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SYMM > SEC Filings for SYMM > Form 10-K on 11-Sep-2013All Recent SEC Filings

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Form 10-K for SYMMETRICOM INC


11-Sep-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included elsewhere in this Form 10-K.

Overview

Symmetricom, a worldwide leader in precision time and frequency technologies, sets the world's standard for time. We generate, distribute and apply precise time for the communications, aerospace/defense, IT infrastructure and metrology industries. Symmetricom's customers, from communications service providers and network equipment manufacturers to governments and their suppliers worldwide, are able to build more reliable networks and systems by using our advanced timing technologies, atomic clocks, services and solutions. Our products support today's precise timing standards, including GPS-based timing, IEEE 1588 (PTP), Network Time Protocol (NTP), Synchronous Ethernet, Building Integrated Timing Supply (BITS) and Data Over Cable Service Interface Specifications (DOCSIS(R)) timing.

Dollar amounts in the tables in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" are in thousands. Our fiscal year is the 52 or 53 weeks ending on the Sunday closest to June 30. Fiscal years 2013 and 2012 were 52-week fiscal years, and 2011 was a 53-week fiscal year.

Fiscal Year 2013 Summary

During fiscal 2013, Symmetricom remained focused on driving new opportunities for growth in key areas such as PackeTime, Quantum Chip Scale Atomic Clock (CSAC) and Government Programs. We enhanced our solution portfolio for service providers transitioning to packet-based networks, LTE and LTE-Advanced wireless technologies with the launch of our PackeTime Edgemaster product. Our Quantum CSAC revenue increased in fiscal 2013 on higher order volumes and production levels. CSAC's significant size, weight, and power advantages over existing technologies continue to drive demand. With a strong backlog in place at the end of the fiscal year and increasing production volumes, we are well positioned for CSAC revenue growth in fiscal 2014. And, our Government Programs portfolio performed well despite the challenging government spending environment. We believe our technology and expertise are well aligned with the new defense priorities, and we plan continued investment in this area as we pursue long-term growth.

However, revenue in other, more mature product areas was adversely impacted by the government spending weakness and broad-based economic weakness, leading to a decline in total company revenue from fiscal 2012. Despite the challenging year, we continued to generate cash, with over $19 million in cash flow from operations and added nearly $9 million to its cash and short-term investment balances.

In April 2013, we announced that Elizabeth A. Fetter, a member of our Board of Directors, had been appointed as our new Chief Executive Officer, replacing David G. Côté. In May 2013, we announced a reorganization of our management structure, in which several other members of our management team left the company. In June 2013, we announced a restructuring plan pursuant to which we plan to reduce our workforce by approximately 12% by December 2013. The restructuring plan we announced in June 2013 is intended to reduce costs while maximizing resources to support our growth initiatives and has helped right-size our organization to current revenue levels.

Known Trends and Uncertainties Impacting Future Results of Operations: Global Market and Economic Conditions

Current macro-economic factors are dynamic and uncertain and are likely to remain so in fiscal 2014. If difficult economic conditions continue or markedly worsen or if there are reductions in government /defense spending or if there are further reductions in wireline modernization spending, our customers may delay or reduce capital expenditures. Among other things, these factors could result in reductions in sales of our products, longer sales cycles, difficulties in collecting accounts receivable, additional excess and obsolete inventory, gross margin deterioration, slower adoption of new technologies, increased price competition and supplier difficulties.


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Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures at the date of our financial statements. On an ongoing 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 values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider the following accounting policies to be critical accounting policies due to their subjective nature and judgments involved in each:

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, our price is fixed or determinable and collectability is reasonably assured. Our standard arrangement for our domestic and international customers includes a signed purchase order or contract and no right of return of delivered products. Revenue is recognized net of any taxes collected from customers and subsequently remitted to governmental authorities. We assess collectability based on the creditworthiness of the customer and past transaction history. We perform periodic credit evaluations of our customers and do not require collateral from our customers. However, for many of our international customers, we require an irrevocable letter of credit to be issued by the customer before the product is shipped. If we determine that collection of the invoice is not reasonably assured, we recognize revenue at the time that collection becomes reasonably assured, which is generally upon the receipt of cash.

Generally, product revenue is generated from the sale of synchronization and timing equipment with embedded software that is incidental to product functionality. Service revenue is recognized as the services are performed, provided collection of the related receivable is reasonably assured. Our sales to distributors are made under agreements allowing for returns or credits under certain circumstances. Accordingly, we record an estimate of returns from distributors based on a historical average of distributor returns. We record commission expense both when orders are received and shipped, at which times the commission is both earned and payable.

Periodically, we enter into revenue transactions with multiple deliverables. Our multiple element product offerings generally include hardware, software and post-contract support ("PCS") services, which are considered separate units of accounting. In evaluating the revenue recognition for multiple element arrangements under the accounting guidance, the total arrangement fees are allocated to all the deliverables based on their relative selling prices. The relative selling price is determined using vendor specific objective evidence ("VSOE") when available. When VSOE cannot be established, we attempt to establish the selling price of deliverables based on relevant third party evidence ("TPE"). TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our competitors, and offerings may contain a significant level of proprietary technology, customization or differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor products' selling prices are on a stand-alone basis. Therefore, we typically are not able to determine TPE.

When we are unable to establish selling price using VSOE or TPE, we use our best estimate of the selling price ("BESP") for the allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service was sold on a stand-alone basis. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings. We determine BESP for a product or service by considering multiple factors including, but not limited to:

• the price list established by our management which is typically based on general pricing practices, market conditions, geographies and targeted gross margin of products and services sold; and

• analysis of pricing history of new arrangements, including multiple element and stand-alone transactions.


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Revenue from contracts that require development and manufacture in accordance with customer specifications and have a lengthy development period may be categorized into two types: firm fixed price and cost reimbursable. Revenue is recognized under the fixed price contracts using the percentage of completion method (cost-to-cost basis), principally based upon the costs incurred relative to the total estimated costs at completion on the individual contracts. Any anticipated losses on contracts are charged to operations as soon as they are determinable. Revenue recognized under cost reimbursable contracts is recognized on the basis of direct and indirect costs incurred plus a negotiated profit calculated as a percentage of costs or as a performance based award fee. Revenue from long-term contracts is reviewed periodically, with adjustments recorded in the period in which the revisions are made.

Inventory Valuation

Inventories are valued at the lower of cost or market, cost being determined on a first-in, first-out basis. We assess the valuation of all inventories, including raw materials, work-in-process, finished goods and spare parts on a periodic basis. Obsolete inventory or inventory in excess of management's estimated usage is written down to its estimated market value less costs to sell, if less than its cost. Inherent in the estimates of market value are management's estimates related to current economic trends, future demand and technological obsolescence. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. If the inventory value is written down to its net realizable value, and subsequently there is an increased demand for the inventory at a higher value, the increased value of the inventory is not realized until the inventory is sold.

Warranty

Our standard warranty agreement is one year from shipment. However, our warranty agreements are contract and component specific and can range to twenty years for selected components. We offer extended warranty contracts on products that are less than eight years old. The extended warranty contract is applicable for a maximum of nine years after the expiration of the standard one-year warranty. The revenue from extended warranty contracts is recognized ratably over the period of contract.

We accrue for anticipated warranty costs upon shipment. We estimate future warranty costs based on, historical warranty claim trends, management's judgment regarding anticipated rates of warranty claims, and associated repair costs. This analysis is updated on a quarterly basis.

Accounting for Income Taxes

We provide for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in the consolidated financial statements in the period that includes the enactment date.

The carrying value of our net deferred tax assets, which are made up of tax deductions, net operating loss carryforwards and tax credits, assumes that we will be able to generate sufficient future income to fully realize these assets. We evaluate the weight of all available evidence in determining whether it is more likely than not that some portion of the deferred tax assets will not be realized. If we do not generate sufficient future income, the realization of these deferred tax assets may be impaired, resulting in an additional income tax expense. A portion of our tax credits are related to stock options and have a valuation allowance because of uncertainty regarding their realization. If these tax credits are realized, the benefit will be credited to common stock. Additionally, for state income tax purposes, we have research and development tax credit carryforwards that have no expiration date but we have full valuation allowance on such credits.


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Short-Term Investments

Short-term investments consist of government sponsored enterprise debt securities, mutual funds, certificates of deposits and corporate debt securities. Maturities for the government sponsored enterprise debt securities, certificates of deposits and corporate debt securities are between three and thirty six months. All of our short-term investments, except the mutual funds which are classified as trading securities, are classified as available-for-sale. Available-for-sale securities are carried at fair value with temporary unrealized gains and losses, net of taxes, reported as a component of stockholders' equity. Unrealized gains and losses related to trading securities are included in interest income in our consolidated statements of operations.

Available-for-sale investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. We consult with our investment manager and consider available quantitative and qualitative evidence in evaluating potential impairment of our investments on a quarterly basis. Other-than-temporary impairment charges exist when the entity has the intent to sell the security or it will more likely than not be required to sell the security before anticipated recovery. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded to operations and a new cost basis in the investment is established.

Valuation of Long-Lived Assets Including Intangible Assets Subject to Amortization

The carrying value of long-lived assets is evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Intangible assets primarily include purchased technology and trademarks. Factors we consider important that could trigger an impairment review include significant under-performance relative to historical or projected future operating results, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, or significant negative industry or economic trends. If these criteria indicate that the value of the intangible asset may be impaired, we compare the respective book value to the projected undiscounted net cash flows associated with the related asset or group of assets over the asset's remaining useful life. In the event that the projected undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the assets. Any such impairment charge could be significant and could have a material adverse effect on our financial statements if and when an impairment charge is recorded. If an impairment charge were recognized, the amortization related to intangible assets would decrease during the remainder of the life of the asset.


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Results of Operations

The following table presents the percentage of total revenue for the respective line items in our consolidated statement of operations:

                                                                    Year ended
                                            June 30, 2013           July 1, 2012          July 3, 2011
Net revenue
Communications                                        55.0 %                 55.7 %                57.2 %
Government and Enterprise                             45.0 %                 44.3 %                42.8 %

Total net revenue                                    100.0 %                100.0 %               100.0 %
Cost of products and services                         55.0 %                 55.5 %                51.9 %
Amortization of purchased technology                   0.6 %                  0.3 %                 0.5 %
Restructuring charges                                  0.4 %                  0.5 %                 4.5 %

Gross profit                                          44.0 %                 43.8 %                43.1 %
Operating expenses:
Research and development                              15.3 %                 11.8 %                13.0 %
Selling, general and administrative                   28.7 %                 24.8 %                27.2 %
Amortization of intangible assets                      0.2 %                  0.1 %                 0.1 %
Restructuring charges                                  2.3 %                   -  %                (0.6 )%

Operating income (loss)                               (2.5 )%                 7.1 %                 3.4 %
Interest income                                        0.2 %                  0.1 %                 0.5 %
Interest expense                                        -  %                   -  %                  -  %

Income (loss) from continuing
operations before taxes                               (2.3 )%                 7.2 %                 3.9 %
Income tax provision (benefit)                        (1.0 )%                 2.4 %                 3.3 %

Income (loss) from continuing
operations                                            (1.3 )%                 4.8 %                 0.6 %
Income from discontinued operations,
net of tax                                              -  %                   -  %                 0.1 %

Net income (loss)                                     (1.3 )%                 4.8 %                 0.7 %

Fiscal 2013 compared to Fiscal 2012

                                                   Year ended                      $ Change          % Change
                                       June 30, 2013          July 1, 2012
Net Revenue:
Communications                        $       116,047        $      132,345        $ (16,298 )           (12.3 )%
Government and Enterprise                      94,943               105,371          (10,428 )            (9.9 )

Total Net Revenue                     $       210,990        $      237,716        $ (26,726 )           (11.2 )%
Percentage of Revenue                           100.0 %               100.0 %


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Net revenue consists of sales of products, services and software licenses. The decrease in Communications revenue is due to lower sales of synchronization products. The decrease in Government and Enterprise segment revenue is due to a decline in our government programs revenue, sales of GPS and time code instrumentation, network time servers, and precision frequency references, driven largely by lower U.S. government spending. These declines were partially offset by higher sales of our new chip scale atomic clock.

                                                    Year ended                      $ Change          % Change
                                        June 30, 2013          July 1, 2012
Gross Profit:
Communications                         $        59,881        $       66,564        $  (6,683 )           (10.0 )%
Government and Enterprise                       33,962                38,626           (4,664 )           (12.1 )
Corporate related                                 (943 )              (1,178 )            235             (19.9 )

Total Gross Profit                     $        92,900        $      104,012        $ (11,112 )           (10.7 )%
Percentage of Revenue                             44.0 %                43.8 %

Gross profit: Gross profit as a percentage of revenue for our Communications segment increased to 52% in fiscal 2013, compared to 50% in fiscal 2012, due to lower manufacturing costs. Gross profit as a percentage of revenue for our Government and Enterprise segment decreased to 36% in fiscal 2013, compared to 37% in fiscal 2012, due to an unfavorable product mix, partially offset by lower manufacturing costs. Corporate related charges decreased $0.2 million due to lower restructuring charges in fiscal 2013.

                                                    Year ended                      $ Change         % Change
                                       June 30, 2013           July 1, 2012
Operating Income:
Communications                        $        23,269         $       28,697        $  (5,428 )          (18.9 )%
Government and Enterprise                       6,040                 11,625           (5,585 )          (48.0 )
Corporate related                             (34,654 )              (23,478 )        (11,176 )          (47.6 )

Total operating income                $        (5,345 )       $       16,844        $ (22,189 )         (131.7 )%
Percentage of Revenue                            (2.5 )%                 7.1 %

Operating income: Operating income for our Communications business decreased, principally due to lower revenue. Operating income for our Government and Enterprise business decreased due to a decline in revenue and an increase in research and development, sales, marketing and administrative expenses. Corporate-related expenses in fiscal 2013 were higher compared to fiscal 2012 due to higher restructuring charges in fiscal 2013 and higher research and development, sales, marketing and administrative expenses.

                                                   Year ended                       $ Change         % Change
                                       June 30, 2013          July 1, 2012
Research and development expense      $        32,384        $       27,960        $    4,424             15.8 %
Percentage of Revenue                            15.3 %                11.8 %

Research and development expense consists primarily of salaries and benefits, prototype expenses, fees paid to outside consultants and facility costs. Research and development expense in fiscal 2013 increased compared to fiscal 2012 due to higher prototype and outside consulting expenses related to the development of our new smart grid clock for substations, PackeTime Edgemaster, and other products.

                                                     Year ended                       $ Change        % Change
                                         June 30, 2013          July 1, 2012
Selling, general and administrative     $        60,717        $       58,921        $    1,796             3.0 %
Percentage of Revenue                              28.7 %                24.8 %


Table of Contents

Selling, general and administrative expense consists primarily of salaries, benefits, sales commissions and travel-related expenses for our sales and services, marketing, finance, human resources, and information technology. In fiscal 2013, compared to fiscal 2012, there were higher employee compensation costs due in part to executive management transitions, legal and consulting costs related to transition of the research and development center in China to US and bad debt expenses, partially offset by lower sales commissions.

                                                   Year ended                     $ Change         % Change
                                       June 30, 2013         July 1, 2012
Amortization of intangible assets     $           346        $         242        $     104             43.0 %
Percentage of Revenue                             0.2 %                0.1 %

Amortization of intangible assets increased in fiscal 2013 compared to fiscal 2012 due to higher amortization of intangible assets arising from assets acquired in fiscal 2012 and 2013, partially offset by certain assets being fully amortized before or during fiscal 2013.

                                      Year ended                   $ Change       % Change
                           June 30, 2013       July 1, 2012
  Restructuring charges   $         4,798      $          45      $    4,753       10,562.2 %
  Percentage of Revenue               2.3 %              0.0 %

Restructuring charges in fiscal 2013 consisted of severance, lease loss charges and other exit costs. In fiscal 2012, restructuring charges consisted of severance and other charges partially offset by a decrease in our lease loss liability.

                                      Year ended                  $ Change       % Change
                           June 30, 2013       July 1, 2012
  Interest income         $           444      $         282      $     162           57.4 %
  Percentage of Revenue               0.2 %              0.1 %

Interest income was higher in fiscal 2013 than the prior year due to an increase in the fair value of our deferred compensation plan assets.

                                     Year ended                   $ Change       % Change
                          June 30, 2013        July 1, 2012
 Income tax provision    $        (2,196 )     $       5,771      $  (7,967 )       (138.1 )%
 Percentage of Revenue              (1.0 )%              2.4 %

Income tax provision: Our effective tax rate in fiscal 2013 was 44.8% on a loss from continuing operations before income taxes of $4.9 million, compared to an effective tax rate of 33.7% on income from continuing operations before income taxes of $17.1 million in fiscal 2012. The tax rate in fiscal 2013 was impacted by the retroactive extension of R&D tax credit enacted in January 2013. The tax rate in fiscal 2012 benefited from the release of reserves on an uncertain tax position that was no longer necessary.

Fiscal 2012 compared to Fiscal 2011

                                        Year ended                  $ Change       % Change
                             July 1, 2012        July 3, 2011
. . .
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