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Lionbridge Technologies 10-K 2012 Documents found in this filing:Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Form 10-K
For the fiscal year ended: December 31, 2011
Commission File Number 000-26933 LIONBRIDGE TECHNOLOGIES, INC. (Exact Name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (781) 434-6000 Securities to be registered pursuant to Section 12(b) of the Act:
Securities to be registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ (Do not check if small reporting company) ¨ Smaller reporting company ¨ Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ¨ No x The aggregate market value of the voting stock held by non-affiliates of the registrant, as of June 30, 2011, was approximately $177.9 million (based on the closing price of the registrant’s Common Stock on June 30, 2011, of $3.18 per share). The number of shares outstanding of the registrant’s $.01 par value Common Stock as of February 29, 2012 was 63,201,962. DOCUMENTS INCORPORATED BY REFERENCE Lionbridge intends to file a proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2011. Portions of such proxy statement are incorporated by reference into Part III of this Report.
Table of ContentsANNUAL REPORT ON FORM 10-K YEAR ENDED DECEMBER 31, 2011 TABLE OF CONTENTS
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Table of ContentsPART I Except for the historical information contained herein, the matters discussed in this Annual Report on Form 10-K are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements involve risks and uncertainties. Lionbridge makes such forward-looking statements under the provision of the “Safe Harbor” section of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements should be considered in light of the factors described below in Item 1A “Risk Factors.” Actual results may vary materially from those projected, anticipated or indicated in any forward-looking statements. In this Annual Report on Form 10-K, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “could,” and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements. Unless the context otherwise requires, all references to “Lionbridge,” “we,” “our,” “us,” “our company”, the “Company” or the “Corporation” in this Annual Report on Form 10-K refer to Lionbridge Technologies, Inc., a Delaware corporation, and its subsidiaries.
About Lionbridge Lionbridge is a leading provider of language, content and testing solutions that enable clients to optimize, release, manage, test and maintain their technology applications and content in global markets. Lionbridge enjoys long-term, recurring relationships with clients across industries. These clients rely on the Company’s global scale, innovative technology and in-market expertise to bring their products, content, and services to global markets and facilitate online customer engagement in local markets worldwide. Lionbridge has three operating segments: Global Language and Content (“GLC”): Lionbridge GLC solutions enable the authoring, translation, localization and worldwide multilingual release of clients’ products, online content and related sales and marketing information, technical support and training material. Lionbridge GLC solutions involve translating, localizing and adapting content and products to meet the language, cultural, technical and industry-specific requirements of users in local markets throughout the world. As part of its GLC solutions, Lionbridge also develops and authors technical documentation. Lionbridge GLC solutions utilize the Company’s cloud-based technology platforms and applications, and its global service delivery model which make the translation, localization and content authoring processes more efficient for Lionbridge and its clients. Global Development and Testing (“GDT”): Through its GDT solutions, Lionbridge optimizes, tests and maintains IT applications to ensure the quality, interoperability, usability, relevance and performance of clients’ software, search engines, consumer technology products, web sites, and content. Lionbridge has deep domain experience in testing, optimizing and maintaining applications in a cost-efficient, blended on-site and offshore model. As part of its GDT offering, Lionbridge also provides specialized enterprise crowdsourcing services including search relevance testing for its clients’ online marketing initiatives. Interpretation: Lionbridge provides interpretation services for government, business and healthcare organizations that require experienced linguists to facilitate communication. Lionbridge provides interpretation communication services in more than 360 languages and dialects, including onsite interpretation, over-the-phone interpretation and interpreter testing, training, and assessment services. Lionbridge provides a full suite of language, testing and content solutions to businesses in diverse end markets including technology, internet and media, mobile and telecommunications, life sciences, government, manufacturing, automotive, aerospace, manufacturing and retail. Lionbridge’s solutions include translation and localization; interpretation; language technology; technical authoring; application testing; and enterprise crowdsourcing. The Company’s services enable global organizations to increase international market share, broaden worldwide product adoption, support customers in global markets and accelerate online customer engagement across languages, geographies and technical platforms.
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Table of ContentsLionbridge provides the following core benefits to clients: Global Scale. With approximately 4,500 employees worldwide, Lionbridge operates solution centers in 26 countries. Lionbridge utilizes its global resources and proven program management capabilities to provide client delivery teams that are designed to have the optimal technical, linguistic and industry-specific expertise and skills to meet each client’s specific needs. Lionbridge’s global infrastructure enables Lionbridge to deliver high-value, cost-effective services and to meet its clients’ technical, linguistic, vertical market and geographic requirements. In-Country Knowledge and Expertise. Lionbridge service offerings are based on the Company’s ability to combine its own network of program and project managers, technical experts and delivery personnel around the world with an external network of pre-qualified, in-country independent professionals. The Company has access to a network of more than 90,000 translators, interpreters, subject-matter experts, and web raters in more than 100 countries. This comprehensive crowd of professionals allows the Company to provide its clients with the optimal combination of in-country, local market knowledge and global expertise in technology, language and online content. As a result, clients can efficiently deliver products and online content that are technically, linguistically and culturally relevant for their target buyers in local markets worldwide. Cloud-based Translation Technologies. Lionbridge solutions include technologies designed to make translation processes more efficient, productive and consistent. A core component of Lionbridge’s technology platform is Translation Workspace™, a cloud-based, multi-tenant translation memory application that simplifies translation processes and allows for automated, in context, use of previously translated words, phrases and glossaries. Lionbridge uses Translation Workspace to increase the effectiveness, efficiency and consistency of its service delivery for clients. Lionbridge also offers GeoFluent™, a cloud-based, customizable, automated translation technology that instantly translates content and communications into multiple languages. GeoFluent offers enterprises the ability to increase their multilingual communications through an automated application that translates websites, online chat sessions, user forums and technical blogs in real-time. Lionbridge believes its clients can use its comprehensive suite of cloud-based translation technologies to improve their translation production processes, increase the availability of multilingual content and communications, reduce the costs of global technical support and bring their content and products to market more quickly. Integrated Full-Service Offering. Lionbridge is able to serve as an outsourcing partner throughout a client’s content and product lifecycle. Clients can utilize Lionbridge’s comprehensive solutions to develop, optimize, release and maintain their global content, websites and technology applications for their customers, prospects, partners and employees throughout the world. This unified suite of solutions allows Lionbridge to serve as its clients’ single outsource provider for developing, releasing, testing and maintaining multilingual content and technology across global end markets. By outsourcing to a large-scale provider, such as Lionbridge, organizations are able to focus on their core competencies, drive process improvements and speed the process of communicating large amounts of information to customers, prospects and employees worldwide. Lionbridge was incorporated in Delaware in September 1996. Its principal executive offices are located at 1050 Winter Street, Waltham, Massachusetts 02451, its telephone number is (781) 434-6000, and its Web site is www.lionbridge.com. Lionbridge makes available, free of charge, on its Web site its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, as well as other reports it files with the SEC and amendments to those reports as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. Lionbridge’s filings with the Securities and Exchange Commission are also available on the Web at www.sec.gov.
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Table of ContentsLionbridge Services Lionbridge provides a full suite of language, development and testing solutions. Our three offering segments consist of the following: Global Language and Content Services (“GLC”) Product Localization. Lionbridge creates foreign language versions of its clients’ products and software applications, including the user interface, online help systems and documentation. Through its internationalization, software localization and technical translation services, Lionbridge provides its clients with culturally adapted multilingual versions of their products and applications. Lionbridge’s product localization services enable Lionbridge clients to release fully operable software applications, consumer devices and hardware products that are adapted to the cultural, linguistic and technical requirements and expectations of users in specific international markets. As an example, Lionbridge provides localization services for a global mobile communications provider that releases dozens of new communication devices and related applications in more than 80 languages every year. Lionbridge localizes and tests software and related documentation, user interfaces and help screens for this client. The Lionbridge process is integrated with and essential to the client’s worldwide product release cycle. As a result, Lionbridge believes that it is reducing the time required for its client’s new products to reach international markets and reducing the client’s global release costs while increasing its customer satisfaction worldwide. Content Translation. Lionbridge adapts web content, interactive media, and marketing information to meet cultural, linguistic and business requirements of international markets. Lionbridge content translation services help organizations effectively communicate with their customers, prospects, partners and employees on a worldwide basis. By utilizing technology and integrating with its clients’ content management processes and systems, Lionbridge is able to manage the translation process in an automation-assisted manner for large volumes of content. Lionbridge combines technical writing and translation expertise, design and production capabilities, program management, standards-based automation technology, industry-specific knowledge and process optimization techniques to provide high-quality, client-specific solutions for multilingual content. For example, Lionbridge is managing frequently changing content for a client’s global online search website and its online advertising program. Lionbridge is automating the process of extracting English language content from the client, routing the content through translation memory technology and workflow processes and publishing the translated content directly to the client in an automated manner. As a result of this streamlined process, Lionbridge estimates that it is saving this client significant time and cost associated with the ongoing management of its multilingual search website and advertising programs. Global Marketing Operations. In 2011 Lionbridge introduced its Global Marketing Operations (“GMO”) offering, a service for managing digital marketing campaigns across languages, technical platforms and local content. Lionbridge GMO combines the Company’s existing capabilities in language, content, global production management, and local market knowledge to create an integrated solution aimed at helping marketing executives provide a globally consistent, locally relevant online customer experience in international markets. In 2011 the Company secured several GMO client programs. For one global organization, Lionbridge is providing a range of GMO solutions including search engine optimized web translation, global website management and support, and global campaign operations. Lionbridge believes this integrated GMO solution is helping the client increase global brand consistency and provide effective marketing content that is optimized for prospects and customers in more than 35 local markets worldwide. Language Technology. Lionbridge offers language technology solutions to enterprises, freelance translators and translation agencies on a Software-as-a-Service (“SaaS”) basis. Lionbridge offers two SaaS-based language technologies, Translation Workspace, a productivity technology for translators and agencies and GeoFluent, a customized machine translation technology developed through our partnership with IBM Research.
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Table of ContentsTranslation Workspace is a multi-tenant translation productivity technology that helps translators, agencies and enterprises manage and sequence their language assets in real-time, collaborate instantly with other translators and providers, monitor project productivity, automate quality assurance and engage qualified resources within a private work environment. Many subscribers use Translation Workspace to ensure consistency of translated content by reusing previously translated content in an accurate manner, as well as to gain real-time visibility into the progress and productivity of projects, collaborate with project teams and to access work from Lionbridge. GeoFluent is a machine-translation technology that automatically translates content and communications into multiple languages on a real-time basis. The GeoFluent platform includes an IBM-developed machine translation engine, a proprietary Lionbridge customization solution to increase quality and usability of translation, a set of pre-built user interfaces, Application Programming Interfaces (“APIs”) for easy integration into enterprise applications, and access to Lionbridge’s translation memory capability. Several enterprises have expressed interest in using GeoFluent to translate content and communications they are not able to translate using traditional methods due to time or cost constraints. Technical Authoring and Documentation. Technical authoring is the creation, design and deployment of user-focused product documentation and training related assets using rich media, text, images, and animations. Lionbridge provides technical authoring, production and integration of content for print, web, multimedia, mobile device, and proprietary displays. As part of this solution, Lionbridge creates content and integrates applications for authoring and managing content. For example, Lionbridge is working with a leading provider of power systems and services for use on land, at sea and in the air. Lionbridge provides technical authoring and illustration for documentation that is used by technicians in the process of repairing, maintaining and operating aircraft, marine (ship) engines, power and energy generating equipment. Lionbridge technical authoring and illustration is used in the client’s print documentation, electronic media and content management systems. Lionbridge manages the program across its solution centers in the U.S., UK, Germany and India. Lionbridge believes that this integrated solution is enabling this client to produce high quality technical documentation while reducing its costs and shortening time to market. Global Language and Content Services Delivery. By integrating language technology and skills, global resources, content creation expertise, skilled program management capabilities, and local market knowledge Lionbridge provides a unified approach to developing, releasing and maintaining multilingual content and technology applications and offers a high-return solution for worldwide delivery and support. Lionbridge maintains long-term, strategic relationships with an extensive network of third-party individual, local-country translators and other language professionals, including independent agencies and freelance professionals. Lionbridge also directly employs program and project managers, linguistic engineers, publishers, editors and quality assurance specialists. Lionbridge uses a combination of translation software, internal expertise as well as external translation professionals for its translation and localization services. This approach allows Lionbridge to provide client delivery teams that have the appropriate combination of linguistic, technology and industry domain expertise and local country presence to meet each client’s specific needs. This flexible and scalable model also enables Lionbridge to manage large, complex client engagements while minimizing its fixed costs. Lionbridge GLC services use Translation Workspace, Lionbridge’s proprietary, internet-architected translation memory application that simplifies translation management. This application, which is hosted by Lionbridge, allows translators to collaborate, share knowledge, and deliver consistent results. Lionbridge GLC services also incorporate translation productivity and quality assurance technologies including Freeway™, a client portal that allows clients to initiate and track translation projects, collaborate with their project teams, manage linguistic assets and generate enterprise budget and status reports. Lionbridge believes that its language technologies increase efficiency and enable clients to better manage their language assets on a real-time basis.
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Table of ContentsUsing technology, Lionbridge increases the quality of multilingual content and enables the translation process to be more efficient as client programs grow in scope and duration. This technology-based approach allows Lionbridge to increase its opportunities for recurring clients and increase program efficiency over time. Lionbridge’s delivery of its GLC services is based on its proprietary Excellence in Operations (“LEO”) methodology. LEO is a process framework to assure quality and on-time deliverables to customers, internal teams and external partners. LEO is a tested, repeatable process designed to ensure consistency around the world. A roadmap for effective service delivery, LEO offers a unified, systematic approach to adapting products and content to a target locale’s technical, linguistic and cultural expectations. Lionbridge’s LEO incorporates regional best practices and consolidates them into a standardized set of global processes to ensure repeatability, predictability and common expectations across various operating centers. LEO defines our customer feedback management approach specifying how to execute timely root cause analysis and improvement plans managed through our global customer feedback tool CCDB (“Customer Care Database”). LEO standardizes processes throughout every Lionbridge solution center, defines key activities, and specifies goals for each project. Our team of experienced auditors execute globally tracked checks against the LEO framework in each of our sites and across our accounts to identify improvements and ensure every customer receives the same high level of quality. Lionbridge’s process-oriented approach to production enables Lionbridge to deliver high-quality applications and content across multiple technology platforms, languages and cultures in a timely fashion, while continually improving process and service delivery for Lionbridge clients. Global Development and Testing Services (“GDT”) Testing. Lionbridge provides a variety of testing services which are offered to clients under the VeriTest® brand. VeriTest services include enterprise-scale managed test teams, test process design, test automation, functional testing, performance testing, globalization testing, and product certification. The Company’s testing services are aimed at helping organizations improve product usability and customer satisfaction, while reducing the time and cost associated with quality assurance (“QA”), testing, and support. VeriTest globalization testing services determine whether the product is ready for international markets by ensuring that locale-dependent functions work as intended within the local hardware and software environment of the end user. As part of its testing services, Lionbridge helps clients implement a QA continuous process improvement method, provide return on investment dashboards to track improvements, deploy a Test Automation framework and reduce test software costs. For example, for a Fortune 100 provider of business and consumer technology products, Lionbridge provides a complete testing solution for many of the company’s information management and printing technologies. Lionbridge tests the client’s applications for functionality, interoperability, usability, environmental impact, duration, and full system performance – to ensure that the products meet the high quality standards required by the end customer while still meeting the providers’ costs and time to market goals. Lionbridge has applied traditional headcount and physical plant cost management methods, and introduced innovative process improvements, to meet client budget, time-to-market, and quality objectives of its testing processes. Lionbridge believes that through its product engineering and testing services, the client is able to bring higher quality products to market faster and at reduced cost. Enterprise Crowdsourcing. Lionbridge provides a range of crowdsourcing services that build on Lionbridge’s skills for managing on-demand resources across a wide range of global markets. As part of its enterprise crowdsourcing service, the Company helps organizations evaluate business processes to determine which jobs or tasks are best suited to crowdsourcing solutions, and then administers the entire crowdsourcing process for the client including finding, recruiting, screening, and paying independent workers with specific skills in global markets. For example, for one global search engine company Lionbridge provides crowdsourcing services that provide insight into the intent of online users in local markets worldwide through a global community of more than 90,000 pre-qualified, bi-lingual professionals across 100+ countries and languages. As a result, Lionbridge
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Table of Contentsbelieves it is helping this client deliver more relevant search results for queries generated in each of the client’s target global markets. Another client relied on Lionbridge enterprise crowdsourcing services to monitor regulatory changes across numerous countries. This enabled the client to gain essential regulatory knowledge via a crowdsourcing model at 30% less cost than using a large accounting firm. Lionbridge believes its enterprise crowdsourcing solutions enable clients to improve their online marketing efforts in local markets, increase efficiency and lower labor and staffing costs. Interpretation Services Lionbridge provides interpretation services for government business and healthcare organizations that require experienced linguists to facilitate communication. Lionbridge provides interpretation communication services in more than 360 languages and dialects, including onsite interpretation, over-the-phone interpretation and interpreter testing, training, and assessment services. For one government agency, Lionbridge provides telephonic interpretation services, onsite interpretation services and translation services during interviews of individuals seeking asylum or protection from removal to their home countries. As a result, Lionbridge believes that this government agency can promote greater reliability in understanding and evaluating claims. For a large healthcare information service provider, Lionbridge provides interpretation services that link patients with interpreters who translate the confidential communications between the patients and healthcare providers. Lionbridge believes that this enables the healthcare information provider to effectively and efficiently service its total of approximately 500 non-English speaking users per month. See Note 12 of Notes to Consolidated Financial Statements included as part of Item 15 of this Form 10-K for financial information relating to Lionbridge’s operating segments and geographic areas of operation. Segment revenue in dollars and as a percentage of total revenue is included in the “Results of Operations” of Item 7. Sales and Marketing Substantially all of Lionbridge’s revenue has been generated through its dedicated direct sales force based in the Americas, Europe and Asia who sell the full range of Lionbridge solutions. The Lionbridge sales approach involves planning for an organization’s unique ongoing requirements, including future versions of products, and ongoing support, maintenance, and training, related to both technology products and content. Clients Lionbridge clients are predominantly Global 2000 companies in the technology, mobile and telecommunications, internet and media, life sciences, government, manufacturing, automotive, retail and aerospace sectors. Lionbridge provided services in excess of $50,000 to approximately 400 clients worldwide for the year ended December 31, 2011. The following companies are representative Lionbridge clients, each of whom purchased more than $2.0 million in services from Lionbridge in the year ended December 31, 2011:
In 2011, 2010 and 2009, Microsoft accounted for 17%, 20% and 21% of total revenue, respectively. In 2011 and 2010, Google accounted for 12% and 11% of total revenue, respectively. No other client accounted for greater than 10% of total revenue in 2011, 2010 or 2009. Lionbridge’s ten largest clients accounted for 56%, 56% and 57% of revenue in 2011, 2010 and 2009, respectively.
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Table of ContentsCompetition Lionbridge provides a broad range of solutions for worldwide delivery of technology and content to its clients. The market for its solutions is highly fragmented, and Lionbridge has many competitors. Additionally, many potential customers address their translation, development and testing requirements through in-house capabilities and/or by using software to automate process, while others outsource their needs to providers such as Lionbridge. Lionbridge’s current competitors include the following:
Lionbridge may also face competition from a number of other companies in the future, including some companies that currently seek translation, development or testing services from Lionbridge. Other potential entrants into Lionbridge’s market include India-based and China-based development organizations that are providing a range of software development, testing and maintenance services for global technology companies that require translation of the products and applications they provide. As content management software is deployed internationally, these firms may be required to assist their customers with maintaining multilingual databases. While today these companies are often working with Lionbridge to assist in meeting their customers’ needs, it is possible that over time they will expand into offering competitive services. From time to time, new companies may enter Lionbridge’s global language and content industry. Although Lionbridge builds unique applications and utilizes machine translation software licensed from third parties, Lionbridge’s technology does not preclude or inhibit others from entering its market. Lionbridge believes the principal competitive factors in providing its services include its global infrastructure which supports cost-effective, high-quality client delivery worldwide; its ability to provide clients a comprehensive set of services that address multiple phases of a client’s content and technology application lifecycle; its project management expertise; its proprietary, web-based language technology platform; quality and speed of service delivery; vertical industry expertise; expertise and presence in certain geographic areas and corporate reputation. Lionbridge believes it has competed favorably with respect to these factors and has a strong reputation in its industry. Government Contracts Many of Lionbridge’s customers within its Interpretation segment are Federal, State or local government entities. A material portion of Lionbridge’s revenues from its Interpretations segment is derived from government entities, and in particular, from two contracts with the U.S. government, both of which were renewed for multi-year terms in 2009. Lionbridge has typically been successful in maintaining existing relationships with government entities and in renewing its contracts for successive multi-year terms; however, there is no guarantee that it may continue to do so in the future. In addition, government entities often reserve the right to change the scope of engagements with limited notice, for lack of approved funding or at their convenience. Intellectual Property Rights Lionbridge’s success is dependent, in part, upon its proprietary methodologies and practices, including its Translation Workspace language platform, applications of its machine translation technologies, its Freeway portal technology, its proprietary linguistic testing practices and methodologies, its language assets and other intellectual property rights. Lionbridge has patents or patent applications pending relating to its language
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Table of Contentsautomation translation memory engine, its machine translation applications and its Translation Workspace and GeoFluent technologies and believes that the duration of these patents is adequate relative to the expected lives of their applications. Patents that have already been issued have remaining terms that range from 5-14 years. Lionbridge relies on a combination of trade secret, license, nondisclosure and other contractual agreements, and copyright and trademark laws to protect its intellectual property rights. Existing trade secret and copyright laws afford Lionbridge only limited protection. Lionbridge enters into confidentiality agreements with its employees, contractors and clients, and limits access to and distribution of Lionbridge’s and Lionbridge’s clients’ proprietary information. Lionbridge cannot assure that these arrangements will be adequate to deter misappropriation of its proprietary information or that it will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights. Employees As of December 31, 2011, Lionbridge had approximately 4,500 full-time equivalent employees. Of these, approximately 3,900 were service delivery professionals and 600 were management and administrative personnel performing sales, operations, marketing, process and technology, research and development, finance, accounting, and administrative functions. Lionbridge has employees in Norway, Poland and Finland who are represented by trade unions, and there are works councils in the Netherlands, France, Germany, Denmark, Finland, and Spain. Lionbridge has never experienced a work stoppage and believes that its employee relations are good. Compliance with Environmental Laws Lionbridge conducts its operations in 26 countries and accordingly, is subject to the laws and regulations of each of those countries, many of which have announced or enacted initiatives designed to reduce carbon emissions in the atmosphere. Lionbridge’s business does not involve manufacturing or other processes that are significant contributors to excessive carbon emissions and does not believe its current operating model requires modification in order to comply with these regulations. Lionbridge has a robust program of telecommuting among its world-wide workforce which results in a reduced global footprint due to reduced office and infrastructure occupancy and reduced commuting costs and emissions.
This Annual Report on Form 10-K contains forward-looking statements which involve risks and uncertainties. Lionbridge’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, without limitation, those set forth in the following risk factors and elsewhere in this Annual Report on Form 10-K. In addition to the other information included or incorporated by reference in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating Lionbridge and its business. A large portion of Lionbridge’s revenue is derived from a relatively small number of large clients and the delay or reduction of its clients’ product releases and production schedules or the loss of, or reduction in revenue from, a major client could negatively affect Lionbridge’s revenue and results of operations. Lionbridge derives a significant portion of its revenues from large projects and programs for a limited number of large clients. In addition, a significant portion of Lionbridge’s revenue is linked to the product release cycles and production schedules of its clients, and, in particular, to certain key clients. As a result, Lionbridge performs varying amounts of work for specific clients from year-to-year based on their product release cycles and production schedules. A major client in one year may not have use for a similar level of Lionbridge’s services in another year. Although we generally enter into long-term contracts with our clients, the volume of work we perform for specific clients may vary from year-to-year or quarter-to-quarter. Our contracts may allow our clients to terminate the contract early. There can be no assurance that we will be able to retain these major
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Table of Contentsclients or that, if we were to lose one or more of our major clients, we would be able to replace such clients with clients that generate a comparable amount of revenues. A number of factors could cause us to lose business or revenue from a client, and some of these factors are not predictable and are beyond our control. For example, a client may demand price reductions, change its procurement strategy, move work in-house or reduce previously forecasted demand. In most cases, if a client terminates its contract with us or does not meet its forecasted demand, we have no contractual recourse even if we have hired and trained service professionals to provide services to the client. Consequently, the loss of one or more of our major clients, or the inability to generate anticipated revenues from them, would have a material adverse effect on our business, results of operations and financial condition. While our strategy of focusing on serving large enterprises is intended to enable us to increase our revenues from large corporate customers, this strategy also exposes us to increased risks arising from the possible loss of major customer accounts. For the years ended December 31, 2011 and 2010, Lionbridge’s largest client accounted for 17% and 20% of its revenue, respectively, and its five largest clients accounted for approximately 46% and 47% of its revenue, respectively. As a result, the loss of any major client or a significant reduction in a large project’s scope could materially reduce Lionbridge’s revenue and cash flow, and adversely affect its ability to maintain profitability. Fluctuations in the mix of customer demand for the Company’s various types of solution offerings could impact Lionbridge’s financial performance and impact Lionbridge’s ability to forecast performance. Due to fluctuations in customer needs, changes in customer industries, and general economic conditions, customer demand for the range of the Company’s offerings varies from time to time and is not predictable. In addition, customer’s software product localization requirements for high quality translation services may be affected by the mix of graphics and words in a particular language, thereby reducing the amount of content suitable for high quality, professional human-based translation. In addition, Lionbridge gross margins vary by customer. Generally, the profitability of an account increases over time. As a result, the mix of solutions provided by Lionbridge to its customers varies at any given time, both within a quarter and from quarter-to-quarter. These variations in service mix impact gross margins and the predictability of gross margins for any period. Therefore, Lionbridge believes that quarter-to-quarter comparisons of its results of operations are not necessarily meaningful. You should not rely on the results of any one quarter as an indication of Lionbridge’s future performance. Lionbridge may not experience profitability or margin increases in future years comparable to those experienced in some prior years. Procurement strategies and vendor consolidation as well as unfavorable conditions in the United States and global economies may adversely affect demand for Lionbridge’s services, which would in turn, adversely affect future revenues and operating results. Many of Lionbridge’s clients are seeking to consolidate their current service providers. In some cases, the range and breadth of our service offerings is not as broad as its customers demand. Lionbridge’s ability to sustain growth and our profitability in the current environment is dependent upon its ability to maintain and/or gain a greater share of the business within its clients, and to attract new clients. There can be no assurance that Lionbridge will be able to do so in the future. More generally, future unfavorable changes in global economic and political conditions, including economic and monetary instability in Europe, inflation, fluctuating energy costs, geopolitical issues, and unrest may contribute to increased volatility and diminished expectations for the global economy and global economic growth going forward. Continued instability in global economic conditions could negatively impact business and customer spending patterns. More specifically, Lionbridge’s customers or potential customers may cancel, reduce or delay their purchases of our solutions or payment for such solutions, which would adversely impact our revenues, collections of customer receivables and ultimately our profitability.
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Table of ContentsThe Company cannot predict global economic conditions or when and to what extent these conditions may affect our customers. The Company can not ensure that its business financial condition or results of operations will not be adversely impacted by any negative economic conditions. Potential fluctuations in Lionbridge’s quarterly results make financial forecasting difficult and could affect its common stock trading price. As a result of fluctuations in Lionbridge’s revenues tied to foreign currency fluctuations, its clients’ activities and release cycles, customer and vendor pricing pressures, the three-to nine-month length of its typical sales cycle, historical growth, acquisition activity, the emerging nature of the markets in which it competes, global economic conditions and other factors outside its control, Lionbridge believes that financial forecasting is difficult and quarter-to-quarter comparisons of its results of operations are not necessarily meaningful. You should not rely on the results of any one quarter as an indication of Lionbridge’s future performance. Lionbridge may not experience revenue increases in future years comparable to the revenue increases in some prior years. There have been quarters in the past in which Lionbridge’s results of operations have fallen below the expectations of securities analysts and investors and this may occur in the future. If in a future quarter Lionbridge’s results of operations were to fall below the expectations of securities analysts and investors, the trading price of its common stock would likely decline. Lionbridge’s expansion into new SaaS-based product offerings may not succeed and may harm its , financial results and reputation. Lionbridge offers its web-based language technologies on a subscription, or Software-as-a-Service (“SaaS”), service offering. The Company’s current SaaS products include Translation Workspace™ and GeoFluent ™. These SaaS-based offerings are available to translators and enterprises on a subscription basis, independent of otherwise engaging Lionbridge as the translation services provider. Lionbridge is providing Translation Workspace on a subscription basis to individual translators and agencies for their use with their customers, as well as to enterprises. Lionbridge has also offered GeoFluent to corporations and enterprises engaged in real-time, web-based communications. Lionbridge will continue to devote capital, personnel and management attention to developing these new services and offerings. These services and offerings will present technological, marketing and management challenges that differ from the challenges the Company faces in its existing localization business. The success of this expansion and Lionbridge’s future growth and profitability in connection with this initiative will depend in large part on its ability to attract and retain subscribers and to constantly improve the tools and solutions offered and adapt them to changing customer needs. Lionbridge cannot assure you that these web-based solutions and strategies will be successful or that they will be profitable, or if they are profitable, that they will provide an adequate return on capital expended. If Lionbridge is not successful in marketing, selling, developing and deploying these new solutions, its financial results and reputation may be harmed. In addition, the market for SaaS-based translation solutions is emerging and it is uncertain whether SaaS-based services will achieve and sustain high levels of demand and market acceptance. Lionbridge’s successful expansion into new SaaS-based product offerings will depend to a substantial extent on the willingness of translators and enterprises, large and small, to subscribe to SaaS-based tools and services for translation requirements. Some potential users may be reluctant or unwilling to use SaaS-based services because they have concerns regarding the risk associated with security capabilities, among other things, of the technology delivery model associated with these services. If they do not perceive the benefits of subscribing to SaaS-based tools and services, then the market for these services may not develop at all, or it may develop more slowly than the Company expects, either of which may adversely affect Lionbridge’s financial results. Defects or disruptions in Lionbridge’s newly introduced web-based tool and service offerings (including interruptions in service due to third parties) could diminish demand for those offerings and subject the Company to liability. SaaS offerings may contain undetected errors when first introduced or when new versions or enhancements are released. Since Lionbridge’s customers use our web-based services for important aspects of their business,
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Table of Contentsany errors, defects, disruptions in service or other performance problems with the Company’s service could hurt its reputation and may damage Lionbridge’s customers’ businesses. If that occurs, customers could elect not to renew, or delay or withhold payment to Lionbridge, the Company could lose future subscribers or customers may make warranty claims against Lionbridge, which could result in an increase in the Company’s provision for doubtful accounts, an increase in collection cycles for accounts receivable or the expense and risk of litigation. Lionbridge currently serves its customers from third-party data center hosting facilities located on the east coast of the United States. Any damage to, or failure of, these facilities could result in interruptions in its service. As Lionbridge continues to add capacity to its data centers, it may move or transfer data. Despite precautions taken during this process, any unsuccessful data transfers may impair the delivery of Lionbridge’s service. Further, any damage to, or failure of, Lionbridge’s systems generally could result in interruptions in its service. Interruptions in Lionbridge’s service may reduce its revenue, cause customers to terminate their subscriptions and adversely affect the Company’s renewal rates and its ability to attract new customers. Lionbridge’s business will also be harmed if its customers and potential customers believe the Company’s service is unreliable. Evolving regulation of the Internet may affect Lionbridge adversely. As Internet commerce continues to evolve, increasing regulation by federal, state or foreign agencies may occur. For example, the Company believes increased regulation may occur in the area of data privacy and in status of employment. In addition, taxation of services provided over the Internet or other charges imposed by government agencies or by private organizations for accessing the Internet may also be imposed. Any regulation imposing greater fees for Internet use or restricting information exchange over the Internet could result in a decline in the use of the Internet and the viability of Internet-based services, which could harm Lionbridge’s web-based tools and services business as well as reduce demand for its services by customers that provide Internet-based services. Demand for subscription fee-based translation tools such as Lionbridge’s and demand for the Company’s high quality translation services could decline if effective tools and solutions become available for free. Presently there are a number of free translation tools offering limited access to machine translation and translation management applications. If these free offerings become more sophisticated or comprehensive, and become better able to produce more accurate translations and production efficiencies, demand for Lionbridge’s solutions and products, particularly its real-time machine translation offering known as GeoFluent, may decline. A failure by Lionbridge to comply with the covenants under its revolving credit facility could trigger a default under that facility if not cured. Lionbridge’s failure to comply with the financial and other restrictive covenants under its revolving credit agreement could result in an event of default, which, if not cured or waived, could result in the Company being required to repay these borrowings before their due date. There is no guarantee that the Company would be able to refinance these borrowings and the failure to refinance would have an adverse affect on the Company’s cash flows, results of operations and financial condition. If the Company is forced to refinance these borrowings on less favorable terms, its results of operations and financial condition could be adversely affected by increased costs, rates and terms. Lionbridge’s results of operations could be negatively affected by potential fluctuations in foreign currency exchange rates. Lionbridge conducts a large portion of its business in international markets. For the years ended December 31, 2011 and 2010, respectively, 38% and 41% of Lionbridge’s revenue was denominated in foreign currencies. In addition, 64% and 66% of its costs and expenses for the years ended December 31, 2011 and 2010, respectively, were denominated in foreign currencies. Therefore, the Company is exposed to the risk of an increase in the value of the foreign currencies relative to the U.S. Dollar, which would increase the value of those
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Table of Contentsexpenses when measured in U.S. Dollars. Lionbridge’s foreign subsidiaries have assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the functional currency value of certain assets and liabilities create fluctuations that may result in translations gains or losses. Management selectively engages in foreign exchange hedging transactions (typically, forward contracts) designed to minimize its exposure to foreign exchange rate fluctuations. Management regularly reviews the hedging program and will make adjustments as necessary, including suspending or accelerating hedging activities based on its judgment of the efficacy of such programs under anticipated market and economic conditions. However, there can be no assurance that our foreign currency management strategy will adequately protect our financial condition or results of operation from the effects of future exchange rate fluctuations. Lionbridge may not realize the anticipated benefits of current or future cost reduction initiatives. Lionbridge has initiated cost reduction actions to improve its operating cost structure, reduce overhead and better position itself competitively. These cost reduction initiatives include measures designed to better align operating expenses with expected revenue levels, resource reallocations, headcount reductions and technology deployments. The timing and implementation of cost reduction initiatives is dependent upon a number of factors, including customer needs and transition requirements, local statutory and regulatory requirements, and economic conditions. Future cost reduction initiatives could result in current period charges and expenses that could impact Lionbridge’s operating results. The anticipated benefits of these cost reduction actions may be negatively impacted by foreign currency exchange rate fluctuations. Lionbridge cannot guarantee that these measures, or other expense reduction measures we take in the future, will result in the expected cost savings. Lionbridge may engage in restructuring actions and incur restructuring charges for actions undertaken in any particular quarter. In connection with determining the size and scope of any such restructuring charge, management will be required to make significant estimates related to expenses for severance and other employee separation costs, lease cancellation and other exit costs, and estimates of future rental income that may be generated through the subleasing of excess leased property. Should the actual amounts differ from our estimates, the amount of the restructuring charges could be materially impacted. Lionbridge may be exposed to employment-related claims and costs that could materially adversely affect its business, financial condition and results of operations. Lionbridge engages resources in multiple countries worldwide and from time-to-time places them in workplaces of its customers. Lionbridge also may engage in redundancy or other reduction in force actions in light of any decline in demand for its services due to global economic conditions. Risks related to these activities include:
Lionbridge may incur fines and other losses or negative publicity with respect to these problems. In addition, some or all of these claims may give rise to litigation, which could be time-consuming to its management team and costly and have a negative impact on its business. Lionbridge cannot assure you that it will not experience these problems in the future.
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Table of ContentsLionbridge cannot assure you that its insurance will be sufficient in amount or scope to cover all claims that maybe asserted against the Company. Should the ultimate judgments and settlements exceed its insurance coverage, it could have a material effect on the Company’s results of operations, financial position and cash flows. Lionbridge cannot assure you that it will be able to obtain appropriate types or levels of insurance in the future. If Lionbridge fails to hire and retain professional staff, its ability to obtain and complete its projects could suffer. Lionbridge’s potential failure to hire and retain qualified employees could impair its ability to complete existing projects and bid for or obtain new projects and, as a result, could have a material adverse effect on its business and revenue. Lionbridge’s ability to grow and increase its market share largely depends on its ability to hire, train, retain and manage highly skilled employees, including project managers and technical, sales and marketing personnel. In addition, Lionbridge must ensure that its employees maintain their technical expertise and business skills. Lionbridge cannot assure you that it will be able to attract a sufficient number of qualified employees or that it will successfully train and manage the employees it hires to allow Lionbridge to carry out its operating plan. Lionbridge’s financial performance may be impacted by its ability to transition service execution to its lower cost operational sites, the timing of such transition, and customer acceptance of such transition. Lionbridge’s business strategy includes the transition of service execution to its global delivery centers located in India, China, Poland and Slovakia. The rate at which such services may be transitioned and the timing of any transition is difficult to predict and is dependent on customer demand for such services and customer acceptance of such any such transition. Accordingly, changes in the location of service execution may not produce the anticipated financial benefit and the Company may not realize the anticipated benefits of service execution in its Global Delivery Centers to the extent anticipated, or as rapidly as anticipated, all of which could adversely affect Lionbridge’s business, financial condition or results of operations. Lionbridge may not realize the anticipated benefits of past or future acquisitions and integration of these acquisitions may interrupt the Company’s business and management. Lionbridge has made significant acquisitions in the past. The Company may make acquisitions in the future as part of its long-term business strategy. Lionbridge may not realize the anticipated benefits of any acquisition, or Lionbridge may not realize the anticipated benefits as quickly as originally anticipated. In particular, the process of integrating acquired companies into the Company’s existing business may result in unforeseen difficulties and delays. These risks include:
Mergers and acquisitions are inherently risky and if Lionbridge does not fully complete the integration of acquired businesses successfully and in a timely manner, the Company may not realize the anticipated benefits of the acquisitions to the extent anticipated, or as rapidly as anticipated, which could adversely affect Lionbridge’s business, financial condition or results of operations.
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Table of ContentsPursuing and completing potential acquisitions could divert management attention and financial resources and may not produce the desired business results. As part of its growth strategy, Lionbridge may pursue and make selected acquisitions of complementary businesses. Lionbridge does not have specific personnel dedicated solely to pursuing and making acquisitions. As a result, if Lionbridge pursues any acquisition, its management, in addition to their operational responsibilities, could spend a significant amount of time and management and financial resources to pursue and integrate the acquired business with its existing business. To fund the purchase price of an acquisition, Lionbridge might use capital stock, cash or a combination of both. Alternatively, Lionbridge may borrow money from a bank or other lender. If it uses capital stock, Lionbridge’s stockholders will experience dilution. If it uses cash or debt financing, Lionbridge’s financial liquidity may be reduced. In addition, from an accounting perspective, an acquisition may involve amortization of significant amounts of other intangible assets that could adversely affect Lionbridge’s ability to maintain profitability. Despite the investment of these management and financial resources, an acquisition may not produce the revenue, earnings or business synergies that Lionbridge anticipated or may produce such synergies less rapidly than anticipated for a variety of reasons, including:
Lionbridge may not be able to successfully address these problems. Lionbridge’s future operating results may depend to a significant degree on Lionbridge’s ability to successfully integrate acquisitions and manage operations while controlling expenses and cash outflows. While Lionbridge currently does not have commitments or agreements with respect to any acquisitions, it regularly explores potential acquisitions of strategically complementary businesses or operations. Lionbridge may not be able to identify suitable acquisition candidates and it can expect to face competition from other companies for potential acquisition candidates, making it more difficult to acquire suitable companies on favorable terms. Difficulties presented by international economic, political, legal, health, accounting and business factors could negatively affect Lionbridge’s business in international markets. Lionbridge conducts business and has operations and clients throughout the world. As a result, Lionbridge’s business is subject to political unrest and economic fluctuations in various countries and to more cost-intensive social insurance and employment laws and regulations, particularly in Europe. In addition, as Lionbridge continues to employ and retain personnel throughout the world and to comply with various employment laws, it may face difficulties in integrating such personnel on a cost-efficient basis. In the U.S. and certain other countries, new employment and labor laws and regulations have been proposed or adopted that may increase the potential exposure of employers to employment-related claims and litigation. There can be no assurance that the corporate policies Lionbridge has in place to help reduce its exposure to these risks will be effective or that the Company will not experience losses as a result of these risks. As Lionbridge aligns its worldwide workforce, it may face difficulties and expense in reducing its workforce in certain high cost countries and regions, including Europe. To date, Lionbridge has been able to successfully staff its international operations, but if Lionbridge seeks to expand its operations, it may become more difficult to manage its international business. In addition, Lionbridge’s ability to engage individual interpreters and translators as contractors rather than employees may be impacted by changes in employment laws, regulations and interpretations in certain jurisdictions, which may
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Table of Contentsexpose Lionbridge to additional costs and expenses. In addition, compliance with complex foreign and U.S. laws and regulations that apply to Lionbridge’s international operations increases the Company’s cost of doing business in international jurisdictions and could expose the Company to fines or penalties. These numerous and sometimes conflicting laws and regulations include import and export requirements, trade restrictions, tax laws, sanctions, data privacy requirements, labor laws, U.S. laws and regulations such as the Foreign Corrupt Practices Act and the regulations of the Office of Foreign Asset Controls (“OFAC”), and local laws. Violations of these law and regulations could result in fines, criminal sanctions, prohibitions on the conduct of Lionbridge’s business and damage to the Company’s reputation. Although Lionbridge has implemented policies and procedures designed to ensure compliance with these laws, the Company cannot guarantee compliance. Any such violations could materially damage the Company’s reputation, its ability to attract and retain employees, our business and our operating results. Lionbridge’s and its clients’ abilities to conduct business may also be affected by wars, political unrest, terrorism, natural disasters or the impact of diseases such as avian influenza. Furthermore, as a result of operating in international markets, Lionbridge is subject to longer payment cycles from many of its customers and may experience greater difficulties in timely accounts receivable collections. If Lionbridge fails to manage these operations successfully, its ability to service its clients and grow its business will be seriously impeded. Goodwill and other intangible assets represent a portion of Lionbridge’s assets; any impairment of Lionbridge’s goodwill or other intangible assets will adversely impact its net income. At December 31, 2011, Lionbridge had goodwill and other intangible assets of approximately $16.9 million, net of accumulated amortization, which represented approximately 10.7% of its total assets. Lionbridge’s goodwill is subject to an impairment test on an annual basis, and both goodwill and other intangible assets are also tested whenever events and circumstances indicate that they may be impaired. Such events or conditions could include an economic downturn in the industries to which Lionbridge provides services, increased competition, an increase in operating or other costs, additional volatility in international currencies, the pace of technological improvements; or other information regarding Lionbridge’s market value, such as a reduction in stock price to a price near or below the book value of the Company for an extended period of time. Any excess goodwill resulting from the impairment test must be written off in the period of determination. Lionbridge recorded a goodwill impairment charge of $120.6 million during the year ended December 31, 2008. Although the Company does not believe that an impairment of Lionbridge’s remaining goodwill or other intangible assets exists at this time, in the event that such a condition or event occurs, we may record additional charges which could have a material adverse effect on our results of operations. If Lionbridge does not respond to future advances in technology and changes in customer demands, its business and results of operations may be adversely affected. The demand for Lionbridge’s services may be substantially affected, in large part, by future advances in technology and changes in customer demands. Lionbridge’s success will depend on its ability to address the increasingly sophisticated and varied needs of its existing and prospective clients. Lionbridge cannot assure you that there will be a demand for its services in the future. Lionbridge’s success in servicing its clients will be largely dependent on its development of strategic business solutions and methodologies in response to technological advances and client preferences. For example, Lionbridge’s services are based on a hosted internet-based language technology platform, core components of which include Lionbridge’s Translation Workspace technology. Lionbridge’s business may be harmed by defects or errors in the services it provides to its clients. Many of the services Lionbridge provides are critical to its clients’ businesses. While Lionbridge maintains general liability insurance, including coverage for errors and omissions, defects or errors in the services it provides could interrupt its clients’ abilities to provide services to their end users resulting in delayed or lost client revenue. This could damage Lionbridge’s reputation through negative publicity, make it difficult to attract new, and retain existing customers and cause customers to terminate their contracts and seek damages.
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Table of ContentsLionbridge may incur additional costs to correct errors or defects. Lionbridge cannot assure you that its general liability and errors and omissions insurance coverage will be available in amounts sufficient to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claims. Improper disclosure of employee and customer data could result in liability and harm Lionbridge’s reputation. From time to time, Lionbridge’s services involve the use, storage and transmission of personal data, including information of its employees and resources. Lionbridge and its third party service providers have established policies and procedures to help protect the security and privacy of this information. It is possible that the Company’s security controls over personal and other data and other practices the Company and its third party service providers follow may not prevent the improper access to or disclosure of personally identifiable or otherwise confidential information. Such disclosure could harm Lionbridge’s reputation and subject the Company to liability under its contracts and laws that protect personal data and confidential information, resulting in increased costs or loss of revenue. Further, data privacy is subject to frequently changing rules and regulations, which sometimes conflict among various jurisdictions and countries in which we provide services. Lionbridge’s failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to its reputation in the marketplace. Lionbridge’s service delivery system is dependent on global electronic communications. System failures could cause delays or interruptions of service, which could cause Lionbridge to lose clients and subscribers and delay scheduled deliveries to customers. Lionbridge’s translation service offerings in particular are dependent on its ability to communicate to its global network of operational sites and translation experts, primarily through web-based communications technologies. As a result, Lionbridge is dependent upon its ability to protect computer and telecommunications equipment and systems against damage from fire, power loss, telecommunications interruption or failure, natural disaster and other similar events. If Lionbridge experiences a temporary or permanent interruption affecting its access to our proprietary solutions, communications with global resources, or preventing its customers from accessing tools or solutions to which they have subscribed, Lionbridge’s business could be materially adversely affected. While Lionbridge maintains property and business interruption insurance, such insurance may not adequately compensate the Company for all losses that it may incur. Although Lionbridge maintains general liability insurance, including coverage for errors and omissions, there can be no assurance that its existing coverage will continue to be available on reasonable terms or will be available in amounts sufficient to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. The occurrence of errors could result in a loss of data to Lionbridge or its clients, which could cause a loss of revenues, failure to achieve product acceptance, increased insurance costs, legal claims, against Lionbridge, delays in payment to Lionbridge by clients, increased service and warranty expenses or financial concessions, diversion of resources, injury to the Company’s reputation, any of which could have a material adverse effect on Lionbridge’s market share and, in turn, its business, results of operations and financial condition. If Lionbridge’s security measures are breached and unauthorized access is obtained to a customer’s data or Lionbridge’s data, the Company’s services may be perceived as not being secure, customers may curtail or stop using Lionbridge’s service and the Company may incur significant legal and financial exposure and liabilities. In all lines of our business, Lionbridge is involved in the storing and transmission of certain customer proprietary information. Accordingly, security breaches could expose Lionbridge to a risk of loss of this information, litigation and possible liability. If Lionbridge’s security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to Lionbridge’s data or its customers’ data, Lionbridge’s reputation could be damaged, the company’s business may suffer and the Company could incur significant liability. Additionally, third parties may attempt to fraudulently
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Table of Contentsinduce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to Lionbridge’s data or its customers’ data, which could result in significant legal and financial exposure and a loss of confidence in the security of the Company’s service that would harm its future business prospects. Because the techniques used to obtain unauthorized access, or to sabotage systems, change Lionbridge may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of Lionbridge’s security occurs, the market perception of the effectiveness of the Company’s security measures could be harmed and Lionbridge could lose sales and customers. Lionbridge competes in highly competitive markets. The markets for Lionbridge’s services are very competitive. Lionbridge cannot assure you that it will compete successfully against its competitors in the future. If Lionbridge fails to be competitive with other companies in the future, it may lose market share and its revenue could decline. There are relatively few barriers preventing companies from competing with Lionbridge. Although Lionbridge owns proprietary technology, Lionbridge does not own any patented or other technology that, by itself, precludes or inhibits others from entering its market. As a result, new market entrants also pose a threat to Lionbridge’s business. In addition to Lionbridge’s existing competitors, Lionbridge may face further competition in the future from companies that do not currently offer globalization or testing services. Lionbridge may also face competition from internal globalization and testing departments of its current and potential clients. Technology companies, information technology services companies, business process outsourcing companies, web consulting firms, technical support call centers, hosting companies and content management providers may choose to broaden their range of services to include globalization or testing as they expand their operations internationally. Lionbridge cannot assure you that it will be able to compete effectively with potential future competitors. Lionbridge will continue to depend on intellectual property rights to protect its proprietary technologies, although it may not be able to successfully protect these rights. Lionbridge relies on its proprietary technology to enhance some of its service offerings. Lionbridge’s policy is to enter into confidentiality agreements with its employees, outside consultants and independent contractors. Lionbridge also uses patent, trademark, trade secret and copyright law in addition to contractual restrictions to protect its technology. Notwithstanding these precautions, it may be possible for a third party to obtain and use Lionbridge’s proprietary technology without authorization. Although Lionbridge holds registered or pending United States patents and foreign patents covering certain aspects of its technology, it cannot be sure of the level of protection that these patents will provide. Lionbridge may have to resort to litigation to enforce its intellectual property rights, to protect trade secrets or know-how, or to determine their scope, validity or enforceability. Enforcing or defending its proprietary technology is expensive, could cause diversion of Lionbridge’s resources and may not prove successful. The laws of other countries may afford Lionbridge little or no effective protection of its intellectual property rights. The intellectual property of Lionbridge’s customers may be damaged, misappropriated, stolen or lost while in Lionbridge’s possession, subjecting it to litigation and other adverse consequences. In the course of providing globalization and testing services to Lionbridge’s customers, Lionbridge takes possession of or is granted access to certain intellectual property of such customers, including unreleased versions of software and source code. In the event such intellectual property is damaged, misappropriated, stolen or lost, Lionbridge could suffer:
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Table of ContentsLionbridge has an accumulated deficit and may not be able to continue to achieve operating profit. For the years ended December 31, 2011, 2010 and 2009, Lionbridge achieved an operating profit of $5.6 million, $3.0 million and $1.4 million, respectively. For the year ended December 31, 2008, Lionbridge incurred an operating loss of $114.2 million, which included a $120.6 million goodwill impairment charge. For the years ended December 31, 2007, 2006 and 2005, Lionbridge achieved operating profits of $9.0 million, $15.0 million, and $1.3 million, respectively. However, prior to 2005, Lionbridge incurred substantial losses and may incur losses in the future. Lionbridge has an accumulated deficit of $235.0 million as of December 31, 2011. Lionbridge intends to continue to invest in internal expansion, infrastructure, select acquisitions and its sales and marketing efforts. Lionbridge cannot be assured that it will continue to achieve operating profits in the future or will generate net income in the future. Changes in, or interpretations of, tax rules and regulations may adversely affect Lionbridge’s effective tax rates. Lionbridge is subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining Lionbridge’s worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Lionbridge is subject to the continual examination by tax authorities in certain jurisdictions, most notably India, and the Company regularly assesses the likelihood of outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. Although Lionbridge believes its tax estimates are reasonable, the final determination of tax audits could be materially different than what is reflected in historical income tax provisions and accruals, and could result in a material effect on the Company’s income tax provision, net income, or cash flows in the period or periods for which that determination is made. If additional taxes are assessed, the possibility exists for an adverse impact on Lionbridge’s financial results. The Indian taxing authorities issued assessment orders to our Indian subsidiary for the fiscal years ended March 31, 2006, March 31, 2007, and March 31, 2008. At issue in these assessments are several matters, the most significant of which is the redetermination of the arm’s-length profit related to intercompany transactions (“Transfer Pricing”). We are contesting all three years of assessments, and they are all at various stages of appeals. If we do not prevail in our appeals, we may incur an additional legal liability and obligations to pay additional interest, penalties and costs related to such matters. Lionbridge’s future effective tax rates could be unfavorably affected by changes in tax laws or the interpretation of tax laws, changes in relative amounts of income before taxes in the various jurisdictions in which Lionbridge operates that have differing statutory tax rates, or by changes in the valuation of the Company’s deferred tax assets or liabilities. Lionbridge has sizeable net operating losses which currently have a valuation allowance recorded against them, based on management’s review of both the positive and negative evidence, and their determination that it is more-likely-than-not that all or a portion of the deferred tax asset will not be realized. In the United States the Company has a substantial net operating loss with a valuation allowance recorded against it. Changes in the valuation allowance could have a substantial favorable impact on the effective tax rate in the period of release and an unfavorable impact in future periods. Changes in accounting policies may affect Lionbridge’s reported earnings and operating income. Generally accepted accounting principles and accompanying accounting pronouncements, implementation guidelines and interpretations for many aspects of our business, including revenue recognition are highly complex and involve subjective judgments. Changes in these rules, their interpretation, or their application relative to changes in the Company’s services or business could significantly change Lionbridge’s reported earnings and could add significant volatility to these measures, without a comparable underlying change in cash flow from operations. Lionbridge’s application of applicable accounting guidance involves interpretation and judgment, and may, as a result, delay the timing of revenue recognition or accelerate the costs associated with deferred revenue.
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Table of ContentsIf future results are different than anticipated, there may be adjustments to stock- based compensation expense. Lionbridge uses stock-based compensation as one of its central incentive and retention components for its key employees. A portion of stock-based compensation expense relates to long-term performance-based stock incentive awards, which will vest only if future revenue and/or profitability levels are met. If these revenue and/or profitability levels are not fully met, all or some portion of the equity will be forfeited, and previously recorded stock-based compensation expense will be adjusted which if material, could affect future earnings.
None.
Lionbridge maintains solution centers in North America, South America, Europe and Asia. Lionbridge’s headquarters and principal administrative, finance, legal, sales and marketing, investor relations and information technology operations are located in Waltham, Massachusetts. Its principal operational facilities are located as follows:
On or about July 24, 2001, a purported securities class action lawsuit captioned “Samet v. Lionbridge Technologies, Inc. et al.” (01-CV-6770) was filed in the United States District Court for the Southern District of New York (the “Court”) against the Company, certain of its officers and directors, and certain underwriters involved in the Company’s initial public offering. The complaint in this action asserted, among other things, that omissions regarding the underwriters’ alleged conduct in allocating shares in Lionbridge’s initial public offering to the underwriters’ customers. In March 2002, the United States District Court for the Southern District of New York entered an order dismissing without prejudice the claims against Lionbridge and its officers and directors (the case remained pending against the underwriter defendants). On April 19, 2002, the plaintiffs filed an amended complaint naming as defendants not only the underwriter defendants but also Lionbridge and certain of its officers and directors. The amended complaint asserts claims under both the registration and antifraud provisions of the federal securities laws relating to, among other allegations, the underwriters’ alleged conduct in allocating shares in the Company’s initial public offering and the disclosures contained in the Company’s registration statement. On July 15, 2002, the Company, together with the other issuers named as defendants in these coordinated proceedings, filed a collective motion to dismiss the complaint on various legal grounds common to all or most of the issuer defendants. In October 2002, the claims against officers and directors were dismissed without prejudice. In February 2003, the Court issued its ruling on the motion to dismiss, ruling that the claims under the antifraud provisions of the securities laws could proceed against the Company and a majority of the other issuer defendants. In June 2003, Lionbridge elected to participate in a proposed settlement agreement with the plaintiffs in this litigation. If the proposed settlement had been approved by the Court, it would have resulted in the dismissal, with prejudice, of all claims in the litigation against Lionbridge and against any other of the issuer defendants who elected to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. This proposed settlement was conditioned on,
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Table of Contentsamong other things, a ruling by the District Court that the claims against Lionbridge and against the other issuers who had agreed to the settlement would be certified for class action treatment for purposes of the proposed settlement, such that all investors included in the proposed classes in these cases would be bound by the terms of the settlement unless an investor opted to be excluded from the settlement. On December 5, 2006, the U.S. Court of Appeals for the Second Circuit issued a decision in In re Initial Public Offering Securities Litigation that six purported class action lawsuits containing allegations substantially similar to those asserted against the Company may not be certified as class actions due, in part, to the Appeals Court’s determination that individual issues of reliance and knowledge would predominate over issues common to the proposed classes. On January 8, 2007, the plaintiffs filed a petition seeking rehearing en banc of the Second Circuit Court of Appeals’ decision. On April 6, 2007 the Court of Appeals denied the plaintiffs’ petition for rehearing of the Court’s December 5, 2006 ruling but noted that the plaintiffs remained free to ask the District Court to certify classes different from the ones originally proposed which might meet the standards for class certification that the Court of Appeals articulated in its December 5, 2006 decision. In light of the Court of Appeals’ December 5, 2006 decision regarding certification of the plaintiffs’ claims, the District Court entered an order on June 25, 2007 terminating the proposed settlement between the plaintiffs and the issuers, including Lionbridge. On August 14, 2007, the plaintiffs filed amended complaints in the six focus cases. The issuer defendants and the underwriter defendants separately moved to dismiss the claims against them in the amended complaints in the six focus cases. On March 26, 2008, the District Court issued an order in which it denied in substantial part the motions to dismiss the amended complaints in the six focus cases. On February 25, 2009, the parties advised the District Court that they had reached an agreement-in-principle to settle the litigation in its entirety. A stipulation of settlement was filed with the District Court on April 2, 2009. On June 9, 2009, the District Court preliminarily approved the proposed global settlement. Notice was provided to the class, and a settlement fairness hearing, at which members of the class had an opportunity to object to the proposed settlement, was held on September 10, 2009. On October 6, 2009, the District Court issued an order granting final approval to the settlement. Ten appeals were filed objecting to the definition of the settlement class and fairness of the settlement. Five of those appeals were dismissed with prejudice on October 6, 2010. On May 17, 2011, the Court of Appeals dismissed four of the remaining appeals. On January 10, 2012, the last remaining appeal was dismissed with prejudice, as a result of which the settlement became final, by its terms. The Company’s financial contribution to the settlement is fully covered by insurance.
Not applicable.
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Table of ContentsPART II
As of February 29, 2012, there were 845 holders of record of Lionbridge’s common stock. Lionbridge’s common stock is listed and traded on the Nasdaq Global Market under the symbol “LIOX”. The following table sets forth, for the periods indicated, the range of high and low sales prices for the common stock for the past eight quarters, all as reported by the Nasdaq Global Market of the Nasdaq Stock Market LLC.
During 2011, the Company purchased 210,353 restricted shares from employees to cover withholding taxes due from the employees at the time the shares vested, 19,460 of these restricted shares were purchased during the quarter ended December 31, 2011 at an average price per share of $2.47. The following table provides information about Lionbridge’s purchases of restricted shares for the year ended December 31, 2011:
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Table of ContentsIn addition, upon the termination of employees during the year ended December 31, 2011, 178,063 unvested restricted shares were forfeited, 122,750 of which were forfeited in the quarter ended December 31, 2011. The following table provides information about Lionbridge’s forfeited restricted shares for the year ended December 31, 2011:
Lionbridge currently intends to retain any earnings for its use in its business. Lionbridge has not paid any cash dividends on its capital stock in the last two completed fiscal years and does not currently anticipate paying any cash dividends on its capital stock in the foreseeable future. The following chart compares the total stockholder return on a cumulative basis of $100 invested in Lionbridge’s common stock for the period from December 31, 2006 through December 31, 2011 to the Nasdaq Composite Index, Morningstar Business Services and 7389—Services—Business Services, NEC.
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Table of ContentsThe Stock Performance Graph furnished shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act. Equity Compensation Plan Information Please see Part III, Item 11 for information regarding securities authorized for issuance under the Company’s equity compensation plans.
The selected consolidated financial data as of December 31, 2011 and 2010 and for each of the three years in the period ended December 31, 2011 have been derived from the audited consolidated financial statements of Lionbridge which appear as part of Item 15 of this Form 10-K. The selected consolidated financial data as of December 31, 2009, 2008 and 2007 and for the years ended December 31, 2008 and 2007 have been derived from audited consolidated financial statements of Lionbridge that are not included in this Form 10-K. The historical results presented are not necessarily indicative of future results. You should read the data set forth below in conjunction with the “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included in this Form 10-K.
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The following discussion contains forward-looking statements which involve risks and uncertainties. Lionbridge makes such forward-looking statements under the provision of the “Safe Harbor” section of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements should be considered in light of the factors described above in Item 1A “Risk Factors.” Actual results may vary materially from those projected, anticipated or indicated in any forward-looking statements. In this Item 7, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “could,” and similar words or expressions (as well as other words or expressions referencing future events, conditions, or circumstances) identify forward-looking statements. The following discussion and analysis should be read in conjunction with “Risk factors,” “Selected Consolidated Financial Data” and the accompanying consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Lionbridge undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date such statement is made except as required by law. Overview Founded in 1996, Lionbridge is a leading provider of language, content and testing solutions that enable clients to optimize, release, manage, test and maintain their technology applications and content in global markets. Lionbridge Global Language and Content (“GLC”) solutions enable the authoring, translation, localization and worldwide multilingual release of clients’ products, online content and related sales and marketing information, technical support and training material. Lionbridge GLC solutions involve translating, localizing and adapting content and products to meet the language, cultural, technical and industry-specific requirements of users in local markets throughout the world. As part of its GLC solutions, Lionbridge also develops and authors technical documentation. Lionbridge GLC solutions utilize the Company’s cloud-based technology platforms and applications, and its global service delivery model which make the translation, localization and content authoring processes more efficient for Lionbridge and its clients. Through its Global Development and Testing (“GDT”) solutions, Lionbridge optimizes, tests and maintains IT applications to ensure the quality, interoperability, usability, relevance and performance of clients’ software, search engines, consumer technology products, web sites, and content. Lionbridge has deep domain experience in testing, optimizing and maintaining applications in a cost-efficient, blended on-site and offshore model. As part of its GDT offering, Lionbridge also provides specialized enterprise crowdsourcing services including search relevance testing for its clients’ online marketing initiatives. Lionbridge also provides interpretation services for government, business and healthcare organizations that experienced linguists to facilitate communication for non-English speaking individuals. Lionbridge provides a full suite of language, testing and content solutions to businesses in diverse end markets including technology, internet and media, mobile and telecommunications, life sciences, government, manufacturing, automotive, aerospace, manufacturing and retail. Lionbridge’s solutions include translation and localization; interpretation; language technology; technical authoring; application testing; and enterprise crowdsourcing. The Company’s services enable global organizations to increase international market share, broaden worldwide product adoption, support customers in global markets and accelerate online customer engagement across languages, geographies and technical platforms. In 2011, 2010 and 2009, Lionbridge’s operating profit was $5.6 million, $3.0 million and $1.4 million, respectively. In 2011, Lionbridge’s net income was $1.7 million. In 2010 and 2009, Lionbridge’s net loss was $1.3 million and $4.0 million, respectively. In 2008, Lionbridge’s operating loss was $114.2 million (which included a goodwill impairment charge of $120.6 million) with a net loss of $119.3 million. In 2007, Lionbridge’s operating profit was $9.0 million with a net loss of $4.2 million. Lionbridge had an accumulated deficit of $235.0 million at December 31, 2011.
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Table of ContentsCritical Accounting Policies and Estimates Lionbridge’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires Lionbridge to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Lionbridge periodically evaluates its estimates. Lionbridge bases its estimates on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Lionbridge reviewed the development, selection, and disclosure of the following critical accounting policies and estimates with its audit committee and the Company’s board of directors. Lionbridge’s critical accounting estimates relate to the following: revenue recognition, allowance for doubtful accounts, business combinations, valuation of goodwill and other intangible assets and the provision for income taxes. Revenue Recognition. Lionbridge recognizes revenue as services are performed and amounts are earned in accordance with ASC 605-20, “Services” (“ASC 605-20”). Lionbridge considers amounts to be earned when (1) persuasive evidence of an arrangement has been obtained; (2) services are delivered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectability of those fees. Lionbridge’s revenue is recorded from the provision of services to customers for GLC, GDT and Interpretation services which include content development, product and content globalization, interpretation, software and hardware testing, product certification and application development and maintenance. Content development, software and hardware testing, interpretations and application development and maintenance projects are normally time and expense priced contracts, and revenue is recognized using a time and expense basis over the period of performance, primarily based on labor costs incurred to date. Product and content globalization and product certification projects are fixed price contracts and revenue is recognized as services are delivered. Depending on specific contractual provisions and the nature of the deliverable, revenue is recognized (1) on a proportional performance model based on level of effort, (2) as milestones are achieved or (3) when final deliverables have been met. Amounts billed in excess of revenue recognized are recorded as deferred revenue. The delivery of Lionbridge’s GLC services involves and is dependent on the translation and development of content by subcontractors and in-house employees. As the time and cost to translate or produce each word of content within a project is relatively uniform, labor input is reflective of the delivery of the contracted service and an appropriate metric for the measurement of proportional performance in delivering such services. The use of a proportional performance assessment of service delivery requires significant judgment relative to estimating total contract costs, including assumptions relative to the length of time to complete the project, the nature and complexity of the work to be performed, anticipated increases in employee wages and prices for subcontractor services, and the availability of subcontractor services. When adjustments in estimated project costs are identified, anticipated losses, if any, are recognized in the period in which they are determined. Lionbridge’s GLC agreements with its customers may provide the customer with a fixed and limited time period following delivery during which Lionbridge will attempt to address any non-conformity to previously agreed upon objective specifications relating to the work, either in the form of a limited acceptance period or a post-delivery warranty period. Management believes recognition of revenue at the time the services are delivered is appropriate, because its obligations under such provisions are limited in time, limited in scope, and historically have not involved significant costs. In the future, if the post delivery acceptance or warranty provisions become more complex or include subjective acceptance criteria, Lionbridge may have to revise its revenue recognition policy appropriately, which could affect the timing of revenue recognition.
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Table of ContentsLionbridge’s GLC segment includes Translation Workspace, the Company’s hosted proprietary, internet-architected translation memory application that simplifies translation management. This SaaS-based application is available to translators on a subscription basis. Access revenue is billed in advance and generally recognized over the subscription period. Incremental overage fees are recognized in the period incurred. Lionbridge occasionally provides integrated full-service offerings throughout a client’s product and content lifecycle, including GLC and GDT services. Such multiple-element service offerings are governed by ASC 605-25, “Multiple-Element Arrangements” (“ASC 605-25”). For these arrangements where the GLC and GDT services have independent value to the customer, and there is evidence of selling price for each service, the combined service arrangement is bifurcated into separate units for accounting treatment. In instances where it is not possible to bifurcate a project, direct and incremental costs attributable to each component are deferred and recognized together with the service revenue upon delivery. The determination of selling price requires the use of significant judgment. Lionbridge determines the selling price of service revenues based upon its recent pricing for those services when sold separately and/or prevailing market rates for similar services. Upon adoption of ASU 2009-13, “Revenue Recognition: Multiple-Deliverable Revenue Arrangements”, there has been no material change to the determination of units of accounting or timing of revenue recognition. Revenue includes reimbursement of travel and out-of-pocket expenses and certain facilities costs with equivalent amounts of expense recorded in cost of revenue. Estimates for incentive rebates and other allowances are recorded as a reduction of revenues in the period the related revenues are recorded. These estimates are based upon contracted terms, historical experience and information currently available to management with respect to business and economic trends. Revisions of these estimates are recorded in the period in which the facts that give rise to the revision become known. Allowance for Doubtful Accounts. Lionbridge establishes an allowance for doubtful accounts to cover accounts receivable that may not be collectible. In establishing the allowance for doubtful accounts, Lionbridge analyzes the collectability of all accounts. Additionally, Lionbridge considers its historical bad debt experience and current economic trends in evaluating the allowance for doubtful accounts. Accounts written off in subsequent periods can differ materially from the allowance provided. Business Combinations. In the event that Lionbridge completes a business combination where the purchase method of accounting is used as required by the authoritative guidance of ASC 805, “Business Combinations” (“ASC 805”), the Company allocates the purchase price paid to the assets of the business acquired, including intangible assets, and the liabilities assumed based on their estimated fair values, with any amount of excess purchase price recorded as goodwill. Significant management judgments and assumptions are required in determining the fair value of acquired assets and liabilities, particularly acquired intangible assets which typically comprise acquired customer contracts and relationships and acquired technology. The valuation of purchased intangible assets is principally based upon estimates of the future performance and cash flows from the acquired business. If different assumptions are used, it could materially impact the purchase price allocation and our financial position and results of operations. Valuation of Goodwill and Other Intangible Assets. Lionbridge assesses the impairment of goodwill and other intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Such events or conditions could include: an economic downturn in the industries to which Lionbridge provides services; increased competition; an increase in operating or other costs; additional volatility in international currencies; the pace of technological improvements; or other information regarding Lionbridge’s market value, such as a reduction in stock price to a price near or below the book value of the Company for an extended period of time. When Lionbridge determines that the carrying value of a reporting unit will may not be recoverable based upon one or more of these indicators of impairment, the Company initially assesses any impairment using fair value measurements based on projected discounted cash flow valuation models. In addition, in accordance with ASC 350, “Intangibles—Goodwill and Other” (“ASC 350”), goodwill is reviewed
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Table of Contentsfor impairment on an annual basis. At December 31, 2011, the Company performed its annual test of goodwill to determine if an impairment existed. This test determined that each reporting unit’s fair value substantially exceeded the carrying value of the net assets of each respective reporting unit, using projected discounted cash flow modeling. As a result, no impairment was recorded for the year ended December 31, 2011. Estimating future cash flows requires management to make projections that can materially differ from actual results. The Company evaluates whether there has been an impairment in the carrying value of its long-lived assets in accordance with ASC 360, “Property, Plant and Equipment” (“ASC 360”), if circumstances indicate that a possible impairment may exist. An impairment in the carrying value of an asset is assessed when the undiscounted expected future operating cash flows derived from the asset grouping are less than its carrying value. If it is determined that the asset is impaired then it is written down to its estimated fair value. Factors that could lead to an impairment of acquired customer relationships (recorded with the acquisition of Bowne Global Solutions (“BGS”) in September 2005) include a worsening in customer attrition rates compared to historical attrition rates, or lower than initially anticipated cash flows associated with customer relationships. Provision for Income Taxes. Lionbridge is required to estimate its income taxes in each of the jurisdictions in which it operates as part of preparing its consolidated financial statements. This involves estimating the current taxes in each taxing jurisdiction in addition to assessing temporary differences resulting from differing treatments for tax and financial accounting purposes. These differences together with net operating loss carryforwards and tax credits may be recorded as deferred tax assets or liabilities on the balance sheet. A judgment must then be made to determine the likelihood that any deferred tax asset will be utilized to offset taxable income. To the extent that Lionbridge determines that it is more-likely-than-not that its deferred tax assets will not be utilized, a valuation allowance is established. A change in taxable income in future periods that is significantly different from that projected may cause adjustments to the valuation allowance that could materially increase or decrease future income tax expense. Significant Acquisitions Lionbridge has grown its business since inception through a combination of acquisitions and organic growth. Such acquisitions through December 31, 2011 have resulted in the cumulative recognition of approximately $204.3 million of goodwill and other intangible assets on its balance sheet. The Company recorded a noncash goodwill impairment charge of $120.6 million in the fourth quarter of 2008. Other acquired intangible assets are amortized over periods ranging from one to twelve years. Lionbridge did not have any acquisitions in the three year period ended December 31, 2011. Lionbridge believes its acquisitions have contributed to its growth by rapidly expanding its employee base, geographic coverage, client base, industry expertise, and technical skills. Lionbridge anticipates that a portion of its future growth will be accomplished by additional acquisitions. The success of this plan depends upon, among other things, Lionbridge’s ability to integrate acquired personnel, operations, products and technologies into its organization effectively; to retain and motivate key personnel of acquired businesses; and to retain customers of acquired firms. Lionbridge cannot guarantee that it will be able to identify suitable acquisition opportunities, obtain any necessary financing on acceptable terms to finance any acquisitions, consummate any acquisitions, or successfully integrate acquired personnel and operations. Restructuring Charges Lionbridge recorded $3.4 million of restructuring charges in the year ended December 31, 2011. The $3.4 million included $2.8 million for workforce reductions in Europe, the Americas and Asia consisting of 53 technical staff, 7 administrative staff and 1 sales staff, $178,000 recorded for vacated facilities and associated site closure costs, $345,000 of additional costs recorded for a previously vacated facility in order to reflect changes in initial estimates of a sublease arrangement due to current economic conditions, recorded pursuant to the guidance of ASC 420, “Exit or Disposal Cost Obligations” (“ASC 420”) and ASC 712, “Compensation—Nonretirement Postemployment Benefits” (“ASC 712”), and related literature. Of these charges, $3.4 million related to the
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Table of ContentsCompany’s Global Language and Content (“GLC”) segment and $9,000 related to the Interpretation segment. The Company made $7.1 million of cash payments related to restructuring in 2011, of which $7.1 million, $8,000 and $9,000 related to the GLC, GDT and Interpretation segments, respectively. Lionbridge recorded $7.8 million of restructuring charges in the year ended December 31, 2010. The $7.8 million included $5.7 million for workforce reductions in Europe, the Americas and Asia consisting of 70 technical staff, 8 administrative staff and 6 sales staff, $1.2 million recorded for vacated facilities and associated site closure costs, $673,000 of additional costs recorded for a previously vacated facility in order to reflect changes in initial estimates of a sublease arrangement due to current economic conditions and $270,000 for the accelerated amortization of long-lived assets in connection with vacated facilities, recorded pursuant to the guidance of ASC 420 and ASC 712, and related literature. Of these charges, $7.7 million related to the Company’s GLC segment and $133,000 related to the GDT segment. Of the $4.0 million of cash payments related to restructuring in 2010, $3.9 million and $89,000 related to the GLC and GDT segments, respectively. Lionbridge recorded $6.8 million of restructuring charges in the year ended December 31, 2009. The $6.8 million included $4.4 million for workforce reductions in Europe, the Americas and Asia consisting of 179 technical staff, 25 administrative staff and 18 sales staff, and $2.4 million recorded for vacated facilities, recorded pursuant to the guidance of ASC 420 and ASC 712, and related literature. Of the $2.4 million recorded for vacated facilities, $1.5 million was a revision of estimated liability recorded on a certain vacated facility. Of these charges, $6.5 million related to the Company’s GLC segment, $260,000 related to the GDT segment, $32,000 related to Corporate and Other and $20,000 related to the Interpretation segment. Of the $4.5 million of cash payments related to restructuring in 2009, $4.1 million, $292,000, $32,000 and $20,000 related to the GLC, GDT, Corporate and Other and Interpretation segments, respectively. The following table summarizes the merger and restructuring reserve activity (excluding the $270,000 long-lived asset accelerated amortization in 2010) for the years ended December 31, 2011, 2010 and 2009, respectively:
At December 31, 2011, the consolidated balance sheet includes accruals totaling $2.9 million primarily related to employee termination costs and vacated facilities. Lionbridge currently anticipates that $1.3 million of this will be fully utilized in 2012. The remaining $1.6 million relates to lease obligations on unused facilities expiring through 2026 and is included in long-term liabilities.
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Table of ContentsNon-Cash Charges Stock-Based Compensation Lionbridge recorded stock-based compensation of approximately $5.5 million, $4.0 million and $3.6 million in 2011, 2010 and 2009, respectively, in connection with stock options and restricted stock awards. Lionbridge issued 2,134,826 and 2,065,511 shares of restricted common stock and restricted stock units with a fair market value of $7.9 million and $6.3 million in 2011 and 2010, respectively. Of the total 2,134,826 shares of restricted common stock and restricted stock units issued in 2011, 1,738,750 have restrictions on disposition which lapse over four years from the date of grant, 56,076 have restrictions on disposition which lapse over thirteen months from the date of grant, and 340,000 restricted shares were granted to certain employees through the long-term incentive plan (the “LTIP”) as long-term performance based stock incentive awards under the Corporation’s 2005 Stock Incentive Plan. Pursuant to the terms of the LTIP, restrictions with respect to the stock will lapse upon the achievement of revenue and/or profitability targets within the two calendar years from and including the year of grant. The grant date fair value of the shares is recognized over the requisite period of performance once achievement of criteria is deemed probable. On a quarterly basis, the Company estimates the likelihood of achieving performance goals. Actual results, and future changes in estimates, may differ substantially from the Company’s current estimates. If the targets are not achieved, the shares will be forfeited by the employee. Lionbridge currently expects to amortize the following unamortized compensation in connection with restricted stock awards outstanding as of December 31, 2011 in the years ending:
For the years ended December 31, 2011, 2010 and 2009, 424,500, 470,500 and 314,125 stock options were granted, respectively. Lionbridge currently expects to amortize the following amounts of stock-based compensation related to stock options outstanding as of December 31, 2011 in the years ending:
Executive Summary In 2011, Lionbridge implemented many aspects of its long term strategy which includes growing its business through large, recurring relationships with global organizations and leveraging its proven delivery model for translation to provide a broader set of global engagement solutions for its clients. The Company believes this expanded platform will enable us to increase our growth and profitability and allow our clients to connect, engage and support their customers more intelligently, effectively and consistently across languages, geographies, technology platforms and devices. Lionbridge’s ongoing strategy includes:
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Lionbridge’s recent development initiatives have focused on transforming and commercializing IBM Research’s real-time machine translation technology application into high-quality customized solution that can be rapidly deployed in large-scale enterprise environments. In May 2011 Lionbridge introduced general availability for GeoFluent and began refining our go-to-market strategy to focus on enterprises that manage global online customer care initiatives. During the year Lionbridge also established technology and marketing partnerships with companies that offer online chat technology and enterprise social media software applications. Over time, the Company believes GeoFluent can expand our growth opportunities by enabling us to offer enterprises an innovative, customized, automated translation solution for rapidly translating online chat, technical forums and blogs and other online communications that increase customer engagement and reduce support costs in global markets. Also in 2011 Lionbridge expanded the development, sales and marketing of Translation Workspace. By the end of 2011, the Translation Workspace subscriber base grew by 50% over the prior year. More than 3,300 translators and agencies in over 80 countries use Translation Workspace as a translation productivity platform. Lionbridge also extended the offering to enterprise clients and secured its first contract with a large global enterprise that will use Translation Workspace to manage their community translation efforts. In 2012 Lionbridge will continue to invest in developing and marketing these SaaS technologies and expect to expand our revenue for both Translation Workspace and GeoFluent.
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In 2012, Lionbridge expects revenue to increase from 2011 primarily as a result of growth driven by anticipated increases in revenue from several large recurring client relationships in our GLC and GDT segments; new relationships with organizations in specific vertical markets such as life sciences, aerospace, manufacturing and retail; new client engagements related to our GMO offerings, new revenue opportunities for its global crowdsourcing offerings and increased subscribers and enterprise clients for our Translation Workspace and GeoFluent SaaS offerings. Lionbridge expects moderate demand for solutions that help clients expand their revenue opportunities in the U.S. and European markets during 2012, with significantly higher demand for solutions that help clients grow their revenue opportunities in developing economies. Lionbridge expects to offset traditional pricing pressure for certain new projects and contract renewals by utilizing our technology, global scale and by continuing our ongoing cost management and operational efficiency initiatives. To facilitate the growth of our SaaS offerings, Lionbridge expects to continue to increase our software development activities and personnel in 2012. In 2012, Lionbridge expects to continue to implement aspects of our long-term strategy by establishing recurring relationships with large clients, providing the capability, capacity, and in-country expertise our clients require, and by extending our new offerings and new technologies to potential customers. As a result, the Company expects to increase market opportunities, improve operational efficiency, and enhance productivity for its clients, which may in turn, accelerate Lionbridge’s revenue and profitability growth opportunities. Financial Overview During 2011, the Company’s revenue increased 5.6% and net income increased by $2.9 million year-over-year reflecting the effectiveness of the Company’s ongoing cost management activities and its technology-assisted production model which increase production efficiency and reduce overhead costs. The Company has benefitted from long-term, recurring relationships with its large clients. More than 93% of the Company’s total revenue for 2011 was generated from clients that have utilized the Company’s services every quarter for 12 consecutive quarters or longer. Historically, the Company’s quarterly results have been
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Table of Contentsimpacted by the timing of product release cycles of its customers, particularly from customers in the technology sector. The Company expects that it will continue to generate and increase revenue from its long term customers and that demand for the Company’s services from new customers may continue to stabilize and possibly strengthen in 2012, although the timing and scope of engagements may vary. Certain segments of Lionbridge’s business, its GLC segment in particular, are sensitive to fluctuations in the value of the U.S. Dollar relative to the Euro and other currencies, as a large portion of its cost of revenue and general and administrative expenses are payable in Euros and other currencies, while the majority of its revenues are recorded in U.S. Dollars. Approximately 38% of Lionbridge’s revenue is denominated in non-U.S. Dollars but more than 61% of the Company’s costs are denominated in non-U.S. Dollar, principally the Euro. During 2011, the value of the U.S. Dollar relative to other currencies weakened by approximately 5.3% from the prior year. This resulted in favorable foreign currency impact on revenue for 2011. In addition, the Company’s operating income and net income (loss) for 2011 was negatively impacted by weakening in the U.S. Dollar against other currencies as compared to 2010, particularly in the GLC segment. The Company’s liquidity position remains strong, in part due to effective cash management actions. Lionbridge generated approximately $9.8 million in cash flow from operations in 2011. The Company’s cash as of December 31, 2011 was $25.2 million and the Company concluded 2011 in a net cash positive position. Revenue increased 5.6% year-over-year, indicating renewed customer demand for the Company’s service offerings, particularly in the Company’s GLC segment. The Company believes that the more efficient cost and operating structure implemented in 2011, coupled with its continued investment in innovative language technologies, will allow the Company to enhance its operating results in 2012, particularly if customer demand for the Company’s services continues to strengthen. Results of Operations The following table sets forth certain consolidated financial data as a percentage of total revenue.
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Table of ContentsRevenue. The following table shows Global Language and Content (“GLC”), Global Development and Testing (“GDT”), and Interpretation revenues in dollars and as a percentage of total revenue for the years ended December 31, 2011, 2010 and 2009, respectively:
In 2011, total revenue was $427.9 million, an increase of $22.6 million, or 5.6% from $405.2 million in 2010. This period-over-period increase in total revenue was primarily due to approximately $13.7 million of organic growth, or 3.4%, and approximately $8.9 million, or 2.2%, due to the decline in the exchange rate of the U.S. Dollar against most foreign currencies in particular the Euro, as compared to the prior year. Lionbridge conducts a large portion of its business in international markets. Approximately 38% of its revenue for the year ended December 31, 2011 was denominated in foreign currencies, primarily the Euro. A fluctuation in foreign currency exchange rates primarily affects the GLC segment. Revenue increases during 2011 in the GLC, GDT and Interpretation segments were $5.8 million, $13.6 million and $3.3 million respectively, as compared to 2010. In 2010, total revenue was $405.2 million, an increase of $16.0 million, or 4.1% from $389.3 million in 2009. This period-over-period increase in total revenue was primarily due to approximately $21.2 million of organic growth, or 5.4%, partially offset by decreased revenue of $5.2 million as a result of the U.S. Dollar strengthening against certain foreign currencies, in particular the Euro, as compared to the prior year. Revenue increases during 2010 in the GLC and GDT segments were $7.9 million and $11.7 million, respectively, as compared to 2009. Revenue decline during 2010 in the Interpretation segment was $3.6 million as compared to 2009. Revenue from the Company’s GLC business for the year ended December 31, 2011 increased $5.8 million, or 2.0%, to $295.3 million from $289.6 million for the year ended December 31, 2010. As compared to 2010, GLC revenue increased approximately $8.5 million due to the impact of the decline in the exchange rate of the U.S. Dollar against most foreign currencies, in particular the Euro, period-over-period, partially offset by a decline of approximately $2.7 million during the year ended December 31, 2011 due to decreased revenue from a certain large customer in the technology sector primarily during the first quarter of 2011. In 2010, revenue from the Company’s GLC business for the year ended December 31, 2010 increased $7.9 million, or 2.8%, to $289.6 million from $281.7 million for the year ended December 31, 2009. As compared to 2009, GLC revenue increased approximately $12.7 million due to organic growth reflecting increased demand for the Company’s services, particularly from existing customers, partially offset by decreased revenue of approximately $4.8 million as a result of the U.S. Dollar strengthening against certain foreign currencies, in particular against the Euro. Revenue from the Company’s GDT business for the year ended December 31, 2011 was $109.5 million, an increase of $13.6 million, or 14.2%, from $95.9 million for the year ended December 31, 2010. The period-over-period increase in GDT revenue was primarily due to expanded customer engagements with a large client in the technology sector and new customer engagements. In 2010, revenue from the Company’s GDT business for the year ended December 31, 2010 was $95.9 million, an increase of $11.7 million, or 13.9%, from $84.2 million for the year ended December 31, 2009. The period-over-period increases in GDT revenue were primarily due to increased revenue from expanded relationships with, and new programs from existing customers. Revenue in the GDT segment is not materially impacted by fluctuations in foreign currency exchange rates. Revenue from the Company’s Interpretation business for the year ended December 31, 2011 was $23.0 million, an increase of $3.3 million, or 16.5%, from $19.7 million for the year ended December 31, 2010. The period-over-period increase in Interpretation revenue was primarily due to increased volume and more favorable terms from one large customer engagement. In 2010, revenue from the Company’s Interpretation
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Table of Contentsbusiness was $19.7 million, a decrease of $3.6 million, or 15.4%, from $23.3 million for the year ended December 31, 2009. The decrease in Interpretation revenue for the year ended December 31, 2010 was primarily due to decreased volume from one large customer engagement. Revenue in the Interpretation segment is not materially impacted by fluctuations in foreign currency exchange rates. Lionbridge’s ten largest customers accounted for 56% of revenue in 2011 as compared to 56% of revenue in 2010 and 57% of revenue in 2009. Cost of Revenue. Cost of revenue, excluding depreciation and amortization, consists primarily of expenses incurred for translation services provided by third parties as well as salaries and associated employee benefits for personnel related to client projects. The following table shows GLC, GDT and Interpretation cost of revenues, the percentage change from the prior year and as a percentage of revenue for the years ended December 31, 2011, 2010 and 2009, respectively:
During 2011, as a percentage of revenue, cost of revenue increased to 69.2% as compared to 68.0% for the same period of the prior year. This increase was primarily the result of customer and work mix changes in the Company’s GLC and GDT segments, and the impact of the weakening of the U.S. Dollar against certain foreign currencies, particularly the Euro, as compared to 2010. The increased cost of revenue percentage was partially offset by cost saving initiatives implemented in 2010 and 2011 in its GLC segment, and continued benefits realized from the deployment and use of Lionbridge’s language management technology platform. In 2010, as a percentage of revenue, cost of revenue increased to 68.0% as compared to 67.8% for the same period of the prior year. This increase was primarily the result of customer and work mix changes in the Company’s GDT segment and decreased revenue levels in the Interpretation segment. The increased cost of revenue percentage was partially offset by cost saving initiatives implemented in 2009 and 2010 in its GLC segment, and continued benefits realized from the deployment and use of Lionbridge’s language management technology platform in addition to the strengthening of the U.S. Dollar against certain foreign currencies, particularly the Euro, as compared to 2009. For the year ended December 31, 2011, cost of revenue was $296.2 million, an increase of $20.7 million, or 7.5%, as compared to $275.5 million for the same period of 2010. This increase was primarily associated with the $22.6 million increase in revenue as compared to the prior year, and includes approximately $10.5 million incremental costs attributable to the weakening of the U.S. Dollar’s exchange rate against certain foreign currencies, in particular the Euro. For the year ended December 31, 2010, cost of revenue was $275.5 million, an increase of $11.5 million, or 4.4%, as compared to $264.0 million for the same period of 2009. This increase was primarily associated with
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Table of Contentsthe $16.0 million increase in revenue as compared to the prior year, offset by approximately $2.8 million of reduced expenses attributable to the strengthening of the U.S. Dollar’s exchange rate against certain foreign currencies, in particular the Euro. Each segment provides distinctive services with different gross margins. For the year ended December 31, 2011, GLC, GDT and Interpretation accounted for approximately 69.0%, 25.6% and 5.3% of the total revenue. For the year ended December 31, 2010, GLC, GDT and Interpretation accounted for approximately 71.5%, 23.8% and 4.7% of the total revenue. Cost of revenue as a percentage of revenue in the Company’s GLC business increased to 67.7% for the year ended December 31, 2011, as compared to 66.9% for the same period of the prior year. For the year ended December 31, 2011, GLC cost of revenue increased $6.0 million to $199.9 million as compared to $193.8 million for the corresponding period of the prior year. This increase is primarily associated with incremental expenses of approximately $9.1 million attributable to the weakening of the U.S. Dollar exchange rate against certain foreign currencies, and the $5.8 million increase in revenue as compared to the corresponding period of the prior year. In 2010, the cost of revenue as a percentage of revenue in the Company’s GLC business decreased to 66.9% for the year ended December 31, 2010, as compared to 67.7% for the same period of the prior year. For the year ended December 31, 2010, GLC cost of revenue increased $3.1 million to $193.8 million as compared to $190.7 million for the corresponding period of the prior year. This increase is primarily associated with the $7.9 million increase in revenue as compared to the corresponding period of the prior year, offset by reduced expenses of approximately $2.5 million attributable to the strengthening of the U.S. Dollar exchange rate against certain foreign currencies, as compared to the corresponding period of 2009. Cost of revenue as a percentage of revenue in the Company’s GDT business increased to 69.9% for the year ended December 31, 2011, as compared to 67.4% for the same period of the prior year, primarily due to changes in customer mix, an increase in U.S.-based customer delivery, and a negative impact of approximately $1.3 million due to the decline in the exchange rate of the U.S. Dollar against certain foreign currencies. For the year ended December 31, 2011, GDT cost of revenue was $76.6 million, an increase of $12.0 million, or 18.5%, as compared to $64.6 million for the same period of 2010. This increase was primarily associated with the $13.6 million increase in revenue as compared to the corresponding period of the prior year, and to a lesser extent the impact of changes in service mix. The increase is inclusive of a negative impact of approximately $1.3 million due to the decline in the exchange rate of the U.S. Dollar against certain foreign currencies. In 2010, the cost of revenue as a percentage of revenue in the Company’s GDT business increased to 67.4% for the year ended December 31, 2010, as compared to 64.9% for the same period of the prior year, primarily due to changes in customer mix and an increase in U.S.-based customer delivery. In 2010, GDT cost of revenue was $64.6 million, an increase of $9.9 million, or 18.2%, as compared to $54.7 million for the same period of 2009. This increase was primarily associated with the $11.7 million increase in revenue as compared to the corresponding period of the prior year. The Company’s GDT business was not materially impacted by foreign currency exchange rate fluctuations in 2010. Cost of revenue as a percentage of revenue in the Company’s Interpretation business decreased to 86.0% for the year ended December 31, 2011, as compared to 86.2% for the same period of the prior year. This decrease is primarily due to higher pricing for a certain large customer, cost savings as a result of service process improvements and increased revenue period-over-period. For the year ended December 31, 2011, cost of revenue was $19.8 million, an increase of $2.8 million, or 16.2%, as compared to $17.0 million for the same period of 2010. This increase was primarily associated with the $3.3 million increase in revenue year-over-year. In 2010, the cost of revenue as a percentage of revenue in the Company’s Interpretation business increased to 86.2% for the year ended December 31, 2010, as compared to 79.9% for the same period of the prior year. This increase reflects the unfavorable impact of pricing and work mix variations in services as compared to the
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Table of Contentscorresponding period of the prior year. For the year ended December 31, 2010, cost of revenue was $17.0 million, a decrease of $1.6 million, or 8.7%, as compared to $18.6 million for the same period of 2009. This decrease was primarily associated with the $3.6 million decrease in revenue year-over-year. The Company’s Interpretation segment is not materially impacted by foreign currency exchange rate fluctuations. Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and associated employee benefits, travel expenses of sales and marketing personnel, promotional expenses, sales force automation expense, training, and the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs. The following table shows sales and marketing expenses, the dollar change from the prior year and as a percentage of revenue for the years ended December 31, 2011, 2010 and 2009, respectively:
For the year ended December 31, 2011, sales and marketing expenses increased $2.3 million to $33.6 million as compared to $31.2 million for the year ended December 31, 2010. This increase is primarily attributable to increased compensation and travel costs to support the $22.6 million increase in revenue, year-over-year. Sales and marketing expenses for 2011 were negatively impacted by approximately $664,000 due to fluctuations in foreign currency exchange rates. As a percentage of revenue, sales and marketing expenses increased to 7.8% as compared to 7.7% for the same period of the prior year. This increase is primarily attributable to higher compensation and travel expense, inclusive of the currency impact noted above, to support the $22.6 million increase in revenue year-over-year and investment in future sales and marketing. In 2010, sales and marketing expenses increased $2.4 million to $31.2 million as compared to $28.8 million for the corresponding period of the prior year. This increase is primarily attributable to increased compensation and travel costs to support the $16.0 million increase in revenue, year-over-year. Sales and marketing expenses for 2010 were not materially impacted by fluctuations in foreign currency exchange rates. As a percentage of revenue, sales and marketing expenses increased to 7.7% as compared to 7.4% for the same period of the prior year. This increase is primarily attributable to higher compensation and travel expense to support the $16.0 million increase in revenue year-over-year and investment in future sales and marketing. General and Administrative. General and administrative expenses consist of salaries of the management, purchasing, process and technology, finance and administrative groups, and associated employee benefits and travel; facilities costs; information systems costs; professional fees; business reconfiguration costs and all other site and corporate costs. The following table shows general and administrative expenses, the dollar change from the prior year and as a percentage of revenue for the years ended December 31, 2011, 2010 and 2009, respectively:
For the year ended December 31, 2011, general and administrative expenses increased $960,000 to $75.0 million as compared to $74.1 million for the year ended December 31, 2010. Approximately $1.9 million of this increase was due to the negative impact of the depreciation of the U.S. Dollar against certain foreign exchange currencies as compared to 2010. These increases were partially offset by reduced expenses as the result of cost initiatives implemented in 2011 and 2010, primarily reductions in rent expense. Approximately 54.7% of general and administrative expenses are denominated in non-U.S. Dollars and of that amount a majority of these
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Table of Contentsexpenses related to rent and compensation expense. As a percentage of revenue, general and administrative expenses decreased to 17.5% for the year ended December 31, 2011, as compared to 18.3%, for the same period of the prior year. This decrease is primarily associated with the $22.6 million increase in revenue year-over-year. In 2010, general and administrative expenses remained flat at $74.1 million as compared to the same period of the prior year. The flat general and administrative expense, year-over-year, reflects the Company’s investment in general and administrative infrastructures for the emerging businesses during 2010, offset by the favorable benefit of the restructuring and cost saving initiatives implemented in 2009 and 2010. General and administrative expenses for 2010 were not materially impacted by fluctuations in foreign currency exchange rates. As a percentage of revenue, general and administrative expenses decreased to 18.3% for 2010 as compared to 19.0% for the same period of the prior year. This decrease is primarily associated with the $16.0 million increase in revenue year-over-year. Research and Development. Research and development expenses relate primarily to the Company’s web-based hosted language management technology platform used in the globalization process and the research and development of a globalization management system, its Translation Workspace SaaS-based offering, and development of GeoFluent based on automated machine translation technology licensed from IBM. The cost consists primarily of salaries and associated employee benefits and third-party contractor expenses. The following table shows research and development expenses, the dollar change from the prior year and as a percentage of revenue for the years ended December 31, 2011, 2010 and 2009, respectively:
For the year ended December 31, 2011, research and development expenses increased to $5.8 million as compared to $3.9 million for the year ended December 31, 2010. This increase is primarily attributable to an increase in headcount to support the development of the Company’s web-based hosted language management technology platform, its Translation Workspace SaaS-based offering and development of automated machine translation technology licensed from IBM (known as GeoFluent). Approximately $177,000 of the increase is due to the depreciation of the U.S. Dollar against most foreign currencies year-over-year. In 2010, research and development expenses decreased $146,000 to $3.9 million as compared to $4.0 million for the prior year. This decrease in research and development expenses is primarily the result of an increase in the internal and external capitalized costs for the development of the Company’s web-based hosted language management technology platform and new SaaS-based offerings. Research and development expenses for 2010 were not materially impacted by fluctuations in foreign currency exchange rates. Depreciation and Amortization. Depreciation and amortization expense relates to property and equipment that is being recognized over the estimated useful lives of the assets using the straight-line method. The following table shows depreciation and amortization expense, the dollar change from the prior year and as a percentage of revenue for the years ended December 31, 2011, 2010 and 2009, respectively:
For the year ended December 31, 2011, depreciation and amortization expense increased by $1.1 million to $6.0 million as compared to $4.9 million for the year ended December 31, 2010. This increase is primarily the result of depreciation of the increased investment in internal and external capitalized costs for the Company’s
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Table of Contentsweb-based hosted management technology platform, its Translation Workspace SaaS-based offering and its customizable real-time automated machine translation technology known as GeoFluent. Approximately $117,000 of the increase is due to the depreciation of the U.S. Dollar against most foreign currencies, year-over-year. In 2010, depreciation and amortization expense increased by $282,000 to $4.9 million as compared to $4.6 million for the prior year. This increase is primarily the result of the depreciation of increased internal and external capitalized costs for the development of the Company’s web-based hosted management technology platform and SaaS-based offering. Depreciation and amortization expense for 2010 was not materially impacted by fluctuations in foreign currency exchange rates. Amortization of Acquisition-related Intangible Assets. Amortization of acquisition-related intangible assets consists of the amortization of identifiable intangible assets from acquired businesses. Amortization expense for 2011, 2010 and 2009 of $2.3 million, $4.9 million and $5.5 million, respectively, relates to the amortization of identifiable intangible assets acquired from BGS. Interest Expense. Interest expense represents interest paid or payable on debt and the amortization of deferred financing costs. The following table shows interest expense, dollar changes from the prior year and as a percentage of revenue for the years ended December 31, 2011, 2010 and 2009, respectively:
For the year ended December 31, 2011, interest expense decreased $428,000 to $822,000 as compared to $1.3 million for the year ended December 31, 2010. The decrease reflects the impact of lower interest rates and lower amortization of deferred financing costs in 2011 as compared to 2010 as well as the impact of the maturity of the Company’s interest rate swap in July 2010. In 2010, interest expense decreased $704,000 to $1.3 million, as compared to $2.0 million for the year ended December 31, 2009. The decrease reflects lower average borrowings and lower interest rates in 2010 as compared to 2009. In addition, interest expense for 2009 includes the effect of the interest rate swap. On July 20, 2007, the Company entered into a three-year amortizing interest rate swap with a notional amount of $20.0 million that corresponds to a portion of the Company’s floating rate credit facility. On July 31, 2010, the Company’s interest rate swap matured. The notional amount effectively converted that portion of the Company’s total floating rate credit facility to fixed rate debt. Other Expense, Net. Other (income) expense, net primarily reflects the foreign currency transaction gains or losses arising from exchange rate fluctuations on transactions denominated in currencies other than the functional currencies of the countries in which the transactions are recorded. For the year ended December 31, 2011, the Company recognized $3.2 million in other expense, net, due to $1.1 million of foreign currency transaction losses attributable to differences among the Euro and other currencies against the U.S. Dollar in the periods, as compared to the net position and variance during the corresponding periods of the prior year and $607,000 realized foreign currency losses on forward contracts. In addition, other expense, net for the year ended December 31, 2011 includes $2.0 million relating to the release of indemnified reserves for uncertain tax positions related to the Bowne Global Solutions (“BGS”) acquisition from Bowne & Co., Inc. (which has since been acquired by R.R. Donnelley & Sons Co.). A corresponding $2.0 million benefit was recorded in the provision for income taxes for the reduction of the indemnified reserves. In addition, other expense, net for the year ended December 31, 2011 includes $434,000 for the release of reserves related to uncertain pre-BGS acquisition property-related tax risks. In 2010, the Company recognized $1.7 million in other expense, net, primarily due to foreign currency transaction losses, as a result of the U.S. Dollar’s strengthening against certain foreign currencies, as compared to the net position and variance during the corresponding periods of prior year. In 2009, the Company recognized
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Table of Contents$3.7 million in other expense, net, primarily due to $2.6 million of foreign currency transaction losses, as a result of the U.S. Dollar’s strengthening against certain foreign currencies, as compared to the net position and variance during the corresponding periods of prior year, partially offset by $1.4 million relating to the release of indemnified reserves for uncertain tax positions related to the BGS acquisition. A corresponding $1.4 million benefit was recorded in the provision for income taxes for the reduction of the indemnified reserves. Provision for (Benefit from) Income Taxes. The following table shows the provision for income taxes and the effective income tax rate for the years ended December 31, 2011, 2010 and 2009, respectively:
The income tax provision decreased $1.5 million to a benefit of $(71,000) in 2011 from $1.4 million in 2010. The 2011 provision for income taxes is primarily attributable to $1.7 million of current income tax expense resulting from profits in various foreign jurisdictions, $303,000 of deferred tax expense in foreign jurisdictions, a benefit of $2.0 million from the release of indemnified reserves for uncertain tax positions related to the BGS acquisition and a benefit of $415,000 from the receipt of a tax refund in South Korea. The Company recognizes tax reserves for uncertainty in income taxes and adjusts these reserves when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may be materially different from our current estimates. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined. The Company’s unrecognized tax benefits include transfer pricing uncertainties from allocation of income between jurisdictions. Lionbridge believes that it is reasonably possible that approximately $628,000 of its unrecognized tax benefits, consisting of several items in various jurisdictions, may be recognized by the end of 2012 as a result of a lapse of the statute of limitations. The income tax provision increased $1.6 million to an expense of $1.4 million in 2010 from $(184,000) in 2009. The 2010 provision for income taxes is primarily attributable to $1.7 million of current income tax expense resulting from profits in various foreign jurisdictions, a $753,000 deferred tax benefit in foreign jurisdictions primarily related to the reversal of deferred tax liabilities for acquired intangible assets and the recognition of deferred tax assets, and a $284,000 net increase in the reserve for uncertain tax positions.
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Table of ContentsQuarterly Results of Operations The following tables set forth unaudited consolidated quarterly financial data for the periods indicated. Lionbridge derived this data from its unaudited consolidated financial statements, and, in the opinion of management, they have been prepared on the same basis as Lionbridge’s audited consolidated financial statements for the years ended December 31, 2011 and 2010, and include all adjustments, which consist only of normal recurring adjustments, necessary to present fairly the financial results for the periods. The operating results for any quarter are not necessarily indicative of results for any future period.
Lionbridge has experienced quarter-to-quarter variability in its revenue and operating profit. This variability is due to fluctuations in its clients’ release cycles, the length of its sales cycle, rapid growth, acquisitions, the emerging nature of the markets in which Lionbridge competes, global economic conditions, and exchange rate fluctuations. Lionbridge believes that quarter-to-quarter comparisons of results of operations are not necessarily meaningful. You should not rely on these comparisons as a measure of future performance.
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Table of ContentsOut of Period Adjustments During the three-month interim period ended March 31, 2011, the Company identified certain out of period immaterial errors related to revenue recognition in the fourth quarter of 2010 and certain gross receipts taxes for the period of fiscal years 2007 through 2010. The Company corrected these errors during the three-month interim period ended March 31, 2011, which had the effect of reducing net income by $320,000, comprised of a $108,000 reduction in revenue, a $30,000 increase in cost of revenue and a $182,000 increase in general and administrative expenses. During the three-month interim period ended June 30, 2011, the Company identified certain out of period immaterial errors related to revenue recognition in the fourth quarter of 2010 and first quarter of 2011 and certain property tax accruals for the period of fiscal year 2007 through the first quarter of 2011. The Company corrected these errors during the three-month interim period ended June 30, 2011, which had the effect of decreasing net income by $16,000, comprised of a $210,000 reduction in revenue and a $194,000 decrease in general and administrative expenses. The Company has evaluated these errors and does not believe the amounts are material to any periods impacted and the correction of these errors is not material to the condensed consolidated financial statements for the year ended December 31, 2011 or any interim periods within the 2011 year. Liquidity and Capital Resources The following table shows cash and cash equivalents, working capital, net cash provided by operating activities, net cash used in investing activities, and net cash provided by (used in) financing activities for the years ended December 31, 2011, 2010 and 2009, respectively:
In 2011, Lionbridge’s working capital increased $4.7 million to $45.5 million at December 31, 2011, as compared to $40.8 million at December 31, 2010. The increase was primarily due to increases in accounts receivable and unbilled receivables, and decreases in accounts payable, accrued outsourcing and other current assets, partially offset primarily by a decrease in cash and cash equivalents, other current assets, accrued expenses and deferred revenue. As of December 31, 2011, cash and cash equivalents totaled $25.2 million, a decrease of $3.0 million from $28.2 million at December 31, 2010. The decrease was primarily due to $12.4 million for the purchase of property and equipment, $607,000 of payments of forward contract hedges, partially offset by $9.8 million of cash generated by the business and $104,000 of cash received from the issuance of common stock under option plans. Accounts receivable and unbilled receivables at December 31, 2011 totaled $79.1 million, an increase of $3.9 million from $75.2 million at December 31, 2010. As of December 31, 2011, other current assets decreased $465,000 to $9.1 million from $9.6 million at December 31, 2010. Current liabilities totaled $67.9 million, a decrease of $4.3 million from $72.2 million at December 31, 2010. In 2010, Lionbridge’s working capital increased $4.6 million to $40.8 million at December 31, 2010, as compared to $36.2 million at December 31, 2009. The increase was primarily due to an increase in cash and cash equivalents, accounts receivable, unbilled receivables, accrued restructuring and other current assets, partially offset primarily by a decrease in accounts payable and deferred revenue.
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Table of ContentsAs of December 31, 2010, cash and cash equivalents totaled $28.2 million, an increase of $774,000 from $27.4 million at December 31, 2009. The increase was primarily due to $8.0 million of cash generated by the business, $814,000 of cash received from forward contract hedges, $701,000 of cash received from the issuance of common stock under option plans, partially offset by $8.8 million used to purchase property and equipment. Accounts receivable and unbilled receivables at December 31, 2010 totaled $75.2 million, an increase of $2.5 million from $72.7 million at December 31, 2009. As of December 31, 2010, other current assets increased $1.3 million to $9.6 million from $8.3 million at December 31, 2009. Current liabilities totaled $72.2 million, a decrease of $57,000 from $72.3 million at December 31, 2009. Net cash provided by operating activities was $9.8 million in 2011 as compared to $8.0 million in 2010. The primary source of cash in 2011 was $1.7 million of net income (inclusive of $15.1 million in depreciation, amortization, stock-based compensation and other non-cash expenses), a $4.3 million net increase in accounts receivable and unbilled receivables, a $2.9 million decrease in other operating assets, a $5.6 million decrease in accounts payable, accrued expenses and deferred revenue. In 2010, net cash provided by operating activities was $8.0 million as compared to $23.2 million in 2009. The primary source of cash in 2010 was a $3.2 million increase in accrued restructuring and a $2.4 million decrease in other assets, partially offset by other changes including a net loss of $1.3 million (net of $13.7 million in depreciation, amortization and other non-cash expenses and gains), a $3.6 million increase in accounts receivable, a $528,000 increase in unbilled receivables a $349,000 decrease in accounts payable, accrued expenses and deferred revenue. Lionbridge has not experienced any significant trends in accounts receivable and unbilled receivables other than changes relative to the change in revenue, as previously noted. Fluctuations in accounts receivable from period to period relative to changes in revenue are a result of timing of customer invoicing and receipt of payments from customers. Net cash used in investing activities increased $5.1 million to $13.0 million in 2011 as compared to $8.0 million in 2010. The primary use of cash in investing activity in 2011 was $12.4 million for the purchase of property and equipment and $607,000 in payments of forward contract hedges. In 2010, net cash used in investing activities increased $4.9 million to $8.0 million as compared to $3.1 million in 2009. The primary use of cash in investing activity in 2010 was $8.8 million for the purchase of property and equipment, partially offset by $814,000 in proceeds from forward contract hedges. The primary use of cash in investing activity in 2009 was $3.1 million for the purchase of property and equipment. Net cash provided by financing activities decreased $600,000 to $90,000 in 2011 as compared to $690,000 in 2010. Cash provided by financing activities consisted of $104,000 of proceeds from the issuance of common stock under option plans and $14,000 for payments of capital lease obligations. In 2010, net cash provided by financing activities increased $31.8 million to $690,000 as compared to $31.1 million of net cash used in financing activities for the corresponding period of 2009. Cash provided by financing activities consisted of $701,000 of proceeds from the issuance of common stock under option plans and $11,000 for payments of capital lease obligations. Net cash used in financing activities in 2009 primarily included $31.0 million of payments of long-term debt, $3.5 million of payments of short-term debt, and $3.5 million of proceeds from the issuance of short-term debt. On May 5, 2010, Lionbridge filed with the Securities and Exchange Commission a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended (SEC File No. 333-166529), covering the registration of debt and equity securities (the “Securities”), in an aggregate amount of $100.0 million. The registration statement was declared effective by the Commission on May 13, 2010. The Company may offer
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Table of Contentsthese Securities from time to time in amounts, at prices and on terms to be determined at the time of sale. The Company believes that with this Registration Statement, it has additional financing flexibility to meet potential future funding requirements and the ability to take advantage of potentially attractive capital market conditions. On September 30, 2010, the Company entered into Amendment No. 3 (the “Amendment”) with HSBC Bank USA, National Association (“HSBC”) to extend the term for an additional four years to 2014 on its revolving credit agreement dated as of December 31, 2006, as the amended to date (the “Credit Agreement”), which was scheduled to expire in December 2011. In addition, under the terms of the Amendment, the Credit Agreement was amended to reflect that HSBC is the sole lender under the Credit Agreement. The Credit Agreement provides for a $50.0 million revolving credit facility and establishes interest rates in the range of LIBOR plus 1.75% – 2.50%, depending on certain conditions. At December 31, 2011, $24.7 million was outstanding with an interest rate of 2.5%. The Company is required to maintain leverage and fixed charge coverage ratios and to comply with other covenants in its revolving credit agreement. The leverage ratio is calculated by dividing the Company’s total outstanding indebtedness at each quarter end by its adjusted earnings before interest, taxes, depreciation and certain other non-cash expenses during the four consecutive quarterly periods then ended. The fixed charge coverage ratio is calculated by dividing the Company’s adjusted earnings before interest, taxes, depreciation and certain other non-cash expenses minus capital expenditures for each consecutive four quarterly periods by its interest paid and cash paid on taxes during each such consecutive four quarterly periods. The Company was in compliance with both of these ratios as well as all other bank covenants as of December 31, 2011. Lionbridge anticipates that its present cash and cash equivalents position and available financing under its Credit Agreement should provide adequate cash to fund its currently anticipated cash needs for at least the next twelve months. Contractual Obligations The following table summarizes Lionbridge’s contractual cash obligations at December 31, 2011 and the effect such obligations are expected to have on its liquidity and cash flow in future periods:
As of December 31, 2011, the total amount of net unrecognized tax benefits for uncertain tax positions and the accrual for the related interest and penalties was $6.2 million. Lionbridge believes that it is reasonably possible that approximately $628,000 of its unrecognized tax position, consisting of several items in various jurisdictions, may be recognized by the end of 2012 as a result of a lapse of the statute of limitations. As of December 31, 2011, Lionbridge did not have any material purchase obligations, or material long-term commitments other than those included in the table above reflected on its consolidated balance sheet. Off-Balance Sheet Arrangements The Company does not have any special purpose entities or off-balance sheet financing arrangements.
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Table of ContentsRecently Issued Accounting Pronouncements In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”), authoritative guidance which requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendment will be effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements. In September 2011, the FASB issued ASU 2011-09, “Compensation—Retirement Benefits—Multiemployer Plans” (“ASU 2011-09”) which pertains to an employer’s participation in multiemployer benefit plans, amending ASC Subtopic 715-80, “Disclosures about an Employer’s Participation in a Multiemployer Plan”. The amendment enhances the disclosures about significant multiemployer plans in which an employer participates, the level of the employer’s participation, the financial health of the plans and the nature of the employer’s commitments to the plans. The new disclosure requirements are required for fiscal years ending after December 15, 2011. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements. In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”), authoritative guidance which simplifies how entities test goodwill for impairment and permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This authoritative guidance is to be applied for goodwill impairment testing performed for fiscal years beginning after December 15, 2011. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements. In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income: Presentation of Comprehensive Income” (“ASU 2011-05”), authoritative guidance which allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This authoritative guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholder’s equity. This authoritative guidance is to be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 820): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income” (“ASU 2011-12”), which defers the reclassifications from other comprehensive income to net income be presented on the face of the financial statements mandated by ASU 2001-05.Although the Company will need to modify the presentation of certain information to comply with the requirements of this guidance, the Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements. In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement” (“ASU 2011-04”), an amendment to achieve common fair value measurement and disclosure requirements in GAAP and international financial reporting standards (“IFRS”). The amendments explain how to measure fair value and will improve the comparability of fair value measurement presented and disclosed in financial statements prepared in accordance with GAAP and IFRS. This authoritative guidance is to be applied prospectively and is effective during interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements. In December 2010, the FASB issued ASU 2010-28, “Intangibles—Goodwill and Other” “(ASU 2010-28”)”, an amendment to goodwill impairment testing. The amendment modifies Step 1 of the goodwill impairment test
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Table of Contentsfor reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments were first effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements since it did not have any reporting units with zero or negative carrying amounts. In January 2010, the FASB issued ASU 2010-06, “Value Measurements and Disclosures—Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”), that amends ASC Subtopic 820-10, “Fair Value Measurements and Disclosures—Overall”, and requires reporting entities to disclose (1) the amount of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, and (2) separate information about purchases, sales, issuance and settlements in the reconciliation of fair value measurements using significant unobservable inputs (Level 3). ASU 2010-06 also requires reporting entities to provide fair value measurement disclosures for each class of assets and liabilities and disclose the inputs and valuation techniques for fair value measurements that fall within Levels 2 and 3 of the fair value hierarchy. These disclosures and clarification were effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuance, and settlements in the rollforward of activity in Level 3 fair value measurements. These additional disclosures were effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company adopted the further provisions of ASU 2010-06 on January 1, 2011 which did not have a material impact on its consolidated financial statements. In October 2009, the Emerging Issues Task Force (“EITF”) reached final consensus on ASU 2009-13, “Revenue Recognition: Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”), which addresses the issue related to revenue arrangements with multiple deliverables. This issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting. This issue is effective for the Company’s revenue arrangements entered into or materially modified on or after January 1, 2011. The Company adopted this guidance and concluded it did not have a material impact on its consolidated financial statements.
Lionbridge conducts its business globally and its earnings and cash flows are exposed to market risk from changes in interest rates and currency exchange rates. The Company manages its risk to foreign currency transaction exposure and interest rates through risk management programs that include the use of derivative financial instruments. Lionbridge operates these programs pursuant to documented corporate risk management policies. Lionbridge does not enter into any derivative transactions for speculative purposes. Gains and losses on derivative financial instruments substantially offset gains and losses on underlying hedged exposures. Interest Rate Risk. Lionbridge is exposed to market risk from changes in interest rates with respect to its revolving loan facility which bears interest at Prime or LIBOR (at the Company’s discretion) plus an applicable margin based on certain financial covenants. As of December 31, 2011, $24.7 million was outstanding under this facility. A hypothetical 10% increase or decrease in interest rates would have approximately a $63,000 impact on the Company’s interest expense based on the $24.7 million outstanding at December 31, 2011 with an interest rate of 2.5%. On July 20, 2007, the Company entered into a three-year amortizing interest rate swap with a notional amount of $20.0 million that corresponds to a portion of the Company’s floating rate credit facility. On July 31, 2010, the interest rate swap matured. The notional amount effectively converted that portion of the Company’s total floating rate credit facility to fixed rate debt. Additionally, Lionbridge is exposed to market risk
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Table of Contentsthrough its investing activities. The Company’s portfolio consists primarily of short-term time deposits with investment grade banks and maturities less than 90 days. A hypothetical 10% increase or decrease in interest rates would not have a material impact on the carrying value of Lionbridge’s investments due to their immediately available liquidity. Foreign Currency Exchange Rate Risk. Lionbridge conducts a large portion of its business in international markets. Although a majority of Lionbridge’s contracts with clients are denominated in U.S. dollars, 64% and 66% of its costs and expenses in 2011 and 2010, respectively, were denominated in foreign currencies, primarily operating expenses associated with cost of revenue, sales and marketing and general and administrative. In addition, 17% of the Company’s consolidated tangible assets were subject to foreign currency exchange fluctuations as of each of December 31, 2011 and 2010, while 16% of its consolidated liabilities were exposed to foreign currency exchange fluctuations as of each of December 31, 2011 and 2010. In addition, net inter-company balances denominated in currencies other than the functional currency of the respective entity were approximately $48.4 million and $57.9 million as of December 31, 2011 and 2010, respectively. The principal foreign currency applicable to our business is the Euro. The Company has implemented a risk management program that partially mitigates its exposure to assets or liabilities (primarily cash, accounts receivable, accounts payable and inter-company balances) denominated in currencies other than the functional currency of the respective entity which includes the option to use derivative financial instruments principally foreign exchange forward contracts. These foreign exchange forward contracts generally have less than 90-day terms and do not qualify for hedge accounting under the ASC 815 guidance. The Company had no foreign exchange forward contracts outstanding at December 31, 2011.
Lionbridge’s consolidated financial statements together with the related notes and the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, are set forth beginning on page 50 of this Form 10-K.
None.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures. Lionbridge maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as the Company’s are designed to do, and management necessarily was required to apply its judgment in evaluating the risk related to controls and procedures. In connection with the preparation of this Form 10-K, as of December 31, 2011, an evaluation was performed under the supervision and with the participation of management, including the CEO and CFO, regarding the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon this evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2011. This conclusion was communicated to the Audit Committee.
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Table of ContentsManagement’s Annual Report on Internal Control Over Financial Reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in 13a-15(f) under the Exchange Act. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The Company’s management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making its assessment of internal controls over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in Internal Control-Integrated Framework. Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective at December 31, 2011 based on the criteria set forth in Internal Control-Integrated Framework. The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of our internal control over financial reporting, as stated in their report which appears herein. Changes in Internal Control over Financial Reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2011 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
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Table of ContentsPART III Anything herein to the contrary notwithstanding, in no event whatsoever are the sections entitled “Nominating and Compensation Committee Report on Executive Compensation” and “Audit Committee Report” to be incorporated by reference herein from Lionbridge’s proxy statement in connection with its annual meeting of stockholders expected to be held in the second quarter of 2012.
Certain information relating to directors and executive officers of Lionbridge is incorporated by reference herein from Lionbridge’s proxy statement in connection with its annual meeting of stockholders expected to be held in the second quarter of 2012, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of Lionbridge’s fiscal year ended December 31, 2011. Lionbridge has adopted a code of conduct that applies to all employees, including its principal executive officer, principal financial officer, and principal accounting officer. A copy of the code of ethics is available on Lionbridge’s Web site.
Certain information relating to remuneration of directors and executive officers and other transactions involving management is incorporated by reference herein from Lionbridge’s proxy statement in connection with its annual meeting of stockholders expected to be held in the second quarter of 2012, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of Lionbridge’s year ended December 31, 2011.
Certain information relating to security ownership of certain beneficial owners and management and information on securities for issuance under equity compensation plans is incorporated by reference herein from Lionbridge’s proxy statement in connection with its annual meeting of stockholders expected to be held in the second quarter of 2012, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of Lionbridge’s fiscal year ended December 31, 2011.
Certain information relating to certain relationships and related transactions, and director independence is incorporated by reference herein from Lionbridge’s proxy statement in connection with its annual meeting of stockholders expected to be held in the second quarter of 2012, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of Lionbridge’s year ended December 31, 2011.
Information regarding principal auditor fees and services is set forth under “Principal Auditor Fees and Services” in Lionbridge’s proxy statement in connection with its annual meeting of stockholders expected to be held in the second quarter of 2012, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of Lionbridge’s year ended December 31, 2011.
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Table of ContentsPART IV
Financial Statement Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the accompanying Consolidated Financial Statements or notes thereto.
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Table of ContentsReport of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Lionbridge Technologies, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Lionbridge Technologies, Inc. and its subsidiaries at December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts March 14, 2012
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Table of ContentsCONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data)
The accompanying notes are an integral part of the consolidated financial statements.
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Table of ContentsCONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share amounts)
The accompanying notes are an integral part of the consolidated financial statements.
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Table of ContentsCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Amounts in thousands, except number of shares)
The accompanying notes are an integral part of the consolidated financial statements.
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Table of ContentsCONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
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