XNAS:LIOX Lionbridge Technologies Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 000-26933

 

 

LIONBRIDGE TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   04-3398462
(State of Incorporation)  

(I.R.S. Employer

Identification No.)

1050 Winter Street, Waltham, MA 02451

(Address of Principal Executive Offices)

Registrant’s Telephone Number, Including Area Code: 781-434-6000

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark 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.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  x

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of April 30, 2012 was 63,174,462.

 

 

 


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LIONBRIDGE TECHNOLOGIES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012

TABLE OF CONTENTS

 

         Page  

PART I: FINANCIAL INFORMATION

  

ITEM 1

 

Condensed Consolidated Financial Statements:

     3   
 

Condensed Consolidated Balance Sheets (unaudited) as of March 31, 2012 and December 31, 2011

     3   
 

Condensed Consolidated Statements of Operations (unaudited) for the three months ended March  31, 2012 and 2011

     4   
 

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three months ended March 31, 2012 and 2011

     5   
 

Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March  31, 2012 and 2011

     6   
 

Notes to Condensed Consolidated Financial Statements (unaudited)

     7   

ITEM 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     15   

ITEM 3

 

Quantitative and Qualitative Disclosures About Market Risk

     22   

ITEM 4

 

Controls and Procedures

     22   

PART II: OTHER INFORMATION

  

ITEM 1

  Legal Proceedings      23   

ITEM 1A

  Risk Factors      24   

ITEM 2

  Unregistered Sales of Equity Securities and Use of Proceeds      24   

ITEM 6

  Exhibits      24   

SIGNATURE

     25   

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

LIONBRIDGE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

 

     March 31,
2012
    December 31,
2011
 
     (unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 19,932      $ 25,219   

Accounts receivable, net of allowance of $500 at March 31, 2012 and December 31, 2011

     62,961        58,413   

Unbilled receivables

     27,825        20,665   

Other current assets

     10,781        9,120   
  

 

 

   

 

 

 

Total current assets

     121,499        113,417   

Property and equipment, net

     21,935        21,725   

Goodwill

     9,675        9,675   

Other intangible assets, net

     6,776        7,256   

Other assets

     5,562        5,674   
  

 

 

   

 

 

 

Total assets

   $ 165,447      $ 157,747   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 21,257      $ 19,347   

Accrued compensation and benefits

     17,712        15,696   

Accrued outsourcing

     13,005        10,907   

Accrued restructuring

     752        1,308   

Income taxes payable

     1,634        1,482   

Accrued expenses and other current liabilities

     7,503        8,105   

Deferred revenue

     11,353        11,057   
  

 

 

   

 

 

 

Total current liabilities

     73,216        67,902   
  

 

 

   

 

 

 

Long-term debt

     24,700        24,700   

Deferred income taxes, long-term

     641        641   

Other long-term liabilities

     13,231        13,212   

Contingencies (Note 10)

    

Stockholders’ equity:

    

Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued and outstanding

     —          —     

Common stock, $0.01 par value; 100,000,000 shares authorized; 63,196,462 and 61,903,518 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively

     632        619   

Additional paid-in capital

     267,827        267,388   

Accumulated deficit

     (233,255     (234,976

Accumulated other comprehensive income

     18,455        18,261   
  

 

 

   

 

 

 

Total stockholders’ equity

     53,659        51,292   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 165,447      $ 157,747   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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LIONBRIDGE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in thousands, except per share data)

 

     Three Months Ended
March  31,
 
     2012     2011  

Revenue

   $ 112,096      $ 99,652   

Operating expenses:

    

Cost of revenue (exclusive of depreciation and amortization included below)

     78,173        71,736   

Sales and marketing

     8,509        8,278   

General and administrative

     19,176        18,625   

Research and development

     1,362        1,396   

Depreciation and amortization

     1,645        1,291   

Amortization of acquisition-related intangible assets

     480        583   

Restructuring and other charges

     284        2,103   
  

 

 

   

 

 

 

Total operating expenses

     109,629        104,012   
  

 

 

   

 

 

 

Income (loss) from operations

     2,467        (4,360

Interest expense:

    

Interest on outstanding debt

     190        149   

Amortization of deferred financing costs

     25        25   

Interest income

     20        17   

Other (income) expense, net

     (31     458   
  

 

 

   

 

 

 

Income (loss) before income taxes

     2,303        (4,975

Provision for income taxes

     582        471   
  

 

 

   

 

 

 

Net income (loss)

   $ 1,721      $ (5,446
  

 

 

   

 

 

 

Net income (loss) per share of common stock:

    

Basic

   $ 0.03      $ (0.09

Diluted

   $ 0.03      $ (0.09

Weighted average number of common shares outstanding:

    

Basic

     58,557        57,523   

Diluted

     59,662        57,523   

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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LIONBRIDGE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Amounts in thousands)

 

     Three Months Ended
March  31,
 
     2012      2011  

Net income (loss)

   $ 1,721       $ (5,446

Other comprehensive income (loss), net of tax:

     

Foreign currency translation adjustment

     194         671   
  

 

 

    

 

 

 

Comprehensive income (loss)

   $ 1,915       $ (4,775
  

 

 

    

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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LIONBRIDGE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)

 

     Three Months Ended
March 31,
 
     2012     2011  

Cash flows from operating activities:

    

Net income (loss)

   $ 1,721      $ (5,446

Adjustments to reconcile net income (loss) to net cash used in operating activities:

    

Stock-based compensation

     1,385        1,091   

Amortization of deferred financing charges

     25        25   

Depreciation and amortization

     1,645        1,291   

Amortization of acquisition-related intangible assets

     480        583   

Deferred income taxes

     —          23   

Net realized foreign currency loss on forward contracts

     —          635   

Other

     —          (22

Changes in operating assets and liabilities:

    

Accounts receivable

     (3,923     5,607   

Unbilled receivables

     (7,059     (3,233

Other current assets

     (1,500     (1,906

Other assets

     69        (23

Accounts payable

     1,707        1,914   

Income tax payable

     143        512   

Accrued compensation and benefits

     806        (294

Accrued outsourcing

     1,948        1,171   

Accrued restructuring

     (587     (1,229

Accrued expenses and other liabilities

     (1,005     (1,303

Deferred revenue

     173        (343
  

 

 

   

 

 

 

Net cash used in operating activities

     (3,972     (947
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (1,322     (2,945

Payments of forward contracts

     —          (635
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,322     (3,580
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from borrowings on revolving line of credit

     —          3,000   

Payments of borrowings on revolving line of credit

     —          (3,000

Proceeds from issuance of common stock under stock option plans

     6        78   

Payments of capital lease obligations

     —          (3
  

 

 

   

 

 

 

Net cash provided by financing activities

     6        75   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (5,288     (4,452

Effects of exchange rate changes on cash and cash equivalents

     1        1,592   

Cash and cash equivalents at beginning of period

     25,219        28,206   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 19,932      $ 25,346   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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LIONBRIDGE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

Nature of the Business

The accompanying condensed consolidated financial statements include the accounts of Lionbridge Technologies, Inc. and its wholly owned subsidiaries (collectively, “Lionbridge” or the “Company”). These financial statements are unaudited. However, in the opinion of management, the consolidated financial statements include all adjustments, all of a normal nature, necessary for their fair presentation. Interim results are not necessarily indicative of results expected for a full year. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of the operations, financial position and cash flows of the Company in conformity with U.S. generally accepted accounting principles. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. These statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

The Company’s preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Estimates are used when accounting for collectability of receivables, calculating service revenue using a proportional performance assessment and valuing intangible assets and deferred tax assets. Actual results could differ from these estimates.

2. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

 

 

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Restricted Stock Awards

Lionbridge issued 1,611,600 and 109,300 shares of restricted common stock and restricted stock units, respectively, under the Company’s 2011 Stock Incentive Plan, during the three-month period ended March 31, 2012 with a fair market value of $4.7 million. Of the total 1,720,900 shares of restricted common stock and restricted stock units issued in the three-month period ended March 31, 2012, 1,308,400 have restrictions on disposition which lapse over four years from the date of grant and 412,500 restricted shares were granted to certain employees through the long-term incentive plan (the “LTIP”) as long-term performance-based stock incentive awards under the Corporation’s 2011 Stock Incentive Plan. Pursuant to the terms of the LTIP, restrictions with respect to the stock will lapse upon the achievement of revenue and/or profitability targets within the two calendar years from and including the year of grant. The grant date fair value of the shares is recognized over the requisite period of performance once achievement of criteria is deemed probable. On a quarterly basis, the Company estimates the likelihood of achieving performance goals and records expense accordingly. Actual results, and future changes in estimates, may differ substantially from the Company’s current estimates. If the targets are not achieved, the shares will be forfeited by the employee.

Stock-based Compensation

The Company recognizes expense for stock options, performance-based restricted stock awards and time-based restricted stock awards pursuant to the authoritative guidance of Accounting Standards Codification (“ASC”) 718, “Compensation – Stock Compensation”. Total compensation expense related to stock options, performance-based restricted stock awards and time-based restricted stock awards was $1.4 million and $1.1 million for the three-month periods ended March 31, 2012 and 2011, respectively, classified in the statement of operations line items as follows:

 

     Three Months Ended
March 31,
 
     2012      2011  

Cost of revenue

   $ 28,000       $ 24,000   

Sales and marketing

     271,000         197,000   

General and administrative

     1,072,000         852,000   

Research and development

     14,000         18,000   
  

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,385,000       $ 1,091,000   
  

 

 

    

 

 

 

As of March 31, 2012, future compensation cost related to non-vested stock options, less estimated forfeitures, is approximately $1.3 million and will be recognized over an estimated weighted average period of approximately 2.9 years. Lionbridge currently expects to amortize $10.1 million of unamortized compensation in connection with restricted stock awards outstanding as of March 31, 2012 over an estimated weighted average period of approximately 2.7 years.

3. UNBILLED RECEIVABLES

Unbilled receivables represent revenue recognized not yet billed. Unbilled receivables are calculated for each individual project based on the proportional delivery of services at the balance sheet date. Billing of amounts in unbilled receivables occurs according to customer-agreed payment schedules or upon completion of specified project milestones. All of Lionbridge’s projects in unbilled receivables are expected to be billed and collected within one year.

4. DEBT

On September 30, 2010, the Company entered into Amendment No. 3 (the “Amendment”) with HSBC Bank USA, National Association (“HSBC”) to extend the term for an additional four years to 2014 on its revolving credit agreement. In addition, under the terms of the Amendment, the Credit Agreement was amended to reflect that HSBC is

 

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the sole lender under the Credit Agreement. The Credit Agreement provides for a $50.0 million revolving credit facility and establishes interest rates in the range of LIBOR plus 1.75% – 2.50%, depending on certain conditions. At March 31, 2012, $24.7 million was outstanding with an interest rate of 2.2%. The fair value of debt approximates its current value of $24.7 million as of March 31, 2012. The fair value of the debt would be classified as a Level 2 measurement due to the use of inputs based on similar liabilities in the market. The Company is required to maintain leverage and fixed charge coverage ratios and to comply with other covenants in its revolving credit agreement. The leverage ratio is calculated by dividing the Company’s total outstanding indebtedness at each quarter end by its adjusted earnings before interest, taxes, depreciation and certain other non-cash expenses during the four consecutive quarterly periods then ended. The fixed charge coverage ratio is calculated by dividing the Company’s adjusted earnings before interest, taxes, depreciation and certain other non-cash expenses minus capital expenditures for each consecutive four quarterly periods by its interest paid and cash paid on taxes during each such consecutive four quarterly periods. The Company was in compliance with both of these ratios as well as all other bank covenants as of March 31, 2012.

5. NET INCOME (LOSS) PER SHARE

Basic earnings per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. For the purposes of calculating diluted earnings per share, the denominator includes both the weighted average number of shares of common stock outstanding and the number of dilutive common stock equivalents such as stock options and unvested restricted stock, as determined using the treasury stock method.

Shares used in calculating basic and diluted earnings per share for the three-month periods ended March 31, 2012 and 2011, respectively, are as follows:

 

     Three Months Ended
March 31,
 
     2012      2011  

Weighted average number of shares of common stock outstanding — basic

     58,557,000         57,523,000   

Dilutive common stock equivalents relating to options and restricted stock

     1,105,000         —     
  

 

 

    

 

 

 

Weighted average number of shares of common stock outstanding — diluted

     59,662,000         57,523,000   
  

 

 

    

 

 

 

Options and unvested restricted stock to purchase 5,667,000 and 8,154,000 shares of common stock for the three-month periods ended March 31, 2012 and 2011, respectively, were not included in the calculation of diluted net income per share, as their effect would be anti-dilutive.

6. RESTRUCTURING CHARGES

During the three-month period ended March 31, 2012, Lionbridge recorded $284,000 of restructuring charges. The $284,000 of restructuring charges recorded in the three-month period ended March 31, 2012 included $137,000 for workforce reductions in Europe consisting of 4 technical staff and1 administrative staff, $28,000 recorded for vacated facilities and associated site closure costs, and $119,000 of additional costs recorded for a previously vacated facility in order to reflect changes in initial estimates of a sublease arrangement due to current economic conditions. All of these charges related to the Company’s Global Language and Content (“GLC”) segment. The Company made $761,000 of cash payments in the three-month period ended March 31, 2012 all of which related to the GLC segment.

During the three-month period ended March 31, 2011, Lionbridge recorded $2.1 million of restructuring charges. The $2.1 million of restructuring charges recorded in the three-month period ended March 31, 2011 included $1.9 million for workforce reductions in Europe, the Americas and Asia consisting of 14 technical staff, 2 administrative staff and 1 sales staff, $106,000 recorded for vacated facilities and associated site closure costs, and $59,000 of additional costs recorded for a previously vacated facility in order to reflect changes in initial estimates of a sublease arrangement due to current economic conditions. Of these charges, $2.1 million

 

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related to the Company’s GLC segment and $9,000 related to the Interpretation segment. The Company made $3.1 million of cash payments in the three-month period ended March 31, 2011 with $3.1 million and $9,000 related to the GLC and Interpretation segments, respectively.

The following table summarizes the accrual activity for the three months ended March 31, 2012 and 2011, respectively, by initiative:

 

     2012     2011  

Beginning balance, January 1

   $ 2,867,000      $ 6,607,000   

Employee severance:

    

Restructuring charges recorded

     153,000        1,935,000   

Cash payments related to liabilities recorded on exit or disposal activities

     (696,000     (3,015,000
  

 

 

   

 

 

 
     (543,000     (1,080,000
  

 

 

   

 

 

 

Vacated facility/Lease termination:

    

Restructuring charges recorded

     —          106,000   

Revision of estimated liabilities

     119,000        59,000   

Cash payments related to liabilities recorded on exit or disposal activities

     (65,000     (100,000
  

 

 

   

 

 

 
     54,000        65,000   
  

 

 

   

 

 

 

Ending balance, March 31

   $ 2,378,000      $ 5,592,000   
  

 

 

   

 

 

 

At March 31, 2012, the Company’s consolidated balance sheet includes accruals totaling $2.4 million primarily related to employee termination costs and vacated facilities. Lionbridge currently anticipates that $752,000 of these will be fully paid within twelve months. The remaining $1.6 million relates to lease obligations on unused facilities expiring through 2026 and is included in long-term liabilities.

7. INCOME TAXES

The provision for income taxes for the three-month periods ended March 31, 2012 and 2011 was $582,000 and $471,000, respectively. The tax provision for the three-month period ended March 31, 2012 consists primarily of taxes on income in foreign jurisdictions and taxes, interest and penalties recorded in relation to the Company’s uncertain tax positions.

The tax provision for the three-month period ended March 31, 2011 consisted primarily of taxes on income in foreign jurisdictions, as well as a foreign tax benefit of $415,000 related to a refund received for an amended 2008 tax filing, and taxes, interest and penalties recorded in relation to the Company’s uncertain tax positions.

The balance of unrecognized tax benefits at March 31, 2012, not including interest and penalties, was $4.5 million, which, if recognized, would affect the effective income tax rate in future periods. Lionbridge also recognizes interest and penalties related to unrecognized tax benefits in tax expense. At March 31, 2012, Lionbridge had approximately $1.8 million of interest and penalties accrued related to unrecognized tax benefits.

The Company conducts business globally and in the normal course of business is subject to examination by local, state and federal jurisdictions in the United States as well as in multiple foreign jurisdictions. Currently, no Internal Revenue Service audits are underway and audits in Belgium, Canada, Finland, Germany, India and Poland are in varying stages of completion. Open audit years are dependent upon the tax jurisdiction and range from 2003 to present.

At March 31, 2012, no provision for U.S. income and foreign withholding taxes has been made for unrepatriated foreign earnings because it is expected that such earnings will be reinvested indefinitely.

Through March 31, 2011, Lionbridge’s Indian subsidiary, Lionbridge Technologies Private Limited (“Lionbridge India”), had a tax holiday granted by the Indian government and was exempt from corporate income tax on its operating profits. This tax holiday expired at the end of the Indian subsidiary’s March 31, 2011 tax year, and the Indian subsidiary is subject to corporate income tax effective April 1, 2011.

 

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Lionbridge’s management has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Under the applicable accounting standards, management has considered Lionbridge’s history of losses and concluded that, with the exception of certain foreign tax jurisdictions, it is more-likely-than-not that Lionbridge will not generate sufficient future taxable income to benefit from the tax assets prior to their expiration. Accordingly, full valuation allowances have been maintained against those tax assets.

8. SEGMENT INFORMATION

Lionbridge has determined that its operating segments are those that are based on its method of internal reporting, which separately presents its business based on the service performed. The Company is reporting its results among the following three business segments:

Global Language and Content (“GLC”)—this segment includes solutions that enable the translation, localization and worldwide multilingual release of clients’ products, content and related technical support, training materials, and sales and marketing information. Lionbridge GLC solutions involve translating, localizing and adapting content and products to meet the language and cultural requirements of users throughout the world. As part of its GLC solutions, Lionbridge also develops eLearning content and technical documentation. Lionbridge GLC solutions are based on the Company’s SaaS-based language technology platforms and applications, and its global service delivery model which make the translation and localization processes more efficient for Lionbridge clients and subscribers.

Global Development and Testing (“GDT”)—this segment includes Lionbridge’s development, engineering and testing services for software, hardware, websites, search engines and content. Specifically, through its GDT solutions, Lionbridge develops, optimizes and maintains IT applications and performs testing to ensure the quality, interoperability, usability and performance of clients’ software, search engines, consumer technology products, web sites, and content. Lionbridge’s testing services, which are offered under the VeriTest brand, also include product certification and competitive analysis. Lionbridge has deep domain experience developing, testing and maintaining applications in a cost-efficient, blended on-site and offshore model. Lionbridge also provides specialized search relevance testing, keyword optimization and related services for clients with global search engines and online marketing initiatives.

Interpretation—this segment includes interpretation services for government and business organizations that require experienced linguists to facilitate communication. Lionbridge provides interpretation communication services in more than 360 languages and dialects, including onsite interpretation, over-the-phone interpretation and interpreter testing, training, and assessment services.

The Company’s internal reporting does not include the allocation of certain expenses to the operating segments but instead includes those other expenses in unallocated other expense. Unallocated expenses primarily include corporate expenses, such as interest expense, restructuring, foreign exchange gains and losses and governance expenses, as well as finance, information technology, human resources, legal, treasury and marketing expenses. The Company determines whether a cost is charged to a particular business segment or is retained as an unallocated cost based on whether the cost relates to a corporate function or to a direct expense associated with the particular business segment. For example, corporate finance, corporate information technology and corporate human resource expenses are unallocated, whereas operating segment finance, information technology and human resource expenses are charged to the applicable operating segment.

The table below presents information about the Company’s segment data for the three-month periods ended March 31, 2012 and 2011. Certain prior period segment data has been reclassified to conform to current year presentation. For the three-months ended March 31, 2012, certain services previously reported as part of the Company’s GDT segment are now reported as part of its GLC segment. The amounts reclassified for the prior period are not material. Asset information by reportable segment is not reported, since the Company does not produce such information internally.

 

     GLC      GDT      Interpretation      Corporate and
Other
    Total  

Three Months Ended March 31, 2012

             

External revenue

   $ 77,600,000       $ 28,600,000       $ 5,896,000       $ —        $ 112,096,000   

Cost of revenue (exclusive of depreciation and amortization)

     53,111,000         20,198,000         4,864,000         —          78,173,000   

Depreciation and amortization

     1,097,000         402,000         6,000         620,000        2,125,000   

Other operating expenses

     18,432,000         3,821,000         494,000         —          22,747,000   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment contribution

     4,960,000         4,179,000         532,000         (620,000     9,051,000   

Interest expense and other unallocated items

     —           —           —           (6,748,000     (6,748,000
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     4,960,000         4,179,000         532,000         (7,368,000     2,303,000   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Three Months Ended March 31, 2011

             

External revenue

   $ 69,471,000       $ 24,346,000       $ 5,835,000       $ —        $ 99,652,000   

Cost of revenue (exclusive of depreciation and amortization)

     49,567,000         17,031,000         5,138,000         —          71,736,000   

Depreciation and amortization

     932,000         184,000         27,000         730,000        1,873,000   

Other operating expenses

     18,456,000         3,356,000         668,000         —          22,480,000   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment contribution

     516,000         3,775,000         2,000         (730,000     3,563,000   

Interest expense and other unallocated items

     —           —           —           (8,538,000     (8,538,000
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     516,000         3,775,000         2,000         (9,268,000     (4,975,000
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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9. GOODWILL AND OTHER INTANGIBLE ASSETS

Lionbridge assesses the impairment of goodwill and other intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Such events or conditions could include an economic downturn in the industries to which Lionbridge provides services; increased competition; an increase in operating or other costs; additional volatility in international currencies; the pace of technological improvements; or other information regarding Lionbridge’s market value, such as a reduction in stock price to a price near or below the book value of the Company for an extended period of time. When Lionbridge determines that the carrying value of goodwill may not be recoverable based upon one or more of these indicators of impairment, the Company initially assesses any impairment using fair value measurements based on projected discounted cash flow valuation models. In addition, in accordance with ASC 350, “Intangibles—Goodwill and Other” (“ASC 350”), goodwill is reviewed for impairment on an annual basis. At December 31, 2011, the Company performed its annual test of goodwill to determine if an impairment existed. This test determined that each reporting unit’s fair value exceeded the carrying value of the net assets of each respective reporting unit, using projected discounted cash flow modeling. As a result, no impairment was recorded for the year ended December 31, 2011. There were no events or changes in circumstances during the first quarter of 2012 which indicated that an assessment of the impairment of goodwill and other intangible assets was required.

The Company evaluates whether there has been an impairment in the carrying value of its long-lived assets in accordance with ASC 360, “Property, Plant and Equipment” (“ASC 360”), if circumstances indicate that a possible impairment may exist. An impairment in the carrying value of an asset is assessed when the undiscounted expected future operating cash flows derived from the asset grouping are less than its carrying value. If it is determined that the asset group is impaired then it is written down to its estimated fair value. Factors that could lead to an impairment of acquired customer relationships (recorded with the acquisition of Bowne Global Solutions (“BGS”) in September 2005) include a worsening in customer attrition rates compared to historical attrition rates, or lower than initially anticipated cash flows associated with customer relationships.

Intangible assets arose from the acquisition of BGS and consisted of BGS customer relationships, which are being amortized using an economic consumption method over an estimated useful life of 3 to 12 years.

The following table summarizes other intangible assets at March 31, 2012 and December 31, 2011, respectively.

 

     March 31, 2012      December 31, 2011  
     Gross
Carrying
Value
     Accumulated
Amortization
    Balance      Gross
Carrying
Value
     Accumulated
Amortization
    Balance  

BGS acquired customer relationships

   $ 32,000,000       $ (25,224,000   $ 6,776,000       $ 32,000,000       $ (24,744,000   $ 7,256,000   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 32,000,000       $ (25,224,000   $ 6,776,000       $ 32,000,000       $ (24,744,000   $ 7,256,000   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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Lionbridge currently expects to amortize the following remaining amounts of intangible assets held at March 31, 2012 in the fiscal periods as follows:

 

Year ending December 31,

      

2012

   $ 1,441,000   

2013

     1,583,000   

2014

     1,304,000   

2015

     1,075,000   

2016

     885,000   

Thereafter

     488,000   
  

 

 

 
   $ 6,776,000   
  

 

 

 

10. CONTINGENCIES

On January 10, 2012, a final settlement was approved in connection with a securities class action lawsuit captioned “Samet v. Lionbridge Technologies, Inc. et al.” (01-CV-6770), with the Company’s financial contribution to the settlement being fully covered by insurance. This matter was originally filed in the United States District Court for the Southern District of New York (the “Court”) against the Company, certain of its officers and directors, and certain underwriters involved in the Company’s initial public offering and asserted, among other things, omissions regarding the underwriters’ alleged conduct in allocating shares in Lionbridge’s initial public offering to the underwriters’ customers.

 

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11. FAIR VALUE MEASUREMENTS

ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. ASC 820 defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required by the standard that Lionbridge uses to measure fair value, as well as the assets and liabilities that the Company values using those levels of inputs.

 

 

Level 1:    Quoted prices in active markets for identical assets or liabilities. The Company did not have any financial assets and liabilities at either March 31, 2012 or December 31, 2011 designated as Level 1.
Level 2:    Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Lionbridge’s Level 2 assets and liabilities have historically been an interest rate swap and foreign exchange forward contracts whose fair value were determined using pricing models predicated upon observable market spot and forward rates. Changes in the fair value of foreign exchange forward contracts are recorded in the Company’s earnings as other (income) expense. The Company did not have any foreign exchange forward contracts outstanding at either March 31, 2012 or December 31, 2011. Lionbridge does not have any financial assets and liabilities as of March 31, 2012 or December 31, 2011 designated as Level 2.
Level 3:    Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company did not have any financial assets and liabilities at either March 31, 2012 or December 31, 2011 designated as Level 3.

12. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”), authoritative guidance on the periodic testing of goodwill for impairment. The updated guidance gives companies the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendment is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. The updated accounting guidance is effective for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company will adopt this guidance during 2012 and does not expect it to have a material impact on its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income: Presentation of Comprehensive Income” (“ASU 2011-05”), authoritative guidance which allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This authoritative guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholder’s equity. This authoritative guidance is to be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted this guidance in the first quarter of 2012 and has presented a separate Condensed Consolidated Statement of Comprehensive Income.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement” (“ASU 2011-04”), an amendment to achieve common fair value measurement and disclosure requirements in GAAP and international financial reporting standards (“IFRS”). The amendments explain how to measure fair value and will improve the comparability of fair value measurement presented and disclosed in financial statements prepared in accordance with GAAP and IFRS. This authoritative guidance is to be applied prospectively and is effective during interim and annual periods beginning after December 15, 2011. The Company adopted this guidance in the first quarter of 2012 and it did not have a material effect on its consolidated financial statements.

New pronouncements issued but not effective until after March 31, 2012 are not expected to have a material impact on the Company’s financial position, results of operations or liquidity.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The matters discussed in this Form 10-Q include forward-looking statements that involve risks or uncertainties. These statements are neither promises nor guarantees, but are based on various assumptions by management regarding future circumstances many of which Lionbridge has little or no control over. A number of important risks and uncertainties, including those identified under the caption “Risk Factors” in Lionbridge’s Annual Report on Form 10-K, filed March 14, 2012 (SEC File No. 000-26933) and subsequent filings as well as risks and uncertainties discussed elsewhere in this Form 10-Q could cause Lionbridge’s actual results to differ materially from those in the forward-looking statements. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The forward-looking statements in this Form 10-Q are made as of the date of this filing only, and Lionbridge does not undertake to update or supplement these statements due to changes in circumstances or otherwise, except as required by law.

Overview

Lionbridge is a leading provider of language, development and testing solutions that enable clients to develop, release, manage and maintain their technology applications and content globally. Lionbridge Global Language and Content (“GLC”) solutions enable the translation, localization and worldwide multilingual release of clients’ products, content and related technical support, training materials, and sales and marketing information. Lionbridge GLC solutions involve translating, localizing and adapting content and products to meet the language and cultural requirements of users throughout the world. As part of its GLC solutions, Lionbridge also develops technical documentation and eLearning content. Lionbridge GLC solutions are based on the Company’s Web-based language technology platforms and global service delivery model which make the translation and localization processes more efficient for Lionbridge clients and translators. Certain of these Web-based language technologies are also available on a subscription basis to translators, enterprises and other third parties.

Through its Global Development and Testing (“GDT”) solutions, Lionbridge develops, optimizes and maintains IT applications and performs testing to ensure the quality, interoperability, usability, relevance and performance of clients’ software, consumer technology products, web sites and content. Lionbridge has deep domain experience developing, testing and maintaining applications in a cost-efficient, blended on-site and offshore model. Lionbridge also provides professional global crowdsourcing including specialized search relevance testing, keyword optimization and related services for clients with global search engines and online marketing initiatives.

Lionbridge also provides interpretation services to government organizations and businesses that require human interpreters for non-English speaking individuals.

Lionbridge provides a full suite of language, testing and development solutions to businesses in diverse end markets including technology, mobile and telecommunications, internet and media, life sciences, government, automotive, retail and aerospace. Lionbridge’s solutions include: translation and localization; interpretation; language technology; technical authoring and eLearning; product engineering; application development and maintenance and testing; and global professional crowdsourcing. Lionbridge’s services enable global organizations to increase market penetration and speed adoption of global content and products, enhance return on enterprise application investments, increase workforce productivity and reduce costs.

For the three-month period ended March 31, 2012, Lionbridge’s income from operations was $2.5 million, with net income of $1.7 million. For the three-month ended March 31, 2011, the Company’s loss from operations was $4.4 million with a net loss of $5.4 million. As of March 31, 2012, the Company had an accumulated deficit of $233.3 million.

Certain segments of Lionbridge’s business, its GLC segment in particular, are sensitive to fluctuations in the value of the U.S. Dollar relative to the Euro and other currencies, as a large portion of its cost of revenue and general and administrative expenses are payable in Euros and other currencies, while the majority of its revenues are recorded in U.S. Dollars. During the quarter ended March 31, 2012, the value of the U.S. Dollar relative to the Euro strengthened by 3.6% from the quarter ended March 31, 2011. This strengthening had an unfavorable foreign currency impact on revenue for the quarter ended March 31, 2012, particularly in the GLC segment. In addition, the Company’s operating income and net income for the quarter ended March 31, 2012 were favorably impacted by foreign currency translation due to the strengthening of the U.S. Dollar relative to the Euro and certain other currencies.

Critical Accounting Policies and Estimates

Lionbridge has identified the policies which are critical to understanding the business and the results of operations. There have been no significant changes during the three months ended March 31, 2012 to the items disclosed as the critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

During the first quarter of 2012, Lionbridge adopted the authoritative guidance in FASB ASU 2011-05 and has presented a separate Condensed Consolidated Statement of Comprehensive Income (Loss). Total comprehensive income (loss) consists of net income (loss) and the net change in foreign currency translation adjustment.

 

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Results of Operations

The following table sets forth for the periods indicated certain consolidated financial data as a percentage of total revenue.

 

     Three Months Ended
March  31,
 
     2012     2011  

Revenue

     100.0     100.0

Operating expenses:

    

Cost of revenue (exclusive of depreciation and amortization included below)

     69.7        72.0   

Sales and marketing

     7.6        8.3   

General and administrative

     17.1        18.7   

Research and development

     1.2        1.4   

Depreciation and amortization

     1.5        1.3   

Amortization of acquisition-related intangible assets

     0.4        0.6   

Restructuring and other charges

     0.3        2.1   
  

 

 

   

 

 

 

Total operating expenses

     97.8        104.4   
  

 

 

   

 

 

 

Income (loss) from operations

     2.2        (4.4

Interest expense:

    

Interest on outstanding debt

     0.2        0.1   

Amortization of deferred financing costs

     —          —     

Interest income

     —          —     

Other (income) expense, net

     —          0.5   
  

 

 

   

 

 

 

Income (loss) before income taxes

     2.0        (5.0

Provision for income taxes

     0.5        0.5   
  

 

 

   

 

 

 

Net income (loss)

     1.5     (5.5 )% 
  

 

 

   

 

 

 

Revenue. The following table shows GLC, GDT, and Interpretation revenues in dollars and as a percentage of total revenue for the three months ended March 31, 2012 and 2011, respectively:

 

     Three Months Ended
March 31,
 
     2012     2011  

GLC

   $ 77,600,000         69   $ 69,471,000         70

GDT

     28,600,000         26     24,346,000         24

Interpretation

     5,896,000         5     5,835,000         6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total revenue

   $ 112,096,000         100   $ 99,652,000         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Revenue for the quarter ended March 31, 2012 was $112.1 million, an increase of $12.4 million, or 12.5%, from $99.7 million for the quarter ended March 31, 2011. This period-over-period increase in total revenue was primarily due to approximately $13.5 million of organic growth due to increased revenue from certain large customer engagements, partially offset by decreased revenue of $1.1 million as a result of the U.S. Dollar strengthening against most foreign currencies, in particular the Euro, as compared to the corresponding quarter of the prior year. Lionbridge conducts a large portion of its business in international markets. Approximately 36% of its revenue for the quarter ended March 31, 2012 was denominated in foreign currencies, primarily the Euro. A fluctuation in foreign currency exchange rates primarily affects the GLC segment.

Revenue from the Company’s GLC segment was $77.6 million for the quarter ended March 31, 2012, an increase of $8.1 million, or 11.7%, from $69.5 million for the quarter ended March 31, 2011. This period-over-period increase in total revenue was primarily due to approximately $9.1 million of organic growth due to increased revenue from certain large customer engagements, partially offset by decreased revenue of $1.0 million as a result of the U.S. Dollar strengthening against most foreign currencies, in particular the Euro, as compared to the corresponding quarter of the prior year.

Revenue from the Company’s GDT segment was $28.6 million for the quarter ended March 31, 2012, an increase of $4.3 million, or 17.5%, from $24.3 million for the quarter ended March 31, 2011. The period-over-period increase in GDT revenue was primarily due to expanded relationships with existing customers. Revenue in the GDT segment is not materially impacted by fluctuations in foreign currency exchange rates.

Revenue from the Company’s Interpretation segment was $5.9 million for the quarter ended March 31, 2012, an increase of $61,000, or 1.1%, from $5.8 million for the quarter ended March 31, 2011. The increase in Interpretation revenue for the quarter ended March 31, 2012 was primarily due to increased revenue from existing customers. Revenue in the Interpretation segment is not materially impacted by fluctuations in foreign currency exchange rates.

Cost of Revenue. Cost of revenue, excluding depreciation and amortization, consists primarily of expenses incurred for translation services provided by third parties as well as salaries and associated employee benefits for personnel related to client engagements. The following table shows GLC, GDT and Interpretation cost of revenues, the percentage change from the three-month period of the prior year and as a percentage of revenue for the three months ended March 31, 2012 and 2011, respectively:

 

     Three Months
Ended
March 31,
2012
    % Change
Q1 11 to  Q1 12
    Three Months
Ended
March 31,
2011
 

GLC:

      

Cost of revenue

   $ 53,111,000        7.2   $ 49,567,000   

Percentage of revenue

     68.4       71.3

GDT:

      

Cost of revenue

     20,198,000        18.6     17,031,000   

Percentage of revenue

     70.6       70.0

Interpretation:

      

Cost of revenue

     4,864,000        (5.3 )%      5,138,000   

Percentage of revenue

     82.5       88.1
  

 

 

     

 

 

 

Total cost of revenue

   $ 78,173,000        $ 71,736,000   
  

 

 

     

 

 

 

Percentage of revenue

     69.7       72.0

For the quarter ended March 31, 2012, as a percentage of revenue, cost of revenue decreased to 69.7% as compared to 72.0% for the quarter ended March 31, 2011. This decrease was primarily the result of an increase in revenue, supplemented by the benefit of cost saving initiatives implemented in 2011, and continued benefits realized from the deployment and use of Lionbridge’s language management technology platforms, in addition to the favorable impact of the strengthening of the U.S. Dollar’s exchange rate against most foreign currencies, particularly the Euro, as compared to the corresponding period of 2011.

For the quarter ended March 31, 2012, cost of revenue increased $6.4 million, or 9.0%, to $78.2 million as compared to $71.7 million for the corresponding period of the prior year. This increase was primarily associated with the $12.4 million increase in revenue as compared to the corresponding period of the prior year, offset by approximately $1.6 million of reduced expenses attributable to the favorable impact of the strengthening of the U.S. Dollar’s exchange rate against most foreign currencies, in particular the Euro.

 

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For the quarter ended March 31, 2012, cost of revenue as a percentage of revenue in the Company’s GLC segment decreased to 68.4% as compared to 71.3% for the quarter ended March 31, 2011. This decrease was primarily the result of the $8.1 million increase in revenue period-over-period in addition to the favorable impact of the strengthening of the U.S. Dollar against most foreign currencies, particularly the Euro, as compared to the corresponding period of 2011. These decreases were benefitted by the cost saving initiatives implemented in 2011, and continued benefits realized from the deployment and use of Lionbridge’s language management technology platform. For the quarter ended March 31, 2012, GLC cost of revenue increased $3.5 million to $53.1 million as compared to $49.6 million for the same quarter of the prior year. This increase was primarily associated with the $8.1 million increase in revenue as compared to the corresponding period of the prior year, offset by approximately $1.3 million of reduced expenses attributable to the favorable impact of the strengthening of the U.S. Dollar’s exchange rate against most foreign currencies, in particular the Euro.

For the quarter ended March 31, 2012, cost of revenue as a percentage of revenue in the Company’s GDT segment increased to 70.6% as compared to 70.0% for the quarter ended March 31, 2011. For the quarter ended March 31, 2012, GDT cost of revenue increased $3.2 million, or 18.6%, to $20.2 million as compared to $17.0 million for the corresponding period of the prior year. This $3.2 million cost of revenue increase was primarily attributable to the $4.3 million increase in revenue and customer work mix variances period-over-period and is inclusive of approximately $326,000 of reduced expenses attributable to the favorable impact of the strengthening of the U.S. Dollar’s exchange rate against certain foreign currencies.

For the quarter ended March 31, 2012, cost of revenue as a percentage of revenue in the Company’s Interpretation segment decreased to 82.5% as compared to 88.1% for the quarter ended March 31, 2011. For the quarter ended March 31, 2012, Interpretation cost of revenue decreased $274,000, or 5.3%, to $4.9 million as compared to $5.1 million for the corresponding period of the prior year. These decreases were primarily due to pricing and work mix variations in services period-over-period. The Company’s Interpretation segment is not materially impacted by foreign currency exchange rate fluctuations.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and associated employee benefits, travel expenses of sales and marketing personnel, promotional expenses, training, and the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs. The following table shows sales and marketing expenses in dollars, the dollar change from the three-month period of the prior year and as a percentage of revenue for the three months ended March 31, 2012 and 2011, respectively:

 

     Three Months Ended March 31,  
     2012     2011  

Total sales and marketing expenses

   $ 8,509,000      $ 8,278,000   

Increase from prior year

     231,000     

Percentage of revenue

     7.6     8.3

Sales and marketing expenses increased $231,000, or 2.8%, for the three months ended March 31, 2012 as compared to the corresponding period of 2011. This increase is primarily attributable to increased compensation and travel costs to support the $12.4 million increase in revenue, period-over-period. In addition, sales and marketing expenses for the three months ended March 31, 2012 were favorably impacted by the strengthening of the U.S. Dollar’s exchange rate against most foreign currencies, in particular the Euro, by approximately $95,000. As a percentage of revenue, sales and marketing expenses decreased to 7.6% for the three months ended March 31, 2012 as compared to 8.3% for the three months ended March 31, 2011 primarily attributable to increased revenue period-over-period.

General and Administrative. General and administrative expenses consist of salaries of the management, purchasing, process and technology, finance and administrative groups, and associated employee benefits and travel; facilities costs; information systems costs; professional fees; business reconfiguration costs and all other site and corporate costs. The following table shows general and administrative expenses in dollars, the dollar change from the three-month period of the prior year and as a percentage of revenue for the three months ended March 31, 2012 and 2011, respectively:

 

     Three Months Ended March 31,  
     2012     2011  

Total general and administrative expenses

   $ 19,176,000      $ 18,625,000   

Increase from prior year

     551,000     

Percentage of revenue

     17.1     18.7

General and administrative expenses increased $551,000, or 3.0%, for the three months ended March 31, 2012 as compared to the corresponding period of 2011. The majority of this increase is primarily due to increased employee

 

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compensation and benefits and stock-based compensation expense. In addition, general and administrative expenses for the three months ended March 31, 2012 were favorably impacted by the strengthening of the U.S. Dollar’s exchange rate against most foreign currencies, in particular the Euro, by approximately $358,000. Approximately 53% of general and administrative expenses are denominated in non-U.S. Dollars, primarily the Euro, and of that amount a majority of these expenses related to rent and compensation expense in the three months March 31, 2012, as compared to the three months ended March 31, 2011. As a percentage of revenue, general and administrative expenses decreased to 17.1% for the quarter ended March 31, 2012, as compared to 18.7%, for the same period of the prior year. This decrease is primarily associated with the $12.4 million increase in revenue for the quarter ended March 31, 2012, as compared to the corresponding period of the prior year and the result of the cost saving initiatives implemented during 2011.

Research and Development. Research and development expenses relate primarily to the Company’s web-based hosted language management technology platform used in the globalization process and the research and development of a globalization management system, its Translation Workspace SaaS-based offering, and development of its GeoFluent automated machine translation technology. The cost consists primarily of salaries and associated employee benefits and third-party contractor expenses. The following table shows research and development expense in dollars, the dollar change from the three-month period of the prior year and as a percentage of revenue for the three months ended March 31, 2012 and 2011, respectively:

 

     Three Months Ended March 31,  
     2012     2011  

Total research and development expense

   $ 1,362,000      $ 1,396,000   

Decrease from prior year

     34,000     

Percentage of revenue

     1.2     1.4

Research and development expenses decreased $34,000 for the three months ended March 31, 2012 as compared to the corresponding period of 2011. The majority of this decrease was due to reduced expenses attributable to the strengthening of the U.S. Dollar’s exchange rate against most foreign currencies, in particular the Euro.

Depreciation and Amortization. Depreciation and amortization consist of the expense related to property and equipment that is being depreciated over the estimated useful lives of the assets using the straight-line method. The following table shows depreciation and amortization expense in dollars, the dollar change from the three-month period of the prior year and as a percentage of revenue for the three months ended March 31, 2012 and 2011, respectively:

 

     Three Months Ended March 31,  
     2012     2011  

Total depreciation and amortization expense

   $ 1,645,000      $ 1,291,000   

Increase from prior year

     354,000     

Percentage of revenue

     1.5     1.3

Depreciation and amortization expense increased by $354,000 for the three months ended March 31, 2012 as compared to the corresponding period of 2011. This increase is primarily the result of the depreciation of increased investment in internal and external capitalized costs for the Company’s web-based hosted management technology platform, its Translation Workspace SaaS-based offering and its customizable real-time automated machine translation technology known as GeoFluent. Depreciation and amortization expense was not materially impacted by fluctuations in foreign currency exchange rates period-over-period.

Amortization of Acquisition-related Intangible Assets. Amortization of acquisition-related intangible assets consists of the amortization of identifiable intangible assets resulting from acquired businesses. Amortization expense for the three months ended March 31, 2012 and 2011 of $480,000 and $583,000, respectively, and relates solely to the amortization of identifiable intangible assets acquired from BGS in 2005.

Interest Expense. Interest expense primarily represents interest paid or payable on debt and the amortization of deferred financing costs. Interest expense for the quarter ended March 31, 2012 of $215,000 increased $41,000 from $174,000 for the quarter ended March 31, 2011. The increase reflects the impact of higher interest rates in the quarter ended March 31, 2012 as compared to the corresponding period of the prior year.

Other (Income) Expense, Net. Other (income) expense, net primarily reflects the foreign currency transaction gains or losses arising from exchange rate fluctuations on transactions denominated in currencies other than the functional currencies of the countries in which the transactions are recorded. The Company recognized $31,000 in other income, net, in the three months ended March 31, 2012 as compared to $458,000 other expense, net in the corresponding period of 2011. The

 

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variations are primarily attributable to the variances in the Euro against other currencies in the periods, as compared to the net position and variance during the corresponding periods of the prior year in addition to a net realized and unrealized foreign currency loss of $635,000 on forward contracts recorded in the three-month period ended March 31, 2011.

Provision for Income Taxes. The provision for income taxes consists primarily of taxes resulting from profits in foreign jurisdiction and taxes, interest and penalties associated with uncertain tax positions. The tax provision increased $111,000 to $582,000 for the quarter ended March 31, 2012 from $471,000 in the corresponding quarter of the prior year. These increases are primarily due to higher foreign profits which are subject to tax by the foreign jurisdictions due to treatment of the foreign subsidiaries as service providers that earn a profit based on a cost-plus model.

Liquidity and Capital Resources

On September 30, 2010, the Company entered into Amendment No. 3 (the “Amendment”) with HSBC Bank USA, National Association (“HSBC”) to extend the term for an additional four years to 2014 on its revolving credit agreement. In addition, under the terms of the Amendment, the Credit Agreement was amended to reflect that HSBC is the sole lender under the Credit Agreement. The Credit Agreement provides for a $50.0 million revolving credit facility and establishes interest rates in the range of LIBOR plus 1.75% – 2.50%, depending on certain conditions. At March 31, 2012, $24.7 million was outstanding with an interest rate of 2.2%. The fair value of debt approximates its current value of $24.7 million as of March 31, 2012. The Company was in compliance with the leverage and fixed charge coverage ratios specified in its revolving credit agreement as well as all other bank covenants as of March 31, 2012.

The following table shows cash and cash equivalents and working capital at March 31, 2012 and at December 31, 2011:

 

     March 31, 2012      December 31, 2011  

Cash and cash equivalents

   $ 19,932,000       $ 25,219,000   

Working capital

     48,283,000         45,515,000   

Lionbridge’s working capital increased $2.8 million to $48.3 million at March 31, 2012, as compared to $45.5 million at December 31, 2011; accounts receivable and unbilled receivables totaled $90.8 million, an increase of $11.7 million as compared to December 31, 2011; and other current assets increased by $1.7 million as compared to December 31, 2011. Current liabilities totaled $73.2 million at March 31, 2012, an increase of $5.3 million from December 31, 2011.

The following table shows the net cash provided by (used in) operating activities, net cash used in investing activities, and net cash provided by financing activities for the three months ended March 31, 2012 and 2011, respectively:

 

     Three Months Ended March 31,  
     2012     2011  

Net cash used in operating activities

   $ (3,972,000   $ (947,000

Net cash used in investing activities

     (1,322,000     (3,580,000

Net cash provided by financing activities

     6,000        75,000   

 

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Net cash used in operating activities was $4.0 million for the three months ended March 31, 2012, as compared to $947,000 for the corresponding period of 2011. The $4.0 million cash used in operating activities was due to net income of $1.7 million (inclusive of $3.5 million in depreciation, amortization, stock-based compensation and other non-cash expenses), a $11.0 million net increase in accounts receivable and unbilled receivables, a $1.4 million increase in other operating assets, a $3.0 million increase in accounts payable, accrued expenses and other operating liabilities, and a $173,000 decrease in deferred revenue. Lionbridge has not experienced any significant trends in accounts receivable and unbilled receivables other than changes relative to the change in revenue, as previously noted. Fluctuations in accounts receivable and unbilled receivables from period to period relative to changes in revenue are a result of timing of customer invoicing and receipt of payments from customers.

In the three months ended March 31, 2011, net cash used in operating activities was $947,000. Net cash used in operating activities was due to a net loss of $5.4 million (inclusive of $3.6 million in depreciation, amortization, stock-based compensation and other non-cash expenses), a $2.4 million net decrease in accounts receivable and unbilled receivables, a $1.9 million increase in other operating assets, a $771,000 increase in accounts payable, accrued expenses and other operating liabilities, and a $343,000 decrease in deferred revenue.

Net cash used in investing activities decreased $2.3 million to $1.3 million for the three months ended March 31, 2012, as compared to $3.6 million for the corresponding period of 2011. The primary investing activity in the three months ended March 31, 2012 was $1.3 million for the purchase of property and equipment.

In the three months ended March 31, 2011, net cash used in investing activities was $3.6 million, which included $2.9 million for the purchase of property and equipment and $635,000 for payments of forward contracts.

Net cash provided by financing activities for the three months ended March 31, 2012 was $6,000, a decrease of $69,000 as compared to $75,000 for the corresponding period of 2011. Cash provided by financing activities consisted of $6,000 of proceeds from the issuance of common stock under option plans.

In the three months ended March 31, 2011, net cash provided by financing activities was $75,000. Cash provided by financing activities consisted of $78,000 of proceeds from the issuance of common stock under option plans and $3,000 for payments of capital lease obligations.

On May 5, 2010, Lionbridge filed with the Securities and Exchange Commission a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended (SEC File No. 333-166529), covering the registration of debt and equity securities (the “Securities”), in an aggregate amount of $100.0 million. The registration statement was declared effective by the Commission on May 13, 2010. The Company may offer these Securities from time to time in amounts, at prices and on terms to be determined at the time of sale. The Company believes that with this registration statement, it has additional financing flexibility to meet potential future funding requirements and the ability to take advantage of potentially attractive capital market conditions.

Lionbridge anticipates that its present cash and cash equivalents position and available financing under its Credit Agreement should provide adequate cash to fund its currently anticipated cash needs for the at least the next twelve months.

Contractual Obligations

As of March 31, 2012, there were no material changes in Lionbridge’s contractual obligations as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Net tax provisions during the three months ended March 31, 2012, primarily related to taxes and accrued interest, have increased the balance of unrecognized tax benefits by $66,000 to $6.3 million.

The Company believes that it is reasonably possible that approximately $562,000 of its unrecognized tax benefits, consisting of several items in various jurisdictions, may be recognized within the next twelve months.

Off-Balance Sheet Arrangements

The Company does not have any special purpose entities or off-balance sheet financing arrangements.

Recently Issued Accounting Pronouncements

        In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”), authoritative guidance on the periodic testing of goodwill for impairment. The updated guidance gives companies the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendment is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. The updated accounting guidance is effective for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company will adopt this guidance during 2012 and does not expect it to have a material impact on its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income: Presentation of Comprehensive Income” (“ASU 2011-05”), authoritative guidance which allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This authoritative guidance eliminates the option to

 

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present the components of other comprehensive income as part of the statement of changes in stockholder’s equity. This authoritative guidance is to be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted this guidance in the first quarter of 2012 and has presented a separate Condensed Consolidated Statement of Comprehensive Income.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement” (“ASU 2011-04”), an amendment to achieve common fair value measurement and disclosure requirements in GAAP and international financial reporting standards (“IFRS”). The amendments explain how to measure fair value and will improve the comparability of fair value measurement presented and disclosed in financial statements prepared in accordance with GAAP and IFRS. This authoritative guidance is to be applied prospectively and is effective during interim and annual periods beginning after December 15, 2011. The Company adopted this guidance in the first quarter of 2012 and it did not have a material effect on its consolidated financial statements.

New pronouncements issued but not effective until after March 31, 2012 are not expected to have a material impact on the Company’s financial position, results of operations or liquidity.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Lionbridge conducts its business globally and its earnings and cash flows are exposed to market risk from changes in interest rates and currency exchange rates. The Company manages its risk to foreign currency transaction exposure and interest rates through risk management programs that include the use of derivative financial instruments. Lionbridge operates these programs pursuant to documented corporate risk management policies. Lionbridge does not enter into any derivative transactions for speculative purposes. Gains and losses on derivative financial instruments substantially offset gains and losses on underlying hedged exposures.

Interest Rate Risk. Lionbridge is exposed to market risk from changes in interest rates with respect to its revolving loan facility which bears interest at Prime or LIBOR (at the Company’s discretion) plus an applicable margin based on certain financial covenants. As of March 31, 2012, $24.7 million was outstanding under this facility. A hypothetical 10% increase or decrease in interest rates would have approximately a $55,000 impact on the Company’s interest expense based on the $24.7 million outstanding at March 31, 2012 with an interest rate of 2.2%. Lionbridge is exposed to market risk through its investing activities. The Company’s portfolio consists primarily of short-term time deposits with investment grade banks and maturities less than 90 days. A hypothetical 10% increase or decrease in interest rates would not have a material impact on the carrying value of Lionbridge’s investments due to their immediately available liquidity.

Foreign Currency Exchange Rate Risk. Lionbridge conducts a large portion of its business in international markets. Although a majority of Lionbridge’s contracts with clients are denominated in U.S. Dollars, 63% and 64% of its costs and expenses for the three-month period ended March 31, 2012 and 2011, respectively, were denominated in foreign currencies, primarily operating expenses associated with cost of revenue, sales and marketing and general and administrative. In addition, 18% and 17% of the Company’s consolidated tangible assets were subject to foreign currency exchange fluctuations as of March 31, 2012 and December 31, 2011, respectively, while 17% and 16% of its consolidated liabilities were exposed to foreign currency exchange fluctuations as of March 31, 2012 and December 31, 2011, respectively. In addition, net inter-company balances denominated in currencies other than the functional currency of the respective entity were approximately $48.8 million and $48.4 million as of March 31, 2012 and December 31, 2011, respectively. The principal foreign currency applicable to our business is the Euro. The Company has implemented a risk management program that partially mitigates its exposure to assets or liabilities (primarily cash, accounts receivable, accounts payable and inter-company balances) denominated in currencies other than the functional currency of the respective entity which includes the option to use derivative financial instruments principally foreign exchange forward contracts. These foreign exchange forward contracts generally have less than 90-day terms and do not qualify for hedge accounting under the ASC 815 guidance. The Company had no foreign exchange forward contracts outstanding at March 31, 2012.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Lionbridge maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the Company’s filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported accurately within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any

 

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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. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (pursuant to Exchange Act Rule 13a-15). Based upon this evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2012.

Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2012 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

LIONBRIDGE TECHNOLOGIES, INC.

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

On January 10, 2012, a final settlement was approved in connection with a securities class action lawsuit captioned “Samet v. Lionbridge Technologies, Inc. et al.” (01-CV-6770), with the Company’s financial contribution to the settlement being fully covered by insurance. This matter was originally filed in the United States District Court for the Southern District of New York (the “Court”) against the Company, certain of its officers and directors, and certain underwriters involved in the Company’s initial public offering and asserted, among other things, omissions regarding the underwriters’ alleged conduct in allocating shares in Lionbridge’s initial public offering to the underwriters’ customers.

 

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Table of Contents
Item 1A. Risk Factors

The matters discussed in this Form 10-Q include forward-looking statements that involve risks or uncertainties. These statements are neither promises nor guarantees, but are based on various assumptions by management regarding future circumstances many of which Lionbridge has little or no control over. A number of important risks and uncertainties, including those identified under the caption “Risk Factors” in Lionbridge’s Annual Report on Form 10-K, filed March 14, 2012 (SEC File No. 000-26933) (the “2011 Annual Report”) and subsequent filings as well as risks and uncertainties discussed elsewhere in this Form 10-Q, could cause Lionbridge’s actual results to differ materially from those in the forward-looking statements. There have been no material changes in Lionbridge’s risk factors from those disclosed in Lionbridge’s 2011 Annual Report.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter ended March 31, 2012, the Company withheld 347,368 restricted shares from certain employees to cover certain withholding taxes due from the employees at the time the shares vested. The following table provides information about Lionbridge’s purchases of equity securities for the quarter ended March 31, 2012:

 

Period

   Total Number of
Shares  Purchased
     Average Price
Paid Per  Share
 

January 1, 2012 – January 31, 2012

     252,658       $ 2.69   

February 1, 2012 – February 29, 2012

     94,710       $ 2.74   
  

 

 

    

 

 

 

Total

     347,368       $ 2.74   
  

 

 

    

 

 

 

In addition, upon the termination of employees during the quarter ended March 31, 2012, 25,851 unvested restricted shares were forfeited. The following table provides information about Lionbridge’s forfeited restricted shares for the quarter ended March 31, 2012:

 

Period

   Total Number of
Shares  Forfeited
 

January 1, 2012 – January 31, 2012

     5,000   

February 1, 2012 – February 29, 2012

     18,351   

March 1, 2012 – March 31, 2012

     2,500   
  

 

 

 

Total

     25,851   
  

 

 

 

 

Item 6. Exhibits

 

  (a) Exhibits.

 

10.1*   Office Lease dated March 13, 2012 between Jarminski Survivors Trust and Lionbridge Technologies, Inc.
10.2*   Sixth Amendment to Lease dated February 29, 2012 between Gewerbezentrum Unterhaching Landthaler AG & Co. KG and Lionbridge Deutschland GmbH.
10.3*   Offer Letter dated November 22, 2010, between Lionbridge Technologies, Inc. and Marc Osofsky.
10.4*   Offer Letter dated October 30, 2011 between Lionbridge Technologies, Inc. and Martha Crow.
10.5   Form of Amended and Restated Lionbridge Technologies, Inc. Agreement (filed as Exhibit 10.1 to Current Report on Form 8-K (File No.: 000-26933) on February 7, 2012 and as Exhibit 10.2 to Current Report on Form 8-K (File No.: 26933) on November 5, 2008 and incorporated herein by reference.)

 

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  10.6   Form of MIP Agreement for Executive Officers (filed as Exhibit 10.2 to Current Report on Form 8-K (File No. 000-26933) on February 7, 2012 and incorporated herein by reference).
  10.7   Form of 2012 Performance-Based Restricted Stock Agreement (filed as Exhibit 10.3 to Current Report on Form 8-K (File No. 000-26933) on February 7, 2012 and incorporated herein by reference).
  31.1*   Certification of Rory J. Cowan, the Company’s principal executive officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2*   Certification of Donald M. Muir, the Company’s principal financial officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1*†   Certifications of Rory J. Cowan, the Company’s principal executive officer, and Donald M. Muir, the Company’s principal financial officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101††   The following financial information from Lionbridge Technologies, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, as filed with the SEC on May 9, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements, tagged in summary and detail.

 

* Filed herewith.
Furnished herewith.
†† As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities and Exchange Act of 1934.

LIONBRIDGE TECHNOLOGIES, INC.

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.

 

LIONBRIDGE TECHNOLOGIES, INC.
By:  

/s/    DONALD M. MUIR

  Donald M. Muir
 

Chief Financial Officer

(Duly Authorized Officer and Principal

Financial Officer)

Dated: May 9, 2012

 

25

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