NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements include the accounts of Avid Technology, Inc. and its wholly owned subsidiaries (collectively, “Avid” or the “Company”). These financial statements are unaudited. However, in the opinion of management, the condensed consolidated financial statements reflect all normal and recurring adjustments necessary for their fair statement. Interim results are not necessarily indicative of results expected for any other interim period or a full year. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of operations, comprehensive (loss) income, financial position and cash flows of the Company in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying condensed consolidated balance sheet as of
December 31, 2015
was derived from the Company’s audited consolidated financial statements and does not include all disclosures required by U.S. GAAP for annual financial statements. The Company filed audited consolidated financial statements as of and for the year ended
December 31, 2015
in its Annual Report on Form 10-K for the year ended
December 31, 2015
, which included all information and footnotes necessary for such presentation. The financial statements contained in this Form 10-Q should be read in conjunction with the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
.
The Company’s preparation of condensed 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 condensed 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 our credit facilities. Cash used in operating activities aggregated
$11.2 million
for the
three months ended
March 31, 2016
.
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. In connection with this restructuring plan, the Company expects to incur incremental cash expenditures of approximately
$25 million
relating to termination benefits, facility costs, employee overlap expenses and related actions. The Company anticipates that the restructuring plan will be substantially complete by the end of the second quarter of 2017 and when fully implemented, is expected to result in annualized costs savings of approximately
$68 million
.
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”) have not been repaid or refinanced by such time. The Financing Agreement requires the Company to comply with a financial statement covenant that stipulates a maximum leverage ratio commencing on June 30, 2016. Proceeds from the Financing Agreement have been used to replace an existing
$35 million
revolving credit facility, finance the Company’s efficiency program and other initiatives, and provide operating flexibility throughout the remainder of the transformation in this period of heightened market volatility. After paying for both debt issuance costs and the 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 Company’s principal sources of liquidity include cash and cash equivalents totaling
$87.8 million
as of
March 31, 2016
including the remaining portion of term loan 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 restructuring programs. 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 12 months as well as for the foreseeable future.
Subsequent Events
The Company evaluated subsequent events through the date of issuance of these financial statements and no subsequent events required recognition or disclosure in these financial statements.
Significant Accounting Policies - 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 without making concessions, 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 for the three months ended
March 31, 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, as the elimination of Implied Maintenance Release PCS also resulted in the accelerated recognition of maintenance and product revenues that were previously being recognized over a much longer expected period of Implied Maintenance Release PCS rather than the contractual maintenance period. The change in the estimated amortization period of transactions being recognized on a ratable basis resulted in an additional
$6.5 million
of revenue during the three months ended
March 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 all professional services and training and for some of the Company’s 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 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, or 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.
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 12 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 many 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 many 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.
Recent Accounting Pronouncements to be Adopted
On May 28, 2014, the Financial Accounting Standards Board (the “FASB”) issued substantially converged final standards on revenue recognition. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes 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. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance in the Accounting Standards Update (“ASU”). The Company has not yet selected a transition method and is evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
In August 2014, the FASB issued
ASU 2014-15, Presentation of Financial Statements - Going Concern
.
ASU 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 new standard is effective for the Company beginning January 1, 2017. Early adoption is permitted. 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 February 25, 2016, the FASB issued new lease accounting standard,
ASU 2016-02, Leases (Topic 842)
. Lessees will need 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 timing of its adoption of the standard.
On March 30, 2016, the FASB issued
ASU 2016-09
, which simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new guidance becomes effective for the Company on January 1, 2017, and early adoption is permitted. The Company expects to adopt this standard effective April 1, 2016 and does not expect the adoption will have a significant impact on the financial statements.
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 or market conditions.
The following table sets forth (in thousands) potential common shares that were considered anti-dilutive securities for the
three months ended
March 31, 2016
and at March 31, 2015.
|
|
|
|
|
|
|
|
March 31, 2016
|
|
March 31, 2015
|
Options
|
4,313
|
|
|
5,452
|
|
Non-vested restricted stock units
|
786
|
|
|
1,352
|
|
Anti-dilutive potential common shares
|
5,099
|
|
|
6,804
|
|
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 (see Note 11). 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 11, 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 of the Company’s common stock but the Company’s stock price was less than the conversion price as of
March 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.
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.
|
|
4.
|
FAIR VALUE MEASUREMENTS
|
Assets Measured at Fair Value on a Recurring Basis
The Company measures the deferred compensation investments on a recurring basis. As of
March 31, 2016
and
December 31, 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 primarily money market and mutual funds. Assets valued based on other observable inputs and classified as Level 2 are primarily 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
|
|
March 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 assets
|
$
|
2,651
|
|
|
$
|
481
|
|
|
$
|
2,170
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 assets
|
$
|
3,617
|
|
|
$
|
572
|
|
|
$
|
3,045
|
|
|
$
|
—
|
|
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. As of
March 31, 2016
, the net carrying amount of the Notes
was
$97.3 million
, and the fair value of the Notes was approximately
$82.5 million
based on open market trading activity, which constitutes a Level 1 input in the fair value hierarchy.
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Raw materials
|
$
|
10,442
|
|
|
$
|
9,594
|
|
Work in process
|
287
|
|
|
256
|
|
Finished goods
|
40,923
|
|
|
38,223
|
|
Total
|
$
|
51,652
|
|
|
$
|
48,073
|
|
As of
March 31, 2016
and
December 31, 2015
, finished goods inventory included
$6.8 million
and
$5.3 million
, respectively, associated with products shipped to customers and deferred labor costs for arrangements where revenue recognition had not yet commenced.
|
|
6.
|
INTANGIBLE ASSETS AND GOODWILL
|
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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
Completed technologies and patents
|
$
|
58,359
|
|
|
$
|
(33,172
|
)
|
|
$
|
25,187
|
|
|
$
|
58,032
|
|
|
$
|
(30,902
|
)
|
|
$
|
27,130
|
|
Customer relationships
|
54,804
|
|
|
(49,543
|
)
|
|
5,261
|
|
|
54,656
|
|
|
(48,767
|
)
|
|
5,889
|
|
Trade names
|
1,346
|
|
|
(1,300
|
)
|
|
46
|
|
|
1,346
|
|
|
(1,146
|
)
|
|
200
|
|
Capitalized software costs
|
4,911
|
|
|
(4,911
|
)
|
|
—
|
|
|
4,911
|
|
|
(4,911
|
)
|
|
—
|
|
Total
|
$
|
119,420
|
|
|
$
|
(88,926
|
)
|
|
$
|
30,494
|
|
|
$
|
118,945
|
|
|
$
|
(85,726
|
)
|
|
$
|
33,219
|
|
Amortization expense related to all intangible assets in the aggregate was
$2.7 million
and
$0.4 million
, respectively, for the three months ended
March 31, 2016
and
2015
. The Company expects amortization of acquired intangible assets to be
$7.6 million
for the remainder of
2016
,
$9.3 million
in
2017
,
$9.3 million
in
2018
, and
$4.3 million
in
2019
.
Goodwill at
March 31, 2016
and
December 31, 2015
was
$32.6 million
, which resulted from the acquisition of Orad in 2015.
|
|
7.
|
OTHER LONG-TERM LIABILITIES
|
Other long-term liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Deferred rent
|
$
|
7,643
|
|
|
$
|
6,755
|
|
Accrued restructuring
|
568
|
|
|
647
|
|
Income tax payable
|
1,543
|
|
|
—
|
|
Deferred compensation
|
6,425
|
|
|
7,309
|
|
Total
|
$
|
16,179
|
|
|
$
|
14,711
|
|
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.
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.
As of
March 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 has letters of credit that are used as security deposits in connection with the Company’s Burlington, Massachusetts office space and other facilities. In the event of default on the underlying leases, the landlords would, as of
March 31, 2016
, be eligible to draw against the letters of credit to a maximum of
$2.2 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 be reduced to below
$1.2 million
in the aggregate throughout the lease periods, all of which extend to May 2020. Also, the Company has letters of credit totaling
$0.4 million
that support its ongoing operations. These letters of credit have various terms and expire during
2016
and beyond, and some of the letters of credit may automatically renew based on the terms of the underlying agreements.
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
three months ended
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Accrual balance at beginning of year
|
$
|
2,234
|
|
|
$
|
2,792
|
|
Accruals for product warranties
|
455
|
|
|
502
|
|
Costs of warranty claims
|
(455
|
)
|
|
(820
|
)
|
Accrual balance at end of period
|
$
|
2,234
|
|
|
$
|
2,474
|
|
The warranty accrual is included in the caption “accrued expenses and other current liabilities” in the Company’s condensed consolidated balance sheet.
|
|
9.
|
RESTRUCTURING COSTS AND ACCRUALS
|
2016 Restructuring Plan
In the first quarter of 2016, the Company commenced restructuring actions that are part of a broad restructuring plan encompassing 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. In connection with this restructuring plan, the Company expects to incur incremental cash expenditures of approximately
$25 million
relating to termination benefits, facility costs, employee overlap expenses and related actions. The Company expects approximately
$14 million
of the expenditures will be recorded as restructuring costs in the quarters ending December 31, 2015 through June 30, 2017, of which
$8.6 million
in the aggregate was recorded in the quarters ended
December 31, 2015
and
March 31, 2016
. The Company anticipates that the restructuring plan will be substantially complete by the end of the second quarter of 2017 and will result in annualized costs savings of approximately
$68 million
.
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.
Prior Years’ Restructuring Plans
The remaining accrual balance of
$1.4 million
as of
March 31, 2016
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. No further actions are anticipated under those plans.
Restructuring Summary
The following table sets forth the activity in the restructuring accruals for the
three months ended
March 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-
Related
|
|
Facilities/ Other-
Related
|
|
Total
|
Accrual balance as of December 31, 2015
|
$
|
5,509
|
|
|
$
|
1,671
|
|
|
$
|
7,180
|
|
New restructuring charges – operating expenses
|
2,777
|
|
|
—
|
|
|
2,777
|
|
Accretion
|
—
|
|
|
66
|
|
|
66
|
|
Cash payments
|
(2,454
|
)
|
|
(327
|
)
|
|
(2,781
|
)
|
Foreign exchange impact on ending balance
|
(12
|
)
|
|
12
|
|
|
—
|
|
Accrual balance as of March 31, 2016
|
$
|
5,820
|
|
|
$
|
1,422
|
|
|
$
|
7,242
|
|
The employee-related accruals as of
March 31, 2016
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/other-related accruals as of
March 31, 2016
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/other-related accruals,
$0.8 million
is included in the caption “accrued expenses and other current liabilities” and
$0.6 million
is included in the caption “other long-term liabilities” in the Company’s condensed consolidated balance sheet as of
March 31, 2016
.
|
|
10.
|
PRODUCT AND GEOGRAPHIC INFORMATION
|
The Company, through the evaluation of the discrete financial information that is regularly reviewed by the chief operating decision makers (the Company’s chief executive officer and chief financial officer), has determined that the Company has one reportable segment. The following table is a summary of the Company’s revenues by type for the
three months ended
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Video products and solutions net revenues
|
$
|
34,569
|
|
|
$
|
47,117
|
|
Audio products and solutions net revenues
|
49,940
|
|
|
32,912
|
|
Products and solutions net revenues
|
84,509
|
|
|
80,029
|
|
Services net revenues
|
59,038
|
|
|
39,557
|
|
Total net revenues
|
$
|
143,547
|
|
|
$
|
119,586
|
|
The following table sets forth the Company’s revenues by geographic region for the
three months ended
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
United States
|
$
|
55,042
|
|
|
$
|
45,162
|
|
Other Americas
|
10,738
|
|
|
7,549
|
|
Europe, Middle East and Africa
|
55,739
|
|
|
49,253
|
|
Asia-Pacific
|
22,028
|
|
|
17,622
|
|
Total net revenues
|
$
|
143,547
|
|
|
$
|
119,586
|
|
|
|
11.
|
LONG TERM DEBT AND CREDIT AGREEMENT
|
2.00% Convertible Senior Notes due 2020
On June 15, 2015, the Company issued
$125.0 million
aggregate principal amount of its 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 event 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 is
7.66%
. The Company recorded
$1.4 million
debt discount accretion as interest expenses in the Company’s statement of operations for the
three months ended
March 31, 2016
. Total interest expense for the
three months ended
March 31, 2016
was
$2.0 million
, 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.
The net carrying amount of the liability component of the Notes consists of the following at
March 31, 2016
(in thousands):
|
|
|
|
|
|
March 31, 2016
|
Principal amount of notes
|
$
|
125,000
|
|
Original debt discount due to:
|
|
Allocation of proceeds to equity
|
(28,298
|
)
|
Allocation of issuance costs to debt
|
(3,641
|
)
|
Accumulated accretion of discount to interest expense
|
4,248
|
|
Net carrying value
|
$
|
97,309
|
|
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 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 in 2015.
Credit Facility
On February 26, 2016, the Company entered into the 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
$100.0 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 have 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 were no amounts outstanding under the Credit Facility as of
March 31, 2016
.
Concurrently with the entry into the Financing Agreement, on February 26, 2016 the Company terminated its prior 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
$0.7 million
interest expenses on the Term Loan for the three months ended
March 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 Adjusted 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 $20,000,000 in any fiscal year.
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.
12. STOCKHOLDERS’ EQUITY
Stock-Based Compensation
Information with respect to option shares granted under all the Company’s stock incentive plans for the
three months ended
March 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Time-Based Shares
|
Performance-Based Shares
|
Total Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
Aggregate
Intrinsic
Value
(in thousands)
|
Options outstanding as of January 1, 2016
|
4,345,334
|
|
—
|
|
4,345,334
|
|
$10.68
|
|
|
Forfeited or canceled
|
(62,766
|
)
|
—
|
|
(62,766
|
)
|
$15.78
|
|
|
Options outstanding as of March 31, 2016
|
4,282,568
|
|
—
|
|
4,282,568
|
|
$10.61
|
3.57
|
$0
|
Options vested as of March 31, 2016 or expected to vest
|
|
|
4,245,004
|
|
$10.63
|
3.55
|
$0
|
Options exercisable as of March 31, 2016
|
|
|
3,729,795
|
|
$11.06
|
3.35
|
$0
|
Information with respect to the Company’s non-vested restricted stock units for the
three months ended
March 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested Restricted Stock Units
|
|
Time-Based Shares
|
Performance-Based Shares
|
Total Shares
|
Weighted-
Average
Grant-Date
Fair Value
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
Aggregate
Intrinsic
Value
(in thousands)
|
Non-vested as of January 1, 2016
|
905,934
|
|
360,074
|
|
1,266,008
|
|
$9.97
|
|
|
Granted
|
546,418
|
|
489,482
|
|
1,035,900
|
|
$7.04
|
|
|
Vested
|
(149,806
|
)
|
—
|
|
(149,806
|
)
|
$13.45
|
|
|
Forfeited
|
(50,917
|
)
|
(41,010
|
)
|
(91,927
|
)
|
$6.28
|
|
|
Non-vested as of March 31, 2016
|
1,251,629
|
|
808,546
|
|
2,060,175
|
|
$8.41
|
1.07
|
$13,906
|
Expected to vest
|
|
|
1,590,942
|
|
$8.48
|
1.02
|
$10,739
|
Stock-based compensation was included in the following captions in the Company’s condensed consolidated statements of operations for the
three months ended
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Cost of products revenues
|
$
|
30
|
|
|
$
|
95
|
|
Cost of services revenues
|
149
|
|
|
159
|
|
Research and development expenses
|
85
|
|
|
107
|
|
Marketing and selling expenses
|
441
|
|
|
690
|
|
General and administrative expenses
|
1,393
|
|
|
1,410
|
|
|
$
|
2,098
|
|
|
$
|
2,461
|
|