TEMPE, Ariz., Feb. 14 /PRNewswire-FirstCall/ -- Inter-Tel, Incorporated today announced operating results for the fourth quarter and year ended December 31, 2005. Net sales for the quarter ended December 31, 2005 decreased 0.1% to $110.7 million compared to restated net sales of $110.8 million for the corresponding period in 2004. Net sales for the quarter ended December 31, 2005 included $5.4 million in revenues attributable to our Lake acquisition in March 2005. Excluding the Lake acquisition, non-GAAP net sales would have been $105.3 million, a decrease of 5.0% for the fourth quarter of 2005 compared to the corresponding period in 2004. Net sales for the year ended December 31, 2005 increased 6.3% to $442.9 million compared to restated net sales of $416.8 million for 2004. Net sales for the year ended December 31, 2005 included $23.0 million in revenues attributable to our acquisition of Lake. Excluding the Lake acquisition, non-GAAP net sales would have been $419.9 million, an increase of 0.8% for the year ended December 31, 2005 compared to 2004.
For the quarter ended December 31, 2005, Inter-Tel reported GAAP net income of $8.8 million ($0.33 per diluted share) including $342,000 in net income from the Lake acquisition, compared to restated GAAP net income of $3.2 million ($0.12 per diluted share) for the quarter ended December 31, 2004. For the year ended December 31, 2005, Inter-Tel reported GAAP net income of $18.4 million ($0.68 per diluted share), including the impact of the Lake acquisition and the related in-process research and development (IPRD) write-off, and $6.8 million in accrued net losses associated with a legal judgment and settlement discussed in further detail below, compared to restated GAAP net income of $27.2 million ($1.00 per diluted share) for the year ended December 31, 2004. For the year ended December 31, 2005, Inter-Tel reported that non-GAAP pro forma net income, excluding the Lake acquisition and the related in-process research and development write-off and the net losses associated with a legal judgment and settlement was $26.3 million ($0.97 per diluted share). Please refer to "Legal judgment, legal settlement and related legal costs" and "Reconciliation of GAAP and Non-GAAP Disclosures" below for additional information.
Restatement. During the Company's year-end close procedures, the Company determined that revenues during 2005 and in prior years that related to a portion of the resale of local and long distance and network services billings were inadvertently recorded in advance of the related service period due to an error in determining the proper time periods covered for certain advance billed products. As a result, the Company intends to restate its revenues and related income tax provision for all periods to be presented in the forthcoming Annual Report on Form 10-K, scheduled to be filed in March 2006. This adjustment grew in small increments over a number of years and the effect on each of the prior quarterly and annual results was not material. However, the cumulative amount of the differences was too large to record in the fourth quarter of 2005, so management elected to restate prior periods to correct this difference. The cumulative effect of the adjustments resulted in a current liability for deferred revenues of $0.9 million, a decrease in accounts receivable of $1.3 million and a decrease in revenues of $2.2 million on a cumulative basis for all periods prior to the beginning of the quarter ended December 31, 2005. In addition, it was determined that the tax treatment of certain intangible assets recorded as part of the acquisition of two foreign subsidiaries (one in 2002 and one in 2005) has not been accounted for correctly. The effect was to overstate our income tax provision in 2003 by $240,000, 2004 by $236,000 and by $329,000 for the nine months ended September 30, 2005. The amount of the adjustment is not material to any of the quarterly or annual results of operations previously reported; however, the cumulative amount of $805,000 was considered too large to record as an adjustment in the fourth quarter of 2005. The impact on net income from all of the adjustments discussed above is minimal on the respective restated quarterly and annual results of operations. Accordingly, management and the board of directors do not believe there are any changes in incentive compensation paid to corporate executives for any of the past 5 years.
The table below reflects the Company's currently estimated expectations of the approximate impact to the Company's net sales, tax provision and net income (a):
Quarter Quarter Year
(in thousands, Ended Ended Ended
except per share 12-31-05 12-31-04 12-31-05
amounts)
Net sales as reported $110,675 $110,448 $442,894
Net sales as restated n/a 110,840 n/a
Changes in reported
net sales n/a 392 n/a
Pre-tax net income
as reported $12,088 $6,129 $27,769
Pre-tax net income
as restated n/a 6,521 n/a
Changes in reported
pre-tax net income n/a 392 n/a
Income tax provision
as reported $3,328 $3,218 $9,375
Income tax provision
as restated n/a 3,308 n/a
Changes in income
tax provision n/a 90 n/a
Net income as reported $8,760 $2,911 $18,394
Net income as restated n/a 3,213 n/a
Change in reported
net income n/a 302 n/a
Net income per diluted
share as reported $0.33 $0.11 $0.68
Net income per diluted
share as restated n/a $0.12 n/a
Change in reported net
income per diluted share n/a $0.01 n/a
Year Nine Months
(in thousands, Ended Ended
except per share 12-31-04 9-30-05
amounts)
Net sales as reported $416,893 $332,655
Net sales as restated 416,768 332,219
Changes in reported
net sales (125) (436)
Pre-tax net income
as reported $43,852 $16,117
Pre-tax net income
as restated 43,727 15,681
Changes in reported
pre-tax net income (125) (436)
Income tax provision
as reported $16,798 $6,542
Income tax provision
as restated 16,514 6,047
Changes in income
tax provision (284) (495)
Net income as reported $27,054 $9,575
Net income as restated 27,213 9,634
Change in reported
net income 159 59
Net income per diluted
share as reported $0.99 $0.35
Net income per diluted
share as restated $1.00 $0.35
Change in reported net
income per diluted share $0.01 $--
(a) The amounts provided are estimates and subject to audit. The Company has not yet filed its Form 10-K report for the Year Ended December 31, 2005, and there can be no assurance that these amounts may not change.
Additional information regarding our operating results follows:
Sales. GAAP net sales decreased 0.1% to $110.7 million in the fourth quarter of 2005 compared to $110.8 million as restated for the fourth quarter of 2004. Non-GAAP net sales, which exclude the operations of Lake, decreased 5.0%, or $5.6 million, in the quarter ended December 31, 2005 compared to restated net sales in the fourth quarter of 2004. GAAP net sales increased 6.3%, or $26.1 million, to $442.9 million in the year ended December 31, 2005 compared to restated net sales of $416.8 million in 2004. Non-GAAP net sales, excluding the operations of Lake, increased 0.8%, or $3.1 million in the year ended December 31, 2005 compared to restated net sales in 2004.
Gross Profit and Gross Margin. GAAP gross profit decreased 6.0%, or $3.6 million, to $56.0 million in the fourth quarter of 2005 compared to restated gross profit of $59.6 million in the fourth quarter of 2004. The gross margin percentage decreased to 50.6% in the fourth quarter of 2005, compared to 53.8% for the fourth quarter of 2004, as restated. The decrease in gross profit dollars was primarily attributable to the mix of products and services sold, and sales promotions and discounts on product and service revenues. The decrease in gross margin percentage was due primarily to sales promotions and discounts on product and service revenues. The gross margin percentage was also affected by the mix of products and services sold, with a higher percentage of net sales recognized in our local, long distance and network services divisions, government and national accounts division, and DataNet operations, which generate lower gross margins than other divisions within our principal operating segment. In the year ended December 31, 2005, GAAP gross profit dollars increased 2.2%, or $4.9 million, to $226.3 million, compared to restated gross profit of $221.5 million in the year ended December 31, 2004. The gross margin percentage decreased to 51.1% in the year ended December 31, 2005, compared to 53.1% for the corresponding period in 2004, as restated, primarily due to promotions and price discounting, as well as the mix of the products and services sold as described in greater detail above.
Research and Development (R&D). GAAP R&D expenses decreased 2.5%, or $197,000, in the fourth quarter of 2005 compared to the fourth quarter of 2004. Non-GAAP R&D costs, which exclude the operations of Lake, decreased 11.2%, or $0.9 million, in the quarter ended December 31, 2005 compared to R&D costs in the fourth quarter of 2004. R&D expenses decreased in the fourth quarter of 2005 compared to the corresponding period in 2004 following the product test and launch expenses associated with the release of new products in the first half of 2005, including the Inter-Tel 5000, Enterprise Messaging, and Unified Communicator v3.0 products. In the year ended December 31, 2005, GAAP R&D expenses increased 15.4%, or $4.4 million, compared to the year ended December 31, 2004. Non-GAAP R&D expenses, which exclude the operations of Lake, increased 3.8%, or $1.1 million, in the year ended December 31, 2005 compared to the year ended December 31, 2004.
In-Process Research and Development (IPRD) Write-Off. In the first quarter of 2005, the Company reported a write-off of IPRD costs of $2.6 million associated with the acquisition of Lake. This write-off reduced GAAP net income by $0.10 per diluted share for the year ended December 31, 2005. Refer to "Reconciliation of GAAP and Non-GAAP Disclosures" below for additional information.
Selling, General and Administrative (SG&A). GAAP SG&A increased slightly by 0.9%, or $329,000, in the fourth quarter of 2005 compared to the fourth quarter of 2004. The slight dollar increase was primarily attributable to higher costs and higher net sales associated with our Lake acquisition in March 2005. SG&A increased to 32.9% of net sales in the fourth quarter of 2005 compared to 32.5% of restated net sales in the fourth quarter of 2004. Non-GAAP SG&A costs, which exclude the operations of Lake, decreased 2.4%, or $0.9 million, in the quarter ended December 31, 2005 compared to SG&A costs in the fourth quarter of 2004. In the year ended December 31, 2005, GAAP SG&A expenses increased 8.9%, or $12.4 million, compared to the year ended December 31, 2004. SG&A increased to 34.4% of net sales in the year ended December 31, 2005, compared to 33.6% of net sales in 2004, as restated. Non-GAAP SG&A expenses, which exclude the operations of Lake, increased 5.6%, or $7.9 million, in the year ended December 31, 2005 compared to SG&A in the year ended December 31, 2004.
Amortization. Amortization increased 110.6% to $1.1 million in the fourth quarter of 2005, compared to $540,000 in the fourth quarter of 2004. The increase was primarily due to increased purchased intangible assets from acquisitions and assets acquired during 2004 and the Lake acquisition in 2005. Amortization increased 124.6% to $4.2 million in the year ended December 31, 2005, compared to $1.9 million in 2004.
Legal judgment, legal settlement and related legal costs. GAAP pre-tax costs associated with this line item in the consolidated statements of income totaled $10.4 million ($0.26 per diluted share after taxes) during the quarter ended September 30, 2005. As disclosed in August 2005, a jury rendered a verdict against Inter-Tel in the net amount of approximately $7.4 million in a trial in Florida. Although the Company is appealing the verdict, the Company has accrued the net verdict amount, plus legal costs incurred in the third quarter. Should the Company be successful or unsuccessful in the appeals process, these costs may be adjusted in the future. The Company also reached a separate settlement in another legal matter during the third quarter in connection with a longstanding dispute with a third-party vendor and customer. The net settlement plus legal fees incurred during the third quarter are included in the pre-tax total costs of $10.4 million identified above.
Reconciliation of GAAP and Non-GAAP Disclosures. 2005 first quarter operating income included a write-off of IPRD costs of $2.6 million, which reduced net income by $2.6 million, or $0.10 per diluted share. This write-off reflected the in-process research and development costs associated with the Company's Lake acquisition in March 2005. The IPRD write-off is not deductible for income tax purposes. Provided in the tables below are the preliminary operating results of our acquired Lake operations, including the IPRD write-off, as well as the impact of costs associated with a legal judgment against the Company in the third quarter, a legal settlement in the third quarter, and legal costs associated with these two events as identified in more detail above. The non-GAAP condensed consolidated statements of operations are provided below to enhance overall understanding of our current financial performance and how we view our operating results. The presentation of this non-GAAP information is not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP and is not necessarily comparable to non-GAAP results published by other companies. The following tables reconcile the financial statements on a GAAP basis for the quarter and year ended December 31, 2005 to the non-GAAP pro forma financial statements, which exclude the effects of (1) the in-process research and development (IPRD) write-off and the impact of operating results from the acquired Lake operations and (2) costs associated with a legal judgment against the Company in the third quarter, a legal settlement in the third quarter, and legal costs associated with each of these two events, as discussed above:
Quarter ended December 31, 2005
(in thousands, except per
share amounts)
Non-GAAP/
Lake Pro forma
GAAP Acquisition excluding Lake
Sales $110,675 $5,423 $105,252
Gross profit 56,038 2,761 53,277
Selling, general and
administrative 36,362 1,182 35,180
Amortization 1,137 522 615
Operating income 10,737 355 10,382
Income before income taxes 12,088 394 11,694
Income tax provision 3,328 52 3,276
Net income 8,760 342 8,418
Net income per share - basic $0.33 $0.01 $0.32
Net income per share - diluted $0.33 $0.01 $0.31
Year ended December 31, 2005
(in thousands,
except per
share amounts)
Legal judgment, Non-GAAP/
legal settlement Pro forma
Lake and related excluding Lake
GAAP Acquisition litigation costs and legal issues
Sales $442,894 $22,996 $-- $419,898
Gross profit 226,310 11,228 -- 215,082
Selling,
general and
administrative 152,314 4,507 -- 147,807
In process R&D
write-off 2,600 2,600 -- --
Amortization 4,194 1,740 -- 2,454
Legal judgment
and settlement 10,378 -- 10,378 --
Operating income
(loss) 23,566 (981) (10,378) 34,925
Income (loss)
before income
taxes 27,769 (911) (10,378) 39,058
Income taxes 9,375 223 (3,580) 12,732
Net income
(loss) 18,394 (1,134) (6,798) 26,326
Net income
(loss) per
share - basic $0.70 $(0.04) $(0.26) $1.00
Net income
(loss) per
share - diluted $0.68 $(0.04) $(0.26) $0.97
Conference call. You may access our quarterly earnings results conference call, which is scheduled for February 14, 2006 at 5:30 p.m. (ET) via the Internet at http://www.inter-tel.com/. Select "News & Events" from the top navigation bar. A link to the webcast will be displayed within the "News & Events" section. A replay of the conference call will be available on the Internet until February 14, 2007 at 11:59 p.m. (ET).
This news release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's estimates of restatement adjustments on net sales, operating income, corporate executive incentive plans, tax provision and net income for all periods presented, the materiality of such adjustments, and the Company's intent to restate its revenues and related income tax provision for all periods to be presented in the forthcoming Annual Report on Form 10-K, scheduled to be filed in March 2006. Such statements are based on current assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially from our current expectations. These risks and uncertainties include, but are not necessarily limited to, the risks that Inter-Tel's management has not properly estimated and accounted for proposed restatement amounts for all applicable periods. For a further list and description of such risks and uncertainties, please see the Company's previously filed SEC reports, including the Company's Annual Report on Form 10-K filed March 16, 2005, Form 10-Q filed on November 9, 2005 and Current Reports on Form 8-K. Inter-Tel disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
About Inter-Tel, Incorporated
Inter-Tel offers value-driven communications products; applications utilizing networks and server-based communications software; and a wide range of managed services that include voice and data network design and traffic provisioning, custom application development, and financial solutions packages. An industry-leading provider focused on the communication needs of business enterprises, Inter-Tel employs approximately 2,000 communications professionals, and services business customers through a network of 59 company-owned direct sales offices and over 350 authorized providers in North America, the United Kingdom, Ireland, Australia and South Africa. More information is available at http://www.inter-tel.com/.
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months
(in thousands, except per Ended December 31,
share amounts)
2005 2004 2004
GAAP GAAP
NET SALES As Reported As Restated
Telecommunications systems,
software and related $96,285 $98,240 $98,240
Resale of local and long
distance 14,390 12,208 12,600
Total net sales 110,675 110,448 110,840
Cost of sales
Telecommunications systems,
software and related 46,194 43,060 43,060
Resale of local and long
distance 8,443 8,144 8,144
Total cost of sales 54,637 51,204 51,204
GROSS PROFIT 56,038 59,244 59,636
Research & development 7,802 7,999 7,999
Selling, general and
administrative 36,362 36,033 36,033
Amortization of purchased
intangible assets 1,137 540 540
Write-off of in-process
research and development costs -- -- --
Legal judgment and
settlement / E-Rate -- 9,261 9,261
45,301 53,833 53,833
OPERATING INCOME (LOSS) 10,737 5,411 5,803
Interest and other income 1,260 846 846
Foreign currency transaction
gains (losses) 111 (118) (118)
Interest expense (20) (10) (10)
INCOME BEFORE INCOME TAXES 12,088 6,129 6,521
INCOME TAX PROVISION (BENEFIT) 3,328 3,218 3,308
NET INCOME $8,760 $2,911 $3,213
NET INCOME PER SHARE -- BASIC $0.33 $0.11 $0.12
NET INCOME PER SHARE -- DILUTED $0.33 $0.11 $0.12
DIVIDENDS PER SHARE $0.08 $0.07 $0.07
Average number of common
shares outstanding -- Basic 26,222 25,994 25,994
Average number of common
shares outstanding -- Diluted 26,914 27,509 27,509
Effective tax rate 27.5% 52.5% 50.7%
Pro Forma Pro Forma
Pro Forma 2005 legal Q4 2005
(in thousands, except 2005 judgment & Excluding
per share amounts) Lake Acq settlement Lake & legal
Non-GAAP Non-GAAP Non-GAAP
NET SALES
Telecommunications systems,
software and related $5,423 $90,862
Resale of local and long
distance -- -- 14,390
Total net sales 5,423 -- 105,252
Cost of sales
Telecommunications systems,
software and related 2,662 43,532
Resale of local and long
distance -- -- 8,443
Total cost of sales 2,662 -- 51,975
GROSS PROFIT 2,761 -- 53,277
Research & development 702 -- 7,100
Selling, general and
administrative 1,182 -- 35,180
Amortization of purchased
intangible assets 522 -- 615
Write-off of in-process
research and development costs -- -- --
Legal judgment and
settlement / E-Rate -- --
2,406 -- 42,895
OPERATING INCOME (LOSS) 355 -- 10,382
Interest and other income 22 -- 1,238
Foreign currency transaction
gains (losses) 17 -- 94
Interest expense -- (20)
INCOME BEFORE INCOME TAXES 394 -- 11,694
INCOME TAX PROVISION (BENEFIT) 52 -- 3,276
NET INCOME $342 $-- $8,418
NET INCOME PER SHARE -- BASIC 0.01 -- $0.32
NET INCOME PER SHARE -- DILUTED 0.01 -- $0.31
DIVIDENDS PER SHARE $-- $-- $0.08
Average number of common
shares outstanding -- Basic 26,222 26,222 26,222
Average number of common
shares outstanding -- Diluted 26,914 26,222 26,914
Effective tax rate 13.2% n/a 28.0%
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Year
(in thousands, except Ended December 31,
per share amounts)
2005 2004 2004
GAAP GAAP
NET SALES As Reported As Restated
Telecommunications systems,
software and related $387,605 $367,969 $367,969
Resale of local and long
distance 55,289 48,924 48,799
Total net sales 442,894 416,893 416,768
Cost of sales
Telecommunications systems,
software and related 182,789 165,345 165,345
Resale of local and long
distance 33,795 29,973 29,973
Total cost of sales 216,584 195,318 195,318
GROSS PROFIT 226,310 221,575 221,450
Research & development 33,258 28,815 28,815
Selling, general and
administrative 152,314 139,917 139,917
Amortization of purchased
intangible assets 4,194 1,867 1,867
Write-off of in-process
research and development costs 2,600 -- --
Legal judgment and
settlement / E-Rate 10,378 9,261 9,261
202,744 179,860 179,860
OPERATING INCOME 23,566 41,715 41,590
Interest and other income 4,073 2,654 2,654
Foreign currency transaction
gains (losses) 215 (399) (399)
Interest expense (85) (118) (118)
INCOME BEFORE INCOME TAXES 27,769 43,852 43,727
INCOME TAXES 9,375 16,798 16,514
NET INCOME $18,394 $27,054 $27,213
NET INCOME PER SHARE -- BASIC $0.70 $1.05 $1.06
NET INCOME PER SHARE -- DILUTED $0.68 $0.99 $1.00
DIVIDENDS PER SHARE $1.24 $0.19 $0.19
Average number of common
shares outstanding -- Basic 26,261 25,767 25,767
Average number of common
shares outstanding -- Diluted 27,207 27,266 27,266
Effective tax rate 33.8% 38.3% 37.8%
Pro Forma
Pro Forma 2005 legal Pro Forma
(in thousands, except 2005 judgment & Excluding
per share amounts) Lake Acq settlement Lake & Charge
Non-GAAP Non-GAAP Non-GAAP
NET SALES
Telecommunications systems,
software and related $22,996 -- $364,609
Resale of local and long
distance -- -- 55,289
Total net sales 22,996 -- 419,898
Cost of sales
Telecommunications systems,
software and related 11,768 -- 171,021
Resale of local and long
distance -- -- 33,795
Total cost of sales 11,768 -- 204,816
GROSS PROFIT 11,228 -- 215,082
Research & development 3,362 -- 29,896
Selling, general and
administrative 4,507 -- 147,807
Amortization of purchased
intangible assets 1,740 -- 2,454
Write-off of in-process
research and development costs 2,600 -- --
Legal judgment and
settlement / E-Rate -- 10,378 --
12,209 10,378 180,157
OPERATING INCOME (981) (10,378) 34,925
Interest and other income 38 -- 4,035
Foreign currency transaction
gains (losses) 32 -- 183
Interest expense -- -- (85)
INCOME BEFORE INCOME TAXES (911) (10,378) 39,058
INCOME TAXES 223 (3,580) 12,732
NET INCOME $(1,134) $(6,798) $26,326
NET INCOME PER SHARE -- BASIC (0.04) (0.26) $1.00
NET INCOME PER SHARE -- DILUTED (0.04) (0.26) $0.97
DIVIDENDS PER SHARE $-- $-- $1.24
Average number of common
shares outstanding -- Basic 26,261 26,261 26,261
Average number of common
shares outstanding -- Diluted 26,261 26,261 27,207
Effective tax rate (24.5%) 34.5% 32.6%
OTHER SELECTED FINANCIAL DATA
(in millions, except DSO and December 31, December 31,
Inventory turn amounts) 2005 2004
Cash and short-term
investments $167.5 $205.0
Long-term investments -- 9.9
Accounts receivable - net 44.1 44.2
Inventory 19.6 16.1
Net investment in
sales-leases (current) 19.7 17.2
Net investment in
sales-leases (long-term) 34.8 33.9
DSO (based on 90 days sales) 35.8 36.0
DSO (based on trailing
12 mo. sales) 35.8 38.1
Inventory turns 11.5 11.7
Quarter ended Quarter ended Year ended Year ended
December 31, December 31, December 31, December 31,
2005 2004 2005 2004
Depreciation and
amortization $3.4 $2.7 $13.7 $10.0
Capital Expenditures 2.5 3.3 8.7 10.7
Cash used for
acquisitions 0.2 4.7 28.2 6.2
Cash dividends paid 2.1 1.8 34.9 6.4
Treasury stock
repurchases (a) -- -- 13.8 --
(a) 716,500 shares at an average price of $19.23 per share.
First Call Analyst:
FCMN Contact: barbara_mcfarlane@inter-tel.com
