Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Business
Ixia ("Ixia" or the "Company") was incorporated on May 27, 1997 as a California corporation. The Company provides application performance and security resilience solutions so that organizations can validate, secure, and optimize their physical and virtual networks. Enterprises, service providers, network equipment manufacturers, and governments worldwide rely on Ixia’s solutions to deploy new technologies and achieve efficient, secure ongoing operation of their networks. Ixia's product solutions consist of its high performance hardware platforms, software applications, and services, including warranty and maintenance offerings and professional services. The Company operates within
one
business segment.
2. Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements
Basis of Presentation
The accompanying condensed consolidated financial statements as of
June 30, 2016
and for the
three and six
months ended
June 30, 2016
and
2015
, are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of the Company's management, necessary for a fair statement of its financial position, operating results and cash flows for the interim periods presented. The results of operations for the
three and six
months ended
June 30, 2016
are not necessarily indicative of results to be expected for the full year ending
December 31, 2016
or any other future period.
These condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting
. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of
December 31, 2015
has been derived from the Company's audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended
December 31, 2015
(the “
2015
Form 10-K"), but does not include all disclosures required by GAAP. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company's
2015
Form 10-K.
Significant Accounting Policies
The Company’s significant accounting policies are set forth in Note 1 to the audited consolidated financial statements included in its
2015
Form 10-K.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13,
Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments.
ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses. The update is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The standard will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within those reporting periods. Early adoption is permitted. The Company has not yet evaluated the impact of the adoption of this accounting standard update on its consolidated financial statements.
In May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients.
ASU 2016-12 addresses narrow-scope improvements to the guidance on collectibility, non-cash consideration, and completed contracts at transition. Additionally, the amendments in this update provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The amendments in this update affect the guidance in ASU 2014-09,
Revenue from Contracts with Customers,
which is not yet effective. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU 2014-09 (as discussed below). The Company has not yet evaluated the impact of the adoption of this accounting standard update on its consolidated financial statements.
In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing.
ASU 2016-10 clarifies the implementation guidance on identifying performance obligations and licensing. Specifically, the amendments reduce the cost and complexity of identifying promised goods or services and improve the guidance for determining whether promises are separately identifiable. The amendments also provide implementation guidance on determining whether an entity's promise to grant a license provides a customer with either a right to use the entity's intellectual property (which is satisfied at a point in time) or a right to access the entity's intellectual property (which is satisfied over time). The amendments in this update affect the guidance in ASU 2014-09,
Revenue from Contracts with Customers,
which is not yet effective. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU 2014-09 (as discussed below). The Company has not yet evaluated the impact of the adoption of this accounting standard update on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Compensation–Stock Compensation: Improvements to Employee Share-Based Payment Accounting.
ASU 2016-09 involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the new standard, income tax benefits and deficiencies are to be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity should also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Excess tax benefits should be classified along with other income tax cash flows as an operating activity. In regards to forfeitures, the entity may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The standard will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods. Early adoption is permitted. The Company has not yet evaluated the impact of the adoption of this accounting standard on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers: Principal Versus Agent Considerations.
ASU 2016-08 clarifies the implementation guidance for what the FASB calls principal-versus-agent considerations in the board's revenue recognition standard by instructing the participants in the sale to determine whether they control the good or service and are entitled to the gross amount of the transaction or are acting as an agent and should collect only a fee or commission for arranging the sale. The amendments in this update affect the guidance in ASU 2014-09,
Revenue from Contracts with Customers,
which is not yet effective. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU 2014-09 (as discussed below). The Company has not yet evaluated the impact of the adoption of this accounting standard update on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which
requires that lessees recognize assets and liabilities for leases with lease terms greater than twelve months in the statement of financial position. ASU 2016-02 also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases
. The standard will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within those reporting periods. Early adoption is permitted. The Company has not yet evaluated the impact of the adoption of this accounting standard on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
, which provides updated guidance that enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation, and disclosure. The standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Except for the early application guidance, early adoption of the amendments is not permitted. The Company has not yet evaluated the impact of the adoption of this accounting standard update on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes,
to simplify the presentation of deferred taxes in the statement of financial position. The updated guidance requires that deferred tax assets and liabilities be classified as noncurrent in a classified balance sheet. The standard will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods. Early application is permitted. The Company has not yet evaluated the impact of the adoption of this accounting standard update on its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory
, which provides new guidance regarding the measurement of inventory. The new guidance requires most inventory to be measured at the lower of cost and net realizable value. The standard defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The standard applies to companies other than those that measure inventory using last-in, first-out (LIFO) or the retail inventory method. The standard will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods. Early adoption is permitted. The Company has not yet evaluated the impact of the adoption of this accounting standard update on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers,
which provides new guidance on the recognition of revenue and states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard was originally set to become effective in annual periods beginning after December 15, 2016 and for interim and annual reporting periods thereafter. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers; Deferral of the Effective Date,
which defers the effective date of ASU 2014-09 for all entities by one year, thereby delaying the effective date of the standard to January 1, 2018, with an option that would permit companies to adopt the standard as early as the original effective date. Early adoption prior to the original effective date is not permitted. The Company has not yet evaluated the impact of the adoption of this accounting standard update on its consolidated financial statements.
3. Debt
Senior Secured Credit Agreements
2015 Credit Agreement
On
March 2, 2015
, the Company entered into an amended and restated credit agreement (as amended to date, the “Credit Agreement”) by and among the Company, as borrower, certain of the Company’s wholly owned direct and indirect subsidiaries, as guarantors, Silicon Valley Bank, as administrative agent, swingline lender and letter of credit issuer, and the other lenders party thereto (Silicon Valley Bank and the other lenders from time to time party thereto hereinafter collectively referred to as the “Lenders”). The Credit Agreement amended and restated the Company's prior credit agreement dated as of
December 21, 2012
, as amended, by and among the Company, the guarantors, Silicon Valley Bank, as administrative agent, swingline lender, and letter of credit issuer (as successor to Bank of America, N.A. in such capacities), and the other lenders party thereto.
The Credit Agreement originally provided for a (i) term loan (the “Term Loan”) in the aggregate principal amount of
$40 million
and (ii) revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan, the “Credit Facility”) in an aggregate amount of up to
$60 million
, with sub-limits of
$25 million
for the issuance of standby letters of credit and
$15 million
for swingline loans. On
September 30, 2015
, the Company entered into an amendment to the Credit Agreement which, among other modifications, increased the commitments under the Revolving Credit Facility to an aggregate amount of up to
$75 million
.
On
January 25, 2016
, the Company entered into an amendment to the Credit Agreement which, among other modifications, (i) increased the commitments under the Revolving Credit Facility to an aggregate amount of up to
$150 million
and (ii) extended the maturity date of the Revolving Credit Facility from
February 15, 2018
to
February 15, 2020
. The maturity date of the Term Loan is
February 15, 2018
. The aggregate amount available under the Revolving Credit Facility is, upon the Company's request and subject to the receipt of increased commitments from the Lenders or additional lenders, subject to increase by an aggregate amount of up to
$100 million
.
The Company is permitted to prepay outstanding loans under the Credit Facility at any time without premium or penalty. The Company may re-borrow amounts under the Revolving Credit Facility, but the Company may not re-borrow amounts that it repays or prepays under the Term Loan.
Debt issuance costs were approximately
$2.2 million
, which were capitalized to deferred issuance costs and are being amortized to interest expense over the term of the Revolving Credit Facility. During the
three and six
months ended
June 30, 2016
, amortization recorded to interest expense pertaining to deferred issuance costs was approximately
$113,000
and
$224,000
, respectively. During the
three and six
months ended
June 30, 2015
, amortization recorded to interest expense pertaining to deferred issuance costs was approximately
$97,000
and
$132,000
, respectively.
The Term Loan requires quarterly repayments of
$500,000
for the first
four
quarters and repayments ranging from
$1.0 million
to
$1.5 million
for the quarters thereafter through
December 31, 2017
. The remaining principal balance will be due and payable on the maturity date of the Term Loan (i.e.,
February 15, 2018
).
The Company’s and the guarantors’ obligations under the Credit Agreement are secured by (i) a first priority perfected security interest in substantially all existing and after acquired tangible and intangible personal property of the Company and the guarantors and (ii) the pledge by the Company and the guarantors of (a) all outstanding equity securities of their existing and future domestic subsidiaries, including, in the case of the Company, the outstanding equity securities of each of the guarantors, and (b)
65%
of the outstanding equity securities of their existing and future respective first-tier foreign subsidiaries, including, in the case of Catapult Communications Corporation (one of the Company's wholly owned domestic subsidiaries),
65%
of the outstanding equity securities of Ixia Technologies International Limited, a company organized under the laws of Ireland.
Interest rates for the Revolving Credit Facility and for the Term Loan are set, at the Company’s option, at a rate per annum based on the Eurodollar rate or a defined base rate. Prior to September 30, 2015, the interest rates were
4.25%
above the Eurodollar rate or
3.25%
above a defined base rate. After
September 30, 2015
, the interest rates for both the Term Loan and the Revolving Credit Facility range from
2.0%
to
3.0%
above the Eurodollar rate for Eurodollar-based borrowings and from
1.0%
to
2.0%
above the defined base rate for base rate borrowings, in each case depending on the Company’s leverage ratio. The Company is also required to pay a quarterly commitment fee, ranging from
0.30%
to
0.50%
per annum, on the undrawn portion of the Revolving Credit Facility. Letter of credit fees accrue based on the daily amount available to be drawn under outstanding letters of credit and range from
2.0%
to
3.0%
, depending on the Company’s leverage ratio. Swingline loans bear interest at the defined base rate plus the applicable margin for loans under the Revolving Credit Facility based on the defined base rate. If the Company defaults under the Credit Agreement, the Lenders may increase the interest rate(s) to
2.0%
more than the rate(s) otherwise applicable. The weighted average interest rate applicable to the Term Loan for the fiscal quarter ended
June 30, 2016
was
2.44
%. As of
June 30, 2016
, the interest rate applicable to the amount outstanding under the Term Loan was
2.45
%.
The Credit Agreement requires the Company to comply with certain covenants, including maintaining (i) a fixed charge coverage ratio (as defined in the Credit Agreement) of not less than
1.25
to
1.00
and (ii) a consolidated total leverage ratio (as defined in the Credit Agreement), of not greater
3.25
to
1.00
through
June 30, 2018
, and
3.00
to
1.00
thereafter, in each case measured quarterly on a trailing 12 month basis.
The Credit Agreement contains reporting covenants typical for transactions comparable to the Credit Facility, including covenants to furnish the lenders with financial statements, business plans, annual budgets, and other financial and business information and with notice of certain material events and information regarding collateral. The Credit Agreement also contains customary affirmative covenants, including covenants relating to the payment of obligations, preservation of the existence of and registrations for patents, trademarks, trade names and copyrights, maintenance of properties and insurance, compliance with laws and material contractual obligations, books and records, inspection rights, use of proceeds, addition of subsidiary guarantors, and security for the Credit Facility. The Credit Agreement contains customary negative covenants, including restrictions relating to liens and additional indebtedness, investments, mergers, liquidations and other fundamental changes, the sale and other disposition of properties and assets, restricted payments, changes in lines of business, transactions with affiliates, entering into certain burdensome agreements, and use of proceeds. The Credit Agreement permits the Company to fund cash acquisitions in an aggregate amount of up to
$200 million
, subject to certain limitations, including the requirement that, after giving effect to an acquisition, the Company’s available liquidity, as defined in the Credit Agreement, exceeds
$50 million
.
The Credit Agreement provides for customary events of default, including the non-payment of amounts due, failure to perform under covenants, breaches of representations and warranties, cross-defaults relating to certain indebtedness, institution of insolvency proceedings, inability to pay debts as they become due, entry of certain judgments, events relating to the Employee Retirement Income Security Act of 1974, as amended, invalidity of loan documents, change of control events, and ineffectiveness of subordination provisions. The occurrence of an event of default may result in the acceleration of all outstanding obligations under the Credit Agreement and in an increase in the applicable interest rate(s) as described above.
Unsecured Convertible Senior Notes
On
December 7, 2010
, the Company issued
$200 million
in aggregate principal amount of
3.00%
Convertible Senior Notes (the “Notes”) due December 15, 2015 unless earlier repurchased or converted. The unsecured Notes were governed by the terms of an indenture dated December 7, 2010 between the Company and Wells Fargo Bank, N.A., as trustee.
In July 2015, the Company repurchased
$65.0 million
in aggregate principal amount of the Notes in a privately negotiated transaction for an aggregate cash purchase price of approximately
$65.2 million
plus accrued interest up to the date of repurchase in the aggregate amount of approximately
$119,000
. In
December 2015
, the remaining outstanding Notes in the aggregate principal amount of
$135.0 million
matured, and the Company repaid the Notes, together with accrued interest in the aggregate amount of approximately
$2.0 million
, in full.
Amortization of deferred issuance costs recorded to interest expense for the
three and six
months ended
June 30, 2015
was
$300,000
and
$600,000
, respectively.
4. Selected Balance Sheet Data
Investments in Marketable Securities
Investments in marketable securities as of
June 30, 2016
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized
Losses
|
|
Fair
Value
|
Available-for-sale – short-term:
|
|
|
|
|
|
|
|
U.S. Treasury, government and agency debt
securities
|
$
|
25,829
|
|
|
$
|
20
|
|
|
$
|
(5
|
)
|
|
$
|
25,844
|
|
Corporate debt securities
|
14,417
|
|
|
18
|
|
|
(14
|
)
|
|
14,421
|
|
Total
|
$
|
40,246
|
|
|
$
|
38
|
|
|
$
|
(19
|
)
|
|
$
|
40,265
|
|
Investments in marketable securities as of
December 31, 2015
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized
Losses
|
|
Fair
Value
|
Available-for-sale – short-term:
|
|
|
|
|
|
|
|
U.S. Treasury, government and agency debt
securities
|
$
|
4,301
|
|
|
$
|
—
|
|
|
$
|
(13
|
)
|
|
$
|
4,288
|
|
Corporate debt securities
|
10,265
|
|
|
—
|
|
|
(49
|
)
|
|
10,216
|
|
Total
|
$
|
14,566
|
|
|
$
|
—
|
|
|
$
|
(62
|
)
|
|
$
|
14,504
|
|
As of
June 30, 2016
and
December 31, 2015
, the Company's available-for-sale securities had a weighted remaining contractual maturity of
1.39
and
1.58
years, respectively. For the
three and six
months ended
June 30, 2016
and
2015
, gross realized gains and losses were not significant. See Note 6 for information on the unrealized holding gains (losses) on available-for-sale securities reclassified out of accumulated other comprehensive loss into the condensed consolidated statements of operations.
The amortized cost and fair value of the Company's marketable securities at
June 30, 2016
, by contractual years-to-maturity, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Fair Value
|
Due in less than 1 year
|
$
|
11,641
|
|
|
$
|
11,642
|
|
Due within 1-2 years
|
24,345
|
|
|
24,357
|
|
Due within 2-5 years
|
4,260
|
|
|
4,266
|
|
Total
|
$
|
40,246
|
|
|
$
|
40,265
|
|
Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Raw materials
|
$
|
937
|
|
|
$
|
3,864
|
|
Work in process
|
7,683
|
|
|
11,253
|
|
Finished goods
|
21,295
|
|
|
18,172
|
|
|
$
|
29,915
|
|
|
$
|
33,289
|
|
Accrued expenses and other
As of
June 30, 2016
and
December 31, 2015
, accrued compensation and related expenses totaled
$10.5 million
and
$12.8 million
, respectively, and accrued vacation totaled
$9.7 million
and
$8.0 million
, respectively. Accrued bonus expenses totaled
$20.4 million
as of
December 31, 2015
.
5. Goodwill and Other Intangible Assets
There was no activity related to goodwill for the
three and six
months ended
June 30, 2016
. The Company has not had any historical goodwill impairment charges.
The following table presents the Company's purchased intangible assets (in thousands) as of
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
Useful Life
(in years)
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Technology
|
5.5
|
|
$
|
185,665
|
|
|
$
|
(140,786
|
)
|
|
$
|
44,879
|
|
Customer relationships
|
6.0
|
|
71,700
|
|
|
(55,596
|
)
|
|
16,104
|
|
Service agreements
|
6.4
|
|
30,100
|
|
|
(15,620
|
)
|
|
14,480
|
|
Trademarks
|
5.1
|
|
11,300
|
|
|
(7,983
|
)
|
|
3,317
|
|
Non-compete agreements
|
4.0
|
|
8,000
|
|
|
(6,598
|
)
|
|
1,402
|
|
Other
|
4.5
|
|
6,374
|
|
|
(2,202
|
)
|
|
4,172
|
|
|
|
|
$
|
313,139
|
|
|
$
|
(228,785
|
)
|
|
$
|
84,354
|
|
The following table presents the Company's purchased intangible assets (in thousands) as of
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
Useful Life
(in years)
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Technology
|
5.5
|
|
$
|
185,665
|
|
|
$
|
(129,509
|
)
|
|
$
|
56,156
|
|
Customer relationships
|
6.0
|
|
71,700
|
|
|
(51,533
|
)
|
|
20,167
|
|
Service agreements
|
6.4
|
|
30,100
|
|
|
(13,272
|
)
|
|
16,828
|
|
Trademarks
|
5.1
|
|
11,300
|
|
|
(7,000
|
)
|
|
4,300
|
|
Non-compete agreements
|
4.0
|
|
8,000
|
|
|
(5,641
|
)
|
|
2,359
|
|
Other
|
4.5
|
|
5,750
|
|
|
(1,900
|
)
|
|
3,850
|
|
|
|
|
$
|
312,515
|
|
|
$
|
(208,855
|
)
|
|
$
|
103,660
|
|
The estimated future amortization expense of purchased intangible assets as of
June 30, 2016
is as follows (in thousands):
|
|
|
|
|
Remaining in 2016
|
$
|
19,127
|
|
2017
|
31,926
|
|
2018
|
20,672
|
|
2019
|
7,455
|
|
2020
|
3,932
|
|
2021
|
756
|
|
Thereafter
|
486
|
|
|
$
|
84,354
|
|
6. Shareholders’ Equity
Accumulated Other Comprehensive Loss
The following table summarizes the changes in
Accumulated other comprehensive loss
, by component, net of income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) on Available-for-
Sale
Securities
(a)
|
|
Foreign Currency
Items
|
|
Total
|
Beginning balance, December 31, 2015
|
$
|
(88
|
)
|
|
$
|
(945
|
)
|
|
$
|
(1,033
|
)
|
|
|
|
|
|
|
Other comprehensive income before reclassifications
|
81
|
|
|
537
|
|
|
618
|
|
Amounts reclassified from accumulated other comprehensive loss
(b)
|
—
|
|
|
—
|
|
|
—
|
|
Net current period other comprehensive income
|
81
|
|
|
537
|
|
|
618
|
|
|
|
|
|
|
|
Ending balance, June 30, 2016
|
$
|
(7
|
)
|
|
$
|
(408
|
)
|
|
$
|
(415
|
)
|
|
|
(a)
|
All amounts are net-of-tax. Amounts in parentheses indicate reductions.
|
|
|
(b)
|
Amount represents gain on the sale of securities and is included as a component of
Interest income and other, net
in the condensed consolidated statements of operations.
|
Share Repurchase Program
In February 2016, the Company’s Board of Directors approved a share repurchase program (the "Program") authorizing the Company, over the 12 months following the date of announcement, to acquire up to
$25 million
of its common stock. Under the Program, the Company is authorized, from time to time, and subject to general business and market conditions, alternative investment opportunities, and other factors, to repurchase shares in open market purchases, privately negotiated transactions and/or through other means, and may include repurchases pursuant to a Rule 10b5-1 trading plan. There is no guarantee as to the exact number of shares that will be repurchased by the Company, and the Company may discontinue or suspend repurchases at any time in the Company’s discretion. During the
three and six
month periods ended
June 30, 2016
, the Company repurchased
707,332
shares of common stock for
$6.9 million
. All of the repurchased shares remain authorized, but are no longer issued and outstanding. As of
June 30, 2016
,
$18.1 million
remained available for share repurchases under the Program.
7. Earnings (Loss) Per Share
Basic earnings (loss) per common share is computed by dividing income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share is computed by giving effect to all potential dilutive common shares, including stock-based awards, using the treasury stock method.
The following table sets forth the computation of basic and diluted earnings (loss) per share for the
three and six
months ended
June 30, 2016
and
2015
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Basic presentation:
|
|
|
|
|
|
|
|
Numerator for basic earnings (loss) per share:
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
1,523
|
|
|
$
|
5,803
|
|
|
$
|
(1,164
|
)
|
|
$
|
(3,808
|
)
|
Denominator for basic earnings (loss) per share:
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
81,325
|
|
|
79,396
|
|
|
81,170
|
|
|
79,053
|
|
Basic earnings (loss) per share
|
$
|
0.02
|
|
|
$
|
0.07
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
Diluted presentation:
|
|
|
|
|
|
|
|
Numerator for diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
1,523
|
|
|
$
|
5,803
|
|
|
$
|
(1,164
|
)
|
|
$
|
(3,808
|
)
|
Denominator for dilutive earnings (loss) per share:
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
81,325
|
|
|
79,396
|
|
|
81,170
|
|
|
79,053
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock options and other share-based awards
|
1,179
|
|
|
1,634
|
|
|
—
|
|
|
—
|
|
Dilutive potential common shares
|
82,504
|
|
|
81,030
|
|
|
81,170
|
|
|
79,053
|
|
Diluted earnings (loss) per share
|
$
|
0.02
|
|
|
$
|
0.07
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.05
|
)
|
The diluted earnings per share computation for the three months ended
June 30, 2016
excludes the weighted average number of shares underlying the Company's employee stock options and other share-based awards of
4.0 million
shares, which are anti-dilutive because, in general, the exercise prices of these awards (to the extent such awards have exercise prices) exceeds the average closing sales price per share of the Company's common stock during the applicable period.
The diluted loss per share computation for the
six
months ended
June 30, 2016
excludes the weighted average number of shares underlying the Company's employee stock options and other share-based awards of
5.0 million
shares, which were anti-dilutive because the Company reported a net loss for the period.
The diluted earnings per share computation for the three months ended
June 30, 2015
excludes the weighted average number of shares underlying the Company's then outstanding notes of
10.3 million
shares and the weighted average number of shares underlying the Company's employee stock options and other share-based awards of
3.0 million
shares, which were both anti-dilutive because, in general, the exercise prices of these awards (to the extent such awards have exercise prices) exceeds the average closing sales price per share of the Company's common stock during the period.
The diluted loss per share computation for the
six
months ended
June 30, 2015
excludes the weighted average number of shares underlying the Company's then outstanding notes of
10.3 million
shares and the weighted average number of shares underlying the Company's employee stock options and other share-based awards of
4.6 million
shares, which were both anti-dilutive because the Company reported a net loss for the period.
8. Concentrations
Revenue by Product Line
The Company has
two
product lines: Network Test Solutions and Network Visibility Solutions. The Company's Network Test Solutions products include its multi-slot test chassis and appliances, traffic generation interface cards, and suite of test applications, and the related technical support, warranty, and software maintenance services, including the Company's Application and Threat Intelligence (ATI) service. The Company's Network Visibility Solutions products include the Company's network packet brokers, bypass switches, and virtual and physical taps, and the related technical support, warranty, and software maintenance services. The following table presents revenue by product line (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Network Test Solutions
|
$
|
89,890
|
|
|
$
|
102,801
|
|
|
$
|
173,395
|
|
|
$
|
188,148
|
|
Network Visibility Solutions
|
30,208
|
|
|
28,809
|
|
|
59,376
|
|
|
64,424
|
|
|
$
|
120,098
|
|
|
$
|
131,610
|
|
|
$
|
232,771
|
|
|
$
|
252,572
|
|
Significant Customers
No
customer accounted for more than 10% of total revenues for the
three and six
months ended
June 30, 2016
.
One
customer accounted for
10.5%
and
10.3%
of total revenues for the
three and six
months ended
June 30, 2015
, respectively.
As of
June 30, 2016
and
December 31, 2015
, no customer accounted for more than 10% of the Company's total receivables.
International Data
For the
three and six
months ended
June 30, 2016
and
2015
, international revenues, based on customer location, as a percentage of total revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
International revenues
|
40.8
|
%
|
|
38.4
|
%
|
|
44.5
|
%
|
|
38.4
|
%
|
As of
June 30, 2016
and
December 31, 2015
, the Company's property and equipment, net were geographically located as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
United States
|
$
|
23,760
|
|
|
$
|
23,654
|
|
Romania
|
6,753
|
|
|
6,542
|
|
India
|
3,431
|
|
|
3,576
|
|
Other
|
3,681
|
|
|
2,764
|
|
Total
|
$
|
37,625
|
|
|
$
|
36,536
|
|
9. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. The Company categorizes each of its fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. This hierarchy prioritizes the inputs into three broad levels as follows:
|
|
Level 1.
|
Observable inputs such as quoted prices in active markets;
|
|
|
Level 2.
|
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
|
|
|
Level 3.
|
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
Financial assets carried at fair value as of
June 30, 2016
are classified in the table below in one of the three categories described above (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
Fair Value
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
254
|
|
|
$
|
254
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt securities
|
4,397
|
|
|
—
|
|
|
4,397
|
|
|
—
|
|
Short-term marketable securities:
|
|
|
|
|
|
|
|
U.S. Treasury, government and agency debt securities
|
25,844
|
|
|
—
|
|
|
25,844
|
|
|
—
|
|
Corporate debt securities
|
14,421
|
|
|
—
|
|
|
14,421
|
|
|
—
|
|
Total financial assets
|
$
|
44,916
|
|
|
$
|
254
|
|
|
$
|
44,662
|
|
|
$
|
—
|
|
Financial assets carried at fair value as of
December 31, 2015
are classified in the table below in one of the three categories described above (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Fair Value
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
284
|
|
|
$
|
284
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Short-term marketable securities:
|
|
|
|
|
|
|
|
U.S. Treasury, government and agency debt securities
|
4,288
|
|
|
—
|
|
|
4,288
|
|
|
—
|
|
Corporate debt securities
|
10,216
|
|
|
—
|
|
|
10,216
|
|
|
—
|
|
Total financial assets
|
$
|
14,788
|
|
|
$
|
284
|
|
|
$
|
14,504
|
|
|
$
|
—
|
|
The Company's cash and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.
The fair values of the Company's money market funds, U.S. treasury, government and agency debt securities, and corporate debt securities are based on quoted market prices as shown in its investment brokerage/custodial statements. To the extent deemed necessary, the Company may also obtain non-binding dealer quotes to corroborate the estimated fair values reflected in its investment brokerage/custodial statements.
There were no transfers of assets between levels within the fair value hierarchy for the
three and six
month periods ended
June 30, 2016
, and there were no Level 3 assets held at
June 30, 2016
.
The carrying value of the Company's Term Loan at
June 30, 2016
and
December 31, 2015
was
$37.0 million
and
$38.5 million
, respectively. The carrying value of the Term Loan approximates fair value as the interest rate is variable over the selected interest period and is similar to current rates at which the Company can borrow funds.
10. Commitments and Contingencies
Securities Class Action
On November 14, 2013, a purported securities class action complaint captioned
Felix Santore v. Ixia, Victor Alston, Atul Bhatnagar, Thomas B. Miller, and Errol Ginsberg
was filed against the Company and certain of its current and former officers and directors in the U.S. District Court for the Central District of California. The lawsuit purports to be a class action brought on behalf of purchasers of the Company’s securities during the period from April 10, 2010 through October 14, 2013. The initial complaint alleged that the defendants violated the Securities Exchange Act of 1934, as amended (the “Exchange Act”), by making materially false and misleading statements concerning the Company’s recognition of revenues related to its warranty and software maintenance contracts and the academic credentials and employment history of the Company’s former President and Chief Executive Officer, Victor Alston. The complaint also alleged that the defendants made false and misleading statements, and failed to make certain disclosures, regarding the Company’s business, operations and prospects, including regarding the financial statements and internal financial controls that were the subject of the Company’s April 2013 restatement of certain of its prior period financial statements. The complaint further alleged that the Company lacked adequate internal financial controls and issued materially false and misleading financial statements for the fiscal years ended December 31, 2010 and 2011, and the fiscal quarters ended March 31, 2011, June 30, 2011, September 30, 2011, March 31, 2012, June 30, 2012, and September 30, 2012. The complaint, which purported to assert claims for violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, sought, on behalf of the purported class, an unspecified amount of monetary damages, interest, fees and expenses of attorneys and experts, and other relief.
On March 24, 2014, following a proceeding to select a lead plaintiff in the matter, the court issued an order appointing Oklahoma Firefighters Pension & Retirement System and Oklahoma Law Enforcement Retirement System (the “Oklahoma Group”) as lead plaintiffs.
On June 11, 2014, the Oklahoma Group filed a first amended complaint, which asserted claims against the same defendants under the same legal theories set forth in the initial complaint. The first amended complaint also contained allegations that certain of the individual defendants increased their trading in the Company’s stock during February, March, April and May of 2011 and during February and March of 2013, and that the defendants sought to inflate the Company’s reported deferred revenues during the period of February 4, 2011 through April 3, 2013.
On July 18, 2014, all named defendants moved to dismiss the first amended complaint for failure to state a claim under the Federal Rules of Civil Procedure and the Private Securities Law Reform Act of 1995 (“PSLRA”). After briefing and a hearing on October 6, 2014, the court issued an order dismissing the first amended complaint in its entirety without prejudice. The court gave the Oklahoma Group
30 days
in which to file an amended complaint.
On November 5, 2014, the Oklahoma Group filed a second amended complaint. On January 6, 2015, the named defendants moved to dismiss the second amended complaint. After briefing and a hearing on April 13, 2015, the court issued an order dismissing the second amended complaint in its entirety without prejudice. The court gave the Oklahoma Group
30 days
in which to file an amended complaint.
On April 24, 2015, the court issued an order staying the class action until July 31, 2015, pending the outcome of a voluntary, non-binding mediation scheduled for July 23, 2015 to explore a possible settlement of both the purported securities class action and the shareholder derivative action discussed below. On July 23, 2015, the parties conducted the scheduled mediation with respect to the purported class action but did not reach an agreement to resolve and settle the litigation. However, settlement discussions continued after the mediation session, and on August 14, 2015, the parties agreed in principle to settle the purported securities class action litigation.
On
November 17, 2015
, the Company entered into a Stipulation and Agreement of Settlement, dated
November 11, 2015
relating to the proposed settlement of the class action (the “Class Action Settlement Agreement”). This Class Action Settlement Agreement would resolve all of the claims asserted against the defendants in the class action and was entered into subject to the Court’s preliminary and final approval. The Class Action Settlement Agreement provides, among other terms, for a settlement payment of
$3.5 million
, which the Company expects will be paid in full by one of the Company’s insurance carriers. The Class Action Settlement Agreement does not include any admission of wrongdoing or liability on the part of the Company or the individual defendants, and upon final approval of the settlement by the Court, provides for a dismissal of, and a release of all claims asserted against the defendants in, the class action. In February 2016, the Court granted preliminary approval of the Class Action Settlement Agreement and scheduled a hearing for July 29, 2016 to consider final approval of the Class Action Settlement Agreement. In March 2016, the Company's insurer funded the payment of
$3.5 million
into an escrow account established pursuant to the Class Action Settlement Agreement.
Following a hearing on
July 29, 2016
, the Court on
August 1, 2016
entered an order granting final approval of the Class Action Settlement Agreement. The final order also approved the award of attorneys’ fees and expenses to Plaintiffs’ counsel in the amount of
$1,135,000
, which will be paid from the settlement payment of
$3.5 million
currently held in the escrow account established pursuant to the Class Action Settlement Agreement. In the event no appeal is filed, the settlement will become effective at the end of the appeal period, which is 30 days from the date the final order was entered by the Court.
The Company has accrued a liability of
$3.5 million
related to this matter as a component of
Accrued expenses and other
in the accompanying consolidated balance sheets as of
June 30, 2016
and an offsetting receivable from the insurance company for
$3.5 million
in
Prepaid expenses and other current assets
in the accompanying consolidated balance sheets as of
June 30, 2016
.
Shareholder Derivative Action
A consolidated shareholder derivative action, captioned
In re Ixia Shareholder Derivative Litigation
, is pending in the U.S. District Court for the Central District of California. This action is the consolidation of
two
lawsuits, namely: (i)
Erie County Employees' Retirement System, Derivatively on behalf of Nominal Defendant Ixia v. Victor Alston, Errol Ginsberg, Laurent Asscher, Jonathan Fram, Gail Hamilton, Jon Rager, Atul Bhatnagar, and Thomas B. Miller, defendants, and Ixia, nominal defendant
and (ii)
Colleen Witmer, derivatively on behalf of Ixia v. Victor Alston, Atul Bhatnagar, Thomas B. Miller, Errol Ginsberg, Jonathan Fram, Laurent Asscher, Gail Hamilton, Jon F. Rager, Christopher Lee Williams, Alan Grahame, Raymond De Graaf, Walker H. Colston II, and Ronald W. Buckly, defendants, and Ixia, nominal defendant
. Both were filed in the U.S. District Court for the Central District of California in May 2014.
Co-lead plaintiffs Erie County Employees’ Retirement System and Colleen Witmer filed a consolidated complaint on September 2, 2014. The consolidated complaint includes many allegations similar to those made in the purported class action complaint described above. Among other things, the complaint alleges that some or all (depending upon the claim) of the individual defendants breached their fiduciary duties to the Company by causing or allowing the Company to disseminate misleading financial statements, ignoring problems with the Company’s financial controls, making stock sales on the basis of material non-public information, and violating the Company’s code of conduct. As relief, among other things, the complaint seeks an unspecified amount of monetary damages, disgorgement and restitution of stock sale proceeds and an award under California Corporations Code Sections 24502 and 25502.5, as well as unspecified equitable and declaratory relief.
On October 15, 2014, the Company, on whose behalf the derivative action claims are purportedly brought, moved to dismiss the consolidated complaint on the grounds that the derivative plaintiffs did not file the claims in accordance with applicable laws governing the filing of derivative actions. The individual defendants joined in that motion and also filed motions to dismiss the claims against them for failure to state a claim. Before any ruling by the court on those motions, the plaintiffs filed an amended consolidated complaint on January 26, 2015. On March 12, 2015, the Company filed a motion to dismiss the amended consolidated complaint on the same grounds as it had set forth with respect to the first consolidated complaint, and the individual defendants joined in that motion and also filed motions to dismiss the claims against them for failure to state a claim. On April 24, 2015, before the scheduled hearing on the motion to dismiss, the Court issued an order staying the shareholder derivative action until July 31, 2015, pending the outcome of a voluntary, non-binding mediation scheduled for July 23, 2015 in connection with both the derivative action and the purported securities class action discussed above.
On July 23, 2015, the parties participated in the scheduled voluntary, non-binding mediation with respect to the derivative action and agreed in principle to resolve and settle the litigation. On
November 17, 2015
, the Company entered into a Stipulation and Agreement of Settlement, dated November 17, 2015, relating to the proposed settlement of the derivative action (the “Derivative Action Settlement Agreement”). The Derivative Action Settlement Agreement would resolve all of the claims asserted against the defendants in the derivative action and was entered into subject to preliminary and final approval by the Court. The Derivative Action Settlement Agreement provides, among other terms, for the Company to implement certain corporate governance measures and for the plaintiffs' counsel to apply to the Court for an award of attorneys’ fees and expenses in an amount of up to
$575,000
. The Derivative Action Settlement Agreement does not include any admission of wrongdoing or liability on the part of the Company or the individual defendants and provides for a dismissal of, and a release of all claims asserted against the defendants in, the derivative action. In February 2016, the Court granted preliminary approval of the Derivative Action Settlement Agreement and scheduled a hearing for May 27, 2016 to consider final approval of the Derivative Action Settlement Agreement.
On June 1, 2016, following a hearing on May 27, 2016, the Court entered an order granting final approval of the Derivative Action Settlement Agreement. The order also approved the award of attorneys’ fees and expenses to Plaintiffs’ counsel in the amount of
$575,000
, which has been paid by one of the Company’s insurance carriers. The deadline to appeal the Court’s order was July 1, 2016. As the deadline to appeal has expired and there was no appeal, the settlement became final on July 1, 2016.
SEC Investigation
In July 2014, the Staff of the SEC’s Division of Enforcement (the “Staff”) requested that the Company produce certain documents and information in connection with an investigation of the Company. The SEC subsequently issued subpoenas to the Company seeking certain additional documents and to certain of the Company’s current and former employees seeking certain documents and their testimony. Based on the documents requested by the Staff, the Company believes that the SEC’s investigation relates to the matters addressed by (i) the previously disclosed accounting-related investigation conducted by the Audit Committee of the Company’s Board of Directors (the “Board”) that was completed in February 2014, and (ii) a separate internal investigation conducted by a Special Committee of the Board of stock sales during February and March 2013 by then current executive officers and directors of the Company. The Special Committee, which completed its investigation in June 2014, did not find with respect to such sales that there had been any insider trading based upon material non-public information. The Special Committee, however, made no finding with respect to the Company's former President and Chief Executive Officer, Victor Alston, because he declined to be interviewed by the Special Committee's counsel (both the Special Committee and the Audit Committee were assisted by independent counsel in their investigations).
The Company is continuing to cooperate fully with the SEC in its investigation and is in discussions with the Staff concerning a proposed settlement of the investigation as it pertains to the Company. Based on oral communications with the Staff, the Company understands that the proposed settlement would require the Company, without admitting or denying any allegations by the SEC, to consent to the SEC’s issuance of an administrative order with non-fraud charges involving violations of Section 13 of the Exchange Act and rules promulgated by the SEC thereunder. The Company understands that the charges would relate to the Company’s books and records, internal controls, and disclosures (not including financial statements) for the year ended December 31, 2012, and books and records, internal controls, and disclosures (including financial statements) for the first and second quarters of 2013. The Company would be required to pay a civil penalty in the amount of
$750,000
. The proposed settlement is subject to the Company’s receipt of, and agreement to, written settlement documentation from the Staff. In the event the Company and the Staff agree on such documentation, the settlement would then be subject to approval by the SEC Commissioners, and there can be no assurance that the SEC Commissioners would approve the proposed settlement. The proposed settlement would resolve Ixia’s potential liability with respect to the SEC investigation. Current or former employees, officers, and/or directors of the Company are not addressed by this proposed settlement.
The Company has accrued a liability of
$750,000
related to this matter as a component of
Accrued expenses and other
in the accompanying condensed consolidated balance sheets as of
June 30, 2016
.
Indemnifications
In the normal course of business, the Company provides certain indemnifications, commitments and guarantees of varying scope to customers, including against claims of intellectual property infringement made by third parties arising from the use of the Company's products. The Company also has certain obligations to indemnify its officers, directors and employees for certain events or occurrences while the officers, directors or employees are or were serving at the Company's request in such capacity. The duration of these indemnifications, commitments and guarantees varies and in certain cases is indefinite. Many of these indemnifications, commitments and guarantees do not provide for any limitation of the maximum potential future payments that the Company could be obligated to make. However, the Company's director and officer insurance policy may enable it to recover a portion of any future payments related to its officer, director or employee indemnifications. Historically, costs related to these indemnifications, commitments and guarantees have not been significant. With the exception of the product warranty accrual associated with the Company's initial standard warranty, no liabilities have been recorded for these indemnifications, commitments and guarantees.
11. Income Taxes
The Company accounts for its provision for income taxes in accordance with Accounting Standards Codification (“ASC”) 740,
Income Taxes
. In accordance with ASC 740, the Company uses an estimate of its annual effective rate for the full fiscal year in computing the year-to-date provision for income taxes for the interim periods, including federal, foreign, state, and local income taxes.
On July 27, 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. On February 19, 2016, the I.R.S. filed a notice of appeal with respect to such opinion in the U.S Ninth Circuit Court of Appeals. The Company concluded that no adjustment to its consolidated financial statements is appropriate at this time due to the uncertainties with respect to the ultimate resolution of this case.
As of
June 30, 2016
and
December 31, 2015
, current deferred tax assets totaled
$14.2 million
and
$14.5 million
, respectively, and were included within
Prepaid expenses and other current assets
on the Company's condensed consolidated balance sheets. At each of
June 30, 2016
and
December 31, 2015
, long-term deferred tax assets totaled
$18.9 million
and were included within
Other assets
on the Company's condensed consolidated balance sheets.