- Cost Restructuring Plan Initiated to Improve Operating Efficiency
PITTSBURGH, July 27 /PRNewswire-FirstCall/ -- Tollgrade Communications,
Inc. (Nasdaq: TLGD) today reported revenue of $16.3 million and a loss per
share of $(0.01) for the second quarter ended July 1, 2006. In comparison,
revenue and per share results for the second quarter of 2005 were $17.1
million and $0.08, respectively. On a year to date basis, the Company
reported revenues of $33.9 million and a loss of $(0.01) per share for the
six month period ended July 1, 2006; revenues were $31.4 million and
earnings were $0.02 per share in the corresponding prior year period.
Revenues and earnings per share for the second quarter of 2006 were within
the range of estimates the Company provided on April 26, 2006, which
indicated sales could range from $14 million to $17 million, and earnings
per share estimates could range between $(0.08) to $0.02.
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Strategic Initiatives Expected to Generate Significant Cost Savings
The Company has begun, on July 27, 2006, to implement several
initiatives in line with its current strategic plan which are aimed at
increasing efficiency and reducing costs. These initiatives are expected to
generate approximately $3.3 million per annum of cost savings and include
the following:
- effective July 27, 2006, the Company will consolidate the Sarasota,
Florida location and its staff into its existing Cheswick, Pennsylvania
headquarters. This effort is expected to generate approximately $2.9
million in annual cost savings through the elimination of approximately
23 positions across the Company and discontinuation of operating costs
for the Sarasota facility. The Company will record a non-recurring
pre-tax charge of approximately $1.9 million during the third quarter
of 2006 related to employee matters and lease and asset disposal costs;
- finalization of the Emerson acquisition integration plan, which
includes the elimination of 6 positions and closing of the Texas
location, effective August 31, 2006. The initiatives are expected to
generate approximately $0.4 million in cost savings and do not result
in any significant non-recurring charges;
- to streamline the Company's product offerings in light of evolving
technology, the Company has identified certain product lines that no
longer meet the criteria of our long-term objectives and strategy.
These product lines have been targeted for discontinuation and the cost
of the inventory will be reduced to its estimated net realizable value,
resulting in a non-recurring pre-tax charge of approximately $4.0
million to be recorded during the third quarter of 2006; and
- write-down of the carrying value of certain real estate to its
estimated net realizable value, resulting in a non-recurring pre-tax
charge of approximately $0.4 million during the third quarter of 2006.
As a result of the aforementioned matters, the Company expects to
record total non-recurring charges of approximately $6.3 million. Of this
amount, approximately $1.7 million represents a cash outlay of which $1.1
million will be paid during the second half of 2006 with the remainder
dispersed over time through April 2008.
"While we have been able to increase revenue by almost 8.0% for the six
months year-to-date, our focus must shift to running the business more
efficiently, which includes aggressive cost management in more price-
competitive markets," said Tollgrade's President and CEO, Mark B. Peterson.
"By re-aligning our cost structure to improve efficiency and profitability
while bringing to market new network assurance solutions for voice, video
and data networks, we improve our ability to compete and focus resources on
the most important new product developments. This restructuring effort is
aimed at balancing costs and growth while unlocking sustainable shareholder
value without compromising customer responsiveness. These actions, in
conjunction with our current product development efforts are being taken to
strengthen Tollgrade's operations and market position," added Peterson.
Second Quarter 2006 Revenue Results
Sales of Tollgrade's DigiTest(R) system products were $4.1 million in
the second quarter of 2006, compared to $5.2 million in the same period of
2005. DigiTest system revenues declined in the second quarter of 2006
compared to the second quarter of 2005, primarily due to the finalization
of our project in Saudi Arabia and a decline in sales to our CLEC
customers, offset, in part, by sales of product to Embarq, formerly Sprint
USA.
Overall sales of cable hardware and software products were $4.2 million
in the second quarter of 2006, compared to $4.8 million in the second
quarter of the prior year. There were fewer sales of our DOCSIS(R)-based
transponders during the quarter, offset in part, by an increase in sales of
legacy transponders and headend equipment.
Sales of LoopCare(TM) software products, separate and unrelated to the
Company's DigiTest system products, were $0.5 million in the second quarter
of 2006 compared to sales of $0.6 million in the comparable period of the
prior year. LoopCare software license fees and services revenues, including
the separate software products previously discussed, were $2.7 million in
the second quarter of 2006 compared to $4.0 million in the comparable
period of the prior year. The second quarter of 2005 benefited from the
inclusion of two quarters of revenues related to one of the Company's RBOC
maintenance agreements.
Overall sales of the Company's MCU(R) products, which extend
testability into the POTS network, were $3.1 million in the second quarter
of 2006, compared to $2.1 million in the corresponding prior year quarter.
The increase is associated with incentive purchases which we believe are
being driven by continuing emphasis on DSL rollouts at remote terminal
sites by certain RBOC customers.
Second quarter 2006 sales from Services, which includes installation
oversight and project management services provided to RBOCs and fees for
software maintenance, were $3.8 million, compared to $4.4 million in the
second quarter of the prior year. The decline is primarily attributed to
the inclusion in the second quarter of 2005 of revenues for two quarters
related to the extension of one of the Company's RBOC maintenance
agreements.
Sales of products acquired from Emerson on February 24, 2006, were $0.6
million for the second quarter of 2006.
Second Quarter 2006 Financial and Operating Data
Gross profit for the second quarter of 2006 was $7.6 million, a
decrease of $1.7 million, or 17.8%, from the second quarter of 2005. As a
percentage of sales, gross profit for the second quarter of 2006 was 46.9%
versus 54.2% for the prior year quarter which included revenues for two
quarters related to the extension of one of the Company's RBOC maintenance
agreements. Gross margins in the second quarter of 2006 were also adversely
impacted by the dilutive effect of the recently acquired Emerson product
line, lower software sales, as well as lower margins on services for two
projects that were completed in the second quarter of 2006.
Overall operating expenses of $8.4 million for the second quarter of
2006 reflect an increase of $0.4 million, or 4.5%, from $8.0 million in the
second quarter of 2005. Selling and marketing expenses in the quarter were
$2.9 million, an increase of $0.5 million, or 20.5%, from the same period
in 2005. The increase is attributed to employee costs associated with the
addition of the Emerson product line and increased commission costs.
General and administrative expenses remained flat at $1.9 million in the
second quarter of 2006 compared to 2005. Research and development expenses
for the second quarter of 2006 were $3.6 million, a decrease of $0.1
million, or 2.8%, from the second quarter of 2005. Research and development
costs were impacted by additional employee costs associated with the
purchase of the Emerson product line which were more than offset by a
reduction in the number of employees in our existing business as well as
reduced prototype costs.
The effective tax rate for the second quarter of 2006 was approximately
27.3%, compared to approximately 29.5% in the prior year quarter. The
decrease is directly related to the proportional impact of certain
permanent items on the calculation, including tax exempt interest and the
level of international sales.
The Company's order backlog for firm customer purchase orders and
signed software maintenance contracts was $8.5 million as of July 1, 2006,
compared to backlog of $14.7 million as of December 31, 2005. The decrease
is primarily attributed to the completion of significant milestones for
certain large projects, a decline in DOCSIS-based product backlog, and
timing of the renewal of certain maintenance agreements that expire on
December 31, 2006. The backlog at July 1, 2006 and December 31, 2005
included approximately $5.3 million and $6.2 million, respectively, related
to software maintenance contracts, which is earned and recognized as income
on a straight-line basis during the remaining terms of these agreements.
Management expects that approximately 39% of the current total backlog
will be recognized as revenue in the third quarter of 2006.
Third Quarter 2006 Outlook
"Regarding our third quarter 2006 outlook, we continue to have several
projects included in our forecast which are subject to competitive
elements, customer budget availability and product acceptances," said
Peterson. "However, the percentage of revenue we expect to record in the
third quarter contained in our backlog has declined. As a result, we expect
revenues in the third quarter of 2006 to range from $14.5 million to $17.5
million and a GAAP loss per share of ($0.31) to ($0.22), which includes an
estimate of approximately $0.31 per share expense from the previously
discussed strategic initiatives which would translate to non-GAAP earnings
per share of breakeven to $0.09."
Conference Call and Webcast
A conference call to discuss earnings results for the second quarter of
2006 will be held on July 27, 2006 at 10:00 a.m., Eastern Time. The
telephone number for U.S. participants is 1-800-860-2442 (international:
412-858-4600). Please reference Tollgrade/Peterson to identify the call.
The conference call will also be broadcast live over the Internet. To
listen to this conference call via the Internet, simply log on to the
following URL address: http://www.videonewswire.com/event.asp?id=34756
About Tollgrade
Tollgrade Communications, Inc. is a leading provider of network service
assurance products and services for centralized test systems around the
world. Tollgrade designs, engineers, markets and supports centralized test
systems, test access and status monitoring products, and next generation
network assurance technologies for the broadband marketplace. Tollgrade's
customers range from the top RBOCs (Regional Bell Operating Companies) and
Cable providers, to numerous independent telecom, cable and broadband
providers around the world. Tollgrade's network testing, measurement and
monitoring solutions support the infrastructure of cable and telecom
companies offering current and emerging triple play services. Tollgrade,
headquartered near Pittsburgh in Cheswick, Pa., and its products and
customer reach span over 200 million embedded access lines, more than any
other test and measurement supplier. For more information, visit
Tollgrade's web site at http://www.tollgrade.com.
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per-share data)
Three Months Ended Six Months Ended
July 1, 2006 June 25, July 1, 2006 June 25,
2005 2005
Revenues:
Products $12,415 $12,703 $26,775 $24,615
Services 3,838 4,389 7,085 6,752
16,253 17,092 33,860 31,367
Cost of sales:
Products 6,316 6,170 13,975 12,222
Services 1,404 936 2,429 1,732
Amortization 913 716 1,890 1,430
8,633 7,822 18,294 15,384
Gross profit
7,620 9,270 15,566 15,983
Operating expenses:
Selling and marketing 2,937 2,438 5,623 4,676
General and
administrative 1,864 1,895 4,183 3,730
Research and
development 3,590 3,693 7,250 7,089
Retirement expense ---- ---- ---- 775
Total operating
expenses 8,391 8,026 17,056 16,270
(Loss) income
from operations (771) 1,244 (1,490) (287)
Other income 628 252 1,255 514
(Loss) income before
income taxes (143) 1,496 (235) 227
(Benefit) provision for
income taxes
(39) 441 (67) 17
Net (loss) income $(104) $1,055 $(168) $210
Diluted earnings
per-share information:
Weighted average shares
of common stock and
equivalents: 13,247 13,168 13,230 13,190
Net (loss) income
per common and
common equivalent
shares $(0.01) $0.08 $(0.01) $0.02
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(In thousands)
July 1, 2006 December
31, 2005
ASSETS
Current assets:
Cash and cash equivalents $51,376 $49,421
Short-term investments 10,190 18,010
Accounts receivable:
Trade 10,826 9,456
Other 1,912 1,406
Inventories 11,602 9,934
Prepaid expenses 1,216 1,397
Deferred and refundable tax assets 1,623 1,803
Total current assets 88,745 91,427
Property and equipment, net 6,155 6,390
Deferred tax assets 72 46
Intangibles and capitalized software costs, net 42,909 43,616
Goodwill 24,075 21,562
Receivable from officer 151 153
Other assets 124 135
Total assets $162,231 $163,329
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,454 $ 1,262
Accrued warranty 2,149 2,220
Accrued expenses 2,031 2,579
Accrued salaries and wages 722 660
Accrued royalties payable 191 581
Income taxes payable 327 869
Deferred income 1,958 2,450
Total current liabilities 8,832 10,621
Deferred tax liabilities 2,577 2,447
Total liabilities 11,409 13,068
Total shareholders' equity 150,822 150,261
Total liabilities and shareholders' equity $162,231 $163,329
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
July 1, 2006 June 25, 2005
Cash flows from operating activities:
Net (loss) income $(168) $210
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Depreciation and amortization 2,989 2,665
Compensation expense related to stock plans 229 ----
Deferred income taxes (367) (53)
Provisions for losses on inventory (97) 274
Provision for allowance for doubtful accounts 54 7
Changes in assets and liabilities:
Accounts receivable-trade 403 (2,056)
Accounts receivable-other (506) (1,089)
Inventory (458) 184
Prepaid expenses and other assets 194 1,176
Refundable taxes 651 212
Accounts payable (441) 173
Accrued warranty (71) (174)
Accrued expenses and deferred income (1,581) (227)
Accrued royalties payable (390) (333)
Accrued salaries and wages 62 (472)
Income taxes payable (542) 169
Net cash (used in) provided by operating
activities (39) 666
Cash flows from investing activities:
Purchase of Emerson test division (5,501) ----
Purchase of short-term investments (6,528) (15,328)
Redemption/maturity of short-term investments 14,348 4,445
Capital expenditures, including
capitalized software (825) (692)
Net cash provided by (used in)
investing activities 1,494 (11,575)
Cash flows from financing activities:
Tax benefit from exercise of stock options 94 ----
Proceeds from exercise of stock options 406 ----
Net cash provided by
financing activities 500 ----
Net increase (decrease) in cash and
cash equivalents 1,955 (10,909)
Cash and cash equivalents at
beginning of period 49,421 32,622
Cash and cash equivalents at end of period $51,376 $21,713
Non-GAAP
To supplement our third quarter of 2006 outlook, we have included
certain non-GAAP financial measures in this press release. Specifically, we
have provided non-GAAP financial measures (e.g., non-GAAP earnings per
share) that exclude the non-recurring charges associated with our strategic
initiatives, as well as the related income tax effects of such items. These
non-GAAP financial measures are provided to enhance the user's overall
understanding of our expected financial performance for the third quarter
of 2006. We believe that by excluding these expected charges, as well as
the related income tax effects, our non-GAAP measures provide supplemental
information to both management and investors that is useful in assessing
our core operating performance, in evaluating our ongoing business
operations and in comparing our results of operations on a consistent basis
from period to period. These non-GAAP financial measures are also used by
management to plan and forecast future periods and to assist us in making
operating and strategic decisions. The presentation of this additional
information is not prepared in accordance with GAAP. The information may
therefore not necessarily be comparable to that of other companies and
should be considered as a supplement to, and not a substitute for, or
superior to, the corresponding measures calculated in accordance with GAAP.
Forward-Looking Statements
The foregoing release contains "forward looking statements" regarding
future events or results within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements concerning the
Company's current expectations regarding revenue and earnings results for
the third quarter of 2006, the expected charges and cash payments arising
from the Company's cost restructuring plan and the expected effect such
actions will have on the Company's revenues and earnings, its participation
in the fundamental network migration currently underway in the
telecommunications industry and its confidence in winning broadband
customers. The Company cautions readers that such "forward looking
statements" are, in fact, predictions that are subject to risks and
uncertainties and that actual events or results may differ materially from
those anticipated events or results expressed or implied by such forward
looking statements. The Company disclaims any current intention to update
its "forward looking statements," and the estimates and assumptions within
them, at any time or for any reason.
In particular, the following factors, among others could cause actual
results to differ materially from those described in the "forward looking
statements:" (a) the unanticipated further decline of the capital budgets
allocated to legacy network elements for certain of our major customers;
(b) the ability to make changes in business strategy, development plans and
product offerings to respond to the needs of the significantly changing
telecommunications markets and network technologies; (c) the ability of the
Company to achieve its planned cost reductions and to reduce expenditures
quickly enough to restore profitability in that portion of its business;
(d) the risk that cost-cutting initiatives will impair the Company's
ability to effectively develop and market products and remain competitive
in the telecom business; (e) possible delays in deployment of products
under international contracts due to project delays, political instability,
inability to obtain proper acceptances or other unforeseen delays; (f)
possible delays in, or the inability to, complete long term maintenance
contracts with certain of our RBOC customers or to complete negotiation and
execution of purchase agreements with new customers; (g) lower than
expected demand for our cable testing products; (h) pricing pressures
affecting our cable-related products as a result of increased competition,
consolidation within the cable industry and the adoption of standards-based
protocols; (i) our ability to close certain international opportunities,
due to numerous risks and uncertainties inherent in international markets;
(j) our dependence upon a limited number of third party subcontractors to
manufacture certain aspects of the products we sell; (k) the ability to
manage the risks associated with and to grow our business; (l) the
uncertain economic and political climate in the United States and
throughout the rest of the world and the potential that such climate may
deteriorate; (m) our ability to efficiently integrate acquired businesses
and achieve expected synergies. Other factors that could cause actual
events or results to differ materially from those contained in the "forward
looking statements" are included in the Company's filings with the U.S.
Securities and Exchange Commission (the "SEC") including, but not limited
to, the Company's Form 10-K for the year ended December 31, 2005 and any
subsequently filed reports. All documents are also available through the
SEC's Electronic Data Gathering Analysis and Retrieval system at
http://www.sec.gov or from the Company's website at http://www.tollgrade.com.
(TM) LoopCare is a trademark of Tollgrade Communications, Inc.
(TM) Cheetah is a trademark of Tollgrade Communications, Inc.
(R) DOCSIS is a registered trademark of Cable Laboratories, Inc.
(R) DigiTest is a registered trademark of Tollgrade Communications, Inc.
(R) MCU is a registered trademark of Tollgrade Communications, Inc.
(R) LIGHTHOUSE is a registered trademark of Tollgrade Communications,
Inc.
All other trademarks are the property of their respective owners.
SOURCE Tollgrade Communications, Inc.
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CONTACT:
Bob Butter, Corporate Communications of
Tollgrade Communications, Inc., +1-412-820-1347, or cell,
+1-412-736-6186, or bbutter@tollgrade.com
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