10-Q/A 1 xxia20140421_10qa.htm FORM 10-Q/A xxia20140421_10qa.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q/A

Amendment No. 2 

 

(Mark One)

 

[X]  

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

For the quarterly period ended March 31, 2013

           

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 000-31523

 

 

IXIA

(Exact name of Registrant as specified in its charter)

 

 

California

 

95-4635982

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

26601 West Agoura Road, Calabasas, CA 91302

(Address of principal executive offices, including zip code)

 

(818) 871-1800

(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 [ ] No [X]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):          

Large accelerated filer [ ]   

Accelerated filer [X] 

Non-accelerated filer (Do not check if a smaller reporting company) [ ] 

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]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock

 

75,270,635

(Class of Common Stock)

 

(Outstanding at April 24, 2013)

 



 

 

EXPLANATORY NOTE

 

As used in this Amendment No. 2 on Form 10-Q/A for the quarter ended March 31, 2013 (the “Form 10-Q/A”), the terms “Company,” “our,” “us” or “we” refer to Ixia, a California corporation.

 

This Form 10-Q/A amends the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, as originally filed with the Securities and Exchange Commission (the “SEC”) on May 10, 2013 (the “Original Filing”), as well as Amendment No. 1 on Form 10-Q/A to the Original Filing, as filed with the SEC on August 9, 2013 (“Amendment No. 1”). This Form 10-Q/A is being filed to restate our unaudited condensed consolidated financial statements for the quarter ended March 31, 2013 and to make related revisions to certain other disclosures in the Original Filing and in Amendment No. 1. The restatement of our financial statements in this Form 10-Q/A reflects the correction of certain identified errors related to revenue that affected the timing of the Company’s recognition of revenue for transactions that impacted the first quarter of 2013. The errors relate to (i) our inappropriate assessment of certain multiple-element arrangement sales transactions and (ii) an arrangement involving the extension of payment terms beyond our customary terms. The restatement also reflects the correction of errors related to the income tax effects of such revenue errors as well as the correction of certain other tax items in the quarter ended March 31, 2013. Further explanation regarding the restatement is set forth in Note 13 to the unaudited condensed consolidated financial statements included in this Form 10-Q/A.

 

The following sections in the Original Filing (and in Amendment No. 1 in the case of Part I – Item 4) are revised in this Form 10-Q/A to reflect the restatement:

 

Part I - Item 1 – Financial Statements (Unaudited)

Part 1 - Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Part I - Item 4 – Controls and Procedures

Part II - Item 1A - Risk Factors

Part II - Item 6 – Exhibits

 

Our principal executive officer and principal financial officer have also provided new certifications as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications are included in this Form 10-Q/A as Exhibits 31.1, 31.2 and 32.1.

 

For the convenience of the reader, this Form 10-Q/A sets forth the information in the Original Filing in its entirety, as such information, as well as the information in Amendment No. 1, are modified and superseded where necessary to reflect the restatement and related revisions. Except as provided above, this Amendment No. 2 does not reflect events occurring after the filing of the Original Filing and does not amend or otherwise update any information in the Original Filing. Accordingly, this Form 10-Q/A should be read in conjunction with our filings with the SEC subsequent to the date on which we filed the Original Filing with the SEC (i.e., May 10, 2013).

 

 
 

 

  

IXIA

 

TABLE OF CONTENTS 

 

   

Page Number

   

PART I. FINANCIAL INFORMATION

     

 

Item 1.

Financial Statements (unaudited)

 

     

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2013 (As Restated) and December 31, 2012

3
     

 

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2013 (As Restated) and 2012 (As Restated)

4
     

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 (As Restated) and 2012 (As Restated)

5
 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 (As Restated) and 2012 (As Restated)

6
     

 

 

 

Notes to Condensed Consolidated Financial Statements

7
     

 

     

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

     

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

35

     

 

 

Item 4.

Controls and Procedures

36

       
     

 

PART II.

OTHER INFORMATION

 

     

 

 

Item 1.

Legal Proceedings

41

     

 

 

Item 1A.

Risk Factors

41

     

 

 

Item 5.

Other Information

42

     

 

 

Item 6.

Exhibits

43

     

 

       
SIGNATURES  

44

 

 
2

 

 

PART I.          FINANCIAL INFORMATION

 

ITEM 1.          Financial Statements (unaudited)

 

IXIA

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

 

   

March 31,

   

December 31,

 
   

2013

   

2012

 
   

(As Restated

See Note 13)

         

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 65,337     $ 47,508  

Short-term investments in marketable securities

    139,753       126,851  

Accounts receivable, net

    99,853       103,523  

Inventories

    36,305       37,220  

Prepaid expenses and other current assets

    46,357       42,942  

Total current assets

    387,605       358,044  
                 

Investments in marketable securities

    3,167       3,119  

Property and equipment, net

    29,205       28,763  

Intangible assets, net

    147,099       157,003  

Goodwill

    260,457       260,457  

Other assets

    13,623       11,863  

Total assets

  $ 841,156     $ 819,249  
                 
                 

Liabilities and Shareholders’ Equity

               

Current liabilities:

               

Accounts payable

  $ 12,445     $ 12,114  

Accrued expenses and other

    44,208       52,525  

Deferred revenues

    66,603       66,096  

Total current liabilities

    123,256       130,735  
                 

Deferred revenues

    10,602       8,695  

Other liabilities

    36,984       32,321  

Convertible senior notes

    200,000       200,000  

Total liabilities

    370,842       371,751  
                 
                 

Shareholders’ equity:

               

Common stock, without par value; 200,000 shares authorized at March 31, 2013 and December 31, 2012; 75,219 and 74,126 shares issued and outstanding as of March 31, 2013 and December 31, 2012, respectively

    166,728       158,933  

Additional paid-in capital

    176,360       168,980  

Retained earnings

    125,116       117,296  

Accumulated other comprehensive income

    2,110       2,289  

Total shareholders’ equity

    470,314       447,498  
                 

Total liabilities and shareholders’ equity

  $ 841,156     $ 819,249  

 

The accompanying notes are an integral part of these condensed consolidated financial statements 

 

 
3

 

 

IXIA

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 

   

Three months ended

 
   

March 31,

 
   

2013

   

2012

 
   

(As Restated

See Note 13)

   

(As Restated

See Note 13)

 

Revenues:

               

Products

  $ 95,511     $ 69,607  

Services

    25,948       17,051  

Total revenues

    121,459       86,658  
                 

Costs and operating expenses:(1)

               

Cost of revenues - products (2)

    21,387       14,782  

Cost of revenues - services

    3,025       2,130  

Research and development

    29,712       20,851  

Sales and marketing

    35,041       24,607  

General and administrative

    12,058       11,516  

Amortization of intangible assets

    10,138       4,045  

Acquisition and other related

    1,272       425  

Restructuring

    58        

Total costs and operating expenses

    112,691       78,356  
                 

Income from operations

    8,768       8,302  

Interest income and other, net

    207       110  

Interest expense

    (1,943 )     (1,800 )

Income before income taxes

    7,032       6,612  

Income tax expense (benefit)

    (788 )     1,445  

Net income

  $ 7,820     $ 5,167  
                 

Earnings per share:

               

Basic

  $ 0.10     $ 0.07  

Diluted

  $ 0.10     $ 0.07  
                 

Weighted average number of common and common equivalent shares outstanding:

               

Basic

    74,718       70,580  

Diluted

    76,919       72,954  

                 
                 
                                                                        

(1) Stock-based compensation included in:

               

Cost of revenues - products

  $ 153     $ 96  

Cost of revenues - services

    58       37  

Research and development

    2,448       1,279  

Sales and marketing

    2,015       1,023  

General and administrative

    2,205       1,666  

  

(2)Cost of revenues – products excludes amortization of intangible assets, related to product lines and purchased technologies of $6.5 million and $2.7 million for the three months ended March 31, 2013 and 2012, respectively, which is included in Amortization of intangible assets.

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements 

 

 
4

 

 

IXIA

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

 

 

   

Three months ended

 
   

March 31,

 
   

2013

   

2012

 
   

(As Restated

See Note 13)

   

(As Restated

See Note 13)

 
                 

Net income

    7,820       5,167  
                 

Other comprehensive income, net of tax:

               

Change in unrealized gains and losses on investments

    144       1,084  

Cumulative translation adjustment

    (323 )     (297 )
                 

Total other comprehensive income (loss), net of tax

    (179 )     787  
                 

Comprehensive income

  $ 7,641     $ 5,954  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements 

 

 
5

 

 

IXIA

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

   

Three months ended

 
   

March 31,

 
   

2013

   

2012

 
   

(As Restated

See Note 13)

   

(As Restated

See Note 13)

 

Cash flows from operating activities:

               

Net income

  $ 7,820     $ 5,167  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation

    3,794       3,700  

Amortization of intangible assets

    10,138       4,045  

Stock-based compensation

    6,880       4,101  

Deferred income taxes

    (1,813 )     (317 )
Tax benefit from stock options transactions     500       657  

Excess tax benefits from stock-based compensation

    (555 )     (597 )

Changes in operating assets and liabilities, net of effect of acquisitions:

               

Accounts receivable, net

    3,670       2,000  

Inventories

    915       443  

Prepaid expenses and other current assets

    (3,954 )     60  

Other assets

    1,739       101  

Accounts payable

    331       4,943  

Accrued expenses and other

    (8,324 )     4,619  

Deferred revenues

    2,414       4,881  

Other liabilities

    3,031       54  
                 

Net cash provided by operating activities

    26,586       33,857  
                 

Cash flows from investing activities:

               

Purchases of property and equipment

    (4,559 )     (4,754 )

Purchases of available-for-sale securities

    (40,216 )     (81,173 )

Proceeds from available-for-sale securities

    27,501       52,417  

Purchases of other intangible assets

    (234 )     (206 )

Payments in connection with acquisitions, net of cash acquired

    401        
                 

Net cash used in investing activities

    (17,107 )     (33,716 )
                 

Cash flows from financing activities:

               

Proceeds from exercise of stock options

    7,795       5,947  

Excess tax benefits from stock-based compensation

    555       597  
                 

Net cash provided by financing activities

    8,350       6,544  
                 

Net increase in cash and cash equivalents

    17,829       6,685  

Cash and cash equivalents at beginning of period

    47,508       42,729  

Cash and cash equivalents at end of period

  $ 65,337     $ 49,414  

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements 

 

 
6

 

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1.           Business

 

Ixia was incorporated on May 27, 1997 as a California corporation. We are a leading provider of converged Internet Protocol (IP) network test and network visibility solutions. Equipment manufacturers, service providers, enterprises, and government agencies use our solutions to design, verify, and monitor a broad range of Ethernet, Wi-Fi, 3G and 4G/LTE equipment and networks. Our product solutions consist of our hardware platforms, such as our chassis, interface cards and appliances, software application tools, and services, including our warranty and maintenance offerings and professional services. We operated within one business segment during the periods presented in the accompanying condensed consolidated financial statements.

 

 

2.           Basis of Presentation and Recent Accounting Pronouncements

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements as of March 31, 2013 and for the three months ended March 31, 2013 and 2012, are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of our financial position, operating results, and cash flows for the interim periods presented. The results of operations for the current interim period presented is not necessarily indicative of results to be expected for the full year ending December 31, 2013 or any other future period.

 

These condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of December 31, 2012 has been derived from our audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2012, but does not include all disclosures required by U.S. GAAP. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”).

 

Reclassifications

 

Certain reclassifications have been made to prior period consolidated financial statements to conform to the current presentation. Income taxes payable is now presented within Accrued expenses and other on our consolidated balance sheets and consolidated statements of cash flows.

 

 

Recent Accounting Pronouncements

 

In June 2011, the FASB issued disclosure guidance related to the presentation of the Statement of Comprehensive Income. This guidance eliminated the then current option to report other comprehensive income and its components in the statement of changes in equity. Under this guidance, we are required to present either a single continuous statement of comprehensive income or a consolidated statement of operations immediately followed by a statement of comprehensive income. Although this guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under the previous guidance. We adopted this guidance in the first quarter of 2012 on a retrospective basis. There was no impact to our consolidated financial results as the adoption of this guidance related only to changes in financial statement presentation. In February 2013, FASB issued finalized disclosure guidance related to the amounts reclassified from accumulated other comprehensive income. Under this guidance, we are required to show reclassifications from accumulated other comprehensive income either in a single note or parenthetically on the face of the statement of operations provided that all of the required information is presented in a single location with the effect of significant amounts reclassified by component and the financial statement line items affected by the reclassification. The effective date for this disclosure guidance is for fiscal years beginning after December 15, 2012. We adopted this new guidance prospectively in the quarter ended March 31, 2013. The adoption of this new guidance did not have a material impact on our consolidated financial position, results of operations and cash flows.

 

 
7

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)  

 

3.           Acquisitions

 

Anue Systems, Inc.

 

On June 1, 2012, we completed our acquisition of all of the outstanding shares of capital stock and all other equity interests of Anue Systems, Inc. (“Anue”). Anue provides solutions to monitor and test complex networks, including Anue’s Net Tool Optimizer solution that efficiently aggregates and filters network traffic to help optimize network monitoring tool usage. With this acquisition, we have expanded our addressable market, broadened our product portfolio and grown our customer base. In addition, we expect to leverage Anue’s existing sales channels and assembled workforce, including its experienced development team. These factors, among others, contributed to a purchase price in excess of the estimated fair value of Anue’s net identifiable assets acquired (see summary of net assets below), and, as a result, we have recorded goodwill in connection with this transaction.

 

The aggregate cash consideration paid totaled $152.4 million and is subject to certain post-closing adjustments including an adjustment based on the final amount of Anue’s closing net working capital. The acquisition was funded from our existing cash and sale of investments.

 

Acquisition and other related costs, including integration activities, approximated $223,000 for the three months ended March 31, 2013. These acquisition and other related costs have been expensed as incurred, and have been included within the Acquisition and Other Related line item on our condensed consolidated statements of operations.

 

The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

Cash and cash equivalents

  $ 3,659  

Accounts receivable

    11,843  

Inventories

    4,380  

Prepaid and other assets

    2,980  

Fixed assets

    1,600  

Identifiable intangible assets

    74,700  

Goodwill

    91,376  

Total assets acquired

    190,538  

Accounts payable, accrued expenses and other liabilities

    (8,115 )

Deferred revenues

    (6,997 )

Deferred tax liability, net

    (22,986 )

Net assets acquired

  $ 152,440  

 

During the fourth quarter of 2012, we increased our purchase price for Anue from $151.9 million to $152.4 million due to the updated computations of Anue’s net working capital and net taxes payable as of the closing date. We also updated the allocation of our purchase price to adjust certain deferred tax balances.

 

The preliminary purchase price allocation is pending the completion of certain items, such as the final net working capital adjustment and the final tax attributes that will be finalized upon the filing of certain pre-acquisition tax returns.

 

The identifiable intangible assets of $74.7 million consist of $45.0 million of acquired technology, $21.9 million of customer relationships, $4.0 million for the trade name, $2.1 million related to non-compete agreements and $1.7 million of other identifiable intangible assets. The fair values of the identifiable intangible assets have been estimated using the income approach, which includes the discounted cash flow and relief-from-royalty methods. These intangible assets will be amortized using a straight-line method over their expected useful lives ranging from six months to six years. The goodwill recorded in connection with this transaction is not deductible for U.S. income tax purposes.

  

 
8

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited) 

 

BreakingPoint Systems, Inc.

 

On August 24, 2012, we completed our acquisition of all of the outstanding shares of capital stock of BreakingPoint Systems, Inc. (“BreakingPoint”). BreakingPoint is a leader in security testing, and its solutions provide global visibility into emerging threats and applications, along with advance insight into the resiliency of an organization’s information technology infrastructure under operationally relevant conditions and malicious attacks. With this acquisition, we have expanded our addressable market, broadened our product portfolio and grown our customer base. In addition, we expect to leverage BreakingPoint’s existing sales channels and assembled workforce, including its experienced product development and sales teams. These factors, among others, contributed to a purchase price in excess of the estimated fair value of BreakingPoint’s net identifiable assets acquired (see summary of net assets below), and, as a result, we have recorded goodwill in connection with this transaction.

 

The aggregate cash consideration paid totaled $163.7 million, and was funded from our existing cash and sale of investments.

 

Acquisition and other related costs, including integration activities, approximated $1.0 million for the three months ended March 31, 2013. These acquisition and other related costs have been expensed as incurred, and have been included within the Acquisition and Other Related line item on our condensed consolidated statements of operations.

 

In connection with the acquisition, we may be obligated to pay up to $3.8 million to certain pre-acquisition employees of BreakingPoint over a weighted average period of less than two years provided they remain employees of Ixia. As of March 31, 2013, we have paid $1.1 million related to this obligation, of which $662,000 has been included within the Acquisition and Other Related line item on our condensed consolidated statements of operations for the three months ended March 31, 2013. The remaining accrual was included as a component of Accrued expenses and other in our consolidated balance sheets.

  

The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

Cash and cash equivalents

  $ 13,417  

Accounts receivable

    4,552  

Inventories

    3,156  

Prepaid and other assets

    796  

Fixed assets

    936  

Identifiable intangible assets

    65,600  

Goodwill

    102,652  

Total assets acquired

    191,109  

Accounts payable, accrued expenses and other liabilities

    (6,889 )

Deferred revenues

    (6,387 )

Deferred tax liability, net

    (14,146 )

Net assets acquired

  $ 163,687  

 

During the fourth quarter of 2012, we reduced our purchase price for BreakingPoint from $164.1 million to $163.7 million as a result of the final computation of BreakingPoint’s closing net working capital. We also updated the allocation of our purchase price to adjust the values of certain intangible assets, to decrease the accrual for vacation and to modify certain deferred tax balances.

 

The preliminary purchase price allocation is pending the completion of certain items, such as the final tax attributes that will be determined upon the filing of certain pre-acquisition tax returns.

 

The identifiable intangible assets of $65.6 million consist of $22.7 million of acquired technology, $20.6 million of customer relationships, $16.6 million of service agreements, $2.9 million for the trade name, $2.2 million related to non-compete agreements and $600,000 of other identifiable intangible assets. The fair values of the identifiable intangible assets have been estimated using the income approach, which includes the discounted cash flow and relief-from-royalty methods. These intangible assets will be amortized using a straight-line method over their expected useful lives ranging from two weeks to six years. The goodwill recorded in connection with this transaction is not deductible for U.S. income tax purposes.

 

 
9

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited) 

 

Pro Forma and Post Acquisition Results (Unaudited)

 

The following table summarizes the unaudited pro forma total revenues and net income of the combined entities, including Ixia, had the acquisitions of Anue and BreakingPoint occurred on January 1, 2011 (in thousands):

 

   

Three Months Ended

 
   

March 31,

 
   

2012

 
         

Total revenues

  $ 108,829  

Net income

    1,253  

 

The pro forma combined results in the table above have been prepared for comparative purposes only and include acquisition related adjustments for, among others items, reductions in revenues related to the estimated fair value adjustment to deferred revenues, certain acquisition related costs, amortization of identifiable intangible assets, and the related income tax effects for these adjustments. The pro forma combined results, as well as those of Anue and BreakingPoint included in the Company’s results subsequent to the acquisition date, do not purport to be indicative of the results of operations which would have resulted had the acquisition been effective at the beginning of the applicable periods noted above, or the future results of operations of the combined entity.

 

 

4.     Restructuring

 

During the third quarter of 2012, our management approved, committed to and initiated a plan to restructure our operations following our August 24, 2012 acquisition of BreakingPoint (“BreakingPoint Restructuring”). The BreakingPoint Restructuring included a net reduction in force of approximately 29 positions (primarily impacting our research and development team in Melbourne, Australia). For the year ended December 31, 2012, we recognized restructuring costs of approximately $4.1 million, and of this amount, $2.7 million primarily related to one-time employee termination benefits consisting of severance and other related costs and $1.4 million related to facility costs associated with the closure of our office in Melbourne, Australia and other costs, which were recorded to the Restructuring line item within our consolidated statement of operations. There were no restructuring activities prior to the third quarter of 2012.

 

As of December 31, 2012, $1.0 million of such costs were accrued to the Accrued expenses and other line item within our consolidated balance sheets. The BreakingPoint Restructuring was substantially completed during the fourth quarter of 2012.

 

As of March 31, 2013, $650,000 of such costs were accrued to the Accrued expenses and other line item within our consolidated balance sheets. These costs relate primarily to lease termination costs which are expected to be paid by the end of the second quarter of 2015.

 

 

Activity related to our restructuring plan is as follows (in thousands): 

 

Accrual at December 31, 2011   $ -  
Charges     4,077  

Payments

    (2,275 )

Non-cash items

    (776 )

Accrual at December 31, 2012

    1,026  

Charges

    58  

Payments

    (310 )

Non-cash items

    (124 )

Accrual at March 31, 2013

  $ 650  

  

 
10

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited) 

 

5.     Convertible Senior Notes

 

On December 7, 2010, we issued $200.0 million in aggregate principal amount of 3.00% Convertible Senior Notes (the “Notes”) due December 15, 2015 unless earlier repurchased or converted. The interest is payable semi-annually on June 15 and December 15 of each year, beginning on June 15, 2011.  The Notes are governed by the terms of an indenture agreement (the "Indenture") dated December 7, 2010 between the Company and Wells Fargo Bank, National Association, as trustee.

 

The Notes are convertible at any time prior to the close of business on the third business day immediately preceding the maturity date at the holder’s option, into shares of our common stock at an initial conversion rate of 51.4536 shares per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $19.43 per share. The conversion rate is subject to adjustment for certain events that occur prior to maturity, such as a change in control transaction as defined in the Indenture.

 

The Notes bear interest at a rate of 3.00% per year, payable semiannually in arrears on June 15 and December 15 of each year, which payments began on June 15, 2011. We may in certain instances be required to pay additional interest if the Notes are not freely tradable by the holders thereof (other than our affiliates) beginning six months after the date of issuance and in connection with events of default, including events of default relating to our failure to comply with our reporting obligations to the trustee and the SEC. After a default under the Indenture, if the trustee or the holders of at least 25% in aggregate principal amount of the Notes give us notice of, and direct us to cure, the default and the default is not cured within 60 days thereafter, then unless a waiver is obtained from the holders of more than 50% in aggregate principal amount of the Notes, an event of default will occur under the Indenture. Upon any such event of default, we may elect that for the first 180 days (or such lesser amount of time during which the event of default continues), the sole remedy be the payment of additional interest at an annual rate equal to 0.50%. In the event that such additional interest becomes payable because of our failure to timely file certain reports with the SEC and the trustee, the filing of such reports should cure the event of default and the interest rate will be reduced (so long as no other events of default then exist). If we elect to pay such additional interest and the event of default is not cured within the 180-day period, or if we do not make such an election to pay additional interest when the event of default first occurs, the trustee or the holders of at least 25% in aggregate principal amount of the Notes may declare the Notes to be due and payable immediately.

 

As of March 31, 2013, the estimated fair value of our Notes was approximately $258.3 million. The fair values of the Notes were estimated using market prices of the Notes, which are based on Level 2 inputs (i.e. inputs, other than the quoted prices in active markets that are observable either directly or indirectly).

 

 

Senior Secured Revolving Credit Facility 

 

 

On December 21, 2012, we entered into a credit agreement (the “Credit Facility Agreement”) establishing a senior secured revolving credit facility (the “Credit Facility”) with certain institutional lenders that provides for an aggregate loan amount of up to $150.0 million. The Credit Facility is expected to mature on December 21, 2016, but may mature on September 14, 2015 if we do not have available liquidity (domestic cash and investments, plus availability under the Credit Facility) of $25.0 million in excess of the amount required to repay our Notes of $200.0 million in full beginning on June 15, 2015. If we satisfy this requirement between June 15, 2015 and September 14, 2015, but fail to do so after September 15, 2015 and prior to December 15, 2015, the maturity date is the date on which the requirement is no longer satisfied.

 

The Credit Facility Agreement requires the Company to comply with certain covenants, including maintaining (i) an interest coverage ratio (as defined in the Credit Facility Agreement) of greater than 3.50 to 1.00, measured quarterly on a trailing twelve months basis and (ii) a maximum leverage ratio (as defined in the Credit Facility Agreement) of not greater than 3.50 to 1.00 through June 30, 2014 and 3.00 to 1.00 thereafter, measured quarterly on a trailing twelve months basis. The Credit Facility Agreement also requires us to timely provide certain periodic financial statements to the lenders.

 

The Credit Facility Agreement also provides for customary events of default (subject to grace and cure periods in certain cases) including, without limitation, (a) failure to pay (with no grace period for the nonpayment of principal); (b) defaults under other documents executed and delivered in connection with the Credit Facility agreement; (c) bankruptcy or the commencement of insolvency proceedings, including the appointment of a receiver; (d) changes of control; and (e) failure to perform or observe covenants contained in the Credit Facility Agreement or related documents, including a covenant in the Credit Facility Agreement to comply with the Indenture governing our Notes that includes our obligation to timely file with the trustee under the Indenture the periodic financial and other reports that we are required to file with the SEC. Upon the occurrence of an event of default, the principal and accrued interest under the Credit Facility then outstanding may be declared due and payable. An event of default related to certain events of bankruptcy, insolvency or reorganization with respect to the Company will automatically cause the acceleration of payment of the unpaid principal and accrued interest of all outstanding loans.

  

 
11

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited) 

 

 

6.            Selected Balance Sheet Data

 

Investments in Marketable Securities

 

Investments in marketable securities as of March 31, 2013 consisted of the following (in thousands):

 

   

Amortized

   

Gross Unrealized

   

Gross Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

Available-for-sale – short-term:

                               

U.S. Treasury, government and agency debt securities

  $ 53,089     $ 41     $     $ 53,130  

Corporate debt securities

    85,387       1,254       (18 )     86,623  
      138,476       1,295       (18 )     139,753  

Available-for-sale – long-term:

                               

Auction rate securities

    820       2,347             3,167  
      820       2,347             3,167  
                                 

Total

  $ 139,296     $ 3,642     $ (18 )   $ 142,920  

  

 
12

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited) 

 

Investments in marketable securities as of December 31, 2012 consisted of the following (in thousands):

 

   

Amortized

   

Gross Unrealized

   

Gross Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

Available-for-sale – short-term:

                               

U.S. Treasury, government and agency debt securities

  $ 77,823     $ 48     $ (1 )   $ 77,870  

Corporate debt securities

    47,933       1,068       (20 )     48,981  
      125,756       1,116       (21 )     126,851  

Available-for-sale – long-term:

                               

Auction rate securities

    820       2,301       (2 )     3,119  
      820       2,301       (2 )     3,119  
                                 

Total

  $ 126,576     $ 3,417     $ (23 )   $ 129,970  

 

As of March 31, 2013 and December 31, 2012, our available-for-sale securities had a weighted remaining contractual maturity of 1.31 and 1.36 years, respectively. For the three months ended March 31, 2013 and 2012, gross realized gains and gross realized losses were not significant.

 

The amortized cost and fair value of our investments at March 31, 2013, by contractual years-to-maturity, are as follows (in thousands): 

 

   

Amortized Cost

   

Fair Value

 

Due in less than 1 year

  $ 49,988     $ 50,073  

Due within 1-2 years

    57,163       57,300  

Due within 2-5 years

    30,992       31,048  

Due after 5 years

    1,153       4,499  

Total

  $ 139,296     $ 142,920  

 

Accounts receivable, net

 

Accounts receivable, net included an allowance for doubtful accounts of $1.8 million and $1.4 million as of March 31, 2013 and December 31, 2012, respectively.

 

Inventories

 

Inventories consist of the following (in thousands):

 

   

March 31,

   

December 31,

 
   

2013

   

2012

 
                 

Raw materials

  $ 3,265     $ 4,530  

Work in process

    18,779       14,144  

Finished goods

    14,261       18,546  
    $ 36,305     $ 37,220  

  

 
13

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(unaidited)

 

Goodwill and Other Intangible Assets

 

The following table presents the 2012 and 2013 activity for our goodwill (in thousands):

 

 

Balance at January 1, 2012:

  $ 66,429  

Acquisition of Anue

    91,376  

Acquisition of BreakingPoint

    102,652  

Balance at December 31, 2012:

  $ 260,457  

Adjustments

    -  

Balance at March 31, 2013

  $ 260,457  

 

We have not had any historical goodwill impairment charges.

 

 

The following table presents our purchased intangible assets (in thousands) as of March 31, 2013:

 

   

Weighted

Average

           

 

         
   

Useful Life

(in years)

   

Gross

   

Accumulated

Amortization

   

Net

 
                                 

Other intangible assets:

                               

Technology

    5.4     $ 141,215     $ (72,222 )   $ 68,993  

Customer relationships

    6.0       70,376       (21,179 )     49,197  

Service agreements

    5.7       22,700       (6,268 )     16,432  

Non-compete agreements

    4.2       5,700       (1,864 )     3,836  

Trademark

    5.3       8,976       (2,674 )     6,302  

Other

    3.9       3,651       (1,312 )     2,339  
            $ 252,618     $ (105,519 )   $ 147,099  

 

The following table presents our purchased intangible assets (in thousands) as of December 31, 2012:

 

   

Weighted

Average 

           

 

         
   

Useful Life

(in years)

   

Gross

   

Accumulated

Amortization

   

Net

 
                                 

Other intangible assets:

                               

Technology

    5.4     $ 141,215     $ (66,704 )   $ 74,511  

Customer relationships

    6.0       70,376       (18,289 )     52,087  

Service agreements

    5.7       22,700       (5,272 )     17,428  

Non-compete agreements

    4.2       5,700       (1,520 )     4,180  

Trademark

    5.3       8,976       (2,333 )     6,643  

Other

    3.8       3,416       (1,262 )     2,154  
            $ 252,383     $ (95,380 )   $ 157,003  

  

 
14

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited) 

 

The estimated future amortization expense of purchased intangible assets as of March 31, 2013 is as follows (in thousands):

 

2013

  $ 29,674  

2014

    33,961  

2015

    29,277  

2016

    25,935  

2017

    18,907  

Thereafter

    9,345  
    $ 147,099  

 

 

7.            Shareholders’ Equity

 

Accumulated Other Comprehensive Income

 

We sold available-for-sale securities in the three months ended March 31, 2013 and 2012. The gains and losses were reclassified from accumulated other comprehensive income and included within our Interest income and other, net line item on our condensed consolidated statements of operations. The reclassification amounts for the three months ended March 31, 2013 were not significant. Prior to the reclassification for the sale of available-for-sale securities, noted above, we had a net unrealized gain arising during the periods of $166,000 for the three months ended March 31, 2013. The tax impact of unrealized gains and losses was $105,000 for the three months ended March 31, 2013. 

 

 

8.             Earnings Per Share

 

The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2013 and 2012 (in thousands, except per share data):

 

 

   

Three months ended

 
   

March 31,

 
   

2013

   

2012

 
             

Basic presentation:

               

Numerator for basic earnings per share:

               

Net income

  $ 7,820     $ 5,167  

Denominator for basic earnings per share:

               

Weighted average common shares outstanding

    74,718       70,580  
                 

Basic earnings per share

  $ 0.10     $ 0.07  
                 

Diluted presentation:

               

Numerator for diluted earnings per share:

               

Net income

  $ 7,820     $ 5,167  

Interest expense on convertible senior notes, net of tax

           

Net income used for diluted earnings per share

  $ 7,820     $ 5,167  
                 

Denominator for dilutive earnings per share:

               

Weighted average common shares outstanding

    74,718       70,580  

Effect of dilutive securities:

               

Stock options and other share-based awards

    2,201       2,374  

Convertible senior notes

           

Dilutive potential common shares

    76,919       72,954  
                 

Diluted earnings per share

  $ 0.10     $ 0.07  

  

 
15

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited) 

 

The diluted earnings per share computation for the three months ended March 31, 2013 and 2012, excludes (i) the weighted average number of shares underlying our outstanding Notes of 10.3 million shares as such shares are considered anti-dilutive because the related interest expense on a per common share “if converted” basis exceeds basic earnings per share and (ii) the weighted average number of shares underlying our employee stock options and other share-based awards of 1.3 million shares and 1.5 million shares, respectively, which were anti-dilutive because, in general, the exercise price of these awards exceeded the average closing sales price per share of our common stock during the applicable period.

 

 

9.            Concentrations

 

Significant Customers

 

The following customers accounted for more than 10% of total revenue for the three months ended March 31, 2013, in the case of Customer A, and for the three months ended March 31, 2013 and 2012, in the case of Customer B:

 

   

Three months ended

 
   

March 31,

 
   

2013

   

2012

 
                 
                 

Customer A

    18.6 %     *  
                 

Customer B

    11.5 %     17.1 %

 

* Less than 10%

 

As of March 31, 2013 and December 31, 2012, the percentage of total receivables for Customer B above was as follows:

 

   

March 31,

2013

   

December 31,

2012

 

Customer B

    11.5 %     *  

 

* Less than 10%

  

 
16

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited) 

 

International Data

   

For the three months ended March 31, 2013 and 2012, the percentage of total international revenues based on customer location consisted of the following:

 

 

   

Three months ended

 
   

March 31,

 
   

2013

   

2012

 
             
                 

International revenues

    37.8 %     49.1 %

 

 

Within international revenues disclosed above, the percentage of total revenues from product shipments to Japan for the three months ended March 31, 2013 and 2012 were as follows:

 

 

   

Three months ended

 
   

March 31,

 
   

2013

   

2012

 
             
                 

Japan

    12.4 %     14.0 %

 

10.          Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. This hierarchy prioritizes the inputs into three broad levels as follows:

 

Level 1.

Observable inputs such as quoted prices in active markets;

   

Level 2.

Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

   

Level 3.

Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

 

Financial assets carried at fair value as of March 31, 2013 and December 31, 2012 are classified in the table below in one of the three categories described above (in thousands):

 

   

March 31, 2013

   

December 31, 2012

 
   

Fair Value

   

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

   

Significant

Other

Observable

Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

   

Fair Value

   

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

   

Significant

Other

Observable

Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

 

Cash equivalents:

                                                               

Money market funds

  $ 156     $ 156     $     $     $ 185     $ 185     $     $  

Corporate debt securities

    18,994             18,994                                

Short-term investments:

                                                               
U.S. Treasury, government and agency debt securities     53,130             53,130             77,870             77,870        

Corporate debt securities

    86,623             86,623             48,981             48,981        

Long-term investments:

                                                               

Auction rate securities

    3,167                   3,167       3,119                   3,119  

Total financial assets

  $ 162,070     $ 156     $ 158,747     $ 3,167     $ 130,155     $ 185     $ 126,851     $ 3,119  

  

 
17

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited) 

 

To estimate the fair value of our money market funds, U.S. treasury, government and agency debt securities and corporate debt securities, we use the estimated fair value per our investment brokerage/custodial statements. To the extent deemed necessary, we may also obtain non-binding market quotes to corroborate the estimated fair values reflected in our investment brokerage/custodial statements.

 

As of March 31, 2013, we held $3.2 million of auction rate securities which we classify as Level 3 because they are valued using valuation models with unobservable inputs. Given the disruption in the auction process, there is no longer an actively quoted market price for these securities. Accordingly, we utilized models to estimate the fair values of these auction rate securities based on, certain unobservable inputs and other items, including: (i) the underlying structure of each security; (ii) the present value of future principal, interest and/or dividend payments discounted at the appropriate rate considering the market rate and conditions; (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period; and (iv) credit quality and estimates of the recovery rates in the event of default for each security. These estimated fair values could change significantly based on, among other events: (i) a further deterioration in market conditions for these securities; (ii) further declines in the credit quality of our auction rate securities or of the issuers of our auction rate securities; or (iii) a cessation of dividend payments or default on interest or principal payments by the issuer of the securities. Significant increases or decreases in any of these unobservable inputs in isolation may result in a significantly lower or higher fair value measurement.

 

There were no transfers of assets between levels within the fair value hierarchy for the three-month period ended March 31, 2013.

 

The following table summarizes the activity for the three months ended March 31, 2013 and 2012 for our auction rate securities where fair value measurements are estimated utilizing Level 3 inputs (in thousands):

 

   

Three months ended

 
   

March 31,

 
   

2013

   

2012

 
                 

Beginning balance

  $ 3,119     $ 2,774  

Unrealized gain recorded in other comprehensive income

    48       180  

Realized gain recorded in earnings

           

Settlements

           

Ending balance

  $ 3,167     $ 2,954  

 

 

There were no unrealized losses recorded in earnings for Level 3 assets still held at March 31, 2013.

 

 

11.          Commitments and Contingencies

 

Litigation

 

On June 15, 2012, Catapult, our wholly owned subsidiary, issued a demand for indemnification to Tekelec pursuant to the Asset Purchase Agreement between Tekelec and Catapult dated July 15, 2002 (the “APA”) under which Catapult had succeeded to Tekelec’s relationship with Tucana, a former distributor of Catapult. Catapult demanded indemnification for the full amount of Catapult’s costs, including attorneys’ fees and expenses, incurred in defending against and resolving Tucana’s claims.

  

 
18

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited) 

 

Because Catapult’s demand for indemnification was not resolved within the 30-day period provided for by the APA, on July 16, 2012, Catapult demanded arbitration of its indemnification claim against Tekelec. The arbitration hearing took place before three arbitrators on January 14 and 15, 2013. The arbitrators issued their final award on January 31, 2013 granting Catapult its full indemnity claim against Tekelec in the amount of approximately $1.2 million. The $1.2 million of proceeds were received in the first quarter of 2013 and were reflected in our results of operations as a component of the General and administrative line item on our condensed consolidated statements of operations.

 

We are not aware of any pending legal proceedings that, individually or in the aggregate, could have a material adverse effect on our business, results of operations, cash flows or financial position. We may in the future be a party to litigation arising in the ordinary course of business, including claims that we allegedly infringe upon third party patents or other intellectual property rights. Such claims, even if without merit, could result in the expenditure of significant financial and managerial resources.

 

 

12.          Income Taxes

 

As of March 31, 2013 and December 31, 2012, current deferred tax assets totaled $24.0 million and $24.2 million, respectively, and were included within the Prepaid expenses & other current assets line item in our condensed consolidated balance sheets.

 

During the 2013 first quarter, the Company recorded a $2.0 million tax benefit due to the retroactive renewal of the 2012 federal R&D tax credit.

 

 

13.          Restatements

 

 

Quarterly financial statements as of and for the quarter ended March 31, 2013 

 

Subsequent to the initial filing of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, we have restated herein our unaudited interim condensed consolidated financial statements as of and for the quarter ended March 31, 2013 to reflect certain corrections in the manner in which we recognize revenue related to certain sales transactions that impacted the first quarter of 2013.  The errors identified by the Company in its revenue recognition practices are described below:

 

 

For certain sales transactions, the Company entered into an extended maintenance and warranty arrangement that included a fixed fee to cover products owned by the customer at the date of execution of the arrangement as well as extended maintenance and warranty coverage on any additional products purchased by the customers over the multi-year term of the applicable arrangement.  The Company did not properly defer revenues on the additional product purchases to correctly account for the fixed fee, multi-year extended maintenance and warranty arrangement.  As a result, the Company improperly recognized product revenues when the additional products were shipped rather than deferring a portion of the consideration and recognizing the related revenues over the remaining term of the applicable fixed fee, multi-year extended maintenance and warranty arrangement.

 

 

For certain other sales transactions, the Company (i) recognized product revenues prematurely in advance of delivering certain product functionality or other deliverables that were committed to be provided to the customers or (ii) recognized product revenues prematurely based on an incorrect assessment of certain multiple-element arrangement sales transactions that included professional services that were provided based on a purchase order that was separate from the product purchase order but that was negotiated concurrently with the customer.

 

 

The Company entered into a sales arrangement that included extended payment terms beyond the Company’s customary terms.  Revenue for this transaction should have been, but was not, recognized when the payments became due, as opposed to when the products were shipped.

     
    These corrections in our revenue recognition resulted in the movements of revenue between accounting periods, and do not have any impact on the total revenue to be recognized over the life of the applicable arrangements.

  

 
19

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited) 

 

The previously filed interim condensed consolidated financial statements for the quarter ended March 31, 2013 have been restated to reflect the correction of these errors, which impact revenue from products, revenue from services and current deferred revenue. All other adjustments relate to the applicable income tax effects of these errors as well as the correction of other cumulative tax errors which existed as of March 31, 2013. Such other cumulative tax errors resulted in $639,000 of out-of-period adjustments which increased the Company’s income tax benefit for the quarter ended March 31, 2013, and increased prepaid expenses and other assets, other assets, and other liabilities by amounts shown in the following table. 

 

Restated condensed consolidated balance sheet amounts 

 

   

As of March 31, 2013

 
   

As Previously

   

Restatement

         
   

Reported

   

Adjustments

   

Restated

 
   

(in thousands)

 
                         
                         

Prepaid expenses and other current assets

  $ 43,790     $ 2,567     $ 46,357  

Total current assets

    385,038       2,567       387,605  
                         

Other assets

    11,814       1,809       13,623  

Total assets

    836,780       4,376       841,156  
                         

Deferred revenues - current

    65,280       1,323       66,603  

Total current liabilities

    121,933       1,323       123,256  
                         

Other liabilities

    33,646       3,338       36,984  

Total liabilities

    366,181       4,661       370,842  
                         

Retained earnings

    125,401       (285 )     125,116  

Total shareholders’ equity

    470,599       (285 )     470,314  

Total liabilities and shareholders’ equity

  $ 836,780     $ 4,376     $ 841,156  

  

 
20

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited) 

 

Restated condensed consolidated statement of operations amounts

  

 

   

For the Three Months Ended March 31, 2013

 
   

As Previously

   

Restatement

         
   

Reported

   

Adjustments

   

Restated

 
   

(in thousands, except per share data)

 
                         

Revenues:

                       

Products

  $ 96,636     $ (1,125 )   $ 95,511  

Services

    26,147       (199 )     25,948  

Total revenues

    122,783       (1,324 )     121,459  
                         
                         

Income from operations

    10,092       (1,324 )     8,768  

Income before income taxes

    8,356       (1,324 )     7,032  

Income tax expense (benefit)

    251       (1,039 )     (788 )

Net income

    8,105       (285 )     7,820  

Earnings per share:

                       

Basic

  $ 0.11     $ (0.01 )   $ 0.10  

Diluted

  $ 0.11     $ (0.01 )   $ 0.10  

 

 

 

  

 

 

Restated condensed consolidated statements of comprehensive income amounts

 

    For the Three Months Ended March 31, 2013  
   

As Previously
Reported

    Restatement
Adjustments
   

Restated

 
   

(in thousands)

 
                         

Net Income

  $ 8,105     $ (285 )   $ 7,820  
Comprehensive Income   $ 7,927     $ (286 )   $ 7,641  

  

 
21

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Restated condensed consolidated statements of cash flows amounts

 

The correction of the errors described above did not impact our total cash flows from operating activities, investing activities or financing activities within our consolidated statement of cash flows, but did result in corrections of the following line items within cash flows from operations activities:

 

 

    For the Three Months Ended March 31, 2013  
    As Previously
Reported
   

Restatement
Adjustments

    Restated  
    (in thousands)  
                         
Net Income    $  8,105     $  (285 )   $  7,820  
Deferred Income Taxes     (1,561 )     (252 )     (1,813 )
Prepaid Expenses and Other Current Assets     (1,387 )     (2,567 )     (3,954 )
Other Assets     48       1,691       1,739  
Deferred Revenues     1,091       1,323       2,414  
Other Liabilities   2,941     90     3,031  

  

 

Quarterly financial statements as of and for the quarter ended March 31, 2012 

 

In our 2012 Form 10-K, we restated, among other previously issued financial statements, our consolidated financial statements for the quarter ended March 31, 2012 to reflect certain corrections in the manner in which we recognized revenue related to our warranty and software maintenance contracts, including a previous implied warranty and software maintenance arrangement with one of our customers. Specifically, we made the following two corrections to our revenue recognition practices to properly report revenue in prior periods:

 

 

Accounting Practice Errors – We now recognize revenue related to our warranty and software maintenance contracts on the effective date of each such contract rather than in the first calendar month following the effective date of the contract as though the warranty and maintenance period commenced on the first day of such month. We also now recognize revenue related to back maintenance fees when evidence of an arrangement exists rather than commencing in the first calendar month following the effective date of the contract as though the warranty and maintenance period commenced on the first day of such month.

 

 

Implied Arrangement Error - We now cease to defer revenue for any implied warranty and software maintenance arrangement upon the receipt from the applicable customer of the first substantive contract for extended warranty and software maintenance services, and we will recognize the applicable previously deferred revenue related to the implied arrangement, provided all other revenue recognition criteria have been met. The Company’s historical practice was to continue to defer revenue for implied warranty and software maintenance arrangements (despite the receipt of an initial substantive extended warranty and software maintenance contract) until we could establish a pattern that we were able to enforce our warranty and software maintenance contracts as evidenced by, among other items, (i) the consistent receipt of extended renewal orders from the specific customer for warranty and software maintenance services and (ii) senior management’s assertion that warranty and software maintenance services would not be provided to the customer if existing contracts were canceled or were not renewed.

 

The 2012 changes in our revenue recognition practices resulted in movements of revenue between accounting periods, and do not have any impact on the total revenue to be recognized over the life of a warranty and software maintenance contract or arrangement, although the timing of the recognition of such revenue commences earlier and ends earlier than would be the case under the Company’s previously used accounting treatment.

  

 
22

 

 
IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited) 

 

This Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2013 (this “Form 10-Q/A”) reflects the impact of the prior restatement on the applicable unaudited quarterly financial information for the three months ended March 31, 2012. Our previously filed Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 has not been and will not be amended.

 

Certain line items included in this Form 10-Q/A have been restated to reflect the corrections of these errors, which impact revenues from products, revenues from services and deferred revenues (current and non-current). All other adjustments related to the applicable income tax effects of these errors. The following tables reconcile the amounts as originally reported in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 to the corresponding amounts as restated and included in Note 15, Restatement, in our 2012 Form 10-K and as reported herein.

 

 Restated consolidated statement of operations amounts

 

 

   

For the Three Months Ended

March 31, 2012

 
   

As Previously

   

Restatement

         
   

Reported

   

Adjustments

   

Restated

 
   

(in thousands, except per share data)

 

Revenues:

                       

Products

                       

Implied arrangement error

  $     $ 564     $  
      69,043       564       69,607  
                         

Services

                       

Accounting practice error

          688        

Implied arrangement error

          (237 )      
      16,600       451       17,051  
                         

Total revenues

    85,643       1,015       86,658  

Income from operations

    7,287       1,015       8,302  

Income before income taxes

    5,597       1,015       6,612  

Income tax expense

    1,215       230       1,445  

Net income

    4,382       785       5,167  

Earnings per share:

                       

Basic

  $ 0.06     $ 0.01     $ 0.07  

Diluted

  $ 0.06     $ 0.01     $ 0.07  

 

Restated consolidated statements of comprehensive income amounts

 

 

   

For the Three Months Ended

March 31, 2012

 
   

As

Previously

Reported

   

Restatement

Adjustments

   

Restated

 
   

(in thousands)

 
                         

Net income

  $ 4,382     $ 785     $ 5,167  

Comprehensive income

  $ 5,169     $ 785     $ 5,954  

  

 
23

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited) 

 

Restated consolidated statements of cash flows amounts

 

The correction of the errors described above did not impact our total cash flows from operating activities, investing activities or financing activities within our consolidated statement of cash flows, but did result in corrections of the following line items within cash flows from operating activities:

 

   

For the Three Months Ended

March 31, 2012

 
   

As

Previously

Reported

   

Restatement
Adjustments

   

Restated

 
   

(in thousands)

 
                         
Net income   $ 4,382     $ 785     $ 5,167  

Accrued expenses and other

    4,389       230       4,619  

Deferred revenues

    5,896       (1,015 )     4,881  

  

 
24

 

 

ITEM 2          MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion contains forward-looking statements that involve risks and uncertainties.  Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2013, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2012 (“2012 Form 10-K”), including the “Risk Factors” section and the consolidated financial statements and notes included therein.

 

Restatement of Previously Issued Financial Statements. As discussed further in Note 13 of the Notes to the condensed consolidated financial statements contained in this Form 10-Q/A, we are restating herein our unaudited quarterly condensed consolidated financial statements for the quarters ended March 31, 2013 and 2012.  There have been no revisions to the previously presented restated unaudited quarterly condensed consolidated financial information for the quarter ended March 31, 2012 that were disclosed in Note 15, Restatement, in our 2012 Form 10-K and as reported herein. The following discussion has been updated to reflect the effects of the restatement.

 

 

BUSINESS OVERVIEW

 

We are a leading provider of converged Internet Protocol (IP) network validation and network visibility solutions. Equipment manufacturers, service providers, enterprises, and government agencies use our solutions to design, verify, and monitor a broad range of Ethernet, Wi-Fi, and 3G/LTE equipment and networks. Our product solutions consist of our hardware platforms, such as our chassis, interface cards and appliances, software application tools, and services, including our warranty and maintenance offerings and professional services.

 

During 2013 first quarter, our cash, cash equivalents and investments in the aggregate increased by $30.8 million to $208.3 million from the $177.5 million reported three months earlier at December 31, 2012. Total revenues increased 40.2% to $121.5 million during the 2013 first quarter from $86.7 million during the 2012 first quarter due to the completion of two significant acquisitions in June and August of 2012. Sales to service providers were at record levels and sales to network equipment manufacturers remained solid during the 2013 first quarter as our customers continue to transition to mobile networks, virtual data centers and hybrid cloud environments to deliver next generation applications. We believe that these market trends will continue to be strong and drive our growth over the long term. However, we believe there are some concerns that are creating uncertainty in the market, such as the Federal sequestration in the United States and the capital spending plans of large service providers. This uncertainty may adversely impact our sales, results of operations and financial position over the near term.

  

 
25

 

 

Acquisition of BreakingPoint Systems, Inc. On August 24, 2012, we completed our acquisition of all of the outstanding shares of capital stock of BreakingPoint Systems, Inc. (“BreakingPoint”). The aggregate cash consideration paid totaled $163.7 million, or $150.3 million net of BreakingPoint’s existing cash and cash equivalents balances at the time of the acquisition. The acquisition was funded from our existing cash and sale of investments. BreakingPoint is a leader in security testing, and its solutions provide global visibility into emerging threats and applications, along with advance insight into the resiliency of an organization’s information technology infrastructure under operationally relevant conditions and malicious attacks. With this acquisition, we have expanded our addressable market, broadened our product portfolio and grown our customer base. In addition, we expect to leverage BreakingPoint’s existing sales channels and assembled workforce, including its experienced product development and sales teams. The results of operations of BreakingPoint have been included in our consolidated statements of operations and cash flows since the date of the acquisition. See Note 3 to the condensed consolidated financial statements included in this Form 10-Q/A.

 

Acquisition of Anue Systems, Inc. On June 1, 2012, we completed our acquisition of all of the outstanding shares of capital stock and other equity interests of Anue Systems, Inc. (“Anue”). The aggregate consideration paid totaled $152.4 million, or $148.7 million net of Anue’s existing cash and cash equivalents balances at the time of the acquisition, and remains subject to certain adjustments including an adjustment based on the final amount of Anue’s net working capital on the closing date. The acquisition was funded from our existing cash and sale of investments. Anue provides solutions to monitor and test complex networks, including Anue’s Net Tool Optimizer solution that efficiently aggregates and filters network traffic to help optimize network monitoring tool usage. With this acquisition, we have expanded our addressable market, broadened our product portfolio and grown our customer base. In addition, we expect to leverage Anue’s existing sales channels and assembled workforce, including its experienced product development team. The results of operations of Anue have been included in our consolidated statements of operations and cash flows since the date of the acquisition. See Note 3 to the condensed consolidated financial statements included in this Form 10-Q/A.

 

Revenues. Our revenues are principally derived from the sale and support of our test and visibility systems.

 

Sales of our network test hardware products primarily consist of traffic generation and analysis hardware platforms containing multi-slot chassis and interface cards. Our primary network test hardware platform is enabled by our operating system software that is essential to the functionality of the hardware platform. Sales of our network visibility hardware products typically include an integrated, purpose-built hardware appliance with essential, proprietary software. Our software products consist of a comprehensive suite of technology-specific applications for certain of our network test hardware platforms. Our software products are typically installed on and work with these hardware products to further enhance the core functionality of the overall network test system, although some of our software products can be operated independently from our network test platforms.

 

Our service revenues primarily consist of technical support, warranty and software maintenance services related to our network test and visibility hardware and software products. Most of our products include up to one year of these services with the initial product purchase, and our customers may separately purchase extended services for annual or multi-year periods. Our technical support, warranty and software maintenance services include assistance with the set-up, configuration and operation of our products, repair or replacement of defective products, bug fixes, and unspecified when and if available software upgrades. For certain network test products, our technical support and software maintenance service revenues also include our Application and Threat Intelligence (ATI) service, which provides a comprehensive suite of application protocols, software updates and technical support. The ATI service provides full access to the latest security attacks and application updates for use in real-world test and assessment scenarios. Our customers may purchase the ATI service for annual or multi-year periods. Service revenues also include training and other professional services.

 

Sales to AT&T were approximately $22.6 million, or 18.6%, and $1.2 million, or 1.4%, of our total revenues for the three months ended March 31, 2013 and 2012, respectively. Sales to Cisco Systems were approximately $14.0 million, or 11.5%, and $14.8 million, or 17.1%, of our total revenues for the three months ended March 31, 2013 and 2012, respectively. To date, we have generated the majority of our revenues from sales to network equipment manufacturers, but this percentage has been declining over the past several years. While we expect that we will continue to have some customer concentration with network equipment manufacturers for the foreseeable future, we expect to continue to see some declines as a percentage of total revenues as we continue to sell our products to a wider variety and increasing number of service provider, enterprise and government customers. To the extent that we develop a broader and more diverse customer base, our reliance on any one customer or customer type should diminish. We also expect that our 2012 acquisitions of Anue and BreakingPoint (the “2012 Acquisitions”) will further diversify our customer base.

 

From a geographic perspective, we generated revenues from shipments to international locations of $46.0 million, or 37.8%, and $42.5 million, or 49.1%, of our total revenues for the three months ended March 31, 2013 and 2012, respectively. The decline in the percentage of our revenue from shipments to international locations was primarily due to our 2012 Acquisitions, which have a higher concentration of revenue from customers in the United States. Over the next 12 months, we expect to leverage and expand our international sales force to sell our Anue and BreakingPoint products to a larger global customer base, and as a result, we expect to increase our percentage of revenue from shipments to international locations. Total revenues from product shipments to Japan were $15.1 million, or 12.4%, and $12.1 million, or 14.0%, of our total revenue, for the three months ended March 31, 2013 and 2012, respectively.

  

 
26

 

 

Stock-Based Compensation. For the three months ended March 31, 2013 and 2012, stock-based compensation expense was $6.9 million and $4.1 million, respectively. The increase in stock-based compensation expense in the three months ended March 31, 2013 as compared to the same period in 2012 was primarily due to (i) the incremental impact of the share-based awards granted to the employees related to our 2012 acquisitions of Anue and BreakingPoint and (ii) an increase in the number of participants in our employee stock purchase plan. The aggregate amount of gross unrecognized stock-based compensation to be expensed in the years 2013 through 2017 related to unvested share-based awards as of March 31, 2013 was approximately $32.9 million. To the extent that we grant additional share-based awards, future expense may increase by the additional unearned compensation resulting from those grants. We anticipate that we will continue to grant additional share-based awards in the future as part of our long-term incentive compensation programs. The impact of future grants cannot be estimated at this time because it will depend on a number of factors, including the amount of share-based awards granted and the then current fair values of such awards for accounting purposes.

 

Cost of Revenues. Our cost of revenues related to the sale of our hardware and software products includes materials, payments to third-party contract manufacturers, royalties, and salaries and other expenses related to our manufacturing and supply operations, technical support and professional service personnel. We outsource the majority of our manufacturing operations, and we conduct supply chain management, quality assurance, documentation control, shipping and some final assembly and testing at our facilities in Calabasas, California, Austin, Texas and Penang, Malaysia. Accordingly, a significant portion of our cost of revenues related to our products consists of payments to our contract manufacturers. Cost of revenues related to the provision of services includes salaries and other expenses associated with technical support services, professional services and the cost of extended warranty and maintenance services. Cost of revenues does not include the amortization of purchased technology and trade names related to our acquisitions of certain businesses, product lines and purchased technologies of $6.5 million and $2.7 million for the three months ended March 31, 2013 and 2012, respectively, which are included within our Amortization of intangible assets line item on our condensed consolidated statements of operations.

 

Our cost of revenues as a percentage of total revenues is primarily affected by the following factors:

 

●     our pricing policies and those of our competitors;

 

●     the pricing we are able to obtain from our component suppliers and contract manufacturers;

 

●     the mix of customers and sales channels through which our products are sold;

 

●     the mix of our products sold, such as the mix of software versus hardware product sales;

 

●     new product introductions by us and by our competitors;

 

●     demand for and quality of our products; and

 

●     shipment volume.

 

In the near term, although we anticipate that our cost of revenues as a percentage of total revenues will remain relatively flat, we expect to continue to experience pricing pressure on larger transactions and from larger customers as a result of competition.

 

Operating Expenses. Our operating expenses are generally recognized when incurred and consist of research and development, sales and marketing, general and administrative, amortization of intangible assets, acquisition and other related costs and restructuring expenses. In dollar terms, we expect total operating expenses, excluding stock-based compensation expense discussed above and amortization of intangible assets, acquisition and other related, and restructuring costs discussed below, to increase modestly for the remainder of 2013 due primarily to the impact of our annual merit increases, the expansion of our sales force and investments in certain product initiatives.

  

 
27

 

 

 

Research and development expenses consist primarily of salaries and other personnel costs related to the design, development, testing and enhancement of our products. We expense our research and development costs as they are incurred. We also capitalize and depreciate over a five-year period costs of our products used for internal purposes.

 

 

Sales and marketing expenses consist primarily of compensation and related costs for personnel engaged in direct sales, sales support and marketing functions, as well as promotional and advertising expenditures. We also capitalize and depreciate over a two-year period costs of our products used for sales and marketing activities, including product demonstrations for potential customers.

 

 

General and administrative expenses consist primarily of salaries and related expenses for certain executive, finance, legal, human resources, information technology and administrative personnel, as well as professional fees (e.g., legal and accounting), facility costs related to our corporate headquarters, insurance costs and other general corporate expenses.

 

 

Amortization of intangible assets consists of the purchase price of various intangible assets over their estimated useful lives. We evaluate our identifiable definite-lived intangible assets and other long-lived assets for impairment when events or changes in circumstances indicate that a potential impairment may exist. An impairment charge would be recorded to the extent that the carrying value of the intangible asset exceeds its undiscounted cash flows and its estimated fair value in the period that the impairment circumstances occurred. We also evaluate the recoverability of our goodwill on an annual basis or if events or changes in circumstances indicate that an impairment in the value of goodwill recorded on our balance sheet may exist. Impairment losses are recorded to the extent that the carrying value of the goodwill exceeds its estimated fair value. The future amortization expense of acquired intangible assets depends on a number of factors, including the extent to which we acquire additional businesses, technologies or product lines or are required to record impairment charges related to our acquired intangible assets.

 

 

Acquisition and other related costs are expensed as incurred and consist primarily of transaction and integration related costs such as success-based banking fees, professional fees for legal, accounting, tax, due diligence, valuation and other related services, change in control payments, amortization of deferred compensation, consulting fees, required regulatory costs, certain employee, facility and infrastructure transition costs, and other related expenses. We expect our acquisition and other related expenses to fluctuate over time based on the timing of our acquisitions and related integration activities.

 

 

Restructuring expenses consist primarily of employee severance costs and other related charges, as well as facility-related charges to exit certain locations. See Note 4 to the condensed consolidated financial statements included in this Form 10-Q/A.

 

Interest Income and Other, Net represents interest on cash and a variety of securities, including money market funds, U.S. government and government agency debt securities, corporate debt securities and auction rate securities, realized gains/losses on the sale of investment securities, certain foreign currency gains and losses, and other non-operating items.

 

Interest Expense consists of interest due to the holders of our 3.00% convertible senior notes issued in December 2010, as well as the amortization of the associated debt issuance costs. See Note 5 to the condensed consolidated financial statements included in this Form 10-Q/A.

 

Income tax is determined based on the amount of earnings and enacted federal, state and foreign tax rates, adjusted for allowable credits and deductions, and for other effects of equity compensation plans. Our income tax provision may be significantly affected by changes to our estimates for tax in jurisdictions in which we operate and other estimates utilized in determining the global effective tax rate. Actual results may also differ from our estimates based on changes in economic conditions. Such changes could have substantial impact on the income tax provision. Our income tax provision could also be significantly impacted by estimates surrounding our uncertain tax positions and changes to valuation allowance set against certain deferred tax assets. We reevaluate the judgments surrounding our estimates and make adjustments as appropriate each reporting period.

 

 
28

 

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements included in this Form 10-Q/A which 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 judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts, write-downs for obsolete inventory, income taxes, acquisition purchase price allocation, impairments of long-lived assets, goodwill and marketable securities, stock-based compensation, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. None of these accounting policies and estimates have significantly changed since our Annual Report on Form 10-K for the year ended December 31, 2012. Critical accounting policies and estimates are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2012 Form 10-K. Actual results may differ from these estimates under different assumptions or conditions.

 

 
29

 

 

RESULTS OF OPERATIONS

 

The following table sets forth certain statement of operations data as a percentage of total revenues for the periods indicated and reflects the impact of the restatement in this Form 10-Q/A of the prior period consolidated financial statements as described in “Restatement of Previously Issued Financial Statements” above and in Note 13 of the Notes to the condensed consolidated financial statements included herein:

 

   

Three months ended

 
   

March 31,

 
   

2013

   

2012

 
                 

Revenues:

               

Products

    78.6 %     80.3 %

Services

    21.4       19.7  

Total revenues

    100.0       100.0  
                 

Costs and operating expenses:(1)

               

Cost of revenues - products (2)

    17.6       17.1  

Cost of revenues - services

    2.5       2.5  

Research and development

    24.5       24.1  

Sales and marketing

    28.9       28.4  

General and administrative

    9.9       13.3  

Amortization of intangible assets

    8.3       4.7  

Acquisition and other related

    1.0       0.5  

Restructuring

    0.1        

Total costs and operating expenses

    92.8       90.4  
                 

Income from operations

    7.2       9.6  

Interest income and other, net

    0.2       0.1  

Interest expense

    (1.6 )     (2.1 )

Income before income taxes

    5.8       7.6  

Income tax expense (benefit)

    (0.7 )     1.7  

Net income

    6.5 %     6.0 %
                 

(1) Stock-based compensation included in: