UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
| x | | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 1,December 31, 2010
| ¨ | | |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-33278
(Exact name of registrant as specified in its charter)
| | |
| Delaware | | |
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Delaware | | 20-5961564 |
| | |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
incorporation or organization) | | |
| | |
5200 Great American Parkway Santa Clara, California | | 95054 |
Santa Clara, California | | 95054 |
| | |
| (Address of principal executive offices) | | (Zip Code) |
(408) 567-7000
(Registrant’s telephone number, including area code)
No changes
(Former name, former address and former fiscal year, if changed since last report)
Indicate by checkmark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþx Noo¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso¨ Noo¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | | ¨ | | Accelerated filer | | x |
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Large acceleratedNon-accelerated filero | | Accelerated filerþ¨ | | Non- accelerated filero(Do (Do not check if a smaller reporting company) | | Smaller Reporting Companyoreporting company | | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12 b-2 of the Exchange Act). Yeso¨ Noþx
The number of shares outstanding of the registrant’s Common Stock as of November 4, 2010February 2, 2011 was 59,718,34460,539,388 shares.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 1,December 31, 2010
(Unaudited)
Note A —1. Basis of Presentation and Nature of Operations
The accompanying condensed consolidated financial statements of Aviat Networks, Inc. and its subsidiaries (“we,” “us,” and “our”) have been prepared by us, without an audit, in accordance with U.S. generally accepted accounting principles for interim financial information and with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles. In the opinion of management, such interim financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows for such periods.
The results for the quarter and two quarters ended October 1,December 31, 2010 (the “first“second quarter and the first two quarters of fiscal 2011”) are not necessarily indicative of the results that may be expected for the full fiscal year or any subsequent period. The balance sheet as of July 2, 2010 has been derived from the audited financial statements but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for annual financial statements. We provide complete financial statements in our Annual Report on Form 10-K, which includes information and footnotes required by the rules and regulations of the SEC. The information included in this Quarterly Report on Form 10-Q (this “Report”) should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended July 2, 2010 (“Fiscal 2010 Form 10-K”).
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.
NatureCertain immaterial amounts in the second and first two quarters of Operations— We design, manufacturefiscal 2010 condensed consolidated financial statements have been reclassified to conform to the same fiscal 2011 period presentation. In addition, the line items of revenue from product sales, revenues from services, cost of product sales and sellcost of services on our consolidated statement of operations for the first two quarters of fiscal 2011 reflected a range$4.3 million reclassification from services revenue to product sales revenue, and a $0.7 million reclassification from cost of wireless networking products, solutions and services to mobile and fixed telephone service providers, private network operators, government agencies, transportation and utility companies, public safety agencies and broadcast system operators acrosscost of product sales for the globe. Our products include both point-to-point (PTP) and point-to-multipoint (PMP) digital microwave transmission systems designedfirst quarter of fiscal 2011. The reclassifications did not impact the consolidated gross margin or net loss for first/last mile access, middle mile/backhaul and long distance trunking applications. Our PMP product portfolio includes base stations and subscriber equipment based upon the IEEE 802.16d-2004 and 16e-2005 standards for fixed and mobile Worldwide Interoperability for Microwave Access (WiMAX). We also provide network management software solutions to enable operators to deploy, monitor and manage our systems, third party equipment such as antennas, routers and multiplexers to build and deploy a wireless transmission network and a full suitefirst two quarters of turnkey support services.
fiscal 2011.Note B —2. New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “FASB”) or other standards setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial position, results of operations and cash flows upon adoption.
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Note C —3. Accumulated Other Comprehensive Loss and Comprehensive Loss
The changes in components of our accumulated other comprehensive loss during the first quartertwo quarters of fiscal 2011 and fiscal 2010 were as follows:
| | | | | | | | | | | | | |
| | | | | | | | | | | Total | |
| | | | | | | | | | | Accumulated | |
| | | Foreign | | | | | | | Other | |
| | | Currency | | | Hedging | | | Comprehensive | |
| | | Translation | | | Derivatives | | | (Loss) Income | |
| | | (In millions) | |
| Balance as of July 2, 2010 | | $ | (2.9 | ) | | $ | 0.3 | | | $ | (2.6 | ) |
| Foreign currency translation gain | | | 0.1 | | | | — | | | | 0.1 | |
| Net unrealized loss on hedging activities | | | — | | | | (0.5 | ) | | | (0.5 | ) |
| | | | | | | | | | |
| Balance as of October 1, 2010 | | $ | (2.8 | ) | | $ | (0.2 | ) | | $ | (3.0 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Balance as of July 3, 2009 | | $ | (4.4 | ) | | $ | (0.4 | ) | | $ | (4.8 | ) |
| Foreign currency translation gain | | | 1.4 | | | | — | | | | 1.4 | |
| Net unrealized loss on hedging activities | | | — | | | | (0.3 | ) | | | (0.3 | ) |
| | | | | | | | | | |
| Balance as of October 2, 2009 | | $ | (3.0 | ) | | $ | (0.7 | ) | | $ | (3.7 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | |
| | | Foreign
Currency
Translation | | | Hedging
Derivatives | | | Total
Accumulated
Other
Comprehensive
Loss | |
| | | (In millions) | |
Balance as of July 2, 2010 | | $ | (2.9 | ) | | $ | 0.3 | | | $ | (2.6 | ) |
Foreign currency translation loss | | | (0.3 | ) | | | — | | | | (0.3 | ) |
Net unrealized loss on hedging activities | | | — | | | | (0.1 | ) | | | (0.1 | ) |
| | | | | | | | | | | | |
Balance as of December 31, 2010 | | $ | (3.2 | ) | | $ | 0.2 | | | $ | (3.0 | ) |
| | | | | | | | | | | | |
| | | |
Balance as of July 3, 2009 | | $ | (4.4 | ) | | $ | (0.4 | ) | | $ | (4.8 | ) |
Foreign currency translation gain | | | 2.0 | | | | — | | | | 2.0 | |
Net unrealized gain on hedging activities | | | — | | | | 0.1 | | | | 0.1 | |
| | | | | | | | | | | | |
Balance as of January 1, 2010 | | $ | (2.4 | ) | | $ | (0.3 | ) | | $ | (2.7 | ) |
| | | | | | | | | | | | |
Total comprehensive loss for the first quarter of fiscal 2011 and two quarters ended December 31, 2010 and January 1, 2010 was comprised of the following:
| | | | | | | | | |
| | | Quarter Ended | |
| | | October 1, 2010 | | | October 2, 2009 | |
| | | (In millions) | |
| Net loss | | $ | (21.3 | ) | | $ | (7.8 | ) |
| Other comprehensive income (loss): | | | | | | | | |
| Foreign currency translation gain | | | 0.1 | | | | 1.4 | |
| Net unrealized loss on hedging activities | | | (0.5 | ) | | | (0.3 | ) |
| | | | | | | |
| Total comprehensive loss | | $ | (21.7 | ) | | $ | (6.7 | ) |
| | | | | | | |
| | | | | | | | | | | | | | | | |
| | | Quarter Ended | | | Two Quarters Ended | |
| | | December 31,
2010 | | | January 1,
2010 | | | December 31,
2010 | | | January 1,
2010 | |
| | | (In millions) | |
Net loss | | $ | (12.5 | ) | | $ | (7.9 | ) | | $ | (33.8 | ) | | $ | (15.7 | ) |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | |
Foreign currency translation income (loss) | | | (0.4 | ) | | | 0.6 | | | | (0.3 | ) | | | 2.0 | |
Net unrealized gain (loss) on hedging activities | | | 0.4 | | | | 0.4 | | | | (0.1 | ) | | | 0.1 | |
| | | | | | | | | | | | | | | | |
Total comprehensive loss | | $ | (12.5 | ) | | $ | (6.9 | ) | | $ | (34.2 | ) | | $ | (13.6 | ) |
| | | | | | | | | | | | | | | | |
Note D — 4. Net Income (Loss) per Share of Common Stock
We compute net income (loss) per share of common stock using the two-class method. Basic net income (loss) per share is computed using the weighted average number of common shares and participating securities outstanding. Our unvested restricted shares (including restricted stock awards and performance share awards) contain rights to receive non-forfeitable dividends therefore are considered to be participating securities and would be included in the calculations of net income per basic and diluted common share. We incurred a net loss in the second and first two quarters of both fiscal 2011 and fiscal 2010. In accordance with ASC subtopic 260-10, undistributed losses were not allocated to unvested restricted shares due to the fact that the unvested restricted shares are not contractually obligated to share in the losses of the company.
As a result of the company’s net loss in the second and first two quarters of fiscal 2011 and fiscal 2010, the computation of diluted net loss per share for these periods excluded all potential common stock equivalents outstanding as their effect was anti-dilutive. Such common equivalent shares included options to purchase shares of common stock, unvested restricted stock awards and units, and unvested performance share awards.
Note 5. Balance Sheet Components
Receivables
Our receivables are summarized below:
| | | | | | | | | |
| | | October 1, 2010 | | | July 2, 2010 | |
| | | (In millions) | |
| Accounts receivable | | $ | 131.4 | | | $ | 113.6 | |
| Notes receivable due within one year | | | 4.2 | | | | 4.5 | |
| | | | | | | |
| | | | 135.6 | | | | 118.1 | |
| Less allowances for collection losses | | | (15.1 | ) | | | (13.3 | ) |
| | | | | | | |
| | | $ | 120.5 | | | $ | 104.8 | |
| | | | | | | |
| | | | | | | | |
| | | December 31,
2010 | | | July 2,
2010 | |
| | | (In millions) | |
Accounts receivable | | $ | 157.7 | | | $ | 113.6 | |
Notes receivable due within one year | | | 4.0 | | | | 4.5 | |
| | | | | | | | |
| | | 161.7 | | | | 118.1 | |
Less allowances for collection losses | | | (15.3 | ) | | | (13.3 | ) |
| | | | | | | | |
| | $ | 146.4 | | | $ | 104.8 | |
| | | | | | | | |
To comply with requests from our customers for longer payment terms, we oftenmay accept letters of credit with payment terms of up to one year or more, which we thengenerally discount with various financial institutions. Under these arrangements, collection risk is fully transferred to the financial institutions. We record the cost of discounting these letters of credit as interest expense. During the first second
quarter of fiscal 2011 and fiscal 2010 we discounted customer letters of credit totaling $4.3$25.4 million and $20.8$20.7 million, respectively, and recorded related interest expense of $0.1$0.3 million and $0.2 million.
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Note E — Inventories
Our inventories are summarized below:
| | | | | | | | | |
| | | October 1, 2010 | | | July 2, 2010 | |
| | | (In millions) | |
| Finished products | | $ | 55.1 | | | $ | 60.4 | |
| Work in process | | | 8.0 | | | | 8.0 | |
| Raw materials and supplies | | | 5.7 | | | | 5.1 | |
| | | | | | | |
| | | $ | 68.8 | | | $ | 73.5 | |
| | | | | | | |
| | | | | | | | |
| | | December 31,
2010 | | | July 2,
2010 | |
| | | (In millions) | |
Finished products | | $ | 57.5 | | | $ | 60.4 | |
Work in process | | | 7.0 | | | | 8.0 | |
Raw materials and supplies | | | 7.8 | | | | 5.1 | |
| | | | | | | | |
| | $ | 72.3 | | | $ | 73.5 | |
| | | | | | | | |
Prior to fiscal 2011, we capitalized most of the costs associated with our internal manufacturing operations as a component of the overall cost of product inventory. Beginning in the first quarter of fiscal 2011, the productionmanufacturing of all our products is outsourced towas handled primarily by contract manufacturers and we no longer manufacture products internally.with the intent to complete all activity transfer by the end of fiscal 2011. Accordingly, the costs associated with our internal operations organization are now expensed as incurred. Gross margin in the first quarterhalf of fiscal 2011 was negatively impacted by the immediate expensing of $6.0 million of such costs.
Note F — costs in the first quarter of fiscal 2011. During the second quarter of fiscal 2011, due to a contract manufacturer closing a facility, we chose to bring final assembly of our current products for North America into our own facility temporarily while we continued to work on transfer of these activities to another contract manufacturer. We intend to have this final assembly activity transition to a new contract manufacturer by the end of fiscal 2011.Property, Plant and Equipment
Our property, plant and equipment are summarized below:
| | | | | | | | | |
| | | October 1, 2010 | | | July 2, 2010 | |
| | | (In millions) | |
| Land | | $ | 0.7 | | | $ | 0.7 | |
| Buildings | | | 9.3 | | | | 9.8 | |
| Software developed for internal use | | | 6.7 | | | | 6.7 | |
| Machinery and equipment | | | 95.3 | | | | 94.1 | |
| | | | | | | |
| | | | 112.0 | | | | 111.3 | |
| Less accumulated depreciation and amortization | | | (75.3 | ) | | | (73.7 | ) |
| | | | | | | |
| | | $ | 36.7 | | | $ | 37.6 | |
| | | | | | | |
| | | | | | | | |
| | | December 31,
2010 | | | July 2,
2010 | |
| | | (In millions) | |
Land | | $ | 0.7 | | | $ | 0.7 | |
Buildings | | | 8.9 | | | | 9.8 | |
Software developed for internal use | | | 6.8 | | | | 6.7 | |
Machinery and equipment | | | 93.7 | | | | 94.1 | |
| | | | | | | | |
| | | 110.1 | | | | 111.3 | |
Less accumulated depreciation and amortization | | | (73.2 | ) | | | (73.7 | ) |
| | | | | | | | |
| | $ | 36.9 | | | $ | 37.6 | |
| | | | | | | | |
Depreciation and amortization expense related to property, plant and equipment, including amortization of software developed for internal use, was $3.6$1.7 million and $5.3$4.1 million, respectively, during the quarters ended OctoberDecember 31, 2010 and January 1, 2010, and October 2, 2009.
$5.3 million and $9.4 million, respectively, in the two quarters ended December 31, 2010 and January 1, 2010.Accrued Warranties
Changes in our warranty liability, which is included as a component of other accrued expenses on the Condensed Consolidated Balance Sheets, during the first two quarters of fiscal 2011and fiscal 2010 are as follows:
| | | | | | | | |
| | | Two Quarters Ended | |
| | | December 31,
2010 | | | January 1,
2010 | |
| | | (In millions) | |
Balance as of the beginning of the fiscal year | | $ | 3.2 | | | $ | 5.5 | |
Warranty provision for revenue recorded during the period | | | — | | | | 0.8 | |
Settlements made during the period | | | (0.5 | ) | | | (1.6 | ) |
| | | | | | | | |
Balance as of the end of the period | | $ | 2.7 | | | $ | 4.7 | |
| | | | | | | | |
Note G —6. Credit Facility and Debt
Our outstanding debt consisted of short-term debt of $6.0 million as of October 1,December 31, 2010 and $5.0 million as of July 2, 2010.
As ofDuring the quarter ended October 1, 2010, we terminated our previous credit facility with two commercial banks and entered into a new $40.0 million credit facility with Silicon Valley Bank for a term of one year expiring on September 30, 2011. The outstanding debt of $5.0 million under the previous credit facility was repaid on October 1, 2010 with the proceeds of a new loan under the new facility in the amount of $6.0 million.
Our new credit facility provides for a committed amount of $40$40.0 million. The facility provides for (1) demand borrowings (with no stated maturity date), (2) fixed term Eurodollar loans for up to six months and (3) the issuance of standby or commercial letters of credit.
Demand borrowings carry an interest rate computed at the daily prime rate as published in theWall Street Journal. Interest on our Eurodollar loans is computed at LIBOR plus a spread of between 2.00% to 2.75% based on our current leverage ratio. The interest rate on Eurodollar loans was set initially at a spread of 2.75% for the fiscal quarter ending October 1, 2010 and is adjustable quarterly thereafter based on the computed actual leverage ratio for the most recently completed fiscal quarter.
The facility contains a minimum liquidity ratio covenant and a minimum profitability covenant and is secured by the company’s assts. As of December 31, 2010, we were in compliance with the financial covenants.Available credit as of October 1,December 31, 2010 was $24.4 million reflecting borrowings of $6.0 million and outstanding letters of credit of $9.6 million. The weighted average interest rate on our short-term borrowings was 3.25% as of October 1,December 31, 2010.
Standby letters of credit includes a standby letter of credit issued in the amount of $2.3 million covering $2.1 million in standby letters of credit outstanding under the previous credit facility at the time of termination of that facility on October 1, 2010. The
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amount of this supporting letter of credit may be amended at any time to exclude the letters of credit issued under the previous facility as they expire.
The amount of outstanding letters of credit under the previous facility was $1.4 million as of December 31, 2010.Note H — Accrued Warranties
Changes7. Restructuring ActivitiesDuring the second quarter of fiscal 2011, we continued executing the restructuring plan that initiated in our warranty liability, which is included as a component of “Other accrued expenses” on the Condensed Consolidated Balance Sheets, during the first quarter of fiscal 2010 and 2009 are as follows:
| | | | | | | | | |
| | | Quarter Ended | |
| | | October 1, 2010 | | | October 2, 2009 | |
| | | (In millions) | |
| Balance as of the beginning of the fiscal year | | $ | 3.2 | | | $ | 5.5 | |
| Warranty provision for revenue recorded during the first quarter | | | 0.2 | | | | 0.7 | |
| Settlements made during the first quarter | | | (0.3 | ) | | | (0.9 | ) |
| | | | | | | |
| Balance as of the end of the first quarter | | $ | 3.1 | | | $ | 5.3 | |
| | | | | | | |
Note I — Restructuring Activities
We have two ongoing restructuring plans.
During the first quarter of fiscal 2011 we implemented a new restructuring plan to reduce our operational costs (the “Fiscal 2011 Plan”). The Fiscal 2011 Plan iswas intended to bring our cost structure in line with the changing dynamics of the worldwide microwave radio and telecommunication markets, primarily in North America, Europe and Asia. During the second and first quartertwo quarters of fiscal 2011, our restructuring charges fromrelated to the Fiscal 2011 Plan totaled $4.7$2.6 million and $7.3 million, respectively, and consisted of the following items:
Severance, retention and related charges totaling $2.5$1.1 million and $3.6 million, respectively, for the second and first two quarters of fiscal 2011 from reductionreductions in force activities for the closing of the Morrisville, North Carolina office.
Severance retention and related charges totaling $1.1 million for the second quarter and first two quarters of fiscal 2011 from reductions in force in Canada of their finance, human resources, IT and engineering functions.
Severance and related charges of zero and $1.4 million for the second and first two quarters of fiscal 2011 from reduction in force activities resulting from the sale of theour NetBoss assets.
Severance retention and related charges totaling $0.8$0.4 million and $1.2 million, respectively, for the second quarter and first two quarters of fiscal 2011 from our various other reductions in force including a reduction in force activities of a portion of global sales personnel.
In addition, during the first quartertwo quarters of fiscal 2011, we continued restructuring activities that commenced during fiscal 2009 to reduce our workforce in the U.S., France, Canada and other locations throughout the world (the “Fiscal 2009 Plan”). These activities primarily consisted of outsourcing our San Antonio manufacturing operations to a third party in Austin, Texas. During the second quarter and first quartertwo quarters of fiscal 2011, our restructuring charges fromrelated to the Fiscal 2009 Plan totaled $0.9$0.8 million and $1.7 million, respectively, and consisted of the following items:
Severance, retention and related charges totaling $0.8$0.7 million and $1.6 million, respectively, for reductionthe second and first two quarters of fiscal 2011 for reductions in force activities.force.
Charges totaling $0.1 million for the second and first two quarters of fiscal 2011 for facility lease obligation adjustments.
During the first quarter of fiscal 2010, we continued executing our Fiscal 2009 Plan to reduce our workforce in the U.S., France, Canada and other locations throughout the world. During the first quarter of fiscal 2010, our restructuring charges totaled $1.1 million and consisted of the following items:
Severance, retention and related charges totaling $0.9 million from reduction in force activities.
Charges totaling $0.2 million related to the relocation of U.S. employees to North Carolina from Florida.
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The following table summarizes our costs incurred through October 1,December 31, 2010, estimated additional costs to be incurred and estimated total costs expected to be incurred for ourunder the Fiscal 2009 Plan:
| | | | | | | | | | | | | | | | | |
| | | Total Costs | | | | | | | | | | | |
| | | Incurred During | | | Cumulative | | | | | | | | |
| | | The | | | Costs Incurred | | | | | | | Total | |
| | | Quarter Ended | | | through | | | Estimated | | | Restructuring | |
| | | October 1, | | | October 1, | | | Additional Costs | | | Costs Expected | |
| | | 2010 | | | 2010 | | | to be Incurred | | | to be Incurred | |
| | | | | | | (In millions) | | | | | |
| North America: | | | | | | | | | | | | | | | | |
| Severance and benefits | | $ | 0.8 | | | $ | 8.5 | | | $ | 3.3 | | | $ | 11.8 | |
| Facilities and other | | | 0.1 | | | | 3.1 | | | | 1.1 | | | | 4.2 | |
| | | | | | | | | | | | | |
| Total North America | | $ | 0.9 | | | $ | 11.6 | | | $ | 4.4 | | | $ | 16.0 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| International: | | | | | | | | | | | | | | | | |
| Severance and benefits | | $ | — | | | $ | 4.9 | | | $ | 1.0 | | | $ | 5.9 | |
| Facilities and other | | | — | | | | 0.2 | | | | — | | | | 0.2 | |
| | | | | | | | | | | | | |
| Total International | | $ | 0.0 | | | $ | 5.1 | | | $ | 1.0 | | | $ | 6.1 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Totals for Fiscal 2009 Plan | | $ | 0.9 | | | $ | 16.7 | | | $ | 5.4 | | | $ | 22.1 | |
| | | | | | | | | | | | | |
Our | | | | | | | | | | | | | | | | |
| | | Total Costs
Incurred During
The
Quarter Ended
December 31,
2010 | | | Cumulative
Costs Incurred
through
December 31,
2010 | | | Estimated
Additional Costs
to be Incurred | | | Total
Restructuring
Costs Expected
to be Incurred | |
| | | (In millions) | |
North America: | | | | | | | | | | | | | | | | |
Severance and benefits | | ($ | 0.1 | ) | | $ | 8.4 | | | $ | 2.7 | | | $ | 11.1 | |
Facilities and other | | | — | | | | 3.1 | | | | 1.1 | | | | 4.2 | |
| | | | | | | | | | | | | | | | |
| | ($ | 0.1 | ) | | $ | 11.5 | | | $ | 3.8 | | | $ | 15.3 | |
| | | | | | | | | | | | | | | | |
International: | | | | | | | | | | | | | | | | |
Severance and benefits | | $ | 0.9 | | | $ | 5.8 | | | $ | 0.8 | | | $ | 6.6 | |
Facilities and other | | | — | | | | 0.2 | | | | — | | | | 0.2 | |
| | | | | | | | | | | | | | | | |
| | $ | 0.9 | | | $ | 6.0 | | | $ | 0.8 | | | $ | 6.8 | |
| | | | | | | | | | | | | | | | |
Totals for Fiscal 2009 Plan | | $ | 0.8 | | | $ | 17.5 | | | $ | 4.6 | | | $ | 22.1 | |
| | | | | | | | | | | | | | | | |
We expect our Fiscal 2009 Plan to restructure and transition our North America manufacturing operations and general restructuring of ourglobal supply chain willoperations to be completed by the end of fiscal 2011.
Note J —8. Share-Based Compensation
CompensationOur share-based compensation expense for share-basedassociated with stock options, restricted stock awards was $0.8 million and $1.1 millionunits, and performance share awards and units is recorded in the following cost and expense categories for the firstquarter and two quarters ended December 31, 2010 and January 1, 2010:
| | | | | | | | | | | | | | | | |
| | | Quarter Ended | | | Two Quarters Ended | |
| | | December 31,
2010 | | | January 1,
2010 | | | December 31,
2010 | | | January 1,
2010 | |
| | | (In millions) | |
Cost of product sales and services | | $ | 0.1 | | | $ | — | | | $ | 0.2 | | | $ | 0.1 | |
Research and development expenses | | | 0.8 | | | | 0.2 | | | | 1.0 | | | | 0.3 | |
Selling and administrative expenses | | | 0.4 | | | | 0.3 | | | | 0.9 | | | | 1.2 | |
| | | | | | | | | | | | | | | | |
Total share-based compensation expense | | $ | 1.3 | | | $ | 0.5 | | | $ | 2.1 | | | $ | 1.6 | |
| | | | | | | | | | | | | | | | |
During the second quarter of fiscal 2011, and 2010. Amounts were included in our Condensed Consolidated Statements of Operations as follows:
| | | | | | | | | |
| | | Quarter Ended | |
| | | October 1, 2010 | | | October 2, 2009 | |
| | | (In millions) | |
| Cost of product sales and services | | $ | 0.1 | | | $ | 0.1 | |
| Research and development expenses | | | 0.2 | | | | 0.1 | |
| Selling and administrative expenses | | | 0.5 | | | | 0.9 | |
| | | | | | | |
| Total compensation expense | | $ | 0.8 | | | $ | 1.1 | |
| | | | | | | |
During the first quarter of fiscal 2010, we awardedgranted options for theto purchase of 14,247894,580 shares of our common stock, and 7,133 performance shares to one employee and 6,780396,994 shares of restricted stock, 50,296 shares of restricted stock units, 811,150 shares of performance share awards, and 202,802 shares of performance share units to employees under our 2007 Stock Equity Plan. In August 2010, our Board of Directors approved a non-employee director (noneNew Product Development Incentive Plan (“PDIP”) to make a one-time grant of performance share awards and units to employees related to several product development projects. During the second quarter of fiscal 2011, we granted 414,156 shares of performance share award and 152,506 shares of performance share unit under the PDIP, of which 109,475 shares of performance share awards and 43,436 shares of performance share units were vested upon achievement of a new product development milestone during the quarter. The PDIP performance shares are under our 2007 Stock Equity Plan. There were no share-based awards granted during the first quarter of fiscal 2011).
11
During the quarter ended January 1, 2010, we determined that the three-year performance period minimum threshold target for income from operations would not be achieved for performance share awards made under our fiscal year 2009 Long-Term Incentive Plan. The three-year performance period for these awards ends on July 1, 2011. We estimate that 60% of these awards will not vest and will be forfeited as of July 1, 2011. Accordingly, we recorded a credit to compensation expense of $0.6 million during the quarter ended January 1, 2010 related to these awards.
Note K —9. Major Customer and Business Segments
During the second quarter and first quartertwo quarters of fiscal 2011 and fiscal 2010, none of our customers accounted for 10% or more of revenue. During the first quarter of fiscal 2010, the MTN group in Africa (“MTN”) and Middle East Telecommunications Company (“METCO”) each accounted for 12% of our total revenue (two customers accounted for 24% of our total revenue).
Revenue and loss before income taxes by segment are as follows:
| | | | | | | | | |
| | | Quarter Ended | |
| | | October 1, 2010 | | | October 2, 2009 | |
| | | (In millions) | |
Revenue | | | | | | | | |
| North America | | $ | 35.6 | | | $ | 48.0 | |
| International | | | 73.5 | | | | 72.0 | |
| | | | | | | |
| Total Revenue | | $ | 109.1 | | | $ | 120.0 | |
| | | | | | | |
| | | | | | | | | |
Loss Before Income Taxes | | | | | | | | |
| Segment Operating Loss: | | | | | | | | |
| North America (1) | | $ | (13.6 | ) | | $ | (3.2 | ) |
| International (2) | | | (12.7 | ) | | | (3.2 | ) |
| Net interest expense | | | (0.5 | ) | | | (0.5 | ) |
| | | | | | | |
| Loss before provision for income taxes | | $ | (26.8 | ) | | $ | (6.9 | ) |
| | | | | | | |
| | | | | | | | | | | | | | | | |
| | | Quarter Ended | | | Two Quarters Ended | |
| | | December 31,
2010 | | | January 1,
2010 | | | December 31,
2010 | | | January 1,
2010 | |
| | | (In millions) | |
Revenue | | | | | | | | | | | | | | | | |
North America | | $ | 40.4 | | | $ | 49.4 | | | $ | 76.1 | | | $ | 97.4 | |
International | | | 83.8 | | | | 73.2 | | | | 157.2 | | | | 145.2 | |
| | | | | | | | | | | | | | | | |
Total Revenue | | $ | 124.2 | | | $ | 122.6 | | | $ | 233.3 | | | $ | 242.6 | |
| | | | | | | | | | | | | | | | |
| | | | |
Loss Before Income Taxes | | | | | | | | | | | | | | | | |
Segment Operating (Loss) Income: | | | | | | | | | | | | | | | | |
North America (1) | | $ | (1.3 | ) | | $ | (9.6 | ) | | $ | (14.7 | ) | | $ | (12.8 | ) |
International (2) | | | (5.2 | ) | | | 3.4 | | | | (18.1 | ) | | | 0.2 | |
Net interest expense | | | (0.7 | ) | | | (0.3 | ) | | | (1.2 | ) | | | (0.8 | ) |
| | | | | | | | | | | | | | | | |
Loss before provision for income taxes | | $ | (7.2 | ) | | $ | (6.5 | ) | | $ | (34.0 | ) | | $ | (13.4 | ) |
| | | | | | | | | | | | | | | | |
| | |
| (1) | | DuringThe following table summarizes certain charges and expenses included in the North America segment operating results during the second quarter and first quartertwo quarters of fiscal 2011 in our North America segment, we recorded $4.8 million for restructuring charges, $3.9 million from the loss on sale of NetBoss assets and $0.7 million for share-based compensation.fiscal 2010: |
| | | | | | | | | | | | | | | | |
| | | Quarter Ended | | | Two Quarters Ended | |
| | | December 31,
2010 | | | January 1,
2010 | | | December 31,
2010 | | | January 1,
2010 | |
| | | (In millions) | |
Amortization of developed technology, trade names and customer relationships | | $ | 0.8 | | | $ | 3.3 | | | $ | 1.7 | | | $ | 4.0 | |
Rebranding and transitional costs | | | 0.7 | | | | 1.4 | | | | 0.9 | | | | 1.5 | |
Restructuring charges | | | 2.1 | | | | 0.7 | | | | 6.9 | | | | 1.5 | |
Share-based compensation expense | | | 1.0 | | | | 0.4 | | | | 1.7 | | | | 1.4 | |
Net loss on NetBoss assets | | | 0.5 | | | | — | | | | 4.4 | | | | — | |
Other non-recurring charges | | | — | | | | 0.2 | | | | — | | | | 0.3 | |
| | | | | | | | | | | | | | | | |
| | $ | 5.1 | | | $ | 6.0 | | | $ | 15.6 | | | $ | 8.7 | |
| | | | | | | | | | | | | | | | |
|
| (2) | | During the first quarter of fiscal 2010 in our North America segment, we recorded $0.8 million for restructuringThe following table summarizes certain charges and $1.0 million for share-based compensation. |
|
(2) | | Duringexpenses included in the International segment operating results during the second quarter and first quartertwo quarters of fiscal 2011 in our International segment, we recorded $0.8 million for restructuring charges and $0.1 million for share-based compensation. |
|
| | During the first quarter of fiscal 2010 in our International segment, we recorded $0.3 million for restructuring charges and $0.1 million for share-based compensation.2010: |
| | | | | | | | | | | | | | | | |
| | | Quarter Ended | | | Two Quarters Ended | |
| | | December 31,
2010 | | | January 1,
2010 | | | December 31,
2010 | | | January 1,
2010 | |
| | | (In millions) | |
Amortization of developed technology, trade names and customer relationships | | $ | — | | | $ | 0.3 | | | $ | — | | | $ | 3.2 | |
Rebranding and transitional costs | | | — | | | | 0.1 | | | | — | | | | 0.1 | |
Restructuring charges | | | 1.3 | | | | 0.8 | | | | 2.1 | | | | 1.1 | |
Amortization of the fair value adjustments related to fixed assets | | | — | | | | — | | | | — | | | | 0.1 | |
Share-based compensation expense | | | 0.3 | | | | 0.1 | | | | 0.4 | | | | 0.2 | |
Other non-recurring charges | | | 0.5 | | | | — | | | | 0.5 | | | | — | |
| | | | | | | | | | | | | | | | |
| | $ | 2.1 | | | $ | 1.3 | | | $ | 3.0 | | | $ | 4.7 | |
| | | | | | | | | | | | | | | | |
Note L —10. Income Taxes
The determination of benefitprovision for income taxes for the second quarter of $5.3 million and benefit from income tax of first quartertwo quarters of fiscal 2011 of $5.5$0.2 million, and provision for income taxes for the second quarter and first quartertwo quarters of fiscal 2010 of $0.9$1.4 million and $2.3 million, respectively, was primarily based on our estimated annual effective tax rate adjusted for losses in separate jurisdictions for which no tax benefit can be recognized. The currentsecond quarter also incorporatesand first two quarters of fiscal 2011, respectively, incorporate an income tax benefit of $1.9$0.2 million and $2.1 million associated with the expiring favorable tax ruling granted by the Singapore Economic Development Board which increasesBoard. The expiration of the ruling resulted in an increase to the local tax rate applied to established local countryall deferred tax assets. The determinationassets that will reverse subsequent to the expiration of firstthis ruling.In the current quarter fiscal 2011a one-time income tax benefit of $2.6 million has been recognized relating to recently passed Singapore legislation that has reduced the prior year taxable income and first quarter fiscal 2010has generated additional tax provision reflected tax benefit and expense generated in certain foreign jurisdictions.
losses that can be carried forward indefinitely. Our effective tax rate varies from the U.S. federal statutory rate of 35% due to results of foreign operations that are subject to income taxes at different statutory rates and certain jurisdictions where we cannot recognize tax benefits on current losses.
As of July 2, 2010 and October 1,December 31, 2010, we had a liability for unrecognized tax benefits of $14.9 million and $15.5 million, respectively, for various federal, foreign, and state income tax matters. During the first quarter of fiscal 2011, theThe liability for unrecognized tax benefits did not change.has increased during the second quarter and first two quarters of fiscal 2011 in the amount of $0.6 million and $0.6 million. If the unrecognized tax benefits associated with these positions are ultimately recognized they would not be expected to have a material impact on our effective tax rate or financial position.
We account for interest and penalties related to unrecognized tax benefits as part of our provision for federal, foreign, and state income taxes. We accrued anno additional amount for such interest of less than $0.1 million during the first quartertwo quarters of fiscal 2011 and fiscal 2010. No penalties have been accrued on any of the unrecognized tax benefits.
We expect that the amount of unrecognized tax benefit may change in the next year; however, it is not expected to have a significant impact on our results of operations, financial position or cash flows.
12
We have a number of years with open tax audits which vary from jurisdiction to jurisdiction. Our major tax jurisdictions include the U.S., Singapore, Poland, Nigeria, France and the U.K. The earliest years still open and subject to potential audits for these jurisdictions are as follows: United States — 2003; Singapore — 2006; Poland — 2004; Nigeria — 2004; France — 2006; and U.K - 2006.U.K-2006. As of October 1,December 31, 2010, we are under audit by the U.S. Internal Revenue Service.
Service for the fiscal year 2008 tax return.Note M —11. Fair Value Measurements of Assets and Liabilities
We determine fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal market (or most advantageous market, in the absence of a principal market) for the asset or liability in an orderly transaction between market participants as of the measurement date. We try to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value and establish a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:
Level 1 — Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2 — Observable market-based inputs or observable inputs that are corroborated by market data;
Level 3 — Unobservable inputs reflecting our own assumptions.
The carrying amounts, estimated fair values and valuation input levels of our financial assets and financial liabilities as of October 1,December 31, 2010 and July 2, 2010 are as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | October 1, | | | | | July 2, | | |
| | | 2010 | | | 2010 | | | | |
| | | Carrying | | | Fair | | | Carrying | | | Fair | | | Valuation | |
| | | Amount | | | Value | | | Amount | | | Value | | | Inputs | |
| | | | | | | | | | | (In millions) | | | | | | | | | |
| Financial Assets: | | | | | | | | | | | | | | | | | | | | |
| Cash | | $ | 70.5 | | | $ | 70.5 | | | $ | 60.4 | | | $ | 60.4 | | | Level 1 |
| Cash equivalents | | $ | 37.3 | | | $ | 37.3 | | | $ | 81.3 | | | $ | 81.3 | | | Level 1 |
| Foreign exchange forward contracts | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.1 | | | Level 2 |
| Financial Liabilities: | | | | | | | | | | | | | | | | | | | | |
| Short-term debt | | $ | 6.0 | | | $ | 6.0 | | | $ | 5.0 | | | $ | 5.0 | | | Level 2 |
| Redeemable preference shares | | $ | 8.3 | | | $ | 8.3 | | | $ | 8.3 | | | $ | 8.3 | | | Level 3 |
| Foreign exchange forward contracts | | $ | 0.2 | | | $ | 0.2 | | | $ | 0.1 | | | $ | 0.1 | | | Level 2 |
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, | | | July 2, | | | | |
| | | 2010 | | | 2010 | | | | |
| | | Carrying
Amount | | | Fair
Value | | | Carrying
Amount | | | Fair
Value | | | Valuation
Inputs | |
| | | (In millions) | |
Financial Assets: | | | | | | | | | | | | | | | | | | | | |
Cash | | $ | 33.3 | | | $ | 33.3 | | | $ | 60.4 | | | $ | 60.4 | | | | Level 1 | |
Cash equivalents | | $ | 69.1 | | | $ | 69.1 | | | $ | 81.3 | | | $ | 81.3 | | | | Level 1 | |
Foreign exchange forward contracts | | $ | 0.3 | | | $ | 0.3 | | | $ | 0.1 | | | $ | 0.1 | | | | Level 2 | |
Financial Liabilities: | | | | | | | | | | | | | | | | | | | | |
Short-term debt | | $ | 6.0 | | | $ | 6.0 | | | $ | 5.0 | | | $ | 5.0 | | | | Level 2 | |
Redeemable preference shares | | $ | 8.3 | | | $ | 8.3 | | | $ | 8.3 | | | $ | 8.3 | | | | Level 3 | |
Foreign exchange forward contracts | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.1 | | | | Level 2 | |
Our cash equivalents consist primarily of shares in prime money market funds purchased from two major financial institutions. As of October 1,December 31, 2010 and July 2, 2010, these money market shares were valued at $1.00 net asset value per share by these financial institutions.
Foreign currency forward contracts are valued using an income approach for the remaining term of the contract based on forward market rates less the contract rate multiplied by the notional amount.
The amortized cost of short-term debt approximates fair value due to the variable interest rate under the arrangement applicable to such debt.
We have valued our redeemable preference shares at face value as of October 1,December 31, 2010 and July 2, 2010 due to the existence of a put option one of the holders has with our former majority shareholder Harris, our current intent not to redeem these shares before their stated termination date and the non-existence of a market for comparable financial instruments.
Note N —12. Risk Management, Derivative Financial Instruments and Hedging Activities
We are exposed to global market risks, including the effect of changes in foreign currency exchange rates, and use derivatives to manage financial exposures that occur in the normal course of business. We do not hold or issue derivatives for trading purposes or make speculative investments in foreign currencies.
13
We formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking hedge transactions. This process includes linking all derivatives to either specific firm commitments or forecasted transactions. We also enter into foreign exchange forward contracts to mitigate the change in fair value of specific assets and liabilities on the balance sheet; these are not designated as hedging instruments. Accordingly, changes in the fair value of hedges of recorded balance sheet positions are recognized immediately in cost of product sales on the consolidated statements of operations together with the transaction gain or loss from the hedged balance sheet position.
Substantially all derivatives outstanding as of October 1,December 31, 2010 are designated as cash flow hedges or non-designated hedges of recorded balance sheet positions. All derivatives are recognized on the balance sheet at their fair value. The total notional amount of outstanding derivatives as of October 1,December 31, 2010 was $46.2$46.5 million, of which $10.2$13.2 million were designated as cash flow hedges and $36.0$33.3 million were not designated as cash flow hedging instruments.
As of October 1,December 31, 2010, we had 4564 foreign currency forward contracts outstanding with a total net notional amount of $22.3$19.0 million consisting of 1213 different currencies, primarily the Canadian dollar,Euro, Philippine peso, Polish zloty, Singapore dollar and Republic of South Africa rand.
The following is a summary by currency of the contract net notional amounts grouped by the underlying foreign currency as of October 1,December 31, 2010:
| | | | | | | | | | | |
| | | Contract Amount | | | Contract | |
| | | (Local Currency) | | | Amount | |
| | | | | (In millions) | | | (USD) | |
| Canadian dollar (“CAD”) net contracts to receive (pay) USD | | (CAD) | | | 5.7 | | | $ | 5.5 | |
| Philippine peso (“PHP”) net contracts to receive (pay) USD | | (PHP) | | | (138.7 | ) | | $ | (3.2 | ) |
| Polish zloty (“PLN”) net contracts to receive (pay) USD | | (PLN) | | | 27.1 | | | $ | 9.0 | |
| Singapore dollar (“SGD”) net contracts to receive (pay) USD | | (SGD) | | | 4.5 | | | $ | 3.4 | |
| Republic of South Africa rand (“ZAR”) net contracts to receive (pay) USD | | (ZAR) | | | 43.0 | | | $ | 6.1 | |
| All other currencies net contracts to receive (pay) USD | | | | | | | | $ | 1.5 | |
| | | | | | | | | | |
| Total of all currencies | | | | | | | | $ | 22.3 | |
| | | | | | | | | | |
| | | | | | | | | | | | |
| | | Contract Amount
(Local Currency) | | | Contract
Amount | |
| | �� | | | | (In millions) | | | (USD, in millions) | |
Euro (“EUR”) net contracts to receive (pay) USD | | | (EUR) | | | | 3.8 | | | $ | 5.0 | |
Philippine peso (“PHP”) net contracts to receive (pay) USD | | | (PHP) | | | | (152.3 | ) | | $ | (3.5 | ) |
Polish zloty (“PLN”) net contracts to receive (pay) USD | | | (PLN) | | | | 14.1 | | | $ | 4.7 | |
Singapore dollar (“SGD”) net contracts to receive (pay) USD | | | (SGD) | | | | 5.1 | | | $ | 3.9 | |
Republic of South Africa rand (“ZAR”) net contracts to receive (pay) USD | | | (ZAR) | | | | 38.6 | | | $ | 5.7 | |
All other currencies net contracts to receive (pay) USD | | | | | | | | | | $ | 3.2 | |
| | | | | | | | | | | | |
Total of all currencies | | | | | | | | | | $ | 19.0 | |
| | | | | | | | | | | | |
The following table presents the fair value of derivative instruments included within our Consolidated Balance Sheet as of October 1,December 31, 2010.
| | | | | | | | | | | | | |
| | | Asset Derivatives | | | Liability Derivatives | |
| | | Balance Sheet Location | | Fair Value | | | Balance Sheet Location | | Fair Value | |
| | | (In millions) | |
| Derivatives designated as hedging instruments: | | | | | | | | | | | | |
| Foreign exchange forward contracts | | Other current assets | | $ | 0.1 | | | Other current liabilities | | $ | 0.2 | |
| Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
| Foreign exchange forward contracts | | Other current assets | | | — | | | Other current liabilities | | | — | |
| | | | | | | | | | | |
| Total derivatives | | | | $ | 0.1 | | | | | $ | 0.2 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | Asset Derivatives | | | Liability Derivatives | |
| | | Balance Sheet Location | | | Fair Value | | | Balance Sheet Location | | | Fair Value | |
| | | (In millions) | |
Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | |
Foreign exchange forward contracts | | | Other current assets | | | $ | 0.2 | | | | Other current liabilities | | | $ | 0.1 | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | |
Foreign exchange forward contracts | | | Other current assets | | | | 0.1 | | | | Other current liabilities | | | | — | |
| | | | | | | | | | | | | | | | |
Total derivatives | | | | | | $ | 0.3 | | | | | | | $ | 0.1 | |
| | | | | | | | | | | | | | | | |
The following table presents the amounts of gains (losses) from cash flow hedges recorded in Other Comprehensive Income (Loss) Income,, the amounts transferred from Other Comprehensive Income (Loss) Income and recorded in Revenue and Cost of Products Sold, and the amounts associated with excluded time value and hedge ineffectiveness during the second quarter and first quartertwo quarters of fiscal 20102011 and 2009:
| | | | | | | | | |
| | | Quarter Ended | |
| Locations of Losses Recorded From Derivatives Designated as Cash Flow Hedges | | October 1, 2010 | | | October 2, 2009 | |
| | | (In millions) | |
| Amount of loss of effective hedges recognized in Other Comprehensive Income | | $ | (0.3 | ) | | $ | (0.2 | ) |
| | | | | | | | | |
| Amount of loss of effective hedges reclassified from Other Comprehensive Income into: | | | | | | | | |
| Revenue | | $ | (0.2 | ) | | $ | — | |
| Cost of Products Sold | | $ | (0.1 | ) | | $ | (0.1 | ) |
| Amount recorded into Cost of Products Sold associated with excluded time value | | $ | — | | | $ | — | |
| Amount recorded into Cost of Products Sold due to hedge ineffectiveness | | $ | — | | | $ | — | |
14
Cash Flow Hedges
The purpose of our foreign currency hedging activities is to protect us from the risk that the eventual cash flows resulting from transactions in foreign currencies, including revenue, product costs, selling and administrative expenses and intercompany transactions will be adversely affected by changes in exchange rates. It is our policy to utilize derivatives to reduce foreign currency exchange risks where internal netting strategies cannot be effectively employed. As of October 1,December 31, 2010, hedged transactions included our customer and intercompany backlog and outstanding purchase commitments denominated primarily in the Canadian dollar, Euro, Philippine peso, Polish zloty, Singapore dollar and Republic of South Africa rand. We hedge up to 100% of anticipated exposures typically one to three months in advance, but have hedged as much as six months in advance. We generally review our exposures twice each month and adjust the amount of derivatives outstanding as needed.
A derivative designated as a hedge of a forecasted transaction is carried at fair value with the effective portion of the derivative’s fair value recorded in other comprehensive income or loss and subsequently recognized in earnings in the same period or periods the hedged transaction affects earnings. Any ineffective or excluded portion of a derivative’s gain or loss is recorded in earnings as it occurs. In some cases, amounts recorded in other comprehensive income or loss will be released to net income or loss some time after the maturity of the related derivative. The consolidated statement of income classification of effective hedge results is the same as that of the underlying exposure. For example, results of hedges of revenue and product costs are recorded in revenue and cost of product sales, respectively, when the underlying hedged transaction is recorded.
As of October 1,December 31, 2010, we had $0.2 million of deferred net losses on both outstanding and matured derivatives accumulated in other comprehensive loss that are expected to be reclassified to net income or loss during the next twelve months as a result of underlying hedged transactions also being recorded in net income or loss. Actual amounts ultimately reclassified to loss will be dependent on the exchange rates in effect when derivative contracts that are currently outstanding mature. As of October 1,December 31, 2010, the maximum term over which we are hedging our cash flow exposures is five months.
We formally assess both at inception and on an ongoing basis, whether the derivatives that are used in the hedging transaction have been highly effective in offsetting changes in the value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. We discontinue hedge accounting when the derivative expires or is sold, terminated, or exercised or it is no longer probable that the forecasted transaction will occur. When it is determined that a derivative is not, or has ceased to be, highly effective as a hedge, we discontinue hedge accounting and re-designate the hedge as a non-designated hedge, if it is still outstanding at the time the determination is made.
When we discontinue hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, the gain or loss on the derivative remains in accumulated other comprehensive income or loss and is reclassified to net income or loss when the forecasted transaction affects net income or loss. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were accumulated in other comprehensive income or loss will be recognized immediately in net income or loss. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, we will carry the derivative at its fair value on the balance sheet, recognizing future changes in the fair value in cost of product sales.
The total notional amount of outstanding derivatives as of October 1,December 31, 2010 not designated as cash flow hedging instruments was $36.0$33.3 million. The purpose of these hedges is to offset realized and unrealized foreign exchange gains and losses recorded on non-functional currency monetary assets and liabilities, including primarily cash balances and accounts receivable and accounts payable from third party and intercompany transactions recorded on the balance sheet. Since these gains and losses are considered by us to be operational in nature, we record both the gains and losses from the revaluation of the balance sheet transactions and the gains and losses on the derivatives in cost of products sold.
15
During the second quarter and first quartertwo quarters of fiscal 2011 and fiscal 2010, we recorded in cost of products sold the following amount of net losses recorded on non-designated hedges as follows:
| | | | | | | | | | | | | |
| �� | | | | | | | | | | Location of Gain | |
| | | | | | | | | | | (Loss) Recognized in | |
| | | First Quarter of | | | First Quarter of | | | Income on | |
| | | Fiscal 2011 | | Fiscal 2010 | | | Derivatives | |
| | | (In millions) | | | | | |
| Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
| Losses on foreign exchange forward contracts | | $ | (0.9) | | | $ | (1.9) | | | Cost of products sold |
| | | | | | | | | | | | | | | | |
| | | Quarter Ended | | | Two Quarters Ended | |
| | | December 31,
2010 | | | January 1,
2010 | | | December 31,
2010 | | | January 1,
2010 | |
| | | (In millions) | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | |
Losses on foreign exchange forward contracts | | $ | (0.3 | ) | | $ | 0.3 | | | $ | (1.2 | ) | | $ | (1.6 | ) |
Credit Risk
We are exposed to credit-related losses in the event of non-performance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings. However, this does not eliminate our exposure to credit risk with these institutions. Should any of these counterparties fail to perform as contracted, we could incur interest charges and unanticipated gains or losses on the settlement of the derivatives in addition to the recorded fair value
of the derivative due to non-delivery of the currency. To manage this risk, we have established strict counterparty credit guidelines and maintain credit relationships with several financial institutions providing foreign currency exchange services in accordance with corporate policy. As a result of the above considerations, we consider the risk of counterparty default to be immaterial.
We have informal credit facilities with several commercial banks under which we transact foreign exchange transactions. These facilities are generally restricted to a total notional amount outstanding, a maximum settlement amount in any one day and a maximum term. There are no written agreements supporting these facilities with the exception of one bank which provided us with their general terms and conditions for trading that we acknowledged. None of the facilities are collateralized and none require compliance with financial covenants or contain cross default or other provisions which could affect other credit arrangements we have with the same or other banks. If we fail to deliver currencies as required upon settlement of a trade, the bank may require early settlement on a net basis of all derivatives outstanding and if any amounts are still owing to the bank, they may charge any cash account we have with the bank for that amount.
Note O — Net Loss per Share of Common Stock
We compute net loss per share of common stock using the two-class method. Basic net loss per share is computed using the weighted average number of common shares outstanding and unvested share-based payment awards that contain rights to receive non-forfeitable dividends or dividend equivalents (whether paid or unpaid) during the period. Such unvested share-based payment awards are considered to be participating securities.
During the first quarter of fiscal 2011 and 2010, we recorded a net loss, so the potential dilution from the assumed exercise of our stock options is anti-dilutive. Accordingly, our basic and diluted net loss per common share amounts are the same.
Note P —13. Legal Proceedings
We and certain of our current and former executive officers and directors were named in a federal securities class action complaint filed on September 15, 2008 in the United States District Court for the District of Delaware by plaintiff Norfolk County Retirement System on behalf of an alleged class of purchasers of our securities from January 29, 2007 to July 30, 2008, including shareholders of Stratex Networks, Inc. who exchanged shares of Stratex Networks, Inc. for our shares as part of the merger between Stratex Networks and the Microwave Communications Division of Harris Corporation. This action relates to the restatement of our prior financial statements as discussed in our fiscal 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 25, 2008. Similar complaints were filed in the United States District Court of Delaware on October 6 and October 30, 2008. Each complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, as well as violations of Sections 11 and 15 of the Securities Act of 1933 and seeks, among other relief, determinations that the action is a proper class action, unspecified compensatory damages and reasonable attorneys’ fees and costs. The actions were consolidated on June 5, 2009 and a consolidated class action complaint was filed on July 29, 2009. On July 27, 2010, the Court denied the motions to dismiss that we and the officer and director defendants had filed. We believe that we have meritorious defenses and intend to defend ourselves vigorously.
On February 8, 2007, a court order was entered against Stratex do Brasil, a subsidiary of Aviat U.S., Inc. (formerly Harris Stratex Networks Operating Corporation), in Brazil, to enforce performance of an alleged agreement between the former Stratex Networks, Inc. entity and a supplier. We have not determined what, if any, liability this may result in, as the court did not award any damages.
16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q, including “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not materialize or prove correct, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements of, about, concerning or regarding: our plans, strategies and objectives for future operations; our research and development efforts and new product releases and services; trends in revenue; drivers of our business and the markets in which we operate; future economic conditions, performance or outlook and changes in our industry and the markets we serve; the outcome of contingencies; the value of our contract awards; beliefs or expectations; the sufficiency of our cash and our capital needs and expenditures; our intellectual property protection; our compliance with regulatory requirements and the associated expenses; expectations regarding litigation; our intention not to pay cash dividends; seasonality of our business; the impact of foreign exchange and inflation; taxes; and assumptions underlying any of the foregoing. Forward-looking statements may be identified by the use of forward-looking terminology, such as “anticipates,” “believes,” “expects,” “may,” “should,” “would,” “will,” “intends,” “plans,” “estimates,” “strategy,” “anticipates,” “projects,” “targets,” “goals,” “seeing,” “delivering,” “continues,” “forecasts,” “future,” “predict,” “might,” “could,” “potential,” or the negative of these terms, and similar words or expressions.
These forward-looking statements are based on estimates reflecting the current beliefs of the senior management of Aviat Networks. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should therefore be considered in light of various important factors, including those set forth in this document. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include the following:
| | • | | continued price erosion as a result of increased competition in the microwave transmission industry; |
|
| | • | | the impact of the volume, timing and customer, product and geographic mix of our product orders may have an impact on our operating results;shipments; |
|
| | • | | our ability to maintainmeet projected new product rollouts, product functionality, anticipated cost reductions or market acceptance of planned products;development commercial shipment dates; |
|
| | • | | the abilitycustomer acceptance of our subcontractors to perform or our key suppliers to manufacture or deliver materialnew products;
|
|
| | • | | the timing of the implementation and achievement of our restructuring and cost reduction plans; |
| • | | our ability to successfully manage our supply chain; |
| • | | the ability of our contract manufacturers, subcontractors and key suppliers to perform their obligations and deliver materials, components and units to us on a timely basis; |
| • | | continued weakness in the global economy affecting customer spending; |
|
| | • | | retention of our key personnel; |
|
| | • | | our ability to manage and maintain key customer relationships; |
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| | • | | uncertain economic conditions in the telecommunications sector combined with operator and supplier consolidation;the timing of our receipt of payment for products or services from our customers; |
|
| | • | | our failure to protect our intellectual property rights or defend against intellectual property infringement claims by others; |
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| | • | | the effects of currency and interest rate risks; and |
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| | • | | the impact of political, economic and geographic risks on international sales. |
Other factors besides those listed here also could adversely affect us. See “Item 1A. Risk Factors” in our Annual Report on Form 10-K for more information regarding factors that may cause our results to differ materially from those expressed or implied by the forward-looking statements contained in this Quarterly Report on Form 10-Q.
You should not place undue reliance on these forward-looking statements, which reflect our management’s opinions only as of the date of the filing of this Quarterly Report on Form 10-Q. Forward-looking statements are made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, along with provisions of the Private Securities Litigation Reform Act of 1995, and we undertake no obligation, other than as imposed by law, to update forward-looking statements to reflect further developments or information obtained after the date of filing of this Quarterly Report on Form 10-Q or, in the case of any document incorporated by reference, the date of that document.
18
RESULTS OF OPERATIONS-Quarter Ended October 1,December 31, 2010 compared with October 2, 2009
Quarter Ended January 1, 2010Highlights
Operations results for the firstsecond quarter of fiscal 2011 include:
Net loss was $12.5 million, or $0.21 per common share, in the second quarter of fiscal 2011 compared with a net loss of $7.9 million, or $0.13 per common share, in the second quarter of fiscal 2010;
| • | | Net loss was $21.3 million, or $0.36 per common share, in the first quarter of fiscal 2011 compared with a net loss of $7.8 million, or $0.13 per common share, in the first quarter of fiscal 2010; |
|
| • | | Revenue decreased 9.1 percent to $109.1 million in the first quarter of fiscal 2011 from $120.0 million in the first quarter of fiscal 2010; |
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| • | | Our North America segment revenue decreased 25.8 percent to $35.6 million and the segment recorded an operating loss of $13.6 million in the first quarter of fiscal 2011 compared with an operating loss of $3.2 million in the first quarter of fiscal 2010; |
|
| • | | Our International segment revenue increased 1.5 percent to $73.5 million and the segment recorded an operating loss of $12.7 million in the first quarter of fiscal 2011 compared with an operating loss of $3.2 million in the first quarter of fiscal 2010; |
|
| • | | Net cash used in operating activities was $36.8 million in the first quarter of fiscal 2011 compared with net cash provided by operations of $4.4 million in the first quarter of fiscal 2010. |
Revenue increased 1.3 percent to $124.2 million in the second quarter of fiscal 2011 from $122.6 million in the second quarter of fiscal 2010;
Our North America segment revenue decreased 18.2 percent to $40.4 million and the segment recorded operating loss of $1.3 million in the second quarter of fiscal 2011 compared with an operating loss of $9.6 million in the second quarter of fiscal 2010;
Our International segment revenue increased 14.5 percent to $83.8 million and the segment recorded an operating loss of $5.2 million in the second quarter of fiscal 2011 compared with operating income of $3.4 million in the second quarter of fiscal 2010;
Net cash used in operating activities was $3.7 million in the second quarter of fiscal 2011 compared with net cash used in operating activities of $0.5 million in the second quarter of fiscal 2010.
Discussion of Consolidated Results of Operations
| | | | | | | | | | | | | |
| | | Quarter Ended | | | Percentage | |
| | | October 1, 2010 | | | October 2, 2009 | | | Increase/(Decrease) | |
| | | (In millions, except percentages) | |
| Revenue | | $ | 109.1 | | | $ | 120.0 | | | | (9.1 | )% |
| Net loss | | $ | (21.3 | ) | | $ | (7.8 | ) | | | N/M | |
| % of revenue | | | (19.5 | )% | | | (6.5 | )% | | | | |
| | | | | | | | | | | | |
| | | Quarter Ended | | | Percentage
Increase/(Decrease) | |
| | | December 31,
2010 | | | January 1,
2010 | | |
| | | (In millions, except percentages) | |
Revenue | | $ | 124.2 | | | $ | 122.6 | | | | 1.3 | % |
Net loss | | $ | (12.5 | ) | | $ | (7.9 | ) | | | 58 | % |
% of revenue | | | (10.1 | )% | | | (6.4 | )% | | | | |
Revenue by region comparing the firstsecond quarter of fiscal 2011 with the firstsecond quarter of fiscal 2010 and the related changes are shown in the table below:
| | | | | | | | | | | | | | | | | |
| | | Quarter Ended | | | Amount | | | Percentage | |
| | | October 1, 2010 | | | October 2, 2009 | | | Increase/(Decrease) | | | Increase/(Decrease) | |
| | | | | | | (In millions, except percentages) | | | | | |
North America | | $ | 35.6 | | | $ | 48.0 | | | $ | (12.4 | ) | | | (25.8 | )% |
International: | | | | | | | | | | | | | | | | |
| Africa | | | 23.0 | | | | 29.9 | | | | (6.9 | ) | | | (23.1 | )% |
| Europe, Middle East, and Russia | | | 28.7 | | | | 18.6 | | | | 10.1 | | | | 54.3 | % |
| Latin America and Asia Pacific | | | 21.8 | | | | 23.5 | | | | (1.7 | ) | | | (7.2 | )% |
| | | | | | | | | | | | | |
Total International | | | 73.5 | | | | 72.0 | | | | 1.5 | | | | 2.1 | % |
| | | | | | | | | | | | | |
Total Revenue | | $ | 109.1 | | | $ | 120.0 | | | $ | (10.9 | ) | | | (9.1 | )% |
| | | | | | | | | | | | | |
Our | | | | | | | | | | | | | | | | |
| | | Quarter Ended | | | Amount
Increase/(Decrease) | | | Percentage
Increase/(Decrease) | |
| | | December 31,
2010 | | | January 1,
2010 | | | |
| | | (In millions, except percentages) | |
North America | | $ | 40.4 | | | $ | 49.4 | | | $ | (9.0 | ) | | | (18.2 | )% |
International: | | | | | | | | | | | | | | | | |
Africa | | | 26.2 | | | | 18.6 | | | | 7.6 | | | | 40.9 | % |
Europe, Middle East, and Russia | | | 33.7 | | | | 29.9 | | | | 3.8 | | | | 12.7 | % |
Latin America and Asia Pacific | | | 23.9 | | | | 24.7 | | | | (0.8 | ) | | | (3.2 | )% |
| | | | | | | | | | | | | | | | |
Total International | | | 83.8 | | | | 73.2 | | | | 10.6 | | | | 14.5 | % |
| | | | | | | | | | | | | | | | |
Total Revenue | | $ | 124.2 | | | $ | 122.6 | | | $ | 1.6 | | | | 1.3 | % |
| | | | | | | | | | | | | | | | |
The increase of our total revenue in the second quarter of fiscal 2011 compared with the same quarter in fiscal 2010 resulted from significant increases in Africa and the Europe, Middle East and Russia (“EMER”) regions, where increased orders for the current product platform were delivered in the second quarter of fiscal 2011. The substantial year to year increase in Africa came from a wireless customer who resumed purchasing after substantially reducing its orders in the prior year. In addition, certain other customers in the region increased spending during the fourth quarter of the calendar year. We expect continued demand for our products and services in Africa during our third fiscal quarter. Revenue in the second quarter of fiscal 2010 included a substantial amount of purchases from a customer in the Middle East that was not repeated in fiscal 2011. However, wireless customers in Russia that had reduced their capital spending sharply in calendar 2009 and early 2010 in response to the tightening in credit markets, increased spending allowing us to benefit from their incremental business in the second quarter of fiscal 2011. Competitive pricing pressures in Russia continue to impact the business so future order levels may vary significantly. Finally, in the Asia Pacific region, the product mix varied from the second quarter of fiscal 2011 as compared with the same quarter in fiscal 2010. In the second quarter of fiscal 2011, revenue from shipments of WiMAX product substantially increased in the region, mostly in India, while microwave business in other countries was flat or down compared to the previous year.
We experienced a significant decrease in revenue in North America that resulted primarily from product transition to our current product platform from our legacy products, some continuing effects of the economic downturn, as well as increased competition. In the second quarter of fiscal 2010, most of our North America business was in our legacy products. While we continued last time buy activity in those product lines in the second quarter of fiscal 2011, we are also in the process of transitioning our North America customers to our current product. Many of our customers are now completing their first deployments of the current product. We expect orders for this line of products to increase in future periods as market acceptance gains traction. Revenue in North America benefited in the second quarter of fiscal 2011 because shipments delayed in the first quarter of fiscal 2011 was $109.1 million, a decrease of $10.9 million or 9.1%, compared withwere delivered and recognized as revenue in the firstsecond quarter of fiscal 2010. This decrease in revenue resulted from significant declines in all regions, except Europe, Middle East and Russia where incremental backhaul product orders were delivered2011. The shipment delays in the first quarter of fiscal 2011. Declines resulted primarily from reduced customer demand2011 were due to component shortages and supply chain issues from the global economic recession and the effects of the continuing credit crisis on our customers’ abilitytransition to finance expansion, as well as increased competition from our competitors. Increased competition has affected product pricing and the ability to combine microwave equipment with other product sales and services. Furthermore, revenue has been negatively affected by anticipated or planned consolidation of our customers and foreign government-based subsidized financing, particularly in Africa.
contract manufacturers.During the firstsecond quarter of fiscal 2011 and fiscal 2010, none of our customers accounted for 10% or more of revenue. During the first quarter of fiscal 2010, the MTN group in Africa (“MTN”) and Middle East Telecommunications Company (“METCO”) each accounted for 12% of our total revenue (two customers accounted for 24% of our total revenue).
19
Our net loss in the firstsecond quarter of fiscal 2011 was $21.3 million compared with a net loss of $7.8 million in the first quarter ofand fiscal 2010. The net loss in the first quarter of fiscal 2011 and 2010 included amortization of purchased intangibles, rebranding expenses and shareshare-based compensation expense. In addition, we incurred substantial charges associated with two ongoing restructuring plans. During the firstsecond quarter of fiscal 2011, we incurred $5.6$3.4 million of restructuring charges compared with $1.1$1.5 million in the second quarter of fiscal 2010. We also recognized an additional $0.5 million loss during the second quarter of fiscal 2011 from the sale of NetBoss assets in the first quarter of fiscal 2010. Finally, we recognized a $3.9 million loss on the sale of NetBoss assets to a third party in the first quarter of fiscal 2011. Other assets on our Condensed Consolidated Balance Sheet as of October 1, 2010 decreased by approximately $8.0 million compared with July 2, 2010 as a result of the sale of NetBoss assets. These charges and expenses are set forth on a comparative basis in the table below:
| | | | | | | | | |
| | | First | | | First | |
| | | Fiscal | | | Fiscal | |
| | | Quarter | | | Quarter | |
| | | 2011 | | | 2010 | |
| | | (In millions) | |
| Restructuring charges | | $ | 5.6 | | | $ | 1.1 | |
| Loss on sale of NetBoss assets | | | 3.9 | | | | — | |
| Amortization of trade names and customer relationships | | | 0.7 | | | | 1.5 | |
| Rebranding expenses | | | 0.3 | | | | 0.1 | |
| Amortization of developed technology | | | 0.2 | | | | 2.1 | |
| Amortization of the fair value adjustments related to fixed assets and inventory | | | — | | | | 0.2 | |
| Share-based compensation expense | | | 0.8 | | | | 1.1 | |
| | | | | | | |
| | | $ | 11.5 | | | $ | 6.1 | |
| | | | | | | |
| | | | | | | | |
| | | Quarter Ended | |
| | | December 31,
2010 | | | January 1,
2010 | |
| | | (In millions) | |
Restructuring charges | | $ | 3.4 | | | $ | 1.5 | |
Additional loss recognized from sale of NetBoss assets | | | 0.5 | | | | — | |
Amortization of trade names and customer relationships | | | 0.7 | | | | 1.5 | |
Rebranding and transitional costs | | | 0.7 | | | | 1.5 | |
Amortization of developed technology | | | 0.1 | | | | 2.1 | |
Share-based compensation expense | | | 1.3 | | | | 0.5 | |
Other | | | 0.5 | | | | 0.2 | |
| | | | | | | | |
| | $ | 7.2 | | | $ | 7.3 | |
| | | | | | | | |
Gross Margin
| | | | | | | | | | | | | |
| | | Quarter Ended | | | Percentage | |
| | | October 1, 2010 | | | October 2, 2009 | | | Increase/(Decrease) | |
| | | (In millions, except percentages) | |
| Revenue | | $ | 109.1 | | | $ | 120.0 | | | | (9.1 | )% |
| Cost of product sales and services | | | (84.9 | ) | | | (82.3 | ) | | | 3.2 | % |
| Gross margin | | $ | 24.2 | | | $ | 37.7 | | | | (35.8 | )% |
| % of revenue | | | 22.2 | % | | | 31.4 | % | | | | |
| | |
| | N/M = Not statistically meaningful |
| | | | | | | | | | | | |
| | | Quarter Ended | | | Percentage
Increase/(Decrease) | |
| | | December 31,
2010 | | | January 1,
2010 | | |
| | | (In millions, except percentages) | |
Revenue | | $ | 124.2 | | | $ | 122.6 | | | | 1.3 | % |
Cost of product sales and services | | | (87.5 | ) | | | (80.3 | ) | | | 9.0 | % |
Gross margin | | $ | 36.7 | | | $ | 42.3 | | | | (13.2 | )% |
% of revenue | | | 29.5 | % | | | 34.5 | % | | | | |
Compared to the second quarter of fiscal 2010, our gross margin decreased in the second quarter of fiscal 2011. Gross margin in the first quarter of fiscal 2011 was $24.2 million, or 22.2% of revenue, compared with $37.7 million, or 31.4% of revenue in fiscal 2010. Prior to fiscal 2011, we capitalized most of the costs associated with our internal manufacturing operations as a component of the overall cost of product inventory. Beginning in the first quarter of fiscal 2011, the production of all our products is outsourced to contract manufacturers and we no longer manufacture products internally. Accordingly, the costs associated with our internal operations organization are now expensed as incurred. Gross margin in the firstsecond quarter of fiscal 2011 was negatively impacted by lower gross margins from sales of our WiMAX products. In addition, we continue to experience pricing pressures in all markets, particularly where we compete for the immediate expensingbusiness of $6.0 million of such costs.
large, carrier customers, especially in EMER and Africa. In these markets we continue to see customer consolidation through mergers or acquisitions, leading to fewer, but larger customers. In those cases, vendors vigorously compete to retain market share, often resulting in significant price erosion. In North America, we find price competition for the large carrier business as intense as we do in other markets. In order to counter pricing pressures, we continue to invest in product improvements to reduce unit costs and negotiate favorable pricing with our suppliers.Gross margin in the firstsecond quarter of fiscal 20112010 was also negatively impactedsubstantially enhanced by low marginsfavorable pricing with certain customers in our WiMAX contracts and by geographic and product mix issues.
the Middle East, which was not repeated in the second quarter of fiscal 2011.Research and Development Expenses
| | | | | | | | | | | | | |
| | | Quarter Ended | | | Percentage | |
| | | October 1, 2010 | | | October 2, 2009 | | | Increase/(Decrease) | |
| | | (In millions, except percentages) | |
| Revenue | | $ | 109.1 | | | $ | 120.0 | | | | (9.1 | )% |
| Research and development expenses | | $ | 11.1 | | | $ | 10.7 | | | | 3.7 | % |
| % of revenue | | | 10.2 | % | | | 8.9 | % | | | | |
Research and development (“R&D”) expenses were $11.1 million in the first quarter of fiscal 2011 compared with $10.7 million in the first quarter of fiscal 2010. As a percentage of revenue, these expenses increased to 10.2% in the first quarter of fiscal 2011 from 8.9% in the first quarter of fiscal 2010 due to 9.1% lower revenue and a 3.7% increase in spending. | | | | | | | | | | | | |
| | | Quarter Ended | | | Percentage
Increase/(Decrease) | |
| | | December 31,
2010 | | | January 1,
2010 | | |
| | | (In millions, except percentages) | |
Revenue | | $ | 124.2 | | | $ | 122.6 | | | | 1.3 | % |
Research and development expenses | | $ | 12.1 | | | $ | 10.1 | | | | 19.8 | % |
% of revenue | | | 9.7 | % | | | 8.2 | % | | | | |
The increase in R&D spendingresearch and development expenses in the firstsecond quarter of fiscal 2011 compared with the firstsecond quarter of fiscal 2010 was primarily attributable to a $0.6 million increase of share-based compensation related to the performance share vesting upon the achievement of new product development milestone during the quarter, as well as additional investments in new product innovation.
20
The North America segment firstoperating loss for the second quarter fiscal 2010 operating loss included $0.8$0.7 million for restructuring charges and $1.0$0.4 million for share-based compensation.
| | | | | | | | | | | | | |
| | | Quarter Ended | | | Percentage | |
| | | October 1, 2010 | | | October 2, 2009 | | | Increase/(Decrease) | |
| | | (In millions, except percentages) | |
| Revenue | | $ | 73.5 | | | $ | 72.0 | | | | 2.1 | % |
| Segment operating loss | | $ | (12.7 | ) | | $ | (3.2 | ) | | | N/M | |
| % of revenue | | | (17.3 | )% | | | (4.4 | )% | | | | |
| | |
| | N/M = Not statistically meaningful |
International segment | | | | | | | | | | | | |
| | | Quarter Ended | | | Percentage
Increase/(Decrease) | |
| | | December 31,
2010 | | | January 1,
2010 | | |
| | | (In millions, except percentages) | |
Revenue | | $ | 83.8 | | | $ | 73.2 | | | | 14.5 | % |
Segment operating income (loss) | | $ | (5.2 | ) | | $ | 3.4 | | | | N/M | |
% of revenue | | | (6.2 | )% | | | 4.6 | % | | | | |
N/M = Not statistically meaningful
The increase of our international revenue increased by $1.5 million or 2.1% in the firstsecond quarter of fiscal 2011 compared with the firstsame quarter in fiscal 2010 resulted from significant increases in Africa and EMER, where increased orders for the current product platform were delivered in the second quarter of fiscal 2010. This2011. The substantial year to year increase in revenue resultedAfrica came from a $10.1 million increasewireless customer who resumed purchasing after substantially reducing its orders in the Europe,prior year. In addition, certain other customers in the region increased spending during the fourth quarter of the calendar year. We expect continued demand for our products and services in Africa during our third fiscal quarter. Revenue in the second quarter of fiscal 2010 included a substantial amount of purchases from a customer in the Middle East that was not repeated in fiscal 2011. However, wireless customers in Russia that had reduced their capital spending sharply in calendar 2009 and early 2010 in response to the tightening in credit markets, increased spending allowing us to benefit from their incremental business in the second quarter of fiscal 2011. Competitive pricing pressures in Russia continue to impact the business so future order levels may vary significantly. Finally, in the Asia Pacific region, partially offsets by a $6.9 million decreasethe product mix varied from the second quarter of fiscal 2011 as compared with the same quarter in Africa and $1.7 million decreasefiscal 2010. In the second quarter of fiscal 2011, revenue from shipments of WiMAX product substantially increased in Latin America and Asia Pacific. The economic recession and the continuing credit crisis adversely affecting our customers’ expansion, as well as increased competition from our competitors, particularlyregion, mostly in Africa, negatively affected ourIndia, while microwave business in other countries was flat or down compared to the previous year.
Gross margin for the International segment revenues.
in the second quarter of fiscal 2010 was substantially enhanced by favorable pricing with certain customers in the Middle East, which was not repeated in the same period of fiscal 2011.The International segment firstoperating loss for the second quarter fiscal 2011 operating loss included $0.8$1.3 million for restructuring charges and $0.1$0.3 million for share-based compensation.
The International segment firstoperating income for the second quarter fiscal 2010 operating loss resulted primarily from the decline in revenue when compared with levels prior to fiscal 2010 without a corresponding decrease in cost structure and included $0.3$0.8 million of restructuring charges and $0.1 million for share-based compensation.
RESULTS OF OPERATIONS – Two Quarters Ended December 31, 2010 compared with Two Quarters Ended January 1, 2010
Highlights
Operations results for the first two quarters of fiscal 2011 include:
Net loss was $33.8 million, or $0.58 per common share, in the first two quarters of fiscal 2011 compared with a net loss of $15.7 million, or $0.27 per common share, in the first two quarters of fiscal 2010;
LiquidityRevenue decreased 3.8 percent to $233.3 million in the first two quarters of fiscal 2011 from $242.6 million in the first two quarters of fiscal 2010;
Our North America segment revenue decreased 21.9 percent to $76.1 million and Capital Resourcesthe segment recorded operating loss of $14.7 million in the first two quarters of fiscal 2011 compared with an operating loss of $12.8 million in the first two quarters of fiscal 2010;
Our International segment revenue increased 8.3 percent to $157.2 million and the segment recorded an operating loss of $18.1 million in the first two quarters of fiscal 2011 compared with operating income of $0.2 million in the first two quarters of fiscal 2010;
Net cash used in operating activities was $40.5 million in the first two quarters of fiscal 2011 compared with net cash provided by operations of $3.9 million in the first two quarters of fiscal 2010.
Discussion of Consolidated Results of Operations
SourcesRevenue and Net Loss
| | | | | | | | | | | | |
| | | Two Quarters Ended | | | Percentage
Increase/(Decrease) | |
| | | December 31,
2010 | | | January 1,
2010 | | |
| | | (In millions, except percentages) | |
Revenue | | $ | 233.3 | | | $ | 242.6 | | | | (3.8 | )% |
Net loss | | $ | (33.8 | ) | | $ | (15.7 | ) | | | 115.3 | % |
% of revenue | | | (14.5 | )% | | | (6.5 | )% | | | | |
Revenue by region comparing the first two quarters of Cashfiscal 2011 with the first two quarters of fiscal 2010 and the related changes are shown in the table below:
| | | | | | | | | | | | | | | | |
| | | Two Quarters Ended | | | Amount
Increase/(Decrease) | | | Percentage
Increase/(Decrease) | |
| | | December 31,
2010 | | | January 1,
2010 | | | |
| | | (In millions, except percentages) | |
North America | | $ | 76.1 | | | $ | 97.4 | | | $ | (21.3 | ) | | | (21.9 | )% |
International: | | | | | | | | | | | | | | | | |
Africa | | | 49.2 | | | | 48.5 | | | | 0.7 | | | | 1.4 | % |
Europe, Middle East, and Russia | | | 62.3 | | | | 48.5 | | | | 13.8 | | | | 28.5 | % |
Latin America and Asia Pacific | | | 45.7 | | | | 48.2 | | | | (2.5 | ) | | | (5.2 | )% |
| | | | | | | | | | | | | | | | |
Total International | | | 157.2 | | | | 145.2 | | | | 12.0 | | | | 8.3 | % |
| | | | | | | | | | | | | | | | |
Total Revenue | | $ | 233.3 | | | $ | 242.6 | | | $ | (9.3 | ) | | | (3.8 | )% |
| | | | | | | | | | | | | | | | |
The decrease of our total revenue in the first two quarters of fiscal 2011 compared with the same period in fiscal 2010 resulted from a significant decrease in revenue in North America, partially offset by increases in international revenues. The increase of our international revenue resulted from significant increases in EMER, where increased orders for the current product platform were delivered in the second quarter of fiscal 2011. Revenue in the first two quarters of fiscal 2010 included a substantial amount of purchases from a customer in the Middle East that was not repeated in fiscal 2011. However, wireless customers in Russia that had reduced their capital spending sharply in calendar 2009 and early 2010 in response to the tightening in credit markets, increased spending allowing us to benefit from their incremental business in the first two quarters of fiscal 2011. Competitive pricing pressures in Russia continue to impact the business so future order levels may vary significantly. Finally, in the Asia Pacific region, the product mix varied from the first two quarters of fiscal 2011 as compared with the same period in fiscal 2010. In the second quarter of fiscal 2011, revenue from shipments of WiMAX product substantially increased in the region, mostly in India, while microwave business in other countries was flat or down compared to the previous year.
We experienced a significant decrease in revenue in North America that resulted primarily from product transition to our current product platform from our legacy products, some continuing effects of the economic downturn, as well as increased competition. In the first two quarters of fiscal 2010, most of our North America business was in our legacy products. While we continued last time buy activity in those product lines in the first two quarters of fiscal 2011, we are also in the process of transitioning our North America customers to our current product. Many of our customers are now completing their first deployments of the current product. We expect orders for this line of products to increase in future periods as market acceptance gains traction.
During the first two quarters of fiscal 2011 and fiscal 2010, none of our customers accounted for 10% or more of revenue.
Our net loss in the first two quarters of fiscal 2011 and fiscal 2010 included amortization of purchased intangibles, rebranding expenses and share-based compensation expense. In addition, we incurred substantial charges associated with two ongoing restructuring plans. During the first two quarters of fiscal 2011, we incurred $9.0 million of restructuring charges compared with $2.6 million in the first two quarters of fiscal 2010. Finally, we recognized a $4.4 million loss on the sale of NetBoss assets to a third party in the first quarter of fiscal 2011. These charges and expenses are set forth on a comparative basis in the table below:
| | | | | | | | |
| | | Two Quarters Ended | |
| | | December 31,
2010 | | | January 1,
2010 | |
| | | (In millions) | |
Restructuring charges | | $ | 9.0 | | | $ | 2.6 | |
Loss on sale of NetBoss assets | | | 4.4 | | | | — | |
Amortization of trade names and customer relationships | | | 1.4 | | | | 3.0 | |
Rebranding and transitional costs | | | 0.9 | | | | 1.6 | |
Amortization of developed technology | | | 0.3 | | | | 4.2 | |
Share-based compensation expense | | | 2.1 | | | | 1.6 | |
Other | | | 0.5 | | | | 0.4 | |
| | | | | | | | |
| | $ | 18.6 | | | $ | 13.4 | |
| | | | | | | | |
Gross Margin
As | | | | | | | | | | | | |
| | | Two Quarters Ended | | | Percentage
Increase/(Decrease) | |
| | | December 31,
2010 | | | January 1,
2010 | | |
| | | (In millions, except percentages) | |
Revenue | | $ | 233.3 | | | $ | 242.6 | | | | (3.8 | )% |
Cost of product sales and services | | | 172.4 | | | | 162.6 | | | | 6.0 | % |
Gross margin | | $ | 60.9 | | | $ | 80.0 | | | | (23.9 | )% |
% of revenue | | | 26.1 | % | | | 33.0 | % | | | | |
Compared to the first two quarters of October 1,fiscal 2010, our principal sourcesgross margin decreased in the same period of liquidity consistedfiscal 2011. Gross margin in the first two quarters of $107.8 millionfiscal 2011 was negatively impacted by lower gross margin from sales of our WiMAX products. In addition, we continue to experience pricing pressures in cashall markets, particularly where we compete for the business of large, carrier customers, especially in EMER and cash equivalents plus $24.4 millionAfrica. In these markets we continue to see customer consolidation through mergers or acquisitions, leading to fewer, but larger customers. In those cases, vendors vigorously compete to retain market share, often resulting in significant price erosion. In North America, we find price competition for the large carrier business as intense as we do in other markets. In order to counter pricing pressures, we continue to invest in product improvements to reduce unit costs and to negotiate favorable pricing with our suppliers.
Prior to fiscal 2011, we capitalized most of available credit underthe costs associated with our current $40.0 million credit facility with Silicon Valley Bank. Cash flow usedinternal manufacturing operations as a component of the overall cost of product inventory. Beginning in operations for the first quarter of fiscal 2011, totaled $36.8 million.
Our cash collectionsthe manufacturing of our products was handled primarily by contract manufacturers with the intent to complete all activity transfer by the end of fiscal 2011. Accordingly, the costs associated with our internal operations organization are now expensed as incurred. Gross margin in the first half of fiscal 2011 was negatively impacted by the immediate expensing of $6.0 million of such costs in the first quarter of fiscal
year 2011 were substantially lower than in2011. During the
fourthsecond quarter of fiscal
year 2010 in part because2011, due to a contract manufacturer closing a facility, we
had very strong collectionschose to bring final assembly of our current products for North America into our own facility temporarily while we continued to work on transfer of these activities to another contract manufacturer. We intend to have this final assembly activity transition to a new contract manufacturer by the end of fiscal 2011.Gross margin in the fourthfirst two quarters of fiscal 2010 was substantially enhanced by favorable pricing with certain customers in the Middle East, which were not repeated in the same period of fiscal 2011.
Research and Development Expenses
| | | | | | | | | | | | |
| | | Two Quarters Ended | | | Percentage
Increase/(Decrease) | |
| | | December 31,
2010 | | | January 1,
2010 | | |
| | | (In millions, except percentages) | |
Revenue | | $ | 233.3 | | | $ | 242.6 | | | | (3.8 | )% |
Research and development expenses | | $ | 23.2 | | | $ | 20.8 | | | | 11.5 | % |
% of revenue | | | 9.9 | % | | | 8.6 | % | | | | |
The increase in R&D expenses in the first two quarters of fiscal 2011 compared with the first two quarters of fiscal 2010 was primarily attributable to a $0.7 million increase of share-based compensation related to the performance share vesting upon the achievement of new product development milestone during the second quarter of fiscal year 20102011, as well as investments in new product innovation.
Selling and Administrative Expense
| | | | | | | | | | | | |
| | | Two Quarters Ended | | | Percentage
Increase/(Decrease) | |
| | | December 31,
2010 | | | January 1,
2010 | | |
| | | (In millions, except percentages) | |
Revenue | | $ | 233.3 | | | $ | 242.6 | | | | (3.8 | )% |
Selling and administrative expenses | | $ | 55.7 | | | $ | 66.2 | | | | (15.9 | )% |
% of revenue | | | 23.9 | % | | | 27.3 | % | | | | |
The $10.5 million decrease in selling and administrative expense in the first two quarters of fiscal 2011 compared with revenuethe same period in that quarter. In addition, because of operationalfiscal 2010 was primarily attributable to a $3.9 million decrease in salaries and manufacturing issues, we had substantial shipments to customers with a large quantity of products shippedwages resulting from the reduction in the final month of the quarter. This limitedworkforce under our ability to collect receivables before the quarter end. Cash use in the quarter was caused by losses in the quarter, sequential increases in receivables of approximately $13 millionrestructuring plans, and a sequential reduction$2.4 million decrease in accounts payables of $5 million. We expect that cash burn will continuespending on rebranding and our information technology. The decrease was also due to a $1.5 million decrease in sales agent commissions as the amount incurred in the second quarter of fiscal year2010 included sales agent commissions related to sales from one large customer in the Middle East, which was not repeated in fiscal 2011.
Income Taxes
| | | | | | | | | | | | |
| | | Two Quarters Ended | | | Percentage
Increase/(Decrease) | |
| | | December 31,
2010 | | | January 1,
2010 | | |
| | | (In millions, except percentages) | |
Loss before income taxes | | $ | (34.0 | ) | | $ | (13.4 | ) | | | N/M | |
Provision for (benefit from) income taxes | | $ | (0.2 | ) | | $ | 2.3 | | | | N/M | |
% of Loss income before income taxes | | | N/M | | | | N/M | | | | | |
N/M = Not statistically meaningful
The determination of benefit from and provision for income taxes for the first two quarters of fiscal 2011 and should resultfiscal 2010 was primarily based on our estimated annual effective tax rate adjusted for losses in separate jurisdictions for which no tax benefit can be recognized. The first two quarters of fiscal 2011 incorporate an additional income tax benefit of $2.1 million associated with the expiring favorable tax ruling granted by the Singapore Economic Development Board which has increased the local tax rate applied to all deferred tax assets that have been projected to reverse subsequent to the expiration of this ruling. Also in the first two quarters of fiscal 2011 a $10one-time income tax benefit of $2.6 million has been recognized relating to $20recently passed Singapore legislation.
Our effective tax rate varies from the U.S. federal statutory rate of 35% due to results of foreign operations that are subject to income taxes at different statutory rates and certain jurisdictions where we cannot recognize tax benefits on current losses.
Discussion of Business Segment Results of Operations
North America Segment
| | | | | | | | | | | | |
| | | Two Quarters Ended | | | Percentage
Increase/(Decrease) | |
| | | December 31,
2010 | | | January 1,
2010 | | |
| | | (In millions, except percentages) | |
Revenue | | $ | 76.1 | | | $ | 97.4 | | | | (21.9 | )% |
Segment operating loss | | $ | (14.7 | ) | | $ | (12.8 | ) | | | N/M | |
% of revenue | | | (19.3 | )% | | | (13.1 | )% | | | | |
N/M = Not statistically meaningful
We experienced a significant decrease in revenue in North America that resulted primarily from product transition to our current product platform from our legacy products, some continuing effects of the economic downturn, as well as increased competition. In the first two quarters of fiscal 2010, most of our North America business was in our legacy products. While we continued last time buy activity in those product lines in the first two quarters of fiscal 2011, we are also in the process of transitioning our North America customers to our current product. Many of our customers are now completing their first deployments of the current product. We expect orders for this line of products to increase in future periods as market acceptance gains traction.
The North America segment operating loss for the first two quarters of fiscal 2011 included $6.9 million of restructuring charges, $4.4 million from the loss on sale of NetBoss assets and $1.7 million for share-based compensation.
The North America segment operating loss for the first two quarters of fiscal 2010 included $1.5 million for restructuring charges and $1.4 million for share-based compensation.
International Segment
| | | | | | | | | | | | |
| | | Two Quarters Ended | | | Percentage
Increase/(Decrease) | |
| | | December 31,
2010 | | | January 1,
2010 | | |
| | | (In millions, except percentages) | |
Revenue | | $ | 157.2 | | | $ | 145.2 | | | | 8.3 | % |
Segment operating income (loss) | | $ | (18.1 | ) | | $ | 0.2 | | | | N/M | |
% of revenue | | | (11.5 | )% | | | 0.1 | % | | | | |
N/M = Not statistically meaningful
The increase of our international revenue in the first two quarters of fiscal 2011 compared with the same period in fiscal 2010 resulted from significant increases in EMER, where increased orders for the current product platform were delivered in the second quarter of fiscal 2011. Revenue in the first two quarters of fiscal 2010 included a substantial amount of purchases from a customer in the Middle East that was not repeated in fiscal 2011. However, wireless customers in Russia that had reduced their capital spending sharply in calendar 2009 and early 2010 in response to the tightening in credit markets, increased spending allowing us to benefit from their incremental business in the first two quarters of fiscal 2011. Competitive pricing pressures in Russia continue to impact the business so future order levels may vary significantly. Finally, in the Asia Pacific region, the product mix varied from the first two quarters of fiscal 2011 as compared with the same period in fiscal 2010. In the second quarter of fiscal 2011, revenue from shipments of WiMAX product substantially increased in the region, mostly in India, while microwave business in other countries was flat or down compared to the previous year.
Gross margin for the International segment in the first two quarters of fiscal 2010 was substantially enhanced by favorable pricing with certain customers in the Middle East, which was not repeated in the same period of fiscal 2011.
The International segment operating loss for the first two quarters of fiscal 2011 included $2.1 million for restructuring charges and $0.4 million for share-based compensation.
The International segment operating loss for the first two quarters of fiscal 2010 resulted primarily from the decline in revenue when compared with levels prior to fiscal 2010 without a corresponding decrease toin cost structure and included $1.1 million of restructuring charges and $0.2 million for share-based compensation.
Liquidity and Capital Resources
Sources of Cash
As of December 31, 2010, our total cash and cash equivalents on our balance sheet.
We believe that cash on hand and the available line of credit are sufficient to meet our working capital requirements for next 12 months and foreseeable future.
As of October 1, 2010, approximately $52.4was $102.4 million. Approximately $37.6 million or 49%37% of our total cash and cash equivalents was held by entities domiciled in the United States. The remaining balance of $55.4$64.8 million or 51%63% was held by entities outside the United States, primarily in Singapore, and could be subject to additional taxation if it were to be repatriated to the United States.
As of December 31, 2010, our principal sources of liquidity consisted of the $102.4 million in cash and cash equivalents, $24.4 million of available credit under our current $40.0 million credit facility with Silicon Valley Bank, and cash collections from customers. Historically our primary sources of liquidity have been cash flows from operations, credit facilities and cash proceeds from sale of our equity securities. During the first two quarters of fiscal 2011, our total cash and cash equivalents decreased by $39.3 million primarily due to cash used in operating activities. During the first two quarters of fiscal 2010, we had positive operating cash flows of $3.9 million.
Cash used in operating activities was $40.5 million in the first two quarters of fiscal 2011 primarily due to the net loss after non-cash adjustments of $27.3 million and a year-to-date increase in receivables of approximately $38.9 million, partially offset by a year-to-date increase in accounts payable of $23.7 million. Our cash collections in each of the first two quarters of fiscal year 2011 were substantially lower than in the fourth quarter of fiscal year 2010 in part due to shipment delays from the first quarter to the second quarter of fiscal 2011 including substantial shipments in the final month of the second quarter. This limited our ability to collect receivables at the end of each quarter. The shipment delays were caused by the transition to outsourced manufacturing and the global parts shortages. In addition, a higher than expected volume of shipments and the longer payment terms for WiMAX shipments have resulted in an increase in our accounts receivable balances at December 31, 2010. During the second quarter of fiscal 2011, we were able to re-negotiate longer payment terms with two of our largest contract manufacturers. The result of higher volume and more favorable payment terms increased our accounts payable balance at the end of the second quarter of fiscal 2011. We expect to continue using cash in our operating activities in the second half of fiscal 2011, but to a substantially lesser extent as compared with the amount of operating cash used in the first two quarters of fiscal 2011.
We believe that our existing cash and cash equivalents, the available line of credit and future cash collections from customers will be sufficient to meet our working capital requirements for next 12 months and the foreseeable future.
Available Credit Facility and Repayment of Debt
As of October 1,December 31, 2010, we had $24.4 million of credit available under our $40.0 million revolving credit facility with Silicon Valley Bank as mentioned above. The total amount of revolving credit available was $40.0 million less $6.0 million in outstanding short term loans which mature by September 30, 2011, and $9.6 million in outstanding standby letters of credit issued under the facility.
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The commitment of $40.0 million under the facility expires in September 2011 and provides for (1) demand borrowings at the prime rate published in theWall Street Journal, (2) fixed term Eurodollar loans for up to six months at LIBOR plus a spread of between 2.00% to 2.75% based on the company’s current leverage ratio and (3) the issuance of standby or commercial letters of credit. The facility contains a minimum liquidity ratio covenant and a minimum profitability covenant and is secured by the company’s assets.
Based on covenants included as part of the credit facility we must maintain, as measured at the last day of each fiscal quarter, (1) no less than a minimum liquidity ratio of 2.50 to 1 (defined as the ratio of total domestic unrestricted cash and cash equivalents plus short-term and long-term marketable securities to total obligations outstanding with the bank) and (2) minimum consolidated EBITDA measured for each fiscal quarter as follows:
| | | | | |
| Period | | Minimum EBITDA | |
| Quarter ending October 1, 2010 | | $ | (18,000,000 | ) |
| Quarter ending December 31, 2010 | | $ | (10,500,000 | ) |
| Quarter ending April 1, 2011 | | $ | (7,000,000 | ) |
| Quarter ending July 1, 2011 | | | (2,500,000 | ) |
| Each Quarter Thereafter | | $ | 1,000,000 | |
| | | | |
Period | | Minimum EBITDA | |
Quarter ending October 1, 2010 | | $ | (18,000,000 | ) |
Quarter ending December 31, 2010 | | $ | (10,500,000 | ) |
Quarter ending April 1, 2011 | | $ | (7,000,000 | ) |
Quarter ending July 1, 2011 | | | (2,500,000 | ) |
Each Quarter Thereafter | | $ | 1,000,000 | |
As of October 1,December 31, 2010, we were in compliance with these financial covenants.
Subsequent to October 1, 2010, we negotiated an amendment to our credit facility with Silicon Valley Bank that modifies the liquidity ratio to expand the definition of domestic unrestricted cash to include cash held by our Singapore subsidiary in the U.S. up to a maximum amount of $20.0 million. This expanded definition will increase our available credit under the facility by up to $8.0 million without changing the maximum credit amount of $40.0 million.
Restructuring and Payments
We have a liability for restructuring activities totaling $7.4$6.7 million as of October 1,December 31, 2010, of which $7.2 million is all classified as a current liability and expected to be paid out in cash over the next year. Additionally, during the remainder of fiscal 2011, we expect to incur approximately $15$11.5 million of additional charges from our restructuring activities. We expect to fund these future payments with available cash and cash flow provided by operations.
Commercial Commitments and Contractual Obligations
The amounts disclosed in our Fiscal 2010 Form 10-K include our commercial commitments and contractual obligations. During the quarter ended October 1,December 31, 2010, no material changes occurred in our contractual cash obligations to repay debt, to purchase goods and services and to make payments under operating leases or our commercial commitments and contingent liabilities on outstanding letters of credit, guarantees and other arrangements as disclosed in our Fiscal 2010 Form 10-K.
Critical Accounting Estimates
For information about our critical accounting estimates, see the “Critical Accounting Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended July 2, 2010.
Impact of Recently Issued Accounting Pronouncements
As described in “Note B2 — New Accounting Pronouncements” in the Notes to Condensed Consolidated Financial Statements, there are accounting pronouncements that have recently been issued but have not yet been implemented by us. Note B2 describes the potential impact that these pronouncements are expected to have on our financial position, results of operations and cash flows.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Financial Risk Management
In the normal course of doing business, we are exposed to the risks associated with foreign currency exchange rates and changes in interest rates. We employ established policies and procedures governing the use of financial instruments to manage our exposure to such risks.
Descriptions of our exchange rate risk are incorporated by reference from Part I, Item 1, Financial Statements — Notes to Condensed Consolidated Financial Statements — “Note N”12 - Risk Management, Derivative Financial Instruments and Hedging Activities” in response to this item.
Our exposure to market risk for changes in interest rates relates primarily to our cash equivalents and bank debt.
Exposure on Cash and Cash Equivalents
We do not use derivative financial instruments in our short-term investment portfolio. We invest in high-credit quality issues and, by policy, limit the amount of credit exposure to any one issuer and country. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. The portfolio is also diversified by maturity to ensure that funds are readily available as needed to meet our liquidity needs. This policy reduces the potential need to sell securities in order to meet liquidity needs and therefore the potential effect of changing market rates on the value of securities sold.
We had $107.8$102.4 million in total cash and cash equivalents as of October 1,December 31, 2010. Cash equivalents totaled $37.3$69.1 million as of October 1,December 31, 2010.
The primary objective of our short-term investment activities is to preserve principal while maximizing yields, without significantly increasing risk. Our cash equivalents earn interest at fixed rates; therefore, changes in interest rates will not generate a gain or loss on these investments unless they are sold prior to maturity. Actual gains and losses due to the sale of our investments prior to maturity have been immaterial. The weighted average days to maturity for cash equivalents held as of October 1,December 31, 2010 was two days,one day, and these investments had an average yield of 0.25%0.15% per annum. A 10% change in interest rates on our cash and cash equivalents is not expected to have a material impact on our financial position, results of operations or cash flows.
Cash equivalents have been recorded at fair value on our balance sheet.
During the firstsecond quarter of fiscal 2011, we had $5.0$6.0 million of short-term borrowings outstanding under our previous $70.0$40.0 million revolving credit facility that incurred interest at the London Interbank Offered Rate (“LIBOR”) plus 1.50%.prime rate. During the second quarter of fiscal 2011, our weighted average interest rate was 2.48%3.25% and we recorded total interest expense of less than $0.1 million on these borrowings.
On October 1, 2010, we repaid the $5.0 million outstanding under our previous $70.0 million revolving credit facility with the proceeds of a new borrowing of $6.0 million at the prime rate under our new $40.0 million credit facility. As of October 1, 2010 our weighted average interest rate was 3.25%. A 10% change in interest rates on the current borrowings or on future borrowings is not expected to have a material impact on our financial position, results of operations or cash flows since interest on our short-term debt is not material to our overall financial position.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management,
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