NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Description of Business
Avid Technology, Inc. (“Avid” or the “Company”) develops, markets, sells, and supports software and hardware for digital media content production, management and distribution. The Company does this by providing an open and efficient platform for digital media, along with a comprehensive set of tools and workflow solutions, that enable the creation, distribution and optimization of audio and video content. Digital media are video, audio or graphic elements in which the image, sound or picture is recorded and stored as digital values, as opposed to analog or tape-based signals. The Company’s products are used in production and post-production facilities; film studios; network, affiliate, independent and cable television stations; recording studios; live-sound performance venues; advertising agencies; government and educational institutions; corporate communication departments; and by independent video and audio creative professionals, as well as aspiring professionals. Projects produced using Avid’s products include feature films, television programming, live events, news broadcasts, sports productions, commercials, music, video and other digital media content.
Management Plans
The Company’s preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from the Company’s estimates.
The Company has generally funded operations in recent years through the use of existing cash balances, supplemented from time to time with the proceeds of long-term debt and borrowings under its credit facilities. The Company’s principal sources of liquidity include cash and cash equivalents totaling
$44.9 million
for the year ended
December 31, 2016
.
In February 2016, the Company committed to a cost efficiency program that encompasses a series of measures intended to allow the Company to more efficiently operate in a leaner, and more directed cost structure. These measures include reductions in the Company’s workforce, facilities consolidation, transferring certain business processes to lower cost regions and reducing other third-party service costs. The Company anticipates that the cost efficiency program will be substantially complete by the end of the second quarter of 2017.
In connection with the cost efficiency program, on February 26, 2016, the Company entered into a Financing Agreement (the “Financing Agreement”) with the lenders party thereto (the “Lenders”). Pursuant to the Financing Agreement, the Company entered into a term loan in the aggregate principal amount of
$100.0 million
. The Financing Agreement also provides the Company with the ability to draw up to a maximum of
$5.0 million
in revolving credit. All outstanding loans under the Financing Agreement will become due and payable in February 2021, or in May 2020 if the
$125.0 million
in outstanding principal of
2.00%
convertible senior notes due June 15, 2020 (the “Notes”) has not been repaid or refinanced by such time. Proceeds from the Financing Agreement have been used to replace an existing
$35.0 million
revolving credit facility, finance the Company’s efficiency program and other initiatives, and provide operating flexibility throughout the remainder of the transformation. After paying for both debt issuance costs and the cost efficiency program, the new financing provided approximately
$70 million
of available liquidity, about half of which replaced the prior revolving credit facility, with the remainder providing incremental liquidity to fund operations.
The Financing Agreement contains customary representations and warranties, covenants, mandatory prepayments, and events of default under which the Company’s payment obligations may be accelerated. The Financing Agreement includes covenants requiring the Company to maintain a Leverage Ratio (defined as the ratio of (a) consolidated total funded indebtedness to (b) consolidated EBITDA) of no greater than 4.35:1.00 for the four quarters ending June 30, 2016, 5.40:1.00 for the four quarters ending September 30, 2016, 4.20:1.00 for the four quarters ending December 31, 2016 and thereafter declining over time from 3.50:1.00 to 2.50:1.00. The Financing Agreement also restricts the Company from making capital expenditures in excess of $20 million in any fiscal year. As of December 31, 2016 the Company was in compliance with these covenants.
The Company’s ability to satisfy the Leverage Ratio covenant in the future is heavily dependent on its ability to increase bookings and billings above levels experienced over the last 12 months. In recent quarters, the Company has experienced volatility in bookings and billings resulting from, among other things, (i) its transition towards subscription and recurring revenue streams and the resulting decline in traditional upfront product sales, (ii) volatility in currency rates and in particular the strengthening of the US dollar against the Euro, (iii) dramatic changes in the media industry and the impact it has on the Company’s customers and (iv) the impact of new and anticipated product launches and features. In addition to the impact of new bookings and billings, GAAP revenues recognized as the result of the existence of Implied Maintenance Release PCS (as defined below) in prior periods will decline significantly in
2017
, which will have an adverse impact on the Company’s Leverage Ratio.
In the event bookings and billings in future quarters are lower than the Company currently anticipates, it may be forced to take remedial actions which could include, among other things (and where allowed by the Lenders), (i) further cost reductions, (ii) seeking replacement financing, (iii) raising additional equity or (iv) disposing of certain assets or businesses. Such remedial actions, which may not be available on favorable terms or at all, could have a material adverse impact on the Company’s business. If the Company is not in compliance with the Leverage Ratio and is unable to obtain an amendment or waiver, such noncompliance may result in an event of default under the Financing Agreement, which could permit acceleration of the outstanding indebtedness under the Financing Agreement and require the Company to repay such indebtedness before the scheduled due date. If an event of default were to occur, the Company might not have sufficient funds available to make the payments required. If the Company is unable to repay amounts owed, the lenders may be entitled to foreclose on and sell substantially all of the Company’s assets, which secure its borrowings under the Financing Agreement.
The Company’s cash requirements vary depending on factors such as the growth of the business, changes in working capital, capital expenditures, and obligations under the cost efficiency program. Management expects to operate the business and execute its strategic initiatives principally with funds generated from operations, remaining net proceeds from the term loan borrowings under the Financing Agreement, and draw up to a maximum of
$5.0 million
under the Financing Agreement’s revolving credit facility. Management anticipates that the Company will have sufficient internal and external sources of liquidity to fund operations and anticipated working capital and other expected cash needs for at least the next twelve months as well as for the foreseeable future.
Subsequent Events
On January 26, 2017, the Company entered into a securities purchase agreement, or the Securities Purchase Agreement, with Jetsen, pursuant to which it have agreed to sell to Jetsen shares of Avid common stock in an amount equal to between
5.0%
and
9.9%
of Avid outstanding common stock on a fully diluted basis. The purchase price for the shares is
$18.2 million
and will be payable in cash. The closing of the sale is subject to closing conditions, including China regulatory approvals. The exact number of shares to be issued and sold at closing will be determined by reference to the trading price of Avid common stock before closing. At the same time, the Company also entered into an Exclusive Distributor Agreement with Jetsen, pursuant to which Jetsen will become the exclusive distributor for Avid products and services in the Greater China region. The Distributor Agreement has a five-year term and Jetsen is required to make at least
$75.8 million
of aggregate purchases under the agreement over the first three years.
On March 14, 2017 (the “Effective Date”), the Company entered into an amendment (the “Amendment”) to its existing Financing Agreement, dated February 26, 2016, with the lenders party thereto. The Amendment modifies the covenant requiring the Company to maintain a Leverage Ratio (defined to mean the ratio of (a) consolidated total funded indebtedness to (b) consolidated EBITDA) such that following the Effective Date, the Company is required to keep a Leverage Ratio of no greater than 3.50:1.00 for the four quarters ending March 31, 2017, 4.20:1.00 for the four quarters ending June 30, 2017, 4.75:1.00 for the four quarters ending September 30, 2017, 4.80:1.00 for the four quarters ending December 31, 2017, 4:40:1 for each of the four quarters ending March 31, 2018 through March 31, 2019, respectively, and thereafter declining over time from 3.50:1.00 to 2.50:1.00.
Following the Effective Date, interest accrues on outstanding borrowings under the credit facility and the term loan (each as defined in the Financing Agreement) at a rate of either the LIBOR Rate (as defined in the Financing Agreement) plus 7.25% or a Reference Rate (as defined in the Financing Agreement) plus 6.25%, at the option of the Company.
The Company evaluated subsequent events through the date of issuance of these financial statements and, other than the events disclosed above, no other subsequent events required recognition or disclosure in these financial statements.
|
|
B.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated.
Basis of Presentation
The Company’s preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from the Company’s estimates.
Revenue Recognition
General
The Company commences revenue recognition when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is reasonably assured. Generally, the products the Company sells do not require significant production, modification or customization. Installation of the Company’s products is generally routine, consists of implementation and configuration and does not have to be performed by the Company.
At the time of a sales transaction, the Company makes an assessment of the collectability of the amount due from the customer. Revenues are recognized only if it is reasonably assured that collection will occur. When making this assessment, the Company considers customer credit-worthiness and historical payment experience. If it is determined from the outset of the arrangement that collection is not reasonably assured, revenues are recognized on a cash basis, provided that all other revenue recognition criteria are satisfied. At the outset of the arrangement, the Company also assesses whether the fee associated with the order is fixed or determinable and free of contingencies or significant uncertainties. When assessing whether the fee is fixed or determinable, the Company considers the payment terms of the transaction, the Company’s collection experience in similar transactions, and the Company’s involvement, if any, in third-party financing transactions, among other factors. If the fee is not fixed or determinable, revenues are recognized only as payments become due from the customer, provided that all other revenue recognition criteria are met. If a significant portion of the fee is due after the Company’s normal payment terms, the Company evaluates whether the Company has sufficient history of successfully collecting past transactions with similar terms without offering concessions. If that collection history is sufficient, revenue recognition commences, upon delivery of the products, assuming all other revenue recognition criteria are satisfied. If the Company was to make different judgments or assumptions about any of these matters, it could cause a material increase or decrease in the amount of revenues reported in a particular period.
The Company often receives multiple purchase orders or contracts from a single customer or a group of related customers that are evaluated to determine if they are, in effect, part of a single arrangement. In situations when the Company has concluded that two or more orders with the same customer are so closely related that they are, in effect, parts of a single arrangement, the Company accounts for those orders as a single arrangement for revenue recognition purposes. In other circumstances, when the Company has concluded that two or more orders with the same customer are independent buying decisions, such as an earlier purchase of a product and a subsequent purchase of a software upgrade or maintenance contract, the Company accounts for those orders as separate arrangements for revenue recognition purposes.
For many of the Company’s products, there has been an ongoing practice of Avid making available at no charge to customers minor feature and compatibility enhancements as well as bug fixes on a when-and-if-available basis (collectively “Software Updates”), for a period of time after initial sales to end users. The implicit obligation to make such Software Updates available to customers over a period of time represents implied post-contract customer support, which is deemed to be a deliverable in each arrangement and is accounted for as a separate element (“Implied Maintenance Release PCS”).
Over the course of the last two years, in connection with a strategic initiative to increase support and other recurring revenue streams, the Company has taken a number of steps to eliminate the longstanding practice of providing Implied Maintenance Release PCS for many of its products, including Media Composer, Pro Tools and Sibelius product lines. In the third quarter and
fourth quarter of 2015, respectively, the Company concluded that Implied Maintenance Release PCS for its Media Composer and Sibelius product lines had ceased. In the first quarter of 2016, in connection with the release of Cloud Collaboration in Pro Tools version 12.5, which was an undelivered feature that had prevented the Company from recognizing any revenue related to new Pro Tools 12 software sales as it represented a specified upgrade right for which vendor specific objective evidence (“VSOE”) of fair value was not available,
the Company concluded that Implied Maintenance Release PCS for Pro Tools 12 product lines had also ended. The determination that Pro Tools 12 Implied Maintenance Release PCS had ended was based on management (i) clearly communicating a policy of no longer providing any Software Updates or other support to customers that are not covered under a paid support plan and (ii) implementing robust digital rights management tools to enforce the policy. With the new policy and technology for Pro Tools 12 in place, combined with management’s intent to continue to adhere to the policy, management concluded in the first quarter of 2016 that Implied Maintenance Release PCS for Pro Tools 12 transactions no longer exists. As a result of the conclusion that Implied Maintenance Release PCS on Pro Tools 12 has ended, revenue and net income in the first quarter of 2016 increased approximately
$11.1 million
, reflecting the recognition of orders received after the launch of Pro Tools 12 that would have qualified for earlier recognition using the residual method of accounting. In addition, the elimination of Implied Maintenance Release PCS also resulted in the accelerated recognition of maintenance and product revenues that were previously being recognized on a ratable basis over a much longer expected period of Implied Maintenance Release PCS rather than the contractual maintenance period. The reduction in the estimated amortization period of transactions being recognized on a ratable basis resulted in an additional
$41.8 million
of revenue during the year ended
December 31, 2016
.
The Company enters into certain contractual arrangements that have multiple elements, one or more of which may be delivered subsequent to the delivery of other elements. These multiple-deliverable arrangements may include products, support, training, professional services and Implied Maintenance Release PCS. For these multiple-element arrangements, the Company allocates revenue to each deliverable of the arrangement based on the relative selling prices of the deliverables. In such circumstances, the Company first determines the selling price of each deliverable based on (i) VSOE of fair value if that exists; (ii) third-party evidence of selling price (“TPE”), when VSOE does not exist; or (iii) best estimate of the selling price (“BESP”), when neither VSOE nor TPE exists. Revenue is then allocated to the non-software deliverables as a group and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the selling price hierarchy. The Company’s process for determining BESP for deliverables for which VSOE or TPE does not exist involves significant management judgment. In determining BESP, the Company considers a number of data points, including:
|
|
•
|
the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone basis;
|
|
|
•
|
contractually stated prices for deliverables that are intended to be sold on a standalone basis;
|
|
|
•
|
the pricing of standalone sales that may not qualify as VSOE of fair value due to limited volumes or variation in prices; and
|
|
|
•
|
other pricing factors, such as the geographical region in which the products are sold and expected discounts based on the customer size and type.
|
In determining a BESP for Implied Maintenance Release PCS, which the Company does not sell separately, the Company considers (i) the service period for the Implied Maintenance Release PCS, (ii) the differential in value of the Implied Maintenance Release PCS deliverable compared to a full support contract, (iii) the likely list price that would have resulted from the Company’s established pricing practices had the deliverable been offered separately, and (iv) the prices a customer would likely be willing to pay.
The Company estimates the service period of Implied Maintenance Release PCS based on the length of time the product version purchased by the customer is planned to be supported with Software Updates. If facts and circumstances indicate that the original service period of Implied Maintenance Release PCS for a product has changed significantly after original revenue recognition has commenced, the Company will modify the remaining estimated service period accordingly and recognize the then-remaining deferred revenue balance over the revised service period.
The Company has established VSOE of fair value for some of the Company’s professional services, training and support offerings. The Company’s policy for establishing VSOE of fair value consists of evaluating standalone sales to determine if a substantial portion of the transactions fall within a reasonable range. If a sufficient volume of standalone sales exist and the standalone pricing for a substantial portion of the transactions falls within a reasonable range, management concludes that VSOE of fair value exists.
In accordance with Accounting Standards Update (“ASU”) No. 2009-14, the Company excludes from the scope of software revenue recognition requirements the Company’s sales of tangible products that contain both software and non-software components that function together to deliver the essential functionality of the tangible products. The Company adopted ASU No. 2009-13 and ASU No. 2009-14 prospectively on January 1, 2011 for new and materially modified arrangements originating after December 31, 2010.
Prior to the Company’s adoption of ASU No. 2009-14, the Company primarily recognized revenues using the revenue recognition criteria of Accounting Standards Codification (“ASC”) Subtopic 985-605, Software-Revenue Recognition. As a result of the Company’s adoption of ASU No. 2009-14 on January 1, 2011, a majority of the Company’s products are now considered non-software elements under GAAP, which excludes them from the scope of ASC Subtopic 985-605 and includes them within the scope of ASC Topic 605, Revenue Recognition. Because the Company had not been able to establish VSOE of fair value for Implied Maintenance Release PCS, as described further below, substantially all revenue arrangements prior to January 1, 2011 were recognized on a ratable basis over the service period of Implied Maintenance Release PCS. Subsequent to January 1, 2011 and the adoption of ASU No. 2009-14, the Company determines a relative selling price for all elements of the arrangement through the use of BESP, as VSOE and TPE are typically not available, resulting in revenue recognition upon delivery of arrangement consideration attributable to product revenue, provided all other criteria for revenue recognition are met, and revenue recognition of Implied Maintenance Release PCS and other service and support elements over time as services are rendered.
The timing of revenue recognition of customer arrangements follows a number of different accounting models determined by the characteristics of the arrangement, and that timing can vary significantly from the timing of related cash payments due from customers. One significant factor affecting the timing of revenue recognition is the determination of whether each deliverable in the arrangement is considered to be a software deliverable or a non-software deliverable. For transactions occurring after January 1, 2011, the Company’s revenue recognition policies have generally resulted in the recognition of approximately
70%
of billings as revenue in the year of billing, and prior to January 1, 2011, the previously applied revenue recognition policies resulted in the recognition of approximately
30%
of billings as revenue in the year of billing. The Company expects this trend to continue in future periods.
Revenue Recognition of Non-Software Deliverables
Revenue from products that are considered non-software deliverables is recognized upon delivery of the product to the customer. Products are considered delivered to the customer once they have been shipped and title and risk of loss has been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped. Revenue from support that is considered a non-software deliverable is initially deferred and is recognized ratably over the contractual period of the arrangement, which is generally twelve months. Professional services and training services are typically sold to customers on a time and materials basis. Revenue from professional services and training services that are considered non-software deliverables is recognized for these deliverables as services are provided to the customer. Revenue for Implied Maintenance Release PCS that is considered a non-software deliverable is recognized ratably over the service period of Implied Maintenance Release PCS, which ranges from one to eight years.
Revenue Recognition of Software Deliverables
The Company recognizes the following types of elements sold using software revenue recognition guidance: (i) software products and software upgrades, when the software sold in a customer arrangement is more than incidental to the arrangement as a whole and the product does not contain hardware that functions with the software to provide essential functionality, (ii) initial support contracts where the underlying product being supported is considered to be a software deliverable, (iii) support contract renewals, and (iv) professional services and training that relate to deliverables considered to be software deliverables. Because the Company does not have VSOE of the fair value of its software products, the Company is permitted to account for its typical customer arrangements that include multiple elements using the residual method. Under the residual method, the VSOE of fair value of the undelivered elements (which could include support, professional services or training, or any combination thereof) is deferred and the remaining portion of the total arrangement fee is recognized as revenue for the delivered elements. If evidence of the VSOE of fair value of one or more undelivered elements does not exist, revenues are deferred and recognized when delivery of those elements occurs or when VSOE of fair value can be established. VSOE of fair value is typically based on the price charged when the element is sold separately to customers. The Company is unable to use the residual method to recognize revenues for some arrangements that include products that are software deliverables under GAAP since VSOE of fair value does not exist for Implied Maintenance Release PCS elements, which are included in some of the Company’s arrangements.
For software products that include Implied Maintenance Release PCS, an element for which VSOE of fair value does not exist, revenue for the entire arrangement fee, which could include combinations of product, professional services, training and support, is recognized ratably as a group over the longest service period of any deliverable in the arrangement, with recognition commencing on the date delivery has occurred for all deliverables in the arrangement (or begins to occur in the case of professional services, training and support). Standalone sales of support contracts are recognized ratably over the service period of the product being supported.
From time to time, the Company offers certain customers free upgrades or specified future products or enhancements. When a software deliverable arrangement contains an Implied Maintenance Release PCS deliverable, revenue recognition of the entire arrangement will only commence when any free upgrades or specified future products or enhancements have been delivered, assuming all other products in the arrangement have been delivered and all services, if any, have commenced.
Other Revenue Recognition Policies
In a limited number of arrangements, the professional services and training to be delivered are considered essential to the functionality of the Company’s software products. If services sold in an arrangement are deemed to be essential to the functionality of the software products, the arrangement is accounted for using contract accounting. As the Company has concluded that it cannot reliably estimate its contract costs, the Company uses the completed contract method of contract accounting. The completed contract method of accounting defers all revenue and costs until the date that the products have been delivered and professional services, exclusive of post-contract customer support, have been completed. Deferred costs related to fully deferred contracts are recorded as a component of inventories in the consolidated balance sheet, and generally all other costs of sales are recognized when revenue recognition commences.
The Company records as revenues all amounts billed to customers for shipping and handling costs and records its actual shipping costs as a component of cost of revenues. Reimbursements received from customers for out-of-pocket expenses are recorded as revenues, with related costs recorded as cost of revenues. The Company presents revenues net of any taxes collected from customers and remitted to government authorities.
In the consolidated statements of operations, the Company classifies revenues as product revenues or services revenues. For multiple-element arrangements that include both product and service elements, including Implied Maintenance Release PCS, the Company evaluates available indicators of fair value and applies its judgment to reasonably classify the arrangement fee between product revenues and services revenues. The amount of multiple-element arrangement fees classified as product and service revenues based on management estimates of fair value when VSOE of fair value for all elements of an arrangement does not exist could differ from amounts classified as product and service revenues if VSOE of fair value for all elements existed.
Allowance for Sales Returns and Exchanges
The Company maintains allowances for estimated potential sales returns and exchanges from its customers. The Company records a provision for estimated returns and other allowances as a reduction of revenues in the same period that related revenues are recorded based on historical experience and specific customer analysis. Use of management estimates is required in connection with establishing and maintaining a sales allowance for expected returns and other credits. If actual returns differ from the estimates, additional allowances could be required.
The following table sets forth the activity in the allowance for sales returns and exchanges for the years ended
December 31, 2016
,
2015
and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Allowance for sales returns and exchanges
–
beginning of year
|
$
|
8,583
|
|
|
$
|
9,510
|
|
|
$
|
12,519
|
|
Additions and adjustments to the allowance
|
9,325
|
|
|
8,468
|
|
|
9,260
|
|
Deductions against the allowance
|
(10,047
|
)
|
|
(9,395
|
)
|
|
(12,269
|
)
|
Allowance for sales returns and exchanges
–
end of year
|
$
|
7,861
|
|
|
$
|
8,583
|
|
|
$
|
9,510
|
|
The allowance for sales returns and exchanges, which is recorded as a reduction to gross accounts receivable, reflects an estimate of amounts invoiced that will not be collected, as well as other allowances and credits that have been or are expected to offset the trade receivables. Since many of the Company’s transactions require some or all of amounts invoiced to be recorded in deferred revenue under GAAP due to revenue recognition considerations, the Company has recorded reductions to deferred revenue of
$1.5 million
,
$3.2 million
and
$3.7 million
as of
December 31, 2016
,
2015
and
2014
, respectively, to eliminate the estimated deferred revenue attributable to transactions already provided for by the sales, returns and exchanges allowance.
Allowances for Doubtful Accounts
The Company maintains allowances for estimated losses from bad debt resulting from the inability of its customers to make required payments for products or services. When evaluating the adequacy of the allowances, the Company analyzes accounts receivable balances, historical bad debt experience, customer concentrations, customer credit worthiness and current economic trends. To date, actual bad debts have not differed materially from management’s estimates.
The following table sets forth the activity in the allowance for doubtful accounts for the years ended
December 31, 2016
,
2015
and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Allowance for doubtful accounts
–
beginning of year
|
$
|
643
|
|
|
$
|
1,182
|
|
|
$
|
1,444
|
|
Bad debt (recovery) expense
|
886
|
|
|
(23
|
)
|
|
(143
|
)
|
Reduction in allowance for doubtful accounts
|
(772
|
)
|
|
(516
|
)
|
|
(119
|
)
|
Allowance for doubtful accounts
–
end of year
|
$
|
757
|
|
|
$
|
643
|
|
|
$
|
1,182
|
|
Translation of Foreign Currencies
The functional currency of each of the Company’s foreign subsidiaries is the local currency, except for the Irish manufacturing branch and Orad Hi-Tech Systems Ltd. (“Orad”) that the Company acquired in June 2015. The functional currency for both the Irish manufacturing branch and Orad is the U.S. dollar due to the extensive interrelationship of the operations of the Irish branch, Orad and the U.S. parent, and the high volume of intercompany transactions among the two subsidiaries and the parent. The assets and liabilities of the subsidiaries whose functional currencies are other than the U.S. dollar are translated into U.S. dollars at the current exchange rate in effect at the balance sheet date. Income and expense items for these entities are translated using rates that approximate those in effect during the period. Cumulative translation adjustments are included in accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ deficit. The Company does not record tax provisions or benefits for the net changes in the foreign currency translation adjustment as the Company intends to permanently reinvest undistributed earnings in its foreign subsidiaries.
The U.S. parent company, Irish manufacturing branch and Orad, all of whose functional currency is the U.S. dollar, carry certain monetary assets and liabilities denominated in currencies other than the U.S. dollar. These assets and liabilities typically include cash, accounts receivable and intercompany operating balances denominated in foreign currencies. These assets and liabilities are remeasured into the U.S. dollar at the current exchange rate in effect at the balance sheet date. Foreign currency transaction and remeasurement gains and losses are included within marketing and selling expenses in the results of operations.
The U.S. parent company and various other wholly owned subsidiaries have long-term intercompany loan balances denominated in foreign currencies that are remeasured into the U.S. dollar at the current exchange rate in effect at the balance sheet date. Such loan balances are not expected to be settled in the foreseeable future. Any gains and losses relating to these loans are included in the accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ deficit.
The Company has significant international operations and, therefore, the Company’s revenues, earnings, cash flows and financial position are exposed to foreign currency risk from foreign-currency-denominated receivables, payables, sales and expense transactions, and net investments in foreign operations. The Company derives more than half of it revenues from customers outside the United States. The business is, for the most part, transacted through international subsidiaries and generally in the currency of the end-user customers. Therefore, the Company is exposed to the risks that changes in foreign currency could adversely affect its revenues, net income, cash flow and financial position. Foreign currency transaction and remeasurement gains
and losses are included within marketing and selling expenses in the results of operations. For the year ended
December 31, 2016
,
2015
, and
2014
the Company recorded net (gains) losses of
$(0.6) million
,
$(1.3) million
, and
$0.9 million
respectively, that resulted from foreign currency denominated transactions and the revaluation of foreign currency denominated assets and liabilities.
Cash, Cash Equivalents and Marketable Securities
The Company measures cash equivalents and marketable securities at fair value on a recurring basis. The cash equivalents and market securities consist primarily of money market investments, mutual funds and insurance contracts held in deferred compensation plans. The money market investments and mutual funds held in the Company’s deferred compensation plan in the U.S. are reported at fair value within other current assets using quoted market prices with the gains and losses included as other (expense) income in the Company’s statement of operations. The insurance contracts held in the deferred compensation plans for employees in Israel and Germany are reported at fair value within other long-term assets using other observable inputs. Other than the investments held in the Company’s deferred compensation plans, the Company held no marketable securities at
December 31, 2016
or
2015
. Amortization or accretion of premium or discount is included in interest income (expense) in the results of operations.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with financial institutions that management believes to be of high credit quality, and, generally, there are no significant concentrations in any one issuer. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers that make up the Company’s customer base and their dispersion across different regions. No individual customer accounted for
10%
or more of the Company’s total net revenues or net accounts receivable in the periods presented.
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market value. Management regularly reviews inventory quantities on hand and writes down inventory to its realizable value to reflect estimated obsolescence or lack of marketability based on assumptions about future inventory demand and market conditions. Inventory in the digital-media market, including the Company’s inventory, is subject to rapid technological change or obsolescence; therefore, utilization of existing inventory may differ from the Company’s estimates.
Property and Equipment
Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful life of the asset. The Company typically depreciates its property and equipment using the following minimum and maximum useful lives:
|
|
|
|
|
|
|
|
Depreciable Life
|
|
|
Minimum
|
|
Maximum
|
Computer and video equipment and software, including internal use software
|
|
2 years
|
|
5 years
|
Manufacturing tooling and testbeds
|
|
3 years
|
|
5 years
|
Office equipment
|
|
3 years
|
|
5 years
|
Furniture, fixtures and other
|
|
3 years
|
|
8 years
|
The Company capitalizes certain development costs incurred in connection with its internal use software. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct, are capitalized until the software is substantially complete and ready for its intended use. Capitalized costs are recorded as part of property and equipment. Maintenance and training costs are expensed as incurred. Internal use software is amortized on a straight line basis over its estimated useful life, generally
three
years.
Leasehold improvements are amortized over the shorter of the useful life of the improvement or the remaining term of the lease. Expenditures for maintenance and repairs are expensed as incurred. Upon retirement or other disposition of assets, the cost and
related accumulated depreciation are eliminated from the accounts and the resulting gain or loss is reflected in other (expense) income in the results of operations.
Acquisition-Related Intangible Assets and Goodwill
Acquisition-related intangible assets consist of customer relationships, developed technology, trade names and non-compete agreements. These assets are determined to have either finite or indefinite lives. For finite-lived intangible assets amortization is straight-line over the estimated useful lives of such assets, which are generally
two
years to
twelve
years. Straight-line amortization is used because the Company cannot reliably determine a discernible pattern over which the economic benefits would be realized. The Company does not have any indefinite-lived intangible assets. Intangible assets are tested for impairment when events and circumstances indicate there is an impairment. The impairment test involves comparing the sum of undiscounted cash flows to the carrying value as of the measurement date. Impairment occurs when the carrying value of the assets exceeds the sum of undiscounted cash flows. Impairment is then measured as the difference between the carrying value and fair value determined using a discounted cash flow method. In estimating the fair value using a discounted cash flow method, the Company uses assumptions that include forecast revenues, gross margins, operating profit margins, growth rates and long-term discount rates, all of which require significant judgment by management. Changes to these assumptions could affect the estimated fair value of the intangible asset and could result in an impairment charge in future.
The Company performs its annual and interim goodwill impairment tests when it is more likely than not that a goodwill impairment exists. The Company has concluded it has one reporting unit and the annual measurement date is October 31, 2016.
Long-Lived Assets
The Company periodically evaluates its long-lived assets for events and circumstances that indicate a potential impairment. A long-lived asset is assessed for impairment when the undiscounted expected future cash flows derived from that asset are less than its carrying value. The cash flows used for this analysis take into consideration a number of factors including past operating results, budgets and economic projections, market trends and product development cycles. The amount of any impairment would be equal to the difference between the estimated fair value of the asset, based on a discounted cash flow analysis, and its carrying value.
Advertising Expenses
All advertising costs are expensed as incurred and are classified as marketing and selling expenses. Advertising expenses were not material in the periods presented.
Research and Development Costs
Research and development costs are expensed as incurred. Development costs for software to be sold that are incurred subsequent to the establishment of technological feasibility, but prior to the general release of the product, are capitalized. Upon general release, these costs are amortized using the straight-line method over the expected life of the related products, generally
12
to
36
months. The straight-line method generally results in approximately the same amount of expense as that calculated using the ratio that current period gross product revenues bear to total anticipated gross product revenues. The Company periodically evaluates the assets, considering a number of business and economic factors, to determine if an impairment exists. No amounts have been capitalized during 2016, 2015, and 2014 as the costs incurred subsequent to the establishment of technological feasibility have not been material.
Income Taxes
The Company accounts for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The Company records deferred tax assets and liabilities based on the net tax effects of tax credits, operating loss carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes compared to the amounts used for income tax purposes. Deferred tax assets are regularly reviewed for recoverability with consideration for such factors as historical losses, projected future taxable income and the expected timing of the reversals of
existing temporary differences. The Company is required to record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company accounts for uncertainty in income taxes recognized in its financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon examination by the taxing authorities, based on the technical merits of the position. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves (“unrecognized tax benefits”) that are considered appropriate, as well as the related net interest and penalties.
Accounting for Stock-Based Compensation
The Company’s stock-based employee compensation plans allow the Company to grant stock awards, options, or other equity-based instruments, or a combination thereof, as part of its overall compensation strategy. For stock-based awards granted, the Company records stock-based compensation expense based on the grant date fair value over the requisite service periods for the individual awards, which generally equal the vesting periods. The vesting of stock-based award grants may be based on time, performance conditions, market conditions, or a combination of performance and market conditions. The Company early adopted ASU No. 2016-09 during the second quarter of 2016 and made the company-wide accounting policy election to account for forfeitures when they occur.
Product Warranties
The Company provides warranties on externally sourced and internally developed hardware. The warranty period for all of the Company’s products is generally
90 days to one year
, but can extend up to
5 years
depending on the manufacturer’s warranty or local law. For internally developed hardware and in cases where the warranty granted to customers for externally sourced hardware is greater than that provided by the manufacturer, the Company records an accrual for the related liability based on historical trends and actual material and labor costs. At the end of each quarter, the Company reevaluates its estimates to assess the adequacy of the recorded warranty liabilities and adjusts the accrued amounts accordingly.
Computation of Net Income Per Share
Net income per share is presented for both basic earnings per share (“Basic EPS”) and diluted earnings per share (“Diluted EPS”). Basic EPS is based on the weighted-average number of common shares outstanding during the period, excluding non-vested restricted stock held by employees. Diluted EPS is based on the weighted-average number of common and potential common shares outstanding during the period. Potential common shares result from the assumed exercise of outstanding stock options and non-vested restricted stock and restricted stock units, the proceeds and remaining unrecorded compensation expense of which are then assumed to have been used to repurchase outstanding common stock using the treasury stock method. For periods when the Company reports a loss, all potential common stock is considered anti-dilutive. For periods when the Company reports net income, potential common shares with combined purchase prices and unamortized compensation costs in excess of the Company’s average common stock fair value for the related period or that are contingently issuable are considered anti-dilutive. The Company issued the Notes in 2015, and the Company applied the treasury stock method in measuring the dilutive impact of those potential common shares to be issued.
Accounting for Restructuring Plans
The Company records facility-related and contract termination restructuring charges in accordance with ASC Topic 420,
Liabilities: Exit or Disposal Cost Obligations
. Based on the Company’s policies for the calculation and payment of severance benefits, the Company accounts for employee-related restructuring charges as an ongoing benefit arrangement in accordance with ASC Topic 712,
Compensation - Nonretirement Postemployment Benefits
. The Company recognizes facility-related restructuring charges upon exiting all or a portion of a leased facility and meeting cease-use and other requirements. The amount of restructuring charges is based on the fair value of the lease obligation for the abandoned space, which includes a sublease assumption that could be reasonably obtained. Restructuring charges and accruals require significant estimates and assumptions, including sub-lease income assumptions. These estimates and assumptions are monitored on at least a quarterly basis for changes
in circumstances and any corresponding adjustments to the accrual are recorded in the Company’s statement of operations in the period when such changes are known.
Related Party Transactions
From time to time the Company enters into arrangements with parties which may be affiliated with the Company, executive officers and members of the Company’s Board of Directors. These transactions are primarily comprised of sales transactions in the normal course of business and are immaterial to the financial statements for all periods presented.
Recently Adopted Accounting Pronouncement
On March 30, 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-09,
Compensation-Stock Compensation (Topic 718)
. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU No. 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The Company early adopted ASU No. 2016-09 during the second quarter of 2016 on a modified retrospective basis for the income statement impact of forfeitures. The adoption of ASU No. 2016-09 had no impact to the Company’s income taxes and consolidated statements of cash flows. Accordingly, a cumulative-effect adjustment recorded to the beginning retained earnings as of January 1, 2016 for the impact of forfeitures is immaterial.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements - Going Concern (Topic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
. ASU No. 2014-15 provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The Company adopted ASC 205-40 in the fourth quarter of 2016, and the adoption did not have a significant impact on the financial statements or related disclosures.
Recent Accounting Pronouncements to be Adopted
In May, 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606).
ASU No. 2014-09 is the final updated standard on revenue recognition. The standard supersedes the most current revenue recognition guidance, including industry-specific guidance. The new revenue recognition guidance becomes effective for the Company on January 1, 2018, and early adoption as of January 1, 2017 is permitted.
Subsequently, the FASB has issued the following standards related to ASU No. 2014-09: ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations;
ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
; and ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
. The Company must adopt ASU No. 2016-08, ASU No. 2016-10 and ASU No. 2016-12 with ASU No. 2014-09 (collectively, the “new revenue standards”).
Entities have the option of using either a full retrospective or a modified approach to adopt the new revenue standards. The Company expects to elect the modified transition method and, while the Company is still in the early stages of evaluating the impact of this new accounting standard, it expects the impact will be significant. The adoption will result in a significant cumulative reduction in deferred revenue as of January 1, 2018 because the Company will no longer require VSOE of fair value to recognize software deliverables with Implied Maintenance Release PCS upon delivery. Upon adoption of ASC 606, the Company expects to recognize a greater proportion of revenue upon delivery of its products, whereas some of the Company’s current product sales are initially recorded in deferred revenue and recognized over a long period of time. Accordingly, the Company’s operating results may become more volatile as a result of the adoption.
On February 25, 2016, the FASB issued ASU No. 2016-02,
Leases (Topic (842)
. The guidance requires an entity to recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and lease liability. The new guidance becomes effective for the Company on January 1, 2019, and early adoption is permitted upon issuance. The Company is evaluating the potential impact of adopting this standard on its financial statements, as well as the timing of its adoption of the standard.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flow (Topic 230)
. The guidance reduces diversity in how certain cash receipts and cash payments are presented and classified in the Statements of Cash Flows. Certain of ASU No. 2016-15 requirements are as follows: 1) cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities, 2) contingent consideration payments made soon after a business combination should be classified as cash outflows for investing activities and cash payment made thereafter should be classified as cash outflows for financing up to the amount of the contingent consideration liability recognized at the acquisition date with any excess classified as operating activities, 3) cash proceeds from the settlement of insurance claims should be classified on the basis of the nature of the loss, 4) cash proceeds from the settlement of Corporate-Owned Life Insurance (COLI) Policies should be classified as cash inflows from investing activities and cash payments for premiums on COLI policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities, and 5) cash paid to a tax authority by an employer when withholding shares from an employee's award for tax-withholding purposes should be classified as cash outflows for financing activities. The new guidance becomes effective for the Company on January 1, 2018, and early adoption is permitted upon issuance. The Company is currently evaluating the potential impact of adopting this standard on its financial statements, as well as the timing of its adoption of the standard.
In October 2016, the FASB issued ASU No. 2016-16,
Income Taxes (Topic 740)
. The guidance requires companies to recognize the income tax effects of intercompany sales and transfers of assets, other than inventory, in the income statement as income tax expense (or benefit) in the period in which the transfer occurs. The new guidance becomes effective for the Company on January 1, 2018, and early adoption is permitted upon issuance. The Company is currently evaluating the impact of the adoption of ASU No. 2016-16 on its financial statements, as well as timing of its adoption of the standard.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash.
The guidance requires companies to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, companies will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet is required. The new guidance becomes effective for the Company on January 1, 2018, and early adoption is permitted upon issuance. The Company is currently evaluating the potential impact of adopting this standard on its financial statements, as well as the timing of its adoption of the standard.
In January 2017, the FASB issued guidance to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The revised guidance will be applied prospectively, and is effective for calendar year-end SEC filers in 2020. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is evaluating the potential impact of adopting this standard on its financial statements, as well as timing of its adoption of the standard.
On June 23, 2015, the Company completed the acquisition of Orad Hi-Tech Systems Ltd. (“Orad”). Orad provides 3D real-time graphics, video servers and related asset management solutions. The acquisition adds applications to Avid’s Studio Suite, which the Company intends to connect to the Avid MediaCentral Platform.
In allocating the total purchase consideration of
$73.4 million
for Orad based on the fair value as of June 23, 2015, the Company recorded
$32.6 million
of goodwill,
$37.2 million
of identifiable intangibles assets, and
$3.6 million
to other net assets. Intangible assets acquired included core and completed technology, customer relationships and trade name. Proforma information is not presented as the impact to the Consolidated Financial Statements is not material.
Net income per common share is presented for both basic income per share (“Basic EPS”) and diluted income per share (“Diluted EPS”). Basic EPS is based on the weighted-average number of common shares outstanding during the period. Diluted EPS is based on the weighted-average number of common shares and common shares equivalents outstanding during the period.
The potential common shares that were considered anti-dilutive securities were excluded from the diluted earnings per share calculations for the relevant periods either because the sum of the exercise price per share and the unrecognized compensation cost per share was greater than the average market price of the Company’s common stock for the relevant period, or because they were considered contingently issuable. The contingently issuable potential common shares result from certain stock options and restricted stock units granted to the Company’s employees that vest based on performance conditions, market conditions, or a combination of performance and market conditions.
The following table sets forth (in thousands) potential common shares that were considered anti-dilutive securities.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Options
|
3,670
|
|
|
1,901
|
|
|
4,748
|
|
Non-vested restricted stock units
|
729
|
|
|
470
|
|
|
118
|
|
Anti-dilutive potential common shares
|
4,399
|
|
|
2,371
|
|
|
4,866
|
|
On June 15, 2015, the Company issued
$125.0 million
aggregate principal amount of its 2.00% Convertible Senior Notes due 2020 (the “Notes”). The Notes are convertible into cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election, based on an initial conversion rate, subject to adjustment. In connection with the offering of the Notes, the Company entered into a capped call transaction with a third party (the “Capped Call”) (see Note Q, Long-Term Debt and Credit Agreement). The Company uses the treasury stock method in computing the dilutive impact of the Notes. The Notes are convertible into shares but the Company’s stock price was less than the conversion price at
December 31, 2016
, and therefore, the Notes are excluded from diluted income per share. The Capped Call is not reflected in diluted net income per share as it will always be anti-dilutive.
E. FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company measures deferred compensation investments on a recurring basis. At
December 31, 2016
and
2015
, the Company’s deferred compensation investments were classified as either Level 1 or Level 2 in the fair value hierarchy. Assets valued using quoted market prices in active markets and classified as Level 1 are money market and mutual funds. Assets valued based on other observable inputs and classified as Level 2 are insurance contracts.
The following tables summarize the Company’s deferred compensation investments measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
December 31,
2016
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Financial Assets:
|
|
|
|
|
|
|
|
Deferred compensation investments
|
$
|
2,035
|
|
|
$
|
493
|
|
|
$
|
1,542
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
December 31, 2015
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Financial Assets:
|
|
|
|
|
|
|
|
Deferred compensation investments
|
$
|
3,617
|
|
|
$
|
572
|
|
|
$
|
3,045
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
14
|
|
|
$
|
—
|
|
Financial Instruments Not Recorded at Fair Value
The carrying amounts of the Company’s other financial assets and liabilities including cash, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values because of the relatively short period of time between their origination and their expected realization or settlement. At
December 31, 2016
, the net carrying amount of the Notes is
$101.6 million
, and the fair value of the Notes is approximately
$83.4 million
based on open market trading activity, which constitutes a Level 1 input in the fair value hierarchy.
F. ACCOUNTS RECEIVABLE
Accounts receivable, net of allowances, consisted of the following at
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Accounts receivable
|
$
|
52,138
|
|
|
$
|
68,033
|
|
Less:
|
|
|
|
Allowance for doubtful accounts
|
(757
|
)
|
|
(643
|
)
|
Allowance for sales returns and rebates
|
(7,861
|
)
|
|
(8,583
|
)
|
Total
|
$
|
43,520
|
|
|
$
|
58,807
|
|
G. INVENTORIES
Inventories consisted of the following at
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Raw materials
|
$
|
10,481
|
|
|
$
|
9,594
|
|
Work in process
|
291
|
|
|
256
|
|
Finished goods
|
39,929
|
|
|
38,223
|
|
Total
|
$
|
50,701
|
|
|
$
|
48,073
|
|
At
December 31, 2016
and
2015
, finished goods inventory included
$8.6 million
and
$5.3 million
, respectively, associated with products shipped to customers or deferred labor costs for arrangements where revenue recognition had not yet commenced.
H. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Computer and video equipment and software
|
|
$
|
120,853
|
|
|
$
|
116,751
|
|
Manufacturing tooling and testbeds
|
|
3,567
|
|
|
3,044
|
|
Office equipment
|
|
4,958
|
|
|
4,942
|
|
Furniture, fixtures and other
|
|
10,691
|
|
|
9,621
|
|
Leasehold improvements
|
|
34,780
|
|
|
33,744
|
|
|
|
174,849
|
|
|
168,102
|
|
Less: Accumulated depreciation and amortization
|
|
144,703
|
|
|
132,621
|
|
Total
|
|
$
|
30,146
|
|
|
$
|
35,481
|
|
The Company capitalizes certain development costs incurred in connection with its internal use software. For the year ended
December 31, 2016
, the Company capitalized
$1.3 million
of contract labor and internal labor costs related to internal use software, and recorded the capitalized costs in computer and video equipment and software. There were
$5.1 million
and
3.4 million
of contract labor and internal labor costs capitalized for the years ended
December 31, 2015
and
December 31, 2014
, respectively. Internal use software is amortized on a straight line basis over its estimated useful life of
three
years, and the Company recorded
$3.0 million
,
$1.8 million
and
$0.5 million
of amortization expense during
2016
,
2015
and
2014
, respectively.
Depreciation and amortization expense related to property and equipment was
$15.2 million
,
$13.7 million
and
$16.1 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
|
|
I.
|
INTANGIBLE ASSETS AND GOODWILL
|
Intangible Assets
Amortizing identifiable intangible assets related to the Company’s acquisitions or capitalized costs of internally developed or externally purchased software that form the basis for the Company’s products consisted of the following at
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Completed technologies and patents
|
$
|
57,994
|
|
|
$
|
(38,657
|
)
|
|
$
|
19,337
|
|
|
$
|
58,032
|
|
|
$
|
(30,902
|
)
|
|
$
|
27,130
|
|
Customer relationships
|
54,597
|
|
|
(51,002
|
)
|
|
3,595
|
|
|
54,656
|
|
|
(48,767
|
)
|
|
5,889
|
|
Trade names
|
1,346
|
|
|
(1,346
|
)
|
|
—
|
|
|
1,346
|
|
|
(1,146
|
)
|
|
200
|
|
Capitalized software costs
|
4,911
|
|
|
(4,911
|
)
|
|
—
|
|
|
4,911
|
|
|
(4,911
|
)
|
|
—
|
|
Total
|
$
|
118,848
|
|
|
$
|
(95,916
|
)
|
|
$
|
22,932
|
|
|
$
|
118,945
|
|
|
$
|
(85,726
|
)
|
|
$
|
33,219
|
|
Amortization expense related to intangible assets in the aggregate was
$10.3 million
,
$6.4 million
and
$1.8 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. The Company expects amortization of intangible assets to be approximately
$9.3 million
in
2017
,
$9.3 million
in
2018
,
$4.3 million
in
2019
.
Goodwill
The acquisition of Orad resulted in goodwill of
$32.6 million
in 2015. As of October 31, 2016, the Company’s goodwill impairment measurement date, the Company concluded that it was not more likely than not that a goodwill impairment existed.
|
|
J.
|
OTHER LONG-TERM LIABILITIES
|
Other long-term liabilities consisted of the following at
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Deferred rent
|
$
|
5,458
|
|
|
$
|
6,755
|
|
Accrued restructuring
|
1,256
|
|
|
647
|
|
Deferred compensation
|
5,464
|
|
|
7,309
|
|
Total
|
$
|
12,178
|
|
|
$
|
14,711
|
|
K. COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company leases its office space and certain equipment under non-cancelable operating leases. The future minimum lease commitments under these non-cancelable leases at
December 31, 2016
were as follows (in thousands
)
:
|
|
|
|
|
Year Ending December 31,
|
|
2017
|
$
|
15,827
|
|
2018
|
12,678
|
|
2019
|
11,355
|
|
2020
|
7,610
|
|
2021
|
4,525
|
|
Thereafter
|
2,659
|
|
Total
|
$
|
54,654
|
|
Included in the operating lease commitments above are obligations under leases for which the Company has vacated the underlying facilities as part of various restructuring plans. These leases expire at various dates through 2021 and represent an aggregate obligation of
$10.1 million
. The Company has restructuring accruals of
$3.1 million
at
December 31, 2016
, which represents the difference between this aggregate future obligation and future sublease income under actual or estimated potential sublease agreements, on a net present value basis, as well as other facilities-related obligations. The Company received
$0.6 million
,
$0.6 million
and
$0.7 million
of sublease income during the years ended
December 31, 2016
,
2015
and
2014
, respectively.
The Company’s leases for corporate office space in Burlington, Massachusetts, which expire in May 2020, contain renewal options to extend the respective terms of each lease for up to
two
additional five-year periods.
The accompanying consolidated results of operations reflect rent expense on a straight-line basis over the term of the leases. Total expense under operating leases was
$14.1 million
,
$14.0 million
and
$15.0 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
Other Commitments
The Company has letters of credit that are used as security deposits in connection with the Company’s leased Burlington, Massachusetts office space. In the event of default on the underlying leases, the landlords would, at
December 31, 2016
, be
eligible to draw against the letters of credit to a maximum of
$1.3 million
in the aggregate. The letters of credit are subject to aggregate reductions provided the Company is not in default under the underlying leases and meets certain financial performance conditions. In no case will the letters of credit amounts for the Burlington leases be reduced to below
$1.2 million
in the aggregate throughout the lease periods, all of which extend to May 2020.
The Company also has letters of credit in connection with security deposits for other facility leases totaling
$1.0 million
in the aggregate, as well as letters of credit totaling
$1.1 million
that otherwise support its ongoing operations. These letters of credit have various terms and expire during
2017
and beyond, while some of the letters of credit may automatically renew based on the terms of the underlying agreements.
Purchase Commitments and Sole-Source Suppliers
At
December 31, 2016
, the Company had entered into purchase commitments for certain inventory and other goods used in its normal operations. The purchase commitments covered by these agreements are for a period of less than
one
year and in the aggregate total
$19.5 million
.
The Company depends on sole-source suppliers for certain key hardware components of its products. Although the Company has procedures in place to mitigate the risks associated with its sole-sourced suppliers, the Company cannot be certain that it will be able to obtain sole-sourced components or finished goods from alternative suppliers or that it will be able to do so on commercially reasonable terms without a material impact on its results of operations or financial position. The Company procures product components and builds inventory based on forecasts of product life cycle and customer demand. If the Company is unable to provide accurate forecasts or manage inventory levels in response to shifts in customer demand, the Company may have insufficient, excess or obsolete product inventory.
Contingencies
The Company’s industry is characterized by the existence of a large number of patents and frequent claims and litigation regarding patent and other intellectual property rights. In addition to the legal proceedings described above, the Company is involved in legal proceedings from time to time arising from the normal course of business activities, including claims of alleged infringement of intellectual property rights and contractual, commercial, employee relations, product or service performance, or other matters. The Company does not believe these matters will have a material adverse effect on the Company’s financial position or results of operations. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Therefore, the Company’s financial position or results of operations may be negatively affected by the unfavorable resolution of one or more of these proceedings for the period in which a matter is resolved. The Company’s results could be materially adversely affected if the Company is accused of, or found to be, infringing third parties’ intellectual property rights.
In November 2016, a purported securities class action lawsuit was filed in the U.S. District Court for the District of Massachusetts (Mohanty v. Avid Technology, Inc. et al., No. 16-cv-12336) against the Company and certain of its executive officers seeking unspecified damages and other relief on behalf of a purported class of purchasers of the Company’s common stock between August 4, 2016 and November 9, 2016, inclusive. The complaint purported to state a claim for violation of federal securities laws as a result of alleged violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The complaint’s allegations relate generally to the Company’s disclosure surrounding the level of implementation of the Company’s Avid NEXIS solution product offerings. On February 7, 2017, the Court appointed a lead plaintiff and counsel in the matter. The matter is not yet scheduled for trial.
The Company considers all claims on a quarterly basis and based on known facts assesses whether potential losses are considered reasonably possible, probable and estimable. Based upon this assessment, the Company then evaluates disclosure requirements and whether to accrue for such claims in its consolidated financial statements.
The Company records a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.
At
December 31, 2016
and as of the date of filing of these consolidated financial statements, the Company believes that, other than as set forth in this note, no provision for liability nor disclosure is required related to any claims because: (a) there is no reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial.
Additionally, the Company provides indemnification to certain customers for losses incurred in connection with intellectual property infringement claims brought by third parties with respect to the Company’s products. These indemnification provisions generally offer perpetual coverage for infringement claims based upon the products covered by the agreement and the maximum potential amount of future payments the Company could be required to make under these indemnification provisions is theoretically unlimited. To date, the Company has not incurred material costs related to these indemnification provisions; accordingly, the Company believes the estimated fair value of these indemnification provisions is immaterial. Further, certain of the Company’s arrangements with customers include clauses whereby the Company may be subject to penalties for failure to meet certain performance obligations; however, the Company has not recorded any related material penalties to date.
The Company provides warranties on externally sourced and internally developed hardware. For internally developed hardware and in cases where the warranty granted to customers for externally sourced hardware is greater than that provided by the manufacturer, the Company records an accrual for the related liability based on historical trends and actual material and labor costs. The following table sets forth the activity in the product warranty accrual account for the years ended
December 31, 2016
,
2015
and
2014
(in thousands):
|
|
|
|
|
Accrual balance at January 1, 2014
|
$
|
3,501
|
|
Accruals for product warranties
|
3,985
|
|
Cost of warranty claims
|
(4,694
|
)
|
Accrual balance at December 31, 2014
|
2,792
|
|
Accruals for product warranties
|
3,025
|
|
Cost of warranty claims
|
(3,583
|
)
|
Accrual balance at December 31, 2015
|
2,234
|
|
Accruals for product warranties
|
2,822
|
|
Cost of warranty claims
|
(2,538
|
)
|
Accrual balance at December 31, 2016
|
$
|
2,518
|
|
Preferred Stock
The Company has authorized up to
one million
shares of preferred stock,
$0.01
par value per share, for issuance. Each series of preferred stock shall have such rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as may be determined by the Company’s board of directors (the “Board”).
Stock Incentive Plans
In November 2014, the Company registered an aggregate of
3,750,000
of its shares of
$0.01
par value per share common stock, which have been authorized and reserved for issuance under the Avid Technology, Inc. 2014 Stock Incentive Plan (the “Plan”). The Plan was originally adopted by the Company’s Board of Directors on September 14, 2014 and approved by the Company’s stockholders on October 29, 2014. In connection with the approval of the Plan the Company’s Amended and Restated 2005 Stock Incentive Plan has been closed; no additional awards may be granted under that Plan. Shares available for issuance under the Company’s 2014 Stock Incentive Plan totaled
1,089,131
at
December 31, 2016
.
Under the Plan, the Company may grant stock awards or options to purchase the Company’s common stock to employees, officers, directors and consultants. The exercise price for options generally must be no less than market price on the date of grant. Awards may be performance-based where vesting or exercisability is conditioned on achieving performance objectives, time-
based or a combination of both. Current option grants become exercisable over various periods, typically
three
to
four
years for employees and
one
year for non-employee directors, and have a maximum term of
seven
to
ten
years. Restricted stock and restricted stock unit awards with time-based vesting typically vest over
three
to
four
years for employees and
one
year for non-employee directors.
In November 2014, the Compensation Committee of the Board of Directors modified certain market and performance based options and restricted stock units held by seven employees of the Company that were originally granted between 2009 and 2013. The modifications included (i) a conversion of vesting conditions from market and performance bases to a
four
year service period, including providing credit for service already rendered prior to the modification and (ii) an acceleration clause that allows vesting of between
50%
and
100%
of unvested awards if certain 2014 Adjusted EBITDA targets were achieved. In total, options to purchase
933,750
shares and
31,250
restricted stock units were modified, which resulted in incremental compensation expense of
$4.3 million
,
$2.3 million
of which was recognized upon modification,
$1.5 million
of which was recognized in the quarter ended December 31, 2014 upon achieving specific 2014 Adjusted EBITDA targets and the remaining
$0.5 million
was recognized in 2015.
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option grants with time-based vesting. The Black-Scholes model relies on a number of key assumptions to calculate estimated fair value. The assumed dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present expectation to pay cash dividends and the Company’s current Financing Agreement precludes the Company from paying dividends. The expected volatility is now based on actual historic stock volatility for periods equivalent to the expected term of the award. The assumed risk-free interest rate is the U.S. Treasury security rate with a term equal to the expected life of the option. The assumed expected life is based on company-specific historical experience considering the exercise behavior of past grants and models the pattern of aggregate exercises.
The fair value of restricted stock and restricted stock unit awards with time-based vesting is based on the intrinsic value of the awards at the date of grant, as the awards have a purchase price of
$0.01
per share.
The Company also issues stock option grants or restricted stock unit awards with vesting based on market conditions, specifically the Company’s stock price and performance conditions, generally using adjusted EBITDA. The fair values and derived service periods for all grants that include vesting based on market conditions are estimated using the Monte Carlo valuation method. For stock option grants that include vesting based on performance conditions, the fair values are estimated using the Black-Scholes option pricing model. For restricted stock unit awards that include vesting based on performance conditions, the fair values are estimated based on the intrinsic values of the awards at the date of grant, as the awards have a purchase price of
$0.01
per share.
Information with respect to options granted under all stock option plans for the year ended
December 31, 2016
was as follows:
|
|
|
|
|
|
|
|
Total Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
Aggregate
Intrinsic
Value
(in thousands)
|
Options outstanding at January 1, 2016
|
4,345,334
|
|
$10.68
|
|
|
Granted
|
—
|
|
$—
|
|
|
Exercised
|
(787,867
|
)
|
$7.67
|
|
|
Forfeited or canceled
|
(709,965
|
)
|
$15.06
|
|
|
Options outstanding at December 31, 2016
|
2,847,502
|
|
$10.43
|
2.85
|
$—
|
Options vested at December 31, 2016 or expected to vest
|
2,847,502
|
|
$10.43
|
2.85
|
$—
|
Options exercisable at December 31, 2016
|
2,707,454
|
|
$10.57
|
2.78
|
$—
|
The following table sets forth the weighted-average key assumptions and fair value results for stock options granted during the years ended
December 31, 2015
and
2014
. No options were granted during the year ended December 31, 2016.
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2015
|
|
2014
|
Expected dividend yield
|
|
0.00%
|
|
0.00%
|
Risk-free interest rate
|
|
1.07%
|
|
1.24%
|
Expected volatility
|
|
52.0%
|
|
50.3%
|
Expected life (in years)
|
|
4.48
|
|
4.16
|
Weighted-average fair value of options granted (per share)
|
|
$3.91
|
|
$3.03
|
The cash received from stock options exercised during the years ended
December 31, 2016
and
2015
was
$5.6 million
and
$5.0 million
, respectively. During the year ended
December 31, 2014
, the cash received from stock options exercised was not material. During the years ended
December 31, 2016
,
2015
and
2014
, the aggregate intrinsic value of stock options exercised was not material.
Information with respect to non-vested restricted stock units for the year ended
December 31, 2016
was as follows:
|
|
|
|
|
|
|
|
Non-Vested Restricted Stock Units
|
|
Total Shares
|
Weighted-
Average
Grant-Date
Fair Value
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
Aggregate
Intrinsic
Value
(in thousands)
|
Non-vested at January 1, 2016
|
1,266,008
|
|
$9.97
|
|
|
Granted
|
1,880,411
|
|
$6.25
|
|
|
Vested
|
(465,392
|
)
|
$11.74
|
|
|
Forfeited
|
(525,246
|
)
|
$7.93
|
|
|
Non-vested at December 31, 2016
|
2,155,781
|
|
$6.85
|
1.13
|
$9,464
|
Expected to vest
|
1,520,098
|
|
$6.70
|
1.13
|
$6,673
|
The weighted-average grant date fair value of restricted stock units granted during the years ended
December 31, 2016
,
2015
and
2014
was
$6.25
,
$10.31
and
$10.19
, respectively. The total fair value of restricted stock units vested during the years ended
December 31, 2016
,
2015
, and
2014
was
$5.5 million
,
$4.2 million
, and
$2.5 million
, respectively.
Employee Stock Purchase Plan
The Company’s Second Amended and Restated 1996 Employee Stock Purchase Plan (the “ESPP”) offers the Company’s shares for purchase at a price equal to 85% of the closing price on the applicable offering period termination date. Shares issued under the ESPP are considered compensatory. Accordingly, the Company is required to measure fair value and record compensation expense for share purchase rights granted under the ESPP. In July 2015, the Board of Directors approved an amendment to the plan to change the subscription period from three to six months and accordingly to adjust the payroll cap to $5,000 per plan period.
A total of
214,271
shares remained available for issuance under the ESPP at
December 31, 2016
.
The Company uses the Black-Scholes option pricing model to calculate the fair value of shares issued under the ESPP. The Black-Scholes model relies on a number of key assumptions to calculate estimated fair values. The following table sets forth the weighted-average key assumptions and fair value results for shares issued under the ESPP during the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Expected dividend yield
|
0.00%
|
|
0.00%
|
|
0.00%
|
Risk-free interest rate
|
0.40%
|
|
0.03%
|
|
0.09%
|
Expected volatility
|
69.0%
|
|
37.0%
|
|
35.0%
|
Expected life (in years)
|
0.49
|
|
0.24
|
|
0.17
|
Weighted-average fair value of shares issued (per share)
|
$1.20
|
|
$2.15
|
|
$2.02
|
The following table sets forth the quantities and average prices of shares issued under the ESPP for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Shares issued under the ESPP
|
129,342
|
|
98,300
|
|
—
|
Average price of shares issued
|
$4.35
|
|
$10.17
|
|
$—
|
The Company did not realize a material tax benefit from the tax deductions for stock option exercises, vested restricted stock units and shares issued under the ESPP during the years ended
December 31, 2016
,
2015
or
2014
.
Stock-Based Compensation Expense
Stock-based compensation was included in the following captions in the Company’s consolidated statements of operations for the years ended
December 31, 2016
,
2015
and
2014
, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Cost of products revenues
|
$
|
60
|
|
|
$
|
199
|
|
|
$
|
397
|
|
Cost of services revenues
|
381
|
|
|
624
|
|
|
279
|
|
Research and development expenses
|
376
|
|
|
461
|
|
|
502
|
|
Marketing and selling expenses
|
1,958
|
|
|
1,785
|
|
|
3,658
|
|
General and administrative expenses
|
5,141
|
|
|
6,445
|
|
|
6,677
|
|
Total
|
$
|
7,916
|
|
|
$
|
9,514
|
|
|
$
|
11,513
|
|
At
December 31, 2016
, there was
$8.4 million
of total unrecognized compensation cost related to non-vested stock-based compensation awards granted under the Company’s stock-based compensation plans. The Company expects this amount to be amortized approximately as follows:
$4.5 million
in
2017
,
$2.8 million
in
2018
and
$1.1 million
in
2019
. At
December 31, 2016
, the weighted-average recognition period of the unrecognized compensation cost was approximately
1.2 years
.
|
|
M.
|
EMPLOYEE BENEFIT PLANS
|
Employee Benefit Plans
The Company has a Section 401(k) plan that covers substantially all U.S. employees. The 401(k) plan allows employees to make contributions up to a specified percentage of their compensation. The Company may, upon resolution by the Company’s board of directors, make discretionary contributions to the plan. The Company’s contributions to the plan totaled
$1.9 million
,
$2.3 million
and
$2.2 million
in
2016
,
2015
and
2014
, respectively.
In addition, the Company has various retirement and post-employment plans covering certain international employees. Certain of the plans allow the Company to match employee contributions up to a specified percentage as defined by the plans. The Company’s contributions to these plans totaled
$2.0 million
,
$2.2 million
and
$2.0 million
in
2016
,
2015
and
2014
, respectively.
Deferred Compensation Plans
The Company maintains a nonqualified deferred compensation plan (the “Deferred Plan”). The Deferred Plan covers senior management and members of the Board. In November 2013, the Board determined to indefinitely suspend the plan, and not offer participants the opportunity to participate in the Deferred Plan as of 2014. The benefits payable under the Deferred Plan represent an unfunded and unsecured contractual obligation of the Company to pay the value of the deferred compensation in the future, adjusted to reflect deemed investment performance. Payouts are generally made upon termination of employment with the Company. The assets of the deferred plan, as well as the corresponding obligations, were approximately
$0.5 million
and
$0.6 million
at
December 31, 2016
and
2015
, respectively, and were recorded in “other current assets” and “accrued compensation and benefits” at those dates.
In connection with the acquisition of a business in 2010, the Company assumed the assets and liabilities of a deferred compensation arrangement for a single individual in Germany. The arrangement represents a contractual obligation of the Company to pay a fixed euro amount for a period specified in the contract. In connection with the acquisition of Orad, the Company assumed the assets and liabilities of a deferred compensation arrangement for employees in Israel. The Company’s assets and liabilities related to the arrangements consisted of assets recorded in “other long-term assets” of
$1.5 million
at
December 31, 2016
and
$3.0 million
at
December 31, 2015
, representing the value of related insurance contracts and investments, and liabilities recorded as “long-term liabilities” of
$5.4 million
at
December 31, 2016
and
$7.3 million
at
December 31, 2015
, representing the fair value of the estimated benefits to be paid under the arrangements.
Income from before income taxes and the components of the income tax provision consisted of the following for the years ended
December 31, 2016
,
2015
and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Income (loss) from operations before income taxes:
|
|
|
|
|
|
United States
|
$
|
12,402
|
|
|
$
|
(23,977
|
)
|
|
$
|
(6,864
|
)
|
Foreign
|
32,942
|
|
|
24,542
|
|
|
23,780
|
|
Total income from operations before income taxes
|
$
|
45,344
|
|
|
$
|
565
|
|
|
$
|
16,916
|
|
(Benefit from) provision for income taxes:
|
|
|
|
|
|
Current tax expense (benefit):
|
|
|
|
|
|
Federal
|
$
|
102
|
|
|
$
|
115
|
|
|
$
|
14
|
|
State
|
32
|
|
|
3
|
|
|
83
|
|
Foreign benefit of net operating losses
|
(1,247
|
)
|
|
(180
|
)
|
|
(180
|
)
|
Other foreign
|
(48
|
)
|
|
3,734
|
|
|
2,217
|
|
Total current tax (benefit) expense
|
(1,161
|
)
|
|
3,672
|
|
|
2,134
|
|
Deferred tax (benefit) expense:
|
|
|
|
|
|
Federal benefit related to Note issuance
|
—
|
|
|
(6,493
|
)
|
|
—
|
|
Federal
|
96
|
|
|
—
|
|
|
—
|
|
Other foreign
|
(1,810
|
)
|
|
906
|
|
|
54
|
|
Total deferred tax (benefit) expense
|
(1,714
|
)
|
|
(5,587
|
)
|
|
54
|
|
Total (benefit from) provision for income taxes
|
$
|
(2,875
|
)
|
|
$
|
(1,915
|
)
|
|
$
|
2,188
|
|
Net deferred tax assets (liabilities) consisted of the following at
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
Tax credit and net operating loss carryforwards
|
$
|
369,847
|
|
|
$
|
318,471
|
|
Allowances for bad debts
|
431
|
|
|
372
|
|
Difference in accounting for:
|
|
|
|
Revenues
|
35,856
|
|
|
54,475
|
|
Costs and expenses
|
26,537
|
|
|
34,116
|
|
Inventories
|
9,118
|
|
|
7,576
|
|
Acquired intangible assets
|
6,112
|
|
|
9,799
|
|
Gross deferred tax assets
|
447,901
|
|
|
424,809
|
|
Valuation allowance
|
(432,631
|
)
|
|
(406,123
|
)
|
Deferred tax assets after valuation allowance
|
15,270
|
|
|
18,686
|
|
Deferred tax liabilities:
|
|
|
|
Difference in accounting for:
|
|
|
|
Costs and expenses
|
(6,457
|
)
|
|
(5,654
|
)
|
Acquired intangible assets
|
(3,669
|
)
|
|
(8,554
|
)
|
Basis difference convertible notes
|
(4,812
|
)
|
|
(5,910
|
)
|
Gross deferred tax liabilities
|
(14,938
|
)
|
|
(20,118
|
)
|
Net deferred tax assets (liabilities)
|
$
|
332
|
|
|
$
|
(1,432
|
)
|
Recorded as:
|
|
|
|
Long-term deferred tax assets, net
|
1,245
|
|
|
2,011
|
|
Long-term deferred tax liabilities, net
|
(913
|
)
|
|
(3,443
|
)
|
Net deferred tax assets (liabilities)
|
$
|
332
|
|
|
$
|
(1,432
|
)
|
On January 1, 2015 the Company adopted ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes
. The standard requires entities to present DTAs and DTLs as non-current in the classified balance sheet. The standard simplifies the current guidance, which requires entities to separately present DTAs and DTLs as current and non-current in a classified balance sheet. The Company early adopted the guidance to simplify its reporting for the current year. The consolidated balance sheet at December 31, 2014 was retrospectively adjusted, resulting in a
$0.3 million
reclassification of current DTAs to long-term DTAs.
Deferred tax assets and liabilities reflect the net tax effects of the tax credits and net operating loss carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The ultimate realization of the net deferred tax assets is dependent upon the generation of sufficient future taxable income in the applicable tax jurisdictions. Based on the magnitude of the deferred tax assets at
December 31, 2016
and
2015
and the level of historical U.S. tax losses, management has determined that the uncertainty regarding the realization of these assets warranted a significant valuation allowance at
December 31, 2016
and
2015
.
For U.S. federal and state income tax purposes at
December 31, 2016
, the Company had tax credit carryforwards of
$51.2 million
, which will expire between 2017 and 2036, and net operating loss carryforwards of
$783.9 million
, which will expire between 2019 and 2036. In 2016, the Company early adopted ASU No. 2019-09,
Improvements to Employee Share-base Payment Accounting
. The deferred tax assets in the schedule above at December 31, 2016, include
$33.7 million
related to prior year tax assets resulting from the exercise of employee stock options, which previously were recognized in additional paid- in capital only when utilized as a reduction in taxes payable. Prior to adoption of ASU No. 2016-09, this amount was excluded from the above deferred tax asset schedule at December 31, 2015. The increase in the deferred tax asset of
$33.7 million
was offset by a corresponding increase in the valuation allowance.
The federal net operating loss and tax credit amounts are subject to annual limitations under Section 382 change of ownership rules of the Internal Revenue Code. The Company completed an assessment at March 31, 2015 regarding whether there may have been a Section 382 ownership change and concluded that it is more likely than not that none of the Company’s net operating loss and tax credit amounts are subject to any Section 382 limitation.
Additionally, the Company has foreign net operating loss carryforwards of
$77.2 million
with an indefinite carryforward period and tax credit carryforwards of
$4.3 million
that begin to expire in 2029. The Company has determined there is uncertainty regarding the realization of a portion of these assets and has recorded a valuation allowance against
$66.0 million
of net operating losses and
$4.3 million
of tax credits at
December 31, 2016
.
The Company’s assessment of the valuation allowance on the U.S. and foreign deferred tax assets could change in the future based on its levels of pre-tax income and other tax related adjustments. Removal of the valuation allowance in whole or in part would result in a non-cash reduction in income tax expense during the period of removal.
The following table sets forth a reconciliation of the Company’s income tax provision (benefit) to the statutory U.S. federal tax amount for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Statutory tax
|
$
|
15,870
|
|
|
$
|
198
|
|
|
$
|
5,921
|
|
Tax credits
|
(2,468
|
)
|
|
(2,972
|
)
|
|
(1,589
|
)
|
Foreign operations
|
(12,662
|
)
|
|
(4,055
|
)
|
|
(6,047
|
)
|
Change in uncertain tax positions
|
(6,710
|
)
|
|
—
|
|
|
—
|
|
Non-deductible expenses and other
|
670
|
|
|
2,303
|
|
|
771
|
|
Federal benefit related to Note issuance
|
—
|
|
|
(6,493
|
)
|
|
—
|
|
Tax deficiency on stock-based compensation
|
2,509
|
|
|
—
|
|
|
—
|
|
Change in valuation allowance
|
(84
|
)
|
|
9,104
|
|
|
3,132
|
|
(Benefit from) provision for income taxes
|
$
|
(2,875
|
)
|
|
$
|
(1,915
|
)
|
|
$
|
2,188
|
|
The cumulative amount of undistributed earnings of foreign subsidiaries, which is intended to be indefinitely reinvested and for which U.S. income taxes have not been provided, totaled
$40.5 million
at
December 31, 2016
. The Company does not have any plans to repatriate these earnings because the underlying cash will be used to fund the ongoing operations of the foreign subsidiaries. The additional taxes that might be payable upon repatriation of foreign earnings are not significant.
A tax position must be more likely than not to be sustained before being recognized in the financial statements. It also requires the accrual of interest and penalties as applicable on unrecognized tax positions. The Company disclosed unrecognized tax benefits primarily related to the foreign tax implications arising from the changes in revenue recognition that arose in periods prior to 2012. The unrecognized tax benefits did not have an impact on the effective tax rate because the Company maintains a full valuation allowance on the related loss carryforwards. At
December 31, 2014
, the Company’s unrecognized tax benefits and related accrued interest and penalties totaled
$25.8 million
, of which
$0.8 million
would affect the Company’s income tax provision and effective tax rate if recognized. At
December 31, 2015
, the Company’s unrecognized tax benefits and related accrued interest and penalties totaled
$26.0 million
, of which
$3.2 million
would affect the Company’s effective tax rate if recognized. During 2016, the Company had a change in its uncertain tax position related to the revenue recognition issue and reversed the associated accrual in its entirety. At
December 31, 2016
, the Company’s accrual for unrecognized tax benefits and related accrued interest and penalties related to an Israel audit issue totaled
$1.0 million
, of which
$1.0 million
would affect the Company’s income tax provision and effective tax rate if recognized.
The following table sets forth a reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding the impact of interest and penalties, for the years ended
December 31, 2016
,
2015
and
2014
(in thousands):
|
|
|
|
|
Unrecognized tax benefits at January 1, 2014
|
$
|
24,729
|
|
Increases for tax positions taken during a prior period
|
1,118
|
|
Unrecognized tax benefits at December 31, 2014
|
25,847
|
|
Increases for tax positions taken during a prior period
|
148
|
|
Unrecognized tax benefits at December 31, 2015
|
25,995
|
|
Increases for tax positions taken during a prior period
|
1,041
|
|
Decreases for tax positions taken during a prior period
|
(25,995
|
)
|
Unrecognized tax benefits at December 31, 2016
|
$
|
1,041
|
|
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. Accrued interest and penalties related to uncertain tax positions at
December 31, 2016
and
2015
were not material.
The tax years 2008 and forward remain open to examination by taxing authorities in the jurisdictions in which the Company operates. The most significant operating jurisdictions include: the United States, Ireland, the Netherlands, Germany, Israel, Japan, and the United Kingdom.
|
|
O.
|
RESTRUCTURING COSTS AND ACCRUALS
|
2016 Restructuring Plan
In February 2016, the Company committed to a restructuring plan that encompasses a series of measures intended to allow the Company to more efficiently operate in a leaner, and more directed cost structure. These include reductions in the Company’s workforce, facilities consolidation, transferring certain business processes to lower cost regions, and reducing other third-party services costs.
During the quarter ended
December 31, 2015
, the Company recorded restructuring costs of
$5.8 million
, which represented an initial elimination of
111
positions worldwide during January and February of 2016. During the quarter ended March 31, 2016, the Company recorded restructuring costs of
$2.8 million
, representing the elimination of an additional
63
positions worldwide. During the quarter ended
June 30, 2016
, the Company recorded additional restructuring costs of
$0.4 million
, and recoveries totaling
$0.6 million
as a result of severance pay estimate changes primarily for the eliminated positions in Europe. During the quarter ended
September 30, 2016
, the Company recorded restructuring charges of
$2.4 million
related to severance costs for an additional
60
positions eliminated and severance pay estimate adjustments, and
$2.1 million
for the partial closure of facilities in Burlington, Massachusetts, which included non-cash amounts of
$1.1 million
for fixed asset write-off. During the quarter ended
December 31, 2016
, the Company recorded restructuring charges of
$5.0 million
, related to severance costs for an additional elimination of
156
positions worldwide.
Prior Years’ Restructuring Plans
The Company recorded restructuring costs revisions of
$0.5 million
and
$0.8 million
, in June 2015 and September 2016, respectively, based on the updated sublease assumption for the Company’s Mountain View, California facility that was partially abandoned in 2012.
At
December 31, 2016
,
$1.4 million
of the facilities-related accrual balance was related to the closure of part of the Company’s Mountain View, California, and Dublin, Ireland facilities under restructuring plans that were made in 2012 and 2008, respectively. No further actions are anticipated under those plans.
Restructuring Summary
The following table sets forth the activity in the restructuring accruals for the years ended
December 31, 2016
,
2015
and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-
Related
|
|
Facilities-
Related
& Other
|
|
Total
|
Accrual balance at January 1, 2014
|
$
|
2,399
|
|
|
$
|
6,102
|
|
|
$
|
8,501
|
|
Revisions of estimated liabilities
|
—
|
|
|
(165
|
)
|
|
(165
|
)
|
Accretion
|
—
|
|
|
565
|
|
|
565
|
|
Cash payments
|
(2,340
|
)
|
|
(4,172
|
)
|
|
(6,512
|
)
|
Foreign exchange impact on ending balance
|
(1
|
)
|
|
(45
|
)
|
|
(46
|
)
|
Accrual balance at December 31, 2014
|
58
|
|
|
2,285
|
|
|
2,343
|
|
New restructuring charges – operating expenses
|
5,766
|
|
|
—
|
|
|
5,766
|
|
Revisions of estimated liabilities
|
—
|
|
|
539
|
|
|
539
|
|
Accretion
|
—
|
|
|
226
|
|
|
226
|
|
Cash payments
|
(315
|
)
|
|
(1,301
|
)
|
|
(1,616
|
)
|
Foreign exchange impact on ending balance
|
—
|
|
|
(78
|
)
|
|
(78
|
)
|
Accrual balance at December 31, 2015
|
5,509
|
|
|
1,671
|
|
|
7,180
|
|
New restructuring charges – operating expenses
|
10,491
|
|
|
943
|
|
|
11,434
|
|
Revisions of estimated liabilities
|
(497
|
)
|
|
763
|
|
|
266
|
|
Accretion
|
—
|
|
|
287
|
|
|
287
|
|
Cash payments
|
(8,225
|
)
|
|
(1,701
|
)
|
|
(9,926
|
)
|
Non-cash write-offs
|
—
|
|
|
1,137
|
|
|
1,137
|
|
Foreign exchange impact on ending balance
|
(260
|
)
|
|
(7
|
)
|
|
(267
|
)
|
Accrual balance at December 31, 2016
|
$
|
7,018
|
|
|
$
|
3,093
|
|
|
$
|
10,111
|
|
The employee-related accruals at
December 31, 2016
and
2015
represent severance costs to former employees that will be paid out within twelve months, and are, therefore, included in the caption “accrued expenses and other current liabilities” in the Company’s consolidated balance sheets.
The facilities-related and other accruals at
December 31, 2016
and
2015
represent contractual lease payments, net of estimated sublease income, on space vacated as part of the Company’s restructuring actions. The leases, and payments against the amounts accrued, extend through 2021 unless the Company is able to negotiate earlier terminations. Of the total facilities-related and other accruals balance,
$0.7 million
is included in the caption “accrued expenses and other current liabilities,”
$1.3 million
is included in the caption “other long-term liabilities,” and
$1.1 million
of fixed asset write-off relating to the partial closure of facilities in Burlington, Massachusetts is reflected in the caption “property and equipment, net” in the Company’s consolidated balance sheet at
December 31, 2016
. At
December 31, 2015
,
$1.0 million
was included in the caption “accrued expenses and other current liabilities” and
$0.6 million
was included in the caption “other long-term liabilities.”
|
|
P.
|
PRODUCT AND GEOGRAPHIC INFORMATION
|
The Company provides digital media content-creation, management and distribution products and solutions for film, video, audio and broadcast professionals, as well as artists and musicians, which the Company classifies as two types, video and audio. The Company also classifies all its maintenance, professional services and training revenues as services revenues. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s evaluation of the discrete financial information that is regularly reviewed by the chief operating decision makers
determined that in
2016
,
2015
and
2014
the Company had only one operating segment. Specifically, the Company does not internally measure profitability based upon video, audio, or service revenue.
The Company’s video products and solutions are designed to improve the productivity of video and film editors and broadcasters by enabling them to edit video, film and sound; manage media assets; and automate workflows. Professional video creative software and hardware products include the Media Composer product line used to edit film, television programmings, news broadcasts, commercials and other video content. Video products also include Avid shared storage systems and Avid Interplay asset management solutions that provide complete network, storage and database solutions to enable users to simultaneously share and manage media assets throughout a project or organization.
The Company’s audio products and solutions include digital audio software and workstation solutions, control surfaces, live sound systems and notation software that provide music creation; audio recording, editing, and mixing; and live performance solutions. Audio products include Pro Tools digital audio software and workstation solutions to facilitate the audio production process, including music and sound creation, recording, editing, signal processing, integrated surround mixing and mastering, and reference video playback. Audio products also include a range of complementary control surfaces and consoles, including the System 5 and System 6 modular consoles, as well as the VENUE live-sound systems and Sibelius-branded notation software.
The Company’s services revenues are primarily derived from the sale of maintenance contracts and professional service and the recognition of revenues for Implied Maintenance Release PCS. The Company provides online and telephone support and access to software upgrades for customers whose products are under warranty or covered by a maintenance contract. The Company’s professional services team provides installation, integration, planning, consulting and training services.
The following is a summary of the Company’s revenues by type for the years ended
December 31, 2016
,
2015
and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Video products and solutions
|
$
|
155,408
|
|
|
$
|
201,559
|
|
|
$
|
233,464
|
|
Audio products and solutions
|
127,702
|
|
|
134,812
|
|
|
145,163
|
|
Total products and solutions
|
283,110
|
|
|
336,371
|
|
|
378,627
|
|
Services
|
228,820
|
|
|
169,224
|
|
|
151,624
|
|
Total net revenues
|
$
|
511,930
|
|
|
$
|
505,595
|
|
|
$
|
530,251
|
|
The following table sets forth the Company’s revenues from by geographic region for the years ended
December 31, 2016
,
2015
and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Revenues:
|
|
|
|
|
|
United States
|
$
|
186,658
|
|
|
$
|
185,109
|
|
|
$
|
193,060
|
|
Other Americas
|
38,824
|
|
|
37,081
|
|
|
45,342
|
|
Europe, Middle East and Africa
|
206,605
|
|
|
206,192
|
|
|
217,767
|
|
Asia-Pacific
|
79,843
|
|
|
77,213
|
|
|
74,082
|
|
Total net revenues
|
$
|
511,930
|
|
|
$
|
505,595
|
|
|
$
|
530,251
|
|
Other than the United States, no single country accounted for more than
10%
of revenue for all periods presented.
The following table presents the Company’s long-lived assets, excluding intangible assets, by geography at
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Long-lived assets:
|
|
|
|
United States
|
$
|
29,970
|
|
|
$
|
30,684
|
|
Other countries
|
11,786
|
|
|
11,920
|
|
Total long-lived assets
|
$
|
41,756
|
|
|
$
|
42,604
|
|
|
|
Q.
|
LONG-TERM DEBT AND CREDIT AGREEMENT
|
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Term Loan, net of unamortized debt issuance costs of $4,042 at December 31, 2016
|
$
|
92,208
|
|
|
$
|
—
|
|
Notes, net of unamortized original issue discount and debt issuance costs of $23,413 at December 31, 2016 and $29,050 at December 31, 2015, respectively
|
101,587
|
|
|
95,950
|
|
Credit Agreement
|
—
|
|
|
5,000
|
|
Total debt
|
193,795
|
|
|
100,950
|
|
Less: current portion
|
5,000
|
|
|
5,000
|
|
Total long-term debt
|
$
|
188,795
|
|
|
$
|
95,950
|
|
2.00% Convertible Senior Notes due 2020
On June 15, 2015, the Company issued
$125.0 million
aggregate principal amount of its
2.00%
Convertible Senior Notes due 2020 (the “Notes”) in an offering conducted in accordance with Rule 144A under the Securities Act of 1933. The net proceeds from the offering were
$120.3 million
after deducting the offering expenses.
The Notes pay interest semi-annually on June 15 and December 15 of each year, beginning on December 15, 2015, at an annual rate of 2.00% and mature on June 15, 2020 unless earlier converted or repurchased in accordance with their terms prior to such date. Additional interest may be payable upon the occurrence of certain events of default relating to the Company’s failure to deliver certain documents or reports to the Trustee, the Company’s failure to timely file any document or report required pursuant to Section 13 or 15(d) of the Exchange Act or if the Notes are not freely tradable as of one year after the last date of original issuance of the Notes.
The Notes are convertible into cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election, based on an initial conversion rate, subject to adjustment, of 45.5840 shares per $1,000 principal amount of Notes, which is equal to an initial conversion price of $21.94 per share. Prior to December 15, 2019, the Notes are convertible only in the following circumstances: (1) during any calendar quarter commencing after September 30, 2015, if the last reported sale price of the Company’s common stock is greater than or equal to 130% of the applicable conversion price for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; (2) during the five business day period after any five consecutive trading day period (the “Measurement Period”) in which the trading price per $1,000 principal amount of Notes for each trading day in the Measurement Period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. On or after December 15, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. The Company may not redeem the Notes prior to their maturity, which means that the Company is not required to redeem or retire the Notes periodically.
The Notes are senior unsecured obligations. Upon the occurrence of certain specified fundamental changes, the holders may require the Company to repurchase all or a portion of the Notes for cash at 100% of the principal amount of the Notes being purchased, plus any accrued and unpaid interest.
In accounting for the Notes at issuance, the Company allocated proceeds from the Notes into debt and equity components according to the accounting standards for convertible debt instruments that may be fully or partially settled in cash upon conversion. The initial carrying amount of the debt component, which approximates its fair value, was estimated by using an interest rate for nonconvertible debt, with terms similar to the Notes. The excess of the principal amount of the Notes over the fair value of the debt component was recorded as a debt discount and a corresponding increase in additional paid-in capital. The debt discount is accreted to the carrying value of the Notes over their term as interest expense using the interest method. Upon issuance of the Notes, the Company recorded
$96.7 million
as debt and
$28.3 million
as additional paid-in capital in stockholders’ equity. The effective interest rate used to estimate the fair value of the debt was
7.66%
. For the years ended
December 31, 2016
and
2015
, the Company recorded debt discount accretion of
$5.6 million
and
$2.9 million
, respectively, as interest expenses in the Company’s statement of operations. Total interest expense for the years ended
December 31, 2016
and
2015
was
$8.1 million
and
$4.3 million
, respectively, reflecting the coupon and accretion of the discount.
The Company incurred transaction costs of
$4.7 million
relating to the issuance of the Notes. The Company adopted ASU No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs,
which requires that debt issuance costs be classified as a reduction in the carrying value of the debt. In accounting for these costs, the Company allocated the costs of the offering between debt and equity in proportion to the fair value of the debt and equity recognized. The transaction costs allocated to the debt component of approximately
$3.6 million
were recorded as a direct deduction from the face amount of the Notes and are being amortized as interest expense over the term of the Notes using the interest method. The transaction costs allocated to the equity component of approximately
$1.1 million
were recorded as a decrease in additional paid-in capital.
Capped Call Transaction
In connection with the offering of the Notes, on June 9, 2015, the Company entered into a capped call derivative transaction with a third party (the “Capped Call”). The Capped Call is expected generally to reduce the potential dilution to the common stock and/or offset any cash payments the Company may be required to make in excess of the principal amount upon conversion of the Notes in the event that the market price per share of the common stock is greater than the strike price of the Capped Call.
The Capped Call has a strike price of $21.94 and a cap price of $26.00 and is exercisable by the Company when and if the Notes are converted.
If, upon conversion of the Notes, the price of the Company’s common stock is above the strike price of the Capped Call, the counterparty will deliver shares of common stock and/or cash with an aggregate value approximately equal to the difference between the price of the common stock at the conversion date (as defined, with a maximum price for purposes of this calculation equal to the cap price) and the strike price, multiplied by the number of shares of common stock related to the portion of the Capped Call being exercised. The Capped Call expires on June 15, 2020. The Company paid
$10.1 million
for the Capped Call and recorded the payment as a decrease to additional paid-in capital.
Credit Facilities
On February 26, 2016, the Company entered into a Financing Agreement with the Lenders. Pursuant to the Financing Agreement, the Lenders agreed to provide the Company with (a) a term loan in the aggregate principal amount of
$100 million
(the “Term Loan”) and (b) a revolving credit facility (the “Credit Facility”) of up to a maximum of
$5.0 million
in borrowings outstanding at any time. All outstanding loans under the Financing Agreement will become due and payable on the earlier of February 26, 2021 and the date that is 30 days prior to June 15, 2020 if the
$125.0 million
in outstanding principal of the Notes has not been repaid or refinanced by such time. The Company borrowed the full amount of the Term Loan, or
$100.0 million
, as of the closing date of the Financing Agreement, and there was
no
amount outstanding under the Credit Facility as of
December 31, 2016
.
Concurrently with the entry into the Financing Agreement, on February 26, 2016 the Company terminated its existing Credit Agreement, dated June 22, 2015, among the Company and certain of its subsidiaries, as borrowers, KeyBank National Association, as Administrative Agent and the other lender parties thereto, and repaid all outstanding borrowings under such agreement. There were no penalties paid by the Company in connection with this termination.
Interest accrues on outstanding borrowings under the Credit Facility and the Term Loan at a rate of either the LIBOR Rate (as defined in the Financing Agreement) plus 6.75% or a Reference Rate (as defined in the Financing Agreement) plus 5.75%, at the option of the Company. The Company must also pay to the Lenders, on a monthly basis, an unused line fee at a rate of 0.5% per annum.
The Company may prepay all or any portion of the Term Loan prior to its stated maturity, subject to the payment of certain fees based on the amount repaid. The Term Loan requires quarterly principal payments of $1.25 million commencing in June 2016. The Term Loan also requires the Company to use 50% of excess cash, as defined in the Financing Agreement, to repay outstanding principal of the loans under the Financing Agreement
. The Company recorded
$6.6 million
of interest expense on the Term Loan for the year ended
December 31, 2016
, of which
$2.0 million
related to the quarter ended
December 31, 2016
.
The Company granted a security interest on substantially all of its assets to secure the obligations under the Credit Facility and the Term Loan.
The Financing Agreement contains customary representations and warranties, covenants, mandatory prepayments, and events of default under which the Company’s payment obligations may be accelerated. The Financing Agreement includes covenants requiring the Company to maintain a Leverage Ratio (defined as the ratio of (a) consolidated total funded indebtedness to (b) consolidated EBITDA) of no greater than 4.35:1.00 for the four quarters ending June 30, 2016, 5.40:1.00 for the four quarters ending September 30, 2016, 4.20:1.00 for the four quarters ending December 31, 2016 and thereafter declining over time from 3.50:1.00 to 2.50:1.00. The Financing Agreement also restricts the Company from making capital expenditures in excess of $20 million in any fiscal year. As of December 31, 2016 the Company was in compliance with these covenants.
The Financing Agreement contains restrictive covenants that are customary for an agreement of this kind, including, for example, covenants that restrict the Company from incurring additional indebtedness, granting liens, making investments and restricted payments, making acquisitions, paying dividends and engaging in transactions with affiliates.
As discussed further in the “Subsequent Events” section of Note A, the Financing Agreement was amended on March 14, 2017, which included, among other changes, increases to the required leverage ratio in future periods.
R. QUARTERLY RESULTS (UNAUDITED)
The following information has been derived from unaudited consolidated financial statements that, in the opinion of management, include all normal recurring adjustments necessary for a fair presentation of such information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
Quarter Ended
|
2016
|
|
2015
|
|
Dec. 31
|
|
Sept. 30
|
|
June 30
|
|
Mar. 31
|
|
Dec. 31
|
|
Sept. 30
|
|
June 30
|
|
Mar. 31
|
Net revenues
|
$
|
115,295
|
|
|
$
|
119,019
|
|
|
$
|
134,069
|
|
|
$
|
143,547
|
|
|
$
|
138,806
|
|
|
$
|
137,436
|
|
|
$
|
109,767
|
|
|
$
|
119,586
|
|
Cost of revenues
|
43,876
|
|
|
41,678
|
|
|
44,320
|
|
|
41,533
|
|
|
54,912
|
|
|
47,672
|
|
|
43,306
|
|
|
47,492
|
|
Amortization of intangible assets
|
1,950
|
|
|
1,950
|
|
|
1,950
|
|
|
1,950
|
|
|
1,950
|
|
|
1,950
|
|
|
163
|
|
|
—
|
|
Gross profit
|
69,469
|
|
|
75,391
|
|
|
87,799
|
|
|
100,064
|
|
|
81,944
|
|
|
87,814
|
|
|
66,298
|
|
|
72,094
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
18,773
|
|
|
19,953
|
|
|
21,433
|
|
|
21,405
|
|
|
24,190
|
|
|
25,225
|
|
|
23,310
|
|
|
23,173
|
|
Marketing and selling
|
21,311
|
|
|
27,231
|
|
|
30,177
|
|
|
31,619
|
|
|
30,091
|
|
|
31,564
|
|
|
32,811
|
|
|
28,045
|
|
General and administrative
|
13,112
|
|
|
13,822
|
|
|
16,818
|
|
|
17,719
|
|
|
21,463
|
|
|
15,834
|
|
|
17,425
|
|
|
19,387
|
|
Amortization of intangible assets
|
363
|
|
|
567
|
|
|
782
|
|
|
786
|
|
|
786
|
|
|
786
|
|
|
408
|
|
|
374
|
|
Restructuring costs (recoveries), net
|
4,959
|
|
|
5,314
|
|
|
(213
|
)
|
|
2,777
|
|
|
5,766
|
|
|
—
|
|
|
539
|
|
|
—
|
|
Total operating expenses
|
58,518
|
|
|
66,887
|
|
|
68,997
|
|
|
74,306
|
|
|
82,296
|
|
|
73,409
|
|
|
74,493
|
|
|
70,979
|
|
Operating income (loss)
|
10,951
|
|
|
8,504
|
|
|
18,802
|
|
|
25,758
|
|
|
(352
|
)
|
|
14,405
|
|
|
(8,195
|
)
|
|
1,115
|
|
Other expense, net
|
(4,622
|
)
|
|
(4,707
|
)
|
|
(5,159
|
)
|
|
(4,183
|
)
|
|
(1,727
|
)
|
|
(2,519
|
)
|
|
(1,439
|
)
|
|
(723
|
)
|
Income (loss) before income taxes
|
6,329
|
|
|
3,797
|
|
|
13,643
|
|
|
21,575
|
|
|
(2,079
|
)
|
|
11,886
|
|
|
(9,634
|
)
|
|
392
|
|
Provision for (benefit from) income taxes
|
1,108
|
|
|
(5,321
|
)
|
|
703
|
|
|
635
|
|
|
2,306
|
|
|
768
|
|
|
(5,550
|
)
|
|
561
|
|
Net income (loss)
|
$
|
5,221
|
|
|
$
|
9,118
|
|
|
$
|
12,940
|
|
|
$
|
20,940
|
|
|
$
|
(4,385
|
)
|
|
$
|
11,118
|
|
|
$
|
(4,084
|
)
|
|
$
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share – basic and diluted
|
$
|
0.13
|
|
|
$
|
0.23
|
|
|
$
|
0.33
|
|
|
$
|
0.53
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.28
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding – basic
|
40,637
|
|
|
40,194
|
|
|
39,678
|
|
|
39,566
|
|
|
39,439
|
|
|
39,231
|
|
|
39,635
|
|
|
39,387
|
|
Weighted-average common shares outstanding – diluted
|
40,746
|
|
|
40,476
|
|
|
39,734
|
|
|
39,640
|
|
|
39,439
|
|
|
39,750
|
|
|
39,635
|
|
|
39,387
|
|