AVID-06.30.2015-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
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| | | |
| (Mark One) | | |
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended June 30, 2015 | |
| OR | |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from __________ to __________ | |
Commission File Number: 1-36254
__________________
Avid Technology, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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| | | | |
| Delaware (State or Other Jurisdiction of Incorporation or Organization) | | 04-2977748 (I.R.S. Employer Identification No.) | |
75 Network Drive
Burlington, Massachusetts 01803
(Address of Principal Executive Offices, Including Zip Code)
(978) 640-6789
(Registrant’s Telephone Number, Including Area Code)
__________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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| | | | |
| Large Accelerated Filer ¨ Non-accelerated Filer ¨ (Do not check if smaller reporting company) | | Accelerated Filer x Smaller Reporting Company ¨ | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the registrant’s Common Stock, par value $0.01, as of August 7, 2015 was 39,222,974.
AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015
TABLE OF CONTENTS
This Quarterly Report on Form 10-Q (the “Form 10-Q”) includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in this Form 10-Q that relate to future results or events are forward-looking statements. Forward-looking statements may be identified by use of forward-looking words, such as “anticipate,” “believe,” “confidence,” “could,” “estimate,” “expect,” “feel,” “intend,” “may,” “plan,” “should,” “seek,” “will” and “would,” or similar expressions.
Forward-looking statements may involve subjects relating to the following:
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• | our ability to develop, market and sell new products and services; |
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• | our ability to successfully implement our Avid Everywhere strategic plan and other strategic initiatives, including our cost saving strategies; |
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• | anticipated trends relating to our sales, financial condition or results of operations, including our shift to a recurring revenue model and complex enterprise sales with elongated sales cycles; |
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• | our ability to achieve our goal of expanding our market positions; |
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• | the anticipated performance of our products; |
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• | our business strategies and market positioning; |
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• | our ability to successfully consummate acquisitions, or investment transactions and successfully integrate acquired businesses including the acquisition of Orad Hi-Tech Ltd (“Orad”), into our operations; |
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• | our anticipated benefits and synergies from and the anticipated financial impact of any acquired business (including Orad); |
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• | the anticipated trends and developments in our markets and the success of our products in these markets; |
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• | our ability to mitigate and remediate effectively the material weaknesses in our internal control over financial reporting, and the expected timing thereof; |
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• | our capital resources and the adequacy thereof; |
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• | our ability to service our debt and meet the obligations thereunder, including our ability to satisfy our conversion and repurchase obligations under our convertible notes due 2020. |
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• | the outcome, impact, costs and expenses of any litigation or government inquiries to which we are or become subject; |
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• | the effect of the continuing worldwide macroeconomic uncertainty on our business and results of operation; |
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• | the expected timing of recognition of revenue backlog as revenue, and the timing of recognition of revenues from subscription offerings; |
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• | estimated asset and liability values and amortization of our intangible assets; |
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• | our compliance with covenants contained in the agreements governing our indebtedness; |
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• | changes in inventory levels; |
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• | plans regarding repatriation of foreign earnings; |
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• | the risk of restatement of our financial statements; and |
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• | fluctuations in foreign exchange and interest rates. |
Actual results and events in future periods may differ materially from those expressed or implied by forward-looking statements in this Form 10-Q. There are a number of factors that could cause actual events or results to differ materially from those indicated or implied by forward-looking statements, many of which are beyond our control, including the risk factors discussed herein and in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014 and of this Form 10-Q. In addition, the forward-looking statements contained in this Form 10-Q represent our estimates only as of the date of this filing and should not be
relied upon as representing our estimates as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, whether to reflect actual results, changes in assumptions, changes in other factors affecting such forward-looking statements or otherwise.
We own or have rights to trademarks and service marks that we use in connection with the operation of our business. Avid is a trademark of Avid Technology, Inc. Other trademarks, logos, and slogans registered or used by us and our subsidiaries in the United States and other countries include, but are not limited to, the following: Avid Everywhere, Avid Motion Graphics, AirSpeed, EUCON, Fast Track, iNEWS, Interplay, ISIS, Avid MediaCentral Platform, Mbox, Media Composer, NewsCutter, Nitris, Pro Tools, Sibelius and Symphony. Other trademarks appearing in this Form 10-Q are the property of their respective owners.
PART I - FINANCIAL INFORMATION
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ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data, unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net revenues: | | | | | | | |
Products | $ | 76,150 |
| | $ | 87,315 |
| | $ | 156,179 |
| | $ | 181,885 |
|
Services | 33,617 |
| | 37,329 |
| | 73,174 |
| | 77,741 |
|
Total net revenues | 109,767 |
| | 124,644 |
| | 229,353 |
| | 259,626 |
|
| | | | | | | |
Cost of revenues: | | | | | | | |
Products | 28,363 |
| | 35,097 |
| | 60,160 |
| | 70,091 |
|
Services | 14,943 |
| | 15,323 |
| | 30,638 |
| | 30,994 |
|
Amortization of intangible assets | 163 |
| | — |
| | 163 |
| | 50 |
|
Total cost of revenues | 43,469 |
| | 50,420 |
| | 90,961 |
| | 101,135 |
|
Gross profit | 66,298 |
| | 74,224 |
| | 138,392 |
| | 158,491 |
|
| | | | | | | |
Operating expenses: | | | | | | | |
Research and development | 23,310 |
| | 22,070 |
| | 46,483 |
| | 45,024 |
|
Marketing and selling | 32,811 |
| | 34,297 |
| | 60,856 |
| | 67,112 |
|
General and administrative | 17,425 |
| | 19,984 |
| | 36,812 |
| | 38,315 |
|
Amortization of intangible assets | 408 |
| | 398 |
| | 782 |
| | 878 |
|
Restructuring costs (recoveries), net | 539 |
| | (165 | ) | | 539 |
| | (165 | ) |
Total operating expenses | 74,493 |
| | 76,584 |
| | 145,472 |
| | 151,164 |
|
| | | | | | | |
Operating (loss) income | (8,195 | ) | | (2,360 | ) | | (7,080 | ) | | 7,327 |
|
| | | | | | | |
Interest income | 5 |
| | 50 |
| | 39 |
| | 70 |
|
Interest expense | (920 | ) | | (415 | ) | | (1,292 | ) | | (788 | ) |
Other (expense) income, net | (524 | ) | | 8 |
| | (909 | ) | | 10 |
|
(Loss) income before income taxes | (9,634 | ) | | (2,717 | ) | | (9,242 | ) | | 6,619 |
|
(Benefit from) provision for income taxes | (5,550 | ) | | 622 |
| | (4,989 | ) | | 1,062 |
|
Net (loss) income | $ | (4,084 | ) | | $ | (3,339 | ) | | $ | (4,253 | ) | | $ | 5,557 |
|
| | | | | | | |
Net (loss) income per common share – basic and diluted | $ | (0.10 | ) | | $ | (0.09 | ) | | $ | (0.11 | ) | | $ | 0.14 |
|
| | | | | | | |
Weighted-average common shares outstanding – basic | 39,635 |
| | 39,119 |
| | 39,512 |
| | 39,109 |
|
Weighted-average common shares outstanding – diluted | 39,635 |
| | 39,119 |
| | 39,512 |
| | 39,138 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands, unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net (loss) income | $ | (4,084 | ) | | $ | (3,339 | ) | | $ | (4,253 | ) | | $ | 5,557 |
|
| | | | | | | |
Other comprehensive (loss) income: | | | | | | | |
Foreign currency translation adjustments | 2,213 |
| | 743 |
| | (3,668 | ) | | 1,136 |
|
| | | | | | | |
Comprehensive (loss) income | $ | (1,871 | ) | | $ | (2,596 | ) | | $ | (7,921 | ) | | $ | 6,693 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)
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| | | | | | | |
| June 30, 2015 | | December 31, 2014 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 34,647 |
| | $ | 25,056 |
|
Accounts receivable, net of allowances of $9,290 and $10,692 at June 30, 2015 and December 31, 2014, respectively | 54,929 |
| | 54,655 |
|
Inventories | 43,872 |
| | 48,001 |
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Deferred tax assets, net | 399 |
| | 322 |
|
Prepaid expenses | 9,467 |
| | 6,892 |
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Other current assets | 14,542 |
| | 17,932 |
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Total current assets | 157,856 |
| | 152,858 |
|
Property and equipment, net | 33,328 |
| | 32,136 |
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Intangible assets, net | 38,701 |
| | 2,445 |
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Goodwill | 33,905 |
| | — |
|
Long-term deferred tax assets, net | 4,441 |
| | 1,886 |
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Other long-term assets | 7,998 |
| | 2,274 |
|
Total assets | $ | 276,229 |
| | $ | 191,599 |
|
| | | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT | | | |
Current liabilities: | | | |
Accounts payable | $ | 34,684 |
| | $ | 32,951 |
|
Accrued compensation and benefits | 24,666 |
| | 32,636 |
|
Accrued expenses and other current liabilities | 38,047 |
| | 32,353 |
|
Income taxes payable | 2,756 |
| | 5,480 |
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Deferred tax liabilities, net | 402 |
| | — |
|
Deferred revenues | 204,495 |
| | 206,608 |
|
Total current liabilities | 305,050 |
| | 310,028 |
|
Long-term debt | 93,497 |
| | — |
|
Long-term deferred tax liabilities, net | 10,078 |
| | 136 |
|
Long-term deferred revenues | 188,304 |
| | 208,232 |
|
Other long-term liabilities | 17,396 |
| | 14,273 |
|
Total liabilities | 614,325 |
| | 532,669 |
|
| | | |
Contingencies (Note 9) |
| |
|
| | | |
Stockholders’ deficit: | | | |
Common stock | 423 |
| | 423 |
|
Additional paid-in capital | 1,057,027 |
| | 1,049,969 |
|
Accumulated deficit | (1,326,051 | ) | | (1,321,798 | ) |
Treasury stock at cost | (64,214 | ) | | (68,051 | ) |
Accumulated other comprehensive loss | (5,281 | ) | | (1,613 | ) |
Total stockholders’ deficit | (338,096 | ) | | (341,070 | ) |
Total liabilities and stockholders’ deficit | $ | 276,229 |
| | $ | 191,599 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
|
| | | | | | | |
| Six Months Ended |
| June 30, |
| 2015 | | 2014 |
Cash flows from operating activities: | | | |
Net (loss) income | $ | (4,253 | ) | | $ | 5,557 |
|
Adjustments to reconcile net (loss) income to net cash used in operating activities: | | | |
Depreciation and amortization | 8,014 |
| | 9,352 |
|
Recovery from doubtful accounts | (205 | ) | | (158 | ) |
Stock-based compensation expense | 5,344 |
| | 3,398 |
|
Non-cash interest expense | 207 |
| | 147 |
|
Unrealized foreign currency transaction gains | (4,043 | ) | | (317 | ) |
Deferred tax benefit | (6,514 | ) | | (16 | ) |
Changes in operating assets and liabilities: | | | |
Accounts receivable | 8,935 |
| | 7,668 |
|
Inventories | 8,940 |
| | 5,424 |
|
Prepaid expenses and other current assets | 784 |
| | 833 |
|
Accounts payable | 347 |
| | (5,666 | ) |
Accrued expenses, compensation and benefits and other liabilities | (17,362 | ) | | (14,842 | ) |
Income taxes payable | 770 |
| | (583 | ) |
Deferred revenues | (27,178 | ) | | (36,879 | ) |
Net cash used in operating activities | (26,214 | ) | | (26,082 | ) |
| | | |
Cash flows from investing activities: | | | |
Purchases of property and equipment | (6,742 | ) | | (6,391 | ) |
Payments for business and technology acquisitions, net of cash acquired | (65,967 | ) | | — |
|
Proceeds from divestiture of consumer business | — |
| | 1,500 |
|
(Increase) decrease in other long-term assets | (850 | ) | | 11 |
|
Increase in restricted cash
| (2,330 | ) | | — |
|
Net cash used in investing activities | (75,889 | ) | | (4,880 | ) |
| | | |
Cash flows from financing activities: | | | |
Proceeds from long-term debt, net of issuance costs | 121,150 |
| | — |
|
Cash paid for capped call transaction | (10,125 | ) | | — |
|
Proceeds from the issuance of common stock under employee stock plans | 2,804 |
| | 1 |
|
Common stock repurchases for tax withholdings for net settlement of equity awards
| (1,299 | ) | | (141 | ) |
Proceeds from revolving credit facilities | 29,500 |
| | 11,500 |
|
Payments on revolving credit facilities | (29,500 | ) | | (6,500 | ) |
Payments for credit facility issuance costs | (505 | ) | | — |
|
Net cash provided by financing activities | 112,025 |
| | 4,860 |
|
| | | |
Effect of exchange rate changes on cash and cash equivalents | (331 | ) | | 948 |
|
Net increase (decrease) in cash and cash equivalents | 9,591 |
| | (25,154 | ) |
Cash and cash equivalents at beginning of period | 25,056 |
| | 48,203 |
|
Cash and cash equivalents at end of period | $ | 34,647 |
| | $ | 23,049 |
|
| | | |
| | | |
|
| | | | | | | |
Supplemental information: | | | |
Cash paid for income taxes, net of refunds | $ | 877 |
| | $ | 1,294 |
|
Cash paid for interest | 981 |
| | 641 |
|
Non-cash financing activities: | | | |
Issuance costs for long-term debt | $ | 581 |
| | $ | — |
|
Issuance costs for credit facility | 634 |
| | — |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
AVID TECHNOLOGY, INC.
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, 2014 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, 2014 in its Annual Report on Form 10-K for the year ended December 31, 2014, 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, 2014.
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.
Cash used in operating activities aggregated $26.2 million for the six months ended June 30, 2015, which was primarily attributable to the annual bonus payments and acquisition-related professional and consulting services. The Company’s cash requirements vary depending on factors such as the growth of the business, changes in working capital, capital expenditures, acquisitions of businesses or technologies and obligations under restructuring programs. On June 15, 2015, the Company issued $125.0 million aggregate principal amount of its 2.00% Convertible Senior Notes due 2020 (the “Notes”) pursuant to the terms of an indenture. The net proceeds from the offering were $120.6 million after deducting the initial purchasers’ discount and the estimated offering expenses. Of the net proceeds of this offering, the Company used $10.1 million to enter into a capped call derivative transaction with a third party (the “Capped Call”), which is described further in Note 12, Long-term Debt and Credit Agreement, and $66.0 million to fund the acquisition of Orad Hi-Tech Systems Ltd. (“Orad”) on June 23, 2015 (see Note 3, Acquisition). On June 22, 2015, the Company entered into a revolving credit facility (the “Credit Facility”) that allows the Company to borrow up to a maximum of $35.0 million. The Company may increase the total commitments under the Credit Facility by up to an additional $15.0 million, subject to certain conditions. Management expects to operate the business and execute its strategic initiatives principally with funds generated from operations, the proceeds from the Notes and available borrowings under the 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.
On June 8, 2015, the Company’s Board of Directors approved a stock repurchase plan authorizing the Company to repurchase up to $9.0 million of common stock from time to time until September 6, 2015. The terms of the stock repurchase plan do not permit the Company to repurchase shares of common stock directly from directors or officers of the Company. Upon the repurchase of any shares of the Company’s common stock, such shares are held as treasury stock of the Company. The Company entered into a stock repurchase agreement, which authorized a third party financial institution to repurchase shares of the Company’s common stock, on the Company’s behalf, on the open market in an aggregate amount not to exceed $8.0 million. The Company repurchased 480,601 shares for $6.6 million during June 2015 and had $1.4 million available for additional stock repurchases as of June 30, 2015. The Company completed the stock repurchase in July 2015. In aggregate 586,825 shares have been repurchased under the plan. At June 30, 2015, the Company had not settled the payment of these purchases and $6.6 million was included in the caption “accrued expenses and other current liabilities” in the Company’s condensed consolidated balance sheet.
Recent Accounting Pronouncements to be Adopted
On May 28, 2014, the Financial Accounting Standards Board (the “FASB”) and the International Accounting Standards Board (the “IASB”) 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.
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2. | NET (LOSS) INCOME PER SHARE |
Net (loss) income per common share is presented for both basic (loss) income per share (“Basic EPS”) and diluted (loss) 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 because the company reported a net loss for the period, 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 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 officers 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 at June 30, 2015 and for the six months ended June 30, 2014.
|
| | | | | | |
| | June 30, 2015 | | June 30, 2014 |
Options | | 5,227 |
| | 4,677 |
|
Non-vested restricted stock units | | 951 |
| | 98 |
|
Anti-dilutive potential common shares | | 6,178 |
| | 4,775 |
|
On June 15, 2015, the Company issued $125.0 million aggregate principal amount of its 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. In connection with the offering of the Notes, the Company entered into the Capped Call (see Note 12, Long-Term Debt and Credit Agreement). 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. The Company will use the treasury stock method in computing the Diluted EPS impact of the Notes. The Capped Call will not be reflected in Diluted EPS as it will always be anti-dilutive.
On June 23, 2015, the Company completed its acquisition of Orad Hi-Tech Systems Ltd. (“Orad”), an Israeli company listed on the Frankfurt Stock Exchange. Each issued and outstanding share of Orad common stock was canceled and converted into the right to receive consideration equal to €5.67 in cash, representing total consideration paid of $66.0 million based on the exchange rate on the date of closing, net of estimated cash acquired. As a result of the acquisition, the Company incurred merger and integration cost of approximately $4.3 million, which was recorded as general and administrative expenses in the Company’s statement of operations. Orad provides 3D real-time graphics, video servers and related asset management solutions. The acquisition adds content creation and media management solutions to the Avid MediaCentral Platform.
The following table summarizes the preliminary purchase price allocation to the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands). The Company is continuing to collect information, refine preliminary valuations with additional information, and evaluate the fair value of the assets and liabilities acquired, and related tax effects. As a result, adjustments to the values presented below may be made over the next several quarters.
|
| | | |
Cash | $ | 7,477 |
|
Accounts receivable, net | 9,004 |
|
Inventories | 4,810 |
|
Other current assets | 1,092 |
|
Property and equipment | 1,338 |
|
Identifiable intangible assets | 37,200 |
|
Long-term deferred tax assets, net | 2,636 |
|
Other assets | 3,457 |
|
Goodwill | 33,905 |
|
Total assets acquired | 100,919 |
|
| |
Accounts payable | (1,395 | ) |
Accrued expenses and other current liabilities | (7,045 | ) |
Deferred revenue and deposits | (5,154 | ) |
Long-term deferred tax liabilities, net | (9,942 | ) |
Other long-term liabilities | (3,939 | ) |
Total liabilities assumed | (27,475 | ) |
Net assets acquired | $ | 73,444 |
|
The purchase price allocation resulted in goodwill of approximately $33.9 million, which is primarily not deductible for tax purposes. The goodwill is attributable to expected synergies from combining the operations of Orad with the Company and intangible assets that do not qualify for separate recognition, such as an assembled workforce. The following are the identifiable intangible assets acquired and their respective weighted average useful lives, as determined based on preliminary valuations (dollars in thousands):
|
| | | | |
| Weighted Average Life (Years) | Amount |
Core and completed technology | 4 | $ | 31,200 |
|
Customer relationships | 4 | 5,800 |
|
Trade name | 1 | 200 |
|
Total | | $ | 37,200 |
|
The estimated fair value of intangible assets was determined using the excess earnings method for technology, replacement cost method for customer relationships and relief from royalty method for trade name.
Pro Forma Financial Information for Acquisition of Orad (in thousands except per share data, unaudited)
The results of operations of Orad have been included in the results of operations of the Company since June 23, 2015, the date of acquisition. As the acquisition was completed on June 23, 2015, the results of operations for Orad that are included in the Company’s consolidated statements of operations from the date of acquisition were not significant for the three and six month periods ended June 30, 2015. The following unaudited pro forma financial information presents the Company’s results of operations for the three and six months ended June 30, 2015 and 2014 as if the acquisition of Orad had occurred at the beginning of 2014. The pro forma financial information for the combined entities has been prepared for comparative purposes only and is not indicative of what actual results would have been if the acquisition had taken place at the beginning of fiscal 2014, or of future results.
|
| | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| (in thousands, except per share data) |
| 2015 | | 2014 | | 2015 | | 2014 |
Net revenues | 115,862 |
| | 134,845 |
| | 245,805 |
| | 279,130 |
|
| | | | | | | |
Net (loss) income | (10,083 | ) | | (4,901 | ) | | (11,915 | ) | | 2,299 |
|
| | | | | | | |
Net (loss) income per share: | | | | | | | |
Basic and Diluted | (0.25 | ) | | (0.13 | ) | | (0.30 | ) | | 0.06 |
|
| |
4. | FOREIGN CURRENCY CONTRACTS |
As a hedge against the foreign exchange exposure of certain forecasted receivables, payables and cash balances of foreign subsidiaries, the Company enters into short-term foreign currency forward contracts, which typically mature within 30 days of execution. The changes in fair value of the foreign currency forward contracts intended to offset foreign currency exchange risk on cash flows associated with net monetary assets are recorded as gains or losses in the Company’s statement of operations in the period of change, because these contracts have not been accounted for as hedges. The Company had no outstanding foreign currency forward contracts at June 30, 2015. The Company had foreign currency forward contracts outstanding with an aggregate notional value of $25.4 million at December 31, 2014 as hedges against such forecasted foreign-currency-denominated receivables, payables and cash balances.
The Company may also enter into short-term foreign currency spot and forward contracts as a hedge against the foreign currency exchange risk associated with certain of its net monetary assets denominated in foreign currencies. The Company had no outstanding short-term foreign currency spot contracts at June 30, 2015. The Company had foreign currency contracts outstanding with an aggregate notional value of $2.8 million at December 31, 2014. Because these contracts are not accounted for as hedges, the changes in fair value of these foreign currency contracts are recorded as gains or losses in the Company’s statement of operations.
The Company also assumed from Orad outstanding foreign currency spot contracts and call and put options to hedge cash flow risks associated with foreign exchange rates. The aggregate notional value of the outstanding contracts and options was $11.3 million at June 30, 2015.
The following table sets forth the balance sheet classification and fair values of the Company’s foreign currency contracts (in thousands):
|
| | | | | | |
Derivatives Not Designated as Hedging Instruments under Accounting Standard Codification (“ASC”) Topic 815 | | Balance Sheet Classification | | Fair Value at June 30, 2015 | | Fair Value at December 31, 2014 |
Financial assets: | | | | | | |
Foreign currency contracts | | Other current assets | | $100 | | $— |
| | | | | | |
Financial liabilities: | | | | | | |
Foreign currency contracts | | Accrued expenses and other current liabilities | | $50 | | $518 |
The following table sets forth the net foreign exchange gains (losses) recorded as marketing and selling expenses in the Company’s statements of operations during the three and six months ended June 30, 2015 and 2014 that resulted from foreign currency forward contracts, foreign currency denominated transactions, and the revaluation of foreign currency denominated assets and liabilities (in thousands):
|
| | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net foreign exchange gain (loss) recorded in marketing and selling expenses | | $(735) | | $(342) | | $571 | | $(1,250) |
See Note 5, Fair Value Measurements, for additional information on the fair value measurements for all financial assets and liabilities, including derivative assets and derivative liabilities, that are measured at fair value on a recurring basis.
| |
5. | FAIR VALUE MEASUREMENTS |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
On a recurring basis, the Company measures certain financial assets and liabilities at fair value, including foreign-currency contracts, cash equivalents, and insurance contracts held in deferred compensation plans. At June 30, 2015 and December 31, 2014, all of the Company’s financial assets and liabilities 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 certain deferred compensation investments, primarily money market and mutual funds. Assets and liabilities valued based on other observable inputs and classified as Level 2 are foreign currency contracts and certain deferred compensation investments, primarily insurance contracts.
The following tables summarize the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis (in thousands):
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date Using |
| June 30, 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 (1) | $ | 4,809 |
| | $ | 1,161 |
| | $ | 3,648 |
| | $ | — |
|
Foreign currency contracts | 100 |
| | — |
| | 100 |
| | — |
|
| | | | | | | |
Financial liabilities: | | | | | | | |
Foreign currency contracts | $ | 50 |
| | $ | — |
| | $ | 50 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date Using |
| December 31, 2014 | | 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 | $ | 1,859 |
| | $ | 1,245 |
| | $ | 614 |
| | $ | — |
|
| | | | | | | |
Financial liabilities: | | | | | | | |
Foreign currency contracts | $ | 518 |
| | $ | — |
| | $ | 518 |
| | $ | — |
|
(1) Deferred compensation assets at June 30, 2015 included $3.1 million of funds that Orad invested in insurance contracts for the post-employment benefits that Orad employees earned.
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. For the Company’s $125.0 million aggregate principal amount of the Notes, the fair value of the liability component, $96.7 million, is based on the discounted cash flow method with the concluded yield of 7.66%. The fair value of the Company’s Notes at June 30, 2015, as issued with the conversion feature recorded in equity, is approximately $113.3 million based on open market trading activity which constitutes a Level 2 input in the fair value hierarchy. See Note 12, Long Term Debt and Credit Agreement, for additional information.
6. INVENTORIES
Inventories consisted of the following (in thousands):
|
| | | | | | | |
| June 30, 2015 | | December 31, 2014 |
Raw materials | $ | 10,614 |
| | $ | 9,942 |
|
Work in process | 1,263 |
| | 248 |
|
Finished goods | 31,995 |
| | 37,811 |
|
Total | $ | 43,872 |
| | $ | 48,001 |
|
The total inventories balance as of June 30, 2015 included $4.7 million of Orad inventories. At June 30, 2015 and December 31, 2014, finished goods inventory included $3.5 million and $4.3 million, respectively, associated with products shipped to customers and deferred labor costs for arrangements where revenue recognition had not yet commenced.
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):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2015 | | December 31, 2014 |
| Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
Completed technologies and patents | $ | 82,679 |
| | $ | (51,642 | ) | | $ | 31,037 |
| | $ | 51,950 |
| | $ | (51,950 | ) | | $ | — |
|
Customer relationships | 54,776 |
| | (47,312 | ) | | 7,464 |
| | 49,216 |
| | (46,771 | ) | | 2,445 |
|
Trade names | 6,112 |
| | (5,912 | ) | | 200 |
| | 5,936 |
| | (5,936 | ) | | — |
|
Capitalized software costs | 5,033 |
| | (5,033 | ) | | — |
| | 5,043 |
| | (5,043 | ) | | — |
|
Total | $ | 148,600 |
| | $ | (109,899 | ) | | $ | 38,701 |
| | $ | 112,145 |
| | $ | (109,700 | ) | | $ | 2,445 |
|
Amortization expense related to all intangible assets in the aggregate was $0.6 million and $0.4 million, respectively, for the three months ended June 30, 2015 and 2014 and $1.0 million and $1.0 million, respectively, for the six months ended June 30, 2015 and June 30, 2014. The Company expects amortization of acquired intangible assets to be $5.5 million for the remainder of 2015, $10.3 million in 2016, $9.3 million in 2017, $9.3 million in 2018, and $4.4 million in 2019.
| |
8. | OTHER LONG-TERM LIABILITIES |
Other long-term liabilities consisted of the following (in thousands):
|
| | | | | | | |
| June 30, 2015 | | December 31, 2014 |
Long-term deferred rent | $ | 7,521 |
| | $ | 8,236 |
|
Long-term accrued restructuring | 1,158 |
| | 1,334 |
|
Long-term deferred compensation | 8,717 |
| | 4,703 |
|
Total | $ | 17,396 |
| | $ | 14,273 |
|
In March 2013 and May 2013, two purported securities class action lawsuits were filed against the Company and certain of the Company’s former executive officers seeking unspecified damages in the U.S. District Court for the District of Massachusetts. In July 2013, the two cases were consolidated and the original plaintiffs agreed to act as co-plaintiffs in the consolidated case. In September 2013, the co-plaintiffs filed a consolidated amended complaint on behalf of those who purchased the Company’s common stock between October 23, 2008 and March 20, 2013. The consolidated amended complaint, which named the
Company, certain of the Company’s current and former executive officers and the Company’s former independent accounting firm as defendants, purported to state a claim for violation of federal securities laws as a result of alleged violations of the federal securities laws pursuant to Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. In October 2013, the Company filed a motion to dismiss the consolidated amended complaint, resulting in the dismissal of some of the claims, and the dismissal of Mr. Hernandez and one of the two plaintiffs from the case. On December 31, 2014, the parties reached an agreement to settle the case. The agreement called for Avid to cause payment of $2.5 million in respect of the settlement. This payment was placed in escrow on or about January 27, 2015 by the Company’s insurance carrier. The settlement was approved and the case was dismissed on May 12, 2015.
In April and May 2013, the Company received a document preservation request and inquiry from the SEC Division of Enforcement and a federal grand jury subpoena from the Department of Justice requesting certain documents, including in particular documents related to the Company’s disclosures regarding the Company’s accounting review and revenue transactions. The Company produced documents responsive to such requests and provided regular updates to the authorities on the Company’s accounting evaluation and intends to continue to cooperate fully with the authorities should the Company receive any further inquiries or requests. However, the Company has not received any such further inquiries or requests since last briefing the authorities in 2014, and although there can be no assurances, the Company believes that, based on information currently available, neither any further action in this matter nor the outcome of these inquiries will have a material adverse impact on the Company’s operations, financial condition or liquidity.
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. See the risk factors discussed in Item 1A of this Form 10-Q and the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. 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.
At June 30, 2015 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 other 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 at a bank that are used as security deposits in connection with the Company’s Burlington, Massachusetts office space. In the event of default on the underlying leases, the landlords would, at June 30, 2015, 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 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 approximately $1.1 million that support its ongoing operations. These letters of credit have various terms and expire during 2015 and beyond, and some of the letters of credit may automatically renew based on the terms of the underlying agreements. In connection with the Credit Facility disclosed in Note 12, Long Term Debt and Credit Agreement, the lenders underwriting these letters of credit required the Company to place $2.3 million in a restricted cash account. The cash will be returned to the Company in Q3 2015.
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 six months ended June 30, 2015 and 2014 (in thousands):
|
| | | | | | | |
| Six Months Ended June 30, |
| 2015 | | 2014 |
Accrual balance at beginning of year | $ | 2,792 |
| | $ | 3,501 |
|
Accruals for product warranties | 1,409 |
| | 2,778 |
|
Costs of warranty claims | (1,727 | ) | | (2,738 | ) |
Accrual balance at end of period | $ | 2,474 |
| | $ | 3,541 |
|
The warranty accrual is included in the caption “accrued expenses and other current liabilities” in the Company’s condensed consolidated balance sheet.
| |
10. | RESTRUCTURING COSTS AND ACCRUALS |
In June 2015, the Company recorded $0.5 million of restructuring costs revision resulting from an update to the sublease assumption related to the Company’s Mountain View, California facility that was partially abandoned in 2012.
The accrual balance of prior restructuring plans was $2.2 million at June 30, 2015, mainly 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 restructuring actions are anticipated under those plans, however, new restructuring plans may occur in the future.
Restructuring Summary
The following table sets forth the activity in the restructuring accruals for the six months ended June 30, 2015 (in thousands):
|
| | | | | | | | | | | |
| Employee- Related | | Facilities/ Other- Related | | Total |
Accrual balance at December 31, 2014 | $ | 58 |
| | $ | 2,285 |
| | $ | 2,343 |
|
Revisions of estimated liabilities | — |
| | 539 |
| | 539 |
|
Accretion | — |
| | 107 |
| | 107 |
|
Cash payments | (58 | ) | | (678 | ) | | (736 | ) |
Foreign exchange impact on ending balance | — |
| | (48 | ) | | (48 | ) |
Accrual balance at June 30, 2015 | $ | — |
| | $ | 2,205 |
| | $ | 2,205 |
|
The facilities/other-related accruals at June 30, 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/other-related accruals, $1.0 million is included in the caption “accrued expenses and other current liabilities” and $1.2 million is included in the caption “other long-term liabilities” in the Company’s condensed consolidated balance sheet at June 30, 2015.
| |
11. | PRODUCT AND GEOGRAPHIC INFORMATION |
The Company, through the evaluation of the discrete financial information that is regularly reviewed by the chief operating decision makers, which include 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 and six months ended June 30, 2015 and 2014 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Video products and solutions net revenues | $ | 42,830 |
| | $ | 55,496 |
| | $ | 89,947 |
| | $ | 115,574 |
|
Audio products and solutions net revenues | 33,320 |
| | 31,819 |
| | 66,232 |
| | 66,311 |
|
Products and solutions net revenues | 76,150 |
| | 87,315 |
| | 156,179 |
| | 181,885 |
|
Services net revenues | 33,617 |
| | 37,329 |
| | 73,174 |
| | 77,741 |
|
Total net revenues | $ | 109,767 |
| | $ | 124,644 |
| | $ | 229,353 |
| | $ | 259,626 |
|
The following table sets forth the Company’s revenues by geographic region for the three and six months ended June 30, 2015 and 2014 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Revenues: | | | | | | | |
United States | $ | 41,917 |
| | $ | 44,653 |
| | $ | 87,079 |
| | $ | 89,732 |
|
Other Americas | 6,623 |
| | 10,131 |
| | 14,172 |
| | 24,610 |
|
Europe, Middle East and Africa | 47,000 |
| | 54,098 |
| | 96,253 |
| | 109,522 |
|
Asia-Pacific | 14,227 |
| | 15,762 |
| | 31,849 |
| | 35,762 |
|
Total net revenues | $ | 109,767 |
| | $ | 124,644 |
| | $ | 229,353 |
| | $ | 259,626 |
|
| |
12. | 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 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 $120.6 million after deducting the initial purchasers’ discount and the estimated 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 tradeable 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 $0.2 million debt discount accretion as interest expenses in the Company’s statement of operations for the three months ended June 30, 2015.
In connection with the issuance of the Notes, the Company recorded an income tax benefit of $6.5 million as a discrete item for the three and six month periods ended June 30, 2015 as a result of the creation of a deferred tax liability associated with the portion of the Notes that was classified as equity. While GAAP requires the offset of the deferred tax liability to be recorded in additional paid-in capital, consistent with the equity portion of the Notes, the creation of the deferred tax liability also necessitated the release of a valuation allowance against deferred tax assets in an equal amount which, under GAAP, is required to be reflected as an income tax benefit in the current period due to the Company having generated taxable losses in the US for the six months ended June 30, 2015. To the extent the Company generates positive taxable income for the twelve months ended December 31, 2015, some or all of the $6.5 million benefit would have to be reversed in the third or fourth quarter of 2015. In addition, there are significant judgments inherent in assessing the deductibility of certain offering costs incurred in connection with the offering of the Notes and changes in those judgments could result in additional income tax benefit being recorded in future quarters.
The Company incurred transaction costs of $4.4 million relating to the issuance of the Notes. The Company adopted ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, prospectively, 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 $3.4 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 $1.0 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:
|
| | | |
| June 30, 2015 |
| (in thousands) |
Principal amount of notes | $ | 125,000 |
|
Original debt discount due to: | |
Allocation of proceeds to equity | (28,298 | ) |
Allocation of issuance costs to debt | (3,412 | ) |
Accumulated accretion | 207 |
|
Net carrying value | $ | 93,497 |
|
Capped Call Transaction
In connection with the offering of the Notes, on June 9, 2015, the Company entered into a capped call 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 Facility
On June 22, 2015, the Company entered into a credit agreement with various lenders (the “Lenders”) and KeyBank National Association, as administrative agent. Pursuant to the credit agreement, the Lenders agreed to provide a revolving credit facility (the “Credit Facility”) that allows the Company to borrow up to a maximum of $35.0 million outstanding at any time. The Company may increase the total commitments under the Credit Facility by up to an additional $15.0 million, subject to certain conditions. The Credit Facility terminates, and all outstanding loans become due and payable, on December 15, 2019. Prior to the maturity of the Credit Facility, any amounts borrowed may be repaid and, subject to the terms and conditions of the Credit Facility, reborrowed in whole or in part without penalty. As of June 30, 2015, there were no amounts outstanding under the Credit Facility.
Interest accrues on outstanding borrowings under the Credit Facility at a rate of a Eurodollar Rate (as defined in the Credit Facility) plus 2.00% or a Base Rate (as defined in the Credit Facility) plus 1.00%, at the option of the Company. The Company must also pay to the Lenders, on a quarterly basis, an unused line fee at a rate of 0.25% per annum on an amount equal to (1) the average lending commitments under the Credit Facility during the immediately preceding quarter less (2) the average daily amount of the outstanding borrowings plus the undrawn amount of any outstanding letters of credit under the Credit Facility during the immediately preceding quarter. During the term of the Credit Facility, the Company is entitled to reduce the maximum amounts of the Lenders’ commitments, subject to the payment of certain fees based on the amount of any reduction.
Borrowings under the Credit Facility are secured by substantially all of the assets of the Company. The Credit Facility requires the Company to comply with a leverage ratio and interest coverage ratio and also contains customary representations and warranties, covenants, mandatory prepayments and events of default under which the Company’s payment obligations may be accelerated.
Concurrently with the entry into the Credit Facility, on June 22, 2015, the Company terminated its credit agreement dated October 1, 2010.
Stock Repurchases
On June 8, 2015, the Company’s Board of Directors approved a stock repurchase plan authorizing the Company to repurchase up to $9.0 million of common stock in open market or other transactions from time to time until September 6, 2015 using a portion of the proceeds of the offering of the Notes. Share repurchases under the plan may be made through the open market, established plans or otherwise in accordance with all applicable securities laws, rules, and regulations. The stock repurchase plan does not permit the Company to repurchase any shares of common stock directly from directors or officers of the Company. Upon the repurchase of any shares of common stock, such shares are held as treasury stock of the Company. The Company entered into a stock repurchase agreement, which authorized a third party financial institution to repurchase shares of the Company’s common stock, on the Company’s behalf, on the open market in an aggregate amount not to exceed $8.0 million. The Company repurchased 480,601 shares for $6.6 million during June 2015 and had $1.4 million available for additional stock repurchases as of June 30, 2015. The Company completed the stock repurchase in July 2015. In aggregate 586,825 shares have been repurchased under the plan. At June 30, 2015, the Company had not settled the payment of these purchases and $6.6 million was included in the caption “accrued expenses and other current liabilities” in the Company’s condensed consolidated balance sheet.
Stock-Based Compensation
Information with respect to option shares granted under all the Company’s stock incentive plans for the six months ended June 30, 2015 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 at January 1, 2015 | 5,564,111 |
| — |
| 5,564,111 |
| $11.20 | | |
Granted | — |
| — |
| — |
| $— | | |
Exercised | (196,486 | ) | — |
| (196,486 | ) | $11.64 | | |
Forfeited or canceled | (140,762 | ) | — |
| (140,762 | ) | $17.98 | | |
Options outstanding at June 30, 2015 | 5,226,863 |
| — |
| 5,226,863 |
| $11.00 | 4.39 | $20,155 |
Options vested at June 30, 2015 or expected to vest | | | 5,099,932 |
| $11.08 | 4.35 | $19,443 |
Options exercisable at June 30, 2015 | | | 3,815,010 |
| $12.17 | 3.92 | $12,375 |
Information with respect to the Company’s non-vested restricted stock units for the six months ended June 30, 2015 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 at January 1, 2015 | 811,880 |
| — |
| 811,880 |
| $10.01 | | |
Granted | 374,195 |
| 347,295 |
| 721,490 |
| $15.19 | | |
Vested | (333,012 | ) | — |
| (333,012 | ) | $10.18 | | |
Forfeited | (210,272 | ) | (38,625 | ) | (248,897 | ) | $11.62 | | |
Non-vested at June 30, 2015 | 642,791 |
| 308,670 |
| 951,461 |
| $13.46 | 0.93 | $12,683 |
Expected to vest | | | 864,317 |
| $13.44 | 0.89 | $11,521 |
Stock-based compensation was included in the following captions in the Company’s condensed consolidated statements of operations for the three and six months ended June 30, 2015 and 2014 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Cost of products revenues | $ | 40 |
| | $ | 65 |
| | $ | 135 |
| | $ | 141 |
|
Cost of services revenues | 175 |
| | 98 |
| | 334 |
| | 175 |
|
Research and development expenses | 46 |
| | 113 |
| | 152 |
| | 240 |
|
Marketing and selling expenses | 683 |
| | 642 |
| | 1,373 |
| | 934 |
|
General and administrative expenses | 1,938 |
| | 1,218 |
| | 3,350 |
| | 1,908 |
|
| $ | 2,882 |
| | $ | 2,136 |
| | $ | 5,344 |
| | $ | 3,398 |
|
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
EXECUTIVE OVERVIEW
Business Overview
We provide an open, integrated, and comprehensive technology platform, along with applications and services that enable the creation, distribution, and monetization of audio and video content. Specifically, we develop, market, sell, and support software and hardware for digital media content production, management and distribution. 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. Our 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 our products include feature films, television programming, live events, news broadcasts, commercials, music, video and other digital media content.
Our mission is to create the most powerful and collaborative media network that enables the creation, distribution and monetization of the most inspiring content in the world. Guided by our Avid Everywhere strategic vision, we strive to deliver the industry’s most open, innovative and comprehensive media platform connecting content creation with collaboration, asset protection, distribution and consumption for the media in the world – from the most prestigious and award-winning feature films, music recordings, and television shows, to live concerts and news broadcasts. We have been honored over time for our technological innovation with 14 Emmy Awards, one Grammy Award, two Oscars and the first ever America Cinema Editors Technical Excellence Award. Our solutions were used in all 2015 Oscar nominated films for Best Picture, Best Editing, Best Sound Editing and Best Sound Mixing. Our audio solutions were also used in all 2015 Grammy nominated recordings for Best Album of The Year, Best Record of the Year and Best Song of the Year.
Operations Overview
Our strategy is built on three pillars, Avid Everywhere, The Avid Advantage and the Avid Customer Association (“ACA”). Avid Everywhere, introduced in April 2013, is our strategic vision for connecting creative professionals and media organizations with their audiences in a more powerful, efficient, collaborative, and profitable way. Central to the Avid Everywhere vision is the Avid MediaCentral Platform, an open, extensible, and customizable foundation that streamlines and simplifies workflows by tightly integrating all Avid or third party products and services that run on top of it. The platform provides secure and protected access, which enables the creation and delivery of content faster and easier through a set of modular application suites that together represent an open, integrated, and flexible media production and distribution environment for the media industry. The Avid Advantage complements Avid Everywhere by offering a new standard in service, support and education to enable our customers to derive more efficiency from their Avid investment. Finally, the ACA created in September 2013, is an association of dedicated media community visionaries, thought leaders and users designed to provide essential strategic leadership to the media industry, facilitate collaboration between Avid and key industry leaders and visionaries, and deepen relationships between our customers and us.
Another key strategic initiative is our transition to a subscription or recurring revenue based model. In 2014 we began offering
subscription based licensing options of some of our products and solutions. These licensing options offer choice in pricing and deployment to suit our customers’ needs and are expected to increase recurring revenue on a longer term basis.
As a complement to our core strategy, we continue to review and implement programs throughout the Company to reduce costs, increase efficiencies and enhance our business, including by rationalizing our facilities and shifting a portion of our employee base to lower cost regions, such as our newly opened offices in Taiwan, the Philippines and Boca Raton, Florida and elsewhere that we are planning to open.
Recent Developments
On June 23, 2015, we completed the acquisition of Orad Hi-Tech Systems Ltd. (“Orad”), an Israeli company. The purchase price for Orad was $66.0 million based on the exchange rate on the date of closing, net of estimated cash acquired. Orad provides 3D real-time graphics, video servers and related asset management solutions. The acquisition adds content creation and media management solutions to the Avid MediaCentral Platform.
On June 15, 2015, we issued $125.0 million aggregate principal amount of our 2.00% Convertible Senior Notes due 2020 (the “Notes”). The net proceeds from the offering were $120.6 million after deducting the initial purchasers’ discount and the estimated 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.
In connection with the offering of the Notes, on June 9, 2015, we 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. The Capped Call expires on June 15, 2020. We paid $10.1 million for the Capped Call and recorded the payment as a decrease to additional paid-in capital.
On June 22, 2015, we entered into a credit agreement with various lenders (the “Lenders”) and KeyBank National Association, as administrative agent. Pursuant to the credit agreement, the Lenders agreed to provide a revolving credit facility (the “Credit Facility”) that allows us to borrow up to a maximum of $35.0 million outstanding at any time. We may increase the total commitments under the Credit Facility by up to an additional $15.0 million, subject to certain conditions, potentially increasing the Credit Facility to up to $50.0 million. The Credit Facility terminates, and all outstanding loans become due and payable, on December 15, 2019. Prior to the maturity of the Credit Facility, any amounts borrowed may be repaid and, subject to the terms and conditions of the Credit Facility, reborrowed in whole or in part without penalty. As of June 30, 2015, we had no amounts outstanding under the Credit Facility.
Concurrently with the entry into the Credit Facility, on June 22, 2015, we terminated our existing credit agreement dated October 1, 2010.
On June 8, 2015, our Board of Directors approved a stock repurchase plan authorizing us to repurchase up to $9.0 million of common stock in open market or other transactions from time to time until September 6, 2015 using a portion of the proceeds of the offering of the Notes. We entered into a stock repurchase agreement, which authorized a third party financial institution to repurchase shares of our common stock, on our behalf, on the open market in an aggregate amount not to exceed $8.0 million. We repurchased 480,601 shares for $6.6 million during June 2015 and had $1.4 million available for additional stock repurchases as of June 30, 2015. We completed the stock repurchase in July 2015. In aggregate 586,825 shares have been repurchased under the plan. The repurchased shares are held as our treasury stock.
For a more detailed description of the acquisition of Orad, the Notes, the Credit Facility, and the stock repurchase plan, see Note 3, Acquisitions, Note 12, Long Term Debt and Credit Agreement, and Note 13, Stockholders’ Equity, to our Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our estimates and judgments on historical experience and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities and the amounts of revenues and expenses. Actual results may differ from these estimates.
We believe that our critical accounting policies are those related to revenue recognition and allowances for sales returns and exchanges; stock-based compensation; income tax assets and liabilities; and restructuring charges and accruals. We believe these policies are critical because they most significantly affect the portrayal of our financial condition and results of operations and involve our most difficult and subjective estimates and judgments. A discussion of our critical accounting policies may be found in our Annual Report on Form 10-K for the year ended December 31, 2014 in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies and Estimates” and below. There have been no significant changes to the identification of the accounting policies and estimates that are deemed critical, nor have there been any significant changes to the policies applied or methodologies used by management to measure the critical accounting estimates.
Revenue Recognition
General
We commence 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 we sell do not require significant production, modification or customization. Installation of our products is generally routine, consists of implementation and configuration and does not have to be performed by us.
At the time of a sales transaction, we make 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, we consider 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, we also assess 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, we consider the payment terms of the transaction, our collection experience in similar transactions without making concessions, and our 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 our normal payment terms, we evaluate whether we have 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 we were 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.
We often receive 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 we have concluded that two or more orders with the same customer are so closely related that they are, in effect, parts of a single arrangement, we account for those orders as a single arrangement for revenue recognition purposes. In other circumstances, when we have 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, we account for those orders as separate arrangements for revenue recognition purposes.
For many of our 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 12 months, 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 the Media Composer, Pro Tools and Sibelius product lines. On Media Composer 8.0 in particular, which was released in May 2014, management has (i) clearly communicated a policy of no longer providing any Software Updates to customers that are not covered under a paid support plan and (ii) implemented robust digital rights management tools to enforce the policy. While the Company’s intent is clear and meaningful actions have been taken to enforce the policy, management does not believe the Company has yet demonstrated adherence to this policy for a sufficient period of time to overcome the presumption that Implied Maintenance Release PCS continues to exist. If management concluded that Implied Maintenance Release PCS on Media Composer 8.0 had ended as of June 30, 2015, revenue and net income for the three and six month periods ended June 30, 2015 would have increased by approximately $10.6 million, reflecting the recognition of orders received over the last 12 months that would have qualified for upfront recognition using the residual method of accounting. Management will continue to evaluate the judgment of whether or not Implied Maintenance Release PCS exists on each product line and version. If and when management concludes the presumption of Implied Maintenance Release PCS has ended for a particular product line or version in future quarters, software revenue related to orders received in prior quarters will be accelerated and prospective revenue recognition on new product orders will qualify for upfront recognition, assuming all other revenue recognition criteria are met and VSOE of fair value exists for all undelivered elements. We believe it is likely that the presumption of Implied Maintenance Release PCS for Media Composer 8.0 will be overcome by the end of the year.
We enter 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, we allocate revenue to each deliverable of the arrangement based on the relative selling prices of the deliverables. In such circumstances, we first determine 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. Our process for determining BESP for deliverables for which VSOE or TPE does not exist involves significant management judgment. In determining BESP, we consider 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 we do not sell separately, we consider (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 our established pricing practices had the deliverable been offered separately, and (iv) the prices a customer would likely be willing to pay.
We estimate 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, we will modify the remaining estimated service period accordingly and recognize the then-remaining deferred revenue balance over the revised service period.
We have established VSOE of fair value for all professional services and training and for some of our support offerings. Our policy for establishing VSOE of fair value consists of evaluating standalone sales, where available, 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, we exclude from the scope of software revenue recognition requirements our sales of tangible products that contain both software and non-software components that function together to deliver the essential functionality of the tangible products. We 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 our adoption of ASU No. 2009-14, we primarily recognized revenues using the revenue recognition criteria of Accounting Standards Codification, or ASC, Subtopic 985-605, Software-Revenue Recognition. As a result of our adoption of ASU No. 2009-14 on January 1, 2011, a majority of our 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 we 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, we determine 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 our 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 1 to 8 years.
Revenue Recognition of Software Deliverables
We recognize 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 we do not have VSOE of the fair value of our software products, we are permitted to account for our 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. We are unable to use the residual method to recognize revenues for most 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 a majority of our 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, we offer 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.
RESULTS OF OPERATIONS
The following table sets forth certain items from our consolidated statements of operations as a percentage of net revenues for the three and six months ended June 30, 2015 and 2014:
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net revenues: | | | | | | | |
Product | 69.4 | % | | 70.1 | % | | 68.1 | % | | 70.1 | % |
Services | 30.6 | % | | 29.9 | % | | 31.9 | % | | 29.9 | % |
Total net revenues | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of revenues | 39.6 | % | | 40.5 | % | | 39.7 | % | | 39.0 | % |
Gross margin | 60.4 | % | | 59.5 | % | | 60.3 | % | | 61.0 | % |
Operating expenses: | | | | | | | |
Research and development | 21.2 | % | | 17.7 | % | | 20.3 | % | | 17.3 | % |
Marketing and selling | 29.9 | % | | 27.5 | % | | 26.4 | % | | 25.8 | % |
General and administrative | 15.8 | % | | 16.0 | % | | 16.1 | % | | 14.8 | % |
Amortization of intangible assets | 0.4 | % | | 0.2 | % | | 0.3 | % | | 0.3 | % |
Restructuring costs, net | 0.5 | % | | (0.1 | )% | | 0.2 | % | | (0.1 | )% |
Total operating expenses | 67.8 | % | | 61.3 | % | | 63.3 | % | | 58.1 | % |
Operating income | (7.4 | )% | | (1.8 | )% | | (3.0 | )% | | 2.9 | % |
Interest and other income (expense), net | (1.3 | )% | | (0.3 | )% | | (0.9 | )% | | (0.3 | )% |
Income before income taxes | (8.7 | )% | | (2.1 | )% | | (3.9 | )% | | 2.6 | % |
Provision for income taxes | (5.2 | )% | | 0.5 | % | | (2.2 | )% | | 0.4 | % |
Net income | (3.5 | )% | | (2.6 | )% | | (1.7 | )% | | 2.2 | % |
Net Revenues
Our net revenues are derived mainly from sales of video and audio hardware and software products and solutions for digital media content production, management and distribution, and related professional services and maintenance contracts. We commonly sell large, complex solutions to our customers that, due to their strategic nature, have long lead times where the timing of order execution and fulfillment can be difficult to predict. As a result, the timing and amount of product revenue recognized each quarter related to these large orders, as well as the services associated with them, can fluctuate significantly from quarter to quarter and cause quarterly operating results to vary. See the risk factors discussed in Item 1A of this report and our Annual Report on Form 10-K for the year ended December 31, 2014.
|
| | | | | | | | | | | | | |
Net Revenues for the Three Months Ended June 30, 2015 and 2014 |
(dollars in thousands) |
| 2015 | | Change | | 2014 |
| Net Revenues | | $ | | % | | Net Revenues |
Video products and solutions | $ | 42,830 |
| | $ | (12,666 | ) | | (22.8)% | | $ | 55,496 |
|
Audio products and solutions | 33,320 |
| | 1,501 |
| | 4.7% | | 31,819 |
|
Products and solutions | 76,150 |
| | (11,165 | ) | | (12.8)% | | 87,315 |
|
Services | 33,617 |
| | (3,712 | ) | | (9.9)% | | 37,329 |
|
Total net revenues | $ | 109,767 |
| | $ | (14,877 | ) | | (11.9)% | | $ | 124,644 |
|
|
| | | | | | | | | | | | | |
Net Revenues for the Six Months Ended June 30, 2015 and 2014 |
(dollars in thousands) |
| 2015 | | Change | | 2014 |
| Net Revenues | | $ | | % | | Net Revenues |
Video products and solutions | $ | 89,947 |
| | $ | (25,627 | ) | | (22.2)% | | $ | 115,574 |
|
Audio products and solutions | 66,232 |
| | (79 | ) | | (0.1)% | | 66,311 |
|
Products and solutions | 156,179 |
| | (25,706 | ) | | (14.1)% | | 181,885 |
|
Services | 73,174 |
| | (4,567 | ) | | (5.9)% | | 77,741 |
|
Total net revenues | $ | 229,353 |
| | $ | (30,273 | ) | | (11.7)% | | $ | 259,626 |
|
The following table sets forth the percentage of our net revenues attributable to geographic regions for the three and six months ended June 30, 2015 and 2014:
|
| | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
United States | 38% | | 36% | | 38% | | 35% |
Other Americas | 6% | | 8% | | 6% | | 9% |
Europe, Middle East and Africa | 43% | | 43% | | 42% | | 42% |
Asia-Pacific | 13% | | 13% | | 14% | | 14% |
Video Products and Solutions Revenues
Video products and solutions revenues are derived primarily from sales of our storage and workflow solutions, our media management solutions and our video creative tools. Video products and solutions revenues decreased $12.7 million, or 22.8%, for the three months ended June 30, 2015, and decreased $25.6 million, or 22.2%, for the six months ended June 30, 2015, compared to the same periods in 2014. The decrease for the three and six months ended June 30, 2015 was primarily due to lower amortization of deferred revenues attributable to transactions executed on or before December 31, 2010. As a result of our adoption of ASU No. 2009-13 and ASU No. 2009-14 on January 1, 2011, many of our product orders now qualify for upfront revenue recognition; however, prior to adoption of this accounting guidance the same orders required ratable recognition over periods of up to eight years. Deferred revenue associated with transactions executed prior to the adoption of ASU No. 2009-13 and ASU No. 2009-14 will continue to decline through 2016, before the balance is largely amortized, contributing less revenue each period. Also contributing to the decline in revenue is the impact of new product offerings that are scheduled to ship in the third and fourth quarter of 2015, which has had the impact of decreasing demand for the legacy versions of those products in the first half of 2015. Revenues for the three and six months ended June 30, 2014 were also higher due to increased demand attributable to the 2014 Winter Olympics and 2014 FIFA World Cup events.
Audio Products and Solutions Revenues
Audio products and solutions revenues are derived primarily from sales of our digital audio software and workstation solutions and our control surfaces, consoles and live-sound systems. Audio products and solutions revenues increased $1.5 million, or 4.7%, for the three months ended June 30, 2015, and decreased $0.1 million, or 0.1%, for the six months ended June 30, 2015, compared to the same periods in 2014. The changes in audio revenues were primarily due to the timing of order execution and fulfillment.
Services Revenues
Services revenues are derived primarily from maintenance contracts, as well as professional services and training. Services revenues decreased $3.7 million, or 9.9%, for the three months ended June 30, 2015, and decreased $4.6 million, or 5.9%, for the six months ended June 30, 2015, compared to the same periods in 2014. The decrease in services revenues was the result of the timing of recognition of professional services revenues, which is largely dependent upon the timing of large professional services agreements, as well as the impact of the previously discussed lower amortization of deferred revenues attributable to transactions executed on or before December 31, 2010.
Cost of Revenues, Gross Profit and Gross Margin Percentage
Cost of revenues consists primarily of costs associated with:
| |
• | procurement of components and finished goods; |
| |
• | assembly, testing and distribution of finished products; |
| |
• | customer support related to maintenance; |
| |
• | royalties for third-party software and hardware included in our products; |
| |
• | amortization of technology; and |
| |
• | providing professional services and training. |
Amortization of technology represents the amortization of developed technology assets acquired as part of acquisitions.
|
| | | | | | | | | | | | | |
Costs of Revenues for the Three Months Ended June 30, 2015 and 2014 |
(dollars in thousands) |
| 2015 | | Change | | 2014 |
| Costs | | $ | | % | | Costs |
Products | $ | 28,363 |
| | $ | (6,734 | ) | | (19.2)% | | $ | 35,097 |
|
Services | 14,943 |
| | (380 | ) | | (2.5)% | | 15,323 |
|
Amortization of intangible assets | 163 |
| | 163 |
| | —% | | — |
|
Total cost of revenues | $ | 43,469 |
| | $ | (6,951 | ) | | (13.8)% | | $ | 50,420 |
|
| | | | | | | |
Gross profit | $ | 66,298 |
| | $ | (7,926 | ) | | (10.7)% | | $ | 74,224 |
|
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Costs of Revenues for the Six Months Ended June 30, 2015 and 2014 |
(dollars in thousands) |
| 2015 | | Change | | 2014 |
| Costs | | $ | | % | | Costs |
Products | $ | 60,160 |
| | $ | (9,931 | ) | | (14.2)% | | $ | 70,091 |
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Services | 30,638 |
| | (356 | ) | | (1.1)% | | 30,994 |
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Amortization of intangible assets | 163 |
| | 113 |
| | 226.0% | | 50 |
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Total cost of revenues | $ | 90,961 |
| | $ | (10,174 | ) | | (10.1)% | | $ | 101,135 |
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Gross profit | $ | 138,392 |
| | $ | (20,099 | ) | | (12.7)% | | $ | 158,491 |
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Gross Margin Percentage
Gross margin percentage, which is net revenues less costs of revenues divided by net revenues, fluctuates based on factors such as the mix of products sold, the cost and proportion of third-party hardware and software included in the systems sold, the offering of product upgrades, price discounts and other sales-promotion programs, the distribution channels through which products are sold, the timing of new product introductions, sales of aftermarket hardware products such as disk drives and currency exchange-rate fluctuations. See the risk factors discussed in Item 1A of this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2014. Our total gross margin percentage for the three months ended June 30, 2015 slightly increased to 60.4% from 59.5% for the same period in 2014. Our total gross margin percentage for the six months ended June 30, 2015 slightly decreased to 60.3% from 61.0% for the same period in 2014. The slight fluctuation in gross margin was attributable to lower absorption of fixed overhead costs due to lower revenues, which was offset by our cost reduction initiatives.
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Gross Margin % for the Three Months Ended June 30, 2015 and 2014 |
| 2015 Gross Margin % | | Increase (Decrease) in Gross Margin % | | 2014 Gross Margin % |
Products | 62.8% | | 3.0% | | 59.8% |
Services | 55.5% | | (3.5)% | | 59.0% |
Total | 60.4% | | 0.9% | | 59.5% |
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Gross Margin % for the Six Months Ended June 30, 2015 and 2014 |
| 2015 Gross Margin % | | Increase (Decrease) in Gross Margin % | | 2014 Gross Margin % |
Products | 61.5% | | —% | | 61.5% |
Services | 58.1% | | (2.0)% | | 60.1% |
Total | 60.3% | | (0.7)% | | 61.0% |
Operating Expenses and Operating (Loss) Income
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Operating Expenses and Operating (Loss) Income for the Three Months Ended June 30, 2015 and 2014 |
(dollars in thousands) |
| 2015 | | Change | | 2014 |
| Expenses | | $ | | % | | Expenses |
Research and development | $ | 23,310 |
| | $ | 1,240 |
| | 5.6% | | $ | 22,070 |
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Marketing and selling | 32,811 |
| | (1,486 | ) | | (4.3)% | | 34,297 |
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General and administrative | 17,425 |
| | (2,559 | ) | | (12.8)% | | 19,984 |
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Amortization of intangible assets | 408 |
| | 10 |
| | 2.5% | | 398 |
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Restructuring costs, net | 539 |
| | 704 |
| | (426.7)% | | (165 | ) |
Total operating expenses | $ | 74,493 |
| | $ | (2,091 | ) | | (2.7)% | | $ | 76,584 |
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Operating loss | $ | (8,195 | ) | | $ | (5,835 | ) | | 247.2% | | $ | (2,360 | ) |
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Operating Expenses and Operating (Loss) Income for the Six Months Ended June 30, 2015 and 2014 |
(dollars in thousands) |
| 2015 | | Change | | 2014 |
| Expenses | | $ | | % | | Expenses |
Research and development | $ | 46,483 |
| | $ | 1,459 |
| | 3.2% | | $ | 45,024 |
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Marketing and selling | 60,856 |
| | (6,256 | ) | | (9.3)% | | 67,112 |
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General and administrative | 36,812 |
| | (1,503 | ) | | (3.9)% | | 38,315 |
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Amortization of intangible assets | 782 |
| | (96 | ) | | (10.9)% | | 878 |
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Restructuring costs, net | 539 |
| | 704 |
| | (426.7)% | | (165 | ) |
Total operating expenses | $ | 145,472 |
| | $ | (5,692 | ) | | (3.8)% | | $ | 151,164 |
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Operating (loss) income | $ | (7,080 | ) | | $ | (14,407 | ) | | (196.6)% | | $ | 7,327 |
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Research and Development Expenses
Research and development (“R&D”) expenses include costs associated with the development of new products and the enhancement of existing products, and consist primarily of employee compensation and benefits; facilities costs; depreciation; costs for consulting and temporary employees; and prototype and other development expenses. R&D expenses increased $1.2 million, or 5.6%, for the three months ended June 30, 2015, compared to the same period in 2014, and increased $1.5 million, or 3.2%, for the six months ended June 30, 2015, compared to the same period in 2014. The table below provides further details regarding the changes in components of R&D expense.
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Change in R&D Expenses for the Three Months Ended June 30, 2015 and 2014 |
(dollars in thousands) |
| 2015 Increase (Decrease) From 2014 |
| $ | | % |
Consulting and outside services | $ | 705 |
| | 18.5 | % |
Computer hardware and supplies | 446 |
| | 47.7 | % |
Facilities and information technology | 106 |
| | 2.7 | % |
Personnel-related | (53 | ) | | (0.4 | )% |
Other | 36 |
| | 5.4 | % |
Total research and development expenses increase | $ | 1,240 |
| | 5.6 | % |
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Change in R&D Expenses for the Six Months Ended June 30, 2015 and 2014 |
(dollars in thousands) |
| 2015 Increase (Decrease) From 2014 |
| $ | | % |
Personnel-related | $ | (1,262 | ) | | (4.7 | )% |
Consulting and outside services | 1,238 |
| | 16.8 | % |
Computer hardware and supplies | 1,036 |
| | 55.8 | % |
Facilities and information technology | 288 |
| | 3.7 | % |
Other | 159 |
| | 11.8 | % |
Total research and development expenses increase | $ | 1,459 |
| | 3.2 | % |
The increase in consulting and outside services and computer hardware and supplies expenses for the three and six months ended June 30, 2015, compared to the same periods in 2014, was primarily due to the timing of certain development projects in 2015 as we develop new products and solutions consistent with our Avid Everywhere strategic vision. The decrease in personnel-related expenses for the six months ended June 30, 2015, compared to the same period in 2014, was primarily the result of the stronger dollar which helped lower the personnel-related expenses of our foreign employees.
Marketing and Selling Expenses
Marketing and selling expenses consist primarily of employee compensation and benefits for selling, marketing and pre-sales customer support personnel; commissions; travel expenses; advertising and promotional expenses; web design costs and facilities costs. Marketing and selling costs expenses decreased $1.5 million, or 4.3%, for the three months ended June 30, 2015, compared to the same period in 2014, and decreased $6.3 million, or 9.3%, for the six months ended June 30, 2015, compared to the same period in 2014. The table below provides further details regarding the changes in components of marketing and selling expense.
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Change in Marketing and Selling Expenses for the Three Months Ended June 30, 2015 and 2014 |
(dollars in thousands) |
| 2015 Increase (Decrease) From 2014 |
| $ | | % |
Facilities and information technology | $ | (1,204 | ) | | (16.9 | )% |
Foreign exchange (gains) losses | 393 |
| | 115.1 | % |
Consulting and outside services | (306 | ) | | (3.8 | )% |
Personnel-related | (23 | ) | | (0.1 | )% |
Other | (346 | ) | | (13.2 | )% |
Total marketing and selling expenses decrease | $ | (1,486 | ) | | (4.3 | )% |
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Change in Marketing and Selling Expenses for the Six Months Ended June 30, 2015 and 2014 |
(dollars in thousands) |
| 2015 Increase (Decrease) From 2014 |
| $ | | % |
Facilities and information technology | $ | (2,570 | ) | | (17.5 | )% |
Foreign exchange (gains) losses | (1,821 | ) | | (145.7 | )% |
Personnel-related | (1,161 | ) | | (1.8 | )% |
Consulting and outside services | (614 | ) | | (6.6 | )% |
Other | (90 | ) | | (0.9 | )% |
Total marketing and selling expenses decrease | $ | (6,256 | ) | | (9.3 | )% |
The decrease in facilities and information technology expenses for the three and six months ended June 30, 2015, compared to the same periods in 2014, was primarily the result of less usage of facilities and information technology in the 2015 periods. The decrease in personnel-related expenses for the six months ended June 30, 2015, compared to the same period in 2014, was primarily the result of the stronger dollar which helped lower the personnel-related expenses of our foreign employees. The decrease in consulting and outside services expenses for the three and six months ended June 30, 2015, compared to the same periods in 2014, was primarily due to our cost reduction initiatives. During the three months ended June 30, 2015, net foreign exchange losses (specifically, resulting from foreign currency forward contracts, foreign currency denominated transactions, and the revaluation of foreign currency denominated assets and liabilities), which are included in marketing and selling expenses, were $0.7 million, compared to losses of $0.3 million in the 2014 period. During the six months ended June 30, 2015, net foreign exchange gains were $0.6 million, compared to losses of $1.3 million in the 2014 period. We classify these gains and losses within marketing and selling expenses because the gains and losses generally arise from revenue arrangements that are denominated in foreign currencies to facilitate sales in certain foreign jurisdictions.
General and Administrative Expenses
General and administrative expenses consist primarily of employee compensation and benefits for administrative, executive, finance and legal personnel; audit, legal and strategic consulting fees; and insurance, information systems and facilities costs. Information systems and facilities costs reported within general and administrative expenses are net of allocations to other expenses categories. General and administrative expenses decreased $2.6 million, or 12.8%, for the three months ended June 30, 2015, compared to the same period in 2014, and decreased $1.5 million, or 3.9%, for the six months ended June 30, 2015, compared to the same period in 2014. The table below provides further details regarding the changes in components of general and administrative expense.
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Change in General and Administrative Expenses for the Three Months Ended June 30, 2015 and 2014 |
(dollars in thousands) |
| 2015 (Decrease) Increase From 2014 |
| $ | | % |
Consulting and outside services | $ | (6,917 | ) | | (71.2 | )% |
Acquisition-related | 4,312 |
| | 100.0 | % |
Personnel-related | (91 | ) | | (1.3 | )% |
Other | 137 |
| | (4.0 | )% |
Total general and administrative expenses decrease | $ | (2,559 | ) | | (12.8 | )% |
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Change in General and Administrative Expenses for the Six Months Ended June 30, 2015 and 2014 |
(dollars in thousands) |
| 2015 (Decrease) Increase From 2014 |
| $ | | % |
Consulting and outside services | $ | (9,081 | ) | | (50.6 | )% |
Acquisition-related | 6,693 |
| | 100.0 | % |
Personnel-related | 450 |
| | 3.3 | % |
Other | 435 |
| | 6.6 | % |
Total general and administrative expenses decrease | $ | (1,503 | ) | | (3.9 | )% |
The decrease in consulting and outside services expenses for the three and six months ended June 30, 2015, compared to the same periods in 2014, was primarily the result of a decrease in restatement-related costs and litigation expenses. The acquisition-related expenses during the three and six months ended June 30, 2015 were primarily the professional and consulting services expenses related to the acquisition of Orad. The increase in personnel-related expenses for the six months ended June 30, 2015, compared to the same period in 2014, was primarily the result of an increase in stock-based compensation.
Provision for Income Taxes
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Provision for Income Taxes for the Three Months Ended June 30, 2015 and 2014 |
(dollars in thousands) |
| 2015 | | Change | | 2014 |
| Provision | | $ | | % | | Provision |
Provision for income taxes | $ | (5,550 | ) | | $ | (6,172 | ) | | (992.3)% | | $ | 622 |
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Provision for Income Taxes for the Six Months Ended June 30, 2015 and 2014 |
(dollars in thousands) |
| 2015 | | Change | | 2014 |
| Provision | | $ | | % | | Provision |
Provision for income taxes | $ | (4,989 | ) | | $ | (6,051 | ) | | (569.8)% | | $ | 1,062 |
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Our effective tax rate, which represents our tax provision as a percentage of loss and income before tax, was 54.0% and 16.0%, respectively, for the six months ended June 30, 2015 and 2014. Our provision for income taxes and effective tax rate both decreased for the six months ended June 30, 2015, compared to the same period in 2014 primarily due to a benefit of $6.5 million that was recorded as a discrete item for the three and six months ended June 30, 2015 resulting from the creation of a deferred tax liability associated with the portion of the convertible note offering that was classified as equity. While GAAP requires the offset
of the deferred tax liability to be recorded in additional paid in capital, consistent with the equity portion of the convertible notes, the creation of the deferred tax liability also necessitated the release of a valuation allowance against deferred tax assets in an equal amount which, under GAAP, is required to be reflected as an income tax benefit in the current period due to the Company having generated taxable losses in the US for the six months ended June 30, 2015. To the extent the Company generates positive taxable income for the twelve months ended December 31, 2015, some or all of the $6.5 million benefit would have to be reversed in the third or fourth quarter of 2015. In addition, there are significant judgments inherent in assessing the deductibility of certain offering costs incurred in connection with the convertible notes offering and changes in those judgments could result in additional income tax benefit being recorded in future quarters.
The $6.5 million benefit was partially offset by increased foreign profits and a discrete tax charge of $0.3 million for a French audit assessment reduced by a $0.1 million benefit for the reversal of a previously accrued Canadian withholding tax assessment. During the six months ended June 30, 2014, the provision included a benefit of $0.3 million which was primarily comprised of a $0.3 million benefit for the reversal of a previously accrued Canada withholding tax penalty.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Sources of Cash
We have generally funded our operations in recent years through the use of existing cash balances, which we have supplemented from time to time with borrowings under our credit facilities. On June 15, 2015, we issued $125.0 million aggregate principal amount of our Notes. The net proceeds from the offering were $120.6 million after deducting the initial purchasers’ discount and the estimated offering expenses. Of the net proceeds of this offering, we used $10.1 million to enter into the Capped Call, $66.0 million to fund the acquisition of Orad, and $8.0 million to repurchase shares of our common stock. We plan to use the remaining proceeds to fund our general working capital requirements.
On June 22, 2015, we entered into a credit agreement with various lenders (the “Lenders”) and KeyBank National Association, as administrative agent. Pursuant to the credit agreement, the Lenders agreed to provide the Credit Facility that allows us to borrow up to a maximum of $35.0 million outstanding at any time. We may increase the total commitments under the Credit Facility by up to an additional $15.0 million, subject to certain conditions, potentially increasing the Credit Facility to up to $50.0 million. As of June 30, 2015, we had no amounts outstanding under the Credit Facility.
At June 30, 2015, our principal sources of liquidity included cash and cash equivalents totaling $34.6 million and available borrowings under our credit facilities of $35.0 million. At June 30, 2015, our working capital was $(147.2) million, compared to $(157.2) million at December 31, 2014