Avid 2004 Annual Report Download - page 38

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compensation, projected future taxable income and the expected timing of the reversals of existing temporary differences.
SFAS No. 109 requires us to record a valuation allowance when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Based on the level of deferred tax assets as of December 31, 2004, the level of
historical U.S. losses after deductions for stock compensation, and the level of outstanding stock options, which we
anticipate will generate significant U.S. tax deductions in the future, we have determined that the uncertainty regarding the
realization of these assets is sufficient to warrant the continued establishment of a full valuation allowance against the U.S.
net deferred tax assets. In the quarter ended December 31, 2004, we removed the valuation allowance related to deferred tax
assets in our Irish manufacturing operations. This resulted in a non–cash $2.1 million tax benefit reflected in the rate
indicated above. The decision to remove the valuation allowance was based on the conclusion that it was more likely than
not that the deferred tax asset in Ireland would be realized. Due to the removal of the valuation allowance, in future periods,
we will have a non-cash increase to provision for income taxes related to our Irish operations.
Excluding the impact of the valuation allowance, our effective tax rate would have been 28% for 2004 and 26% for
2003. These rates differ from the Federal statutory rate of 35% primarily due to income in foreign jurisdictions, which have
lower tax rates. Excluding the impact of the valuation allowance, our effective tax rate would have been 43% for 2002. This
differs from the Federal statutory rate of 35% primarily due to state taxes, while savings due to the U.S. Federal Research
Tax Credit more than offset a higher level of taxes from our foreign subsidiaries, which are taxed at different rates.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date through both private and public sales of equity securities, including stock
option exercises from our employee stock plans, as well as through cash flows from operations. As of December 31, 2004,
our principal sources of liquidity included cash, cash equivalents and marketable securities totaling $155.4 million.
Net cash provided by operating activities was $81.4 million in 2004 compared to $58.6 million in 2003 and $25.4
million in 2002. In each case, cash generated from operating activities primarily reflects net income after adjustment for
depreciation and amortization. In addition, 2004 cash flows reflect cash generated through increases in accounts payable
and accrued expenses, partially offset by increases in accounts receivable and prepaid expenses and other current assets. In
2003, cash flows also reflect cash generated through increases in deferred revenues and accrued expenses, partially offset by
a decrease in accounts payable. In 2002, cash flows also reflect cash generated through a decrease in accounts receivable
and increases in accounts payable and deferred revenues. This was partially offset by an increase in inventories during
2002.
At December 31, 2004 and 2003, we held inventory in the amounts of $53.9 million and $38.3 million,
respectively. These balances include stockroom, spares and demonstration equipment inventories at various locations, and
inventory at customer sites related to shipments for which we have not yet recognized revenue. We review these balances
regularly for excess quantities or potential obsolescence and make appropriate adjustments to write down the inventories to
reflect their estimated realizable value. Of the $15.7 million increase in inventories from December 31, 2003 to 2004,
approximately $11.3 million relates to the acquisition of M-Audio.
Accounts receivable increased by $28.3 million to $97.5 million at December 31, 2004 from $69.2 million at
December 31, 2003, driven primarily by the year-over-year increase in net revenues. These balances are net of allowances
for sales returns, bad debts and customer rebates, all of which we estimate and record based on historical experience. Days
sales outstanding in accounts receivable increased from 49 days at December 31, 2003 to 50 days at December 31, 2004.
Net cash flow used in investing activities was $107.1 million in 2004, compared to $73.9 million in 2003 and
$34.5 million in 2002. In 2004, we had net sales of marketable securities in the amount of $44.2 million. The marketable
securities in which we invest our excess cash typically include corporate obligations, asset backed securities, commercial
paper, taxable municipal obligations and U.S. Treasuries and other governmental obligations. We also expended cash of
$135.5 million in 2004 for the acquisitions of M-Audio, NXN, and Avid Nordic and the final payment for Bomb Factory
Digital. We purchased $15.2 million of property and equipment during 2004, compared to $8.0 million during 2003, and
$9.4 million in 2002. Purchases of property and equipment in both 2004 and 2003 were primarily of computer hardware
and software to support research and development activities and our information systems. Our capital spending program
for 2005 is currently expected to be approximately $16.2 million, including purchases of hardware and software to support
activities in the research and development, information systems and manufacturing areas, as well as for facilities
renovations. However, this amount could increase in the event we enter into strategic business acquisitions or for other
reasons.