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PEGASYSTEMS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements This Quarterly Report on Form 10-Q contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements about our future financial performance and business plans, the adequacy of our liquidity and capital resources, the continued payment of quarterly dividends by the Company, and the timing of recognizing revenue under existing term license agreements. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management's beliefs and assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as "expect," "anticipate," "intend," "plan," "believe," "could," "estimate," "may," "target," "project," or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Important factors that could cause actual future activities and results to differ include, among others, variation in demand for our products and services and the difficulty in predicting the completion of product acceptance and other factors affecting the timing of license revenue recognition, the ongoing uncertainty and volatility in the global financial markets, the ongoing consolidation in the financial services and healthcare markets, reliance on third party relationships, the potential loss of vendor specific objective evidence for our consulting services, and management of the Company's growth. These risks are described more completely in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2013. We do not intend to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Business overview We develop, market, license, and support a software application development platform that enables enterprises to build and integrate strategic business processes into their customer engagement strategies. Our Pega 7 platform ("Pega 7") assists our clients in building, deploying, and evolving enterprise applications, creating an environment in which business and IT can collaborate to manage back office operations, front office sales, marketing, and/or customer service needs. We also provide consulting services, maintenance, and training for our software, as well as a variety of applications. Pega 7 is available for installation on premises, and is also cloud enabled. Our current clients are primarily Global 500 companies and government agencies that seek to manage complex enterprise systems and customer service issues more nimbly and cost-effectively. Our license revenue is primarily derived from sales of the Pega 7 platform and our related applications in the areas of customer service and support, sales and onboarding, marketing, and operations. Our platform provides a model-driven, visual code-free approach to application development that enables business and IT to collaborate in delivering applications faster and more accurately than traditional Java-based development approaches. Our software uses visual models to capture business processes, and then generates the code for the application from the model. Changes to the code are made by changing the model, and application documentation is generated directly from the model as well. Our recently introduced Pega Cloud® service also provides our clients with the option to build, test, and deploy their applications in a Cloud environment. Pega 7 and our related applications are used by our clients in financial services, insurance, healthcare, communications and media, life sciences, manufacturing, high technology, government, and other verticals. We continue to invest heavily in research and development to continue improving our software, and most recently have added mobile and "co-browsing" capabilities as more fully described below. We sell our software directly, and also through a network of business and technology alliances. Our partners include major systems integrators, management consulting firms, technology providers, and application developers. 19 -------------------------------------------------------------------------------- Table of Contents Customer Service and Support: Our acquisition of Profeatable Corporation ("Profeatable") on July 1, 2014, allows us to integrate Profeatable's Firefly Cloud-based collaboration technology into the Pega 7 platform as well as our customer service and sales applications. The Firefly technology enables users to share content by simultaneously "co-browsing" Web pages. The Profeatable technology is designed to allow our clients to engage customers in real time and on line, and can also be used to enable employees to collaborate on work, regardless of location. Social Context: Our acquisition of MeshLabs Software Private Limited ("MeshLabs") on April 28, 2014, unified MeshLabs' social listening, text analytics, and natural language processing with the existing capabilities of our customer service, marketing, and case management applications. The combined solutions are designed to enable our clients to collect social content (tweets, blogs, and posts on Facebook or in other social communities), and enrich it by detecting language, topic, taxonomy, and sentiment. Using this combination, our clients are able to monitor, triage, and respond to social content across multiple channels, and turn it into actionable social intelligence. Mobile: Our acquisition of Antenna Software, Inc. and its subsidiaries ("Antenna") on October 9, 2013 expanded our Application Mobility Platform that is designed to help clients efficiently build, manage, and deploy mobile applications as part of a unified Omni channel experience. By using our Mobility Platform, enterprises can manage the complex elements of the mobile application lifecycle including security, integration, testing, and management of mobile applications and devices. Our mobile application development solutions help businesses to reduce their development time, deployment costs, and the complexity associated with run-the-business mobile applications. The operations of Antenna are included in our operating results from the date of acquisition. Due to the integration of the products, sales force, and operations of Antenna, other than the maintenance and hosting revenue attributable to the recognition of the fair value of acquired deferred maintenance and hosting revenue, it is no longer feasible for us to identify revenue from new arrangements solely attributable to Antenna. Training: We offer training for our clients and partners at our regional training facilities, at third party facilities, and at client sites. Our online training through PegaACADEMY provides an alternative way to learn our software in a virtual environment. We believe that this online training will continue to expand the number of trained experts at a faster pace. Critical accounting policies Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and the rules and regulations of the SEC for interim financial reporting. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions, and beliefs of what could occur in the future given available information. There have been no changes in our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013. For more information regarding our critical accounting policies, we encourage you to read the discussion contained in Item 7 under the heading "Critical Accounting Policies, Significant Judgments, and Estimates" and Note 2 "Significant Accounting Policies" included in the notes to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2013. 20 -------------------------------------------------------------------------------- Table of Contents Results of Operations Three Months Ended Nine Months Ended September 30, Increase (Decrease) September 30, Increase (Decrease) (Dollars in thousands) 2014 2013 2014 2013 Total revenue $ 137,631 $ 122,011 $ 15,620 13 % $ 421,080 $ 355,572 $ 65,508 18 % Gross profit $ 91,249 $ 83,913 $ 7,336 9 % $ 282,094 $ 241,943 $ 40,151 17 % Total operating expenses $ 86,252 $ 70,124 $ 16,128 23 % $ 260,248 $ 208,150 $ 52,098 25 % Income from operations $ 4,997 $ 13,789 $ (8,792) (64)% $ 21,846 $ 33,793 $ (11,947) (35)% Income before provision for income taxes $ 2,352 $ 13,410 $ (11,058) (82)% $ 19,280 $ 32,085 $ (12,805) (40)% Revenue Three Months Ended Increase Nine Months Ended September 30, (Decrease) September 30, Increase (Dollars in thousands) 2014 2013 2014 2013 License revenue Perpetual licenses $ 27,338 57 % $ 28,971 65 % $ (1,633) $ 83,995 54 % $ 79,978 62 % $ 4,017 Term licenses 19,220 40 % 14,077 31 % 5,143 65,086 42 % 42,987 34 % 22,099 Subscription 1,734 3 % 1,754 4 % (20) 5,837 4 % 5,252 4 % 585 Total license revenue $ 48,292 100 % $ 44,802 100 % $ 3,490 8 % $ 154,918 100 % $ 128,217 100 % $ 26,701 21 % The aggregate value of new license arrangements executed during the nine months of 2014 significantly increased compared to the nine months of 2013 due to a higher number and higher total value of license arrangements executed in this period compared to the same period in 2013. The increase in the aggregate value of license arrangements executed was primarily due to one perpetual license arrangement executed in the second quarter of 2014 for more than $10 million. The aggregate value of new license arrangements executed fluctuates quarter to quarter. During the nine months of 2014 and 2013, approximately 86% and 72%, respectively, of the value of new license arrangements were executed with existing clients. The mix between perpetual and term license arrangements executed in a particular period varies based on client needs. A change in the mix between perpetual and term license arrangements executed may cause our revenues to vary materially from period to period. A higher proportion of term license arrangements executed would result in more license revenue being recognized over longer periods as payments become due or earlier if prepaid. Some of our perpetual license arrangements include extended payment terms or additional rights of use, which also result in the recognition of revenue over longer periods. The decrease in perpetual license revenue during the third quarter of 2014 compared to the third quarter of 2013 was primarily due to the lower value of perpetual arrangements executed and recognized into revenue during the third quarter of 2014 compared to the same period in 2013. The increase in perpetual license revenue during the nine months of 2014 compared to the nine months of 2013 was primarily due to license arrangements executed in the first half of 2014. The aggregate value of payments due under noncancellable perpetual licenses was $15.3 million as of September 30, 2014 compared to $30.5 million as of September 30, 2013. We expect to recognize $7.1 million of the $15.3 million as revenue in the fourth quarter of 2014. The increases in term license revenue were primarily due to term license arrangements executed in the fourth quarter of 2013 and first half of 2014 and a $1.5 million prepayment of a client arrangement in the first quarter of 2014. The aggregate value of payments due under noncancellable term licenses and our Pega Cloud arrangements grew to $250 million as of September 30, 2014 compared to $217.9 million as of September 30, 2013. We expect to recognize $21.3 million of the $250 million as revenue in the fourth quarter of 2014 in addition to new term license and Pega Cloud agreements we may complete in the fourth quarter of 2014 or prepayments we may receive from existing term license agreements. See the table of future cash receipts in Liquidity and Capital Resources - Cash Provided by Operating Activities. Subscription revenue primarily consists of the ratable recognition of license, maintenance and bundled services revenue on license arrangements that include a right to successor products or unspecified future products. Subscription revenue does not include revenue from our Pega Cloud arrangements, which is included in services. The timing of scheduled payments under client arrangements may limit the amount of revenue recognized in a reporting period. Consequently, our subscription revenue may vary quarter to quarter. The increase in subscription revenue for the nine months of 2014 compared to the same period in 2013 was primarily due to the timing of payments for a client arrangement. 21-------------------------------------------------------------------------------- Table of Contents Three Months Ended Nine Months Ended September 30, Increase September 30, Increase (Dollars in thousands) 2014 2013 2014 2013 Maintenance revenue Maintenance $ 47,281 $ 37,979 $ 9,302 24 % $ 137,555 $ 112,238 $ 25,317 23 % The increases in maintenance revenue were primarily due to the growth in the aggregate value of the installed base of our software and continued strong renewal rates. Maintenance revenue primarily attributable to recognition of the fair value of the acquired Antenna deferred maintenance revenue was $0.1 million and $0.7 million in the third quarter and nine months of 2014, respectively. Three Months Ended Increase Nine Months Ended Increase September 30, (Decrease) September 30, (Decrease) 2014 2013 2014 2013 (Dollars in thousands) Services revenue Consulting services $ 35,951 85 % $ 36,459 93 % $ (508 ) (1 ) % $ 112,862 88 % 105,831 92 % $ 7,031 7 % Cloud 4,561 11 % 1,638 4 % 2,923 178 % 12,146 9 % 5,441 5 % 6,705 123 % Training 1,546 4 % 1,133 3 % 413 36 % 3,599 3 % 3,845 3 % (246 ) (6 ) % Total services $ 42,058 100 % $ 39,230 100 % $ 2,828 7 % $ 128,607 100 % $ 115,117 100 % $ 13,490 12 % Consulting services primarily relate to new license implementations. The increase in consulting services revenue during the nine months of 2014 was a result of revenue from Antenna and unusually low services revenue in the first quarter of 2013 mainly because many of our large fourth quarter 2012 license arrangements were for the purchase of additional usage, which did not require implementation services. Our consulting services may be lower in future periods as our clients become enabled and our partners lead more projects. Cloud represents revenue from our Pega Cloud offerings. The increases in cloud revenue during the third quarter and nine months of 2014 were primarily due to growth of our cloud client base and revenue attributable to Antenna. The increase in training revenue during the third quarter of 2014 was due to an increase in the number of clients taking courses through our PegaACADEMY self-service online training during the third quarter of 2014 compared to the third quarter of 2013. The decrease in training revenue during the nine months of 2014 was primarily due to the increased adoption of our PegaACADEMY self-service online training by our partners, which has a significantly lower average price per student as compared to our traditional instructor-led training. Gross profit Three Months Ended Nine Months Ended September 30, Increase (Decrease) September 30, Increase (Decrease) (Dollars in thousands) 2014 2013 2014 2013 Gross Profit Software license $ 47,216 $ 43,210 $ 4,006 9 % $ 151,086 $ 123,466 $ 27,620 22 % Maintenance 41,896 34,380 7,516 22 % 122,462 101,132 21,330 21 % Services 2,137 6,323 (4,186) (66) % 8,546 17,345 (8,799) (51) % Total gross profit $ 91,249 $ 83,913 $ 7,336 9 % $ 282,094 $ 241,943 $ 40,151 17 % Total gross profit % 66 % 69 % 67 % 68 % Software license gross profit % 98 % 96 % 98 % 96 % Maintenance gross profit % 89 % 91 % 89 % 90 % Services gross profit % 5 % 16 % 7 % 15 % The increases in total gross profit were primarily due to increases in software license and maintenance revenue. 22-------------------------------------------------------------------------------- Table of Contents The decreases in services gross profit percent were primarily due to increased subcontractor and employee-related costs associated with higher headcount, primarily related to Antenna, and costs incurred on several consulting projects in the third quarter and nine months of 2014, for which the corresponding revenue will be recognized in future periods, as revenue recognition criteria had not been met. In addition, European professional services utilization rates declined 16% and 8% during the third quarter and nine months of 2014 compared to the same periods in 2013, primarily due to the weakening overall economic conditions in Europe and the completion of a large project. Operating expenses Three Months Ended Nine Months Ended September 30, Increase (Decrease) September 30, Increase (Dollars in thousands) 2014 2013 2014 2013 Amortization of intangibles: Cost of revenue $ 1,382 $ 1,540 $ (158) (10) % $ 4,666 $ 4,622 $ 44 1 % Selling and marketing 1,501 1,232 269 22 % 4,496 3,696 800 22 % General and administrative 574 - 574 n/m 1,475 4 1,471 n/m $ 3,457 $ 2,772 $ 685 25 % $ 10,637 $ 8,322 $ 2,315 28 % n/m - not meaningful The increases in amortization expense were primarily due to the amortization associated with $10.4 million of intangibles acquired from Antenna in October 2013. Three Months Ended Nine Months Ended September 30, Increase September 30, Increase (Dollars in thousands) 2014 2013 2014 2013 Selling and marketing Selling and marketing $ 48,623 $ 42,663 $ 5,960 14 % $ 150,772 $ 127,279 $ 23,493 18 % As a percent of total revenue 35 % 35 % 36 % 36 % Selling and marketing headcount at September 30, 637 538 99 18 % Selling and marketing expenses include compensation, benefits, and other headcount-related expenses associated with our selling and marketing personnel as well as advertising, promotions, trade shows, seminars, and other programs. Selling and marketing expenses also include the amortization of customer related intangibles. The increase in selling and marketing expenses during the third quarter of 2014 compared to the same period in 2013 was primarily due to a $5.1 million increase in compensation and benefits associated with higher headcount, partially due to Antenna, and a $1.5 million increase in marketing and sales program expenses, partially offset by a $2.6 million decrease in partner commissions. The increase in selling and marketing expenses during the nine months of 2014 compared to the same period in 2013 was primarily due to a $12.8 million increase in compensation and benefit expenses associated with higher headcount, partially due to Antenna, a $3.5 million increase in marketing and sales program expenses primarily related to PegaWORLD, our annual user conference, a $2.7 million increase in commission expense associated with the higher value of new license arrangements executed during the nine months of 2014 compared to the same period in 2013, a $0.9 million increase in contracted services, and a $0.8 million increase in amortization expense due to the Antenna customer related intangible assets, partially offset by a $2.8 million decrease in partner commissions. Effective January 1, 2014, we realigned the organizational structure of our product management and design team. As a result of this realignment, we changed the classification of this team's expenses from selling and marketing to research and development as the roles of the members of this team are now aligned with our research and development efforts. The decrease caused by this realignment partially offset the increase in headcount as well as the overall increase in selling and marketing expenses during the third quarter and nine months of 2014 compared to the same periods in 2013. 23-------------------------------------------------------------------------------- Table of Contents Three Months Ended Nine Months Ended September 30, September 30, (Dollars in thousands) 2014 2013 Increase 2014 2013 Increase Research and development Research and development $ 28,558 $ 19,786 $ 8,772 44 % $ 80,490 $ 59,123 $ 21,367 36 % As a percent of total revenue 21 % 16 % 19 % 17 % Research and development headcount at September 30, 1,046 817 229 28 % Research and development expenses include compensation, benefits, contracted services, and other headcount-related expenses associated with the creation and development of our products as well as enhancements and engineering changes to existing products. The realignment of the organizational structure of our product management and design team as discussed above contributed to the increase in headcount as well as the overall increase in research and development expense during the third quarter and nine months of 2014 compared to the same periods in 2013. The increase in headcount also reflects the impact of Antenna and the growth in our India research facility as we have been replacing contractors with employees. The increase in offshore headcount lowered our average compensation expense per employee. The increase in research and development expenses during the third quarter of 2014 compared to the same period in 2013 was primarily due to a $6.2 million increase in compensation and benefit expenses associated with higher headcount inclusive of the compensation and benefit expenses associated with our product management and design group now included in research and development, a $0.8 million increase in contracted professional services, and a $0.7 million increase in equipment-related costs. The increase in research and development expenses during the nine months of 2014 compared to the same period in 2013 was primarily due to a $15 million increase in compensation and benefit expenses associated with higher headcount inclusive of the compensation and benefit expenses associated with our product management and design group now included in research and development, a $1.9 million increase in equipment-related costs, and a $1.4 million increase in contracted professional services. Three Months Ended Nine Months Ended September 30, September 30, (Dollars in thousands) 2014 2013 Increase 2014 2013 Increase General and administrative General and administrative $ 8,825 $ 7,130 $ 1,695 24 % $ 28,377 $ 21,203 $ 7,174 34 % As a percent of total revenue 6 % 6 % 7 % 6 % General and administrative headcount at September 30, 298 248 50 20 % General and administrative expenses include compensation, benefits, and other headcount-related expenses associated with finance, legal, corporate governance, and other administrative headcount. It also includes accounting, legal, and other administrative fees. The general and administrative headcount includes employees in human resources, information technology and corporate services departments whose costs are allocated to our other functional departments. The increase in general and administrative expenses during the third quarter of 2014 compared to the same period in 2013 was primarily due to a $1 million increase in compensation and benefits associated with higher headcount and a $0.6 million increase in amortization associated with the Antenna trademark intangible asset and the non-compete intangible assets related to the Antenna, MeshLabs, and Profeatable acquisitions. The increase in general and administrative expenses during the nine months of 2014 compared to the same period in 2013 was primarily due to a $2.7 million increase in compensation and benefits associated with higher headcount, a $1.7 million increase in professional fees, and a $1.5 million increase in amortization associated with the Antenna trademark intangible asset and the non-compete intangible assets related to the Antenna, MeshLabs, and Profeatable acquisitions. 24 -------------------------------------------------------------------------------- Table of Contents Restructuring expenses The restructuring expenses represent future lease payments and demising costs, net of estimated sublease income for space acquired in connection with the Antenna acquisition. During the fourth quarter of 2013, we ceased use of some of this space as part of our integration of Antenna. During the third quarter of 2014, we restructured the remaining space and revised our estimate of sublease income for the previously restructured space, recognizing $0.2 million in expenses. See Note 11 "Accrued Restructuring" for further discussion. Stock-based compensation The following table summarizes stock-based compensation expense included in our unaudited condensed consolidated statements of operations: Three Months Ended Nine Months Ended September 30, Increase September 30, Increase (Dollars in thousands) 2014 2013 2014 2013 Cost of services $ 1,418 $ 947 $ 471 50% $ 3,816 $ 3,134 $ 682 22 % Operating expenses 3,850 2,053 1,797 88% 9,905 6,579 3,326 51 % Total stock-based compensation before tax 5,268 3,000 2,268 76% 13,721 9,713 4,008 41 % Income tax benefit (1,395) (893) (3,977) (2,941) The increases in stock-based compensation expense during the third quarter and nine months of 2014 were primarily due to the timing of the 2013 and 2012 annual periodic equity grants, which occurred in March 2014 and December 2012, respectively, as well as the higher value of the 2013 annual periodic equity grant, executive new hire grants made since September 30, 2013, and awards granted in connection with the 2014 acquisitions. Non-operating income and expenses, net Three Months Ended Nine Months Ended September 30, Change September 30, Change (Dollars in thousands) 2014 2013 2014 2013 Foreign currency transaction (loss) gain $ (2,845) $ 661 $ (3,506) (530) % $ (2,527) $ (1,666) $ (861) 52 % Interest income, net 181 123 58 47 % 468 376 92 24 % Other income (expense), net 19 (1,163) 1,182 (102) % (507) (418) (89) 21 % Non-operating loss $ (2,645) $ (379) $ (2,266) 598 % $ (2,566) $ (1,708) $ (858) 50 % We have historically used foreign currency forward contracts ("forward contracts") to manage our exposure to changes in foreign currency denominated accounts receivable, intercompany payables, and cash primarily held by our U.S. operating company. We have not designated these forward contracts as hedging instruments and as a result, we record the fair value of the outstanding contracts at the end of the reporting period in our consolidated balance sheet, with any fluctuations in the value of these contracts recognized in other income (expense), net. The fluctuations in the value of these forward contracts recorded in other income (expense), net, partially offset in net income, the gains and losses from the remeasurement or settlement of the foreign currency denominated accounts receivable, intercompany payables, and cash held by the U.S. operating company recorded in foreign currency transaction (loss) gain. We are in the process of reassessing our hedging strategy and have not entered into any forward contracts since February 2014. We are primarily exposed to the fluctuation in the British pound, Euro, Australian dollar and Indian rupee relative to the U.S. dollar. See Note 4 "Derivative Instruments" in the notes to the accompanying unaudited condensed consolidated financial statements for discussion of our use of forward contracts. The total change in the fair value of our forward contracts recorded in other income (expense), net, during the nine months of 2014 and 2013 was a loss of $0.5 million and $0.4 million, respectively. 25-------------------------------------------------------------------------------- Table of Contents Provision for income taxes We account for income taxes at each interim period using our estimated annual effective tax rate and adjust for discrete tax items recorded in the same period. The provision for income taxes represents current and future amounts owed for federal, state, and foreign taxes. During the third quarter of 2014 and 2013, we recorded a tax provision of $0.5 million and $4.7 million, respectively, which resulted in an effective tax rate of 20% and 35%, respectively. During the nine months of 2014 and 2013, we recorded a provision of $6.1 million and $9.6 million, respectively, which resulted in an effective tax rate of 32% and 30%, respectively. Our effective tax rates for the third quarter and nine months of 2014 were below the statutory rate primarily due to our domestic production activities deduction and a favorable foreign tax rate differential. In addition, our effective tax rate for the third quarter of 2014 was impacted by favorable discrete items due to the lapse of certain foreign income tax statutes and transfer pricing rulings. Our effective tax rate for the nine months of 2013 was below the statutory rate primarily due to a $0.8 million tax benefit related to our 2012 research and experimentation credit recognized in the first quarter of 2013 as a result of the American Taxpayer Relief Act of 2012 that was signed into law in January 2013. Our effective tax rate for nine months of 2014 was higher than in the same period in 2013 primarily because the research and experimentation credit has not yet been extended to 2014. Liquidity and capital resources Nine Months Ended September 30, (in thousands) 2014 2013 Cash provided by (used in): Operating activities $ 98,267 $ 83,435 Investing activities (22,485) (39,674) Financing activities (17,403) (11,942) Effect of exchange rate on cash (2,065) (517) Net increase in cash and cash equivalents $ 56,314 $ 31,302 As of As of September 30, 2014 December 31, 2013 Total cash, cash equivalents, and marketable securities $ 228,571 $ 156,692 The increase in cash and cash equivalents was primarily due to the significant increase in cash provided by operating activities associated with our strong accounts receivable collections during the nine months of 2014, which were generated from the significant value of arrangements executed in the fourth quarter of 2013 and nine months of 2014. We believe that our current cash, cash equivalents, marketable securities, and cash flow from operations will be sufficient to fund our operations, our dividend payments and our share repurchase program for at least the next 12 months. We evaluate acquisition opportunities from time to time, which if pursued, could require use of our funds. On October 9, 2013, we acquired Antenna for $26.3 million in cash. During the first quarter of 2014, we paid $0.8 million of the remaining merger consideration related to the final working capital adjustment for Antenna, and we incurred $0.3 million of direct and incremental expenses associated with this transaction during the nine months of 2014. During the second quarter of 2014, we paid $0.8 million in cash consideration to acquire MeshLabs. On July 1, 2014, we acquired Profeatable for $2.3 million in cash consideration, inclusive of $0.2 million in cash acquired, of which $1.2 million was paid upon closing and $1.1 million will be paid within one year from the acquisition or earlier, based on the achievement of certain performance milestones. As of September 30, 2014, approximately $58.7 million of our cash and cash equivalents was held in our foreign subsidiaries. If it becomes necessary to repatriate these funds, we may be required to pay U.S. tax, net of any applicable foreign tax credits, upon repatriation. We consider the earnings of our foreign subsidiaries to be permanently reinvested and, as a result, U.S. taxes on such earnings are not provided. It is impractical to estimate the amount of U.S. tax we could have to pay upon repatriation due to the complexity of the foreign tax credit calculations and because we consider our earnings permanently reinvested. There can be no assurance that changes in our plans or other events affecting our operations will not result in materially accelerated or unexpected expenditures. Cash provided by operating activities The primary drivers of cash provided by operating activities during the nine months of 2014 were net income of $13.2 million and the $56.4 million net change in assets and liabilities. The net change in assets and liabilities primarily consisted of a decrease in accounts receivable due to our strong collections, partially offset by an increase in income taxes receivable due to estimated tax payments and the tax benefits associated with domestic stock-based compensation. 26 -------------------------------------------------------------------------------- Table of Contents The primary drivers of cash provided by operating activities during the nine months of 2013 were net income of $22.5 million and the $35.9 million net change in assets and liabilities. The net change in assets and liabilities primarily consisted of a decrease in accounts receivable due to higher collections, partially offset by a decrease in accounts payable and accrued expenses due to the timing of payments for compensation-related accruals. |