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STEC Inc. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: August 7, 2012 05:28PM

STEC Inc. (STEC) filed Quarterly Report for the period ended 2012-06-30. Stec, Inc. has a market cap of $369 million; its shares were traded at around $7.52 with and P/S ratio of 1.2. Stec, Inc. had an annual average earning growth of 19.1% over the past 5 years.



Highlight of Business Operations:

Sales and Marketing. Sales and marketing expenses are primarily comprised of payroll and payroll-related expenses for our domestic and international sales and marketing employees. Sales and marketing expenses increased 13% from $6.1 million in the second quarter of 2011 to $6.9 million in the second quarter of 2012. Sales and marketing expenses as a percentage of revenues increased from 7.3% in the second quarter of 2011 to 16.9% in the second quarter of 2012. The increase in sales and marketing expenses in absolute dollars was due primarily to a $1.0 million increase in payroll and payroll-related costs due to an increase in employee headcount and stock-based compensation and a $315,000 increase in marketing and advertising related costs as part of our efforts to better position our products in the market and expand our customer base, partially offset by a $475,000 decrease in sales commissions due to lower revenues in the second quarter of 2012. The increase in sales and marketing expenses as a percentage of revenues was due primarily to the fixed nature of sales and marketing costs such as certain payroll and payroll-related expenses, excluding sales commissions, and the decrease in revenues in the second quarter of 2012 compared to the second quarter of 2011.

Provision for Income Taxes. We recorded a provision for income taxes of $12.5 million and $298,000 in the second quarter of 2012 and 2011, respectively. Our effective tax rate was 33.6% and 3.0% in the second quarter of 2012 and 2011, respectively. Our effective tax rate each quarter will differ from previous quarters due to various factors, such as tax legislation, the results of tax audits, the effectiveness of our tax-planning strategies, discrete items, the effect from changes to the valuation allowance and the mix of domestic and foreign earnings. The change in our effective tax rate for the second quarter of 2012 from the same period in 2011 was due primarily to the establishment of full non-cash valuation allowance of $25.8 million against all our net U.S. deferred tax assets during the second quarter of 2012. Additionally, the provision for income taxes for the second quarter of 2012 includes the reversal of $3.0 million of benefits recognized during the first quarter of 2012 prior to the establishment of the full non-cash valuation allowance. We operate under an income tax holiday in Malaysia, which is effective through September 30, 2027 subject to meeting certain conditions. The impact of the Malaysia income tax holiday decreased our provision for income taxes by $1.1 million and $1.9 million in the second quarter of 2012 and 2011, respectively. The benefit of the income tax holiday on earnings per share was $0.03 and $0.04 in the second quarter of 2012 and 2011, respectively.

Sales and Marketing. Sales and marketing expenses are primarily comprised of payroll and payroll-related expenses for our domestic and international sales and marketing employees. Sales and marketing expenses increased 15% from $11.7 million in the first six months of 2011 to $13.5 million in the first six months of 2012. Sales and marketing expenses as a percentage of revenues increased from 6.6% in the first six months of 2011 to 14.9% in the first six months of 2012. The increase in sales and marketing expenses in absolute dollars was due primarily to a $2.2 million increase in payroll and payroll-related costs due to an increase in employee headcount and stock-based compensation and a $405,000 increase in marketing and advertising related costs as part of our efforts to better position our products in the market and expand our customer base, partially offset by a $1.2 million decrease in sales commissions due to lower revenues during the first six months of 2012. The increase in sales and marketing expenses as a percentage of revenues was due primarily to the fixed nature of sales and marketing costs such as certain payroll and payroll-related expenses, excluding sales commissions, and the decrease in revenues in the first six months of 2012 compared to the first six months of 2011.

Provision (Benefit) for Income Taxes. We recorded a provision for income taxes of $12.5 million for the second quarter of 2012 and a benefit for income taxes of $3.0 million for the first quarter of 2012. Our effective tax rate was a 33.6% provision in the second quarter of 2012 and a 21.7% benefit in the first quarter of 2012. Our effective tax rate each quarter will differ from previous quarters due to various factors, such as tax legislation, the results of tax audits, the effectiveness of our tax-planning strategies, discrete items, the effect from changes to the valuation allowance, and the mix of domestic and foreign earnings. The change in our effective tax rate for the three months ended June 30, 2012 from the three months ended March 31, 2012 was due primarily to the establishment of a non-cash valuation allowance of $25.8 million against all of our net U.S. deferred tax assets during the three months ended June 30, 2012. We operate under an income tax holiday in Malaysia, which is effective through September 30, 2027 subject to meeting certain conditions. The impact of the Malaysia income tax holiday decreased our provision for income taxes by $1.1 million for the second quarter of 2012 and increased our benefit for income taxes by $960,000 for the first quarter of 2012. The benefit of the income tax holiday on earnings per share was $0.03 and $0.02 in the second quarter of 2012 and first quarter of 2012, respectively.

Net cash provided by operating activities was $30.2 million in the first six months of 2012 and resulted primarily from a $24.0 million decrease in inventory, a $10.9 million decrease in account receivables, a $10.1 million increase in accounts payable, a $15.0 million settlement charge, a $10.6 million non-cash decrease in deferred income taxes, $7.8 million of non-cash stock-based compensation expense and $7.7 million of non-cash depreciation and amortization, partially offset by a net loss of $60.3 million. Inventory decreased due primarily to lower inventory purchases in 2012, compared to 2011. In 2010, we had increased purchases of raw materials under non-cancelable inventory purchase commitments in order to guarantee the availability of components for anticipated sales demand in 2010, 2011, and 2012. Accounts receivable decreased due primarily to a decrease in revenues in the second quarter of 2012, compared to the fourth quarter of 2011. Deferred income taxes decreased due primarily to the establishment of a non-cash valuation allowance of $25.8 million against all of our net U.S. deferred tax assets during the second quarter of 2012. During the first six months of 2012, we recorded approximately $21.2 million of legal fees in excess of our insurance deductible under our director and officer insurance coverage and our insurance carriers paid $1.6 million of claims for legal fees incurred by us. We have recognized a liability, with a corresponding receivable that offsets legal expense, until the remainder of our claims are paid by our insurance carriers, subject to their reservation of rights.

Read the The complete Report



Stocks Discussed: STEC,
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