SYMM Symmetricom, Inc. (MM)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)

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

For the quarterly period ended March 27, 2011

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 0-02287

 

 

 

SYMMETRICOM, INC.

(Exact name of registrant as specified in our charter)

 

 

 

Delaware		No. 95-1906306
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

2300 Orchard Parkway, San Jose, California 95131-1017

(Address of principal executive offices)

Registrant’s telephone number: (408) 433-0910

 

 

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     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. (Check one):

 

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

Indicate number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:

 

Class		Outstanding as of April 22, 2011
Common Stock		43,265,146

 

 

 

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SYMMETRICOM, INC.

FORM 10-Q

INDEX

 

				Page
PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements:
		Condensed Consolidated Balance Sheets—March 27, 2011 and June 27, 2010			3
		Condensed Consolidated Statements of Operations—Three and nine months ended March 27, 2011 and March 28, 2010			4
		Condensed Consolidated Statements of Cash Flows—Nine months ended March 27, 2011 and March 28, 2010			5
		Notes to Condensed Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			26
Item 4.		Controls and Procedures			26
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings			27
Item 1A.		Risk Factors			27
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			27
Item 3.		Defaults Upon Senior Securities			27
Item 4.		Removed and Reserved			27
Item 5.		Other Information			27
Item 6.		Exhibits			28
SIGNATURES					29

 

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PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

SYMMETRICOM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

		March 27, 2011				June 27, 2010
ASSETS
Current assets:
Cash and cash equivalents		$	28,383			$	21,794
Short-term investments			46,959				53,825
Accounts receivable, net of allowance for doubtful accounts of $280 and $427			36,778				40,075
Inventories			45,049				37,229
Prepaids and other current assets			14,227				15,108
Total current assets			171,396				168,031
Property, plant and equipment, net			22,728				23,077
Intangible assets, net			2,749				3,745
Deferred taxes and other assets			37,217				36,534
Total assets		$	234,090			$	231,387
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	15,700			$	6,768
Accrued compensation			12,607				18,731
Accrued warranty			1,587				2,900
Other accrued liabilities			14,061				10,506
Total current liabilities			43,955				38,905
Long-term obligations			4,533				8,296
Deferred income taxes			334				334
Total liabilities			48,822				47,535
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.0001 par value; 500 shares authorized, none issued			—				—
Common stock, $0.0001 par value; 70,000 shares authorized, 50,544 shares issued and 43,256 outstanding at March 27, 2011; 49,933 shares issued and 43,699 outstanding at June 27, 2010			200,793				202,450
Accumulated other comprehensive income (loss)			17				(356	)
Accumulated deficit			(15,542	)			(18,242	)
Total stockholders’ equity			185,268				183,852
Total liabilities and stockholders’ equity		$	234,090			$	231,387

See notes to the condensed consolidated financial statements.

 

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SYMMETRICOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended								Nine Months Ended
		March 27, 2011				March 28, 2010				March 27, 2011				March 28, 2010
Net revenue		$	51,234			$	56,526			$	147,457			$	165,656
Cost of sales:
Cost of products and services			26,778				28,367				76,606				88,788
Amortization of purchased technology			260				278				814				1,014
Restructuring charges			1,330				448				8,987				2,241
Total cost of sales			28,368				29,093				86,407				92,043
Gross profit			22,866				27,433				61,050				73,613
Operating expenses:
Research and development			6,717				5,684				20,061				17,511
Selling, general and administrative			13,592				14,385				39,987				42,183
Amortization of intangible assets			60				62				183				219
Restructuring charges			(1,142	)			998				(1,985	)			2,009
Total operating expenses			19,227				21,129				58,246				61,922
Operating income			3,639				6,304				2,804				11,691
Interest income, net of amortization (accretion) of premium (discount) on investments			441				350				664				1,316
Interest expense			—				(1,318	)			(55	)			(3,862	)
Income from continuing operations before taxes			4,080				5,336				3,413				9,145
Income tax provision			1,095				1,648				810				3,018
Income from continuing operations		$	2,985			$	3,688			$	2,603			$	6,127
Income from discontinued operations, net of tax			19				804				97				38
Net income		$	3,004			$	4,492			$	2,700			$	6,165
Earnings per share - basic:
Income from continuing operations		$	0.07			$	0.08			$	0.06			$	0.14
Income from discontinued operations			—				0.02				—				—
Net income		$	0.07			$	0.10			$	0.06			$	0.14
Weighted average shares outstanding - basic			43,153				43,438				43,285				43,309
Earnings per share - diluted:
Income from continuing operations		$	0.07			$	0.08			$	0.06			$	0.14
Income from discontinued operations			—				0.02				—				—
Net income		$	0.07			$	0.10			$	0.06			$	0.14
Weighted average shares outstanding - diluted			43,859				43,934				43,853				43,828

See notes to the condensed consolidated financial statements.

 

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SYMMETRICOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Nine Months Ended
		March 27, 2011				March 28, 2010
Cash flows from operating activities:
Net income		$	2,700			$	6,165
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			5,174				5,219
Non-cash interest on convertible bonds			—				2,346
Deferred income taxes			832				2,604
Gain on sale of discontinued operations			—				(915	)
Loss on disposal of fixed assets			5				129
Stock-based compensation			3,004				2,614
Allowance for doubtful accounts			61				141
Provision for excess and obsolete inventory			1,188				1,239
Changes in assets and liabilities:
Accounts receivable			3,236				5,529
Inventories			(9,008	)			313
Prepaids and other assets			(407	)			1,887
Accounts payable			8,655				(2,221	)
Accrued compensation			(6,124	)			(3,419	)
Other accrued liabilities			(1,521	)			3,879
Net cash provided by operating activities			7,795				25,510
Cash flows from investing activities:
Purchases of short-term investments			(34,289	)			(79,789	)
Maturities of short-term investments			40,313				35,364
Purchases of property, plant and equipment			(3,556	)			(6,660	)
Cash proceeds from sale of discontinued operations			—				1,850
Net cash provided by (used for) investing activities			2,468				(49,235	)
Cash flows from financing activities:
Proceeds from issuance of common stock			2,011				1,826
Repurchase of common stock			(6,013	)			(909	)
Net cash (used for) provided by financing activities			(4,002	)			917
Effect of exchange rate changes on cash			328				(184	)
Net increase (decrease) in cash and cash equivalents			6,589				(22,992	)
Cash and cash equivalents at beginning of period			21,794				72,064
Cash and cash equivalents at end of period		$	28,383			$	49,072
Non-cash investing and financing activities:
Unrealized gain (loss) on investments, net		$	45			$	(148	)
Property, plant and equipment purchases included in accounts payable			410				66
Cash payments for:
Interest		$	—			$	924
Income taxes			190				745

See notes to the condensed consolidated financial statements

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation and Recently Issued Accounting Pronouncements

The condensed consolidated financial statements of Symmetricom, Inc. (“Symmetricom,” “we,” “us,” the “Company,” or “our”) included herein are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. In presenting the financial statements in accordance with accounting principles generally accepted in the United States (“US GAAP”), management makes certain estimates and assumptions that impact the amounts reported and related disclosures. Estimates, by their nature, are judgments based upon available information. Accordingly, actual results could differ from those estimates.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Symmetricom’s Annual Report on Form 10-K for the fiscal year ended June 27, 2010. The results of operations for the three and nine months ended March 27, 2011 are not necessarily indicative of the results to be anticipated for the entire fiscal year ending July 3, 2011.

The condensed consolidated balance sheet as of June 27, 2010 has been derived from the audited consolidated financial statements as of that date but does not include all of the information and footnotes required by US GAAP for complete financial statements.

Fiscal Quarter

Our fiscal quarter is 13 weeks ending on the Sunday closest to the end of the calendar quarter.

Recently Adopted Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of industry specific software revenue recognition guidance. In October 2009, the FASB also amended the standards for multiple deliverable revenue arrangements to:

 

(i)

provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the arrangement consideration should be allocated among its elements;

 

(ii)

require an entity to allocate the revenue using best estimate of selling price (“BESP”) of the deliverables if there is no vendor specific objective evidence (“VSOE”) or third party evidence of selling price (“TPE”); and

 

(iii)

eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.

We adopted this guidance for transactions that were entered into or materially modified on or after June 28, 2010 using the prospective basis of adoption. The adoption of this authoritative guidance had no material impact on our financial position, results of operations or cash flows in the periods presented.

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, our price is fixed or determinable and collectability is reasonably assured. Our standard arrangement for our domestic and international customers includes a signed purchase order or contract and no right of return of delivered products. Revenue is recognized net of any taxes collected from customers and subsequently remitted to governmental authorities.

We assess collectability based on the creditworthiness of the customer and past transaction history. We perform periodic credit evaluations of our customers and do not require collateral from our customers. However, for many of our international customers, we require an irrevocable letter of credit to be issued by the customer before the product is shipped. If we determine that collection of the invoice is not reasonably assured, we recognize revenue at the time that collection becomes reasonably assured, which is generally upon the receipt of cash.

Generally, product revenue is generated from the sale of synchronization and timing equipment with embedded software that is incidental to product functionality. Service revenue is recognized as the services are performed, provided collection of the related receivable is reasonably assured. Our sales to distributors are made under agreements allowing for returns or credits under certain circumstances. Accordingly, we record an estimate of returns from distributors based on a historical average of distributor returns. We record commission expense both when orders are received and shipped, at which times the commission is both earned and payable.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Our multiple element product offerings generally include hardware, software and PCS services, which are considered separate units of accounting.

The new guidance does not generally change the units of accounting for our revenue transactions. Most of the products and services continue to qualify as separate units of accounting. For multiple-element arrangements entered into prior to the first quarter of fiscal 2011, we recognized revenue based on the then relevant revenue recognition guidance that allowed us to utilize the residual method to determine the amount of revenue to be recognized on the delivered elements of the arrangement provided VSOE existed for the undelivered elements. Under the residual method, the fair value of the undelivered elements was deferred, such as post-contract support, and the remaining portion of the arrangement consideration was recognized as revenue. VSOE of fair value is limited to the price charged when the same element is sold separately. VSOE of fair value is established for post-contractual support based on the volume and pricing of the stand-alone sales within a narrow range. The fair value of the post-contractual support is recognized on a straight-line basis over the term of the related support period. In evaluating the revenue recognition for multiple element arrangements under the new accounting guidance, the total arrangement fees are allocated to all the deliverables based on their respective relative selling prices and the residual method is no longer permitted. The relative selling price is determined using VSOE when available. When VSOE cannot be established, we attempt to establish the selling price of deliverables based on relevant TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our competitors, and offerings may contain a significant level of proprietary technology, customization or differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis. Therefore, we typically are not able to determine TPE.

When we are unable to establish selling price using VSOE or TPE, we use a BESP for the allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service was sold on a stand-alone basis. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings. We determine BESP for a product or service by considering multiple factors including, but not limited to:

 

•

the price list established by our management which is typically based on general pricing practices, market conditions, geographies and targeted gross margin of products and services sold;

 

•

analysis of pricing history of new arrangements, including multiple element and stand-alone transactions.

Our future revenue recognition for multiple element arrangements is not expected to differ materially from the results in the current period. However, as our marketing and product strategies evolve, we may modify our pricing practices, which could result in changes in selling prices, including both VSOE and BESP which could impact future revenues.

Note 2. Financial Instruments

The following table presents our financial instruments that are measured at fair value on a recurring basis and categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant non-observable inputs.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

		Balance as of March 27, 2011				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)
		(In thousands)
Assets:
Money market funds		$	12,239			$	12,239			$	—
Short-term investments:
Corporate debt securities			26,073				—				26,073
Government sponsored enterprise debt securities			17,532				17,532				—
Mutual funds			3,354				2,482				872
Total short-term investments			46,959				20,014				26,945
Total financial assets		$	59,198			$	32,253			$	26,945
		Balance as of June 27, 2010				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)
		(In thousands)
Assets:
Money market funds		$	9,729			$	9,729			$	—
Short-term investments:
Corporate debt securities			37,264				—				37,264
Government sponsored enterprise debt securities			13,336				13,336				—
Mutual funds			3,225				2,500				725
Total short-term investments			53,825				15,836				37,989
Total financial assets		$	63,554			$	25,565			$	37,989

Our valuation techniques used to measure the fair values of our money market funds, government sponsored entity securities, and certain mutual funds were derived from quoted market prices as active markets for these instruments exist. Our valuation techniques used to measure the fair values of corporate debt securities and certain mutual funds were derived from non-binding market consensus prices that are corroborated by observable market data.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The following table summarizes Symmetricom’s available-for-sale and trading securities recorded as cash, cash equivalents or short-term investments:

 

		Cost Basis				Gross Unrealized Gains				Fair Value
		(In thousands)
March 27, 2011
Short-term investments and money market funds		$	55,844			$	—			$	55,844
Less amounts classified as cash equivalents			(12,239	)			—				(12,239	)
Deferred compensation plan assets			3,354				—				3,354
Total short-term investments		$	46,959			$	—			$	46,959
June 27, 2010
Short-term investments and money market funds		$	60,265			$	64			$	60,329
Less amounts classified as cash equivalents			(9,729	)			—				(9,729	)
Deferred compensation plan assets			2,854				—				3,225
Total short-term investments		$	53,390			$	64			$	53,825

Deferred compensation plan assets are classified as trading securities in order to maintain consistency with the method in which the Company accounts for deferred compensation obligations. As a result, all gains and losses related to the deferred compensation plan assets have been included in earnings.

Note 3. Inventories

Components of inventories were as follows:

 

		March 27, 2011				June 27, 2010
		(In thousands)
Raw materials		$	22,000			$	19,419
Work-in-process			7,138				8,593
Finished goods			15,911				9,217
Inventories		$	45,049			$	37,229

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 4. Intangible Assets

Intangible assets as of March 27, 2011 and June 27, 2010 consist of:

 

		Gross Carrying Amount				Accumulated Amortization				Net Intangible Assets
		(in thousands)
Purchased technology		$	24,357			$	(22,966	)		$	1,391
Customer lists and trademarks			7,025				(5,667	)			1,358
Total as of March 27, 2011		$	31,382			$	(28,633	)		$	2,749
Purchased technology		$	24,357			$	(22,150	)		$	2,207
Customer lists and trademarks			7,025				(5,487	)			1,538
Total as of June 27, 2010		$	31,382			$	(27,637	)		$	3,745

The estimated future amortization expense by fiscal year is as follows:

 

Fiscal year:		(in thousands)
2011 (Remaining 3 months)		$	317
2012			726
2013			502
2014			502
2015			232
Thereafter			470
Total amortization		$	2,749

Intangible asset amortization expense was $0.3 million each for third quarter of fiscal 2011 and 2010. Intangible asset amortization for the first nine months of fiscal 2011 and 2010 was $1.0 million and $1.2 million, respectively.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 5. Long-term Obligations

Long-term obligations consist of:

 

		March 27, 2011				June 27, 2010
		(In thousands)
Long-term obligations:
Lease loss accrual, net		$	1,630			$	4,784
Deferred revenue			1,601				1,919
Rent accrual			1,095				1,066
Income tax			—				300
Post-retirement benefits			207				227
Total		$	4,533			$	8,296

Note 6. Stockholders’ Equity

Stock Award Activity

Stock award activity for the nine months ended March 27, 2011 is as follows:

 

						Non Performance-based Options Outstanding								Restricted Stock Outstanding
		Shares Available For Grant				Number of Shares				Weighted Average Exercise Price				Number of Shares				Weighted Average Grant-Date Fair Value
		(In thousands, except per share amounts)
Balances at June 27, 2010			5,697				6,043			$	5.84				219			$	5.20
Granted - options			(1,974	)			1,974				6.24				—				—
Granted - restricted shares			(422	)			—				—				211				6.55
Exercised			—				(428	)			4.70				—				—
Vested			—				—				—				(175	)			5.19
Cancelled			1,255				(1,037	)			7.31				(27	)			5.78
Expired			(76	)			—				—				—				—
Balances at March 27, 2011			4,480				6,552			$	5.81				228			$	6.39

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Options outstanding, vested and expected to vest, and exercisable as of March 27, 2011 were as follows:

 

Options		Number of Shares				Weighted Average Remaining Contractual Life				Weighted Average Exercise Price				Aggregate Intrinsic Value
		(In thousands)				(In years)								(In thousands)
Outstanding			6,552				4.67			$	5.81			$	3,840
Vested and expected to vest			6,140				4.58			$	5.81			$	3,681
Exercisable			2,654				3.15			$	6.18			$	1,855

The aggregate intrinsic value of options outstanding in the preceding table represents the total pre-tax value of stock options outstanding as of March 27, 2011, based on our common stock closing price of $5.84 on March 25, 2011, which would have been received by the option holders had all option holders exercised their options as of that date.

The total intrinsic value of options exercised during the third quarter of fiscal 2011 was approximately $0.2 million and $0.6 million for the nine months ended March 27, 2011.

For the quarter ended March 27, 2011 and March 28, 2010, the weighted-average estimated fair value of options granted was $3.09 and $2.51 per share, respectively. For the nine months ended March 27, 2011 and March 28, 2010, the weighted-average estimated fair value of options granted was $3.08 and $2.41 per share, respectively. Our calculations were made using the Black-Scholes option-pricing model. The fair value of Symmetricom stock-based awards to employees was estimated assuming no expected dividend and the weighted-average assumptions for the three and nine months ended March 27, 2011 and March 28, 2010 as follows:

 

		Three months ended								Nine months ended
		March 27, 2011				March 28, 2010				March 27, 2011				March 28, 2010
Expected life (in years)			4.6				5.1				5.1				4.9
Risk-free interest rate			1.3	%			2.0	%			1.2	%			1.9	%
Volatility			56.4	%			57.6	%			56.7	%			56.4	%

We recorded stock-based compensation expense of $1.5 million and $0.8 million in the third quarter of fiscal 2011 and 2010, respectively, and $3.0 million and $2.6 million in the first nine months of fiscal 2011 and 2010, respectively. We calculated these stock-based compensation expenses using an estimated annual forfeiture rate of 8%. At March 27, 2011, the total cumulative compensation cost related to unvested stock-based awards granted to employees, directors and consultants under the Company’s stock option plans, but not yet recognized, was approximately $6.6 million, net of estimated forfeitures of $1.5 million. This cost will be amortized using an accelerated method over a period of approximately 1.4 years and will be adjusted for subsequent changes in estimated forfeitures.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The following table shows total stock-based compensation expense included in the condensed consolidated statements of operations:

 

		Three Months Ended								Nine Months Ended
		March 27, 2011				March 28, 2010				March 27, 2011				March 28, 2010
		(In thousands)								(In thousands)
Cost of sales		$	253			$	169			$	506			$	641
Research and development			240				194				562				622
Selling, general and administrative			1,055				457				2,050				1,351
Stock compensation expense from continuing operations			1,548				820				3,118				2,614
Stock compensation expense from discontinued operations			—				—				(114	)			—
Total		$	1,548			$	820			$	3,004			$	2,614

Stock Repurchases

During the third quarter of fiscal 2011, we repurchased approximately 316,000 shares of common stock pursuant to our repurchase program for an aggregate price of approximately $1.9 million. During the first nine months of fiscal 2011, we repurchased approximately 993,000 shares of common stock pursuant to our repurchase program for an aggregate price of approximately $5.7 million. A further 61,000 shares were repurchased by us in the first nine months of fiscal 2011 for an aggregate price of approximately $0.3 million to cover the cost of taxes on vested restricted stock.

On October 28, 2010, the Company’s Board of Directors authorized management to repurchase an additional 1.6 million shares of Symmetricom common stock in addition to the remaining shares available for repurchase under previously approved programs. As of March 27, 2011, the total number of shares available for repurchase under the repurchase programs authorized by the Board of Directors was approximately 1.9 million.

Note 7. Restructuring Charges

The following table shows the details of the restructuring cost accruals included in other accrued liabilities and long-term obligations on our condensed consolidated balance sheets, which consist of facilities and severance costs, at March 27, 2011 and June 27, 2010:

 

		Balance at June 27, 2010				Expense Additions				Payments and Non-cash Settlements				Balance at March 27, 2011
		(in thousands)
Lease loss accrual (fiscal 2004)		$	198			$	—			$	(29	)		$	169
All other restructuring charges (fiscal 2004)			85				22				(51	)			56
Lease loss accrual (fiscal 2009)			5,330				(2,774	)			(660	)			1,896
Additional depreciation charges (fiscal 2009 & 2010)			—				945				(945	)			—
All other restructuring charges (fiscal 2009 & 2010)			2,604				7,514				(9,598	)			520
Lease loss accrual (fiscal 2010)			304				182				(486	)			—
Other restructuring charges (fiscal 2011)			—				1,113				(521	)			592
Total		$	8,521			$	7,002			$	(12,290	)		$	3,233

During the first nine months of fiscal 2011, we incurred approximately $7.0 million in severance, manufacturing transfer consulting services, lease loss charges and additional depreciation on leasehold improvements. These expenses included $8.7 million of severance, consulting, additional depreciation and other charges for our Puerto Rico facility closure and $1.1 million of severance, consulting and other charges related to the plan to move the Government Business Unit’s engineering and new product introduction team from our Santa Rosa facility to San Jose and other facilities. The lease loss accrual was reduced by $2.8 million primarily due to re-occupation of a section of our San Jose facility that was previously not used and the sub-lease of a section of our Santa Rosa facility. The lease loss accruals are subject to periodic revisions based on current market estimates. The balance of these lease loss accruals will be paid over the next eight years.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Over the next three months, we expect to incur approximately $1.5 million in other restructuring related charges.

Note 8. Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of two components: net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that under US GAAP are recorded as an element of stockholders’ equity but are excluded from net income (loss). Other comprehensive income (loss) is comprised of unrealized gains and losses, net of taxes, on marketable securities categorized as available-for-sale and foreign currency translation adjustments. The components of comprehensive income (loss), net of tax, are as follows:

 

		Three Months Ended								Nine Months Ended
		March 27, 2011				March 28, 2010				March 27, 2011				March 28, 2010
		(in thousands)								(in thousands)
Net income		$	3,004			$	4,492			$	2,700			$	6,165
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments			241				(59	)			328				(184	)
Unrealized gain (loss) on investments			(8	)			(19	)			45				(148	)
Other comprehensive income (loss)			233				(78	)			373				(332	)
Total comprehensive income		$	3,237			$	4,414			$	3,073			$	5,833

Note 9. Net Income (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period less unvested shares of restricted common stock. Diluted earnings (loss) per share is calculated by dividing net income by the weighted-average number of common shares outstanding and common equivalent shares from stock options and unvested restricted stock using the treasury method, except when anti-dilutive.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The following table reconciles the number of shares utilized in the net income (loss) per share calculations:

 

		Three Months Ended								Nine Months Ended
		March 27, 2011				March 28, 2010				March 27, 2011				March 28, 2010
		(In thousands, except per share amounts)								(In thousands, except per share amounts)
Numerator:
Income from continuing operations		$	2,985			$	3,688			$	2,603			$	6,127
Income from discontinued operations			19				804				97				38
Net income		$	3,004			$	4,492			$	2,700			$	6,165
Shares (denominator):
Weighted average common shares outstanding			43,383				43,682				43,448				43,666
Weighted average common shares outstanding subject to repurchase			(230	)			(244	)			(163	)			(357	)
Weighted average shares outstanding—basic			43,153				43,438				43,285				43,309
Weighted average dilutive share equivalents from stock options			661				331				510				261
Weighted average dilutive common shares subject to repurchase			45				165				58				258
Weighted average shares outstanding—diluted			43,859				43,934				43,853				43,828
Earnings per share — basic:
Income from continuing operations		$	0.07			$	0.08			$	0.06			$	0.14
Income from discontinued operations			—				0.02				—				—
Net income		$	0.07			$	0.10			$	0.06			$	0.14
Earnings per share — diluted:
Income from continuing operations		$	0.07			$	0.08			$	0.06			$	0.14
Income from discontinued operations			—				0.02				—				—
Net income		$	0.07			$	0.10			$	0.06			$	0.14

The following common stock equivalents were excluded from the net income (loss) per share calculation as their effect would have been anti-dilutive:

 

		Three Months Ended								Nine Months Ended
		March 27, 2011				March 28, 2010				March 27, 2011				March 28, 2010
		(In thousands)								(In thousands)
Stock options			3,081				4,846				2,603				4,082
Common shares subject to repurchase			—				—				17				—
Total shares of common stock excluded from diluted net income per share calculation			3,081				4,846				2,620				4,082

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 10. Contingencies

Former Texas Facility Environmental Cleanup

We formerly leased a tract of land in Texas for our operations. Those operations involved the use of solvents and, at the end of the lease, we remediated an area where the solvents had been deposited on the ground and obtained regulatory approval for that remedial activity. In 1996, an environmental investigation of the property detected those same contaminants in groundwater in excess of then current regulatory standards. The groundwater contamination has migrated to some adjacent properties. We have entered into the Texas Natural Resource Conservation Commission’s Voluntary Cleanup Program (the “Voluntary Cleanup Program”) to obtain regulatory approval for closure of this site and a release from liability to the State of Texas for subsequent landowners and lenders. We have notified adjacent property owners affected by the contamination of participation in the Voluntary Cleanup Program. On May 20, 2004, we received a demand from the owner of several adjacent lots for damages in the amount of $1.3 million, as well as seeking an indemnity for the contamination and a promise to remediate the contamination. On March 14, 2006, the adjacent property owner filed suit in Probate Court No. 1, Travis County, Texas (Anna B. Miller, Individually and as Executrix of the Estate of Robert L. Miller, et al. vs. Austron, Inc., et al.), seeking damages. Symmetricom has not yet been served in this matter, but we intend to defend this lawsuit vigorously. We are continuing to work on the remediation of the formerly leased site as well as the adjacent properties, and have also taken steps to begin work on the Miller property. As of March 27, 2011, we had an accrual of $56,000 for remediation costs and other ongoing monitoring costs.

Shipments of Product with Lead-free Solder

From the fourth quarter of fiscal 2007 until the third quarter of fiscal 2008, we inadvertently shipped certain products that included lead-free solder in the product backplanes to two customers whose contracts specified that the products would be made with lead solder. As of March 27, 2011, we have received a waiver from one of these customers to use lead-free solder. The total sales value of product shipped with lead-free solder to the customer that has not as yet granted us the waiver is $1.2 million. Management believes that this customer will not request that the parts be replaced and that our existing warranty accrual is adequate to cover any potential product failures. Also, since March 2008, new product shipments to this customer have included lead solder.

Michael E. McNeil, et al. vs. Jason Book, et al.

On or around May 25, 2010, Symmetricom was served with the first amended complaint in the case of Michael E. McNeil, et al. vs. Jason Book, et al. (Case No. CV165643) filed in Santa Cruz County Superior Court, California. The first amended complaint added Symmetricom and several other parties to the lawsuit, which had been originally filed in 2009 by plaintiffs against their former attorney for legal malpractice in connection with certain settlement agreements in 1999 between plaintiffs and Datum (a Company acquired by Symmetricom) in which they assigned to Datum certain intellectual property rights. The complaint has since been amended for the second time and Symmetricom was served with the second amended complaint on or around January 7, 2011. The second amended complaint alleges several causes of action for alleged breach of contract by Symmetricom in connection with the 1999 settlement agreements, and related claims, and seeks unspecified monetary damages along with equitable relief. Symmetricom firmly believes that this lawsuit has no merit or basis whatsoever and intends to defend this lawsuit vigorously. Symmetricom believes the final outcome of this matter will not have a material adverse effect on our financial position and results of operations.

Other

Under the indemnification provisions of our standard sales contracts, we agree to defend our customers against third party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the reseller/customer. The exposure to us under these indemnification provisions is generally limited to the total amount paid by the customer under the agreement. However, certain agreements include indemnification provisions that could potentially expose us to losses in excess of the amount received under the agreement. To date, there have been no claims under such indemnification provisions. We believe the estimated fair value of these indemnification agreements is not material.

We are also a party to certain other claims in the normal course of our operations. While the results of these claims cannot be predicted with any certainty, we believe that the final outcome of these matters will not have a material adverse effect on our financial position and results of operations.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 11. Business Segment Information

In the third quarter of fiscal 2010, we changed our segment reporting structure from four operating and reporting segments to two operating and reporting segments. This change was effected to better reflect how the Chief Operating Decision Maker (CODM) makes decisions about resource allocation and segment performance. The CODM, as defined by authoritative accounting guidance on Segment Reporting, is our President and Chief Executive Officer (CEO). Our CEO allocates resources to and assesses the performance of each operating segment using information about its revenue and operating income (loss) before interest and taxes. Symmetricom is now organized into two operating segments corresponding to our two divisions: Communications and Government. Given the measure of profit reviewed by our CEO, we have changed our segment profit measure to operating income (loss). Prior to this change, the CEO used gross margin as the segment profit measure.

During the first quarter of fiscal 2011, the Company changed its method of allocating revenue between its two reportable segments. Such revenue is now allocated based on the nature of the product sold versus the end customer (as presented in previous reporting periods). As a result of this change, the Company has revised the applicable segment financial information for the three and nine months ended March 28, 2010 to be presented on a consistent basis.

With the exception of intangible assets, we do not identify or allocate assets by operating segment, nor does our CEO evaluate operating segments using discrete asset information. We do not allocate restructuring charges, interest and other income, interest expense, or taxes to operating segments.

During the second quarter of fiscal 2010, we classified our Quality of Experience Assurance (QoE) business as a discontinued operation and its respective assets as held for sale. During the third quarter of fiscal 2010, we sold our QoE business. QoE was a reportable segment within our Telecom Solutions Division segment under previous segment presentation. Due to this sale, the results of QoE have been removed from the Communications segment, shown as discontinued operations, and all comparative information from prior periods has been updated to reflect this change.

The following describes our two reporting segments:

Communications

Our Communications business supplies timing technologies and services for worldwide communications infrastructure. Products include primary reference sources, synchronization distribution systems, embedded components and software, and test and measurement equipment, all of which support the timing and synchronization requirements of telecommunications and cable networks and equipment.

Government

Our Government business provides time technology products for aerospace/defense, IT infrastructure and science and metrology applications. Precision time and frequency systems enable a range of critical operations, including the international time scale, global navigation, the management of power grids, synchronization of complex control systems, and signals intelligence for securing communications in remote and hostile environments.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The comparative information from prior periods related to the following tables has been updated to reflect our change in segment reporting. Segment revenue, gross profit and operating income (loss) were as follows during the periods presented:

 

Three months ended March 27, 2011
		Communications				Government				Corporate				Total
		(In thousands)
Net revenue		$	30,398			$	20,836			$	—			$	51,234
Cost of sales			14,941				12,097				1,330				28,368
Gross profit			15,457				8,739				(1,330	)			22,866
Operating expenses			8,471				5,820				4,936				19,227
Operating income (loss)		$	6,986			$	2,919			$	(6,266	)		$	3,639
Three months ended March 28, 2010
		Communications				Government				Corporate				Total
		(In thousands)
Net revenue		$	35,304			$	21,222			$	—			$	56,526
Cost of sales			17,043				11,602				448				29,093
Gross profit			18,261				9,620				(448	)			27,433
Operating expenses			8,988				5,091				7,050				21,129
Operating income (loss)		$	9,273			$	4,529			$	(7,498	)		$	6,304
Nine months ended March 27, 2011
		Communications				Government				Corporate				Total
		(In thousands)
Net revenue		$	83,916			$	63,541			$	—			$	147,457
Cost of sales			42,188				35,232				8,987				86,407
Gross profit			41,728				28,309				(8,987	)			61,050
Operating expenses			25,654				17,590				15,002				58,246
Operating income (loss)		$	16,074			$	10,719			$	(23,989	)		$	2,804
Nine months ended March 28, 2010
		Communications				Government				Corporate				Total
		(In thousands)
Net revenue		$	104,010			$	61,646			$	—			$	165,656
Cost of sales			53,807				35,995				2,241				92,043
Gross profit			50,203				25,651				(2,241	)			73,613
Operating expenses			27,746				15,563				18,613				61,922
Operating income (loss)		$	22,457			$	10,088			$	(20,854	)		$	11,691

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The information in the corporate category above represents corporate-related costs that are not allocated to either of our two segments for the purpose of evaluating their performance. The following table outlines our major corporate-related costs:

 

		Three Months Ended								Nine Months Ended
		March 27, 2011				March 28, 2010				March 27, 2011				March 28, 2010
		(In thousands)								(In thousands)
Selling, general and administrative costs		$	6,078			$	6,052			$	16,987			$	16,604
Restructuring charges			188				1,446				7,002				4,250
Corporate-related total		$	6,266			$	7,498			$	23,989			$	20,854

Note 12. Warranty

Changes in our accrued warranty liability during the third quarter and first nine months of fiscal 2011 and 2010 were as follows:

 

		Three Months Ended								Nine Months Ended
		March 27, 2011				March 28, 2010				March 27, 2011				March 28, 2010
		(In thousands)								(In thousands)
Beginning balance		$	2,002			$	3,648			$	2,900			$	3,737
Provision for warranty			(11	)			180				(9	)			996
Accruals related to change in estimate			105				82				527				22
Less: Actual warranty costs			(509	)			(470	)			(1,831	)			(1,315	)
Ending balance		$	1,587			$	3,440			$	1,587			$	3,440

 

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Item 2.

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

The following discussion and analysis of our financial condition and results of operations should be read together with the condensed consolidated financial statements and related notes included elsewhere in this report.

When used in this discussion or elsewhere in this report, the words “expects,” “anticipates,” “estimates,” “believes,” “plans,” “will,” “intend,” “can” and similar expressions are intended to identify forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

These risks and uncertainties include, but are not limited to, risks relating to general economic conditions in the markets we address and the telecommunications market in general, risks related to the development of our new products and services, the transition of our manufacturing operations in Puerto Rico to our contract manufacturer, the effects of increasing competition and competitive pricing pressure, uncertainties associated with changing intellectual property laws, developments in and expenses related to litigation, inability to obtain sufficient amounts of key components, the rescheduling or cancellations of key customer orders, the loss of a key customer, the effects of new and emerging technologies, the risk that excess inventory may result in write-offs, price erosion and decreased demand, fluctuations in the rate of exchange of foreign currency, changes in our effective tax rate, market acceptance of our new products and services, technological advancements, undetected errors or defects in our products, the risks associated with our international sales, potential short-term investment losses and other risks due to credit market dislocation, geopolitical risks and risk of terrorist activities, the risks associated with attempting to integrate other companies and businesses we acquire, and the risks set forth below in Part II, Item 1A, “Risk Factors.”

These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances or on which any such statement is based.

All references to “Symmetricom,” “we,” “us,” and “our” mean Symmetricom, Inc. and its subsidiaries, except where it is made clear that the term means only the parent company.

Overview

Symmetricom, a worldwide leader in precision time and frequency technologies, sets the world’s standard for time. We generate, distribute and apply precise time for the communications, aerospace/defense, IT infrastructure and metrology industries. Symmetricom’s customers, from communications service providers and network equipment manufacturers to governments and their suppliers worldwide, are able to build more reliable networks and systems by using our advanced timing technologies, atomic clocks, services and solutions. Our products support today’s precise timing standards, including GPS-based timing, IEEE 1588 (PTP), Network Time Protocol (NTP), Synchronous Ethernet, Building Integrated Timing Supply (BITS) and Data Over Cable Service Interface Specifications (DOCSIS(R)) timing.

Quarter ended March 27, 2011 Summary

For the nine months ended March 27, 2011, Symmetricom recorded net revenues of $147.5 million, down 11% compared to the same period of the previous year. The decrease in revenue is due to product supply and fulfillment delays associated with our transition to an outsourced manufacturing and logistics model. Symmetricom ceased manufacturing operations in Puerto Rico in the second quarter of fiscal 2011 and completed the transition to an outsourced manufacturing and logistics model in the third quarter of fiscal 2011. We made significant progress in our manufacturing transition in the third quarter of fiscal 2011, resulting in an improvement of product supply and our ability to fulfill orders on a timely basis, and we expect to see continued progress in the fourth quarter of fiscal 2011. However, our ability to continue to enhance and streamline our new outsourced manufacturing and logistics model could be impacted by further ramp-up complications or difficulties. These difficulties could result in further delayed shipments, reductions in sales of our products, longer sales cycles, excess and obsolete inventory, gross margin deterioration and supplier difficulties.

Critical Accounting Estimates

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures at the date of our financial statements. On an ongoing basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. We believe that there have been no significant changes during the three and nine months ended March 27, 2011 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 27, 2010, with the exception of the Company’s accounting policy for revenue recognition as described in Note 1 of Item 1- Basis of Presentation and Recently Issued Accounting Pronouncements.

Known Trends and Uncertainties Impacting Future Results of Operations: Global Market and Economic Conditions

While general macro-economic conditions have improved since the second half of calendar year 2009, current macro-economic factors remain dynamic and uncertain and are likely to remain so for the remainder of calendar year 2011. If difficult economic conditions resume or markedly worsen or if there are reductions in government / defense spending, our customers may delay or reduce capital expenditures. Among other things, these factors could result in reductions in sales of our products, longer sales cycles, difficulties in collecting accounts receivable, additional excess and obsolete inventory, gross margin deterioration, slower adoption of new technologies, increased price competition and supplier difficulties.

 

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Results of Operations

The following table presents selected items in our condensed consolidated statements of operations as a percentage of total revenues for the three and nine months ended March 27, 2011 and March 28, 2010:

 

		Three Months Ended								Nine Months Ended
		March 27, 2011				March 28, 2010				March 27, 2011				March 28, 2010
Net revenue
Communications			59.3	%			62.5	%			56.9	%			62.8	%
Government			40.7	%			37.5	%			43.1	%			37.2	%
Total net revenue			100.0	%			100.0	%			100.0	%			100.0	%
Cost of products and services			52.3	%			50.2	%			52.0	%			53.6	%
Amortization of purchased technology			0.5	%			0.5	%			0.6	%			0.6	%
Restructuring charges			2.6	%			0.8	%			6.1	%			1.4	%
Gross profit			44.6	%			48.5	%			41.4	%			44.4	%
Operating expenses:
Research and development			13.1	%			10.1	%			13.6	%			10.6	%
Selling, general and administrative			26.5	%			25.4	%			27.1	%			25.5	%
Amortization of intangible assets			0.1	%			0.1	%			0.1	%			0.1	%
Restructuring charges			(2.2	)%			1.8	%			(1.3	)%			1.2	%
Operating income			7.1	%			11.1	%			1.9	%			7.0	%
Interest income, net of amortization (accretion) of premium (discount) on investments			0.9	%			0.6	%			0.5	%			0.8	%
Interest expense			—	%			(2.3	)%			—	%			(2.3	)%
Income from continuing operations before taxes			8.0	%			9.4	%			2.3	%			5.5	%
Income tax provision			2.1	%			2.9	%			0.5	%			1.8	%
Income from continuing operations			5.9	%			6.5	%			1.8	%			3.7	%
Income from discontinued operations, net of tax			—	%			1.4	%			0.1	%			0.0	%
Net income			5.9	%			7.9	%			1.8	%			3.7	%

 

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Net Revenue:

 

		Three Months Ended								$ Change				% Change				Nine Months Ended								$ Change				% Change
		March 27, 2011				March 28, 2010												March 27, 2011				March 28, 2010
Net Revenue (dollars in thousands) :
Communications		$	30,398			$	35,304			$	(4,906	)			(13.9	)%		$	83,916			$	104,010			$	(20,094	)			(19.3	)%
Government			20,836				21,222				(386	)			(1.8	)			63,541				61,646				1,895				3.1
Total Net Revenue		$	51,234			$	56,526			$	(5,292	)			(9.4	)%		$	147,457			$	165,656			$	(18,199	)			(11.0	)%
Percentage of Revenue			100	%			100	%											100	%			100	%

Third Quarter of Fiscal 2011: Net revenue consists of sales of products, software licenses and services. In the third quarter of fiscal 2011, net revenue decreased $5.3 million, or 9.4%, compared to the corresponding quarter of fiscal 2010. Communications revenue decreased $4.9 million, or 13.9%, compared to the same quarter for the prior year, due to product supply and fulfillment delays associated with our transition to an outsourced manufacturing and logistics model. Government revenue decreased marginally by $0.4 million, or 1.8%, compared to the same quarter for the prior year due to a decline in sales of instruments partially offset by an increase in government system sales.

First Nine Months of Fiscal 2011: In the first nine months of fiscal 2011, net revenue decreased $18.2 million, or 11.0%, compared to the corresponding period of fiscal 2010. Communications revenue decreased $20.1 million, or 19.3%, compared to the same period for the prior year, primarily due to product supply and fulfillment delays associated with the company’s transition to an outsourced manufacturing and logistics model. Government revenue increased $1.9 million, or 3.1% compared to the same period for the prior year, due to an increase in sales of government systems and enterprise products partially offset by a decrease in sales of instruments.

Gross Profit:

 

		Three Months Ended								$ Change				% Change				Nine Months Ended								$ Change				% Change
		March 27, 2011				March 28, 2010												March 27, 2011				March 28, 2010
Gross Profit (dollars in thousands) :
Communications		$	15,457			$	18,261			$	(2,804	)			(15.4	)%		$	41,728			$	50,203			$	(8,475	)			(16.9	)%
Government			8,739				9,620				(881	)			(9.2	)			28,309				25,651				2,658				10.4
Corporate related			(1,330	)			(448	)			(882	)			196.9				(8,987	)			(2,241	)			(6,746	)			301.0
Total Gross Profit		$	22,866			$	27,433			$	(4,567	)			(16.6	)%		$	61,050			$	73,613			$	(12,563	)			(17.1	)%
Percentage of Revenue			44.6	%			48.5	%											41.4	%			44.4	%

Third Quarter of Fiscal 2011: Gross profit in the third quarter of fiscal 2011 decreased by $4.6 million or 16.6%, compared to the corresponding quarter of fiscal 2010. Gross profit as a percentage of revenue in the third quarter of fiscal 2011 decreased to 44.6% as compared to 48.5% in the corresponding quarter of fiscal 2010 due to an increase in corporate related restructuring charges resulting from our transition to an outsourced manufacturing and logistics model as well as a decline in revenue resulting from product supply and fulfillment delays associated with our transition to an outsourced manufacturing and logistics model. Gross profit for our Communications segment decreased by $2.8 million, or 15.4%, which was a greater decline than the revenue decrease of 13.9%, due to higher period costs and variances, partially offset by favorable mix of higher margin products. Gross profit for our Government segment decreased $0.9 million, or 9.2%, which was greater than the revenue decrease of 1.8% in this segment for the same period, due to an unfavorable sales mix of lower margin products.

Corporate related restructuring charges increased by $0.9 million, or 197%, due to severance and product transfer costs and additional depreciation costs related to restructuring activities in the phased closure of our Puerto Rico manufacturing facility which was completed in the third quarter of fiscal 2011, and restructuring charges associated with the plan to transfer our Santa Rosa manufacturing activities, which is expected to be completed by the second quarter of fiscal 2012.

First Nine Months of Fiscal 2011: Gross profit in the first nine months of fiscal 2011 decreased by $12.6 million or 17.1%, compared to the corresponding period of fiscal 2010. Gross profit as a percentage of revenue in the first nine months of fiscal 2011 decreased to 41.4% as compared to 44.4% in the corresponding period of fiscal 2010 primarily due to an increase in corporate related restructuring charges, partially offset by the increase in sales of higher margin products. Gross profit for our Communications segment decreased by $8.5 million, or 16.9%, which was a smaller decline than the revenue decrease of 19.3%, due to a favorable mix of higher margin products such as PackeTime. Gross profit for our Government segment increased $2.7 million, or 10.4%, which was greater than the revenue increase of 3.1% in this segment for the same period, due to a favorable sales mix of higher margin products.

Corporate related restructuring charges increased by $6.8 million, or 301%, due to severance, product transfer costs and additional depreciation costs related to restructuring activities in the phased closure of our Puerto Rico manufacturing facility and restructuring charges associated with the plan to transfer our Santa Rosa manufacturing activities, which is expected to be completed by the second quarter of fiscal 2012.

 

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Operating Expenses:

Research and Development Expense:

 

		Three Months Ended								$ Change				% Change				Nine Months Ended								$ Change				% Change
		March 27, 2011				March 28, 2010												March 27, 2011				March 28, 2010
Research and development expense (dollars in thousands)		$	6,717			$	5,684			$	1,033				18.2	%		$	20,061			$	17,511			$	2,550				14.6	%
Percentage of Revenue			13.1	%			10.1	%											13.6	%			10.6	%

Third Quarter of Fiscal 2011: Research and development expense consists primarily of salaries and benefits, prototype expenses and fees paid to outside consultants. Research and development expense in the third quarter of fiscal 2011 increased $1.0 million, or 18.2%, compared to the same quarter of fiscal 2010 due to higher engineering and consulting expenses related to product development projects, partially offset by lower health and welfare costs. We expect that research and development expenses in the fourth quarter of fiscal 2011 will be consistent with the third quarter of fiscal 2011.

First Nine Months of Fiscal 2011: Research and development expense in the first nine months of fiscal 2011 increased $2.6 million, or 14.6%, compared to the same period of fiscal 2010 due to higher engineering and consulting expenses related to product development projects.

Selling, General and Administrative:

 

		Three Months Ended								$ Change				% Change				Nine Months Ended								$ Change				% Change
		March 27, 2011				March 28, 2010												March 27, 2011				March 28, 2010
Selling, general and administrative (dollars in thousands)		$	13,592			$	14,385			$	(793	)			(5.5	)%		$	39,987			$	42,183			$	(2,196	)			(5.2	)%
Percentage of Revenue			26.5	%			25.4	%											27.1	%			25.5	%

Third Quarter of Fiscal 2011: Selling, general and administrative expenses consist primarily of salaries, benefits, sales commissions and travel-related expenses for our sales and services, marketing, finance, human resources, information technology and facilities departments. These expenses decreased by $0.8 million, or 5.5%, to $13.6 million for the third quarter of fiscal 2011, compared to $14.4 million in the corresponding quarter of fiscal 2010. The decrease in expenses consisted of a decrease in compensation-related expenses, recruiting expenses and commission expenses associated with lower sales. We expect selling, general and administrative expense to increase in the fourth quarter of fiscal 2011.

First Nine Months of Fiscal 2011: Selling, general and administrative expenses decreased by $2.2 million, or 5.2%, to $40.0 million for the first nine months of fiscal 2011, compared to $42.2 million in the corresponding period of fiscal 2010. The decrease in expenses consisted of decreases in compensation-related expenses and commission expenses associated with lower sales.

Amortization of intangibles:

 

		Three Months Ended								$ Change				% Change				Nine Months Ended								$ Change				% Change
		March 27, 2011				March 28, 2010												March 27, 2011				March 28, 2010
Amortization of intangible assets (dollars in thousands)		$	60			$	62			$	(2	)			(3.2	)%		$	183			$	219			$	(36	)			(16.4	)%
Percentage of Revenue			0.1	%			0.1	%											0.1	%			0.1	%

Amortization of intangibles decreased in the third quarter and first nine months of fiscal 2011 compared to the corresponding periods of fiscal 2010 due to certain assets becoming fully amortized during the first nine months of fiscal 2011.

 

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Restructuring charges:

 

		Three Months Ended								$ Change				% Change				Nine Months Ended								$ Change				% Change
		March 27, 2011				March 28, 2010												March 27, 2011				March 28, 2010
Restructuring charges (dollars in thousands)		$	(1,142	)		$	998			$	(2,140	)			(214.4	)%		$	(1,985	)		$	2,009			$	(3,994	)			(198.8	)%
Percentage of Revenue			(2.2	)%			1.8	%											(1.3	)%			1.2	%

Restructuring charges decreased in the third quarter of fiscal 2011 compared to the same period in fiscal 2010 due to a change in the estimate by $1.9 million for lease loss accruals due to utilization of a section of the San Jose facility that had previously been recorded as a lease loss at the time we ceased using the space. The restructuring charges decreased in the first nine months of fiscal 2011 compared with the same period in fiscal 2010 due to utilization of a section of the San Jose facility that had previously been recorded as a lease loss at the time we ceased using the space and the sublease of a section of our Santa Rosa facility that had previously been recorded as a lease loss at the time we ceased using the space.

Interest income, net of amortization (accretion) of premium (discount) on investments:

 

		Three Months Ended								$ Change				% Change				Nine Months Ended								$ Change				% Change
		March 27, 2011				March 28, 2010												March 27, 2011				March 28, 2010
Interest income, net of amortization (accretion) of premium (discount) on investments ( dollars in thousands )		$	441			$	350			$	91				26.0	%		$	664			$	1,316			$	(652	)			(49.5	)%
Percentage of Revenue			0.9	%			0.6	%											0.5	%			0.8	%

Interest income, net of amortization (accretion) of premium (discount) on investments, decreased $0.7 million in the first nine months of fiscal 2011 compared to the same period in the prior year due to lower short-term investment balances in fiscal 2011 compared to fiscal 2010.

Interest expense:

 

		Three Months Ended								$ Change				% Change				Nine Months Ended								$ Change				% Change
		March 27, 2011				March 28, 2010												March 27, 2011				March 28, 2010
Interest expense ( dollars in thousands )		$	—			$	(1,318	)		$	1,318				(100.0	)%		$	(55	)		$	(3,862	)		$	3,807				(98.6	)%
Percentage of Revenue			—	%			(2.3	)%											(0.0	)%			(2.3	)%

Interest expense decreased $3.8 million in the first nine months of fiscal 2011 compared to the same period in the prior fiscal year due to the repayment of convertible notes in the fourth quarter of fiscal 2010.

Income tax provision:

 

		Three Months Ended								$ Change				% Change				Nine Months Ended								$ Change				% Change
		March 27, 2011				March 28, 2010												March 27, 2011				March 28, 2010
Income tax provision ( dollars in thousands )		$	1,095			$	1,648			$	(553	)			(33.6	)%		$	810			$	3,018			$	(2,208	)			(73.2	)%
Percentage of Revenue			2.1	%			2.9	%											0.5	%			1.8	%

Third Quarter of Fiscal 2011: Our income tax provision was $1.1 million in the third quarter of fiscal 2011, compared to a tax provision of $1.6 million in the corresponding quarter of fiscal 2010. Our effective tax rate in the third quarter of fiscal 2011 was 26.8%, compared to an effective tax rate of 30.9% in the corresponding period of fiscal 2010. The effective tax rate for fiscal 2011 was lower than fiscal 2010 due to benefits from federal research credits, which were re-enacted in the second quarter of fiscal 2011 and the benefit from the release of a tax reserve, related to the expiration of the statute on a non-U.S. uncertain tax position.

 

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First Nine Months of Fiscal 2011: Our income tax provision was $0.8 million in the first nine months of fiscal 2011, compared to a tax provision of $3.0 million in the corresponding period of fiscal 2010. Our effective tax rate in the first nine months of fiscal 2011 was 23.7%, compared to an effective tax rate of 33.0% in the corresponding period of fiscal 2010. The effective tax rate for fiscal 2011 is lower than fiscal 2010 due to the benefits from pre-tax losses and federal research credits, which were re-enacted in the second quarter of fiscal 2011 and the benefit from the release of a tax reserve, related to the expiration of the statute on a non-U.S. uncertain tax position.

Income from discontinued operations, net of tax:

 

		Three Months Ended								$ Change				% Change				Nine Months Ended								$ Change				% Change
		March 27, 2011				March 28, 2010												March 27, 2011				March 28, 2010
Income from discontinued operations, net of tax ( in thousands )		$	19			$	804			$	(785	)			(97.6	)%		$	97			$	38			$	59				155.3	%
Percentage of Revenue			0.0	%			1.4	%											0.1	%			0.0	%

Discontinued operations relate to our Quality of Experience business which we sold in the third quarter of fiscal 2010. In the first nine months of fiscal 2011, we recorded income of $97,000 net of income taxes, primarily due to the finalization of compensation costs of former employees and miscellaneous expenses. The $38,000 income in the first nine months of fiscal 2010 represents a gain on the sale of discontinued operations partially offset by the general operating expenses, net of taxes.

Key Operating Metrics

Key operating metrics for measuring our performance include sales backlog and contract revenue. A comparison of these metrics at the end of the third quarter of fiscal 2011 with the end of fiscal 2010 is discussed below:

Sales Backlog:

Our backlog consists of firm orders that have yet to be shipped to the customer, or may not be shippable to a customer until a future period. Most orders included in backlog can be rescheduled or cancelled by customers without significant penalty. Historically, a substantial portion of net revenue in any fiscal period has been derived from orders received during that fiscal period.

Our backlog amounted to $60.1 million as of March 27, 2011, compared to $42.5 million as of June 27, 2010. The increase in backlog is due to an increase in orders from our government business that has a longer sales cycle. Our backlog, that is shippable within the next six months was $41.1 million as of March 27, 2011, compared to $28.7 million as of June 27, 2010.

Contract Revenue:

As of March 27, 2011, we had approximately $15.3 million in contract revenue to be performed and recognized within the next 36 months, compared to $9.5 million in contract revenue that was to be performed and recognized within 36 months following June 27, 2010. The increase in contract revenue to be performed and recognized within the next 36 months is attributable to an increase in backlog of government business. These amounts have been included in our sales backlog discussed above.

Liquidity and Capital Resources

Balance Sheet and Cash Flows

The following table summarizes our cash, cash equivalents and short-term investments (in thousands):

 

		March 27, 2011				June 27, 2010				Change $
Cash and cash equivalents		$	28,383			$	21,794			$	6,589
Short-term investments			46,959				53,825				(6,866	)
Total		$	75,342			$	75,619			$	(277	)

As of March 27, 2011, our principal sources of liquidity consisted of cash, cash equivalents and short-term investments of $75.3 million and accounts receivable, net of $36.8 million.

As of March 27, 2011, working capital was $127.4 million compared to $129.1 million as of June 27, 2010. Cash, cash equivalents and short-term investments as of March 27, 2011 decreased slightly to $75.3 million from $75.6 million as of June 27, 2010.

Our days sales outstanding in accounts receivable was 65 days as of March 27, 2011, compared to 66 days as of June 27, 2010.

 

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Our principal uses of cash historically have consisted of the purchase of inventories, payroll and other operating expenses related to the manufacturing of products, development of new products and purchase of property and equipment.

Cash flows from operating activities

Net cash provided by operating activities in the first nine months of fiscal 2011 was $7.8 million. The net cash provided by operating activities consisted of non-cash charges of $10.3 million and net income of $2.7 million. The non-cash charges consisted primarily of $5.2 million in depreciation and amortization expenses, $3.0 million in stock-based compensation expense and $1.2 million in provision for excess and obsolete inventory and $0.8 million in deferred tax assets. Cash provided by operating activities during the first nine months of fiscal 2011 was partially offset by net changes in operating assets and liabilities of $5.2 million. Those net changes consisted primarily of a $9.0 million increase in inventory primarily to support the transfer of manufacturing activity to a third-party contract manufacturer, a decrease in accrued compensation of $6.1 million and a decrease in other liabilities of $1.5 million, partially offset by a decrease in accounts receivable of $3.2 million and an increase in accounts payable of $8.7 million.

Cash flows from investing activities

Net cash provided by investing activities was $2.5 million in the first nine months of fiscal 2011, which represented the maturities of short-term investments of $40.3 million, partially offset by the purchase of short-term investments and property, plant and equipment of $34.3 million and $3.5 million, respectively.

Cash flows from financing activities

Net cash used for financing activities was $4.0 million in the first nine months of fiscal 2011, which represented the repurchase of common stock of $6.0 million, partially offset by cash generated from the exercise of common stock options of $2.0 million.

Contingencies

See Item 1 of Part I, Financial Statements — Note 10 — Contingencies.

Recently Issued Accounting Pronouncements

See Item 1 of Part I, Financial Statements— Note 1— Basis of Presentation and Recently Issued Accounting Pronouncements

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk affecting Symmetricom, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended June 27, 2010. Our exposure to market risk has not changed materially since June 27, 2010.

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed in the reports that we file or submit under the Exchange Act and that such information has been accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There was no material change in our internal control over financial reporting that occurred during the quarter ended March 27, 2011 that has affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

See Item 1 of Part I, Financial Statements — Note 10 — Contingencies.

 

Item 1A.

Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended June 27, 2010. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

a)

Not applicable.

 

b)

Not applicable.

 

c)

The following table provides monthly detail regarding our share repurchases during the three months ended March 27, 2011:

 

Period		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				Approximate Number of Shares That May Yet Be Purchased Under the Plans or Programs
December 27, 2010 through January 23, 2011			—			$	—				—				2,246,975
January 24, 2011 through February 20, 2011			125,668			$	5.82				125,668				2,121,307
February 21, 2011 through March 27, 2011			190,246			$	5.88				190,246				1,931,061
Total			315,914			$	5.86				315,914

During the third quarter of fiscal 2011, we repurchased approximately 316,000 shares of common stock pursuant to our repurchase program for an aggregate price of approximately $1.9 million.

On October 28, 2010, the Company’s Board of Directors authorized management to repurchase an additional 1.6 million shares of Symmetricom common stock in addition to the remaining shares available for repurchase under previously approved programs. As of March 27, 2011, the total number of shares available for repurchase under the repurchase program authorized by the Board of Directors was approximately 1.9 million.

 

Item 3.

Defaults Upon Senior Securities

Not applicable.

 

Item 4.

Removed and Reserved

 

Item 5.

Other Information

Not applicable.

 

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Item 6.

Exhibits

 

Exhibit Number		Description of Exhibits
10.1		Symmetricom, Inc. 2010 Employee Stock Purchase Plan, as amended and restated as of February 18, 2011.
31		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.

 

				SYMMETRICOM, INC.
				(Registrant)
Date: May 6, 2011				By:		/ S /  D AVID G. C ÔTÉ
						David G. CÔTÉ
						Chief Executive Officer (Principal Executive Officer) and Director
Date: May 6, 2011				By:		/ S /  J USTIN R. S PENCER
						Justin R. Spencer
						Executive Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)

 

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