PITTSBURGH, Oct. 25 /PRNewswire-FirstCall/ -- Tollgrade Communications,
Inc. (Nasdaq: TLGD) today reported revenue of $14.9 million and a loss per
share of $(0.25) for the third quarter ended September 30, 2006. These
results include a per share charge of $(0.30) for the implementation of
cost restructuring initiatives announced on July 27, 2006. Excluding this
charge, our non-GAAP earnings per share for the third quarter ended
September 30, 2006 were $0.05. In comparison, revenue and per share results
for the third quarter of 2005 were $16.8 million and $0.11, respectively,
including a charge of $(0.02) per share related to the write down of
certain acquired software. Revenues and earnings per share for the third
quarter of 2006 were within the range of estimates the Company provided on
July 27, 2006, which indicated sales could range from $14.5 million to
$17.5 million, and earnings per share could range between $(0.31) to
$(0.22) on a GAAP basis and breakeven to $0.09 on a non-GAAP basis.
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On a year to date basis, the Company reported revenue of $48.8 million
and a loss per share of $(0.26) for the nine month period ended September
30, 2006. Excluding the special charges for restructuring discussed below,
non- GAAP earnings per share for the nine month period ended September 30,
2006 were $0.03. In comparison, revenues for the nine months ended
September 24, 2005 were $48.2 million and earnings per share were $0.13.
Excluding the special charges related to the write-down of certain acquired
software and retirement cost associated with the Company's former CEO,
non-GAAP earnings per share for the nine months ended September 24, 2005
were $0.19.
Strategic Initiatives
During the third quarter of 2006 the Company recorded a charge of
approximately $5.8 million related to its previously announced cost
restructuring initiatives, of which $5.3 million is a non-cash charge. The
restructuring charge includes severance of $0.2 million, lease abandonment
costs of $0.3 million, inventory write-downs of $4.3 million, and fixed
assets and property impairments of $1.0 million. Cash outlays during the
third quarter of 2006 for the restructuring costs were $0.2 million. The
Company expects to record a charge of approximately $0.3 million in the
fourth quarter of 2006 for completion of this program.
"We have made significant progress reducing the overall cost structure
of our business in a highly competitive market," said Mark B. Peterson,
Tollgrade's President and CEO. "Our strategic initiative to improve
efficiency is on track with our plans and will remain a focus area for us.
We continue to pursue international project opportunities for both existing
and planned products and are well-positioned with domestic cable and
telecom customers as they assess their triple-play service assurance
needs," added Peterson.
Third Quarter 2006 Revenue Results
Sales of Tollgrade's DigiTest(R) system products were $2.6 million in
the third quarter of 2006, compared to $5.2 million in the third quarter of
2005. DigiTest system revenues declined in the third quarter of 2006
compared to the third quarter of 2005, primarily due to reduced deployment
of products into the Middle East, offset, in part, by increased sales of
product into Africa.
Overall sales of cable hardware and software products were $2.9 million
in the third quarter of 2006, compared to $3.2 million in the third quarter
of 2005. The decrease was primarily due to the inclusion in the prior year
quarter of higher sales of certain legacy products, as well as a large sale
of VoIP products to an international customer.
Sales of LoopCare(TM) software products, separate and unrelated to the
Company's DigiTest system products, were $0.7 million in the third quarter
of 2006 compared to sales of $0.2 million in the third quarter of 2005. The
third quarter of 2006 includes the effect of additional software
customization work for a customer in the Middle East and for Cincinnati
Bell. LoopCare software license fees and services revenues, including the
separate software products previously discussed, were $2.9 million in the
third quarter of 2006 compared to $2.4 million in the comparable period of
the prior year.
Overall sales of the Company's MCU(R) products, which extend
testability into the POTS network, were $4.1 million in the third quarter
of 2006, compared to $4.9 million in the third quarter of 2005. The third
quarter of 2005 benefited from increased bulk purchases likely due to
hurricane and storm-related restoration projects by certain RBOCs.
Third quarter 2006 sales from Services, which includes installation
oversight and project management services provided to RBOCs and fees for
software maintenance, were $2.9 million, compared to $3.3 million in the
third quarter of 2005. The decline is primarily attributable to lower sales
of software maintenance for traditional legacy cable products.
Sales of products acquired from Emerson on February 24, 2006, were $1.7
million for the third quarter of 2006. Sales were driven by pilot
acceptance and initial deployment of product into Eastern Europe.
Third Quarter 2006 Financial and Operating Data
Gross profit for the third quarter of 2006 was $3.2 million, a decrease
of $5.6 million or 63.4% compared to $8.8 million in the third quarter of
2005, and gross profit as a percentage of sales for the third quarter of
2006 was 21.4% versus 52.1% for the prior year quarter. The gross margin
for the quarter ended September 30, 2006 included a $4.3 million charge for
inventory associated with our restructuring effort, while gross margin for
the quarter ended September 24, 2005 included a charge of $0.4 million
associated with the write-down of the value of certain acquired software.
Excluding these charges from their respective periods, gross profit was
$7.6 million in the third quarter of 2006 compared to $9.2 million in the
third quarter of 2005, a decrease of $1.6 million or 17.8% primarily as a
result of lower sales volumes. Excluding special charges, gross profit as a
percentage of sales for the third quarter of 2006 was 50.5% versus 54.7%
for the third quarter of 2005. The decrease in gross profit as a percentage
of sales was primarily the result of product mix due to lower overall sales
of DigiTest and MCUs in the third quarter of 2006.
Overall operating expenses were $8.9 million for the third quarter of
2006, including a restructuring charge of $1.5 million, compared to $7.3
million in the third quarter of 2005. Selling and marketing expenses for
the third quarter of 2006 were $2.5 million, an increase of $0.5 million
from the third quarter of 2005. The increase is attributable to employee
costs associated with the addition of the Emerson product line, stock
compensation expense, and increased commission costs. General and
administrative expenses decreased slightly to $1.8 million in the third
quarter of 2006 compared to $1.9 million in the third quarter of 2005.
Research and development expenses for the third quarter of 2006 were $3.2
million, a decrease of $0.2 million from the third quarter of 2005 as some
of the initial cost benefits of the restructuring program were realized.
The effective tax rate for the third quarter of 2006 was a benefit of
approximately 35.1%, compared to approximately 17.5% of tax expense
provided for in the prior year quarter. The effective tax rate for the
third quarter of 2006 reflects higher losses as a result of restructuring
and the relative impact of permanent tax items thereon.
The Company's order backlog for firm customer purchase orders and
signed software maintenance contracts was $11.6 million as of September 30,
2006, compared to backlog of $14.7 million as of December 31, 2005. The
decrease is primarily attributable to the completion of significant
milestones for certain large projects and timing of the renewal of certain
maintenance agreements that expire on December 31, 2006. The backlog at
September 30, 2006 and December 31, 2005 included approximately $4.7
million and $6.2 million, respectively, related to software maintenance
contracts, which is earned and recognized as income on a ratable basis
during the remaining terms of these agreements.
Management expects that approximately 62.0% of the current total
backlog will be recognized as revenue in the fourth quarter of 2006.
Fourth Quarter 2006 Outlook
"Regarding our fourth quarter 2006 outlook, we expect to continue to
generate revenue from existing projects which will contribute to the fourth
quarter," said Peterson. "In addition, there are certain sales
opportunities that were in process at the end of the third quarter of 2006
which we believe will close in the fourth quarter. As a result, we expect
revenues for the fourth quarter of 2006 to range from $14.5 million to
$18.5 million and earnings per share of $0.02 to $0.13 including an
estimate of approximately $0.3 million of expense related to finalization
of our restructuring efforts. Excluding these restructuring costs, non-GAAP
earnings per share should range from $0.03 to $0.14. Our business continues
to evolve to be more project- oriented while customers transition their
network platforms," added Peterson.
Conference Call and Webcast
A conference call to discuss earnings results for the third quarter of
2006 will be held on October 26, 2006 at 9:00 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=36084
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 Nine Months Ended
September September September September
30, 2006 24, 2005 30, 2006 24, 2005
Revenues:
Products $12,053 $13,573 $38,828 $38,412
Services 2,896 3,229 9,982 9,757
14,949 16,802 48,810 48,169
Cost of sales:
Products 5,454 5,987 19,238 18,210
Services 982 911 3,601 2,643
Amortization 962 718 2,853 2,147
Inventory write-down 4,346 ---- 4,346 ----
Write down of acquired
software ---- 424 ---- 424
11,744 8,040 30,038 23,424
Gross profit 3,205 8,762 18,772 24,745
Operating expenses:
Selling and marketing 2,459 1,918 8,081 6,594
General and
administrative 1,751 1,910 5,935 5,640
Research and
development 3,233 3,465 10,484 10,554
Restructuring expense 1,500 ---- 1,500 ----
Retirement expense ---- ---- ---- 775
Total operating
expenses 8,943 7,293 26,000 23,563
(Loss) income from
operations (5,738) 1,469 (7,228) 1,182
Other income 729 313 1,984 827
(Loss) income before
income taxes (5,009) 1,782 (5,244) 2,009
(Benefit) provision
for income taxes (1,759) 311 (1,826) 328
Net (loss) income $(3,250) $1,471 $(3,418) $1,681
Diluted earnings
per-share information:
Weighted average shares
of common stock and
equivalents: 13,247 13,221 13,236 13,202
Net (loss) income
per common and common
equivalent shares ($0.25) $0.11 ($0.26) $0.13
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(In thousands)
September December
30, 2006 31, 2005
ASSETS
Current assets:
Cash and cash equivalents $51,169 $49,421
Short-term investments 7,245 18,010
Accounts receivable:
Trade 15,100 9,456
Other 1,292 1,406
Inventories 10,953 9,934
Prepaid expenses 847 1,397
Deferred and refundable tax assets 3,445 1,803
Assets held for sale 1,190 ----
Total current assets 91,241 91,427
Property and equipment, net 3,549 6,390
Deferred tax assets 207 46
Intangibles and capitalized software costs, net 42,020 43,616
Goodwill 23,857 21,562
Receivable from officer 149 153
Other assets 119 135
Total assets $161,142 $163,329
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,473 $ 1,262
Accrued warranty 2,133 2,220
Accrued expenses 3,605 2,579
Accrued salaries and wages 158 660
Accrued royalties payable 160 581
Income taxes payable 441 869
Deferred income 2,836 2,450
Total current liabilities 10,806 10,621
Deferred tax liabilities 2,615 2,447
Total liabilities 13,421 13,068
Total shareholders' equity 147,721 150,261
Total liabilities and shareholders' equity $161,142 $163,329
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
Sept 30, 2006 Sept 24, 2005
Cash flows from operating activities:
Net (loss) income $(3,418) $1,681
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization 4,483 4,038
Compensation expense related to stock plans 378 ---
Deferred income taxes (2,280) 408
Restructuring and asset impairment 5,338 ---
Provisions for losses on inventory (44) 237
Write down of acquired software --- 424
Provision for allowance for doubtful accounts (47) 80
Changes in assets and liabilities:
Accounts receivable-trade (3,770) (2,688)
Accounts receivable-other 114 (875)
Inventory (4,208) 2,425
Prepaid expenses and other assets 570 1,629
Refundable taxes 645 212
Accounts payable (425) (146)
Accrued warranty (87) (14)
Accrued expenses and deferred income 1,089 63
Accrued royalties payable (421) (226)
Accrued salaries and wages (502) (274)
Income taxes payable (428) 10
Net cash (used in) provided by
operating activities (3,013) 6,984
Cash flows from investing activities:
Purchase of Emerson test division (5,501) ---
Purchase of short-term investments (7,589) (15,479)
Redemption/maturity of short-term investments 18,354 12,490
Capital expenditures, including
capitalized software (1,003) (903)
Net cash provided by (used in)
investing activities 4,261 (3,892)
Cash flows from financing activities:
Proceeds from exercise of stock options 406 65
Tax benefit from exercise of stock options 94 8
Net cash provided by financing activities 500 73
Net increase (decrease) in cash and
cash equivalents 1,748 3,165
Cash and cash equivalents at beginning
of period 49,421 32,622
Cash and cash equivalents at end of period $51,169 $35,787
Explanation of Non-GAAP Measures
During the third quarter of 2006, we implemented a restructuring
program aimed at reducing the Company's existing cost structure. We have
provided non-GAAP financial measures (e.g., non-GAAP earnings per share)
that exclude the non-recurring charges associated with the restructuring
initiatives announced on July 27, 2006, 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 third quarter, 2006
financial performance and expected financial performance for the fourth
quarter of 2006. We have also provided non-GAAP financial measures for
certain actions completed during 2005, including the write-down of certain
acquired software and retirement costs associated with a former CEO. We
believe that by excluding these 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.
To supplement the presentation of our non-GAAP financial measures for
the three and nine month periods ended September 30, 2006 and September 24,
2005, we have prepared the following tables that reconcile the differences
between the non-GAAP financial measures with the most comparable measures
prepared in accordance with GAAP. Our non-GAAP financial measures are not
meant to be used in isolation from or as a substitute for comparable GAAP
measures, and should be read only in conjunction with our consolidated
financial statements prepared in accordance with GAAP. Our non-GAAP
financial measures reflect adjustments based on the following items, as
well as the related income tax effect:
- Restructuring expense: For the three and nine months ended
September 30, 2006 we have excluded the effect of the restructuring
program from our GAAP gross profit, gross profit percentage, operating
expense, operating income, net income and diluted EPS. The
restructuring program included charges associated with the write down
of inventory, employee severance and associated costs and write down of
property. We believe it is useful for investors to understand the
effect of these expenses on our cost structure.
- 2005 Special items: For the three and nine months ended
September 24, 2005 we have excluded the effect of the write-down
of certain acquired software. For the nine months ended
September 24, 2005 we have excluded the charge associated with the
retirement of our former CEO.
Reconciliation to GAAP- Quarter Ended September 30, 2006 (Unaudited)
(In thousands, except
per share amount) Gross Operating NET
Gross Profit Operating (Loss) (Loss) Diluted
Profit Percentage Expense Income Income EPS
2006 GAAP Reported
Results $3,205 21.4% $8,943 ($5,738) ($3,250) ($0.25)
Inventory
write-down 4,346 29.1% 4,346 2,868 0.22
Restructuring (1,500) 1,500 990 0.08
2006 Non-GAAP
Results, Excluding
special items $7,551 50.5% $7,443 $108 $608 $0.05
Reconciliation to GAAP- Nine Months Ended September 30, 2006 (Unaudited)
(In thousands, except
per share amount) Gross Operating NET
Gross Profit Operating (Loss) (Loss) Diluted
Profit Percentage Expense Income Income EPS
2006 GAAP Reported
Results $18,772 38.5% $26,000 ($7,228) ($3,418)($0.26)
Inventory
write-down 4,346 8.9% 4,346 2,868 0.22
Restructuring
expense (1,500) 1,500 990 0.07
2006 Non-GAAP
Results, Excluding
special items $23,118 47.4% $24,500 ($1,382) $440 $0.03
Reconciliation to GAAP- Quarter Ended September 24, 2005 (Unaudited)
(In thousands, except
per share amount) Gross
Gross Profit Operating Operating NET Diluted
Profit Percentage Expense Income Income EPS
2005 GAAP Reported
Results $8,762 52.1% $7,293 $1,469 $1,471 $0.11
Acquired software
write-down 424 2.6% 424 280 0.02
2005 Non-GAAP
Results, Excluding
special items $9,186 54.7% $7,293 $1,893 $1,751 $0.13
Reconciliation to GAAP- Nine Months Ended September 24, 2005 (Unaudited)
(In thousands, except
per share amount) Gross
Gross Profit Operating Operating NET Diluted
Profit Percentage Expense Income Income EPS
2005 GAAP Reported
Results $24,745 51.4% $23,563 $1,182 $1,681 $0.13
Acquired software
write-down 424 0.9% 424 280 0.02
Retirement expense (775) 775 512 0.04
2005 Non-GAAP
Results, Excluding
special items $25,169 52.3% $22,788 $2,381 $2,473 $0.19
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 fourth 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 inability 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 inability 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 renewals of
long term maintenance contracts with certain of our RBOC customers, two of
which are scheduled to expire this year, 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.
(R) DigiTest is a registered trademark of Tollgrade Communications, Inc.
(R) MCU 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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http://www.tollgrade.com/
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CONTACT:
Bob Butter, Corporate Communications /
Office: 412-820-1347 / Cell: 412-736-6186 / bbutter@tollgrade.com
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