Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
TSYS > SEC Filings for TSYS > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for TELECOMMUNICATION SYSTEMS INC /FA/

Form 10-Q for TELECOMMUNICATION SYSTEMS INC /FA/


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the consolidated financial statements, related notes, and other detailed information included elsewhere in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 (this "Form 10-Q"). This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements other than historical information or statements of current condition. We generally identify forward-looking statements by the use of terms such as "believe", "intend", "expect", "may", "should", "plan", "project", "contemplate", "anticipate", or other similar statements. Examples of forward looking statements in this Quarterly Report on Form 10-Q include, but are not limited to statements: a) regarding our belief that our technology does not infringe the patents related to customer indemnification requests and that indemnification claims should not have a material effect on our results of operations; (b) regarding our expectations with regard to the notes hedge transactions; (c) that we believe we have sufficient capital resources to fund our operations for the next twelve months, (d) relating to our backlog, (e) that we believe that capitalized software development costs will be recoverable from future gross profits (f) regarding our belief that we were in compliance with our loan covenants and that we believe that we will continue to comply with these covenants, (g) regarding our expectations with regard to income tax assumptions and future stock based compensation expenses, (h) regarding our assumptions related to goodwill, (i) that a sustained, significant decline in the Company's stock price and market capitalization, a decline in the Company's expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition and/or slower growth rate, among others, could cause us to conclude that impairment indicators exist and that our acquired intangible and long-lived assets might be impaired, (j) that we believe our


Table of Contents

intellectual property represented by patents is a valuable asset which will contribute positively to our results of operations, (k) relating to our R&D spending, (l) that we believe we should not incur any material liabilities from customer indemnification requests, (m) that determining fair value requires the exercise of significant judgment, including judgment about appropriate discount rates, the amount and timing of expected future cash flows, projected revenues and sales pipelines, as well as relevant comparable company multiples for the market comparable approach, and (n) that the microDATA acquisitions technology and expertise is expected to enhance the Company's end-to-end public safety communications business with expanded Geographical Information Systems emergency services information network software and additional Public Safety Answering Point-based customer premise equipment software.

These forward-looking statements relate to our plans, objectives and expectations for future operations. We base these statements on our beliefs as well as assumptions made using information currently available to us. In light of the risks and uncertainties inherent in all such projected operational matters, the inclusion of forward-looking statements in this report should not be regarded as a representation by us or any other person that our objectives or plans will be achieved or that any of our operating expectations will be realized. Revenues, results of operations, and other matters are difficult to forecast and our actual financial results realized could differ materially from the statements made herein, as a result of the risks and uncertainties described in our filings with the Securities and Exchange Commission. These include without limitation risks and uncertainties relating to our financial results and our ability to (i) continue to rely on our customers and other third parties to provide additional products and services that create a demand for our products and services, (ii) conduct our business in foreign countries, (iii) adapt and integrate new technologies into our products, (iv) develop software without any errors or defects, (v) protect our intellectual property rights, (vi) implement our business strategy, (vii) realize backlog, (viii) compete with small business competitors, (ix) effectively manage our counterparty risks, (x) achieve continued revenue growth in the foreseeable future in certain of our business lines, (xi) have sufficient capital resources to fund the Company's operations, and (xii) successfully integrate the assets and personnel obtained in our acquisitions. These factors should not be considered exhaustive; we undertake no obligation to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. We caution you not to put undue reliance on these forward-looking statements.

The information in this "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" discusses our unaudited consolidated financial statements, which have been prepared in accordance with GAAP for interim financial information.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations addresses our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2011 (the "2011 Form 10-K"). See Note 1 to the unaudited interim consolidated financial statements included elsewhere in this Form 10-Q for a list of the standards implemented for the nine months ended September 30, 2012.

We have identified our most critical accounting policies and estimates to be those related to the following:

Revenue recognition,

Stock compensation expense,

Marketable securities,

Income taxes,

Business combinations, and

Legal and other contingencies.


Table of Contents

Use of Estimates. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates. The Navigation reporting unit's goodwill and long-lived assets with a carrying value of $164,500 at March 31, 2012 were written down to their estimated fair value of $38,797, resulting in an impairment charge of $125,703 in the second quarter of 2012. The Company engaged a third party valuation firm to assist in the determination of the fair value of goodwill, acquired intangibles, capitalized software, and long-lived assets. The Company utilized a discounted cash flow to determine the fair value of goodwill and an income approach to determine the fair values of acquired intangibles, capitalized software, and long-lived assets. A summary of the impairment is set forth below.

Navigation Reporting Unit - Impairment charge recognized in earnings in the second   Carrying       Fair Value         Total
quarter                                                                                Value          Total          Impairment

Property and Equipment, including capitalized software for internal use              $  23,335     $     10,348     $     12,987
Software development costs                                                              18,767            6,347           12,420
Acquired intangible assets                                                              13,964               -            13,964
Goodwill - Navigation                                                                  108,434           22,102           86,332

                                                                                     $ 164,500     $     38,797     $    125,703

Goodwill. Goodwill represents the excess of cost over the fair value of assets of acquired businesses. Goodwill is not amortized, but instead is evaluated annually for impairment using a discounted cash flow model and other measurements of fair value such as market comparable transactions, etc. The authoritative guidance for the goodwill impairment model includes a two-step process. First, it requires a comparison of the book value of net assets to the fair value of the reporting units that have goodwill assigned to them. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of the impairment. In the second step, a fair value for goodwill is estimated, based in part on the fair value of the reporting unit used in the first step, and is compared to its carrying value. The shortfall of the fair value below carrying value, if any, would represent the amount of goodwill impairment.

The Company assesses goodwill and other intangible assets for impairment in the fourth quarter of each fiscal year, or sooner should there be an indicator of impairment. The Company periodically analyzes whether any such indicators of impairment exist. Such indicators include a sustained, significant decline in the Company's stock price and market capitalization, a decline in the Company's expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, and/or slower growth rate, among others.

For goodwill impairment testing, the Company has four reporting units: two Commercial Segment units, Navigation and Other Commercial (which comprises our text messaging and location-based technology businesses, including E9-1-1 call routing); and two Government Segment units, the Government Solutions Group ("GSG") unit and the Cyber Intelligence unit.

                                         September 30,       December 31,
                                             2012                2011
           Cyber Intelligence           $        28,155     $       28,155
           Government Solutions Group            26,142             25,869
           Other Commercial                      38,719             14,019
           Navigation                            22,102            108,434

           Total goodwill               $       115,118     $      176,477

In the second quarter of 2012, the Company received notice from a navigation application customer that it intends to adjust pricing for TCS services. Management considered this to be an indicator that the Company should evaluate the long-lived assets (including goodwill and other intangible assets) related to the Company's 2009 acquisition of Networks In Motion, operating as the Company's Navigation unit, for potential impairment.

As a result, the Company completed Step 1 of the goodwill impairment testing in the second quarter of 2012 for the Navigation reporting unit using a DCF analysis supported by a market comparable approach. The DCF analysis is based on the Company's updated long-range forecast for Navigation. For years beyond the forecast, the Company's estimated terminal value based on a discount rate of approximately 12% and a perpetual cash flow growth rate of 3%. For the market comparable approach, the Company evaluated comparable company public trading values, using sales multiples.

Determining fair value requires the exercise of significant judgment, including judgment about appropriate discount rates, the amount and timing of expected future cash flows, as well as relevant comparable company multiples for the market comparable approach and the relevant weighting of the methods utilized. The estimated fair value of the Navigation reporting unit was compared to the carrying amount including goodwill, and the results of the Step 1 goodwill testing indicated a potential impairment.


Table of Contents

Accordingly, the Company proceeded with Step 2 of the impairment test to measure the amount of potential impairment. The Company allocated the fair value of the Navigation reporting unit to its assets and liabilities as of the date of the impairment analysis.

As a result of our analysis as described above, an $86,332 impairment charge was recorded in the second quarter for the excess of the carrying value of goodwill over the estimated fair value. No triggering events have occurred with regard to other reporting units, so analysis of other units has not been done at this time; our next impairment analysis is scheduled for October 2012.

The gross carrying amount for the Government Segment increased by $273 in the nine months ended September 30, 2012 due to the final Trident purchase price allocation and adjustments. The gross carrying amount for the Commercial Segment increased by $24,700 in the nine months ended September 30, 2012 due to the preliminary microDATA purchase price allocation and adjustments; see Note 2. Prior to the end of the measurement period for the final purchase price allocation , which is not to exceed 12 months from the acquisition date, if information becomes available which would indicate adjustments are required to the purchase price the adjustments will be included in the purchase price allocation retrospectively.

A reconciliation of the changes in carrying value of goodwill:

                                                                      Government
                                                       Other          Solutions           Cyber
                                   Navigation        Commercial         Group          Intelligence        Total
Balance as of January 1, 2012     $    108,434      $     14,019     $     25,869     $       28,155     $ 176,477
Goodwill from preliminary
purchase price allocation of
microDATA                                                 24,700                                            24,700
Goodwill from final purchase
price allocation of Trident                 -                 -               273                 -            273
Impairment charge related to
the adjusted fair value of the
Navigation reporting unit              (86,332 )              -                -                  -        (86,332 )

Balance as of September 30,
2012                              $     22,102      $     38,719     $     26,142     $       28,155     $ 115,118

Acquired Intangible Assets. The acquired intangible assets are amortized over their useful lives of between four and nineteen years, based on the straight-line method. We evaluate acquired intangible assets when events or changes in circumstances indicate that the carrying values of such assets might not be recoverable. Our review of factors present and the resulting appropriate carrying value of our acquired intangible assets are subject to judgments and estimates by management.

The acquired intangible assets increased by $14,325 in the third quarter due to the microDATA acquisition. The microDATA acquired intangible assets are being amortized on a straight line basis over their estimated useful lives of five years.

As a result of our analysis of the fair value of the Navigation reporting unit, as discussed above under "Goodwill", a $13,964 impairment charge was recorded for the excess of the carrying value of acquired intangible assets over the estimated fair value in the second quarter of 2012.

Software Development Costs. Acquired technology, representing the estimated value of the proprietary technology acquired, has been recorded as capitalized software development costs. We also capitalize software development costs after we establish technological feasibility, and amortize those costs over the estimated useful lives of the software beginning on the date when the software is available for general release.

Costs are capitalized when technological feasibility has been established. For new products, technological feasibility is established when an operative version of the computer software product is completed in the same software language as the product to be ultimately marketed, performs all the major functions planned for the product, and has successfully completed initial customer testing. Technological feasibility for enhancements to an existing product is established when a detail program design is completed. Costs that are capitalized include direct labor and other direct costs. These costs are amortized on a product-by-product basis using the straight-line method over the product's estimated useful life, between three and five years. Amortization is also computed using the ratio that current revenue for the product bears to the total of current and anticipated future revenue for that product (the revenue curve method). If this revenue curve method results in amortization greater than the amount computed using the straight-line method, amortization is recorded at that greater amount. Our policies to determine when to capitalize software development costs and how much to amortize in a given period require us to make subjective estimates and judgments. If our software products do not achieve the level of market acceptance that we expect and our future revenue estimates for these products change, the amount of amortization that we record may increase compared to prior periods.

The Company capitalizes costs related to software developed or obtained for internal use when management commits to funding the project and the project completes the preliminary project stage. Capitalization of such costs ceases when the project is substantially complete and ready for its intended use. The Company routinely updates our estimates of the recoverability of the software products that have been capitalized. Management uses these estimates as the basis for evaluation the carrying values and remaining useful lives of the respective assets.


Table of Contents

The capitalized software development costs also increased by $5,578 in the third quarter due to the microDATA acquisition and are being amortized on a straight line basis over their estimated useful lives of five years.

In the second quarter of 2012, the Company recorded an impairment charge of $12,420 after determining certain capitalized software development costs were not recoverable based on decreased projected revenues and sales pipeline.

Our acquired intangible assets and capitalized software development costs of consisted of the following:

                                               September 30, 2012                             December 31, 2011
                                      Gross                                         Gross
                                    Carrying       Accumulated                    Carrying       Accumulated
                                     Amount        Amortization        Net         Amount        Amortization        Net
Acquired intangible assets:
Customer lists and other            $  36,224     $        8,307     $ 27,917     $  21,899     $        5,596     $ 16,303
Customer relationships                     -                  -            -         20,138              5,502       14,636
Trademarks and patents                  1,334                735          599         1,364                628          736
Software development costs,
including acquired technology          44,732             25,566       19,166        61,163             30,012       31,151

Total acquired intangible assets
and software dev. costs             $  82,290     $       34,608     $ 47,682     $ 104,564     $       41,738     $ 62,826

Impairment of Long-Lived Assets. Long-lived assets (property and equipment) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable.

In the second quarter of 2012, we evaluated recoverability of the assets related to the Navigation operating unit by a comparison of the carrying amount of the assets to future undiscounted net cash flows that we expect to generate from these assets. The Company recognized a loss of $12,987 which is equal to the amount by which the carrying amount exceeds the fair value of the assets.

Overview

Our business is reported using two business segments: (i) the Government Segment, which consists principally of engineering, deployment and field support of secure communication solutions and components, mainly satellite-based, and related services, including cyber-security training and related services, to government agencies and (ii) the Commercial Segment, which consists principally of communication technology for wireless networks based on location-based services, including E9-1-1 call routing application.

Effective July 6, 2012, the Company completed the acquisition of the all of the outstanding shares of privately-held microDATA, GIS, Inc., ("microDATA") in accordance with the Purchase and Sale Agreement. microDATA is a leading provider of Next Generation 9-1-1 software and solutions. Consideration for the acquisition was approximately $37 million, comprised of $20 million in cash at closing, plus $14 million in promissory notes and performance-based earn-out opportunities. The microDATA acquisition is accounted for using the acquisition method; accordingly, the total purchase price is allocated to the acquired assets and assumed liabilities based on management preliminary valuation of the fair values as of July 6, 2012. microDATA's operating results since July 6, 2012 are included in the Commercial Segment; see Note 2.

This "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" provides information that our management believes to be necessary to achieve a clear understanding of our financial statements and results of operations. You should read this "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" together with Item 1A "Risk Factors" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2011 Form 10-K as well as the unaudited interim consolidated financial statements and the notes thereto located elsewhere in this Form 10-Q.

Indicators of Our Financial and Operating Performance

Our management monitors and analyzes a number of performance indicators in order to manage our business and evaluate our financial and operating performance. Those indicators include:

Revenue and gross profit. We derive revenue from the sales of systems and services including recurring monthly service and subscriber fees, maintenance fees, software licenses and related service fees for the design, development, and deployment of software and communication systems, and products and services derived from the delivery of information processing, communication systems and components for governmental agencies.

Gross profit (revenue minus direct cost of revenue, including certain non-cash expenses). The major items comprising our cost of revenue are compensation and benefits, third-party hardware and software, network operation center and co-location facility operating expenses, amortization of capitalized software development costs, stock-based compensation, and overhead expenses. The costs of hardware and third-party software are primarily associated with the delivery of systems, and fluctuate from period to


Table of Contents
period as a result of the relative volume, mix of projects, level of service support required and the complexity of customized products and services delivered. Amortization of capitalized software development costs, including acquired technology, is associated with the recognition of revenue from our Commercial Segment.

Operating expenses. Our operating expenses are primarily compensation and benefits, professional fees, facility costs, marketing and sales-related expenses, and travel costs as well as certain non-cash expenses such as stock based compensation expense, depreciation and amortization of property and equipment, and amortization of acquired intangible assets.

Liquidity and cash flows. The primary driver of our cash flows is the results of our operations. Other important sources of our liquidity are our capacity to borrow, through our bank credit and term loan facility and other markets; lease financing for the purchase of equipment; and access to the public equity market.

Balance sheet. We view cash, working capital, and accounts receivable balances and days revenue outstanding as important indicators of our financial health.

Results of Operations

We develop and deliver highly reliable and secure wireless communication technology. Our mobile cloud computing services provide wireless applications and operator infrastructure for E9-1-1 call routing, navigation, asset and social applications, telematics, and text messaging. Our engineered satellite-based solutions incorporate cyber security expertise, and include base station management, deployable solutions for mission-critical communications with expert field support, and professional services including training.

The comparability of our operating results in nine month period ended September 30, 2012 to nine month period ended September 30, 2011 is affected by acquisition of Trident which completed on January 31, 2011 and the acquisition of microDATA which completed on July 6, 2012. Where changes in our results of operations from nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 are clearly related to these acquisitions, such as revenue and increases in amortization of intangibles, we quantify the effects. These acquisitions did not result in our entry into a new line of business or product category since it added products and services similar to those provided by our Government Segment and Commercial Segments.

Revenue and Cost of Revenue

The following discussion addresses the revenue, direct cost of revenue, and gross profit for our two business segments.

Government Segment



                                        Three Months Ended                                    Nine Months Ended
. . .
  Add TSYS to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for TSYS - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.