
September 30, 2012, we borrowed approximately $5.0 million and subsequently
repaid all amounts in the same period. During November 2012, the Company
borrowed $9.0 million against the facility, which remained outstanding as of the
date of this report.
In September 2009, we filed a shelf registration statement with the SEC that
will allow us to sell up to $125 million of equity, debt or other securities
described in the registration statement in one or more offerings by us from time
to time. As set forth in the shelf registration statement, the net proceeds from
the sale of our securities may be used for general corporate purposes, including
working capital, capital expenditures and acquisitions. As of the date of this
report, we have not issued any securities under this registration statement.
Working Capital, Cash and Cash Equivalents and Marketable Securities
The following table presents working capital, cash and cash equivalents and
marketable securities (in thousands):
September 30, December 31,
2012 2011
(unaudited)
Working capital(1) $ 75,747 $ 81,113
Cash and cash equivalents (2) $ 16,341 $ 47,069
Short-term marketable securities (2) 39,958 28,267
Long-term marketable securities 6,174 13,495
Total cash and cash equivalents and marketable
securities $ 62,473 $ 88,831
(1) Working capital is defined as the excess of current assets over current
liabilities.
(2) Included in working capital.
23
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Our working capital decreased $5.4 million from December 31, 2011 to
September 30, 2012. The decrease was primarily due to the operating loss in the
nine months ended September 30, 2012, net of non-cash related expenses.
As of September 30, 2012, cash and cash equivalents and marketable securities
decreased by $26.4 million from December 31, 2011. The principal component of
this net decrease was the cash used by our operating activities of $22.8
million, and cash used to pay for acquisition of property, plant and equipment
of $4.0 million.
Historical Cash Flows
The following table summarizes our condensed consolidated statements of cash
flows for the periods indicated (in thousands):
Nine Months Ended
September 30,
2012 2011
Net cash used in operating activities $ (22,836 ) $ (26,702 )
Net cash provided by (used in) investing activities (8,386 ) 32,026
Net cash provided by (used in) financing activities 537 (698 )
Effect of exchange rates on cash and cash equivalents (43 ) (74 )
Net increase (decrease) in cash and cash equivalents (30,728 ) 4,552
Cash and cash equivalents, beginning of period 47,069 17,375
Cash and cash equivalents, end of period $ 16,341 $ 21,927
Operating activities. Net cash used in operating activities was $22.8 million
for the nine months ended September 30, 2012 as compared to net cash used by
operating activities of $26.7 million for the same period in 2011. Net cash used
for the nine months ended September 30, 2012 was attributable to net losses in
the period and a net decrease in cash caused by changes in working capital
accounts, offset by non-cash charges for impairments of goodwill and
intangibles, depreciation and amortization, and share based compensation
expense. The net decrease in cash caused by changes in net working capital
accounts primarily included increases in accounts receivable and prepaid
expenses and other assets, as well as a decrease in accounts payable. For the
nine months ended September 30, 2011, net cash used by operating activities was
primarily related to net losses for the period, along with decreases in cash
caused by a reduction in accounts payable and an increase in inventory. These
were partially offset by an increase in cash caused by a decrease in accounts
receivable.
Investing activities. Net cash used in investing activities during the nine
months ended September 30, 2012 was $8.4 million compared to $32.0 million
provided during the same period in 2011. Cash used in investing activities
during the nine months ended September 30, 2012 was related to net purchases of
marketable securities of $4.4 million, and purchases of property, plant, and
equipment for approximately $4.0 million. Cash provided by investing activities
during the same period in 2011 was primarily related to net sales of marketable
securities of $37.2 million, net of purchases of property, plant, and equipment
for approximately $4.9 million.
Financing activities. Net cash provided by financing activities during the nine
months ended September 30, 2012 was $537,000, compared to cash used of $698,000
during the same period in 2011. Net cash provided by financing activities in
2012 was primarily related to cash received for ESPP purchases. Net cash used in
financing activities in 2011 was primarily related to payroll taxes paid on
behalf of employees for restricted stock units which vested during the period.
Other Liquidity Needs
We expect to incur ongoing professional fees and expenses to defend litigation
filed against us or related to our products, which litigation is discussed in
Note 9 to our condensed consolidated financial statements included in this
report. These costs cannot be estimated at this time.
During the next twelve months, we currently plan to incur approximately $5.1
million for discretionary capital expenditures, including the acquisition of
additional software licenses.
24
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We believe our cash resources from cash and cash equivalents and marketable
securities, together with anticipated cash flows from operations, will be
sufficient to meet our working capital needs for the next twelve months.
Our liquidity could be impaired if there is any interruption in our business
operations, a material failure to satisfy our contractual commitments or a
failure to generate revenue from new or existing products.
We may raise additional funds to accelerate development of new and existing
services and products, to respond to competitive pressures or to acquire
complementary products, businesses or technologies. There can be no assurance
that any required additional financing will be available on terms favorable to
us, or at all. If additional funds are raised by the issuance of equity
securities, our shareholders could experience dilution of their ownership
interests and securities issued may have rights senior to those of the holders
of our common stock. If additional funds are raised by the issuance of debt
securities or from other borrowings, we may be subject to certain limitations on
our operations. If adequate funds are not available or not available on
acceptable terms, we may be unable to take advantage of acquisition
opportunities, develop or enhance products or respond to competitive pressures,
any of which could have a material adverse effect on our business, financial
condition and results of operations.
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