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| LCRY > SEC Filings for LCRY > Form 10-K on 14-Sep-2009 | All Recent SEC Filings |
14-Sep-2009
Annual Report
The following discussion and analysis should be read in conjunction with the other financial information and consolidated financial statements and related notes appearing elsewhere in this Form 10-K and the documents incorporated by reference herein. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors, including those discussed in Item 1A, "Risk Factors", and elsewhere in this Form 10-K.
Overview
We were founded in 1964 to develop, manufacture and sell high performance signal analysis tools to scientists engaged in high-energy physics research. In 1985 we introduced our first oscilloscope using our core competency of designing signal acquisition and digitizing technology.
We are a leading, worldwide provider of oscilloscopes and protocol analyzers as well as a provider of related test and measurement equipment and currently operate as one business segment in the Test and Measurement market. Our oscilloscopes are tools used by designers and engineers to measure and analyze complex electronic signals in order to develop high-performance systems, to validate electronic designs and to improve time to market. We currently offer seven families of oscilloscopes, which address different solutions to the markets we serve: WaveExpert, a powerful family of sampling oscilloscopes and modules; WaveMaster, one of our high performance product families; WavePro, which is targeted at the mid- to high-performance sector; WaveRunner, designed for the mid-performance sector; WaveSurfer, designed for users in the low bandwidth sector of the market; WaveJet, designed for value-oriented users in the low bandwidth sector of the market; and WaveAce, our entry-level oscilloscope products. Our protocol analyzers are tools used by designers and engineers to generate and monitor traffic over high speed serial data interfaces, including USB 2.0, USB 3.0, Bluetooth, PCI Express, Serial ATA, Serial Attached SCSI (SAS), Wireless USB, and others.
We sell our products into a broad range of end markets, including Computer/Semiconductor/Consumer Electronics, Data Storage, Automotive/Industrial, and Military/Aerospace markets. We believe that our products offer a strong value proposition in these markets by providing advanced analysis capabilities coupled with innovative and proprietary technology features. We believe designers in all of these markets are developing products which rely on increasingly complex electronic signals to provide the features and performance their customers require.
We employ a direct sales model utilizing a highly skilled global sales force where it makes economic sense to do so. We supplement our direct sales force with a combination of manufacturers' representatives and distributors in certain geographic areas. We divide the world into four areas - the Americas, Europe/Middle East/Africa, Japan and Asia/Pacific. In the Americas, we primarily sell our products directly in the United States. In Europe/Middle East, we sell our products directly in Switzerland, Germany, Italy, France, the United Kingdom and Sweden. In Japan, we sell our higher end oscilloscope products directly and our lower end scopes and protocol analyzer products through distributors. In Asia/Pacific, we sell our products directly in South Korea, Singapore and five regions in China.
We generate revenue in a single segment within the Test and Measurement market, primarily from the sale of our oscilloscopes, protocol analyzers, probes, accessories, and applications solutions. To a lesser extent, we also generate revenue from the sales of our extended warranty, maintenance contracts and repairs and calibrations on our instruments after their warranties expire.
Generally, we transact revenues and pay our operating expenses in the local currencies of the countries in which we have a direct distribution presence or other operations, with limited exceptions, most notably in China where our sales and operating expenses are denominated in U.S. dollars. In Europe/Middle East, we transact business in Euros, Swiss francs, British pounds, Swedish krona and U.S. dollars. In Japan, we transact business in Japanese yen. In South Korea, we transact business in Korean won and in Singapore, we transact business in both U.S. dollars and Singapore dollars. For a discussion of our foreign currency exchange rate exposure, see below, Item 7A of this Part II entitled "Quantitative and Qualitative Disclosure About Market Risk."
Historically, we have, at times, experienced lower levels of demand during our first fiscal quarter than in other fiscal quarters which, we believe, have been principally due to the lower level of general market activity during the summer months, particularly in Europe.
Cost of revenues represents manufacturing and service costs, which primarily comprise materials, labor and factory overhead. Gross profit represents revenues less cost of revenues. Additional factors integral to gross profit earned on our products are mix, as the list prices of our products range from $950 to $216,000, and the effects of foreign currencies, as approximately two-thirds of our revenues are derived overseas, much of which is denominated in local currencies while product manufacturing costs are primarily U.S. dollar denominated.
Selling, general and administrative expenses consist primarily of salaries, share based compensation, and related overhead costs for sales, marketing and administrative personnel as well as legal, accounting and other professional services.
Research and development expenses consist primarily of salaries, share based compensation, and related overhead costs associated with employees engaged in research, design and development activities, as well as the cost of masks, wafers and other materials and related test services and equipment used in the development process.
Our results of operations and financial position are affected by a variety of factors. As discussed below, we believe the most significant recurring factors are the economic strength of the technology markets into which we sell our products, our ability to identify market demands and develop competitive products to meet those demands, the announcements and actions of our competitors and our ability to enter into new markets and broaden our presence in existing markets.
Our sales are largely dependent on the health and growth of technology companies whose operations tend to be cyclical. Consequently, demand for our products tends to coincide with the increase or decrease in capital spending in the Computer/Semiconductor/Consumer Electronics, Data Storage, Automotive/Industrial, and Military/Aerospace industries.
In addition, in response to fluctuations in the technology markets we target, we continually assess and adopt programs aimed at positioning us for long-term success. These programs may include streamlining operations, discontinuing older and less profitable product lines, changing our future product strategy, and reducing operating expenses from time to time. As an example, we implemented business realignment and restructuring initiatives intended to reduce costs and more efficiently allocate product development resources (See Note 3 to the Consolidated Financial Statements - Business Realignment, Restructuring Initiatives and Related Asset Impairments, for additional information).
We face significant competition in our target markets. We believe that in order to continue to compete successfully, we need to anticipate, recognize and respond to changing market demands by providing products that serve our customers' needs as they arise at prices acceptable to the market. We believe that we compete favorably with our competition in each of these areas. Consequently, we are constantly reviewing our product development strategy and invest time, resources and capital in development projects we deem most likely to succeed.
In furtherance of our drive to meet our customers' changing demands, we also look outside our organization for opportunities to expand our markets. Accordingly, on October 29, 2004 and October 2, 2006, we completed the acquisitions of Computer Access Technology Corporation ("CATC") and Catalyst Enterprises, Inc. ("Catalyst"), respectively, to complement our expanding portfolio of serial data test solutions. This product line, Protocol Solutions Group ("PSG"), now represents about 20% of our total business.
In fiscal 2009, we transformed our entire oscilloscope product lines by introducing a brand new line of WaveAces on the low end and a new line of WavePros and WaveMasters on the high end. We also refreshed our low and mid-range product lines by introducing updated versions of WaveRunners, WaveSurfers and WaveJet product lines. We believe that our diversified product mix, along with continued enhancements, strategically positions us to expand our presence in the oscilloscope market.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial position and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles. Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements. The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the Consolidated Financial Statements and accompanying notes. These estimates and assumptions are based on management's judgment and available information and, consequently, actual results could differ from these estimates.
The accounting policies that we believe are the most critical in understanding and evaluating our reported financial results include: revenue recognition; reserves on accounts receivable; allowance for excess and obsolete inventory; uncertain tax positions; valuation of deferred tax assets; valuation of long-lived assets; valuation of goodwill; estimation of warranty liabilities and share-based compensation expense.
Revenue Recognition. We enter into agreements to sell products, services, and other arrangements that include combinations of products and services. Revenues from products are included in revenues from Test and measurement products in the Consolidated Statements of Operations, net of any applicable sales or value added taxes. Revenue from product sales, net of allowances for anticipated returns, is recognized provided that persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collection is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer, or when services have been provided. The price is considered fixed or determinable when it is not subject to refund or adjustments.
Revenue from services is deferred and recognized on a straight-line basis over the contractual period or as services are rendered and accepted by the customer. When arrangements include multiple elements, we use relative fair values to allocate revenue to the elements and recognize revenue when the criteria for revenue recognition have been met for each element. The amount of revenue recognized is affected by our judgments as to whether an arrangement includes multiple elements and if so, whether objective and reliable evidence of fair value exists for those elements. Changes to the elements in an arrangement and the ability to establish objective and reliable evidence of fair value for those elements could affect the timing of the revenue recognition.
Due to the significant software content of our protocol analyzer products, we recognize revenue on the sale of these products upon shipment provided there is persuasive evidence of an arrangement, the product has been delivered, the price is fixed or determinable and collection is probable. Software maintenance support revenue is deferred based on its vendor specific objective evidence of fair value ("VSOE") and recognized ratably over the maintenance support periods. Provisions for warranty costs are recorded at the time sales of related products are recognized as revenue. Revenues from protocol analyzer products are included in Test and measurement products in the Consolidated Statements of Operations.
In an effort to provide end-user customers an alternative to purchasing the Company's higher end products under its standard terms and conditions, the Company began offering customers an opportunity to enter into sales-type or direct financing leases for these products. The Company is accounting for these leases in accordance with Statement of Financial Accounting Standards (SFAS) No. 13, "Accounting for Leases." Lease and rental revenues are reported within Test and measurement product revenue.
Reserves on Accounts Receivable. We maintain an allowance for anticipated returns and doubtful accounts relating to the portion of the accounts receivable which we estimate is non-collectible. We analyze historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts. Changes in the overall economic environment or in the financial condition of our customers may require adjustments to the allowance for doubtful accounts which could have a material adverse effect on our consolidated financial position, results of operations and cash flows.
Allowance for Excess and Obsolete Inventory. We assess the valuation of our inventory and provide an allowance for the value of estimated excess and obsolete inventory. Our marketing department plays a key role in our inventory review process by providing updated sales forecasts, managing product rollovers and working with our manufacturing department to maximize recovery of excess inventory. Based upon management's forecast, inventory items no longer expected to be used in the future are considered obsolete and the difference between an inventory's quantity and its forecasted usage are classified as excess. If actual market conditions are less favorable than those projected by management, additional inventory allowances for excess or obsolete inventory may be required (See Note 5 to the Consolidated Financial Statements - Inventories, net for additional information).
Uncertain Tax Positions. The recognition and measurement of uncertain tax positions that we have taken or expect to take is inherently difficult and requires subjective estimations. We reevaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues, and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an additional charge to the tax provision in the period. Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit or litigation, it could have a material effect on our income tax provision and net income in the period or periods for which that determination is made.
On July 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes", as amended by FASB Staff Position No. 48-1 ("FSP-FIN 48-1"), "Definition of Settlement in FASB Interpretation 48". FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return. FIN 48 states that a tax benefit from an uncertain tax position may be recognized only if it is "more likely than not" that the position is sustainable, based on its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit greater than 50% likely of being realized upon settlement with a taxing authority having full knowledge of all relevant information. This measurement is inherently difficult and requires subjective estimations.
A tax benefit from an uncertain position was previously recognized if it was probable of being sustained. Currently, the liability for unrecognized tax benefits is classified as non-current unless the liability is expected to be settled in cash within twelve months of the reporting date (See Note 11 to the Consolidated Financial Statements - Income Taxes for additional information).
Valuation of Deferred Tax Assets. We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits and deductions, and in the calculation of certain tax assets and liabilities, including FIN 48 liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as interest and penalties related to uncertain tax positions. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.
The Company is required to recognize a valuation allowance for all or a portion of its deferred tax assets if it believes that it is not more likely than not, given the weight of all available evidence, that all or a portion of its deferred tax assets will be realized. Management assesses the realizability of the deferred tax assets based on actual and forecasted operating results. The Company assessed both its positive and negative evidence to determine the proper amount of its required valuation allowance. Factors considered include the Company's current and cumulative losses in certain jurisdictions and management's projection that the Company expects to utilize its domestic net operating loss carryforwards prior to the initial expiration in fiscal 2022.
In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, excess of appreciated asset value over the basis of net assets, the duration of statutory carryforward periods, the Company's experience with operating loss and tax credit carryforwards not expiring unused, and tax planning alternatives. The
Company's analysis of the need for a valuation allowance recognizes that the Company has incurred a cumulative loss for its domestic operations over the recent years, which was principally due to a non-recurring goodwill impairment charge as well as acquisition and business realignment charges. The Company believes it will be able to realize all of its domestic deferred tax assets, net of the $1.5 million valuation allowance. Consideration has also been given to the period over which these net deferred tax assets can be realized, and the Company's history of not having federal tax loss carryforwards expire unused. In addition, the Company has considered tax planning strategies that are both prudent and feasible that will be implemented in a timely manner, if necessary, which will allow the Company to recognize the future tax attributes by increasing taxable income in the United States.
A valuation allowance of approximately $1.9 million and $1.7 million existed as of June 27, 2009 and June 28, 2008, respectively, for certain tax credit carryforwards, capital loss carryforwards and foreign deferred tax assets due to the uncertainty surrounding the utilization of these deferred tax assets. During the year ended June 27, 2009, the valuation allowance increased by approximately $0.2 million. The increase was mainly due to an increase in foreign net operating loss carryforwards and uncertainty surrounding the utilization of such carryforwards. During the year ended June 30, 2008, the valuation allowance increased by approximately $0.1 million. The increase was due to an increase in state investment tax credit carryforwards, which remain uncertain in their utilization, changes in gross deferred tax assets due to the adoption of FIN 48 on July 1, 2007, and partially offset by decreases in the valuation allowance due to the utilization of foreign net operating loss carryforwards, and changes surrounding the utilization of such foreign deferred tax assets. Management believes that it is more likely than not that the Company will realize the benefits of the Company's net deductible temporary differences, net of the valuation allowance. The factors that management considered in assessing the likelihood of realization included, the forecast of future taxable income, reversal of taxable temporary differences and available tax planning strategies that could be implemented to realize the deferred tax assets. Management will continue to assess the realizability of the deferred tax assets at each interim and annual balance sheet date based on actual and forecasted operating results. Adjustments to the valuation allowance may be made in the future if it is determined that the realizable amount of net operating losses and other deferred tax assets is greater or less than the amount recorded. Such adjustments may be material to the Company's financial position, and results of operations.
At June 27, 2009, the Company's net domestic deferred tax assets amounted to approximately $15.7 million. Management has considered the realizability of the deferred tax assets and has concluded that a domestic valuation allowance of approximately $1.5 million should be recorded, mainly related to certain state investment tax credit carryforwards that are not anticipated to be realized. Although management determined that a valuation allowance was not required with respect to most of the net domestic deferred tax assets, recovery is primarily dependent on achieving the forecast of future operating income, as well as prudent tax planning strategies. At June 27, 2009, the Company requires approximately $40 million in cumulative domestic future operating income to be generated at various times in the future to realize the domestic net deferred tax assets. Based upon the projections, the domestic net operating loss carryforwards and federal tax credit carryforwards would be fully utilized before expiration (See Note 11 to the Consolidated Financial Statements - Income Taxes for additional information).
Valuation of Long-Lived Assets. We assess the recoverability of our long-lived assets whenever events or changes in circumstances indicate that the carrying values may not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of long-lived assets by determining whether the carrying values of such assets will be recovered through undiscounted expected future cash flows. If the undiscounted cash flows are less than the carrying amounts, an impairment loss is recorded to the extent that the carrying amounts exceed the fair value. Factors which could trigger an impairment review include, but are not limited to the following: significant underperformance by us relative to historical or projected operating results; significant changes in the manner of our use of the assets or the strategy for the overall business; and significant negative industry or economic trends (See Note 8 to the Consolidated Financial Statements - Goodwill, Intangible Assets, net, and Other Non-Current Assets for additional information).
Valuation of Goodwill. Goodwill is to be tested for impairment annually, or more frequently, if events or changes in circumstances indicate that the carrying amount of the asset might be impaired. Impairment is assessed at the "reporting unit" level by applying a fair value-based test. A reporting unit is defined as the same as or one level below the operating segment level as described in SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company has one reporting unit, in the Test and Measurement business, because none of the components of the Company constitute a business for which discrete financial information is available and for which Company management regularly reviews the results of operations. In fiscal 2008, the Company changed its annual impairment testing date from fiscal year end to the last day of the eleventh month of the fiscal year. The Company believes the last day of the eleventh month of the fiscal year is preferable as it provides the Company additional time to complete the impairment test and report the results of that test in the Company's annual filing on Form 10-K.
The goodwill impairment test is a two-step process which requires management to make judgmental assumptions regarding fair value. Testing is required between annual tests if events occur or circumstances change that would, more likely than not, reduce the fair value of the reporting unit below its carrying value. Such an event may occur if, for an extended period of time, the market value of the Company's common stock plus a control premium were less than the carrying value of the Company. The determination as to whether a write-down of goodwill is necessary, and the amount of the impairment charge, involves significant judgment around the assumptions used to determine the impairment charge.
Fiscal 2008
In fiscal 2008, as a result of the decline in our stock price since June 30, 2007, which affected our market capitalization, we updated our goodwill impairment test as of September 29, 2007, December 29, 2007, and March 29, 2008 respectively, to identify whether a potential impairment of our recorded goodwill existed. For the first quarter ended September 29, 2007 our market capitalization, without regard to a control premium, exceeded our carrying value. For the second quarter testing as of December 29, 2007, the fair value of our reporting unit was determined to be $142.8 million, using a 30% control premium, which exceeded our carrying amount by $25.6 million, or 21%. For the third quarter testing as of March 29, 2008, the fair value of our reporting unit was determined to be $137.8 million, using a 30% control premium, which exceeded our carrying amount by $18.5 million, or 15.5%. For the fourth quarter testing as of May 31, 2008, the fair value of our reporting unit was determined to be $138.0 million, using a 30% control premium, which exceeded our carrying amount by $19.8 million, or 16.7%.
A 30% control premium was utilized in our second quarter, third quarter and annual goodwill impairment testing. This control premium was not a standard amount based on broad assumptions; rather, the amount was based on detailed analysis that considered appropriate industry, market, economic and other pertinent factors, including, indications of such premiums from data on recent acquisition transactions. The control premium is reviewed periodically, taking into consideration current industry, market and economic conditions along with other factors or available information specific to the Company's business.
We determined that there was no impairment to the recorded goodwill balances in fiscal 2008. We did, however, during the fourth quarter of fiscal 2007, reduce the goodwill by approximately $0.1 million as a result of a reversal of a . . .
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