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Moldflow 10-Q 2006 Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Commission file number:
000-30027
492 OLD CONNECTICUT PATH, SUITE 401 FRAMINGHAM, MA
01701
(Address of principal executive
offices) (Zip Code)
508-358-5848
(Registrant’s telephone
number, including area code)
[None]
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 is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
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
Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest
practicable date.
MOLDFLOW
CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 2006
Table of Contents
MOLDFLOW
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEET
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Table of Contents
MOLDFLOW
CORPORATION
CONDENSED
CONSOLIDATED STATEMENT OF INCOME
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Table of Contents
MOLDFLOW
CORPORATION
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Table of Contents
MOLDFLOW
CORPORATION
Moldflow Corporation (“Moldflow” or the
“Company”) designs, develops, manufactures and markets
computer software and hardware solutions for the design,
engineering and manufacture of injection-molded plastic parts
and, as such, revenues are derived primarily from the plastics
design and manufacturing industry. The Company sells its
products primarily to customers in the United States, Europe,
Asia and Australia. The Company’s fiscal year end is
June 30.
The accompanying unaudited condensed consolidated financial
statements include the accounts of Moldflow and its wholly-owned
subsidiaries. The unaudited condensed consolidated financial
statements have been prepared by the Company in accordance with
the rules and regulations of the Securities and Exchange
Commission (“SEC”) regarding interim financial
reporting. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements and
should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended
June 30, 2006 included in the Company’s Annual Report
on
Form 10-K.
The June 30, 2006 condensed consolidated balance sheet was
derived from the Company’s audited consolidated financial
statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of
America. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements contain
all adjustments, consisting only of those of a normal recurring
nature, necessary for a fair statement of the results for the
interim periods. The results of operations for the three-month
period ended September 30, 2006 are not necessarily
indicative of the results to be expected for any future period
or the full fiscal year. Certain prior year amounts disclosed in
the condensed consolidated statement of cash flows and in the
notes to the unaudited condensed consolidated financial
statements have been reclassified to conform with the fiscal
2007 presentation.
Effective July 1, 2005, the Company adopted the provisions
of Statement of Financial Accounting Standards
(“SFAS”) No. 123(R), “Share-Based
Payment,” which establishes accounting for equity
instruments exchanged for employee and director services. Under
the provisions of SFAS No. 123(R), share-based
compensation cost is measured at the grant date, based on the
calculated fair value of the award, and is recognized as an
expense over the requisite service period, which generally is
the vesting period of the equity grant.
The following table presents share-based compensation expenses
included in the Company’s unaudited condensed consolidated
statement of income:
Table of Contents
MOLDFLOW
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company estimates the fair value of stock options using the
Black-Scholes valuation model. Key input assumptions used to
estimate the fair value of stock options include the exercise
price of the award, the expected option term, the expected
volatility of the Company’s stock over the option’s
expected term, the risk-free interest rate over the
option’s expected term, and the Company’s expected
annual dividend yield. Pre-vesting forfeiture rates for purposes
of determining share-based compensation expense for the three
months ended September 30, 2006 and 2005 were estimated to
be 8.6% and 3.0%, respectively. The Company believes that the
valuation technique and the approach utilized to develop the
underlying assumptions are appropriate in calculating the fair
values of the Company’s stock options granted in the three
months ended September 30, 2006 and September 30,
2005. Estimates of fair value are not intended to predict actual
future events or the value ultimately realized by persons who
receive equity awards.
The fair value of each option grant was estimated on the grant
date using the Black-Scholes option-pricing model with the
following assumptions:
In August 1997, the Company adopted the 1997 Equity Incentive
Plan (the “1997 Plan”), which provides for the grant
of incentive stock options, non-qualified stock options, stock
awards and stock purchase rights for the purchase of up to
931,303 shares of the Company’s common stock by
officers, employees, consultants and directors of the Company.
In April 1999, the number of shares available under the 1997
Plan was increased to 1,537,158 shares. The Board of
Directors is responsible for administration of the 1997 Plan.
The Company will not issue any more shares under the 1997 Plan.
On January 20, 2000, the Board of Directors approved the
Moldflow Corporation 2000 Stock Option and Incentive Plan (the
“2000 Plan”), which, as amended, provides for the
grant of incentive stock options, stock awards and stock
purchase rights for the purchase of up to 3,673,536 shares
of common stock by officers, employees, consultants and
directors of the Company. The number of shares issuable under
the 2000 Plan is also increased as of each June 30 and
December 31 by a number of shares equal to 20% of the
shares issued by the Company during such six-month period. The
Board determines the term of each option, the option exercise
price, the number of shares for which each option is granted and
the rate at which each option is exercisable. Incentive stock
options may be granted to any officer or employee at an exercise
price per share of not less than the fair value per common share
on the date of the grant (not less than 110% of fair value in
the case of holders of more than 10% of the Company’s
voting stock) and with a term not to exceed ten years from the
date of the grant (five years for incentive stock options
granted to holders of more than 10% of the Company’s voting
stock). Non-qualified stock options may be granted to any
Table of Contents
MOLDFLOW
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
officer, employee, consultant or director at an exercise price
per share of not less than the par value per share. As of
September 30, 2006, there were 979,518 shares
available for future grant under the 2000 Plan.
A summary of the Company’s stock option activity follows:
The following table summarizes information about outstanding
stock options as of September 30, 2006:
The intrinsic value of options exercised in the three months
ended September 30, 2006 was $581,000, and the intrinsic
value of options that vested during the period was $301,000.
The total compensation cost not yet recognized as of
September 30, 2006 related to non-vested awards was
$2.0 million, which will be recognized over a
weighted-average period of 1.8 years. During the
three-month period ended September 30, 2006, there were
210,690 shares cancelled with a weighted average grant date
fair value of $8.24. The weighted average remaining contractual
life for options exercisable at September 30, 2006 was
1.9 years.
Table of Contents
MOLDFLOW
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes restricted stock award activity
under the 2000 Plan during the first three months of fiscal year
2007:
The shares of restricted stock have been issued at no cost to
the recipients. The restricted stock vests annually over a
three-year period. The fair value of the restricted stock is
expensed ratably over the vesting period. The Company recorded
share-based compensation expense related to restricted stock of
$139,000 and $3,000 for the three months ended
September 30, 2006 and 2005, respectively. As of
September 30, 2006, the total compensation cost not yet
recognized related to non-vested restricted stock awards is
$2.1 million, which is expected to be recognized over a
weighted-average period of 2.5 years.
The following table presents the calculation for both basic and
diluted net income per common share:
Weighted average common stock equivalents related to stock
options of 863,000 and 496,000 were outstanding for the three
months ended September 30, 2006 and September 30,
2005, respectively, but were not included in the calculation of
diluted net income per share as the sum of the option exercise
proceeds, including unrecognized compensation and unrecognized
future tax benefits, divided by the aggregate number of shares
under outstanding options exceeded the average stock price and,
therefore, would be antidilutive.
The Company has established a hedging program designed to reduce
the exposure to changes in currency exchange rates.
Table of Contents
MOLDFLOW
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of September 30, 2006, hedging instruments with nominal
amounts of $3.6 million, $5.7 million and
$4.1 million were outstanding to exchange Euros, Japanese
yen and Australian dollars, respectively. The fair value of
these instruments, as derived from dealer quotations, was
$146,000 and was recorded as a component of other current
assets. Net unrealized gains of $50,000 for the three months
ended September 30, 2006 on these instruments were included
in accumulated other comprehensive income. During the period
ended September 30, 2006, gains of $8,000 were recorded as
components of other income on the effective portion of options
that were settled. As of September 30, 2006, there was no
gain or loss recognized on the ineffective portion of these
options.
As of September 30, 2005, hedging instruments with nominal
amounts of $4.0 million, $6.8 million and
$4.2 million were outstanding to exchange Euros, Japanese
yen and Australian dollars, respectively. The fair value of
these instruments, as derived from dealer quotations, was
$108,000 and was recorded as a component of other current
assets. Net unrealized losses of $39,000 on these instruments
were included in accumulated other comprehensive income. During
the three months ended September 30, 2005, a net charge of
$13,000 related to premiums paid for new instruments was
recorded as a component of other income and expense.
The Company held no derivatives during the period ended
September 30, 2006 or September 30, 2005 for
non-hedging purposes.
Intangible assets acquired in the Company’s business
combinations include goodwill, customer base, developed
technology, customer order backlog and non-compete agreements.
All of the Company’s acquired intangible assets, except for
goodwill, are subject to amortization over their estimated
useful lives. No significant residual value is estimated for
these intangible assets. A portion of the amortization expense
relating to these assets is included as a component of the
Company’s cost of product revenue. In addition, a portion
of the acquired intangible assets, including goodwill, is
recorded in the accounts of a French subsidiary of the Company
and, as such, is subject to translation at the currency exchange
rates in effect at the balance sheet date.
The components of acquired intangible assets, excluding
goodwill, are as follows:
Table of Contents
MOLDFLOW
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Acquired intangible asset amortization for three months ended
September 30, 2006 and September 30, 2005 was $80,000
and $85,000, respectively. The following table summarizes the
expected remaining amortization of acquired intangible assets as
of September 30, 2006:
Changes in the carrying value of goodwill since June 30,
2006 were due to foreign currency translation adjustments. At
both September 30, 2006 and 2005, $5.9 million of
goodwill was related to the Design Analysis Solutions division
(“DAS”), and $12.8 million of goodwill was
related to the Manufacturing Solutions division (“MS”).
Inventories consisted of the following:
Costs associated with the development of computer software and
related products are expensed prior to establishing
technological feasibility, as defined by SFAS No. 86,
“Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed,” and capitalized thereafter
until the product is available for general release to customers.
Eligible development costs of $52,000 and $40,000 were
capitalized in three months ended September 30, 2006 and
September 30, 2005, respectively. All such costs have been
included in other non-current assets in the Company’s
unaudited condensed consolidated balance sheet and are being
amortized to cost of product revenue over their estimated useful
lives, which range from three to five years.
A summary of capitalized software development costs follows:
Table of Contents
MOLDFLOW
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Comprehensive income is comprised of net income and other
comprehensive income and losses. Other comprehensive income
includes certain changes in equity that are excluded from net
income, such as cumulative foreign currency translation
adjustments. Other comprehensive income also includes unrealized
gains and losses on the Company’s hedging instruments and
unrealized gains and losses on the Company’s marketable
securities.
The following table presents the calculation of comprehensive
income:
In April 2006, the Company initiated a corporate restructuring
plan (the “April 2006 plan”) to reduce its operating
costs. The April 2006 plan included the involuntary termination
of twelve employees within various departments of the
Company’s Manufacturing Solutions division in the United
States, France, Australia, Germany, Ireland and Italy. As a
result of the April 2006 plan, the Company recorded charges of
$1.3 million in the three months ended June 30, 2006,
which included legal, travel and other costs associated with the
activities. All such items were recorded as restructuring
charges in the Company’s consolidated statement of income.
The following table presents activity against the restructuring
liability during the three months ended September 30, 2006.
All significant activities under the April 2006 plan are
complete.
In October 2005, the Company initiated a corporate restructuring
plan (the “October 2005 plan”) to reduce its operating
costs. The October 2005 plan included the involuntary
termination of seven employees within various departments of the
Company in the United States, France and Italy and the closure
of a leased facility in Oregon. As a result of the October 2005
plan, the Company recorded charges of $1.4 million in the
three months ended December 31, 2005, which included legal
and travel costs associated with the activities. All such items
were recorded as restructuring charges in the Company’s
consolidated statement of income. All significant activities
under the October 2005 plan are complete.
Table of Contents
MOLDFLOW
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In April 2002, the Company initiated a corporate restructuring
plan (the “April 2002 plan”) to resize the Company and
to reduce its operating costs. The April 2002 plan included the
involuntary termination of thirty-seven employees, the closing
of certain leased offices and the reduction in size of other
leased offices. All significant activities under the April 2002
plan are complete, except for cash payments of the remaining
liabilities. As a result of the April 2002 plan, the Company
recorded charges and related accruals in fiscal 2002 of
$1.3 million. The remaining accrual balances as of
September 30, 2006 relate to long-term contractual
obligations from facility commitments that will be paid over
three years. The following table presents activity against the
restructuring liability during the three months ended
September 30, 2006 and the remaining liability at the
period end included in other long-term liabilities in the
Company’s unaudited condensed consolidated balance sheet:
Segment
Information
The Company is focused on providing solutions that optimize
discrete product development and manufacturing operations for
companies in industries that work with complex processes, with a
particular focus on companies working with injection molded
plastics. The Company is organized into two separate divisions:
the DAS division and the MS division. These divisions are
considered reportable segments as defined by
SFAS No. 131, “Disclosure about Segments of an
Enterprise and Related Information.” Segment income (loss)
from operations is a key measurement of segment profit or loss.
In fiscal 2007, primarily as a result of its fourth quarter
fiscal 2006 restructuring, the Company changed the management
approach by which it uses financial data to make operating
decisions. Under this new management approach, all costs and
operating expenses directly related to our MS division are now
included in that reporting segment’s operating results,
including such items as marketing programs, research and
development expenses and general and administrative costs. All
remaining previously unallocated costs and expenses, including
most general and administrative costs associated with being a
publicly-traded company, are now reflected in the operating
results of the DAS division.
Although the Company reported DAS and MS as separate reportable
segments prior to the three months ended September 2006,
significant costs were considered corporate expenses and not
allocated to the reportable segments for the purposes of
assessing performance and making operating decisions. These
unallocated corporate expenses included certain marketing,
development, general and administrative and restructuring costs.
To enhance the comparability with prior periods, the prior year
information included in this note was reclassified to reflect
this change in management approach. Certain previously
unallocated expenses were not fully tracked by division in prior
fiscal years. Therefore, the basis of allocation applied to
previous fiscal periods includes significant estimation and may
differ from that employed in the current fiscal year.
Table of Contents
MOLDFLOW
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes information about the
Company’s reportable segments for the indicated periods.
Asset information by reportable segment is not reported as the
Company does not accumulate such information internally. The
Company had no customers from which it derived more than 10% of
the total revenue of either reporting unit for the fiscal
periods presented.
Table of Contents
MOLDFLOW
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We are subject to income tax in numerous jurisdictions and at
various rates worldwide, and the use of estimates is required in
determining our provision for income taxes. For the three months
ended September 30, 2006, the Company recorded a tax
benefit of $158,000 on income before tax of $1.5 million
resulting in an effective income tax benefit rate of 10%.
Significant reconciling items between the 34% U.S. federal
statutory income tax rate and the effective income tax benefit
rate of 10% included the following: a one-time benefit of
$562,000 which resulted from a revised estimate of the
Company’s tax liabilities related to certain tax positions
of one of the Company’s foreign subsidiaries and taxes
payable in certain foreign jurisdictions at rates lower than
those enacted in the U.S.
For the three months ended September 30, 2005, our income
tax rate was a benefit rate of 124% on a pre-tax loss of
$124,000. The difference between the U.S. federal statutory
income tax rate of 34% and the income tax benefit rate of 124%
was primarily due to a one-time benefit of $126,000, which
resulted from a reduction in our tax liabilities upon the
resolution of certain tax position uncertainties.
The Company has established a valuation allowance against net
deferred tax assets, consisting principally of net operating
losses and foreign tax credit carryforwards and temporary
differences in certain jurisdictions, including the United
States, because it believes that it is more likely than not that
the tax assets in those jurisdictions will not be realized prior
to their expiration. At September 30, 2006, the Company had
total deferred tax assets of $46,000, net of a tax asset
valuation allowance of $2.6 million and deferred tax
liabilities of $799,000. Realization of the net deferred tax
assets is dependent on the Company’s ability to generate
future taxable income in the related tax jurisdictions.
Management believes that sufficient taxable income will be
earned in the future to realize these assets.
In the first quarter of fiscal 2005, one of the Company’s
Australian subsidiaries became subject to an audit by the
Australian Tax Office (“ATO”). The amount of
liabilities assessed to date by the ATO, including tax penalties
of $444,000 and interest of $2.3 million, is approximately
$5.6 million (A$7.5 million). The $5.6 million
represents the Company’s maximum potential exposure, but
does not reflect the potential tax benefits of such payments,
which might serve to mitigate the net expense that would be
reflected in the Company’s results of operations.
In order to limit the interest that may accrue on these amounts
from the date of assessment through the ultimate resolution of
this matter, the Company has paid $2.9 million
(A$3.9 million ), 50% of its assessed liabilities,
including taxes and interest to the ATO, which included payments
of $222,000 for tax penalties and $1.2 million for
interest. All payments to date have been recorded as current
assets. The Company may continue to make cash payments with
respect to these matters during fiscal 2007. The tax authority
has agreed to defer any action to recover the remaining assessed
tax amount outstanding and that no portion of the remaining
interest and penalty charge for any of the assessed tax years
needs to be paid pending the resolution of the dispute.
The Company believes that the positions on its tax returns have
merit. The Company has taken steps to preserve its rights
through the ATO’s objection process and believes that its
position will ultimately be sustained. Accordingly, the Company
has not recorded any liabilities in its consolidated balance
sheet related to these matters.
In the normal course of business, the Company has indemnified
third parties and has commitments and guarantees
(“Agreements”) under which it may be required to make
payments in certain circumstances. These Agreements include
indemnities to the following parties: lessors in connection with
facility leases; customers in relation to their performance of
services subcontracted to other providers; vendors in connection
with guarantees of Company employee expenses; and former
employees in connection with their prior services as director or
officer of the Company or its subsidiary companies, and
performance under credit facilities of the Company’s
subsidiaries. The duration of these Agreements varies, and in
certain cases, is indefinite. Furthermore, the majority of these
Agreements do not limit the Company’s maximum potential
payment exposure. The Company has never incurred material costs
to settle claims or defend lawsuits related to these
indemnities, commitments and guarantees. As a
Table of Contents
MOLDFLOW
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
result, the estimated fair value of these Agreements is minimal.
Accordingly, no liabilities have been recorded for these
agreements as of September 30, 2006.
The Company generally warrants that its products will perform in
all material respects in accordance with its standard published
specifications in effect at the time of delivery of the products
to the customer for a period of 90 days to three years from
the date of shipment or any longer period that may be required
by local law. The following table presents changes to the
warranty provision:
On September 19, 2001, the Company’s Board of
Directors authorized a repurchase of up to 500,000 shares
of the Company’s outstanding common stock. On May 17,
2006, the Board of Directors cancelled the September
2001 share repurchase plan and simultaneously authorized a
revised share repurchase plan allowing the repurchase of up to
600,000 shares of common stock.
In August 2006, the Company acquired 64,500 shares of its
common stock for $785,000, an average purchase price of
$12.17 per share. In September 2006, the Company acquired
50,000 shares of its common stock for $602,000, an average
purchase price of $12.05 per share. All of these shares
were held as treasury stock as of September 30, 2006. The
Company has cumulatively purchased 310,600 shares under the
May 2006 share repurchase plan.
In May 2005, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 154,
“Accounting Changes and Error Corrections, a replacement of
Accounting Principles Board (“APB”) Opinion
No. 20 and FASB Statement No. 3”
(“SFAS No. 154”). SFAS No. 154
provides guidance on the accounting for, and reporting of, a
change in accounting principle, in the absence of explicit
transition requirements specific to a newly adopted accounting
principle. SFAS No. 154 requires retrospective
application to prior period’s financial statements, unless
it is impracticable to determine either the period-specific
effects or the cumulative effect of the change.
SFAS No. 154 is effective for the Company’s 2007
fiscal year.
In February 2006, the FASB issued SFAS No. 155,
“Accounting for Certain Hybrid Financial Instruments”
(“SFAS No. 155”). This Statement permits
fair value remeasurement for any hybrid financial instrument
containing an embedded derivative that would otherwise require
bifurcation, and broadens a Qualified Special Purpose
Entity’s (“QSPE”) permitted holdings to include
passive derivative financial instruments that pertain to other
derivative financial instruments. SFAS No. 155 is
effective for all financial instruments acquired, issued or
subject to a remeasurement event occurring after the beginning
of an entity’s first fiscal year beginning after
September 15, 2006. The Company adopted
SFAS No. 155 on July 1, 2006 with no material
impact on its consolidated financial position or results of
operations.
In March 2006, the FASB issued SFAS No. 156
(“SFAS No. 156”), “Accounting for
Servicing of Financial Assets, an amendment of FASB Statement
No. 140, ‘Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities’,”
which requires that all separately recognized servicing assets
and servicing liabilities be initially measured at fair value,
if practicable, and permits the entities to elect either fair
value measurement with
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MOLDFLOW
CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
changes in fair value reflected in earnings or the amortization
and impairment requirements of SFAS No. 140 for
subsequent measurement. SFAS No. 156 is effective as
of the beginning of an entity’s first fiscal year after
September 15, 2006. The Company will adopt
SFAS No. 156 on July 1, 2007 and expects no
material impact on its consolidated financial position or
results of operations.
In June 2006, the FASB issued Interpretation (“FIN”)
No. 48, “Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement
No. 109,” which clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement
No. 109, “Accounting for Income Taxes.” The
interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN No. 48 requires recognition of
tax benefits that satisfy a greater than 50% probability
threshold. FIN No. 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition.
FIN No. 48 is effective for the Company on
July 1, 2007 and will be adopted on that date.
In September 2006, the SEC issued Staff Accounting
Bulletin No. 108, “Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements”
(“SAB No. 108”). SAB No. 108 was
issued in order to eliminate the diversity of practice
surrounding how public companies quantify financial statement
misstatements. Traditionally, there have been two
widely-recognized methods for quantifying the effects of
financial statement misstatements: the “roll-over”
method and the “iron curtain” method. The roll-over
method focuses primarily on the impact of a misstatement on the
income statement — including the reversing effect of
prior year misstatements — but its use can lead to the
accumulation of misstatements in the balance sheet. The
iron-curtain method focuses primarily on the effect of
correcting the period-end balance sheet with less emphasis on
the reversing effects of prior year errors on the income
statement. The Company typically applies the iron curtain method
for quantifying identified financial statement misstatements.
In SAB No. 108, the SEC staff established an approach
that requires quantification of financial statement
misstatements based on the effects of the misstatements on each
of the Company’s financial statements and the related
financial statement disclosures. This model is commonly referred
to as a “dual approach” because it requires
quantification of errors under both the iron curtain and the
roll-over methods. SAB No. 108 permits existing public
companies to initially apply its provisions either by
(i) restating prior financial statements as if the
“dual approach” had always been used, or
(ii) recording the cumulative effect of initially applying
the “dual approach” as adjustments to the carrying
values of assets and liabilities as of July 1, 2006 with an
offsetting adjustment recorded to the opening balance of
retained earnings. Use of the “cumulative effect”
transition method requires detailed disclosure of the nature and
amount of each individual error being corrected through the
cumulative adjustment and how and when it arose.
The Company will initially apply the provisions of
SAB No. 108 using the cumulative effect transition
method in connection with the preparation of our annual
financial statements for our fiscal year ending June 30,
2007. The Company is currently assessing the impact that the
adoption of SAB No. 108 might have on our financial
position or our results of operations.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, “Fair Value
Measurements” (“SFAS No. 157”).
SFAS No. 157 defines fair value as used in numerous
accounting pronouncements, establishes a framework for measuring
fair value in generally accepted accounting principles
(“GAAP”) and expands disclosure related to the use of
fair value measures in financial statements.
SFAS No. 157 does not expand the use of fair value
measures in financial statements, but standardizes its
definition and guidance in GAAP. SFAS No. 157
emphasizes that fair value is a market-based measurement and not
an entity-specific measurement based on an exchange transaction
in which the entity sells an asset or transfers a liability
(exit price). SFAS No. 157 establishes a fair value
hierarchy from observable market data as the highest level to
fair value based on an entity’s own fair value assumptions
as the lowest level. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the
timing of adoption and the impact that adoption might have on
its financial position or results of operations.
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We begin Management’s Discussion and Analysis of Financial
Condition and Results of Operations (“MD&A”) with
a review of our overall strategy to give the reader a view of
the goals of our business and the direction in which our
business and products are moving. This is followed by a
discussion of the Critical Accounting Policies that we believe
are important to understanding the assumptions and judgments
incorporated in our reported financial results and an overview
of our results of operations for the current quarter. Following
that, beginning on page 19 we discuss our Results of
Operations for the three months ended September 30, 2006
compared to the three months ended September 30, 2005. We
then provide an analysis of changes in our balance sheet and
cash flows, and discuss our financial commitments in the
sections entitled “Liquidity and Capital Resources”
and “Off-Balance Sheet Financing Arrangements.”
This Quarterly Report on
Form 10-Q
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. The forward-looking statements contained in this report
include, but are not limited to, statements concerning growth
opportunities for our business, taxes, working capital and
capital expenditure requirements, inflation, international
operations, shared-based compensation expenses and restructuring
plans. You can identify these statements by forward-looking
words such as “may,” “will,”
“expect,” “anticipate,” “believe,”
“estimate,” and “continue” or similar words.
You should read statements that contain these words carefully
because they discuss our future expectations, contain
projections of our future results of operations or of our
financial condition, or state other “forward-looking”
information.
We believe that it is important to communicate our future
expectations to our investors. However, there may be events in
the future that we are not able to accurately predict or control
that may cause our actual results to differ materially from the
expectations we describe in our forward-looking statements.
Investors are cautioned that all forward-looking statements
involve risks and uncertainties, and actual results may differ
materially from those discussed as a result of various factors,
including those factors described in the Company’s most
recent Annual Report on
Form 10-K,
Part I, Item 1A. “Risk Factors.” Readers
should not place undue reliance on our forward-looking
statements. We do not undertake any obligation to update any of
our forward-looking statements to reflect events occurring after
the date of this report.
Our vision is to be the leading provider of solutions that
optimize discrete product development and manufacturing
operations for companies in industries that work with complex
processes, with a particular focus on companies working with
injection molded plastics. We help companies manufacture less
expensive and more reliable products by increasing the
effectiveness of their product and mold design process and
manufacturing operations as well as improving efficiencies
across their entire design-through-manufacture process.
We believe that our key competitive strength is our extensive
domain knowledge in the fields of materials science and
characterization, numerical methods and predictive modeling
through simulation and analysis, coupled with our expertise in
packaging and delivering this knowledge to our customers in
easy-to-use
software applications and hardware systems that optimize the
manufacturing process. We develop software products internally
and through cooperative research relationships with a number of
public and private educational and research organizations around
the world. In addition, some of our products are developed by
commercial contractors. Because of the strong body of
intellectual property and knowledge that we have created over
the course of twenty-eight years in serving the product design,
engineering and manufacturing markets, we have become the
leading provider of highly sophisticated predictive software
applications for the plastics design, engineering and
manufacturing communities. Our growth strategy is derived from
these strengths.
We continue to increase the business value of our products for
our customers by improving the performance and functionality of
existing products with each new release, and developing products
addressing specific vertical market needs in each of our target
market segments. In the design phase, for example, we provide
applications which address the process of microchip
encapsulation, a process which is involved in the manufacture of
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semiconductors. In the manufacturing phase, we offer solutions
to the die cast market, a conversion process that is similar to
the plastics injection molding process.
A key element of our growth strategy includes expanding our
geographic coverage. We believe that we must be present wherever
our customers have a significant business presence. This
includes the rapidly growing economies in China, India, Eastern
Europe, South America and other developing regions present
significant longer-term growth opportunities for our business.
Our ability to conduct research and development at various
locations throughout the world allows us to optimize product
development and lower costs. International development, however,
also involves significant costs and challenges, including
whether we can adequately protect our intellectual property and
derive significant revenue in areas where laws regarding
intellectual property are not in place or not effectively
enforced.
A significant element of our growth strategy is directed toward
increasing customer loyalty and further developing opportunities
within our large installed customer base. We receive
approximately 60% to 70% of our overall revenues from repeat
customers. We deliver product releases on a regular and timely
basis which incorporate significant functionality improvements
to ensure that our customers have access to the latest
technology developments. We focus on customer satisfaction
through programs aimed at involving our customers in the future
direction of our products, enhancing their ease of use and user
experience, and providing multiple points of contact within the
Company to ensure that their needs are met.
Our uses of cash include capital expenditures to support our
operations and product development, mergers and acquisitions,
investments in growth initiatives, and repurchases of our
outstanding common stock. We continue to evaluate merger and
acquisition opportunities to the extent they support our
strategy and growth objectives.
The Design Analysis Solutions (“DAS”) business unit
serves the product, part and mold tooling design markets. Our
strategy is to provide powerful and sophisticated solutions that
enable our customers to optimize the design of parts and molds
in order to reduce the time to market, improve the reliability
of the production process, improve part quality and lower the
cost of manufacture for parts once in production. Our primary
product offerings are our Moldflow Plastics Advisers
(“MPA”) for part and mold design optimization and our
Moldflow Plastics Insight (“MPI”) for in-depth
simulation for part and mold design validation and optimization.
The Manufacturing Solutions (“MS”) business unit
serves the plastics-focused discrete manufacturing sector. Our
strategy is to provide powerful integrated solutions that enable
our customers to optimize and control the
set-up of an
injection molding machine, monitor and control the injection
molding process, control the temperature and flow of plastic
into the mold and monitor and report on the process and
production at both the machine and plant-wide level. These
products enable customers to improve the reliability of their
production process, improve their production yield and
efficiency and reduce their costs of production by reducing
material usage and cycle times.
MS includes two product types: real-time production management
systems and process optimization and control products, both of
which are included under the broad market category of
Collaborative Production Management (“CPM”) products.
CPM products provide manufacturers with the means to plan,
control and run their manufacturing operations on an on-going
basis. Our primary MS product is our Altanium hot runner process
controller, which assures that plastic materials are kept in
optimal molten state until injected in the part cavity in order
to achieve higher yields, better part quality and reduced cycle
time.
Our unaudited consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the
United States (“GAAP”). In connection with the
preparation of these financial statements, we make assumptions
and estimates about future events, and apply judgments that
affect the reported amounts of assets, liabilities, revenue, and
expenses and the related disclosures.
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A critical accounting policy is one that is both material to the
presentation of our financial statements and requires us to make
difficult, subjective or complex judgments for uncertain matters
that could have a material effect on our financial condition and
results of operations. Critical accounting policies for us
include: Revenue Recognition, Asset Valuation Allowances,
Acquisition Accounting, Impairment Accounting, Income Tax
Accounting, Capitalization of Software Development Costs, Stock
Option Accounting and Restructuring. Management has reviewed
these policies and related disclosures with the Audit Committee
of our Board of Directors. For a detailed explanation of the
judgments included in our critical accounting policies, refer to
our Annual Report on
Form 10-K
for the year ended June 30, 2006.
Results
of Operations
Beginning in fiscal 2007, primarily as a result of our
fourth-quarter fiscal 2006 organizational restructuring,
management changed the approach by which it uses financial data
to make operating decisions. As a result, financial information
regarding our reportable segments as disclosed in Note 10
to the unaudited condensed consolidated financial statements,
Segment Information, has changed. Under this new
management approach, all costs and operating expenses directly
related to our MS division are now included in that reporting
segment’s operating results, including such items as
marketing programs, research and development expenses and
general and administrative costs. All remaining previously
unallocated costs and expenses, including most general and
administrative costs associated with being a publicly-traded
company, are now reflected in the operating results of the DAS
division. To enhance the comparability with prior periods,
fiscal 2006 segment information was reclassified to reflect the
change in our management approach. Because certain previously
unallocated expenses were not fully tracked by division before
fiscal 2007, the basis of allocation for previous fiscal periods
includes significant estimation and may differ from that
employed in the current fiscal year.
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The following table sets forth statement of income data for the
periods indicated as a percentage of total revenue:
Revenue
Our product revenue includes both license fees for our packaged
software application products and product fees. Typically, our
customers pay an up-front, one-time fee for our products. For
our packaged software applications, the amount of the fee
depends upon the number and type of software modules licensed
and the number of the customer’s employees or other users
who can access the software product simultaneously. For our
collaborative product management systems, the amount of the fee
depends upon the number and type of software modules licensed
with the system, if any, and the system’s hardware
components. In addition, we receive royalty payments from
developers of other software products related to the bundling of
our software with their design software programs. We record
these payments as revenue as well, but such amounts have been
immaterial to date.
Our service revenue is derived from maintenance and support
contracts that require us to provide technical support services
to customers and unspecified product upgrades and enhancements
on a
when-and-if-available
basis. We also provide consulting and implementation services,
training of customers’ employees and material testing
services.
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The following table sets forth our revenue by geography and
division for the three months ended September 30, 2006 and
September 30, 2005.
Changes in foreign currency exchange rates did not have a
significant impact on the change in revenue from the prior year.
We added 50 new customers in the first quarter of fiscal 2007,
compared to 92 new customers in the same period of fiscal 2006.
Sales to new customers represented 25% of total product revenue
in the three months ended September 30, 2006, compared to
30% of total product revenue in the three months ended
September 30, 2005.
DAS product revenue decreased $540,000 in the first quarter of
fiscal 2007 compared to the same period of the prior fiscal
year. The reduction was primarily a result of lower product
revenue from our European region which was due to turnover in
our sales personnel which led to lower than expected sales
productivity in this region.
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DAS services revenue increased $821,000 in the first quarter of
fiscal 2007 relative to the same period last year. This increase
was primarily from the sale of maintenance contracts across all
geographic regions and is a reflection of long-term growth in
our installed customer base arising from software license sales
made during the current and previous reporting periods.
MS product revenue decreased $204,000 in the first quarter of
fiscal 2007 relative to the same period last year. This result
reflected continued weakness in the North American automotive
market, which contributed to a regional decrease of $423,000.
This was partially offset by a stronger automotive market in
Europe, which resulted in an increase of $134,000 of product
revenue relative to the same period last year.
Our MS services revenue did not materially change relative to
the same period last year.
Cost of product revenue consists primarily of the costs
associated with hardware components for our MS products, compact
discs and related packaging material, duplication and shipping
costs and the compensation of our personnel involved with the
assembly and distribution of our products. In some cases, we pay
royalties to third parties for usage-based licenses of their
products that are embedded in our products. Product royalties
are expensed when the related obligation arises, which is
generally upon the license of our products, and are included in
cost of product revenue. Also, included in cost of product
revenue is amortization expense related to capitalized software
development costs and amortization expense related to acquired
intangible assets.
Cost of product revenue for our DAS division was $357,000 in the
three months ended September 30, 2006, compared to $366,000
in the three months ended September 30, 2005, as increased
amortization expenses was offset by other various net cost
savings.
Cost of product revenue for our MS division was
$1.7 million in the three months ended September 30,
2006, compared to $2.2 million in the three months ended
September 30, 2005. This decrease included a $170,000
reduction in direct labor costs, primarily a result of our
fiscal 2006 restructuring activities and a $278,000 reduction in
product material costs, a result of our success in reducing
certain product component costs and the implementation of more
cost-effective designs of some of our key products.
Cost of services revenue consists primarily of salary, fringe
benefits and facility related costs of our maintenance and
support, consulting and training activities and of our material
testing laboratories, and is expensed when incurred.
Additionally, from time to time, we engage outside consultants
to meet peaks in customer demand for consulting and
implementation services.
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Cost of services revenue for our DAS division was
$1.0 million in both the three months ended
September 30, 2006 and 2005, as the costs associated with
an increased number of technical support engineers on staff was
offset by reduced overhead charges, a result of our prior year
restructuring actions.
Cost of services revenue for our MS division was $269,000 in the
three months ended September 30, 2006, compared to $603,000
in the three months ended September 30, 2005. This decrease
was primarily a result of our prior year restructuring plans,
pursuant to which the role of our MS support personnel changed
from that of a post-sales support and implementation function
into a technical sales function. Accordingly, the cost of these
personnel is now included as a component of our selling and
marketing expenses, which reduced our cost of services revenue
by $245,000 when compared to the previous year. In addition, our
prior year restructuring actions reduced various personnel costs
by $71,000.
We employ a staff to develop new products and enhance our
existing products. Product development expenditures, which
include compensation, benefits, travel, payments to universities
and other research institutions and facilities costs, are
generally charged to operations as incurred. However,
SFAS No. 86, “Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise
Marketed,” requires the capitalization of certain software
development costs subsequent to the establishment of
technological feasibility up to the point the product is
available for commercial release to customers. In accordance
with SFAS No. 86, research and development costs of
$52,000 and $40,000 were capitalized in the three months ended
September 30, 2006 and 2005, respectively. All such
capitalized costs are amortized to cost of product revenue over
the estimated economic life of the related products, which
ranges from three to five years.
Research and development expenses related to our DAS division
were $1.7 million in the three months ended
September 30, 2006, compared to $1.9 million in the
three months ended September 30, 2005. Research and
development expenses of our MS division were $373,000 in the
three months ended September 30, 2006, compared to $534,000
in the three months ended September 30, 2005. The decrease
in both divisions was primarily due to our prior year
restructuring actions and normal turnover, which resulted in a
reduction in staff when compared to the prior year.
We sell our products primarily through our direct sales force
and indirect distribution channels. Selling and marketing
expenses consist primarily of compensation paid to our sales
staff and third-party manufacturers’ representatives,
employee benefits costs, sales office facility rental and
related costs, travel and promotional events such as trade
shows, advertising, print and web-based collateral materials and
public relations programs.
Selling and marketing expenses related to our DAS division were
approximately $4.1 million in both the three months ended
September 30, 2006 and 2005, as $313,000 of increased costs
associated with the addition of eight new sales representatives
hired to address under-penetrated and developing markets was
offset by approximately
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$205,000 of savings realized as a result of our prior year
restructurings actions and $123,000 of reduced spending on
marketing programs, primarily a function of the timing of trade
shows.
Selling and marketing expenses related to our MS division were
$1.2 million in the three months ended September 30,
2006, compared to $1.5 million in the three months ended
September 30, 2005. The decrease was primarily a result of
our prior year restructuring actions, which reduced spending by
$292,000 from the elimination of several MS sales management
positions and the redirection of relatively lower-cost resources
from post-sale support and implementation roles into technical
sales positions.
General and administrative expenses include legal, audit, tax
consulting, regulatory compliance and insurance expenses and the
compensation costs of our executive management, finance,
information technology, human resources and administrative
support groups.
General and administrative expenses related to our DAS division
were $3.7 million in the three months ended
September 30, 2006, compared to $3.4 million in the
three months ended September 30, 2005. This increase
included $310,000 of increased costs related to our financial
statement and Sarbanes-Oxley audits, a result of the timing of
work performed by our independent auditors, $193,000 of
increased legal expenses and $82,000 of costs incurred in the
implementation of an enterprise resource planning system. These
increases were partially offset by a $126,000 reduction in
consulting costs related to management’s assessment of the
Company’s internal control environment and a $104,000
decrease in our share-based compensation expenses.
General and administrative expenses related to our MS division
were $159,000 in the three months ended September 30, 2006,
compared to $207,000 in the three months ended
September 30, 2005.
These costs represent the amortization of intangible assets,
other than goodwill, recorded in connection with our
acquisitions. Those assets include customer base, developed
technology, customer order backlog and non-compete agreements,
which are amortized over their economic lives, ranging from six
months to seven years. The reduction in amortization expense in
all periods reflects the completion of amortization of certain
intangible assets that reached the end of their estimated useful
life.
Interest income, net, includes interest income earned on
invested cash balances. Our interest income was $786,000 in the
three months ended September 30, 2006 compared to $562,000
in the three months ended September 30, 2005. The increase
in interest income is due to cash on-hand invested at higher
interest rates than those existing during the three months ended
September 30, 2005.
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Other income (loss), net, includes realized and unrealized gains
and losses arising from the remeasurement of our foreign
currency denominated asset and liability balances recorded,
especially in the United States, Australia and Ireland,
recognized gains and losses on our foreign currency hedging
instruments, and other non-operating income and expense items.
Our other income did not significantly change from the three
months ended September 30, 2006 compared to same period of
last year.
We are subject to income tax in numerous jurisdictions and at
various rates worldwide, and the use of estimates is required in
determining our provision for income taxes. For the three months
ended September 30, 2006, we recorded a tax benefit of
$158,000 on income before tax of $1.5 million resulting in
an effective income tax benefit rate of 10%. The significant
reconciling items between the 34% U.S. federal statutory
income tax rate and the effective income tax benefit rate of 10%
included a one-time benefit of $562,000 which resulted from a
revised estimate of our tax liabilities related to certain tax
positions of one of the Company’s foreign subsidiaries and
taxes payable in certain foreign jurisdictions at rates lower
than those enacted in the U.S.
For the three months ended September 30, 2005, our income
tax rate was a benefit rate of 124% on a pre-tax loss of
$124,000. The difference between the U.S. federal statutory
income tax rate of 34% and the income tax benefit rate of 124%
was primarily due to a one-time benefit of $126,000, which
resulted from a reduction in our tax liabilities upon the
resolution of certain tax position uncertainties.
We currently estimate that our income tax rate in each of the
remaining quarters of fiscal 2007 will be approximately 25%, and
that this will result in the estimated effective income tax rate
of approximately 20% for the full fiscal year. This estimated
annual rate does not take into account any discrete items, other
than the item described above, and is subject to change.
We have established a valuation allowance against net deferred
tax assets, consisting principally of net operating loss and
foreign tax credits carryforwards and temporary differences in
certain jurisdictions, including the United States, because we
believe that it is more likely than not that the tax assets in
those jurisdictions will not be realized prior to their
expiration. At September 30, 2006, we had total net
deferred tax assets of $46,000, net of a tax asset valuation
allowance of $2.6 million and deferred tax liabilities of
$799,000. Realization of our net deferred tax assets is
dependent on our ability to generate future taxable income in
the related tax jurisdictions. We believe that sufficient
taxable income will be earned in the future to realize these
assets.
In the first quarter of fiscal 2005, one of our Australian
subsidiaries became subject to an audit by the Australian Tax
Office (“ATO”). The amount of liabilities assessed to
date by the ATO, including tax penalties of $444,000 and
interest of $2.3 million, is approximately
$5.6 million (A$7.5 million). The $5.6 million
represents our maximum potential exposure, but does not reflect
the potential tax benefits of such payments, which might serve
to mitigate the net expense that would be reflected in our
results of operations.
In order to limit the interest that may accrue on these amounts
from the date of assessment through the ultimate resolution of
this matter, we paid $2.9 million (A$3.9 million ),
50% of its assessed liabilities, including taxes and interest to
the ATO, which included payments of $222,000 for tax penalties
and $1.2 million for interest. All payments to date have
been recorded as current assets. We may continue to make cash
payments with respect to these matters during fiscal 2007. The
tax authority has agreed to defer any action to recover the
remaining assessed tax amount outstanding and that no portion of
the remaining interest and penalty charge for any of the
assessed tax years needs to be paid pending the resolution of
the dispute. We believe that the positions on our tax returns
have merit. We have taken steps to preserve our rights through
the ATO’s objection process and believe that our position
will ultimately be sustained. Accordingly, we have not recorded
any liabilities in its consolidated balance sheet or made any
provision on our income statement related to these matters.
In the event that such audit is resolved in a manner unfavorable
to Moldflow or in the event that we are required to record a
liability related to these matters in our consolidated balance
sheet or make further cash payments, there would likely be a
material adverse impact on our results of operations. In
addition, our effective tax rate for fiscal
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2007 may be materially and adversely impacted in the event that
we are required to record a liability with respect to these
matters, which would have a material adverse impact on our
results of operations.
Historically, we have financed our operations and met our
capital expenditure requirements primarily through funds
generated from operations and borrowings from lending
institutions. As of September 30, 2006, our primary sources
of liquidity consisted of our total cash and cash equivalents
balance of $52.3 million, our marketable securities balance
of $8.1 million and our credit facilities. In February
2005, we renewed our primary $5.0 million unsecured working
capital credit facility for a term of two years. The available
borrowing base of the facility is subject to a calculation that
is based upon eligible accounts receivable. Advances may be in
the form of loans, letters of credit, foreign exchange contracts
or other cash management lines. The facility includes
restrictive covenants, all of which we were in compliance with
at September 30, 2006. These covenants include liquidity
and profitability measures and restrictions that limit our
ability to merge, acquire or sell assets without prior approval
from the bank. At September 30, 2006, we had employed
$1.3 million of available borrowings through outstanding
foreign exchange contracts and letters of credit. The remaining
available borrowings were $3.7 million. In addition to our
primary working capital line of credit, we also utilize domestic
and foreign banking institutions to provide liquidity to our
subsidiaries. We also have relationships with other banking
institutions in order to facilitate foreign currency and hedging
transactions. As of September 30, 2006, we had no
outstanding debt.
At September 30, 2006, our marketable securities consisted
of corporate bonds with maturities from the date of purchase in
excess of three months. Investments in marketable securities are
made in accordance with our corporate investment policy. The
primary objective of this policy is the preservation of capital.
Investments are limited to high quality corporate debt,
government securities, municipal debt securities, money market
funds and similar instruments. The policy establishes maturity
limits, liquidity requirements and concentration limits. At
September 30, 2006, we were in compliance with this
internal policy.
Net cash provided by operating activities was $1.2 million
in the three months ended September 30, 2006, as compared
to $1.5 million in the three months ended
September 30, 2005. In the first three months of fiscal
2007, cash of $2.7 million was provided by our net income
adjusted for certain non-cash charges and expenses, such as
depreciation and amortization and share-based compensation
expense. In addition, decreases in accounts receivable balances
generated $1.8 million of cash. These items were partially
offset by a $673,000 decrease in accounts payable and
$1.7 million decrease in accrued expenses and other
liabilities, and a $1.6 million decrease in deferred
revenue.
Net cash provided by investing activities was $19,000 in the
first three months of fiscal 2007 and $319,000 in the same
period of the previous year. In the first three months of fiscal
2007, sales and maturities of marketable securities provided
$5.7 million of cash, which was almost completely offset by
$5.4 million in purchases of
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marketable securities, $259,000 in purchases of fixed assets and
$52,000 of capitalized of software development costs.
Financing activities consumed $945,000 of cash in the first
three months of fiscal 2007, a result of our repurchase of
114,500 shares of common stock for $1.4 million,
offset by $432,000 of cash received from the exercise of stock
options. Financing activities generated $1.3 million of
cash in the first three months of fiscal 2006, a result of
proceeds received from the exercise of stock options.
On May 17, 2006, our Board of Directors terminated the
September 2001 share repurchase plan, which originally
authorized the repurchase of up to 500,000 shares of its
outstanding common stock, and simultaneously authorized the
repurchase of up to 600,000 shares under a new stock
repurchase plan. In August and September of 2006, pursuant to
the plan, the Company acquired 114,500 shares for
$1.4 million, an average purchase price of $12.12 per
share. All of these shares remained in treasury as of
September 30, 2006.
We believe that our current cash, cash equivalents, marketable
securities and available lines of credit will be sufficient to
meet our anticipated cash needs for working capital and capital
expenditures for at least the next twelve months following the
date of this report. Capital expenditure requirements for fiscal
2007 are expected to be approximately $2.3 million of
which, $311,000 has been expended on purchases of fixed assets
and capitalized software development costs as of
September 30, 2006. Long-term cash requirements, other than
normal operating expenses, are anticipated for the continued
development of new products, the financing of anticipated
growth, and the possible acquisition of businesses, software
products or technologies complementary to our business. On a
long-term basis or to complete acquisitions in the short term,
we may require additional external financing through credit
facilities, sales of additional equity or other financing
vehicles. There can be no assurance that such financing can be
obtained on favorable terms, if at all.
We do not have any special purpose entities or off-balance sheet
financing arrangements.
In May 2005, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 154,
“Accounting Changes and Error Corrections, a replacement of
Accounting Principles Board (“APB”) Opinion
No. 20 and FASB Statement No. 3”
(“SFAS No. 154”). SFAS No. 154
provides guidance on the accounting for, and reporting of, a
change in accounting principle, in the absence of explicit
transition requirements specific to a newly adopted accounting
principle. SFAS No. 154 requires retrospective
application to prior period’s financial statements, unless
it is impracticable to determine either the period-specific
effects or the cumulative effect of the change.
SFAS No. 154 is effective for our 2007 fiscal year.
In February 2006, the FASB issued SFAS No. 155,
“Accounting for Certain Hybrid Financial Instruments”
(“SFAS No. 155”). This Statement permits
fair value remeasurement for any hybrid financial instrument
containing an embedded derivative that would otherwise require
bifurcation, and broadens a Qualified Special Purpose
Entity’s (“QSPE”) permitted holdings to include
passive derivative financial instruments that pertain to other
derivative financial instruments. SFAS No. 155 is
effective for all financial instruments acquired, issued or
subject to a remeasurement event occurring after the beginning
of an entity’s first fiscal year beginning after
September 15, 2006. We adopted SFAS No. 155 on
July 1, 2006 with no material impact on our consolidated
financial position or results of operations.
In March 2006, the FASB issued SFAS No. 156
(“SFAS No. 156”), “Accounting for
Servicing of Financial Assets, an amendment of FASB Statement
No. 140, ‘Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities,’”
which requires that all separately recognized servicing assets
and servicing liabilities be initially measured at fair value,
if practicable, and permits the entities to elect either fair
value measurement with changes in fair value reflected in
earnings or the amortization and impairment requirements of
SFAS No. 140 for subsequent measurement.
SFAS No. 156 is effective as of the beginning of an
entity’s first fiscal year after September 15, 2006.
We will adopt SFAS No. 156 on July 1, 2007 and
expect no material impact on our consolidated financial position
or results of operations.
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In June 2006, the FASB issued Interpretation (“FIN”)
No. 48, “Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement
No. 109,” which clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement
No. 109, “Accounting for Income Taxes.” The
interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN No. 48 requires recognition of
tax benefits that satisfy a greater than 50% probability
threshold. FIN No. 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition.
FIN No. 48 is effective for us on July 1, 2007
and will be adopted on that date.
In September 2006, the SEC issued Staff Accounting
Bulletin No. 108, “Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements”
(“SAB No. 108”). SAB No. 108 was
issued in order to eliminate the diversity of practice
surrounding how public companies quantify financial statement
misstatements. Traditionally, there have been two
widely-recognized methods for quantifying the effects of
financial statement misstatements: the “roll-over”
method and the “iron curtain” method. The roll-over
method focuses primarily on the impact of a misstatement on the
income statement — including the reversing effect of
prior year misstatements — but its use can lead to the
accumulation of misstatements in the balance sheet. The
iron-curtain method focuses primarily on the effect of
correcting the period-end balance sheet with less emphasis on
the reversing effects of prior year errors on the income
statement. We typically apply the iron curtain method for
quantifying identified financial statement misstatements.
In SAB No. 108, the SEC staff established an approach
that requires quantification of financial statement
misstatements based on the effects of the misstatements on each
of the company’s financial statements and the related
financial statement disclosures. This model is commonly referred
to as a “dual approach” because it requires
quantification of errors under both the iron curtain and the
roll-over methods. SAB No. 108 permits existing public
companies to initially apply its provisions either by
(i) restating prior financial statements as if the
“dual approach” had always been used, or
(ii) recording the cumulative effect of initially applying
the “dual approach” as adjustments to the carrying
values of assets and liabilities as of July 1, 2006 with an
offsetting adjustment recorded to the opening balance of
retained earnings. Use of the “cumulative effect”
transition method requires detailed disclosure of the nature and
amount of each individual error being corrected through the
cumulative adjustment and how and when it arose.
We will initially apply the provisions of SAB No. 108
using the cumulative effect transition method in connection with
the preparation of our annual financial statements for our
fiscal year ending June 30, 2007. We are currently
assessing the impact that the adoption of SAB No. 108
might have on our financial position or results of operations
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, “Fair Value
Measurements” (“SFAS No. 157”).
SFAS No. 157 defines fair value as used in numerous
accounting pronouncements, establishes a framework for measuring
fair value in generally accepted accounting principles
(“GAAP”) and expands disclosure related to the use of
fair value measures in financial statements.
SFAS No. 157 does not expand the use of fair value
measures in financial statements, but standardizes its
definition and guidance in GAAP. SFAS No. 157
emphasizes that fair value is a market-based measurement and not
an entity-specific measurement based on an exchange transaction
in which the entity sells an asset or transfers a liability
(exit price). SFAS No. 157 establishes a fair value
hierarchy from observable market data as the highest level to
fair value based on an entity’s own fair value assumptions
as the lowest level. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007. We are currently evaluating the timing
of adoption and the impact that adoption might have on our
financial position or results of operations.
We believe that our revenue and results of operations have not
been significantly impacted by inflation. We do not believe that
our revenue and results of operations will be significantly
impacted by inflation in future periods.
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There have been no significant changes in our market risk
exposure as described in Item 7A: “Quantitative and
Qualitative Disclosures about Market Risk” in our Annual
Report on
10-K for the
fiscal year ended June 30, 2006.
We collect amounts representing a substantial portion of our
revenues and pay amounts representing a substantial portion of
our operating expenses in foreign currencies. As a result,
changes in currency exchange rates affect our operating results
and our invested cash balances. At September 30, 2006, we
had $6.8 million of cash and cash equivalents invested in
foreign currency denominated accounts.
Our invested cash balances are subject to interest rate risk
and, as a result, changes in interest rates from time to time
may affect our operating results. We invest our excess cash
balances in highly liquid, interest bearing instruments,
including government and corporate bonds. At September 30,
2006, the fair value and principal amounts of our marketable
securities portfolio amounted to $8.1 million, with a
yield-to-maturity
of 5.35%.
As required by
Rules 13a-15
and 15d-15
under the Securities Exchange Act of 1934, our management,
including our Chief Executive Officer and Chief Financial
Officer, have evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by
this report. In designing and evaluating our disclosure controls
and procedures, we and our management recognize that any
controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
desired control objectives, and our management necessarily was
required to apply its judgment in evaluating and implementing
possible controls and procedures. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer have
concluded, as of September 30, 2006, our disclosure
controls and procedures were effective to ensure that
information required to be disclosed by us in the reports we
file or submit under the Exchange Act, (i) is recorded,
processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission’s rules
and forms, and (ii) is accumulated and communicated to
Moldflow’s management, including our Chief Executive
Officer and our Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. In compliance
with the rules, we intend to continue to review and document our
disclosure controls and procedures, including our internal
control over financial reporting, on an ongoing basis, and may
from time to time make changes aimed at enhancing their
effectiveness and to ensure that our systems evolve with our
business.
There were no changes in our internal control over financial
reporting that occurred during our most recent fiscal quarter
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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From time to time, the Company may be involved in various claims
and legal proceedings arising in the ordinary course of
business. The Company is not currently a party to any such
claims or proceedings which, if decided adversely to it, would
either individually or in the aggregate have a material adverse
effect on its business, financial condition or results of
operations.
The Company cautions investors that its future performance and
results and, therefore, any forward-looking statements are
subject to risks and uncertainties. Various factors may cause
the Company’s future results to differ materially from
those projected in any forward-looking statements. These factors
were disclosed, but are not limited to, the items in the
Company’s most recent Annual Report on
Form 10-K,
Part I, Item 1A.
The Company has a stock repurchase plan in place that allows it
to purchase shares of its common stock on the open market or
otherwise, from time to time, as conditions warrant. A summary
of the Company’s repurchase activity for the first quarter
of fiscal 2007 is as follows.
None.
None.
None.
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(a) Exhibits:
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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.
Moldflow Corporation
A. Roland Thomas
President and Chief Executive Officer
Moldflow Corporation
Christopher L. Gorgone
Executive Vice President of Finance,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: November 6, 2006
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