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SYMM > SEC Filings for SYMM > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for SYMMETRICOM INC

Form 10-Q for SYMMETRICOM INC


7-Nov-2013

Quarterly Report


Item 2. 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 the condensed consolidated financial statements and related notes included elsewhere in this report.

When used in this discussion, the words "expect," "anticipate," "estimate," "believe," "plan," "will," "may," "intend," "can," "project" and similar expressions are intended to identify forward-looking statements. These statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

These risks and uncertainties include, but are not limited to, risks associated with our proposed acquisition by Microsemi Corporation ("Microsemi"), including uncertainties as to how many of the Company's stockholders will tender their shares in the tender offer; the possibility that competing offers or acquisition proposals will be made; the possibility that various conditions to the consummation of the transactions may not be satisfied or waived, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the transactions; the effects of disruption from the transactions on the Company's business and the fact that the announcement and pendency of the transactions may make it more difficult to establish or maintain relationships with employees, suppliers, customers and other business partners; the risk that any stockholder litigation in connection with the transactions may result in significant costs of defense, indemnification and liability; the costs of negotiating and consummating the transactions; and other risks and uncertainties pertaining to the Company's business, including the extent and magnitude of customer orders received and shipped within the same quarter, risks relating to general economic conditions in the markets we address and the telecommunications and government and enterprise markets in general, risks related to the development of our new products and services, our reliance on our contract manufacturer, the effects of increasing competition and competitive pricing pressure, uncertainties associated with changing intellectual property laws, developments in and expenses related to litigation, inability to obtain sufficient amounts of key components, the rescheduling or cancellations of key customer orders, the loss of a key customer, the effects of new and emerging technologies, the risk that excess inventory may result in write-offs, price erosion and decreased demand, fluctuations in the rate of exchange of foreign currency, changes in our effective tax rate, market acceptance of our new products and services, technological advancements, undetected errors or defects in our products, the risks associated with our international sales, potential short-term investment losses and other risks due to credit market dislocation, geopolitical risks and risk of terrorist activities, the risks associated with attempting to integrate other companies and businesses we acquire, and the other risks set forth below in Part II, Item 1A, "Risk Factors."

These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

BesTime, ExacTime, PackeTime, Symmetricom, SymmTime, SyncServer, TimeCesium, TimeCreator, TimeHub, TimePieces, TimePictra, TimeProvider, TimeScan, TimeSource, TrueTime are our trademarks. We also refer to trademarks of other corporations and organizations in this document.

All references to "Symmetricom," "we," "us," and "our" mean Symmetricom, Inc. and its subsidiaries, except where it is made clear that the term means only the parent company. Dollar amounts in the tables in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" are in thousands.

Overview

Symmetricom is a leading source of highly precise timekeeping technologies, instruments and solutions. We generate, distribute and apply precise time for the communications, aerospace/defense, power, 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.

Recent Developments

On October 21, 2013, we entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among the Company, Microsemi and PETT Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Microsemi ("Purchaser"), pursuant to which Microsemi will acquire the Company.

Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Purchaser commenced a cash tender offer (the "Offer") on October 28, 2013 to purchase all of the outstanding shares of the Company's common stock, par value $0.0001 per share (the "Shares"), at a purchase price of $7.18 per Share, net to the tendering stockholder in cash, without interest and less any required withholding taxes (the "Per Share Amount"). The Offer is presently scheduled to expire at 12:00 a.m. New York City time


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on November 25, 2013. Upon successful completion of the Offer, and subject to the terms and conditions of the Merger Agreement, Purchaser will be merged with and into the Company (the "Merger"), and the Company will survive the Merger as a wholly owned subsidiary of Microsemi. At the effective time of the Merger (the "Effective Time"), each outstanding Share, other than Shares owned by the Company, Microsemi or their respective subsidiaries immediately prior to the Effective Time, will automatically be converted into the right to receive the Per Share Amount on the terms and subject to the conditions set forth in the Merger Agreement.

The Company, Microsemi and Purchaser have made customary representations and warranties in the Merger Agreement and agreed to certain customary covenants, including covenants regarding the operation of the Company's business prior to the closing of the Merger. The Merger Agreement provides for a "go-shop" period for the Company through November 8, 2013, during which period the Company will be permitted to solicit, and provide information and enter into discussions concerning, proposals relating to alternative business combination transactions. Following such date, the Company will be generally prohibited from engaging in such activities, subject to certain exceptions set forth in the Merger Agreement. The Merger Agreement contains certain termination rights for each of the Company, Microsemi and Purchaser and further provides that upon termination of the Merger Agreement under specified circumstances the Company may be required to pay Microsemi a termination fee of $10,400,000 or, in certain specified circumstances, a lower termination fee of $5,050,000.

Critical Accounting Estimates

Our condensed 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.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. We believe that there have been no significant changes during the three months ended September 29, 2013 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

Known Trends and Uncertainties Impacting Future Results of Operations

Current macro-economic factors are dynamic and uncertain and are likely to remain so in the remainder of fiscal 2014. If difficult economic conditions continue or markedly worsen, if there are further reductions in government /defense spending, or if there are further reductions in wireline modernization spending, our customers may delay or reduce capital expenditures. These factors have resulted in and could continue to 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 procurement difficulties.


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Results of Operations

The following table presents selected items in our condensed consolidated
statements of operations as a percentage of total net revenue for the three
months ended September 29, 2013 and September 30, 2012:



                                                                   Three Months Ended
                                                          September 29,          September 30,
                                                               2013                  2012
Net revenue

Communications                                                       49.1 %                55.8 %
Government and Enterprise                                            50.9 %                44.2 %

Total net revenue                                                   100.0 %               100.0 %

Cost of products and services                                        57.0 %                56.6 %
Amortization of purchased technology                                  0.4 %                 0.4 %
Restructuring charges                                                 0.0 %                (0.1 )%

Gross profit                                                         42.6 %                43.1 %
Operating expenses:
Research and development                                             14.1 %                14.7 %
Selling, general and administrative                                  29.5 %                28.8 %
Amortization of intangible assets                                     0.2 %                 0.2 %
Restructuring charges                                                 2.0 %                 0.1 %

Operating loss                                                       (3.2 )%               (0.7 )%
Interest income (loss), net of amortization
(accretion) of premium (discount) on investments                      0.2 %                (0.1 )%
Loss before taxes                                                    (3.0 )%               (0.7 )%
Income tax benefit                                                   (0.9 )%               (0.4 )%

Net loss                                                             (2.1 )%               (0.4 )%

Net Revenue



                                                        Three Months Ended                $ Change         % Change
                                                September 29,         September 30,
                                                    2013                  2012

Net Revenue :
Communications                                $          23,569      $        31,439      $  (7,870 )%         (25.0 )%
Government and Enterprise                                24,475               24,952           (477 )           (1.9 )

Total Net Revenue                             $          48,044      $        56,391      $  (8,347 )%         (14.8 )%
Percentage of Revenue                                       100 %                100 %

First Quarter of Fiscal 2014: Net revenue consists of sales of products, software licenses, and services. In the first quarter of fiscal 2014, net revenue decreased $8.3 million, or 14.8%, compared to the corresponding quarter of fiscal 2013. The decrease of $7.9 million, or 25%, in Communications revenue was due to lower sales of Traditional Synchronization equipment for wireline and cable network infrastructure. The decrease of $0.5 million, or 1.9%, in Government and Enterprise segment revenue was due to lower U.S. government spending partially offset by higher Quantum™ Chip Scale Atomic Clock (CSAC) revenue.


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Gross Profit:



                                                        Three Months Ended               $ Change       % Change
                                                September 29,        September 30,
                                                    2013                 2012

Gross Profit :
Communications                                 $        12,828      $        16,229      $  (3,401 )        (21.0 )%
Government and Enterprise                                7,635                8,028           (393 )         (4.9 )
Corporate related                                           (3 )                 45            (48 )       (106.7 )

Total Gross Profit                             $        20,460      $        24,302      $  (3,842 )        (15.8 )%
Percentage of Revenue                                     42.6 %               43.1 %

First Quarter of Fiscal 2014: Gross profit as a percentage of revenue in the first quarter of fiscal 2014 decreased to 42.6%, compared to 43.1% in the corresponding quarter of fiscal 2013, due to higher manufacturing costs.

In the first quarter of fiscal 2014, gross profit as a percentage of revenue for our Communications segment increased to 54.4%, compared to 51.6% in the same period of the prior year, due to lower manufacturing costs. Gross profit as a percentage of revenue for our Government and Enterprise segment decreased to 31.2% in the first quarter of fiscal 2014, compared to 32.2% in the first quarter of fiscal 2013, due to unfavorable shift in product mix to lower margin products.

Operating Expenses:

Research and Development Expense:



                                                       Three Months Ended                $ Change       % Change
                                               September 29,         September 30,
                                                   2013                  2012

Research and development expense              $         6,795       $         8,313      $  (1,518 )        (18.3 )%
Percentage of Revenue                                    14.1 %                14.7 %

First Quarter of Fiscal 2014: Research and development expense consists primarily of salaries and benefits, prototype expenses and fees paid to outside consultants. These expenses decreased in the first quarter of fiscal 2014 compared to same quarter of fiscal 2013 due to lower employee compensation expenses resulting from the restructuring activities begun in June 2013. In addition, there were lower travel and entertainment expenses, and outside consulting fees. We expect that research and development expenses in the second quarter of fiscal 2014 will be similar to the first quarter of fiscal 2014.

Selling, General and Administrative:



                                                        Three Months Ended                $ Change        % Change
                                                September 29,         September 30,
                                                    2013                  2012

Selling, general and administrative           $          14,161      $        16,227      $  (2,066 )         (12.7 )%
Percentage of Revenue                                      29.5 %               28.8 %

First Quarter of Fiscal 2014: Selling, general and administrative expenses consist primarily of salaries, benefits, sales commissions and travel-related expenses for our sales and services, marketing, and general and administrative departments. Selling, general, and administrative expenses in the first quarter of fiscal 2014 decreased compared to same quarter of fiscal 2013 due to lower employee compensation expenses resulting from the restructuring begun in June 2013. In addition, there were lower travel and entertainment expenses, and sales commission expenses compared to the first quarter of fiscal 2013. We expect that selling, general and administrative expenses in the second quarter of fiscal 2014 will be consistent with the first quarter of fiscal 2014.


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Amortization of intangible assets:

                                                          Three Months Ended                   $ Change       % Change
                                                September 29,            September 30,
                                                    2013                     2012

Amortization of intangible assets              $            86         $              86      $       -              -  %
Percentage of Revenue                                      0.2 %                     0.2 %

Amortization of intangible assets in the first quarter of fiscal 2014 was comparable to the corresponding period of fiscal 2013.

Restructuring charges:

                                                          Three Months Ended                  $ Change      % Change
                                                September 29,            September 30,
                                                    2013                     2012

Restructuring charges                          $           962         $              55      $     907       1,649.1 %
Percentage of Revenue                                      2.0 %                     0.1 %

Restructuring charges in the first quarter of fiscal 2014 consisted of severance, consulting and outside service charges related to our reduction in work force and facilities, partially off-set by sublease of one of our facilities that had previously been recorded as a lease loss at the time we ceased using that space.

Interest income, net of amortization (accretion) of premium (discount) on investments:

                                                          Three Months Ended                  $ Change      % Change
                                                September 29,           September 30,
                                                    2013                    2012

Interest income (loss), net of amortization
(accretion) of premium (discount) on
investments                                    $            88        $             (36 )     $     124        (344.4 )%
Percentage of Revenue                                      0.2 %                   (0.1 )%

Interest income, net of amortization (accretion) of premium (discount) on investments increased $0.1 million in the first quarter of fiscal 2014 compared to the same period of the prior year due to higher yields in the first quarter of fiscal 2014.

Income tax provision (benefit):

                                                       Three Months Ended                   $ Change        % Change
                                              September 29,           September 30,
                                                   2013                   2012

Income tax provision (benefit)               $           (456 )      $          (212 )     $     (244 )         115.1 %
Percentage of Revenue                                    (1.0 )%                (0.4 )%

First Quarter of Fiscal 2014: We recorded an income tax benefit of $0.5 million in the first quarter of fiscal 2014, compared to a benefit of $0.2 million in the corresponding quarter of fiscal 2013. Our effective tax rate in the first quarter of fiscal 2014 was 31.3%, compared to an effective tax rate of 51.1% in the corresponding period of fiscal 2013. The effective tax rate for the first quarter of fiscal 2013 benefitted from employees' disqualifying dispositions of shares purchased through our employee stock purchase plan.


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Key Operating Metrics

A key operating metric for measuring our performance is sales backlog. A comparison of this metric at the end of the first quarter of fiscal 2014 with the end of fiscal 2013 is below:

Sales Backlog:

Our backlog consists of firm orders that have yet to be shipped to the customer, or may not be shippable to a customer until a future period. Most orders included in backlog can be rescheduled or cancelled by customers without significant penalty. Historically, a substantial portion of net revenue in any fiscal period has been derived from orders received during that fiscal period.

Our backlog totaled $53.6 million as of September 29, 2013, compared to $45.3 million as of June 30, 2013.

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