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PROTO LABS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2013. Forward-Looking Statements Statements contained in this report regarding matters that are not historical or current facts are "forward-looking statements" within the meaning of The Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by the following words: "may," "will," "could," "would," "should," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict," "project," "potential," "continue," "ongoing" or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve known and unknown risks, uncertainties and other factors which may cause our results to be materially different than those expressed or implied in such statements. Certain of these risk factors and others are described in Item 1A. "Risk Factors" of our Annual Report on Form 10-K as filed with the SEC. Other unknown or unpredictable factors also could have material adverse effects on our future results. We cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not place undue reliance on these forward-looking statements. Finally, we expressly disclaim any intent or obligation to update any forward-looking statements to reflect subsequent events or circumstances. Overview We are a leading online and technology-enabled manufacturer of quick-turn additive-manufactured (3D printed), CNC-machined and molded custom parts for prototyping and short-run production. We provide "Real Parts, Really Fast" to product developers worldwide, who are under increasing pressure to bring their finished products to market faster than their competition. We believe low-volume manufacturing has historically been an underserved market due to the inefficiencies inherent in the quotation, equipment set-up and non-recurring engineering processes required to produce custom parts. Our proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts in low volumes, and our customers conduct nearly all of their business with us over the Internet. We target our services to the millions of product developers who use three-dimensional computer-aided design (3D CAD) software to design products across a diverse range of end-markets. Our primary manufacturing products currently include Fineline, which is our additive-manufacturing (3D printing) product line, Firstcut, which is our CNC machining product line, and Protomold, which is our molding product line. Key Financial Measures and Trends Revenue The Company's operations are comprised of three geographic business units in the United States, Europe and Japan. Revenue within each of our business units is derived from our Fineline, Firstcut and Protomold product lines. Fineline revenue consists of sales of additive-manufactured custom parts, often referred to as 3D printed parts. Firstcut revenue consists of sales of CNC-machined custom parts. Protomold revenue consists of sales of custom molds and molded parts. Our historical and current efforts to increase revenue have been directed at gaining new customers and selling to our existing customer base by: ? increasing marketing and selling activities, ? offering additional services such as the acquisition in April 2014 of FineLine Prototyping, Inc. leading to the offering of Fineline additive manufacturing technologies, often times referred to as 3D printing, ? introducing our Firstcut product line in 2007, ? expanding internationally such as the opening of our Japanese plant in 2009, ? improving the usability of our services such as our web-centric applications, and ? expanding the breadth and scope of our products such as by adding more sizes and materials to our offerings such as liquid silicon rubber (LSR) and metal injection molding (MIM). 16--------------------------------------------------------------------------------Excluding product developers we gained through the acquisition of FineLine, during the three months ended June 30, 2014, we served approximately 8,200 unique product developers, an increase of 19% over the same period in 2013. Excluding product developers we gained through the acquisition of FineLine, during the six months ended June 30, 2014, we served approximately 12,100 unique product developers, an increase of 18% over the same period in 2013. Cost of Revenue, Gross Profit and Gross Margin Cost of revenue consists primarily of raw materials, equipment depreciation, employee salaries, benefits, stock-based compensation, bonuses and overhead allocations associated with the manufacturing process for molds and custom parts. We expect cost of revenue to increase in absolute dollars, but remain relatively constant as a percentage of total revenue. We define gross profit as our revenue less our cost of revenue, and we define gross margin as gross profit expressed as a percentage of revenue. Our gross profit and gross margin are affected by many factors, including pricing, sales volume and manufacturing costs, the costs associated with increasing production capacity, the mix between domestic and foreign revenue sources and foreign exchange rates. Operating Expenses Operating expenses consist of marketing and sales, research and development and general and administrative. Personnel-related costs are the most significant component of the marketing and sales, research and development and general and administrative expense categories. Our recent growth in operating expenses is mainly due to higher headcounts to support our growth and expansion, and we expect that trend to continue. Our business strategy is to continue to be a leading online and technology-enabled manufacturer of quick-turn additive-manufactured (3D printing), CNC-machined and molded custom parts for prototyping and short-run production. For us to achieve our goals, we anticipate continued substantial investments in technology and personnel, resulting in increased operating expenses. Marketing and sales. Marketing and sales expense consists primarily of employee compensation, benefits, commissions, stock-based compensation, marketing programs such as print and pay-per-click advertising, trade shows, direct mail and other related overhead. We expect sales and marketing expense to increase in the future as we increase the number of marketing and sales professionals and marketing programs targeted to increase our customer base. Research and development. Research and development expense consists primarily of employee compensation, benefits, stock-based compensation, depreciation on equipment, outside services and other related overhead. All of our research and development costs have been expensed as incurred. We expect research and development expense to increase in the future as we seek to enhance and expand our service offerings. General and administrative. General and administrative expense consists primarily of employee compensation, benefits, stock-based compensation, professional service fees related to accounting, tax and legal services, amortization of intangibles and other related overhead. We expect general and administrative expense to increase on an absolute basis as we continue to grow and expand our operations. Other Income (Expense), Net Other income (expense), net primarily consists of foreign currency-related gains and losses, interest income on cash balances and investments, and interest expense on borrowings. Our foreign currency-related gains and losses will vary depending upon movements in underlying exchange rates. Our interest income will vary each reporting period depending on our average cash balances during the period, composition of our marketable security portfolio and the current level of interest rates. Our interest expense will vary based on borrowings and interest rates. Provision for Income Taxes Provision for income taxes is comprised of federal, state, local and foreign taxes based on pre-tax income. We expect income taxes to increase as our taxable income increases and our effective tax rate to remain relatively constant. 17-------------------------------------------------------------------------------- Results of Operations The following table sets forth a summary of our results of operations and the related changes for the periods indicated. The results below are not necessarily indicative of the results for future periods. Three Months Ended June 30, Change Six Months Ended June 30, Change (dollars in $ % $ % thousands) 2014 2013 2014 2013 Revenue $ 52,866 100.0 % $ 39,749 100.0 % $ 13,117 33.0 % $ 98,940 100.0 % $ 77,062 100.0 % $ 21,878 28.4 Cost of revenue 20,183 38.2 14,896 37.5 5,287 35.5 37,233 37.6 28,930 37.5 8,303 28.7 Gross profit 32,683 61.8 24,853 62.5 7,830 31.5 61,707 62.4 48,132 62.5 13,575 28.2 Operating expenses: Marketing and sales 7,261 13.7 5,550 13.9 1,711 30.8 13,678 13.8 10,813 14.0 2,865 26.5 Research and development 3,914 7.4 2,751 6.9 1,163 42.3 7,370 7.4 5,379 7.0 1,991 37.0 General and administrative 5,534 10.5 3,923 9.9 1,611 41.1 10,237 10.4 7,917 10.3 2,320 29.3 Total operating expenses 16,709 31.6 12,224 30.7 4,485 36.7 31,285 31.6 24,109 31.3 7,176 29.8 Income (expense) from operations 15,974 30.2 12,629 31.8 3,345 26.5 30,422 30.8 24,023 31.2 6,399 26.6 Other income, net (66 ) (0.1 ) 116 0.3 (182 ) * 37 0.0 119 0.1 (82 ) (68.9 ) Income before income taxes 15,908 30.1 12,745 32.1 3,163 24.8 30,459 30.8 24,142 31.3 6,317 26.2 Provision for income taxes 4,952 9.4 4,134 10.4 818 19.8 9,401 9.5 7,244 9.4 2,157 29.8 Net income $ 10,956 20.7 % $ 8,611 21.7 % $ 2,345 27.2 % $ 21,058 21.3 % $ 16,898 21.9 % $ 4,160 24.6 % *Percentage change not meaningful Stock-based compensation expense included in the statements of operations data above is as follows: Three Months Ended June 30, Six Months Ended June 30, (dollars in thousands) 2014 2013 2014 2013 Stock options and restricted stock $ 1,147 $ 778 $ 2,060 $ 1,554 Employee stock purchase plan 103 93 188 182 Total stock-based compensation expense $ 1,250 $ 871 $ 2,248 $ 1,736 Cost of revenue $ 97 $ 73 $ 179 $ 144 Operating expenses: Marketing and sales 240 151 435 301 Research and development 268 181 483 354 General and administrative 645 466 1,151 937Total stock-based compensation expense $ 1,250 $ 871 $ 2,248 $ 1,736 18--------------------------------------------------------------------------------Comparison of Three Months Ended June 30, 2014 and 2013 Revenue Revenue by product line and the related changes for the three months ended June 30, 2014 and 2014 were as follows: Three Months Ended June 30, 2014 2013 Change (dollars in % of Total % of Total thousands) $ Revenue $ Revenue $ % Revenue Protomold $ 36,255 68.6 % $ 27,924 70.3 % $ 8,331 29.8 % Firstcut 14,478 27.4 11,825 29.7 2,653 22.4 Fineline 2,133 4.0 - - 2,133 100.0 Total revenue $ 52,866 100.0 % $ 39,749 100.0 % $ 13,117 33.0 % Revenue by geographic region, based on the billing location of the end customer, is summarized as follows: Three Months Ended June 30, 2014 2013 Change (dollars in % of Total % of Total thousands) $ Revenue $ Revenue $ % Revenue United States $ 39,966 75.6 % $ 30,106 75.7 % $ 9,860 32.8 % International 12,900 24.4 9,643 24.3 3,257 33.8 Total revenue $ 52,866 100.0 % $ 39,749 100.0 % $ 13,117 33.0 % Our revenue increased $13.1 million, or 33.0%, for the three months ended June 30, 2014 compared with the same period in 2013. This revenue growth was driven by a 32.8% increase in United States revenue, 33.8% increase in international revenue, 29.8% increase in Protomold revenue, 22.4% increase in Firstcut revenue and $2.1 million increase in revenue from the FineLine acquisition, in all cases for the three months ended June 30, 2014 compared with the same period in 2013. Within our legacy Firstcut and Protomold product lines, our revenue growth in the three months ended June 30, 2014 was the result of increased number and spending of the product developers we served. During the three months ended June 30, 2014, excluding product developers who purchased Fineline products, we served approximately 8,200 unique product developers, an increase of 19.4% over the same period in 2013. Average revenue per product developer, excluding product developers who purchased Fineline products, also increased 6.9% during the three months ended June 30, 2014 compared to the same period in 2013. Excluding revenue gained through the acquisition of FineLine, our revenue increases were primarily driven by increases in sales personnel and marketing activities. Our sales personnel focus on gaining new customer accounts and expanding the depth and breadth into existing customer accounts. Our marketing personnel focus on trade show and marketing activities that have proven to result in the greatest number of customer leads to support sales activity. International revenue was favorably impacted by $0.7 million in the three months ended June 30, 2014 compared to the same period in 2013 due to weakening of the United States dollar relative to certain foreign currencies, particularly the British Pound. The effect of pricing changes on revenue was immaterial for the three months ended June 30, 2014 compared to the same period in 2013. Cost of Revenue, Gross Profit and Gross Margin Cost of Revenue. Cost of revenue increased $5.3 million, or 35.5%, for the three months ended June 30, 2014 compared to the same period in 2013, which was faster than the rate of revenue increase of 33.0% for the three months ended June 30, 2014 compared to the same period in 2013. The increase in cost of revenue was due to raw material and production cost increases of $1.8 million to support increased sales volumes, equipment and facility-related cost increases of $0.7 million and an increase in direct labor headcount resulting in personnel and related cost increases of $2.8 million. Gross Profit and Gross Margin. Gross profit increased to $32.7 million, or 61.8% of revenues, for the three months ended June 30, 2014 from $24.9 million, or 62.5% of revenues, for the three months ended June 30, 2013 due to increases in revenue offset by the cost of revenue as discussed above. Gross margin decreased primarily as a result of additional costs incurred related to the integration of FineLine and the move to our new facility in Plymouth, Minnesota. 19--------------------------------------------------------------------------------Operating Expenses, Other Income (Expense), net and Provision for Income Taxes Marketing and Sales. Marketing and sales expense increased $1.7 million, or 30.8%, for the three months ended June 30, 2014 compared to the same period in 2013 due primarily to an increase in headcount resulting in personnel and related cost increases of $1.3 million and marketing program cost increases of $0.4 million. The increase in marketing program costs is the result of our focus and concentration on funding those programs which have proven to be the most effective in growing our business. Marketing and sales expense as a percentage of revenue decreased to 13.7% for the three months ended June 30, 2014 from 14.0% during the same period in 2013, primarily due to the fixed nature of certain marketing and sales costs as well as focus on effective marketing spending as previously discussed. Research and Development. Our research and development expense increased $1.2 million, or 42.3%, for the three months ended June 30, 2014 compared to the same period in 2013 due to an increase in headcount resulting in personnel and related cost increases of $1.0 million and operating cost increases of $0.2 million. General and Administrative. Our general and administrative expense increased $1.6 million, or 41.1%, for the three months ended June 30, 2014 compared to the same period in 2013 due to an increase in headcount resulting in personnel and related cost increases of $0.7 million, stock-based compensation costs increases of $0.2 million, administrative cost increases of $0.1 million, intangible amortization expense cost increases of $0.1 and professional service cost increases of $0.5 million. Other Income (Expense), net. Other income, net decreased $0.2 million for the three months ended June 30, 2014 compared to the same period in 2013 due to changes in foreign currency rates. Provision for Income Taxes. Our effective tax rate of 31.1% for the three months ended June 30, 2014 decreased 1.3% when compared to 32.4% for the same period in 2013. The decrease in the effective tax rate is primarily due to an increase in tax benefit from the domestic manufacturing deduction projected for the tax year ending December 31, 2014. As a result of increased income attributable to the fluctuations described above, our income tax provision increased by $0.9 million to $5.0 million for the three months ended June 30, 2014 compared to our income tax provision of $4.1 million for the three months ended June 30, 2013. Comparison of Six Months Ended June 30, 2014 and 2013 Revenue Revenue by product line and the related changes for the six months ended June 30, 2014 and 2014 were as follows: Six Months Ended June 30, 2014 2013 Change (dollars in % of Total % of Total thousands) $ Revenue $ Revenue $ % Revenue Protomold $ 68,949 69.7 % $ 54,804 71.1 % $ 14,145 25.8 % Firstcut 27,858 28.2 22,258 28.9 5,600 25.2 Fineline 2,133 2.1 - - 2,133 100.0 Total revenue $ 98,940 100.0 % $ 77,062 100.0 % $ 21,878 28.4 % 20--------------------------------------------------------------------------------Revenue by geographic region, based on the billing location of the end customer, is summarized as follows: Six Months Ended June 30, 2014 2013 Change (dollars in % of Total % of Total thousands) $ Revenue $ Revenue . $ % Revenue United States $ 72,988 73.8 % $ 58,254 75.6 % $ 14,734 25.3 % International 25,952 26.2 18,808 24.4 7,144 38.0 Total revenue $ 98,940 100.0 % $ 77,062 100.0 % $ 21,878 28.4 % Our revenue increased $21.9 million, or 28.4%, for the six months ended June 30, 2014 compared with the same period in 2013. This revenue growth was driven by a 25.3% increase in United States revenue, 38.0% increase in international revenue, 25.8% increase in Protomold revenue, 25.2% increase in Firstcut revenue and $2.1 in revenue from the FineLine acquisition, in each case for the six months ended June 30, 2014 compared with the same period in 2013. Within our legacy Firstcut and Protomold product lines, our revenue growth in the six months ended June 30, 2014 was the result of increased number and spending of the product developers we served. During the six months ended June 30, 2014, excluding product developers who purchased Fineline products, we served approximately 12,100 unique product developers, an increase of 18.4% over the same period in 2013. Average revenue per product developer, excluding product developers who purchased Fineline products, also increased 6.1% during the six months ended June 30, 2014 compared to the same period in 2013. Excluding revenue gained through the acquisition of FineLine, our revenue increases were primarily driven by increases in sales personnel and marketing activities. Our sales personnel focus on gaining new customer accounts and expanding the depth and breadth into existing customer accounts. Our marketing personnel focus on trade show and marketing activities that have proven to result in the greatest number of customer leads to support sales activity. International revenue was favorably impacted by $1.1 million in the six months ended June 30, 2014 compared to the same period in 2013 due to the weakening of United States dollar relative to certain foreign currency, particularly the British Pound. The effect of pricing changes on revenue was immaterial for the six months ended June 30, 2014 compared to the same period in 2013. Cost of Revenue, Gross Profit and Gross Margin Cost of Revenue. Cost of revenue increased $8.3 million, or 28.7%, for the six months ended June 30, 2014 compared to the same period in 2013, which was slightly higher than the rate of revenue increase of 28.4% for the six months ended June 30, 2014. The increase in cost of revenue was due to raw material and production cost increases of $2.4 million to support increased sales volumes, equipment and facility-related cost increases of $1.3 million and an increase in direct labor headcount resulting in personnel and related cost increases of $4.6 million. Gross Profit and Gross Margin. Gross profit increased to $61.7 million, or 62.4% of revenues, for the six months ended June 30, 2014 from $48.1 million, or 62.5% of revenues, for the six months ended June 30, 2013 due to increases in revenue offset by the cost of revenue as discussed above. Despite costs incurred related to the integration of FineLine and the move to our new facility in Plymouth, Minnesota, gross margins have remained similar in each of the six month periods ended June 30, 2014 and 2013. Operating Expenses, Other Income (Expenses), Net and Provision for Income Taxes Marketing and Sales. Marketing and sales expense increased $2.9 million, or 26.5%, for the six months ended June 30, 2014 compared to the same period in 2013 due primarily to an increase in headcount resulting in personnel and related cost increases of $2.2 million and marketing program cost increases of $0.7 million. The increase in marketing program costs is the result of our focus and concentration on funding those programs which have proven to be the most effective in growing our business. Research and Development. Our research and development expense increased $2.0 million, or 37.0%, for the six months ended June 30, 2014 compared to the same period in 2013 due to an increase in headcount resulting in personnel and related cost increases of $1.6 million and operating cost increases of $0.4 million. 21-------------------------------------------------------------------------------- General and Administrative. Our general and administrative expense increased $2.3 million, or 29.3%, for the six months ended June 30, 2014 compared to the same period in 2013 due to an increase in headcount resulting in personnel and related cost increases of $0.7 million, stock-based compensation costs increases of $0.2 million, administrative cost increases of $0.4 million, intangible amortization expense cost increases of $0.1 and professional service cost increases of $0.9 million. Other Income (Expense), Net. Our other income, net decreased $0.1 million for the six months ended June 30, 2014 compared to the same period in 2013 due to foreign currency change decreases of $0.2 million, which were partially offset by investment interest income increases of $0.1 million. Provision for Income Taxes. Our effective tax rate of 30.9% for the six months ended June 30, 2014 increased by 0.9% when compared to our effective tax rate of 30.0% for the same period in 2013. The increase in our effective tax rate is due primarily to the American Taxpayer Relief Act of 2012, which was enacted on January 2, 2013 and required that we recognize the federal portion of our 2012 research and development credit in the first quarter of 2013. Refer to Footnote 11 for additional information. As a result of the change in effective tax rate as well as increased income attributable to the fluctuations described above, our income tax provision increased by $2.2 million to $9.4 million for the six months ended June 30, 2014 compared to our income tax provision of $7.2 million for the six months ended June 30, 2013. Liquidity and Capital Resources Cash Flows The following table summarizes our cash flows for the six months ended June, 2014 and 2013: Six Months Ended June 30, (dollars in thousands) 2014 2013 Net cash provided by operating activities $ 26,017 $ 19,448 Net cash used in investing activities (48,511 ) (29,099 ) Net cash provided by financing activities 2,075 8,633 Effect of exchange rates on cash and cash equivalents 234 (295 ) Net increase (decrease) in cash and cash equivalents $ (20,185 ) $ (1,313 ) Sources of Liquidity Historically we have financed our operations and capital expenditures primarily through cash flow from operations and, to a lesser extent, lease financing and the use of bank loans. We had cash and cash equivalents of $22.9 million as of June 30, 2014, a decrease of $20.2 million from December 31, 2013. The decrease in our cash was primarily due to the purchase of FineLine Prototyping, Inc. as discussed in Footnote 3. Cash Flows from Operating Activities Cash provided by operating activities was $26.0 million for the six months ended June 30, 2014. We had net income of $21.1 million, which included non-cash charges consisting of $4.7 million in depreciation and amortization, $2.2 million in stock-based compensation, $0.8 million in amortization of held-to-maturity securities and $0.1 million in deferred taxes, partially offset by $1.6 million of excess tax benefit on stock-based compensation. Other uses of cash in operating activities totaled $1.3 million, which included an increase in accounts receivable of $5.6 million, increase in inventory of $0.3 million, increase in prepaid expenses and other of $0.4 million and a decrease in accrued liabilities of $2.4 which were partially offset by a decrease in accounts payable of $5.0 million and a decrease in income taxes payable of $2.4 million. These operating cash increases in accounts receivable, accounts payable, inventories and other reflect increases in revenue and the growth of our business. Cash provided by operating activities was $19.4 million for the six months ended June 30, 2013. We had net income of $16.9 million, which included non-cash charges consisting of $3.6 million in depreciation, $1.7 million in stock-based compensation, $0.6 million in amortization of held-to-maturity securities and $0.3 million in deferred taxes, offset by $5.9 million of excess tax benefit on stock-based compensation. Other sources of cash in operating activities totaled $2.2 million, which included an increase in income taxes payable of $3.1 million, increase in prepaid expenses and other of $1.7 million and increase in accounts payable of $1.1 million, which were partially offset by an increase in accounts receivable of $2.0 million, increase in inventories of 0.4 million and decrease in accrued liabilities and other of $1.3 million. These operating cash increases in accounts receivable, accounts payable, inventories and other reflect increases in revenue and the growth of our business. 22--------------------------------------------------------------------------------Cash Flows from Investing Activities Cash used in investing activities was $48.5 million for the six months ended June 30, 2014, consisting of $31.6 million for the purchase of property and equipment, $33.9 million for the payments on business acquisitions and $38.5 million for the purchase of marketable securities, which were partially offset by $55.5 million in proceeds from the maturities, sales and call redemptions of marketable securities. Cash used in investing activities was $29.1 million for the six months ended June 30, 2013, consisting of $6.1 million for the purchase of property and equipment and $57.3 million for the purchase of marketable securities, which were partially offset by $34.3 million in proceeds from the maturities and call redemptions of marketable securities. Cash Flows from Financing Activities Cash provided by financing activities was $2.1 million for the six months ended June 30, 2014, consisting of proceeds from exercises of stock options of $1.8 million and $1.6 million in excess tax benefit on stock-based compensation, which were partially offset by $0.9 million for payments of debt and $0.4 million for payments of acquisition-related contingent consideration. Cash provided by financing activities was $8.6 million for the six months ended June 30, 2013, consisting of excess tax benefit on stock-based compensation of $5.9 million and $2.9 million in proceeds from exercises of stock options, partially offset by $0.2 million for payments of debt. Off-Balance Sheet Arrangements Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities. Critical Accounting Policies and Use of Estimates We have adopted various accounting policies to prepare the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Our significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013. There were no material changes in our significant accounting policies, with the following change made to goodwill and intangible assets, during the six months ended June 30, 2014. Goodwill We recognize goodwill in accordance with ASC 350, Intangibles - Goodwill and Other (ASC 350). Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment annually in the fourth quarter of each year, and is tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. An impairment charge for goodwill is recognized only when the estimated fair value of a reporting unit, including goodwill, is less than its carrying amount. Other Intangible Assets We recognize other intangibles assets in accordance with ASC 350, Intangibles - Goodwill and Other (ASC 350). Other intangible assets include internally developed software, customer relationships and other intangible assets acquired from an independent party. Other intangible assets with a definite life are amortized over a period ranging from two to 10 years on a straight line basis. Other intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The amount of the impairment loss recorded is calculated by the excess of the asset's carrying value over its fair value. 23--------------------------------------------------------------------------------Recent Accounting Pronouncements For information on recent accounting pronouncements, see Note 2 to the consolidated financial statements appearing in Part I, Item 1 in this Quarterly Report on Form 10-Q. 24-------------------------------------------------------------------------------- |