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MKS Instruments 10-Q 2010 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
FORM 10-Q
(MARK
ONE)
For the quarterly period ended June 30, 2010
or
For the transition period from to
Commission file number 0-23621
MKS INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code (978) 645-5500
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 þ No o
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 þ
No o
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 the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of July 30, 2010 the registrant had 50,175,005 shares of common stock outstanding.
MKS INSTRUMENTS, INC.
FORM 10-Q INDEX
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MKS INSTRUMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)
The accompanying notes are an integral part of the consolidated financial statements.
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MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
The accompanying notes are an integral part of the consolidated financial statements.
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MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
The accompanying notes are an integral part of the consolidated financial statements.
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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per share data)
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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued) (Tables in thousands, except share and per share data)
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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued) (Tables in thousands, except share and per share data)
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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued) (Tables in thousands, except share and per share data) Assets and liabilities of the Company measured at fair value on a recurring basis as of June
30, 2010, are summarized as follows:
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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued) (Tables in thousands, except share and per share data)
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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued) (Tables in thousands, except share and per share data)
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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued) (Tables in thousands, except share and per share data)
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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued) (Tables in thousands, except share and per share data)
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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued) (Tables in thousands, except share and per share data)
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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued) (Tables in thousands, except share and per share data)
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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued) (Tables in thousands, except share and per share data)
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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued) (Tables in thousands, except share and per share data)
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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued) (Tables in thousands, except share and per share data)
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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued) (Tables in thousands, except share and per share data)
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MKS INSTRUMENTS, INC.
We believe that this Quarterly Report on Form 10-Q contains “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act. When used herein, the words
“believes,” “anticipates,” “plans,” “expects,” “estimates,” “would,” “will,” “intends” and similar
expressions are intended to identify forward-looking statements. These forward-looking statements
reflect management’s current opinions and are subject to certain risks and uncertainties that could
cause results to differ materially from those stated or implied. While we may elect to update
forward looking statements at some point in the future, we specifically disclaim any obligation to
do so even if our estimates or expectations change. Risks and uncertainties include, but are not
limited to those discussed in our Annual Report on Form 10-K for the year ended December 31, 2009
in the section entitled “Risk Factors” as referenced in Part II, Item 1A “Risk Factors” of this
Quarterly Report on Form 10-Q.
Overview
We are a leading worldwide provider of instruments, subsystems and process control solutions
that measure, control, power, monitor and analyze critical parameters to improve process
performance and productivity of advanced manufacturing processes.
We are managed as one operating segment. We group our products into three product groups:
Instruments and Control Systems, Power and Reactive Gas Products and Vacuum Products. Our products
are derived from our core competencies in pressure measurement and control, materials delivery, gas
composition analysis, control and information technology, power and reactive gas generation and
vacuum technology. Our products are used in diverse markets, applications and processes. Our
primary served markets are manufacturers of capital equipment for semiconductor devices, and for
other thin film applications including flat panel displays, light-emitting diodes (“LEDs”), solar
cells, data storage media and other advanced coatings. We also leverage our technology in other
markets with advanced manufacturing applications including medical equipment, biopharm
manufacturing, energy generation and environmental monitoring.
We have a diverse base of customers that includes manufacturers of semiconductor capital
equipment and semiconductor devices, thin film capital equipment used in the manufacture of flat
panel displays, LEDs, solar cells, data storage media, and other coating applications; and other
industrial, medical, energy generation, environmental monitoring and manufacturing companies; and
university, government and industrial research laboratories. For the six months ended June 30, 2010
and the full year ended December 31, 2009, we estimate that approximately 64% and 52% of our net
sales, respectively, were to semiconductor capital equipment manufacturers and semiconductor device
manufacturers. We expect that sales to semiconductor capital equipment manufacturers and
semiconductor device manufacturers will continue to account for a substantial portion of our sales.
During the second quarter of 2010, we committed to a plan to divest two product lines, as
their growth potential no longer met our long-term strategic objectives. We completed the sale of
one product line, Ion Systems, Inc. (“Ion”), during the second quarter of 2010. The results of
operations of the two product lines have been classified as discontinued operations in the
consolidated statements of operations for all periods presented. The assets and liabilities of
these discontinued product lines have not been reclassified and segregated in the consolidated
balance sheets or consolidated statements of cash flows due to their immaterial amounts.
We have seen an improvement in the global economy in 2010 compared to 2009, which has
contributed to an increase in our business, financial condition and results of operations for the
six months ended June 30, 2010. As a result of the improved global economy, our shipments to
semiconductor capital equipment manufacturers and semiconductor device manufacturers have increased
sequentially over the past twelve months. Product revenues increased 432% for the six months ended
June 30, 2010 compared to the same period for the prior year for these customers. Although our
business levels have increased rapidly, the semiconductor capital equipment industry is subject to
rapid demand shifts, which are difficult to predict, and we are uncertain as to the timing or
extent of further increased demand or any future weakness in the semiconductor capital equipment
industry.
Our product revenues sold to other markets, which exclude semiconductor capital equipment and
semiconductor device product applications, increased 82% for the six months ended June 30, 2010
compared to the same period for the prior year. These advanced and growing markets include LED,
medical, biopharm, environmental, thin films, solar and other markets.
A significant portion of our net sales is to operations in international markets.
International net sales include sales by our foreign subsidiaries, but exclude direct export sales.
For the six months ended June 30, 2010 and the year ended December 31, 2009, international
net sales accounted for approximately 42% and 46% of our net sales, respectively. A
significant portion of our international net sales were sales in Japan. We expect that
international net sales will continue to represent a significant percentage of our total net sales.
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Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America requires management
to make judgments, assumptions and estimates that affect the amounts reported. There have been no
material changes in our critical accounting policies since December 31, 2009. For further
information, please see the discussion of critical accounting policies in our Annual Report on Form
10-K for the year ended December 31, 2009 in the section captioned “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and
Estimates.”
Results of Operations
The following table sets forth, for the periods indicated, the percentage of total net
revenues of certain line items included in MKS’ consolidated statements of operations data.
Net Revenues (dollars in millions)
Product revenues increased $139.2 million and $251.8 million during the three and six months
ended June 30, 2010, respectively, compared to the same periods for the prior year. During 2010, we
have seen a recovery in the global economy which has contributed to an increase in demand for our
products in all of the markets we serve. Our increase in overall product revenues is primarily due
to the increase in worldwide demand from our semiconductor capital equipment manufacturer and
semiconductor device manufacturer customers. The product revenues to these customers increased by
$105.9 million or 467.3% and $190.6 million or 432.1% during the three and six months ended June
30, 2010, respectively, compared to the same periods for the prior year. The product revenues
related to other markets increased by $33.3 million or 89.8% and $61.1 million or 82.5% during the
three and six months ended June 30, 2010, respectively, compared to the same
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periods for the prior year. The increase in demand in our other markets included the LED,
medical, biopharm, environmental, thin films, solar and other markets.
Service revenues consist mainly of fees for services relating to the maintenance and repair of
our products, software maintenance, installation services and training. Service revenue increased
$5.8 million and $13.1 million during the three and six months ended June 30, 2010, respectively,
compared to the same periods for the prior year. The increase is a result of the improvement in the
global economy in 2010 as compared to 2009.
Total international net revenues, including product and service, were $92.6 million and $172.0
million for the three and six months ended June 30, 2010, or 42% of net revenues for both periods,
compared to $35.2 million and $72.0 million or 46.6% and 48.7% of net revenues, for the three and
six months ended June 30, 2009, respectively. The increases are mainly due to an increase in
worldwide demand from our semiconductor capital equipment manufacturer and semiconductor device
manufacturer customers as a result of an improvement in the global economy. The international net
revenues related to other markets also increased compared to the same periods for the prior year.
Gross Profit
Gross profit on product revenues increased 14.1 percentage points for the three months ended
June 30, 2010 compared to the same period for the prior year. The increase is mainly due to an
increase in product revenue volumes which accounted for 10.3 percentage points of the overall
increase since a portion of our overhead costs are fixed, an increase of 3.9 percentage points due
to favorable product mix and an increase of 1.1 percentage points due to lower excess and obsolete
inventory related net charges. These increases were partially offset by a decrease of 1.2
percentage points from increased warranty costs, unfavorable foreign currency fluctuations and
higher overhead spending.
Gross profit on product revenues increased 25.3 percentage points for the six months ended
June 30, 2010 compared to the same period for the prior year. The increase is mainly due to an
increase in product revenue volumes which accounted for 18.2 percentage points of the overall
increase and an increase of 3.2 percentage points due to favorable product mix. In addition, our
gross profit increased by 4.4 percentage points due to lower excess and obsolete inventory related
net charges. This was primarily due to the $12.9 million of special charges we recorded during the
first quarter of 2009 for excess, obsolete and committed inventory purchases primarily due to a
lower future production plan during the first quarter of 2009 in response to the continued weakness
in the markets we serve. These increases were partially offset by a net decrease of 0.5 percentage
points from increased warranty costs, unfavorable foreign currency fluctuations and lower overhead
spending.
Cost of service revenues consists primarily of costs of providing services for repair and
training which includes salaries and related expenses and other fixed costs. Service gross profit
increased by 3.9 percentage points and 8.2 percentage points for the three and six months ended
June 30, 2010, compared to the same periods for the prior year. The increases are mainly a result
of higher service revenues since a portion of our overhead costs are fixed, as well as lower
compensation expense.
Research and Development (dollars in millions)
Research and development expense increased $4.7 million during the three months ended June 30,
2010 compared to the same period for the prior year. The increase includes a $2.6 million increase
in compensation expense, a $1.0 million increase in spending on project materials and a $0.6
million increase in consulting costs. The increase in compensation expense is primarily due to the
restoration of certain employee benefits suspended as part of cost control measures in 2009 and an
increase in incentive compensation
Research and development expense increased $5.8 million during the six months ended June 30,
2010 compared to the same period for the prior year. The increase includes a $2.3 million increase
in compensation expense, a $1.8 million increase in spending on project materials, a $1.3 million
increase in consulting and other costs and a $0.6 million increase in patent and other legal
related costs. The increase in compensation expense is primarily due to an increase in incentive
compensation.
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Our research and development is primarily focused on developing and improving our instruments,
components, subsystems and process control solutions to improve process performance and
productivity.
We have hundreds of products and our research and development efforts primarily consist of a
large number of projects related to these products, none of which is individually material to us.
Current projects typically have a duration of 3 to 30 months depending upon whether the product is
an enhancement of existing technology or a new product. Our current initiatives include projects to
enhance the performance characteristics of older products, to develop new products and to integrate
various technologies into subsystems. These projects support in large part the transition in the
semiconductor industry to smaller integrated circuit geometries and in the flat panel display and
solar markets to larger substrate sizes, which require more advanced process control technology.
Research and development expenses consist primarily of salaries and related expenses for personnel
engaged in research and development, fees paid to consultants, material costs for prototypes and
other expenses related to the design, development, testing and enhancement of our products as well
as legal costs associated with maintaining and defending our intellectual property.
We believe that the continued investment in research and development and ongoing development
of new products are essential to the expansion of our markets, and expect to continue to make
significant investment in research and development activities. We are subject to risks if products
are not developed in a timely manner, due to rapidly changing customer requirements and competitive
threats from other companies and technologies. Our success primarily depends on our products being
designed into new generations of equipment for the semiconductor industry. We develop products that
are technologically advanced so that they are positioned to be chosen for use in each successive
generation of semiconductor capital equipment. If our products are not chosen to be designed into
our customers’ products, our net revenues may be reduced during the lifespan of those products.
Selling, General and Administrative (dollars in millions)
Selling, general and administrative expenses increased $6.3 million for the three months ended
June 30, 2010 compared to the same period for the prior year. The increase includes a $5.3 million
increase in compensation expense, a $1.2 million unfavorable impact from foreign exchange
fluctuations and a $1.1 million increase in consulting, travel and professional fees partially
offset by a $0.9 million decrease in the provision for uncollectable accounts and a $0.7 decrease
in facility and depreciation expenses. The increase in compensation expense is primarily due to the
restoration of certain employee benefits suspended as part of cost control measures in 2009 and an
increase in incentive compensation.
Selling, general and administrative expenses increased $7.4 million for the six months ended
June 30, 2010 compared to the same period for the prior year. The increase includes a $7.9 million
increase in compensation expense, a $1.4 million unfavorable impact from foreign exchange
fluctuations and a $1.1 million increase in consulting, travel and professional fees partially
offset by a $1.9 million decrease in the provision for uncollectable accounts and a $0.9 million
decrease in facility and depreciation expenses. The increase in compensation expense is primarily
due to an increase in incentive compensation.
Amortization of Acquired Intangible Assets (dollars in millions)
Amortization expense for the three and six months ended June 30, 2010 decreased $0.4 million
and $0.6 million, respectively, compared to the same periods for the prior year. The decrease is a
result of certain acquired intangible assets that became fully amortized during 2009 as well as the
write-down of certain intangibles of $11.7 million recorded in the second quarter of 2009.
Goodwill and Asset Impairment Charges (dollars in millions)
During the second quarter of 2009, we reviewed our goodwill and long-lived assets for
potential impairment as a result of current market and economic conditions that contributed to a
decline in our forecasted business levels, and the excess of our consolidated net assets over our
market capitalization for a sustained period of time. As a result of this impairment assessment, we
recorded non-cash goodwill impairment charges of $139.5 million to continuing operations. In
addition, as a result of a facility consolidation in Asia in the second quarter of 2009, we
recorded a non-cash impairment charge of $3.5 million to continuing operations resulting from the
write-down of the value of a building to its estimated fair value.
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Gain on Sale of Asset (dollars in millions)
During the first quarter of 2010, we sold two vacated facilities for proceeds of $2.1 million and
recorded a $0.7 million net gain on the sale.
Restructuring (dollars in millions)
In the first quarter of 2009, we initiated a restructuring plan as a result of the global
financial crisis and its impact on our semiconductor equipment OEM customers and the other markets
we serve. The plan included a reduction in our worldwide headcount of approximately 630 people,
which represented approximately 24% of our global workforce. The restructuring charges of $5.4
million for the six months ended June 30, 2009 were primarily for severance and other charges
associated with the reductions in workforce.
Interest Income, Net (dollars in millions)
Interest income, net increased $0.1 million in the three months ended June 30, 2010 compared
to the same period in 2009, and decreased $0.6 million in the six months ended June 30, 2010
compared to the same period for the prior year. The $0.6 million decrease is related to lower
interest rates and a change in the mix of the investment portfolio in the six months ended June 30,
2010 compared to the same period for the prior year.
Provision (Benefit) for Income Taxes (dollars in millions)
Our effective tax rate for the three and six months ended June 30, 2010 was 34% and 33%,
respectively. The effective tax rate for the six months ended June 30, 2010 and the related income
tax provision was lower than the U.S. statutory tax rate primarily due to geographic mix of income
and profits earned by our international subsidiaries being taxed at rates lower than the U.S.
statutory rate. Our effective tax rate for the three and six months ended June 30, 2009 was 5.8%
and 16.4%, respectively. The effective tax rate for the six months ended June 30, 2009 and the
related tax benefit are lower than the U.S. statutory tax rate primarily due to non-deductible
goodwill impairment charges of $139.4 million during the second quarter of 2009.
At June 30, 2010, the total amount of gross unrecognized tax benefits, which excludes interest
and penalties, was approximately $10.7 million. At December 31, 2009, the total amount of gross
unrecognized tax benefits, which excludes interest and penalties, was approximately $9.1 million.
The net increase from December 31, 2009 was primarily attributable to an increase in reserves for
existing uncertain tax positions. If these benefits were recognized in a future period, the timing
of which is not estimable, the net unrecognized tax benefit of $6.5 million, excluding interest and
penalties, would impact our effective tax rate. We accrue interest expense and, if applicable,
penalties for any uncertain tax positions. Interest and penalties are classified as a component of
income tax expense. At June 30, 2010 and December 31, 2009, we had accrued interest on unrecognized
tax benefits of approximately $0.9 million and $0.7 million, respectively.
We and our subsidiaries are subject to examination by federal, state and foreign tax
authorities. The statute of limitations for our tax filings varies by tax jurisdiction between
fiscal years 2001 through present.
Our future effective income tax rate depends on various factors, such as tax legislation and
the geographic composition of our pre-tax income. We monitor these factors and timely adjust our
effective tax rate accordingly. Additionally, the effective tax rate could be adversely affected by
changes in the valuation of deferred tax assets and liabilities. In particular, the carrying value
of deferred tax assets, which are predominantly in the United States, is dependent on our ability
to generate sufficient future taxable income in the United States. While we believe we have
adequately provided for all tax positions, amounts asserted by taxing authorities could materially
differ from our accrued positions as a result of uncertain and complex application of tax
regulations. Additionally, the recognition and measurement of certain tax benefits include
estimates and judgment by management and inherently includes subjectivity. Accordingly, we could
record
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additional provisions to U.S. federal, state, and foreign tax-related matters in the future
as we revise estimates or settle or otherwise resolve the underlying matters.
Discontinued Operations
During the second quarter of 2010, we committed to a plan to divest two product lines as their
growth potential no longer met our long-term strategic objectives. We completed the sale of one
product line, Ion, on May 17, 2010 for $15.1 million of net cash proceeds after expenses and
recorded a pre-tax gain on the sale of $4.2 million. For the three and six month periods ended June
30, 2009, the loss from discontinued operations includes $65.5 million of goodwill and intangible
asset impairment charges. These charges were a result of the interim impairment assessment
performed on April 30, 2009.
The two product lines have been accounted for as discontinued operations. Accordingly, their
results of operations have been reclassified to discontinued operations in the consolidated
statements of operations for all periods presented. The assets and liabilities of these
discontinued product lines have not been reclassified or segregated in the consolidated balance
sheets or consolidated statements of cash flows due to their immaterial amounts.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments totaled $323.4 million at June 30, 2010
compared to $271.8 million at December 31, 2009. This increase was mainly attributable to our net
income and net proceeds from the sale of a discontinued product line.
Net cash provided by operating activities of $39.2 million for the six months ended June 30,
2010, resulted mainly from net income of $68.0 million, a $41.7 million increase in operating
liabilities, non-cash charges of $11.3 million for depreciation, amortization and stock-based
compensation and a $4.9 million provision for excess and obsolete inventory, partially offset by a
net increase of $83.5 million in operating assets and a $4.2 million gain on the disposal of a
discontinued product line. The increase in operating liabilities is caused by a $14.0 million
increase in accounts payable related to inventory purchases to support our increased business
levels and an increase of $27.7 million in accrued compensation related to increases in incentive
compensation and accrued salaries and benefits. The $83.5 million net increase in operating assets
consisted primarily of a $58.0 million increase in trade accounts receivable and an increase of
$28.3 million of inventory as a result of our increased business levels.
Net cash used in operating activities of $5.9 million for the six months ended June 30, 2009,
resulted mainly from a net loss of $223.6 million, a $14.3 million decrease in operating
liabilities and a $5.2 million increase in net operating assets, partially offset by a $14.8
million provision for excess or obsolete inventory, non-cash charges of $208.5 million for
impairment of goodwill, intangibles and other long-lived assets, $10.0 million for depreciation and
amortization and $4.2 million for stock-based compensation. The net decrease in operating
liabilities is due to a decrease of $5.9 million in non-current income taxes payable and a decrease
of $4.2 million in accrued compensation. The decrease in accrued compensation is primarily as a
result of the workforce reduction and mandatory time-off. The $5.2 million increase in operating
assets consisted primarily of a $29.5 million increase in income taxes receivable due to the
operating losses, partially offset by a $26.5 million decrease in accounts receivable as a result
of lower revenue and improved collections.
Net cash provided by investing activities of $1.9 million for the six months ended June 30,
2010, resulted primarily from $15.1 million in net proceeds from the sale of a discontinued product
line and proceeds of $2.1 million from the sale of two vacated facilities, partially offset by $7.2
million of net purchases of available-for-sale investments and by $6.6 million in purchases of
property, plant and equipment. Net cash provided by investing activities of $34.6 million for the
six months ended June 30, 2009, resulted primarily from net sales of $36.3 million of
available-for-sale investments, offset by $2.4 million in purchases of property, plant and
equipment.
Net cash provided by financing activities was $2.4 million for the six months ended June 30,
2010 and consisted primarily of $2.3 million of net proceeds related to stock-based compensation.
Net cash used in financing activities was $9.3 million for the six months ended June 30, 2009 and
consisted primarily of $8.0 million in net payments on short-term borrowings.
On July 31, 2010, the Optional Advance Demand Grid Note dated August 3, 2004 expired without
renewal. The unsecured short-term LIBOR based loan agreement was with HSBC Bank USA and was
utilized primarily by our Japanese subsidiary for short-term liquidity purposes and had a maximum
borrowing amount of $5.0 million. We did not have outstanding borrowings under this line of credit
at June 30, 2010 or December 31, 2009.
Additionally, our Japanese subsidiary has lines of credit and short-term borrowing
arrangements with two financial institutions which provide for aggregate borrowings as of June 30,
2010 of up to an equivalent of $28.2 million, which generally expire and are renewed at three month
intervals. At June 30, 2010 and December 31, 2009, total borrowings outstanding under these
arrangements were $13.0
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million and $12.9 million, respectively, at interest rates ranging from
0.73% to 1.47% at June 30, 2010 and at interest rates ranging from 0.76% to 1.48% at December 31,
2009.
We believe that our current cash position and available borrowings will be sufficient to
satisfy our estimated working capital and planned capital expenditure requirements through at least
the next 12 months and the foreseeable future.
Off-Balance Sheet Arrangements
We do not have any financial partnerships with unconsolidated entities, such as entities often
referred to as structured finance, special purpose entities or variable interest entities, which
are often established for the purpose of facilitating off-balance sheet arrangements or for other
contractually narrow or limited purposes. Accordingly, we have no off-balance sheet arrangements
that have or are reasonably expected to have a current or future effect on our financial condition,
results of operations, liquidity, capital expenditures or capital resources that are material to
investors.
Recently Issued Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued updated guidance to
amend the disclosure requirements related to recurring and nonrecurring fair value measurements.
This update requires new disclosures on significant transfers of assets and liabilities in and out
of Level 1 and Level 2 of the fair value hierarchy (including the reasons for these transfers) and
also requires a reconciliation of recurring Level 3 measurements about purchases, sales, issuances
and settlements on a gross basis. In addition to these new disclosure requirements, this update
clarifies certain existing disclosure requirements. For example, this update clarifies that
reporting entities are required to provide fair value measurement disclosures for each class of
assets and liabilities rather than each major category of assets and liabilities. This update also
clarifies the requirement for entities to disclose information about both the valuation techniques
and inputs used in estimating Level 2 and Level 3 fair value measurements. This update is effective
for companies with interim and annual reporting periods after December 15, 2009, except for the
requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a
gross basis, which will become effective for interim and annual reporting periods beginning after
December 15, 2010. We adopted the updated guidance in the first quarter of 2010 and the adoption
did not have an impact on our financial position, results of operations, or cash flows.
In October 2009, the FASB issued guidance that establishes the accounting and reporting
provisions for arrangements including multiple revenue-generating activities. This guidance
provides amendments to the criteria for separating deliverables, measuring and allocating
arrangement consideration to one or more units of accounting. The amendments in this guidance also
establish a selling price hierarchy for determining the selling price of a deliverable.
Significantly enhanced disclosures are also required to provide information about a vendor’s
multiple-deliverable revenue arrangements, including information about the nature and terms,
significant deliverables, and its performance within arrangements. The amendments also require
providing information about the significant judgments made and changes to those judgments and about
how the application of the relative selling-price method affects the timing or amount of revenue
recognition. The amendments in this guidance are effective prospectively for revenue arrangements
entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early
adoption is permitted. We are currently evaluating the potential impact of this new guidance on our
consolidated financial statements.
In October 2009, the FASB issued guidance that changes the accounting model for revenue
arrangements that include both tangible products and software elements that are “essential to the
functionality,” and scopes these products out of current software revenue guidance. The new
guidance will include factors to help companies determine what software elements are considered
“essential to the functionality.” The amendments will now subject software-enabled products to
other revenue guidance and disclosure requirements, such as guidance surrounding revenue
arrangements with multiple-deliverables. The amendments in this guidance are effective
prospectively for revenue arrangements entered into or materially modified in the fiscal years
beginning on or after June 15, 2010. Early adoption is permitted. We are currently evaluating the
potential impact of this new guidance on our consolidated financial statements.
Information concerning market risk is contained in the section entitled “Quantitative and
Qualitative Disclosures About Market Risk” contained in our Annual Report on Form 10-K for the year
ended December 31, 2009 filed with the Securities and Exchange Commission on February 26, 2010.
There were no material changes in our exposure to market risk from December 31, 2009.
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Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2010.
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other
procedures of an issuer that are designed to ensure that information required to be disclosed by
the issuer in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the issuer’s management,
including its principal executive and principal financial officers, as appropriate to allow timely
decisions regarding required disclosure. Management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the evaluation of our disclosure
controls and procedures as of June 30, 2010, our Chief Executive Officer and Chief Financial
Officer concluded that, as of such date, our disclosure controls and procedures were effective at
the reasonable assurance level to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules and forms and is
accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2010 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are subject to various legal proceedings and claims, which have arisen in the ordinary
course of business. In the opinion of management, the ultimate disposition of these matters will
not have a material adverse effect on our results of operations, financial condition or cash flows.
ITEM 1A. RISK FACTORS.
Information regarding risk factors affecting the Company’s business are discussed in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2009 in the section entitled
“Risk Factors.” There have been no material changes from the risks disclosed therein.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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