e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
April 24, 2009
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number 0-27130
NetApp, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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77-0307520
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(State or other jurisdiction
of
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(IRS Employer
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incorporation or
organization)
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Identification
No.)
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495 East Java Drive,
Sunnyvale, California 94089
(Address of principal
executive offices, including zip code)
Registrants telephone number, including area code:
(408) 822-6000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Exchange on Which Registered
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Common Stock, $0.001 Par Value
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by a check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of voting stock held by
non-affiliates of the registrant, as of October 24, 2008,
the last day of registrants most recently completed second
fiscal quarter, was $3,421,803,943 (based on the closing price
for shares of the registrants common stock as reported by
the NASDAQ Global Select Market for the last business day prior
to that date). Shares of common stock held by each executive
officer, director, and holder of 5% or more of the outstanding
common stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
On June 12, 2009, 335,543,451 shares of the
registrants common stock, $0.001 par value, were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The information called for by Part III of this
Form 10-K
is hereby incorporated by reference from the definitive Proxy
Statement for our annual meeting of stockholders, which will be
filed with the Securities and Exchange Commission not later than
120 days after April 24, 2009.
PART I
Forward
Looking Statements
This Annual Report on
Form 10-K
contains forward-looking statements 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 (the Exchange Act), and is subject to the
safe harbor provisions set forth in the Exchange Act.
Forward-looking statements usually contain the words
estimate, intend, plan,
predict, seek, may,
will, should, would,
could, anticipate, expect,
believe, or similar expressions and variations or
negatives of these words. In addition, any statements that refer
to expectations, projections, or other characterizations of
future events or circumstances, including any underlying
assumptions, are forward-looking statements. All forward-looking
statements, including but not limited to, statements about:
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our future financial and operating results;
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our business strategies;
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managements plans, beliefs and objectives for future
operations, research and development,
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acquisitions and joint ventures, growth opportunities,
investments and legal proceedings;
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our restructuring plans and estimates;
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competitive positions;
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product introductions, development, enhancements and acceptance;
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economic and industry trends or trend analyses
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future cash flows and cash deployment strategies;
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short-term and long-term cash requirements;
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the impact of completed acquisitions;
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our anticipated tax rate;
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the continuation of our stock repurchase program;
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compliance with laws, regulations and loan covenants; and
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the conversion, maturation or repurchase of the Notes,
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are inherently uncertain as they are based on managements
current expectations and assumptions concerning future events,
and they are subject to numerous known and unknown risks and
uncertainties. Therefore, our actual results may differ
materially from the forward-looking statements contained herein.
Factors that could cause actual results to differ materially
from those described herein include, but are not limited to:
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the amount of orders received in future periods;
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our ability to ship our products in a timely manner;
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our ability to achieve anticipated pricing, cost, and gross
margins levels;
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our ability to maintain or increase backlog and increase revenue;
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our ability to successfully execute on our strategy
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our ability to increase our customer base, market share and
revenue;
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our ability to successfully introduce new products;
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our ability to adapt to changes in market demand;
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the general economic environment and the growth of the storage
markets;
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acceptance of, and demand for, our products;
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demand for our global service and support and professional
services;
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our ability to identify and respond to significant market trends
and emerging standards;
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our ability to realize our financial objectives through
management of our investment in people, process, and systems;
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our ability to maintain our supplier and contract manufacturer
relationships;
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the ability of our suppliers and contract manufacturers to meet
our requirements;
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the ability of our competitors to introduce new products that
compete successfully with our products;
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our ability to grow direct and indirect sales and to efficiently
utilize global service and support;
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the general economic environment and the growth of the storage
markets;
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variability in our gross margins;
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our ability to sustain
and/or
improve our cash and overall financial position;
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our cash requirements and terms and availability of financing;
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valuation and liquidity of our investment portfolio;
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our ability to finance business acquisitions, construction
projects and capital expenditures through cash from operations
and/or
financing;
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the impact of industry consolidation
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the results of our ongoing litigation, tax audits, government
audits and inquiries; and
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those factors discussed under Risk Factors elsewhere
in this Annual Report on
Form 10-K.
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Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date
hereof and are based upon information available to us at this
time. These statements are not guarantees of future performance.
We disclaim any obligation to update information in any
forward-looking statement. Actual results could vary from our
forward looking statements due to foregoing factors as well as
other important factors, including those described in the Risk
Factors included on page 11.
Overview
NetApp, Inc. (NetApp) is a leading provider of
storage and data management solutions. We offer solutions for
storing, managing, protecting and archiving business data. Our
solutions are designed to lower the cost of managing and
protecting our customers data while increasing their
agility and competitiveness.
We offer complete solutions to help customers effectively
streamline operations and lower the cost associated with storing
and managing their data. We strive to provide the best
experience in the industry with every interaction customers have
with our people, products and services. In addition to our broad
range of storage and data management solutions, we provide
global service and support and work to simplify customer
environments by utilizing open standards and through close
collaboration and partnerships with other industry leaders. We
help solve customer business challenges while helping them
maximize return on investment through a combination of products,
technologies, services, and partnerships.
Our products and services are designed to meet the expansive
requirements and demanding service levels of large enterprises
and their mission-critical business applications. To better meet
these needs, we partner with key industry leaders, such as IBM
Corporation, Microsoft Corporation, Oracle Corporation, SAP
Corporation, Symantec Corporation and VMware, Inc., to develop
integrated solutions that optimize the performance of
customers applications and their infrastructure. In
addition, our products have been designed to satisfy the
rigorous
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demands of high performance computing and technical data center
applications, offering solutions used in the design of
semiconductors and automobiles, as well as graphics rendering
and seismic exploration.
We were incorporated in 1992 and shipped the worlds first
networked storage appliance a year later. Since then, we have
brought to market many significant innovations and industry
firsts in storage and data management. We have grown to over
7,900 employees with operations in over 130 offices around
the world.
NetApp
Product Families
We offer highly available, scalable and cost-effective storage
solutions that incorporate our unified storage platform and the
feature-rich functionality of our data and storage resource
management software. Our solutions help improve enterprise
productivity, performance and profitability, while providing
investment protection and enhanced asset utilization. Our
enterprise-class storage solutions are complemented by our
services expertise to enable interoperability and optimization
in the context of the application and information technology
(IT) infrastructure within which they are deployed.
Data
ONTAP®
Software
Our Fabric-Attached Storage (FAS) and V-Series
storage solutions are based on Data ONTAP, a highly optimized,
scalable and flexible operating system that uniquely supports
any mix of storage area network (SAN),
network-attached storage (NAS) and Internet protocol
SAN (IP SAN) environments concurrently. This unified
storage software platform integrates seamlessly into
UNIX®,
Linux®,
Windows®
and Web environments.
The Data ONTAP operating system provides the foundation to build
a storage infrastructure and an enterprise-wide data fabric for
mission-critical business applications, while lowering the total
cost of ownership and complexity typically associated with the
management of large-scale enterprise data centers.
Data ONTAP GX, our high-performance operating system, supports
fully integrated, multi-node storage systems within a single
global name space. This storage grid architecture provides the
ability to dynamically add storage resources and transparently
redistribute data without disruption to client systems. We have
been integrating the Data ONTAP GX functionality with the core
Data ONTAP capabilities in order to converge both into a single
operating system.
Data
Management Software
Our products are in use today in some of the largest data
centers in the world. These environments require
enterprise-class management tools. We provide management
software to increase productivity and simplify data management.
Such tools include:
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FlexVol®
technology, which enables storage architectures to be more
efficient and achieve higher utilization using flexible volumes
that do not require repartitioning of physical storage space;
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FlexClone®
technology, which enables true data cloning using logical
copies that do not require additional physical storage space,
and allows for instant replication of data volumes and data sets;
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Deduplication technology, which provides the ability to
eliminate duplicate data within primary and secondary disk
storage environments, resulting in greater efficiency and higher
utilization of storage capacity;
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FlexSharetm
technology, which directs how storage system resources are used
to deliver an appropriate level of service for each application;
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FlexCachetm
technology, which allows performance acceleration through the
creation of read-only cached volumes by creating caching volumes
on multiple storage controllers; and
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MultiStore®
software, which allows partitioning of individual physical
storage systems into multiple separate logical partitions.
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Storage
Management and Application Integration Software
Our management software family of products provides a broad
range of storage and data management tools to simplify IT
administration and enhance flexibility and productivity. We
deliver differentiated products and collaborate with industry
open standards and interfaces to deliver this value to
customers. We have four suites of products targeted to different
IT administrative roles: Storage Suite, Server Suite, Database
Suite and Application Suite. The software products within these
suites are tightly integrated with database and business
applications software from partners such as Microsoft, Oracle,
SAP and VMware in order to optimize the performance of those
applications on our storage systems. Our product offering
extends into data center automation which provides the
capability to monitor service levels, manage performance and
support change management in complex enterprise SAN environments.
FAS Family
Our family of modular, scalable, highly available, unified
networked storage systems provides seamless access to a full
range of enterprise data for users on a variety of platforms.
The FAS 6000, FAS 3000, and the FAS 2000 series
of fabric-attached enterprise storage systems are designed to
consolidate UNIX, Windows, NAS, Fibre Channel (FC),
Internet Small Computer Systems Interface (iSCSI),
SAN and Web data in central locations running over the standard
connection types: Gigabit Ethernet, FC and parallel SCSI (for
backup). Our design optimizes and consolidates high-performance
data access for individuals in multi-user environments as well
as for application servers and server clusters with dedicated
access. All of our FAS systems are interoperable and run the
highly efficient Data ONTAP operating system.
V-Series Family
Our V-Series is a network-based virtualization solution that
consolidates storage from different suppliers behind our data
management interface, providing SAN and NAS access to the data
stored in heterogeneous storage arrays. With the V-Series
solution, customers are able to: transform existing
heterogeneous, multi-vendor storage systems into a single
storage pool; simplify storage provisioning and management with
Data ONTAP thin provisioning; and dramatically lower backup
time, space and cost with Data ONTAP
Snapshottm
copies. The V-Series is compatible with the FAS family of
storage systems.
VTL
Data Protection Systems
Our Virtual Tape Library (VTL) solution is a
disk-to-disk backup appliance that appears as a tape library to
a backup software application, but provides the superior speed
and reliability of disk technologies. Our VTL is a
high-performance, easily managed system that can be used in any
heterogeneous primary storage environment. Developed
specifically to address the requirements of backup
administrators, our VTL solutions increase the performance and
reliability of backups, simplify backup management and reduce
storage costs in traditional data center tape backup
infrastructures.
Data
Protection Software Products
We offer a broad range of business continuance and disk backup
solutions for enterprise customer environments. Our Snapshot
technology enables near-instantaneous, space efficient online
backups of large data sets without affecting system performance.
MetroCluster,
SnapMirror®,
SyncMirror®
and
SnapRestore®
products provide an appropriate level of data availability and
cost of protection matched to the recovery point objectives and
recovery time objectives of customer environments.
SnapVault®,
Open Systems SnapVault and SnapVault for
NetBackuptm
products provide network- and storage-optimized disk-to-disk
backup solutions.
Data
Retention and Archive Products
To meet growing regulatory compliance demands faced by most
enterprises, we offer a broad suite of products to help enable
data permanence, accessibility and privacy across a variety of
different regulations such as the Sarbanes-Oxley Act,
21 CFR Part 11, SEC
Rule 17a-4
and HIPAA. Immutable, cost-effective, resilient and reliable
storage architectures can be created utilizing
SnapLock®
products.
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Storage
Security Products
Security has become a critical element of data management, and
we have taken a leading role in driving security innovation. Our
DataFort storage security appliance provides a unified
platform for data security and key management across NAS, IP
SAN, FC SAN and tape backup environments. The platform combines
wire-speed encryption, access controls, authentication and
automated key management to provide strong security for data at
rest, while still allowing the capability to search compliant
data for legal discovery purposes if the need arises.
Performance
Acceleration Module
The NetApp Performance Acceleration Module (PAM) optimizes the
performance of random read intensive workloads such as file
services and messaging. NetApp created this intelligent read
cache to reduce storage latency and increase I/O throughput
without adding more fast-spinning disk drives.
NetApp
Global Services
Our customers demand high availability and reliability of their
storage infrastructure to ensure the successful, ongoing
operation of their businesses. NetApps global services are
designed with this in mind. We provide professional services,
global support solutions and customer education and training to
help customers most effectively manage their data. The
professional services and support solutions we offer help our
customers to resolve business problems, reduce costs, keep
businesses up and running continuously, comply with regulations
and policies and improve overall operational results. We utilize
a global, integrated model to provide consistent service
delivery and global support during every phase of the customer
engagement, including assessment and analysis, planning, design,
installation, implementation, integration, optimization, ongoing
support and remote management and monitoring. Services and
support often involve phased rollouts, technology transitions
and migrations and other long-term engagements.
Principal
Markets and Distribution Channels
We market and sell our products in numerous countries throughout
the world and we continue to make investments in our multi-year
branding and awareness campaign to increase visibility of NetApp
in the broader IT segment. Our diversified customer base
represents a number of large segments and vertical markets. We
focus primarily on the data management and storage markets,
offering an array of solutions from our ultra high-end products
designed for large enterprise customers to entry level products
designed for mid-sized enterprise customers. We have also
expanded into the VTL and data encryption markets, bringing us
into parts of the data center in which we have not previously
competed. We offer storage grid architecture to high-performance
computing environments with our next-generation operating
system, Data ONTAP GX.
We employ a multi-channel distribution strategy, selling
products and services to end users through a direct sales force,
value-added resellers, system integrators, original equipment
manufacturers (OEMs) and distributors. During fiscal
2009, two U.S. distributors accounted for approximately
10.5% and 10.6% of our net revenues, respectively. No customer
accounted for ten percent or more of our net revenues during
fiscal 2008 and 2007.
Seasonality
As the size of our business has grown, we have begun to see a
seasonal decline in revenues in the first quarter of our fiscal
year. In addition, we also see some international seasonality,
as sales to European customers are historically weaker during
the summer months. Sales to the U.S. government tend to be
seasonally stronger during our second fiscal quarter, concurrent
with the end of the U.S. federal governments fiscal
year in September. Additionally, we derive a majority of our
revenue in any given quarter from orders booked in the same
quarter. Bookings typically follow intraquarter seasonality
patterns weighted toward the back end of the quarter.
Backlog
We manufacture products based on a combination of specific order
requirements and forecasts of our customers demand. Orders
are generally placed by customers on an as-needed basis.
Products are typically shipped
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within one to four weeks following receipt of an order. In
certain circumstances, customers may cancel or reschedule orders
without penalty. For these reasons, orders may not
constitute a firm backlog and may not be a meaningful indicator
of future revenues.
Manufacturing
and Supply Chain
We have outsourced manufacturing operations to third parties
located in Memphis, Tennessee; Fremont, California,
San Jose, California; Olive Branch, Mississippi;
Livingston, Scotland; Shanghai, China; Singapore; and Schiphol
Airport, The Netherlands. These operations include materials
procurement, commodity management, component engineering, test
engineering, manufacturing engineering, product assembly,
product assurance, quality control, final test and global
logistics. We rely on a limited number of suppliers for
materials, as well as several key subcontractors for the
production of certain subassemblies and finished systems. We
multi-source wherever possible to mitigate supply risk. Our
strategy has been to develop close relationships with our
suppliers, exchanging critical information and implementing
joint quality programs. We also use contract manufacturers for
the production of major subassemblies to improve our
manufacturing redundancy. This manufacturing strategy minimizes
capital investments and overhead expenditures and creates
flexibility for rapid expansion. We were awarded ISO 9001
certification on May 29, 1997 and continue to be ISO 9001
certified. We were awarded ISO 14001 certification on
December 8, 2004 and continue to be ISO 14001 certified.
Research
and Development
We conduct research and development activities in various
locations throughout the world. In fiscal 2009, 2008 and 2007,
research and development expenses represented 14.6%, 13.7% and
13.7% of our net revenues, respectively. These costs relate
primarily to personnel and related costs incurred to conduct
product development activities. Although we develop many of our
products internally, we may acquire technology through business
combinations or through licensing from third parties when
appropriate. We believe that technical leadership is essential
to our success and we expect to continue to commit substantial
resources to research and development.
Competition
We compete with many companies in the markets we serve,
including companies that offer a broad spectrum of IT products
and services and others that offer specific storage and data
management products or services. In the storage market, our
primary and near-line storage system products and our associated
software portfolio compete primarily with storage system
products and data management software from EMC, Hitachi Data
Systems, HP, IBM and Sun Microsystems. In addition, Dell, Inc.
is a competitor in the storage marketplace through its business
arrangement with EMC, which allows Dell to resell EMC storage
hardware and software products, as well as through its
acquisition of EqualLogic through which Dell offers low-priced
storage solutions. In the secondary storage market, which
includes the disk-to-disk backup, compliance and business
continuity segments, our solutions compete primarily against
products from EMC and Sun Microsystems. Our VTL products also
compete with traditional tape backup solutions in the broader
data backup/recovery space. Additionally, a number of small,
newer companies have recently entered the storage systems and
data management software markets, the near-line and VTL storage
markets and the high-performance clustered storage markets some
of which may become significant competitors in the future.
We believe that most of these companies compete based on their
market presence, products, service or price. Some of these
companies also compete by offering storage and data management
products or services together with other IT products or
services, at minimal or no additional cost in order to preserve
or gain market share.
We believe that we have a number of competitive advantages over
many of these companies, including product innovation and the
relationships we have with our customers and partners. We
believe the advantages of our products include functionality,
scalability, performance, quality and operational efficiency. We
believe our advantages in customer and partner relationships
include a worldwide storage and data management-focused direct
sales force, a broad network of channel partners, relationships
with enterprise software vendors, and service offerings that
enable us to provide our customers with a full range of
expertise before, during and after their purchase of solutions
from us.
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Customer
Base
Our diversified customer base spans a number of large segments
and vertical markets. Examples include: energy, financial
services, government, high technology, internet, life sciences
and healthcare services, major manufacturing, media,
entertainment, animation and video postproduction and
telecommunications.
Segment,
Geographic Information and Classes of Similar Product and
Services
See Note 7 to the Consolidated Financial Statements
accompanying this Annual Report on
Form 10-K.
Information about our classes of similar product and services is
included in Item 8 Financial Statements
and Supplementary Data under the heading
Consolidated Statements of Operations and
Notes to consolidated financial statements and is
incorporated herein by reference.
Proprietary
Rights
We currently rely on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures, contractual
provisions, and patents to protect our proprietary rights. We
seek to protect our software, documentation, and other written
materials under trade secret, copyright, and patent laws, which
afford only limited protection. We have registered our NetApp
name and logo, Network Appliance name and logo, Data ONTAP,
DataFabric, FAServer, FlexVol, FilerView, NearStore,
SecureShare, SnapDrive, SnapLock, SnapManager, SnapMirror,
SnapRestore, SnapVault, WAFL, and others as trademarks in the
United States. Other U.S. trademarks and
U.S. registered trademarks are registered internationally
as well. We will continue to evaluate the registration of
additional trademarks as appropriate. We generally enter into
confidentiality agreements with our employees, resellers,
customers, and suppliers. We currently have multiple
U.S. and international patent applications pending and
multiple U.S. patents issued.
In addition, through various licensing arrangements, we receive
certain rights to intellectual property of others. We expect to
maintain current licensing arrangements and to secure licensing
arrangements in the future, as needed and to the extent
available on reasonable terms and conditions, to support
continued development and sales of our products and services.
Some of these licensing arrangements require or may require
royalty payments and other licensing fees. The amount of these
payments and fees may depend on various factors, including but
not limited to: the structure of royalty payments, offsetting
considerations, if any, and the degree of use of the licensed
technology.
See Item 1A Risk Factors We are exposed
to various risks related to legal proceedings or claims and
protection of intellectual property rights, which could
adversely affect our operating results.
Environmental
Disclosure
Various federal, state and local provisions regulate the use and
discharge of certain hazardous materials used in the manufacture
of our products. Failure to comply with environmental
regulations in the future could cause us to incur substantial
costs or subject us to business interruptions. We believe we are
fully compliant with all applicable environmental laws. All of
our products meet the requirements for WEEE, RoHS and China RoHS
compliance. We have maintained an Environmental Management
System since December 2004 as well as our ISO 14001
certification. As part of ISO 14001 requirements, NetApp
conducts annual review of all aspects of our operations and we
constantly monitor environmental legislation and requirements to
ensure we are taking necessary measures to continually remain in
compliance with any and all applicable laws.
Working
Capital Practices
Information about our working capital practices is included in
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operation
under the heading Financial Condition, Capital Resources
and Liquidity and is incorporated herein by reference.
Government
Contracts
We derive revenues from contracts with the United States
government, state and local governments and their respective
agencies. Our sales to government clients subject us to risks
including early termination, audits,
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investigations, sanctions penalties and potential disbarment.
For more information, refer to Item 1A Risk
Factor The U.S. government has contributed to
our revenue growth and has become an important customer for
us. In addition, please refer to Item 3
Legal Proceedings for information related to our GSA
settlement.
Foreign
Operations and Export Sales
Information about our foreign operations and export sales is
included in Note 7 Segment, Geographic,
and Significant Customer Information to our consolidated
financial statements and Item 1A Risk
Factors Risks inherent in our international
operations could have a material adverse effect on our operating
results.
Employees
As of April 24, 2009, we had 7,976 employees. We have
never had a work stoppage and consider relations with our
employees to be good.
Executive
Officers
Our executive officers and their ages as of May 25, 2009,
are as follows:
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Name
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Age
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Position
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Daniel J. Warmenhoven
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58
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Chief Executive Officer and Chairman of the Board
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Thomas F. Mendoza
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58
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Vice Chairman
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Thomas Georgens
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49
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President and Chief Operating Officer, Board Member
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Steven J. Gomo
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57
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Executive Vice President, Finance and Chief Financial Officer
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Robert E. Salmon
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48
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Executive Vice President, Field Operations
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Daniel J. Warmenhoven joined NetApp in October 1994 as
president and chief executive officer, and has been a member of
the Board of Directors since October 1994. Mr. Warmenhoven
currently serves as chief executive officer and as of March 2008
he was appointed chairman of the Board of Directors. Prior to
joining the Company, Mr. Warmenhoven served in various
capacities, including president, chief executive officer, and
chairman of the Board of Directors of Network Equipment
Technologies, Inc., a telecommunications equipment company, from
November 1989 to January 1994. Prior to Network Equipment
Technologies, Mr. Warmenhoven held executive and managerial
positions at Hewlett-Packard from 1985 to 1989 and IBM
Corporation from 1972 to 1985. Mr. Warmenhoven is a
Director of Aruba Networks, Inc., sits on the Bechtel Board of
Counselors, is vice chairman of the board of the Tech Museum of
Innovation in San Jose, CA and is a trustee of Bellarmine
College Preparatory in San Jose, CA. Mr. Warmenhoven
holds a B.S. degree in electrical engineering from Princeton
University.
Thomas F. Mendoza was appointed vice chairman in March
2008. Mr. Mendoza joined the company in May 1994 and served
as president from October 2000 to March 2008. Prior to March
2000, he served in various capacities at NetApp including senior
vice president, worldwide sales and marketing, senior vice
president, worldwide sales and vice president, North American
sales. Mr. Mendoza has more than 30 years of
experience as a high-technology executive and has held executive
positions at Auspex Systems, Inc. and Stratus Technologies, Inc.
He holds a B.A. degree in economics from Notre Dame and is an
alumnus of Stanford Universitys Executive Business
Program. In September 2000, the University of Notre Dame renamed
its business school the Mendoza College of Business in honor of
an endowment from Tom and his wife, Kathy.
Thomas Georgens is the president and chief operating
officer of the Company and is responsible for all product
operations and field operations worldwide. Mr. Georgens has
also been a member of the Board of Directors at NetApp since
March 2008. Mr. Georgens joined the Company in 2005 and
served as the Companys executive vice president of product
operations from January 2007 until February 2008. Prior to
January 2007, Mr. Georgens served as the Companys
executive vice president and general manager of enterprise
storage systems. Before joining NetApp, Mr. Georgens spent
nine years at Engenio, a subsidiary of LSI Logic, with the last
two years as chief executive officer. He has also served in
various other positions, including president of LSI Logic
Storage Systems
10
and executive vice president of LSI Logic. Prior to LSI Logic,
Mr. Georgens spent 11 years at EMC in a variety of
engineering and marketing positions. Mr. Georgens holds a
B.S. degree and an M.E. degree in Computer and Systems
Engineering from Rensselaer Polytechnic Institute as well as an
M.B.A. degree from Babson College.
Steven J. Gomo joined NetApp in August 2002 as senior
vice president of finance and chief financial officer. He was
appointed executive vice president of finance and chief
financial officer in October 2004. Prior to joining the Company,
he served as chief financial officer for Gemplus International
S.A., headquartered in Luxembourg from November 2000 to April
2002 and as chief financial officer of Silicon Graphics, Inc.,
from February 1998 to August 2000. Prior to February 1998, he
worked at Hewlett-Packard Company for 24 years in various
positions, including financial management, corporate finance,
general management, and manufacturing. Mr. Gomo currently
serves on the board of SanDisk Corporation. Mr. Gomo holds
an M.B.A. degree from Santa Clara University and a B.S.
degree in business administration from Oregon State University.
Robert E. Salmon joined NetApp in January 1994 and was
appointed executive vice president, field operations in December
2005. Mr. Salmon has served as the Companys executive
vice president of worldwide sales since September 2004. From
August 2003 to September 2004, Mr. Salmon served as the
Companys senior vice president of worldwide sales and from
May 2000 to August 2003, Mr. Salmon served as the
Companys vice president of North American sales. Prior to
his tenure at NetApp Mr. Salmon spent nearly ten years with
Sun Microsystems and Data General Corporation. Mr. Salmon
graduated from California State University, Chico with a B.S.
degree in computer science.
Additional
Information
Our Internet address is www.netapp.com. We make available
through our Internet Web site our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
SEC.
The SEC maintains an Internet site (www.sec.gov) that
contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the
SEC. The public also may read and copy these filings at the
SECs Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549. Information about this Public
Reference Room is available by calling (800) SEC-0330.
The following risk factors and other information included in
this Annual Report on
Form 10-K
should be carefully considered. The risks and uncertainties
described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we presently
deem less significant may also impair our business operations.
Please see page 3 of this Annual Report on
Form 10-K
for additional discussion of these forward-looking statements.
If any of the events or circumstances described in the following
risk factors actually occurs, our business, operating results,
and financial condition could be materially adversely
affected.
Our
operating results may be adversely affected by unfavorable
economic and market conditions, including the current economic
downturn.
We are subject to the effects of general global economic and
market conditions challenging economic conditions worldwide have
from time to time contributed, and are currently contributing,
to slowdowns in the computer, storage, and networking industries
at large, as well as the information technology (IT)
market, resulting in:
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Reduced demand for our products as a result of continued
constraints on IT related spending by our customers;
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Increased price competition for our products from competitors;
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Deferment of purchases and orders by customers due to budgetary
constraints or changes in current or planned utilization of our
systems;
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11
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Risk of excess and obsolete inventories;
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Excess facilities costs;
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Higher overhead costs as a percentage of revenue;
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Increased risk of losses or impairment charges related to our
investment portfolio;
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Negative impacts from increased financial pressures on
customers, distributors and resellers;
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Negative impacts from increased financial pressures on key
suppliers or contract manufacturers; and
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Potential discontinuance of product lines or businesses and
related asset impairments.
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The turmoil in the global credit markets, the recent instability
in the geopolitical environment in many parts of the world and
other disruptions may continue to put pressure on global
economic conditions. The economic challenges we initially
experienced in the United States have spread throughout the
world. If global economic and market conditions, or economic
conditions in the United States or other key markets, remain
uncertain, persist, or deteriorate further, we may experience
material adverse impacts on our business, operating results, and
financial condition.
Our
quarterly operating results may fluctuate, which could adversely
impact our common stock price.
We believe that period-to-period comparisons of our results of
operations are not necessarily meaningful and should not be
relied upon as indicators of future performance. Our operating
results have in the past, and will continue to be, subject to
quarterly fluctuations as a result of numerous factors, some of
which may contribute to more pronounced fluctuations in an
uncertain global economic environment. These factors include,
but are not limited to, the following:
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Fluctuations in demand for our products and services, in part
due to changes in general economic conditions and specific
economic conditions in the computer, storage, and networking
industries;
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A shift in federal government spending patterns;
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Changes in sales and implementation cycles for our products and
reduced visibility into our customers spending plans and
associated revenue;
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The level of price and product competition in our target product
markets;
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The impact of the current adverse economic and credit
environment on our customers, channel partners, and suppliers,
including their ability to obtain financing or to fund capital
expenditures;
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The overall movement toward industry consolidations among both
our competitors and our customers;
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Our reliance on a limited number of suppliers due to industry
consolidation, which could subject us to periodic
supply-and-demand,
price rigidity, and quality issues with our components;
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The timing of bookings or the cancellation of significant orders;
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Product configuration and mix;
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The extent to which our customers renew their service and
maintenance contracts with us;
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Market acceptance of new products and product enhancements;
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Announcements and introductions of, and transitions to, new
products by us or our competitors;
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Deferrals of customer orders in anticipation of new products or
product enhancements introduced by us or our competitors;
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Our ability to develop, introduce, and market new products and
enhancements in a timely manner;
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Technological changes in our target product markets;
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Our levels of expenditure on research and development and sales
and marketing programs;
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12
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Our ability to achieve targeted cost reductions;
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Adverse movements in foreign currency exchange rates as a result
of our international operations;
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Excess or inadequate facilities;
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Actual events, circumstances, outcomes and amounts differing
from judgments, assumptions, and estimates used in determining
the values of certain assets (including the amounts of valuation
allowances), liabilities, and other items reflected in our
consolidated financial statements;
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Disruptions resulting from new systems and processes as we
continue to enhance and scale our system infrastructure;
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Future accounting pronouncements and changes in accounting
rules, such as the increased use of fair value measures and the
potential requirement that U.S. registrants prepare
financial statements in accordance with International Financial
Reporting Standards (IFRS);
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Seasonality, such as our historical seasonal decline in revenues
in the first quarter of our fiscal year and seasonal increase in
revenues in the second quarter of our fiscal year, with the
latter due in part to the impact of the U.S. federal
governments September 30 fiscal year end on the timing of
its orders, and
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Linearity, such as our historical intraquarter revenue pattern
in which a disproportionate percentage of each quarters
total revenues occur in the last month of the quarter.
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Due to such factors, operating results for a future period are
difficult to predict, and, therefore, prior results are not
necessarily indicative of results to be expected in future
periods. Any of the foregoing factors, or any other factors
discussed elsewhere herein, could have a material adverse effect
on our business, results of operations, and financial condition.
It is possible that in one or more quarters our results may fall
below our forecasts and the expectations of public market
analysts and investors. In such event, the trading price of our
common stock would likely decrease.
Our
revenue for a particular period is difficult to forecast, and a
shortfall in revenue may harm our business and our operating
results.
Our revenues for a particular period are difficult to forecast,
especially in light of the current global economic downturn and
related market uncertainty. Product sales are also difficult to
forecast because the storage and data management market is
rapidly evolving, and our sales cycle varies substantially from
customer to customer. New or additional product introductions
also increase the complexities of forecasting revenues.
Additionally, we derive a majority of our revenue in any given
quarter from orders booked in the same quarter. Bookings
typically follow intraquarter seasonality patterns weighted
toward the back end of the quarter. If we do not achieve
bookings in the latter part of a quarter consistent with our
quarterly targets, our financial results will be adversely
impacted.
We use a pipeline system, a common industry
practice, to forecast bookings and trends in our business. Sales
personnel monitor the status of potential business and estimate
when a customer will make a purchase decision, the dollar amount
of the sale and the products or services to be sold. These
estimates are aggregated periodically to generate a bookings
pipeline. Our pipeline estimates may prove to be unreliable
either in a particular quarter or over a longer period of time,
in part because the conversion rate of the pipeline
into contracts varies from customer to customer, can be
difficult to estimate, and requires management judgment. Small
deviations from our forecasted conversion rate may result in
inaccurate plans and budgets and could materially and adversely
impact our business or our planned results of operations. In
particular, the continued adverse events in the economic
environment and financial markets have made it even more
difficult for us to forecast our future results and may result
in a reduction in our quarterly conversion rate as our
customers purchasing decisions are delayed, reduced in
amount, or cancelled.
Uncertainty about current and future global economic conditions
has caused consumers, businesses and governments to defer
purchases in response to tighter credit, decreased cash
availability and declining customer confidence. Accordingly,
future demand for our products could differ from our current
expectations.
13
We
have experienced periods of alternating growth and decline in
revenues and operating expenses. If we are not able to
successfully manage these fluctuations, our business, financial
condition and results of operations could be significantly
impacted.
The ongoing global financial crisis has led to a worldwide
economic downturn that has negatively affected our business. If
the current economic downturn continues or worsens, demand for
our products and services and our revenues may be further
reduced. A prolonged downturn can adversely affect our revenues,
gross margin and results of operations. During such economic
downturns, it is critical to appropriately align our cost
structure with prevailing market conditions and to minimize the
effect of such downturns on our operations, while also
maintaining our capabilities and strategic investments for
future growth.
Our expense levels are based in part on our expectations as to
future revenues, and a significant percentage of our expenses
are fixed. We have a limited ability to quickly or significantly
reduce our fixed costs, and if revenue levels are below our
expectations, operating results will be adversely impacted.
During uneven periods of growth, we may incur costs before we
realize some of the anticipated benefits, which could harm our
operating results. We have significant investments in
engineering, sales, service support, marketing programs and
other functions to support and grow our business. We are likely
to recognize the costs associated with these investments earlier
than some of the anticipated benefits, and the return on these
investments may be lower, or may develop more slowly, than we
expect, which could harm our business, operating results and
financial condition.
Conversely, if we are unable to effectively manage our resources
and capacity, during periods of increasing demand for our
products, we could experience a material adverse effect on
operations and financial results. If the network storage market
fails to grow, or grows slower than we expect, our revenues will
be adversely affected. Also, even if IT spending increases, our
revenue may not grow at the same pace.
Our
gross margins have varied over time and may continue to vary,
and such variation may make it more difficult to forecast our
earnings.
Our product gross margins have been and may continue to be
affected by a variety of factors, including:
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Demand for storage and data management products;
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Pricing actions, rebates, initiatives, discount levels, and
price competition;
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Direct versus indirect and OEM sales;
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Changes in customer, geographic, or product mix, including mix
of configurations within each product group;
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Product and add-on software mix;
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The mix of services as a percentage of revenue;
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The mix and average selling prices of products;
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The mix of disk content;
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The timing of revenue recognition and revenue deferrals;
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New product introductions and enhancements;
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Excess inventory purchase commitments as a result of changes in
demand forecasts and possible product and software defects as we
transition our products; and
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The cost of components, manufacturing labor, quality, warranty,
and freight.
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Changes in software entitlements and maintenance gross margins
may result from various factors, such as:
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The size of the installed base of products under support
contracts;
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The timing of technical support service contract renewals;
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Demand for and the timing of delivery of upgrades;
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14
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The timing of our technical support service initiatives; and
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The level of spending on our customer support infrastructure.
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Changes in service gross margins may result from various
factors, such as:
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The mix of customers;
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The size and timing of service contract renewals;
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The volume and use of outside partners to deliver support
services on our behalf; and
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Product quality and serviceability issues.
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Due to such factors, gross margins are subject to variations
from period to period and are difficult to predict.
Our
cost-reduction initiatives and restructuring plans may not
result in anticipated savings or more efficient operations. Our
recently-announced restructuring may disrupt our operations and
adversely affect our operations and financial
results.
On February 11, 2009, in response to the worsening global
economic conditions and uncertainty about future IT spending, we
announced a restructuring of our worldwide operations in an
effort to strategically align our cost structure with expected
revenues, as well as to reallocate resources into areas of our
business with more growth potential.
Additionally, in December 2008, we decided to cease development
and availability of our
SnapMirror®
for Open Systems (SMOS) product, and as a result
recorded restructuring and other charges attributable primarily
to severance and employee-related and facility closure costs, as
well as the impairment of certain acquired intangible assets.
We may not be able to successfully complete and realize the
expected benefits of these restructuring plans. Our
restructuring plans may involve higher costs or a longer
timetable, or they may fail to improve our gross margins,
results of operations and cash flows as we anticipate. Our
inability to realize these benefits may result in an ineffective
business structure that could negatively impact our results of
operations. In addition to costs related to severance and other
employee-related costs, our restructuring plans may also subject
us to litigation risks and expenses.
In addition, our restructuring plans may have other adverse
consequences, such as attrition beyond our planned reduction in
workforce, the loss of employees with valuable knowledge or
expertise, a negative impact on employee morale, or a gain in
competitive advantage by our competitors over us. The
restructuring efforts could also be disruptive to our day-to-day
operations and cause our remaining employees to be less
productive, which in turn may affect our revenue and other
operating results in the future. In the event that the economy
recovers sooner than we expect and results in increased IT
spending, we may not have sufficient capacity to capitalize on
the related increase in demand for our products and services.
We may undertake future cost-reduction initiatives and
restructuring plans that may adversely impact our operations;
and we may not realize all of the anticipated benefits of our
prior or any future restructurings.
Changes
in market conditions have led, and in the future could lead, to
charges related to the discontinuance of certain of our products
and asset impairments.
In response to changes in economic conditions and market
demands, we may be required to strategically realign our
resources and consider cost containment measures including
restructuring, disposing of, or otherwise discontinuing certain
products. Any decision to limit investment in, dispose of, or
otherwise exit products may result in the recording of charges
to earnings, such as inventory and technology-related or other
intangible asset write-offs, workforce reduction costs, charges
relating to consolidation of excess facilities, cancellation
penalties or claims from third parties who were resellers or
users of discontinued products, which would harm our operating
results. Our estimates with respect to the useful life or
ultimate recoverability of our carrying basis of assets,
including purchased intangible assets, could change as a result
of such assessments and decisions. Additionally, we
15
are required to perform goodwill impairment tests on an annual
basis, and between annual tests in certain circumstances when
impairment indicators exist or if certain events or changes in
circumstances have occurred. Future goodwill impairment tests
may result in charges to earnings, which could materially harm
our operating results.
Our
OEM relationship with IBM may not continue to generate
significant revenue.
In April 2005, we entered into an OEM agreement with IBM, which
enables IBM to sell IBM branded solutions based on NetAppunified
solutions, including
NearStore®
and V-Series systems, as well as associated software offerings.
While this agreement is an element of our strategy to expand our
reach into more customers and countries, we do not have an
exclusive relationship with IBM, and there is no minimum
commitment for any given period of time; therefore, this
relationship may not continue to contribute revenue in future
years. In addition, we have no control over the products that
IBM selects to sell, or its release schedule and timing of those
products; nor do we control its pricing. In the event that sales
through IBM increase, we may experience distribution channel
conflicts between our direct sales force and IBM or among our
channel partners. If we fail to minimize channel conflicts, our
operating results and financial condition could be harmed. We
cannot assure you that this OEM relationship will continue to
generate significant revenue while the agreement is in effect,
or that the relationship will continue to be in effect for any
specific period of time.
If we
are unable to maintain our existing relationships and develop
new relationships with major strategic partners, our revenue may
be impacted negatively.
An element of our strategy to increase revenue is to
strategically partner with major third-party software and
hardware vendors that integrate our products into their products
and also co-market our products with these vendors. We have
significant partner relationships with database, business
application, backup management and server virtualization
companies, including Microsoft, Oracle, SAP, Symantec and
VMware. A number of these strategic partners are industry
leaders that offer us expanded access to segments of the storage
market. There is intense competition for attractive strategic
partners, and even if we can establish relationships with these
or other partners, these partnerships may not generate
significant revenue or may not continue to be in effect for any
specific period of time. If these relationships fail to
materialize as expected, we could suffer delays in product
development or other operational difficulties.
We intend to continue to establish and maintain business
relationships with technology companies to accelerate the
development and marketing of our storage solutions. To the
extent that we are unsuccessful in developing new relationships
or maintaining our existing relationships, our future revenue
and operating results could be impacted negatively. In addition,
the loss of a strategic partner could have a material adverse
effect on our revenues and operating results.
Disruption
of or changes in our distribution model could harm our
sales.
If we fail to manage distribution of our products and services
properly, or if our distributors financial condition or
operations weaken, our revenue and gross margins could be
adversely affected.
We market and sell our storage solutions directly through our
worldwide sales force and indirectly through channel partners
such as value-added resellers, systems integrators,
distributors, OEMs and strategic business partners, and we
derive a significant portion of our revenue from these channel
partners. During fiscal 2009, revenues generated from sales
through our channel partners accounted for 69.0% of our
revenues. In order for us to maintain or increase our revenues,
we must effectively manage our relationships with channel
partners.
Several factors could result in disruption of or changes in our
distribution model, which could materially harm our revenues and
gross margins, including the following:
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We compete with some of our channel partners through our direct
sales force, which may lead these partners to use other
suppliers who do not directly sell their own products;
|
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Our channel partners may demand that we absorb a greater share
of the risks that their customers may ask them to bear;
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16
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Our channel partners may have insufficient financial resources
and may not be able to withstand changes and challenges in
business conditions; and
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Revenue from indirect sales could suffer if our channel
partners financial condition or operations weaken.
|
In addition, we depend on our channel partners to comply with
applicable regulatory requirements in the jurisdictions in which
they operate. Their failure to do so could have a material
adverse effect on our revenues and operating results.
The
U.S. government has contributed to our revenue growth and has
become an important customer for us. Future revenue from the
U.S. government is subject to shifts in government spending
patterns. A decrease in government demand for our products could
materially affect our revenues. In addition, our business could
be adversely affected as a result of future examinations by the
U.S. government.
The U.S. government has become an important customer for
the storage market and for us; however, government demand is
unpredictable, and there can be no assurance that we will
maintain or grow our revenue from the U.S. government.
Government agencies are subject to budgetary processes and
expenditure constraints that could lead to delays or decreased
capital expenditures in IT spending. If the government or
individual agencies within the government reduce or shift their
capital spending patterns, our revenues and operating results
may be harmed.
In addition, selling our products to the U.S. government
also subjects us to certain regulatory requirements. The failure
to comply with these requirements could subject us to fines and
other penalties, which could have a material adverse effect on
our revenues and operating results. For example, in April 2009,
we entered into a settlement agreement with the United States of
America, acting through the United States Department of Justice
(DOJ) and on behalf of the General Services
Administration (the GSA), under which we agreed to
pay the United States $128.0 million, plus interest of
$0.7 million, related to a dispute regarding our discount
practices and compliance with the price reduction clause
provisions of its GSA contracts between August 1997 and February
2005. We are currently in discussions with the
U.S. government to demonstrate that we have implemented
processes and procedures to ensure that we comply with federal
contracting rules. If we are unable to demonstrate to the
U.S. government that we have implemented such improved
policies and procedures or if we are subject to an adverse
outcome in any future examinations of our federal contracting
practices, we could be suspended or debarred from contracting
with the U.S. government generally, or with any specific
agency, which could materially and adversely affect our revenue
and operating results.
A
portion of our revenue is generated by large, recurring
purchases from various customers, resellers and distributors. A
loss, cancellation or delay in purchases by these parties has
and could continue to negatively affect our
revenue.
During fiscal 2009, two U.S. distributors accounted for
approximately 10.5% and 10.6% of our revenues, respectively. The
loss of continued orders from any of our more significant
customers, strategic partners, distributors or resellers could
cause our revenue and profitability to suffer. Our ability to
attract new customers will depend on a variety of factors,
including the cost-effectiveness, reliability, scalability,
breadth and depth of our products.
We generally do not enter into binding purchase commitments with
our customers for an extended period of time, and thus we may
not be able to continue to receive large, recurring orders from
these customers, resellers or distributors. For example, our
reseller agreements generally do not require minimum purchases
and our customers, resellers and distributors can stop
purchasing and marketing our products at any time.
Recent turmoil in the credit markets may further negatively
impact our operations by affecting the solvency of our
customers, resellers and distributors, or the ability of our
customers to obtain credit to finance purchases of our products.
If the global economy and credit markets continue to deteriorate
and our future sales decline, our financial condition and
operating results could be adversely impacted.
Because our expenses are based on our revenue forecasts, a
substantial reduction or delay in sales of our products to, or
unexpected returns from, customers and resellers, or the loss of
any significant customer or reseller,
17
could harm our business. Although our largest customers may vary
from period to period, we anticipate that our operating results
for any given period will continue to depend on large orders
from significant customers. In addition, a change in the mix of
our customers could adversely affect our revenue and gross
margins.
We are
exposed to the credit risk of some of our customers, resellers,
and distributors, as well as credit exposures in weakened
markets, which could result in material losses.
Most of our sales to customers are on an open credit basis, with
typical payment terms of 30 days in the United States
and, because of local customs or conditions, longer in some
markets outside the United States. We monitor individual
customer payment capability in granting such open credit
arrangements, and seek to limit such open credit to amounts we
believe the customers can pay. Beyond our open credit
arrangements, we also have recourse or nonrecourse customer
financing leasing arrangements with third party leasing
companies through preexisting relationships with customers.
Under the terms of recourse leases, which are treated as
off-balance sheet arrangements, we remain liable for the
aggregate unpaid remaining lease payments to the third party
leasing company in the event that any customers default. We
expect demand for customer financing to continue. During periods
of economic downturn in the storage industry and the global
economy, our exposure to credit risks from our customers
increases. In addition, our exposure to credit risks of our
customers may increase if our customers and their customers or
their lease financing sources are adversely affected by the
current global economic downturn, or if there is a continuation
or worsening of the downturn. Although we have programs in place
to monitor and mitigate the associated risks, such programs may
not be effective in reducing our credit risks.
In the past, there have been bankruptcies by our customers both
who have open credit and who have lease financing arrangements
with us, causing us to incur bad debt charges, and, in the case
of financing arrangements, a loss of revenues. There can be no
assurance that additional losses will not occur in future
periods. Any future losses could harm our business and have a
material adverse effect on our operating results and financial
condition. Additionally, to the extent that the recent turmoil
in the credit markets makes it more difficult for customers to
obtain open credit or lease financing, those customers
ability to purchase our product could be adversely impacted,
which in turn could have a material adverse impact on our
financial condition and operating results.
The
market price for our common stock has fluctuated significantly
in the past and will likely continue to do so in the
future.
The market price for our common stock has experienced
substantial volatility in the past, and several factors could
cause the price to fluctuate substantially in the future. These
factors include but are not limited to:
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Fluctuations in our operating results;
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Variations between our operating results and either the guidance
we have furnished to the public or the published expectations of
securities analysts;
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Economic developments in the storage and data management market
as a whole;
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Fluctuations in the valuation of companies perceived by
investors to be comparable to us;
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Changes in analysts recommendations or projections;
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Inquiries by the SEC, NASDAQ, law enforcement, or other
regulatory bodies;
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International conflicts and acts of terrorism;
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Announcements of new products, applications, or product
enhancements by us or our competitors;
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Changes in our relationships with our suppliers, customers,
channel and strategic partners; and
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General market conditions, including the recent financial and
credit crisis and global economic downturn.
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In addition, the stock market has experienced volatility that
has particularly affected the market prices of the equity
securities of many technology companies. Certain macroeconomic
factors such as changes in interest rates, the market climate
for the technology sector, and levels of corporate spending on
IT, as well as variations in our expected operating performance,
could continue to have an impact on the trading price of our
stock. As a result, the
18
market price of our common stock may fluctuate significantly in
the future, and any broad market decline may materially and
adversely affect the market price of our common stock.
If we
are unable to develop and introduce new products and respond to
technological change, if our new products do not achieve market
acceptance, if we fail to manage the transition between our new
and old products, or if we cannot provide the expected level of
service and support for our new products, our operating results
could be materially and adversely affected.
Our future growth depends upon the successful development and
introduction of new hardware and software products. Due to the
complexity of storage subsystems and storage security appliances
and the difficulty in gauging the engineering effort required to
produce new products, such products are subject to significant
technical risks. In addition, our new products must respond to
technological changes and evolving industry standards. If we are
unable, for technological or other reasons, to develop and
introduce new products in a timely manner in response to
changing market conditions or customer requirements, or if such
products do not achieve market acceptance, our operating results
could be materially and adversely affected. New or additional
product introductions increase the complexities of forecasting
revenues, and if not managed effectively, may adversely affect
our sales of existing products.
As new or enhanced products are introduced, we must successfully
manage the transition from older products in order to minimize
disruption in customers ordering patterns, avoid excessive
levels of older product inventories, and ensure that enough
supplies of new products can be delivered to meet
customers demands.
As we enter new or emerging markets, we will likely increase
demands on our service and support operations and may be exposed
to additional competition. We may not be able to provide
products, service and support to effectively compete for these
market opportunities.
An
increase in competition and industry consolidation could
materially and adversely affect our operating
results.
The storage markets are intensely competitive and are
characterized by rapidly changing technology. In the storage
market, our primary and near-line storage system products and
our associated software portfolio compete primarily with storage
system products and data management software from EMC, Hitachi
Data Systems, HP, IBM, and Sun Microsystems. In addition, Dell,
Inc. is a competitor in the storage marketplace through its
business arrangement with EMC, which allows Dell to resell EMC
storage hardware and software products, as well as through
Dells acquisition of EqualLogic, through which Dell offers
low-priced storage solutions. In the secondary storage market,
which includes the disk-to-disk backup, compliance and business
continuity segments, our solutions compete primarily against
products from EMC and Sun Microsystems. Our VTL products also
compete with traditional tape backup solutions in the broader
data backup/recovery space. Additionally, a number of small,
newer companies have recently entered the storage systems and
data management software markets, the near-line and VTL storage
markets and the high-performance clustered storage markets, some
of which may become significant competitors in the future.
There has been a trend toward industry consolidation in our
markets for several years. For example, in April 2009, Oracle
Corporation, one of our strategic partners, announced its plan
to acquire Sun Microsystems. We expect this trend to continue as
companies attempt to strengthen or hold their market positions
in an evolving industry and as companies are acquired or are
unable to continue operations. We believe that industry
consolidation may result in stronger competitors that are better
able to compete as sole-source vendors for customers. In
addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with
third parties. Accordingly, it is possible that new competitors
or alliances among competitors may emerge and rapidly acquire
significant market share. We may not be able to compete
successfully against current or future competitors. Competitive
pressures we face could materially and adversely affect our
business and operating results.
19
Our
future financial performance depends on growth in the storage
and data management markets. If these markets do not perform as
we expect and upon which we calculate and forecast our revenues,
our operating results will be materially and adversely
impacted.
All of our products address the storage and data management
markets. Accordingly, our future financial performance will
depend in large part on continued growth in the storage and data
management markets and on our ability to adapt to emerging
standards in these markets. The markets for storage and data
management have been adversely impacted by the current global
economic downturn and may not grow as anticipated or may
continue to decline.
Additionally, emerging standards in these markets may adversely
affect the
UNIX®,
Windows®
and the World Wide Web server markets upon which we depend. For
example, we provide our open access data retention solutions to
customers within the financial services, healthcare,
pharmaceutical and government market segments, industries that
are subject to various evolving governmental regulations with
respect to data access, reliability and permanence (such as
Rule 17(a)(4) of the Securities Exchange Act of 1934, as
amended) in the United States and in the other countries in
which we operate. If our products do not meet and continue to
comply with these evolving governmental regulations in this
regard, customers in these market and geographical segments will
not purchase our products, and we will not be able to expand our
product offerings in these market and geographical segments at
the rates which we have forecasted.
Supply
chain issues, including financial problems of contract
manufacturers or component suppliers, or a shortage of adequate
component supply or manufacturing capacity that increase our
costs or cause a delay in our ability to fulfill orders, could
have a material adverse impact on our business and operating
results, and our failure to estimate customer demand properly
may result in excess or obsolete component supply, which could
adversely affect our gross margins.
The fact that we do not own or operate our manufacturing
facilities and supply chain exposes us to risks, including
reduced control over quality assurance, production costs and
product supply, which could have a material adverse impact on
the supply of our products and on our business and operating
results.
Financial problems of either contract manufacturers or component
suppliers could limit supply, increase costs, or result in
accelerated payment terms. The loss of any contract manufacturer
or key supplier could negatively impact our ability to
manufacture and sell our products. Qualifying a new contract
manufacturer and commencing volume production is expensive and
time-consuming. If we are required to change contract
manufacturers, we may lose revenue and damage our customer
relationships. Disruption or termination of manufacturing
capacity or component supply could delay shipments of our
products and could materially and adversely affect our operating
results. Such delays could also damage relationships with
current and prospective customers and suppliers, and our
competitive position and reputation could be harmed.
A return to growth in the economy is likely to put greater
pressures on us, our contract manufacturers and our suppliers to
accurately project demand and to establish optimal purchase
commitment levels. Additionally, the reservation of
manufacturing capacity at our contract manufacturers by other
companies, inside or outside of our industry, or the inability
by us to appropriately cancel, reschedule, or adjust our
manufacturing or components requirements based upon business
needs could result in either limitation of supply or increased
costs from these suppliers.
If we inaccurately forecast demand for our products or if there
is lack of demand for our products, we may have excess or
inadequate inventory or incur cancellation charges or penalties,
which would increase our costs and have an adverse impact on our
gross margins.
We rely on a limited number of suppliers for components such as
disk drives, computer boards and microprocessors utilized in the
assembly of our products. In recent years, rapid industry
consolidation has led to fewer component suppliers, which has
and could subject us to future periodic supply constraints and
price rigidity.
Furthermore, as a result of binding price or purchase
commitments with suppliers, we may be obligated to purchase
components at prices that are higher than those available in the
current market, or in amounts greater than
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our needs. In the event that we become committed to purchase
components at prices in excess of the current market price when
the components are actually used, or are committed to buy
components in amounts greater than our needs, our gross margins
could decrease.
Component quality is a risk and is particularly significant with
respect to our suppliers of disk drives. In order to meet
product performance requirements, we must obtain disk drives of
extremely high quality and capacity.
As suppliers upgrade their components, they regularly end
of life older components. As we become aware of an end of
life situation, we attempt to make purchases or purchase
commitments to cover all future requirements or find a suitable
substitute component. We may not be able to obtain a sufficient
supply of components on a timely and cost effective basis. Our
failure to do so may lead to an adverse impact on our business.
On the other hand, if we fail to anticipate customer demand
properly or if there is reduced demand or no demand for our
products, an oversupply of end of life components could result
in excess or obsolete components that could adversely affect our
gross margins.
We intend to regularly introduce new products and product
enhancements, which will require us to rapidly achieve volume
production by coordinating with our contract manufacturers and
suppliers. We may need to increase our material purchases,
contract manufacturing capacity and quality functions to meet
anticipated demand. The inability of our contract manufacturers
or our component suppliers to provide us with adequate supplies
of high-quality products and materials suitable for our needs
could cause a delay in our ability to fulfill orders.
Our
acquisitions may not provide the anticipated benefits and may
disrupt our existing business.
As part of our strategy, we are continuously evaluating
opportunities to buy other businesses or technologies that would
complement our current products, expand the breadth of our
markets, or enhance our technical capabilities. On May 20,
2009, we announced that we have entered into a definitive
agreement to acquire Data Domain, Inc. (Data
Domain). We subsequently amended the terms of the
definitive agreement on June 3, 2009.
The success of this and any future acquisition is impacted by a
number of factors, and may be subject to the following risks:
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The inability to successfully integrate the operations,
technologies, products and personnel of the acquired companies;
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The diversion of managements attention from normal daily
operations of the business;
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The loss of key employees; and
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Substantial transaction costs and accounting charges.
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Exposure to litigation related to acquisitions. For example, see
the lawsuit related to Data Domain described in Part I,
Item 3 Legal Proceedings below.
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This and any future acquisitions may also result in risks to our
existing business, including:
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Dilution of our current stockholders percentage ownership
to the extent we issue new equity;
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Assumption of additional liabilities;
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Incurrence of additional debt or a decline in available cash;
adverse effects to our financial statements, such as the need to
make large and immediate write-offs or the incurrence of
restructuring and other related expenses;
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Liability for intellectual property infringement and other
litigation claims, which we may or may not be aware of at the
time of acquisition; and
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Creation of goodwill or other intangible assets that could
result in significant future amortization expense or impairment
charges.
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In addition, failure to complete the Data Domain acquisition as
planned could negatively impact our stock price.
The failure to achieve the anticipated benefits of an
acquisition may also result in impairment charges for goodwill
or acquired intangibles. For example, in fiscal 2009 we
announced our decision to cease the development
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and availability of our SMOS product, which was originally
acquired through our acquisition of Topio, Inc.
(Topio) in fiscal 2007, resulting in the impairment
of acquired intangibles related to such acquisition. Additional
or realized risks of this nature could have a material adverse
effect on our business, financial condition and results of
operations.
The occurrence of any of the above risks could seriously harm
our business.
We are
exposed to fluctuations in the market values of our portfolio
investments and in interest rates; impairment of our investments
could harm our financial results.
At April 24, 2009, we had $2.6 billion in cash, cash
equivalents, available-for-sale securities and restricted cash
and investments. We invest our cash in a variety of financial
instruments, consisting principally of investments in
U.S. Treasury securities, U.S. government agency
bonds, corporate bonds, corporate securities, auction rate
securities, certificates of deposit, and money market funds,
including the Primary Fund. These investments are subject to
general credit, liquidity, market and interest rate risks, which
have been exacerbated by unusual events such as the financial
and credit crisis, and bankruptcy filings in the United States
which have affected various sectors of the financial markets and
led to global credit and liquidity issues. These securities are
generally classified as available-for-sale and,
consequently, are recorded on our consolidated balance sheets at
fair value with unrealized gains or losses reported as a
component of accumulated other comprehensive income (loss), net
of tax.
Investments in both fixed rate and floating rate interest
earning instruments carry a degree of interest rate risk. Fixed
rate debt securities may have their market value adversely
impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment
income may fall short of expectations due to changes in interest
rates. Currently, we do not use derivative financial instruments
in our investment portfolio. We may suffer losses if forced to
sell securities that have experienced a decline in market value
because of changes in interest rates. Currently, we do not use
financial derivatives to hedge our interest rate exposure.
The fair value of our investments may change significantly due
to events and conditions in the credit and capital markets.
These securities/issuers could be subject to review for possible
downgrade. Any downgrade in these credit ratings may result in
an additional decline in the estimated fair value of our
investments. Changes in the various assumptions used to value
these securities and any increase in the markets perceived
risk associated with such investments may also result in a
decline in estimated fair value. If such investments suffer
market price declines, as we experienced with some of our
investments during fiscal 2009, we may recognize in earnings the
decline in the fair value of our investments below their cost
basis when the decline is judged to be
other-than-temporary.
As a result of the bankruptcy filing of Lehman Brothers, which
occurred during fiscal 2009, we recorded an other-than-temporary
impairment charge of $11.8 million on our corporate bonds
related to investments in Lehman Brothers securities and
approximately $9.3 million on our investments in the
Primary Fund that held Lehman Brothers investments. As of
April 24, 2009, we have an investment in the Primary Fund,
an AAA-rated money market fund at the time of purchase, with a
par value of $60.9 million and an estimated fair value of
$51.6 million, which suspended redemptions in September
2008 and is in the process of liquidating its portfolio of
investments. We received total distributions of
$546.3 million during fiscal 2009 from the Primary Fund. On
December 3, 2008, it announced a plan for liquidation and
distribution of assets that includes the establishment of a
special reserve to be set aside out of its assets for pending or
threatened claims, as well as anticipated costs and expenses,
including related legal and accounting fees. On
February 26, 2009, the Primary Fund announced a plan to set
aside $3.5 billion of the funds remaining assets as
the special reserve which may be increased or
decreased as further information becomes available. The Primary
Fund has received an SEC order providing that the SEC will
supervise the distribution of assets from the Primary Fund. Our
pro rata share of the $3.5 billion special reserve is
approximately $41.5 million. The Primary Fund plans to
continue to make periodic distributions, up to the amount of the
special reserve, on a pro-rata basis. We could realize
additional losses in our holdings of the Primary Fund and may
not receive all or a portion of our remaining balance in the
Primary Fund as a result of market conditions and ongoing
litigation against the fund.
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If the conditions in the credit and capital markets continue to
worsen, our investment portfolio may be impacted and we could
determine that more of our investments have experienced an
other-than-temporary decline in fair value, requiring further
impairments, which could adversely impact our financial position
and operating results.
Funds
associated with certain of our auction rate securities may not
be accessible for more than 12 months and our auction rate
securities may experience further other-than-temporary declines
in value, which would adversely affect our
earnings.
Auction rate securities (ARS) held by us are
securities with long-term nominal maturities, which, in
accordance with investment policy guidelines, had credit ratings
of AAA and Aaa at time of purchase. Interest rates for ARS are
reset through a Dutch auction each month, which
prior to February 2008 had provided a liquid market for these
securities.
Substantially all of our ARS are backed by pools of student
loans guaranteed by the U.S. Department of Education, and
we believe the credit quality of these securities is high based
on this guarantee. However liquidity issues in the global credit
markets resulted in the failure of auctions for certain of our
ARS investments, with a par value of $73.3 million at
April 24, 2009. For each failed auction, the interest rate
resets to a maximum rate defined for each security, and the ARS
continue to pay interest in accordance with their terms,
although the principal associated with the ARS will not be
accessible until there is a successful auction or such time as
other markets for ARS investments develop.
As of April 24, 2009, we determined there was a total
decline in the fair value of our ARS investments of
approximately $8.8 million, of which we recorded temporary
impairment charges of $7.0 million, offset by unrealized
gains of $0.3 million, and $2.1 million was recognized
as an other-than-temporary impairment charge. In addition, we
have classified all of our auction rate securities as long-term
assets in our consolidated balance sheets of April 24, 2009
as our ability to liquidate such securities in the next
12 months is uncertain. Although we currently have the
ability and intent to hold these ARS investments until recovery
in market value or until maturity, if the current market
conditions deteriorate further, or the anticipated recovery in
market liquidity does not occur, we may be required to record
additional impairment charges in future quarters.
Our
leverage and debt service obligations may adversely affect our
financial condition and results of operations.
As a result of our sale of $1.265 billion of 1.75%
convertible senior notes in June 2008 (the Notes),
we have a greater amount of long-term debt than we have
maintained in the past. We also have a credit facility and
various synthetic lease arrangements. In addition, subject to
the restrictions in our existing and any future financings
agreements, we may incur additional debt.
Our maintenance of higher levels of indebtedness could have
adverse consequences including:
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Adversely affecting our ability to satisfy our obligations;
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Increasing the portion of our cash flows from operations may
have to be dedicated to interest and principal payments and may
not be available for operations, working capital, capital
expenditures, expansion, acquisitions or general corporate or
other purposes;
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Impairing our ability to obtain additional financing in the
future;
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Limiting our flexibility in planning for, or reacting to,
changes in our business and industry; and
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Making us more vulnerable to downturns in our business, our
industry or the economy in general.
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Our ability to meet our expenses and debt obligations will
depend on our future performance, which will be affected by
financial, business, economic, regulatory and other factors. We
will not be able to control many of these factors, such as
economic conditions and governmental regulations. Furthermore,
our operations may not generate sufficient cash flows from
operations to enable us to meet our expenses and service our
debt. As a result, we may be required to repatriate funds from
our foreign subsidiaries, which could result in a significant
tax liability to us. If we are unable to generate sufficient
cash flows from operations, or if we are unable to repatriate
sufficient or any funds from our foreign subsidiaries, in order
to meet our expenses and debt service obligations, we may need
to utilize our existing line of credit to obtain the necessary
funds, or we may be required to raise additional funds. If we
determine it is necessary to seek additional funding for any
reason, we may not be able to obtain such funding or, if funding
is
23
available, obtain it on acceptable terms. If we fail to make a
payment on our debt, we could be in default on such debt, and
this default could cause us to be in default on our other
outstanding indebtedness.
We are
subject to restrictive and financial covenants in our credit
facility and synthetic lease arrangements. The restrictive
covenants may restrict our ability to operate our
business.
Our access to undrawn amounts under our credit facility and the
ongoing extension of credit under our synthetic lease
arrangements are subject to continued compliance with financial
covenants, which could be more challenging in a difficult
operating environment. If we do not comply with these
restrictive and financial covenants or otherwise default under
the facility or arrangements, we may be required to repay any
outstanding amounts under this credit facility or repurchase the
properties and facility which are subject to the synthetic lease
arrangements. If we lose access to these credit facility and
synthetic lease arrangements, we may not be able to obtain
alternative financing on acceptable terms, which could limit our
operating flexibility.
The agreements governing our credit facility and synthetic lease
arrangements contain restrictive covenants that limit our
ability to operate our business, including restrictions on our
ability to:
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Incur indebtedness;
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Incur indebtedness at the subsidiary level;
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Grant liens;
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Sell all or substantially all our assets:
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Enter into certain mergers;
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Change our business;
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Enter into swap agreements;
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Enter into transactions with our affiliates; and
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Enter into certain restrictive agreements.
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As a result of these restrictive covenants, our ability to
respond to changes in business and economic conditions and to
obtain additional financing, if needed, may be significantly
restricted. We may also be prevented from engaging in
transactions that might otherwise be beneficial to us, such as
strategic acquisitions or joint ventures.
We are also required to comply with financial covenants under
our credit facility and synthetic lease arrangements, and our
ability to comply with these financial covenants is dependent on
our future performance, which will be subject to many factors,
some of which are beyond our control, including prevailing
economic conditions.
Our failure to comply with the restrictive and financial
covenants could result in a default under our credit facility
and our synthetic lease arrangements, which would give the
counterparties thereto the ability to exercise certain rights,
including the right to accelerate the amounts owed thereunder
and to terminate the arrangement, and could also result in a
cross default with respect to our other indebtedness. In
addition, our failure to comply with these covenants and the
acceleration of amounts owed under our credit facility and
synthetic lease arrangements could result in a default under the
Notes, which could permit the holders to accelerate the Notes.
If all of our debt is accelerated, we may not have sufficient
funds available to repay such debt.
Future
issuances of common stock and hedging activities by holders of
the Notes may depress the trading price of our common stock and
the Notes.
Any new issuance of equity securities, including the issuance of
shares upon conversion of the Notes, could dilute the interests
of our existing stockholders, including holders who receive
shares upon conversion of their Notes, and could substantially
decrease the trading price of our common stock and the Notes. We
may issue equity securities in the future for a number of
reasons, including to finance our operations and business
strategy (including in connection with acquisitions, strategic
collaborations or other transactions), to increase our capital,
to adjust our
24
ratio of debt to equity, to satisfy our obligations upon the
exercise of outstanding warrants or options, or for other
reasons.
In addition, the price of our common stock could also be
affected by possible sales of our common stock by investors who
view the Notes as a more attractive means of equity
participation in our company and by hedging or arbitrage trading
activity that we expect to develop involving our common stock by
holders of the Notes. The hedging or arbitrage could, in turn,
affect the trading price of the Notes, or any common stock that
holders receive upon conversion of the Notes.
Conversion
of our Notes will dilute the ownership interest of existing
stockholders.
The conversion of some or all of our outstanding Notes will
dilute the ownership interest of existing stockholders to the
extent we deliver common stock upon conversion of the Notes.
Upon conversion of a Note, we will satisfy our conversion
obligation by delivering cash for the principal amount of the
Note and shares of common stock, if any, to the extent the
conversion value exceeds the principal amount. There would be no
adjustment to the numerator in the net income per common share
computation for the cash settled portion of the Notes as that
portion of the debt instrument will always be settled in cash.
The number of shares delivered upon conversion, if any, will be
included in the denominator for the computation of diluted net
income per common share. Any sales in the public market of any
common stock issuable upon such conversion could adversely
affect prevailing market prices of our common stock. In
addition, the existence of the Notes may encourage short selling
by market participants because the conversion of the Notes could
be used to satisfy short positions, or anticipated conversion of
the Notes into shares of our common stock could depress the
price of our common stock.
The
note hedges and warrant transactions that we entered into in
connection with the sale of the Notes may affect the trading
price of our common stock.
In connection with the issuance of the Notes, we entered into
privately negotiated convertible note hedge transactions with
certain option counterparties (the Counterparties),
which are expected to reduce the potential dilution to our
common stock upon any conversion of the Notes. At the same time,
we also entered into warrant transactions with the
Counterparties pursuant to which we may issue shares of our
common stock above a certain strike price. In connection with
these hedging transactions, the Counterparties may have entered
into various over-the-counter derivative transactions with
respect to our common stock or purchased shares of our common
stock in secondary market transactions at or following the
pricing of the Notes. Such activities may have had the effect of
increasing the price of our common stock. The Counterparties are
likely to modify their hedge positions from time to time prior
to conversion or maturity of the Notes by purchasing and selling
shares of our common stock or entering into other derivative
transactions. Additionally, these transactions may expose us to
counterparty credit risk for nonperformance. We manage our
exposure to counterparty credit risk through specific minimum
credit standards and the diversification of counterparties. The
effect, if any, of any of these transactions and activities on
the market price of our common stock or the Notes will depend,
in part, on market conditions and cannot be ascertained at this
time, but any of these activities could adversely affect the
value of our common stock. In addition, if our stock price
exceeds the strike price for the warrants, there could be
additional dilution to our shareholders, which could adversely
affect the value of our common stock.
Lehman Brothers OTC Derivatives, Inc. (Lehman OTC)
is the counterparty to 20% of our Note hedges. The bankruptcy
filing by Lehman OTC on October 3, 2008 constituted an
event of default under the hedge transaction that
could, at our option, lead to termination under the hedge
transaction to the extent we provide notice to Lehman OTC.
We have not terminated the Note hedge transaction with Lehman
OTC, and will continue to carefully monitor the developments
impacting Lehman OTC. This event of default is not
expected to have an impact on our financial position or results
of operations. However, we could incur significant costs if we
elect to replace this hedge transaction originally held with
Lehman OTC. If we do not elect to replace this hedge
transaction, then we would be subject to potential dilution upon
conversion of the Notes if on the date of conversion the
per-share market price of our common stock exceeds the
conversion price of $31.85. The terms of the Notes, the rights
of the holders of the Notes and other counterparties to Note
hedges and warrants were not affected by the bankruptcy filings
of Lehman OTC.
25
Our
synthetic leases are off-balance sheet arrangements that could
negatively affect our financial condition and results. We have
invested substantial resources in new facilities and physical
infrastructure, which will increase our fixed costs. Our
operating results could be harmed if our business does not grow
proportionately to our increase in fixed costs.
We have various synthetic lease arrangements with BNP Paribas
Leasing Corporation as lessor (BBPPLC) for our
headquarters office buildings and land in Sunnyvale, California.
On April 1, 2009, we terminated two of the synthetic lease
arrangements in an effort to manage our capital structure in
light of the current economic environment. The lease payments
commitments associated with the remaining arrangements as of the
termination date totaled $141.1 million through fiscal
2013. These synthetic leases qualify for operating lease
accounting treatment under SFAS No. 13,
Accounting for Leases (as amended), and are not
considered variable interest entities under
FIN No. 46R Consolidation of Variable Interest
Entities (revised). Therefore, we do not include the
properties or the associated debt on our condensed consolidated
balance sheet. However, if circumstances were to change
regarding our or BNPPLCs ownership of the properties, or
in BNPPLCs overall portfolio, we could be required to
consolidate the entity, the leased facilities and the associated
debt.
Our future minimum lease payments under these synthetic leases
limit our flexibility in planning for, or reacting to, changes
in our business by restricting the funds available for use in
addressing such changes. If we are unable to grow our business
and revenues proportionately to our increase in fixed costs, our
operating results will be harmed. If we elect not to purchase
the properties at the end of the lease term, we have guaranteed
a minimum residual value to BNPPLC. Therefore, if the fair value
of the properties declines below that guaranteed minimum
residual value, our residual value guarantee would require us to
pay the difference to BNPPLC, which could have a material
adverse effect on our cash flows, financial condition and
operating results.
Reductions in headcount growth have resulted in excess capacity
and vacant facilities. In addition, we may experience changes in
our operations in the future that could result in additional
excess capacity and vacant facilities. We will continue to be
responsible for all carrying costs of these facilities
operating leases until such time as we can sublease these
facilities or terminate the applicable leases based on the
contractual terms of the operating lease agreements, and these
costs may have an adverse effect on our business, operating
results and financial condition.
Risks
inherent in our international operations could have a material
adverse effect on our operating results.
We conduct a significant portion of our business outside the
United States. A substantial portion of our revenues is derived
from sales outside of the U.S. During fiscal 2009 and 2008,
our international revenues accounted for 48.5% and 47.1% of our
total revenues, respectively. In addition, we have several
research and development centers overseas, and a substantial
portion of our products are manufactured outside of the
U.S. Accordingly, our business and our future operating
results could be materially and adversely affected by a variety
of factors affecting our international operations, some of which
are beyond our control, including regulatory, political, or
economic conditions in a specific country or region, trade
protection measures and other regulatory requirements,
government spending patterns, and acts of terrorism and
international conflicts. In addition, we may not be able to
maintain or increase international market demand for our
products.
We face exposure to adverse movements in foreign currency
exchange rates as a result of our international operations.
These exposures may change over time as business practices
evolve, and they could have a material adverse impact on our
financial results and cash flows. Our international sales are
denominated in U.S. dollars and in foreign currencies. An
increase in the value of the U.S. dollar relative to
foreign currencies could make our products more expensive and
therefore potentially less competitive in foreign markets.
Conversely, lowering our price in local currency may result in
lower
U.S.-based
revenue. A decrease in the value of the U.S. dollar
relative to foreign currencies could increase the cost of local
operating expenses. Additionally, we have exposures to emerging
market currencies, which can have extreme currency volatility.
We utilize forward and option contracts to hedge our foreign
currency exposure associated with certain assets and liabilities
as well as anticipated foreign currency cash flows. All balance
sheet hedges are marked to market through earnings every
quarter. The time-value component of our cash flow hedges is
recorded in earnings while all other gains and losses are marked
to market through other comprehensive income until forecasted
transactions occur, at which time such realized gains and losses
are recognized in earnings.
26
These hedges attempt to reduce, but do not always entirely
eliminate, the impact of currency exchange movements. Factors
that could have an impact on the effectiveness of our hedging
program include the accuracy of forecasts and the volatility of
foreign currency markets as well as widening interest rate
differentials and the volatility of the foreign exchange market.
There can be no assurance that such hedging strategies will be
successful and that currency exchange rate fluctuations will not
have a material adverse effect on our operating results.
Additional risks inherent in our international business
activities generally include, among others, longer accounts
receivable payment cycles and difficulties in managing
international operations. Such factors could materially and
adversely affect our future international sales and consequently
our operating results. Our international operations are subject
to other risks, including general import/export restrictions and
the potential loss of proprietary information due to piracy,
misappropriation or laws that may be less protective of our
intellectual property rights than U.S. law.
Moreover, in many foreign countries, particularly in those with
developing economies, it is common to engage in business
practices that are prohibited by regulations applicable to us,
such as the Foreign Corrupt Practices Act. Although we implement
policies and procedures designed to ensure compliance with these
laws, our employees, contractors and agents, as well as those
companies to which we outsource certain of our business
operations, may take actions in violation of our policies. Any
such violation, even if prohibited by our policies, could
subject us to fines and other penalties, which could have a
material adverse effect on our business, financial condition or
results of operations.
We
have credit exposure to our hedging
counterparties.
In order to minimize volatility in earnings associated with
fluctuations in the value of foreign currency relative to the
U.S. Dollar, we utilize forward and option contracts to
hedge our exposure to foreign currencies. As a result of
entering into these hedging contracts with major financial
institutions, we may be subject to counterparty nonperformance
risk. Should there be a counterparty default, we could be
exposed to the net losses on the original hedge contracts or be
unable to recover anticipated net gains from the transactions.
A
significant portion of our cash and cash equivalents balances is
held overseas. If we are not able to generate sufficient cash
domestically in order to fund our U.S. operations and strategic
opportunities and service our debt, we may incur a significant
tax liability in order to repatriate the overseas cash balances,
or we may need to raise additional capital in the
future.
A portion of our earnings which is generated from our
international operations is held and invested by certain of our
foreign subsidiaries. These amounts are not freely available for
dividend repatriation to the United States without triggering
significant adverse tax consequences, which could adversely
affect our financial results. As a result, unless the cash
generated by our domestic operations is sufficient to fund our
domestic operations, our broader corporate initiatives such as
stock repurchases, acquisitions, and other strategic
opportunities, and to service our outstanding indebtedness, we
may need to raise additional funds through public or private
debt or equity financings, or we may need to expand our existing
credit facility to the extent we choose not to repatriate our
overseas cash. Such additional financing may not be available on
terms favorable to us, or at all, and any new equity financings
or offerings would dilute our current stockholders
ownership. Furthermore, lenders, particularly in light of the
current challenges in the credit markets, may not agree to
extend us new, additional or continuing credit. If adequate
funds are not available, or are not available on acceptable
terms, we may be forced to repatriate our foreign cash and incur
a significant tax expense or we may not be able to take
advantage of strategic opportunities, develop new products,
respond to competitive pressures or repay our outstanding
indebtedness. In any such case, our business, operating results
or financial condition could be materially adversely affected.
27
Changes
in our effective tax rate or adverse outcomes resulting from
examination of our income tax returns could adversely affect our
results.
Our effective tax rate could be adversely affected by several
factors, many of which are outside of our control, including:
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Earnings being lower than anticipated in countries where we are
taxed at lower rates as compared to the U.S. statutory tax
rate;
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Material differences between forecasted and actual tax rates as
a result of a shift in the mix of pretax profits and losses by
tax jurisdiction, our ability to use tax credits, or effective
tax rates by tax jurisdiction that differ from our estimates;
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Changing tax laws or related interpretations, accounting
standards, regulations, and interpretations in multiple tax
jurisdictions in which we operate, as well as the requirements
of certain tax rulings;
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An increase in expenses not deductible for tax purposes,
including certain stock-based compensation expense, write-offs
of acquired in-process research and development, and impairment
of goodwill;
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The tax effects of purchase accounting for acquisitions and
restructuring charges that may cause fluctuations between
reporting periods;
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Changes related to our ability to ultimately realize future
benefits attributed to our deferred tax assets, including those
related to other-than-temporary impairments;
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Tax assessments resulting from income tax audits or any related
tax interest or penalties could significantly affect our income
tax expense for the period in which the settlements take
place; and
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A change in our decision to indefinitely reinvest foreign
earnings.
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We receive significant tax benefits from sales to our
non-U.S. customers.
These benefits are contingent upon existing tax regulations in
the United States and in the countries in which our
international operations are located. Future changes in domestic
or international tax regulations could adversely affect our
ability to continue to realize these tax benefits. We have not
provided for United States federal and state income taxes or
foreign withholding taxes that may result on future remittances
of undistributed earnings of foreign subsidiaries. The Obama
administration recently announced several proposals to reform
United States tax rules, including proposals that may result in
a reduction or elimination of the deferral of United States
income tax on our future unrepatriated earnings. Absent a
restructuring of some legal entities and their functionality,
some of the future unrepatriated earnings would be taxed at the
United States federal income tax rate.
Additionally, the United States Court of Appeals for the Ninth
Circuit on May 27, 2009 held in Xilinx Inc. v.
Commissioner that stock-based compensation must be included in
the research and development cost base of companies that have
entered into a cost sharing arrangement and must, therefore, be
allocated among the participants based on anticipated benefits.
The Courts reversal of the prior U.S. Tax Court
decision will impact our estimate of tax benefits that were
required to be recognized under Financial Interpretation
No. 48, Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109
(FIN 48). We are currently evaluating the
impact of the Xilinx case on our provision for income taxes for
the first quarter of fiscal 2010, but expect any final
adjustment will be limited to a reduction of our unrecognized
tax attributes.
Our international operations currently benefit from a tax ruling
concluded in the Netherlands, which expires in 2010. If we are
unable to negotiate a similar tax ruling upon expiration of the
current ruling, our effective tax rate could increase and our
operating results could be adversely affected. Our effective tax
rate could also be adversely affected by different and evolving
interpretations of existing law or regulations, which in turn
would negatively impact our operating and financial results as a
whole. Our effective tax rate could also be adversely affected
if there is a change in international operations and how the
operations are managed and structured. The price of our common
stock could decline to the extent that our financial results are
materially affected by an adverse change in our effective tax
rate.
28
We are currently undergoing federal income tax audits in the
United States and several foreign tax jurisdictions. The rights
to some of our intellectual property (IP) are owned
by certain of our foreign subsidiaries, and payments are made
between U.S. and foreign tax jurisdictions relating to the
use of this IP in a qualified cost sharing arrangement. In
recent years, several other U.S. companies have had their
foreign IP arrangements challenged as part of IRS examinations,
which has resulted in material proposed assessments
and/or
pending litigation with respect to those companies. During
fiscal 2009, we received Notices of Proposed Adjustments from
the IRS in connection with federal income tax audits conducted
with respect to our fiscal 2003 and 2004 tax years. If the
ultimate determination of income taxes assessed under the
current IRS audit or under audits being conducted in any of the
other tax jurisdictions in which we operate results in an amount
in excess of the tax provision we have recorded or reserved for,
our operating results, cash flows and financial condition could
be adversely affected.
We may
face increased risks and uncertainties related to our current or
future investments in nonmarketable securities of private
companies, and these investments may not achieve our
objectives.
On occasion, we make strategic investments in nonmarketable
securities of development stage entities. As of April 24,
2009, the carrying value of our investments in nonmarketable
securities totaled $4.0 million. Investments in
nonmarketable securities are inherently risky, and some of these
companies are likely to fail. Their success (or lack thereof) is
dependent on product development, market acceptance, operational
efficiency and other key business success factors. In addition,
depending on these companies future prospects, they may
not be able to raise additional funds when needed, or they may
receive lower valuations, with less favorable investment terms
than in previous financings, and our investments in them would
likely become impaired. We could lose our entire investment in
these companies. For example, during fiscal 2009 we determined
that our investments in nonmarketable securities of two
companies had been impaired, and we recorded impairment charges
of $6.3 million.
If we
are unable to establish fair value for any undelivered element
of a sales arrangement, all or a portion of the revenue relating
to the arrangement could be deferred to future
periods.
In the course of our sales efforts, we often enter into multiple
element arrangements that include our systems and one or more of
the following undelivered software-related elements: software
entitlements and maintenance, premium hardware maintenance, and
storage review services. If we are required to change the
pricing of our software related elements through discounting, or
otherwise introduce variability in the pricing of such elements,
we may be unable to maintain Vendor Specific Objective Evidence
of fair value of the undelivered elements of the arrangement,
and would therefore be required to delay the recognition of all
or a portion of the related arrangement. A delay in the
recognition of revenue may cause fluctuations in our financial
results and may adversely affect our operating margins.
Our
business could be materially and adversely affected as a result
of a natural disaster, terrorist acts or other catastrophic
events.
We depend on the ability of our personnel, raw materials,
equipment and products to move reasonably unimpeded around the
world. Any political, military, world health or other issue that
hinders this movement or restricts the import or export of
materials could lead to significant business disruptions.
Furthermore, any strike, economic failure or other material
disruption caused by fire, floods, hurricanes, power loss, power
shortages, telecommunications failures, break-ins and similar
events could also adversely affect our ability to conduct
business. If such disruptions result in cancellations of
customer orders or contribute to a general decrease in economic
activity or corporate spending on information technology, or
directly impact our marketing, manufacturing, financial and
logistics functions, our results of operations and financial
condition could be materially adversely affected. In addition,
our headquarters are located in Northern California, an area
susceptible to earthquakes. If any significant disaster were to
occur, our ability to operate our business could be impaired.
We
depend on attracting and retaining qualified technical and sales
personnel. If we are unable to attract and retain such
personnel, our operating results could be materially and
adversely impacted.
Our continued success depends, in part, on our ability to
identify, attract, motivate and retain qualified technical and
sales personnel. Because our future success is dependent on our
ability to continue to enhance and introduce new products, we
are particularly dependent on our ability to identify, attract,
motivate and retain qualified engineers with the requisite
education, background and industry experience. Competition for
qualified
29
engineers, particularly in Silicon Valley, can be intense. The
loss of the services of a significant number of our engineers or
salespeople could be disruptive to our development efforts or
business relationships and could materially and adversely affect
our operating results.
Undetected
software errors, hardware errors, or failures found in new
products may result in loss of or delay in market acceptance of
our products, which could increase our costs and reduce our
revenues. Product quality problems could lead to reduced
revenue, gross margins and operating results.
Our products may contain undetected software errors, hardware
errors or failures when first introduced or as new versions are
released. Despite testing by us and by current and potential
customers, errors may not be found in new products until after
commencement of commercial shipments, resulting in loss of or
delay in market acceptance, which could materially and adversely
affect our operating results.
If we fail to remedy a product defect, we may experience a
failure of a product line, temporary or permanent withdrawal
from a product or market, damage to our reputation, inventory
costs or product reengineering expenses, any of which could have
a material impact on our revenue, gross margins and operating
results.
In addition, we may be subject to losses that may result from or
are alleged to result from defects in our products, which could
subject us to claims for damages, including consequential
damages. Based on our historical experience, we believe that the
risk of exposure to product liability claims is low. However,
should we experience increased exposure to product liability
claims, our business could be adversely impacted.
We are
exposed to various risks related to legal proceedings or claims
and protection of intellectual property rights, which could
adversely affect our operating results.
We are a party to lawsuits in the normal course of our business,
including our ongoing litigation with Sun Microsystems.
Litigation can be expensive, lengthy and disruptive to normal
business operations. Moreover, the results of complex legal
proceedings are difficult to predict. An unfavorable resolution
of a particular lawsuit could have a material adverse effect on
our business, operating results, or financial condition.
If we are unable to protect our intellectual property, we may be
subject to increased competition that could materially and
adversely affect our operating results. Our success depends
significantly upon our proprietary technology. We rely on a
combination of copyright and trademark laws, trade secrets,
confidentiality procedures, contractual provisions, and patents
to protect our proprietary rights. We seek to protect our
software, documentation and other written materials under trade
secret, copyright and patent laws, which afford only limited
protection. Some of our U.S. trademarks are registered
internationally as well. We will continue to evaluate the
registration of additional trademarks as appropriate. We
generally enter into confidentiality agreements with our
employees and with our resellers, strategic partners and
customers. We currently have multiple U.S. and
international patent applications pending and multiple
U.S. patents issued. The pending applications may not be
approved, and our existing and future patents may be challenged.
If such challenges are brought, the patents may be invalidated.
We may not be able to develop proprietary products or
technologies that are patentable, or where any issued patent
will provide us with any competitive advantages or will not be
challenged by third parties. Further, the patents of others may
materially and adversely affect our ability to do business. In
addition, a failure to obtain and defend our trademark
registrations may impede our marketing and branding efforts and
competitive position.
Litigation may be necessary to protect our proprietary
technology. Any such litigation may be time consuming and
costly. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products
or obtain and use information that we regard as proprietary. In
addition, the laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the
United States. Our means of protecting our proprietary rights
may not be adequate or our competitors may independently develop
similar technology, duplicate our products, or design around
patents issued to us or other intellectual property rights of
ours.
We are subject to intellectual property infringement claims. We
may, from time to time, receive claims that we are infringing
third parties intellectual property rights. Third parties
may in the future claim infringement by us with respect to
current or future products, patents, trademarks or other
proprietary rights. We expect that companies in the network
storage market will increasingly be subject to infringement
claims as the number of products and
30
competitors in our industry segment grows and the functionality
of products in different industry segments overlaps. Any such
claims could be time consuming, result in costly litigation,
cause product shipment delays, require us to redesign our
products or enter into royalty or licensing agreements, any of
which could materially and adversely affect our operating
results. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to us or at all.
We are
continually seeking ways to make our cost structure more
efficient, including moving activities from higher- to
lower-cost owned locations, as well as outsourcing certain
business process functions. Problems with the execution of these
changes could have an adverse effect on our business or results
of operations.
We continuously seek to make our cost structure more efficient.
We are focused on increasing workforce flexibility and
scalability, and improving overall competitiveness by leveraging
our global capabilities, as well as external talent and skills
worldwide. For example, certain engineering activities and
projects that were formally performed in the U.S. have been
moved to lower cost international locations. The challenges
involved with these initiatives include executing business
functions in accordance with local laws and other obligations
while maintaining adequate standards, controls and procedures.
In addition, we will rely on partners or third party service
providers for the provision of certain business process
functions in IT and accounting, and as a result, we may incur
increased business continuity risks. For example, we may no
longer be able to exercise control over some aspects of the
future development, support or maintenance of outsourced
operations and processes, including the internal controls
associated with those outsourced business operations and
processes, which could adversely affect our business. If we are
unable to effectively utilize or integrate and interoperate with
external resources or if our partners or third party service
providers experience business difficulties or are unable to
provide business process services as anticipated, we may need to
seek alternative service providers or resume providing these
business processes internally, which could be costly and time
consuming and have a material adverse effect on our operating
results.
Our
business could be materially adversely affected by changes in
regulations or standards regarding energy efficiency of our
products.
We continually seek ways to increase the energy efficiency of
our products. Recent analyses have estimated the amount of
global carbon emissions that are due to information technology
products. As a result, governmental and non-governmental
organizations have turned their attention to development of
regulations and standards to drive technological improvements
and reduce such amount of carbon emissions. There is a risk that
the rush to development of these standards will not fully
address the complexity of the technology developed by the IT
industry or will favor certain technological approaches.
Depending on the regulations or standards that are ultimately
adopted, compliance could adversely affect our business,
financial condition or operating results.
Our
business is subject to increasingly complex corporate
governance, public disclosure, accounting and tax requirements
that have increased both our costs and the risk of
noncompliance.
Because our common stock is publicly traded, we are subject to
certain rules and regulations of federal, state and financial
market exchange entities charged with the protection of
investors and the oversight of companies whose securities are
publicly traded. These entities, including the Public Company
Accounting Oversight Board, the SEC, and NASDAQ, have
implemented requirements and regulations and continue developing
additional regulations and requirements in response to corporate
scandals and laws enacted by Congress, most notably the
Sarbanes-Oxley Act of 2002. Our efforts to comply with these
regulations have resulted in, and are likely to continue
resulting in, increased general and administrative expenses and
diversion of management time and attention from
revenue-generating activities to compliance activities.
We completed our evaluation of our internal controls over
financial reporting for the fiscal year ended April 24,
2009 as required by Section 404 of the Sarbanes-Oxley Act
of 2002. Although our assessment, testing and evaluation
resulted in our conclusion that as of April 24, 2009, our
internal controls over financial reporting were effective, we
cannot predict the outcome of our testing in future periods. If
our internal controls are ineffective in future periods, our
business and reputation could be harmed. We may incur additional
expenses and commitment of
31
managements time in connection with further evaluations,
either of which could materially increase our operating expenses
and accordingly reduce our operating results.
Because new and modified laws, regulations, and standards are
subject to varying interpretations in many cases due to their
lack of specificity, their application in practice may evolve
over time as new guidance is provided by regulatory and
governing bodies. This evolution may result in continuing
uncertainty regarding compliance matters and additional costs
necessitated by ongoing revisions to our disclosure and
governance practices.
Changes
in financial accounting standards may cause adverse unexpected
fluctuations and affect our reported results of
operations.
A change in accounting standards or practices and varying
interpretations of existing accounting pronouncements, such as
the increased use of fair value measures and the potential
requirement that U.S. registrants prepare financial
statements in accordance with International Financial Reporting
Standards (IFRS), could have a significant effect on our
reported financial results or the way we conduct our business.
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Item 1B.
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Unresolved
Staff Comments
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None.
Our headquarters site for corporate general administration,
sales and marketing, research and development, global services,
and operations is located in Sunnyvale, California. We own
approximately 933,484 square feet of facilities at our
Sunnyvale headquarters, of which we occupy approximately
737,157 square feet. In addition, we own
646,123 square feet of facilities in Research Triangle Park
(RTP) , North Carolina, of which we occupy approximately
490,131 square feet, that is being used for research and
development, and global support.
In addition, we have commitments related to various lease
arrangements with BNP Paribas LLC (BNP) for
approximately 559,002 square feet of facilities at our
headquarters in Sunnyvale, California, of which we occupy
approximately 274,398 square feet (as further described
below under Contractual Cash Obligations and Other
Commercial Commitments in Item 7 and Note 15
under Item 8).
We lease other sales offices and research and development
facilities throughout the U.S. and internationally. We
expect that our existing facilities and those being developed in
Sunnyvale, California; RTP, North Carolina; and worldwide are
adequate for our requirements over at least the next two years
and that additional space will be available as needed.
See additional discussion regarding properties in
Note 15 under Item 8. Financial Statements and
Supplementary Data Notes to Consolidated Financial
Statements and Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
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Item 3.
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Legal
Proceedings
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On September 5, 2007, we filed a patent infringement
lawsuit in the Eastern District of Texas seeking compensatory
damages and a permanent injunction against Sun Microsystems. On
October 25, 2007, Sun Microsystems filed a counter
claim against us in the Eastern District of Texas seeking
compensatory damages and a permanent injunction. On
October 29, 2007, Sun filed a second lawsuit against us in
the Northern District of California asserting additional patents
against us. The Texas court granted a joint motion to transfer
the Texas lawsuit to the Northern District of California on
November 26, 2007. On March 26, 2008, Sun filed a
third lawsuit in federal court that extends the patent
infringement charges to storage management technology we
acquired in January 2008. The three lawsuits are currently in
the discovery phase and no trial date has been set, so we are
unable at this time to determine the likely outcome of these
various patent litigations. Since we are unable to reasonably
estimate the amount or range of any potential settlement, no
accrual has been recorded as of April 24, 2009.
In April 2009, we entered into a settlement agreement with the
United States of America, acting through the United States
Department of Justice (DOJ) and on behalf of the
General Services Administration (the GSA), under
which we agreed to pay the United States $128.0 million,
plus interest of $0.7 million, related to a dispute
regarding our discount practices and compliance with the price
reduction clause provisions of GSA contracts between August 1997
and February 2005 in consideration for the release of NetApp by
the DOJ and GSA with
32
respect to the claims alleged in the investigation as set forth
in the settlement agreement. The agreement reflects neither an
admission nor denial by us of any of the claims alleged by the
DOJ and represents a compromise to avoid continued litigation
and associated risks. We made the settlement payment on
April 27, 2009. We are currently in discussions with the
U.S. government to demonstrate that we have implemented
processes and procedures to ensure that we comply with federal
contracting rules.
On June 12, 2009, a purported class action lawsuit was
filed on behalf of Data Domain stockholders in the Court of
Chancery of the State of Delaware. The complaint names as
defendants the Data Domain directors, and NetApp and its merger
subs. The lawsuit alleges breach of fiduciary duty by the Data
Domain board and aiding and abetting that breach by NetApp. The
complaint seeks injunctive relief and damages. We believe that
the claims against it are without merit.
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Item 4.
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Submissions
of Matters to a Vote of Security Holders
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At a special meeting of stockholders held on April 21,
2009, the stockholders of the Company approved (i) a
one-time option exchange program pursuant to which employees of
the Company (excluding the Companys executive officers and
directors) who hold certain options to purchase shares of the
Companys common stock (such options, eligible
options) are being given the opportunity to exchange such
eligible options for restricted stock units and
(ii) certain amendments to the Companys 1999 Stock
Option Plan and other equity plans to facilitate the option
exchange program. The table below shows the number of votes cast
for and against such proposal and the number of votes withheld.
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Voted For
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Voted Against
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Abstained
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129,568,703
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127,715,080
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75,235
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The option exchange program commenced on May 22, 2009 and
will expire on June 19, 2009, unless extended by the
Company. For more information, please see our definitive proxy
statement on Schedule 14A, as filed with the SEC on
March 23, 2009, and our tender offer statement on
Schedule TO, as filed with the SEC on May 22, 2009, as
may be amended from time to time.
33
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock commenced trading on the NASDAQ Global Select
Market (and its predecessor, the Nasdaq National Market) on
November 21, 1995, and is traded under the symbol
NTAP. As of June 12, 2009 there were
952 holders of record of the common stock. The closing
price for our common stock on June 12, 2009 was $20.14. The
following table sets forth for the periods indicated the high
and low closing sale prices for our common stock as reported on
the NASDAQ Global Select Market.
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Fiscal 2009
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Fiscal 2008
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High
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Low
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High
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Low
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First Quarter
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$
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27.31
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$
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21.66
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|
|
$
|
39.05
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$
|
28.68
|
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Second Quarter
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26.42
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12.20
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|
32.04
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22.97
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Third Quarter
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15.32
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10.39
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31.49
|
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20.38
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Fourth Quarter
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18.84
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12.52
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23.78
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19.49
|
|
The following graph shows a five-year comparison of cumulative
total return on our common stock, the NASDAQ Composite Index and
the S&P 500 Information Technology Index from
April 30, 2004 through April 24, 2009. The past
performance of our common stock is no indication of future
performance.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among NetApp, Inc., The NASDAQ Composite Index
And The S&P Information Technology Index
* $100 invested on
4/30/04 in
stock or index, including reinvestment of dividends.
Fiscal year ending April 30.
Copyright©
2009 S&P, a division of The McGraw-Hill Companies Inc. All
rights reserved.
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* |
|
$100 invested on April 30, 2004 in stock or index-including
reinvestment of dividends. Fiscal year ending April 30. |
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4/04
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4/05
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4/06
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|
|
4/07
|
|
|
4/08
|
|
|
4/09
|
NetApp., Inc.
|
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100.00
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|
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143.31
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|
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199.19
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199.95
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130.04
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98.33
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|
NASDAQ Composite
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100.00
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100.90
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|
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124.20
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136.38
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130.63
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91.41
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|
S&P Information Technology
|
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100.00
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98.25
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114.80
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126.21
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127.47
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93.45
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34
We believe that a number of factors may cause the market price
of our common stock to fluctuate significantly. See
Item 1A. Business Risk Factors.
Dividend
Policy
We have never paid cash dividends on our capital stock. We
currently anticipate retaining all available funds, if any, to
finance internal growth and product development as well as other
possible management initiatives, including stock repurchases and
acquisitions. Payment of dividends in the future will depend
upon our earnings and financial condition and such other factors
as the directors may consider or deem appropriate at the time.
Securities
Authorized for Issuance under Equity Compensation
Plans
Information regarding securities authorized for issuance under
equity compensation plans is incorporated by reference from our
Proxy Statement for the 2009 Annual Meeting of Stockholders.
Unregistered
Securities Sold in Fiscal 2009
We did not sell any unregistered securities during fiscal 2009.
Issuer
Purchases of Equity Securities
The following table provides information as of April 24,
2009 with respect to the shares of common stock repurchased by
NetApp during the fourth quarter of fiscal 2009:
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|
Total Number of
|
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Maximum Dollar
|
|
|
|
|
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|
Shares
|
|
|
Value of
|
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|
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Purchased as
|
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|
Shares
|
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|
|
|
|
|
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|
Part of
|
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That May Yet
|
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Total Number of
|
|
|
Average
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Publicly
|
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|
be Purchased
|
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Shares
|
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Price Paid
|
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Announced
|
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Under
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Period
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Purchased(1)
|
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per Share
|
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Program(2)
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the Program(2)
|
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(Shares in thousands)
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(Shares in thousands)
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(Dollars in millions)
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Period #1
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(January 24, 2009 to February 20, 2009)
|
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37
|
|
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$
|
16.22
|
|
|
|
|
|
|
$
|
1,096
|
|
Period #2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(February 21, 2009 to March 20, 2009)
|
|
|
8
|
|
|
$
|
14.82
|
|
|
|
|
|
|
$
|
1,096
|
|
Period #3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(March 21, 2009 to April 24, 2009)
|
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|
11
|
|
|
$
|
17.26
|
|
|
|
|
|
|
$
|
1,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Total
|
|
|
56
|
|
|
$
|
16.24
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
(1) |
|
Consists of shares repurchased to satisfy tax withholding
obligations that arose on the vesting of shares of restricted
stock units. |
|
(2) |
|
On May 13, 2003, we announced that our Board of Directors
had authorized a stock repurchase program. As of April 24,
2009, our Board of Directors had authorized the repurchase of up
to $4,023,638,730 of common stock under this program. On
August 13, 2008, our Board of Directors approved an
increase of $1,000,000 to the stock repurchase program. During
fiscal 2009, we repurchased 16,960 shares of our common
stock at a weighted-average price of $23.58, for an aggregate
purchase price of $399,981,855. As of April 24, 2009, we
had repurchased 104,325,286 shares of our common stock at a
weighted-average price of $28.06 per share for an aggregate
purchase price of $2,927,376,373 since inception of the stock
repurchase program, and the remaining authorized amount for
stock repurchases under this program was $1,096,262,357 with no
termination date. |
35
|
|
Item 6.
|
Selected
Financial Data
|
The data set forth below are qualified in their entirety by
reference to, and should be read in conjunction with,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated
Financial Statements and related notes thereto included in this
Annual Report on
Form 10-K.
Five
Fiscal Years Ended April 24, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per-share amounts)
|
|
|
Net revenues(1)
|
|
$
|
3,406,393
|
|
|
$
|
3,303,167
|
|
|
$
|
2,804,282
|
|
|
$
|
2,066,456
|
|
|
$
|
1,598,131
|
|
Total cost of revenues
|
|
|
1,416,478
|
|
|
|
1,289,791
|
|
|
|
1,099,782
|
|
|
|
809,995
|
|
|
|
623,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,989,915
|
|
|
|
2,013,376
|
|
|
|
1,704,500
|
|
|
|
1,256,461
|
|
|
|
975,048
|
|
Total operating expenses
|
|
|
1,942,740
|
|
|
|
1,699,776
|
|
|
|
1,403,258
|
|
|
|
948,170
|
|
|
|
721,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
47,175
|
|
|
|
313,600
|
|
|
|
301,242
|
|
|
|
308,291
|
|
|
|
253,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(1)
|
|
$
|
86,545
|
|
|
$
|
309,738
|
|
|
$
|
297,735
|
|
|
$
|
266,452
|
|
|
$
|
225,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, basic
|
|
$
|
0.26
|
|
|
$
|
0.88
|
|
|
$
|
0.80
|
|
|
$
|
0.72
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, diluted
|
|
$
|
0.26
|
|
|
$
|
0.86
|
|
|
$
|
0.77
|
|
|
$
|
0.69
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in basic net income per share calculation
|
|
|
330,279
|
|
|
|
351,676
|
|
|
|
371,204
|
|
|
|
371,061
|
|
|
|
361,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in diluted net income per share calculation
|
|
|
334,575
|
|
|
|
361,090
|
|
|
|
388,454
|
|
|
|
388,381
|
|
|
|
380,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and short-term investments
|
|
$
|
2,604,206
|
|
|
$
|
1,164,390
|
|
|
$
|
1,308,781
|
|
|
$
|
1,322,892
|
|
|
$
|
1,169,965
|
|
Working capital
|
|
|
1,759,459
|
|
|
|
653,331
|
|
|
|
1,053,256
|
|
|
|
1,116,047
|
|
|
|
1,055,700
|
|
Total assets
|
|
|
5,472,819
|
|
|
|
4,070,988
|
|
|
|
3,658,478
|
|
|
|
3,260,965
|
|
|
|
2,372,647
|
|
Short-term debt
|
|
|
|
|
|
|
|
|
|
|
85,110
|
|
|
|
166,211
|
|
|
|
|
|
Long-term debt and other
|
|
|
1,429,499
|
|
|
|
318,658
|
|
|
|
9,487
|
|
|
|
138,200
|
|
|
|
4,474
|
|
Total stockholders equity
|
|
|
1,662,346
|
|
|
|
1,700,339
|
|
|
|
1,989,021
|
|
|
|
1,923,453
|
|
|
|
1,660,804
|
|
|
|
|
(1) |
|
Net revenues and net income for fiscal 2009 included a GSA
settlement of $128,715. Net income for fiscal 2006 included an
income tax expense of $22,500 related to the American Jobs
Creation Act and the repatriation of foreign subsidiary earnings
back to the U.S. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion of our financial condition and results
of operations should be read together with the financial
statements and the related notes set forth under
Item 8. Financial Statements and Supplementary
Data. The following discussion also contains trend
information and other forward looking statements that involve a
number of risks and uncertainties. The Risk Factors set forth in
Item 1. Business are hereby incorporated into
the discussion by reference.
Overview
Fiscal 2009 was characterized initially by a slowdown in the
macroeconomic environment with continued deterioration in global
economic conditions as the year progressed. Customers were faced
with data volumes that continued to grow and shrinking or frozen
capital budgets. As a result, customers postponed many IT
projects and looked for solutions that provided a rapid return
on their investment typically less than twelve
months. Server virtualization remained one of the most often
funded IT projects, due to the cost savings it produces. NetApp
has been a direct beneficiary of the trend towards server
virtualization because of the unique storage efficiency features
36
we provide along with our ability to virtualize the storage
infrastructure. With our software intensive solutions, we offer
customers greater functionality, easier manageability and a
smaller hardware footprint, helping them to meet their business
objectives with less physical storage and a lower total cost of
ownership. As a result, NetApp gained a significant number of
new customer accounts in fiscal 2009.
However, revenue from new accounts was not enough to offset the
slowdown in spending from many of our largest accounts, and our
overall revenue growth slowed relative to previous years. Our
largest accounts contributed to a significant level of hardware
service contract and software entitlement and maintenance
contract renewals, demonstrating continued commitment to NetApp
technology in their data centers while at the same time delaying
capital expenditures amidst an uncertain economic environment.
Net revenues increased by 3.1% to $3,406.4 million in
fiscal 2009, from $3,303.2 million in fiscal 2008. The
increase in our net revenues for fiscal 2009 was due to
increases in software entitlements and maintenance revenues as
well as service revenues, partially offset by decreases in
product revenues and a negative impact from a GSA settlement.
The $128.7 million GSA settlement was related to a dispute
regarding our discount practices and compliance with the price
reduction clause provisions of a GSA contract between August
1997 and February 2005.
NetApp implemented comprehensive expense reduction programs in
fiscal 2009 as the global macroeconomic conditions worsened. We
decided to cease development and availability of our
SnapMirror®
for Open Systems (SMOS) product. We also implemented
a worldwide restructuring program which included a reduction in
workforce, the closing or downsizing of certain facilities, and
the establishment of a plan to outsource certain internal
activities. As a result of these programs, we recognized total
restructuring charges of $51.5 million, including the
severance costs related to the elimination of approximately 450
regular positions, contract cancellation charges, write offs of
intangible and fixed assets and costs association with the
closure of some of our facilities; as well as $2.9 million
of other charges to support our restructuring initiatives. Our
actions were intended to better align our cost structure with
expected revenues, as well as to reallocate resources into areas
of our business with more growth potential.
As a result of the financial crisis during fiscal 2009, we
recorded an
other-than-temporary
impairment charge of $29.6 million on our investments which
resulted from direct and indirect exposure to Lehman Brothers
Holdings Inc. securities and
other-than-temporary
declines in the value of our auction rate securities and
investments in privately held companies. The volatility in the
financial markets and economic uncertainty has had and may
continue to have an adverse impact on our business and financial
condition in ways that we currently cannot predict.
Despite the current challenging economic environment, we believe
there are fundamental aspects of our business that will allow us
to succeed over the long term. We believe that our products and
services provide customers with valuable storage solutions, even
in a more constrained spending environment. We also believe that
our investments in branding, awareness and new customer
acquisition will lead to an increase in our market share once
the economy begins to recover. However, continued revenue growth
depends on the introduction and market acceptance of new
products and solutions and continued market demand for our
products. We will continue our focus on expense management while
improving our resource allocation to fund investment in
strategic initiatives. Our actions are designed to preserve our
revenue-generating potential, increase our focus on key growth
opportunities, and at the same time improve operating leverage
over the long term.
Subsequent
Event
On May 20, 2009, we entered into an agreement to acquire
Data Domain, a leading provider of storage solutions for backup
and archive applications based on deduplication technology. Data
Domain deduplication storage systems are designed to deliver
reliable, efficient and cost-effective solutions that enable
enterprises of all sizes to manage, retain and protect their
data. The agreement was subsequently amended on June 3,
2009. Pursuant to the terms of the definitive merger agreement
relating to the merger, each share of Data Domain common stock
issued and outstanding immediately prior to the completion of
merger will be cancelled and converted into the right to
receive, subject to adjustment, a combination of $16.45 in cash
and a certain number of shares of our common stock, calculated
based on an exchange ratio.
37
The merger, if completed, may result in material but
indeterminable increases in our revenues, operating results,
financial position and cash flows. While we anticipate cost
synergies associated with combining facilities, IT
infrastructure, and certain functions such as finance, human
resources and administrative services with those of Data Domain,
differences between our and Data Domains operations could
cause unforeseen delays in the integration process, result in
lower savings than originally anticipated, or both, which could
adversely affect NetApps business and operating results.
Critical
Accounting Estimates and Policies
Our discussion and analysis of financial condition and results
of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of such statements requires us to make
estimates and assumptions that affect the reported amounts of
revenues and expenses during the reporting period and the
reported amounts of assets and liabilities as of the date of the
financial statements. Our estimates are based on historical
experience and other assumptions that we consider to be
appropriate in the circumstances. However, actual future results
may vary from our estimates.
We believe that the following accounting policies are
critical as defined by the Securities and Exchange
Commission, in that they are both highly important to the
portrayal of our financial condition and results and require
difficult management judgments and assumptions about matters
that are inherently uncertain. We also have other important
policies, including those related to derivative instruments and
concentration of credit risk. However, these policies do not
meet the definition of critical accounting policies because they
do not generally require us to make estimates or judgments that
are difficult or subjective. These policies are discussed in
Note 2 to the consolidated financial statements
accompanying this Annual Report on
Form 10-K.
We believe the accounting policies described below are the ones
that most frequently require us to make estimates and judgments
and therefore are critical to the understanding of our results
of operations:
|
|
|
|
|
Revenue recognition and allowances
|
|
|
|
Valuation of goodwill and intangibles
|
|
|
|
Accounting for income taxes
|
|
|
|
Inventory write-downs
|
|
|
|
Restructuring accruals
|
|
|
|
Impairment losses on investments
|
|
|
|
Fair value measurements
|
|
|
|
Accounting for stock-based compensation
|
|
|
|
Loss contingencies
|
Revenue
Recognition and Allowances
We apply the provisions of Statement of Position
(SOP)
No. 97-2,
Software Revenue Recognition
(SOP No. 97-2),
and related interpretations to our product sales, both hardware
and software, because our software is essential to the
performance of our hardware. We recognize revenue when:
|
|
|
|
|
Persuasive evidence of an arrangement
exists: It is our customary practice to have a
purchase order
and/or
contract prior to recognizing revenue on an arrangement from our
end users, customers, value-added resellers, or distributors.
|
|
|
|
Delivery has occurred: Our product is
physically delivered to our customers, generally with standard
transfer terms such as FOB origin. We typically do not allow for
restocking rights with any of our value-added resellers or
distributors. Products shipped with acceptance criteria or
return rights are not recognized
|
38
|
|
|
|
|
as revenue until all criteria are achieved. If undelivered
products or services exist that are essential to the
functionality of the delivered product in an arrangement,
delivery is not considered to have occurred.
|
|
|
|
|
|
The fee is fixed or determinable: Arrangements
with payment terms extending beyond our standard terms,
conditions and practices are not considered to be fixed or
determinable. Revenue from such arrangements is recognized as
the fees become due and payable. We typically do not allow for
price-protection rights with any of our value-added resellers or
distributors.
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Collection is probable: Probability of
collection is assessed on a
customer-by-customer
basis. Customers are subjected to a credit review process that
evaluates the customers financial position and ultimately
their ability to pay. If it is determined at the outset of an
arrangement that collection is not probable based upon our
review process, revenue is recognized upon cash receipt.
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Our multiple element arrangements include our systems and one or
more of the following undelivered software-related elements:
software entitlements and maintenance, premium hardware
maintenance, and storage review services. Our software
entitlements and maintenance entitle our customers to receive
unspecified product upgrades and enhancements on a
when-and-if-available
basis, bug fixes, and patch releases. Premium hardware
maintenance services include contracts for technical support and
minimum response times. Revenues from software entitlements and
maintenance, premium hardware maintenance services and storage
review services are recognized ratably over the contractual
term, generally from one to three years. We also offer extended
service contracts (which extend our standard parts warranty and
may include premium hardware maintenance) at the end of the
warranty term; revenues from these contracts are recognized
ratably over the contract term. We typically sell technical
consulting services separately from any of our other revenue
elements, either on a time and materials basis or for fixed
price standard projects; we recognize revenue for these services
as they are performed. Revenue from hardware installation
services is recognized at the time of delivery and any remaining
costs are accrued, as the remaining undelivered services are
considered to be inconsequential and perfunctory. For
arrangements with multiple elements, we recognize as revenue the
difference between the total arrangement price and the greater
of fair value or stated price for any undelivered elements
(the residual method).
For our undelivered software-related elements, we apply the
provisions of
SOP No. 97-2
and determine fair value of these undelivered elements based on
vendor-specific objective evidence (VSOE), which for
us consists of the prices charged when these services are sold
separately either alone, in the case of software entitlements
and maintenance, or as a bundled element which always includes
software entitlements and maintenance and premium hardware
maintenance, and may also include storage review services. To
determine the fair value of these elements, we analyze both the
selling prices when elements are sold separately as well as the
concentrations of those prices. We believe those concentrations
have been sufficient to enable us to establish VSOE of fair
value for the undelivered elements. If VSOE cannot be obtained
to establish fair value of the undelivered elements,
paragraph 12 of
SOP No. 97-2
would require that revenue from the entire arrangement be
initially deferred and recognized ratably over the period these
elements are delivered.
For income statement presentation purposes, once fair value has
been determined for our undelivered bundled elements, we
allocate revenue first to software entitlements and maintenance,
based on VSOE of its fair value with the remainder allocated to
other service revenues.
We record reductions to revenue for estimated sales returns at
the time of shipment. Sales returns are estimated based on
historical sales returns, current trends, and our expectations
regarding future experience. We monitor and analyze the accuracy
of sales returns estimates by reviewing actual returns and
adjust them for future expectations to determine the adequacy of
our current and future reserve needs. Our reserve levels have
been sufficient to cover actual returns and have not required
material changes in subsequent periods. While we currently have
no expectations for significant changes to these reserves, if
actual future returns and allowances differ from past
experience, additional allowances may be required.
We also maintain a separate allowance for doubtful accounts for
estimated losses based on our assessment of the collectibility
of specific customer accounts and the aging of the accounts
receivable. We analyze accounts receivable and historical bad
debts, customer concentrations, customer solvency, current
economic and geographic trends, and changes in customer payment
terms and practices when evaluating the adequacy of our current
and
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future allowance. In circumstances where we are aware of a
specific customers inability to meet its financial
obligations to us, a specific allowance for bad debt is
estimated and recorded, which reduces the recognized receivable
to the estimated amount we believe will ultimately be collected.
We monitor and analyze the accuracy of allowance for doubtful
accounts estimate by reviewing past collectibility and adjust it
for future expectations to determine the adequacy of our current
and future allowance. Our reserve levels have generally been
sufficient to cover credit losses. Our allowance for doubtful
accounts as of April 24, 2009 was $3.1 million,
compared to $2.4 million as of April 25, 2008. If the
financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments,
additional allowances may be required.
Valuation
of Goodwill and Intangibles
Identifiable intangible assets are amortized over time, while
in-process research and development is recorded as a charge on
the date of acquisition and goodwill is capitalized, subject to
periodic review for impairment. Accordingly, the allocation of
the acquisition cost to identifiable intangible assets has a
significant impact on our future operating results. The
allocation process requires extensive use of estimates and
assumptions, including estimates of future cash flows expected
to be generated by the acquired assets. Should conditions be
different than managements current assessment, material
write-downs of the fair value of intangible assets may be
required. We periodically review the estimated remaining useful
lives of our intangible assets. A reduction in the estimate of
remaining useful life could result in accelerated amortization
expense or a write-down in future periods. As such, any future
write-downs of these assets would adversely affect our operating
results.
Under our accounting policy we perform an annual review of the
valuation of goodwill in the fourth quarter of each fiscal year,
or more often if indicators of impairment exist. Triggering
events for impairment reviews may be indicators such as adverse
industry or economic trends, restructuring actions, lower
projections of profitability, or a sustained decline in our
market capitalization. Evaluations of possible impairment and,
if applicable, adjustments to carrying values require us to
estimate, among other factors, future cash flows, useful lives,
and fair market values of our reporting units and assets. When
we conduct our evaluation of goodwill, the fair value of
goodwill is assessed using valuation techniques that require
significant management judgment. Should conditions be different
from managements last assessment, significant write-downs
of goodwill may be required, which would adversely affect our
operating results. In fiscal 2009 we performed such evaluation
and found no impairment of goodwill. As of April 24, 2009,
our assets included $681.0 million in goodwill. See
Note 12, Goodwill and Purchased Intangible
Assets, to our Consolidated Financial Statements.
In fiscal 2009, we increased goodwill by $0.9 million
relating to the tax benefits associated with the subsequent
exercise of previously vested assumed Spinnaker and Onaro
options. During fiscal 2008, we recorded goodwill of
$79.2 million in connection with our Onaro acquisition and
a decrease of goodwill for $0.2 million in connection with
the escrow received from our Topio acquisition in fiscal 2007.
Accounting
for Income Taxes
The determination of our tax provision is subject to judgments
and estimates due to the complexity of the tax law that we are
subject to in several tax jurisdictions. Earnings derived from
our international business are generally taxed at rates that are
lower than U.S. rates, resulting in a lower effective tax
rate than the U.S. statutory tax rate of 35.0%. The ability
to maintain our current effective tax rate is contingent on
existing tax laws in both the United States and the respective
countries in which our international subsidiaries are located.
Future changes in domestic or international tax laws could
affect the continued realization of the tax benefits we are
currently receiving. In addition, a decrease in the percentage
of our total earnings from international business or a change in
the mix of international business among particular tax
jurisdictions could increase our overall effective tax rate.
We account for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes.
SFAS No. 109 requires that deferred tax assets and
liabilities be recognized for the effect of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. SFAS No. 109 also
requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some or all of the
deferred tax asset will not be realized. We have provided a
valuation allowance of $28.0 million as of April 24,
2009,
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compared to $28.6 million as of April 25, 2008 on
certain of our deferred tax assets. The $0.5 million
decrease in valuation allowance in fiscal 2009 was primarily
related to changes in the blended state tax rates. Tax
attributes related to the exercise of employee stock options are
not realized until they result in a reduction of taxes payable.
Pursuant to SFAS No. 123R, we do not include
unrealized stock option attributes as components of our gross
deferred tax assets and corresponding valuation allowance
disclosures. The tax effected amounts of gross unrealized net
operating loss and business tax credit carryforwards, and their
corresponding valuation allowance at April 24, 2009 and
April 25, 2008 are $278.9 million and
$245.1 million, respectively.
On April 28, 2007, we adopted Financial Interpretation
No. 48, Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109
(FIN 48). FIN No. 48 clarifies the
accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with
SFAS No. 109. This interpretation prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. As a
result of the implementation of FIN No. 48, we
recognize the tax liability for uncertain income tax positions
on the income tax return based on the two-step process
prescribed in the interpretation. The first step is to determine
whether it is more likely than not that each income tax position
would be sustained upon audit. The second step is to estimate
and measure the tax benefit as the amount that has a greater
than 50% likelihood of being realized upon ultimate settlement
with the tax authority. Estimating these amounts requires us to
determine the probability of various possible outcomes. We
evaluate these uncertain tax positions on a quarterly basis.
This evaluation is based on the consideration of several
factors, including changes in facts or circumstances, changes in
applicable tax law, settlement of issues under audit, and new
exposures. If we later determine that our exposure is lower or
that the liability is not sufficient to cover our revised
expectations, we adjust the liability and effect a related
change in our tax provision during the period in which we make
such determination.
We are currently undergoing federal income tax audits in the
United States and several foreign tax jurisdictions. The rights
to some of our intellectual property (IP) are owned
by certain of our foreign subsidiaries, and payments are made
between foreign and U.S. tax jurisdictions relating to the
use of this IP in a qualified cost sharing arrangement.
Recently, several other U.S. companies have had their
foreign IP arrangements challenged as part of IRS examinations,
which have resulted in material proposed assessments
and/or
pending litigation. Effective September 27, 2007, the
IRSs Large and Mid-Sized Business Division
(LMSB) released a Coordinated Issues Paper
(CIP) with respect to qualified cost sharing
arrangements (CSAs). Specifically, this CIP provides
guidance to IRS personnel concerning methods that may be applied
to evaluate the arms length charge (buy-in payment) for
internally developed (pre-existing) as well as
acquisition-related intangible property that is made available
to a qualified CSA. During fiscal year 2009 we received Notices
of Proposed Adjustments from the IRS in connection with a
federal income tax audit of our fiscal 2003 and 2004 tax year
tax returns. We recently filed a protest with the IRS in
response to the Notices of Proposed Adjustments. The Notices of
Proposed Adjustments focus primarily on issues of the timing and
the amount of income recognized and deductions taken during the
audit years and on the level of cost allocations made to foreign
operations during the audit years. If upon the conclusion of
these audits the ultimate determination of our taxes owed in any
of these tax jurisdictions is for an amount in excess of the tax
provision we have recorded in the applicable period or
subsequently reserved for, our overall tax expense and effective
tax rate may be adversely impacted in the period of adjustment.
Effective March 20, 2008, the IRSs LMSB also released
a CIP with respect to the cost sharing of stock based
compensation. Specifically, this CIP provides guidance to IRS
personnel concerning stock based compensation related to a CSA
by providing that the parties to a CSA will share all costs
related to intangible development of the covered intangibles,
including but not limited to, salaries, bonuses, and other
payroll costs and benefits. Taxpayers should include all forms
of compensation in the cost pool, including those costs related
to stock-based compensation. On May 27, 2009, the United
States Court of Appeals for the Ninth Circuit held in Xilinx
Inc. v. Commissioner that stock-based compensation must be
included in the research and development cost base of companies
that have entered into a CSA and must, therefore, be allocated
among the participants based on anticipated benefits. The
Courts reversal of the prior U.S. Tax Court decision
will impact our estimate of tax benefits that were required to
be recognized under FIN 48. We are evaluating the impact of
the Xilinx case on our provision for income taxes for the first
quarter of fiscal 2010, but expect any final adjustment will be
limited to a reduction of our unrecognized tax attributes. Our
international operations currently benefit from a tax ruling
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concluded in the Netherlands, which expires in 2010. If we are
unable to negotiate a similar tax ruling upon expiration of the
current ruling, our effective tax rate could increase and our
operating results could be adversely affected. Our effective tax
rate could also be adversely affected by different and evolving
interpretations of existing law or regulations, which in turn
would negatively impact our operating and financial results.
The Obama administration recently announced several proposals to
reform United States tax rules, including proposals that may
result in a reduction or elimination of the deferral of United
States income tax on our future unrepatriated earnings. Absent a
restructuring of some legal entities and their functionality,
the changes as currently proposed would result in some of the
future unrepatriated earnings being taxed at the United States
federal income tax rate.
Inventory
Write-Downs
Our inventory balance was $61.1 million as of
April 24, 2009, compared to $70.2 million as of
April 25, 2008. Inventories are stated at the lower of cost
or market (which approximates actual cost on a
first-in,
first-out basis). We perform an in-depth excess and obsolete
analysis of our inventory based upon assumptions about future
demand and market conditions. We adjust the inventory value
based on estimated excess and obsolete inventories determined
primarily by future demand forecasts. Although we strive for
accuracy in our forecasts of future product demand, any
significant unanticipated changes in demand or technological
developments could have a significant impact on the value of our
inventory and commitments and on our reported results. If actual
market conditions are less favorable than those projected,
additional write-downs and other charges against earnings may be
required. If actual market conditions are more favorable, we may
realize higher gross margins in the period when the written-down
inventory is sold. During the past few years, our inventory
reserves have been sufficient to cover excess and obsolete
exposure and have not required material changes in subsequent
periods.
We are subject to a variety of federal, state, local, and
foreign environmental regulations relating to the use, storage,
discharge, and disposal of hazardous chemicals used in the
manufacture of our products, which may require design changes or
recycling of products we manufacture. We will continue to
monitor our compliance with these regulations, which may require
us to incur higher costs, and adversely impact our operating
results.
Restructuring
Accruals
In fiscal 2009 we recorded restructuring and other charges of
$54.4 million. We recognize a liability for restructuring
costs when the liability is incurred. The restructuring accruals
are based upon management estimates at the time they are
recorded. These estimates can change depending upon changes in
facts and circumstances subsequent to the date the original
liability was recorded. The main components of our restructuring
charges are workforce reduction, intangibles and fixed assets
write-offs and non-cancelable lease costs related to excess
facilities. Severance-related charges are accrued when it is
determined that a liability has been incurred, which is
generally when individuals have been notified of their
termination dates and expected severance payments. We record
contract cancellation costs when contracts are terminated. The
decision to eliminate excess facilities results in charges for
lease termination fees and future commitments to pay lease
charges, net of estimated future sublease income. We recognize
charges for elimination of excess facilities when we have
vacated the premises. Intangible asset write-offs consist of
impairment of acquired intangible assets related to our decision
to cease the development and availability of SMOS. Fixed assets
write-offs primarily consist of equipment and furniture
associated with excess facilities being eliminated, and are
based on an estimate of the amounts and timing of future cash
flows related to the expected future remaining use and ultimate
sale or disposal of the equipment and furniture.
Our estimates involve a number of risks and uncertainties, some
of which are beyond our control, including future real estate
market conditions and our ability to successfully enter into
subleases or lease termination agreements with terms as
favorable as those assumed when arriving at our estimates. We
regularly evaluate a number of factors to determine the
appropriateness and reasonableness of our restructuring
accruals, including the various assumptions noted above. If
actual results differ significantly from our estimates, we may
be required to adjust our restructuring accruals in the future.
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Impairment
Losses on Investments
All of our
available-for-sale
investments and nonmarketable securities are subject to periodic
impairment review. Investments are considered to be impaired
when a decline in fair value is judged to be
other-than-temporary.
This determination requires significant judgment. For publicly
traded investments, impairment is determined based upon the
specific facts and circumstances present at the time, including
factors such as current economic and market conditions, the
credit rating of the securitys issuer, the length of time
an investments fair value has been below our carrying
value, our ability and intent to hold investments to maturity or
for a period of time sufficient to allow for any anticipated
recovery in fair value. If an investments decline in fair
value, caused by factors other than changes in interest rates,
is deemed to be
other-than-temporary,
we reduce its carrying value to its estimated fair value, as
determined based on quoted market prices, liquidation values or
other metrics. For investments in publicly held companies, we
recognize an impairment charge when the decline in the fair
value of our investment is below its cost basis and is judged to
be
other-than-temporary.
The ultimate value realized on these investments in publicly
held companies is subject to market price volatility until they
are sold.
We actively review, along with our investment advisors, current
investment ratings, company specific events, and general
economic conditions in managing our investments and determining
whether there is a significant decline in fair value that is
other-than-temporary.
As of April 24, 2009 and April 25, 2008, our
short-term and long-term investments in marketable securities
have been classified as
available-for-sale
and are carried at fair value.
Available-for-sale
investments with original maturities of greater than three
months at the date of purchases are classified as short-term
investments as these investments generally consist of marketable
securities that are intended to be available to meet current
cash requirements. Currently, all marketable securities held by
us are classified as
available-for-sale
and our entire auction rate securities (ARS) portfolio and our
investment in the Reserve Primary Fund (Primary
Fund) are classified as long-term investments.
Our ARS are securities with long-term nominal maturities which,
in accordance with investment policy guidelines, had credit
ratings of AAA and Aaa at the time of purchase. During the
fourth quarter of fiscal 2008, we reclassified all of our
investments in ARS from short-term investments to long-term
investments as we believed our ability to liquidate these
investments in the next twelve months was uncertain. Based on an
analysis of the fair value and marketability of these
investments, we recorded temporary impairment charges of
approximately $7.0 million during fiscal 2009, partially
offset by $0.3 million in unrealized gains within other
comprehensive income (loss). During fiscal 2009, we recorded an
other-than-temporary
impairment loss of $2.1 million due to a significant
decline in the estimated fair values of certain of our ARS
related to credit quality risk and rating downgrades.
During fiscal 2008 and 2007, recognized gains and losses on
available-for-sale
investments were not material. Management determines the
appropriate classification of debt and equity securities at the
time of purchase and reevaluates the classification at each
reporting date. The fair value of our marketable securities,
including those included in long-term investments, was
$1,228,220 and $543,226 as of April 24, 2009 and
April 25, 2008, respectively.
The valuation models used to estimate the fair value of our ARS
included numerous assumptions such as assessments of the
underlying structure of each security, expected cash flows,
discount rates, credit ratings, workout periods, and overall
capital market liquidity. These assumptions, assessments and the
interpretations of relevant market data are subject to
uncertainties, are difficult to predict and require significant
judgment. The use of different assumptions, applying different
judgments to inherently subjective matters and changes in future
market conditions could result in significantly different
estimates of fair value. There is no assurance as to when the
market for auction rate securities will stabilize. The fair
value of our ARS could change significantly based on market
conditions and continued uncertainties in the credit markets. If
these uncertainties continue or if these securities experience
credit rating downgrades, we may incur additional temporary
impairment related to our auction rate securities portfolio. We
will continue to monitor the fair value of our ARS and relevant
market conditions and will record additional temporary or
other-than-temporary
impairments if future circumstances warrant such charges.
As a result of the bankruptcy filing of Lehman Brothers, which
occurred during fiscal 2009, we recorded an
other-than-temporary
impairment charge of $11.8 million on our corporate bonds
related to investments in Lehman Brothers securities and
approximately $9.3 million on our investments in the
Primary Fund that held Lehman Brothers investments. As of
April 24, 2009, we have an investment in the Primary Fund,
an AAA-rated money market fund at the time of purchase, with a
par value of $60.9 million and an estimated fair value of
$51.6 million, which suspended redemptions in September
2008 and is in the process of liquidating its portfolio of
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investments. The Primary Fund suspended redemptions in September
2008, and on December 3, 2008, it announced a plan for
liquidation and distribution of assets that includes the
establishment of a special reserve to be set aside out of its
assets for pending or threatened claims, as well as anticipated
costs and expenses, including related legal and accounting fees.
On February 26, 2009, the Primary Fund announced a plan to
set aside $3.5 billion of the funds remaining assets
as the special reserve which may be increased or
decreased as further information becomes available. Our pro rata
share of the $3.5 billion special reserve is approximately
$41.5 million. The Primary Fund announced plans to continue
to make periodic distributions, up to the amount of the special
reserve, on a pro-rata basis. The Primary Fund has received an
SEC order providing that the SEC will supervise the distribution
of assets from the Primary Fund. We could realize additional
losses in our holdings of the Primary Fund and may not receive
all or a portion of our remaining balance in the Primary Fund as
a result of market conditions and ongoing litigation against the
fund
To determine the fair value of nonmarketable investments, we use
the most recent information available to us, including new
financings or estimates of current fair value, as well as
through traditional valuation techniques. It is our policy to
review the fair value of these investments on a regular basis to
determine whether the investments in these companies are
other-than-temporarily
impaired. In the case of privately-held companies, this
evaluation is based on information that we request from these
companies. This evaluation includes, but is not limited to,
reviewing company cash position, financing needs and prospects,
earnings or revenue outlook, operational performance, management
or ownership changes and competition. This information is not
subject to the same disclosure regulations as United States
publicly-traded companies, and as such, the basis for these
evaluations is subject to the timing and the accuracy of the
data received from these companies. If we believe the carrying
value of an investment is in excess of fair value, and this
difference is
other-than-temporary,
it is our policy to write down the investment to fair value. The
carrying value of our investments in privately-held companies
were $4.0 million and $11.2 million as of
April 24, 2009 and April 25, 2008, respectively.
During fiscal 2009 and 2008, we recorded $6.3 million and
$1.6 million of impairment charges, respectively, for our
investments in privately-held companies, which were recorded in
net gain (loss) on investments in our consolidated statements of
operations, and adjusted the carrying amount of those
investments to fair value, as we deemed the decline in the value
of these assets to be
other-than-temporary.
Fair
Value Measurements
We adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value
Measurements, effective April 26, 2008 for
financial assets and liabilities that are being measured and
reported at fair value on a recurring basis. Under this
standard, fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability (i.e.,
the exit price) in an orderly transaction between
market participants at the measurement date.
SFAS No. 157 establishes a hierarchy for inputs used
in measuring fair value that minimizes the use of unobservable
inputs by requiring the use of observable market data when
available. Observable inputs are inputs that market participants
would use in pricing the asset or liability based on active
market data. Unobservable inputs are inputs that reflect the
assumptions market participants would use in pricing the asset
or liability based on the best information available in the
circumstances.
The fair value hierarchy is broken down into the three input
levels summarized below:
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Level 1 Valuations are based on quoted prices
in active markets for identical assets or liabilities, and
readily accessible by us at the reporting date. Examples of
assets and liabilities utilizing Level 1 inputs are certain
money market funds, U.S. Treasury notes and trading
securities with quoted prices on active markets.
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Level 2 Valuations based on inputs other than
the quoted prices in active markets that are observable either
directly or indirectly in active markets. Examples of assets and
liabilities utilizing Level 2 inputs are
U.S. government agency bonds, corporate bonds, corporate
securities, certificates of deposit, and
over-the-counter
derivatives.
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Level 3 Valuations based on unobservable inputs
in which there is little or no market data, which require us to
develop our own assumptions. Examples of assets and liabilities
utilizing Level 3 inputs are cost method investments, ARS,
and the Primary Fund.
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We measure our
available-for-sale
securities at fair value on a recurring basis.
Available-for-sale
securities include U.S. Treasury securities,
U.S. government agency bonds, corporate bonds, corporate
securities, auction rate
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securities money market funds and certificates of deposit. Where
possible, we utilize quoted market prices to measure and such
items are classified as Level 1 in the hierarchy. When
quoted market prices for identical assets are unavailable,
varying valuation techniques are used. Such assets are
classified as Level 2 or Level 3 in the hierarchy. We
classify items in Level 2 if the investments are valued
using observable inputs to quoted market prices, benchmark
yields, reported trades, broker/dealer quotes or alternative
pricing sources with reasonable levels of price transparency. We
classify items in Level 3 if the investments are valued
using a pricing model, based on unobservable inputs in the
market or require us to develop our own assumptions. Our
assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment and
considers factors specific to the investment.
We evaluate our investments for
other-than-temporary
impairment in accordance with guidance provided by
SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities and related
guidance. We consider and review factors such as the length of
time and extent to which fair value has been below cost basis,
the significance of the loss incurred, the financial condition
and credit rating of the issuer and insurance guarantor, the
length of time the investments have been illiquid, and our
ability and intent to hold the investment for a period of time
which may be sufficient for anticipated recovery of market value.
We are also exposed to market risk relating to our
available-for-sale
investments due to uncertainties in the credit and capital
markets. As a result of the bankruptcy filing of Lehman
Brothers, we recorded an
other-than-temporary
impairment charge of $21.1 million in fiscal 2009 related
to Lehman Brothers corporate bonds and the Primary Fund that
held Lehman Brothers investments, as well as an
other-than-temporary
impairment charge of $2.1 million related to the value of
our ARS. The fair value of our investments may change
significantly due to events and conditions in the credit and
capital markets. These securities/issuers could be subject to
review for possible downgrade. Any downgrade in these credit
ratings may result in an additional decline in the estimated
fair value of our investments. We will continue to monitor and
evaluate the accounting for our investment portfolio on a
quarterly basis for additional
other-than-temporary
impairment charges. We could realize additional losses in our
holdings of the Primary Fund and may not receive all or a
portion of our remaining balance in the Primary Fund as a result
of market conditions and ongoing litigation against the fund.
Accounting
for Stock-Based Compensation
We account for stock-based compensation in accordance with
SFAS No. 123R, Share-Based Payment,
using the Black-Scholes option pricing model to value our
employee stock options. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option
pricing model. Option pricing models require the input of highly
subjective assumptions, including the expected stock price
volatility, expected life, and forfeiture rate. Any changes in
these highly subjective assumptions may significantly impact the
stock-based compensation expense for the future.
Loss
Contingencies
We are subject to the possibility of various loss contingencies
arising in the course of business. We consider the likelihood of
the loss or impairment of an asset or the incurrence of a
liability as well as our ability to reasonably estimate the
amount of loss in determining loss contingencies. An estimated
loss contingency is accrued when it is probable that a liability
has been incurred or an asset has been impaired and the amount
of loss can be reasonably estimated. In April 2009, we entered
into a settlement agreement with the United States of America,
acting through the United States Department of Justice
(DOJ) and on behalf of the General Services
Administration (the GSA), under which we agreed to
pay the United States $128.0 million, plus interest of
$0.7 million, related to a dispute regarding our discount
practices and compliance with the price reduction clause
provisions of GSA contracts between August 1997 and February
2005 in consideration for the release of NetApp by the DOJ and
GSA with respect to the claims alleged in the investigation as
set forth in the settlement agreement. The agreement reflects
neither an admission nor denial by NetApp of any of the claims
alleged by the DOJ and represents a compromise to avoid
continued litigation and associated risks. NetApp made the
settlement payment on April 27, 2009. In fiscal 2008 and
2007, we did not identify or accrue for any loss contingencies.
We regularly evaluate current information available to us to
determine whether such accruals should be adjusted.
45
New
Accounting Standards
See Note 2 of the consolidated financial statements for a
full description of new accounting pronouncements, including the
respective expected dates of adoption and effects on results of
operations and financial condition.
Results
of Operations
The following table sets forth certain Consolidated Statements
of Operations data as a percentage of net revenues for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 24,
|
|
|
April 25,
|
|
|
April 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
63.2
|
%
|
|
|
67.9
|
%
|
|
|
74.4
|
%
|
Software entitlements and maintenance
|
|
|
18.2
|
|
|
|
14.7
|
|
|
|
12.2
|
|
Service
|
|
|
22.4
|
|
|
|
17.4
|
|
|
|
13.4
|
|
GSA settlement
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
|
|
29.6
|
|
|
|
28.4
|
|
|
|
29.9
|
|
Cost of software entitlements and maintenance
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.4
|
|
Cost of service
|
|
|
11.7
|
|
|
|
10.4
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
58.4
|
|
|
|
60.9
|
|
|
|
60.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
34.8
|
|
|
|
32.6
|
|
|
|
32.0
|
|
Research and development
|
|
|
14.6
|
|
|
|
13.7
|
|
|
|
13.7
|
|
General and administrative
|
|
|
6.0
|
|
|
|
5.2
|
|
|
|
5.3
|
|
Restructuring and other charges
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
57.0
|
|
|
|
51.5
|
|
|
|
50.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
1.4
|
|
|
|
9.4
|
|
|
|
10.7
|
|
Other Income (Expenses), Net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1.7
|
|
|
|
2.0
|
|
|
|
2.5
|
|
Interest expense
|
|
|
(0.8
|
)
|
|
|
(0.2
|
)
|
|
|
(0.4
|
)
|
Gain (loss) on investments, net
|
|
|
(0.9
|
)
|
|
|
0.4
|
|
|
|
(0.1
|
)
|
Other income (expenses), net
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expenses), Net
|
|
|
(0.1
|
)
|
|
|
2.2
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
1.3
|
|
|
|
11.6
|
|
|
|
12.8
|
|
Provision (Benefit) for Income Taxes
|
|
|
(1.2
|
)
|
|
|
2.2
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
2.5
|
%
|
|
|
9.4
|
%
|
|
|
10.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discussion
and Analysis of Results of Operations
Net Revenues Our net revenues for fiscal
2009, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 24, 2009
|
|
|
April 25, 2008
|
|
|
% Change
|
|
|
April 27, 2007
|
|
|
% Change
|
|
|
|
(In millions)
|
|
|
Net revenues
|
|
$
|
3,406.4
|
|
|
$
|
3,303.2
|
|
|
|
3.1
|
%
|
|
$
|
2,804.3
|
|
|
|
17.8
|
%
|
46
Net revenues increased by 3.1% to $3,406.4 million in
fiscal 2009, from $3,303.2 million in fiscal 2008. The
increase in our net revenues for fiscal 2009 was due to
increases in software entitlements and maintenance revenues as
well as service revenues, partially offset by decreases in
product revenues, and the negative impact from the GSA
settlement.
Net revenues increased by 17.8% to $3,303.2 million in
fiscal 2008, from $2,804.3 million in fiscal 2007. Our
fiscal 2008 revenue growth was attributable to increased product
revenues, software entitlements and maintenance revenues, and
service.
Sales through our indirect channels represented 69.0%, 63.0% and
59.6% of net revenues for fiscal 2009, 2008 and 2007,
respectively.
During fiscal 2009, two U.S. distributors accounted for
approximately 10.5% and 10.6% of our net revenues, respectively.
No distributor or other customer accounted for ten percent or
more of our net revenues during fiscal 2008 and 2007.
Product
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 24, 2009
|
|
|
April 25, 2008
|
|
|
% Change
|
|
|
April 27, 2007
|
|
|
% Change
|
|
|
|
(In millions)
|
|
|
Product revenues
|
|
$
|
2,152.7
|
|
|
$
|
2,242.5
|
|
|
|
(4.0
|
)%
|
|
$
|
2,085.9
|
|
|
|
7.5
|
%
|
Product revenues decreased by $89.8 million, or 4.0% in
fiscal 2009, compared to fiscal 2008. Unit volume increased,
driven by smaller, low end systems, partially offset by
decreases in mid-range and high end systems. This trend is
consistent with a shift in customer buying patterns towards
smaller systems, due to IT spending constraints and difficult
economic conditions. In addition, average selling prices
declined, driven by lower list prices, unfavorable configuration
mix (consisting of hardware and software components, disk
capacity and disk price) and higher discounting, as well as
unfavorable foreign exchange rate changes during fiscal 2009.
Partially offsetting these factors was an increase in revenues
from add-on products, as customers focused more on extending the
useful lives and capacity of their existing storage solutions.
Product revenues increased by $156.6 million or 7.5% to
$2,242.5 million in fiscal 2008, from $2,085.9 million
in fiscal 2007. Unit volume increased, driven by low end and
mid-range systems, partially offset by a slight decrease in high
end systems. In addition, average selling prices increased,
driven by higher list prices and favorable configuration mix,
partially offset by higher discounting. Revenue from add-on
products increased, as customers focused on extending the
capacity of their storage solutions.
Our systems are highly configurable to respond to customer
requirements in the open systems storage markets that we serve.
This wide variation in customer configurations can significantly
impact revenue, cost of revenue, and gross margin performance.
Price changes, unit volumes, and product configuration mix can
also impact revenue, cost of revenue and gross margin
performance. Disks are a significant component of our storage
systems. Industry disk pricing continues to fall every year, and
we pass along those price decreases to our customers while
working to maintain relatively constant margins on our disk
drives. While price per petabyte continues to decline, system
performance, increased capacity and software to manage this
increased capacity have an offsetting impact on product revenue.
Software
Entitlements and Maintenance Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 24, 2009
|
|
|
April 25, 2008
|
|
|
% Change
|
|
|
April 27, 2007
|
|
|
% Change
|
|
|
|
(In millions)
|
|
|
Software entitlements and maintenance revenues
|
|
$
|
618.4
|
|
|
$
|
486.9
|
|
|
|
27.0
|
%
|
|
$
|
341.3
|
|
|
|
42.7
|
%
|
Software entitlements and maintenance revenues increased by
$131.5 million, or 27.0% in fiscal 2009 compared to fiscal
2008. This year over year increase in software entitlements and
maintenance revenues was due
47
primarily to the recognition of service contracts that were
purchased or renewed in prior years, and to a lesser extent,
service contracts entered into in fiscal 2009.
Software entitlements and maintenance revenues increased by
$145.6 million, or 42.7% in fiscal 2008, compared to fiscal
2007. The year over year increase was due to a larger installed
base of customers who have purchased or renewed software
entitlements and maintenance.
Service
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 24, 2009
|
|
|
April 25, 2008
|
|
|
% Change
|
|
|
April 27, 2007
|
|
|
% Change
|
|
|
|
(In millions)
|
|
|
Service revenues
|
|
$
|
764.1
|
|
|
$
|
573.8
|
|
|
|
33.2
|
%
|
|
$
|
377.1
|
|
|
|
52.1
|
%
|
Service revenues increased by $190.3 million, or 33.2% in
fiscal 2009, compared to fiscal 2008. Service revenues include
service maintenance, professional services and educational and
training services. The primary reason for the increase was
increased service contract revenue related to an increase in the
installed base. In addition, revenue from professional services
increased due to increased integration consulting services
provided in fiscal 2009 and improved productivity of our
professional service personnel.
Service revenues increased by $196.7 million, or 52.1% in
fiscal 2008, compared to fiscal 2007. The primary reasons for
the increase were increased service contract revenue, related to
an increase in the installed base and the average revenue
generated per installed base unit, and an increase in
professional services.
GSA
settlement
In April 2009, we entered into a settlement agreement with the
United States of America, acting through the United States
Department of Justice and on behalf of the General Services
Administration (the GSA), under which we agreed to
pay the United States $128.0 million, plus interest of
$0.7 million, related to a dispute regarding our discount
practices and compliance with the price reduction clause
provisions of its GSA contracts between August 1997 and February
2005. We have recorded the settlement as a reduction of revenues
in fiscal 2009.
Total
International Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
|
April 24, 2009
|
|
|
Revenues
|
|
|
April 25, 2008
|
|
|
Revenues
|
|
|
% Change
|
|
|
April 27, 2007
|
|
|
Revenues
|
|
|
% Change
|
|
|
|
(In millions)
|
|
|
International
|
|
$
|
1,652.8
|
|
|
|
48.5
|
%
|
|
$
|
1,554.3
|
|
|
|
47.1
|
%
|
|
|
6.3
|
%
|
|
$
|
1,254.0
|
|
|
|
44.7
|
%
|
|
|
23.9
|
%
|
United States
|
|
|
1,753.6
|
|
|
|
51.5
|
%
|
|
|
1,748.9
|
|
|
|
52.9
|
%
|
|
|
0.3
|
%
|
|
|
1,550.3
|
|
|
|
55.3
|
%
|
|
|
12.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
3,406.4
|
|
|
|
|
|
|
$
|
3,303.2
|
|
|
|
|
|
|
|
|
|
|
$
|
2,804.3
|
|
|
|
|
|
|
|
|
|
Total international revenues (including U.S. exports)
increased by 6.3% in fiscal 2009 compared to fiscal 2008. Total
international revenues (including U.S. exports) increased
by 23.9% in fiscal 2008 compared to fiscal 2007.
Cost
of Revenues
Our cost of revenue includes: (1) cost of product revenue,
which includes the costs of manufacturing and shipping our
storage systems, and amortization of purchased intangible
assets, inventory write-downs, and warranty costs; (2) cost
of software maintenance and entitlements, which includes the
costs of providing software entitlements and maintenance and
third party royalty costs, and (3) cost of service, which
reflects costs associated with providing services for support
center activities and global service partnership programs.
48
Cost
of Product Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Product
|
|
|
|
|
|
Product
|
|
|
|
|
|
Product
|
|
|
|
April 24, 2009
|
|
|
Revenue
|
|
|
April 25, 2008
|
|
|
Revenue
|
|
|
April 27, 2007
|
|
|
Revenue
|
|
|
|
(In millions)
|
|
|
Cost of product revenue
|
|
$
|
1,007.6
|
|
|
|
46.8
|
%
|
|
$
|
938.4
|
|
|
|
41.8
|
%
|
|
$
|
838.0
|
|
|
|
40.2
|
%
|
Cost of product revenue as a percentage of product revenue
increased by 5.0% in fiscal 2009 as compared to fiscal 2008. The
increase in total costs was primarily due to increased unit
volume. The increase in costs as a percentage of revenues was
due to a larger decrease in average selling prices than
corresponding costs, primarily standard material costs, across
all of our systems.
Cost of product revenue as a percentage of product revenue
increased by 1.6% in fiscal 2008 compared to fiscal 2007. The
increase in total costs was primarily due to increased unit
volume. The increase in costs as a percentage of revenues was
due to a lower increase in average selling prices than
corresponding costs, primarily related to standard material
costs on new low end systems.
Stock-based compensation expense included in cost of product
revenues was $3.3 million, $3.4 million and
$3.7 million in fiscal 2009, 2008, and 2007, respectively.
Amortization of existing technology included in cost of product
revenues was $24.5 million, $22.6 million and
$17.6 million for fiscal 2009, 2008 and 2007, respectively.
In the first quarter of fiscal 2009, we implemented a change in
the reporting of warranty costs and reported these costs in cost
of product revenues. These costs were included in cost of
service revenues in previous periods. Our cost of product
revenues and service revenues for fiscal years 2008 and 2007
reflect a reclassification of $27.0 million and
$22.1 million, respectively, to conform to current period
presentation. There was no change in warranty costs as a
percentage of product revenue in fiscal 2009, 2008 and 2007.
We expect future product gross margins to be impacted by a
variety of factors including selective price reductions and
discounts, increased indirect channel sales, higher software
revenue mix and the margin profile of new products. If our
shipment volumes, product mix, average selling prices and
pricing actions that impact our product gross margin continue to
be adversely affected by the economic downturn or market
factors, our gross margin could decline.
Cost
of Software Entitlements and Maintenance Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Software
|
|
|
|
|
|
% of Software
|
|
|
|
|
|
Software
|
|
|
|
|
|
|
Entitlements
|
|
|
|
|
|
Entitlements
|
|
|
|
|
|
Entitlements
|
|
|
|
|
|
|
and
|
|
|
|
|
|
and
|
|
|
|
|
|
and
|
|
|
|
|
|
|
Maintenance
|
|
|
|
|
|
Maintenance
|
|
|
|
|
|
Maintenance
|
|
|
|
April 24, 2009
|
|
|
Revenue
|
|
|
April 25, 2008
|
|
|
Revenue
|
|
|
April 27, 2007
|
|
|
Revenue
|
|
|
|
(In millions)
|
|
|
Cost of software entitlements and maintenance revenues
|
|
$
|
9.2
|
|
|
|
1.5
|
%
|
|
$
|
8.6
|
|
|
|
1.8
|
%
|
|
$
|
10.2
|
|
|
|
3.0
|
%
|
Cost of software entitlements and maintenance revenues as a
percentage of software entitlements and maintenance revenue
remained relatively flat at 1.5% in fiscal 2009 and 1.8% in
fiscal 2008, respectively. Cost of software entitlements and
maintenance revenues as a percentage of software entitlements
and maintenance revenue decreased in fiscal 2008 compared to
fiscal 2007 due to lower third-party royalty expenses.
Cost
of Service Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
% of Service
|
|
|
|
|
|
% of Service
|
|
|
|
|
|
% of Service
|
|
|
|
April 24, 2009
|
|
|
Revenue
|
|
|
April 25, 2008
|
|
|
Revenue
|
|
|
April 27, 2007
|
|
|
Revenue
|
|
|
|
(In millions)
|
|
|
Cost of service revenues
|
|
$
|
399.7
|
|
|
|
52.3
|
%
|
|
$
|
342.8
|
|
|
|
59.7
|
%
|
|
$
|
251.6
|
|
|
|
66.7
|
%
|
49
Cost of service revenue as a percentage of service revenue
decreased by 7.4% in fiscal 2009 from fiscal 2008 and by 7.0% in
fiscal 2008 compared to fiscal 2007. The increase in service
cost of revenues in fiscal 2009 compared to fiscal 2008 and in
fiscal 2008 compared to fiscal 2007 was primarily due to
increased service infrastructure spending to support our
customers, which included additional professional support
engineers, increased support center activities for a larger
installed base of product, and global service partnership
programs. The decrease in service cost of revenues as a
percentage of service revenue in fiscal 2009 compared to fiscal
2008 and fiscal 2007 was primarily due to increased service
revenue volume and improved productivity, partially offset by
higher costs.
Stock-based compensation expense of $12.3 million was
included in the cost of service revenue for fiscal 2009 compared
to $10.4 million and $10.1 million for fiscal 2008 and
2007, respectively.
In the first quarter of fiscal 2009, we implemented a change in
the reporting of warranty costs and reported these costs in cost
of product revenues. These costs were included in cost of
service revenues in previous periods. Our cost of product
revenues and service revenues for fiscal years 2008 and 2007
reflect a reclassification of $27.0 million and
$22.1 million, respectively, to conform to current period
presentation.
Service gross margin is also typically impacted by factors such
as changes in the size of our installed base of product, as well
as the timing of support service initiations and renewals, and
incremental investments in our customer support infrastructure.
Sales and Marketing Sales and marketing
expense consists primarily of salaries and related benefits,
commissions, allocated facilities and IT costs, advertising and
promotional expenses, stock-based compensation expense, and
travel and entertainment expenses. Sales and marketing expense
for fiscal 2009, 2008 and 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 24, 2009
|
|
|
April 25, 2008
|
|
|
% Change
|
|
|
April 27, 2007
|
|
|
% Change
|
|
|
|
(In millions)
|
|
|
Sales and marketing
|
|
$
|
1,186.1
|
|
|
$
|
1,075.6
|
|
|
|
10.3
|
%
|
|
$
|
895.8
|
|
|
|
20.1
|
%
|
Sales and marketing expense increased by $110.5 million, or
10.3% in fiscal 2009 compared to fiscal 2008. The increase was
primarily due to an increase in salaries and related benefits
primarily due to increased average compensation and incentive
plan costs per person, and an increase in IT expenses related to
new software implementations partially offset by a decrease in
marketing expenses and travel and entertainment expenses.
The increase in sales and marketing expense in fiscal 2008
compared to fiscal 2007 was due to increased commission expenses
resulting from increased revenues, higher payroll expenses due
to higher profitability, higher partner program expenses, the
continued worldwide investment in our sales and global service
organizations associated with selling complete enterprise
solutions, and higher stock-based compensation expenses.
Sales and marketing expense for fiscal 2009 was favorably
impacted by the strengthening of the U.S. dollar relative
to other foreign currencies (primarily Euro, British pound and
Australian Dollar). Had foreign exchange rates remained constant
in these periods, our sales and marketing expense in fiscal 2009
would have been approximately $10.5 million higher, or
0.9%, higher. The foreign currency exchange rate impact on sales
and marketing expense was insignificant for fiscal 2008 and 2007.
Stock-based compensation expense included in sales and marketing
expense in fiscal 2009 was $65.1 million compared to stock
compensation expense of $65.4 million and
$71.7 million in fiscal 2008 and 2007, respectively.
Amortization of trademarks/trade names and customer
contracts/relationships included in sales and marketing expense
was $4.4 million in fiscal 2009 compared to
$4.2 million and $2.9 million in fiscal 2008 and
fiscal 2007, respectively.
50
Research and Development Research and
development expense consists primarily of salaries and related
benefits, allocated facilities and IT costs, depreciation and
amortization, stock-based compensation, and prototype and
engineering charges. Research and development expense for fiscal
2009, 2008 and 2007 was as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 24, 2009
|
|
|
April 25, 2008
|
|
|
% Change
|
|
|
April 27, 2007
|
|
|
% Change
|
|
|
|
(In millions)
|
|
|
Research and development
|
|
$
|
498.5
|
|
|
$
|
452.2
|
|
|
|
10.2
|
%
|
|
$
|
385.4
|
|
|
|
17.3
|
%
|
Research and development expense increased by
$46.3 million, or 10.2% in fiscal 2009 as compared to
fiscal 2008. The increase in research and development expense
was primarily due to an increase in salaries and related
benefits resulting from increased average compensation and
incentive plan costs per person, as well as higher average
headcount, and an increase in facilities expenses related to new
engineering labs.
The increase in research and development expense in fiscal 2008
compared to fiscal 2007 was primarily due increased headcount,
ongoing operating impact of acquisitions, ongoing current and
future product development and enhancement efforts, higher
performance-based payroll expenses due to higher profitability,
and higher stock-based compensation expense.
Stock-based compensation expense included in research and
development expense for fiscal 2009 was $37.9 million,
compared to $46.6 million and $51.3 million in fiscal
2008 and 2007, respectively. No software development costs were
capitalized during any of the periods.
We believe that our future performance will depend in large part
on our ability to maintain and enhance our current product line,
develop new products that achieve market acceptance, maintain
technological competitiveness, and meet an expanding range of
customer requirements. We expect to continuously support current
and future product development, broaden our existing product
offerings and introduce new products that expand our solutions
portfolio.
General and Administrative General and
administrative expense consists primarily of salaries and
related benefits, professional and corporate legal fees,
stock-based compensation, recruiting expenses, and allocated
facilities and IT costs. General and administrative expense for
fiscal 2009, 2008 and 2007 was as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 24, 2009
|
|
|
April 25, 2008
|
|
|
% Change
|
|
|
April 27, 2007
|
|
|
% Change
|
|
|
|
(In millions)
|
|
|
General and administrative
|
|
$
|
203.7
|
|
|
$
|
171.5
|
|
|
|
18.7
|
%
|
|
$
|
147.5
|
|
|
|
16.3
|
%
|
General and administrative expense increased by
$32.2 million, or 18.7% in fiscal 2009 as compared to
fiscal 2008. The increase was primarily due to increased
professional and legal fees, an increase in salaries and related
benefits primarily resulting from increased average compensation
and incentive plan costs per person, and an increase in IT
expenses.
The increase in general and administrative expense in fiscal
2008 compared to fiscal 2007 was primarily due to higher payroll
expenses due to higher profitability and increased headcount,
higher stock-based compensation expense recognized, and higher
legal and professional fees for general corporate matters.
Stock-based compensation expense included in general and
administrative expense in fiscal 2009 was $22.2 million
compared to $22.1 million and $26.2 million for fiscal
2008 and 2007, respectively.
Restructuring
and Other Charges
Fiscal 2009 Restructuring Plans In February
2009, we announced our decision to execute a worldwide
restructuring program, which included a reduction in workforce,
the closing or downsizing of certain facilities, and the
establishment of a plan to outsource certain internal
activities. In December 2008, we announced our decision to cease
the development and availability of SMOS, which was originally
acquired through our acquisition of Topio in fiscal 2007. As
part of this decision, we also announced the closure of our
engineering facility in Haifa, Israel. These restructuring
activities resulted in restructuring charges totaling
$51.5 million of severance-related amounts and other
charges attributable to the termination of approximately 450
regular positions, abandoned excess facilities
51
charges relating to non-cancelable lease costs, which are net of
expected sublease income; contract cancellation charges;
outplacement expenses; fixed assets and intangibles write-offs;
as well as $2.9 million of other charges to support our
restructuring initiatives. In recording the facility lease
restructuring reserve, we made certain estimates and assumptions
related to the (i) time period over which the relevant
buildings would remain vacant, (ii) sublease terms, and
(iii) sublease rates.
As of April 24, 2009, approximately $15.9 million of
the costs associated with these activities were unpaid. We
expect that severance-related charges and other costs will be
substantially paid by the third quarter of fiscal 2010 and the
facilities-related lease payments to be substantially paid by
the third quarter of fiscal 2013.
Fiscal 2002 Restructuring Plan As of
April 24, 2009, we also have $1.3 million remaining in
facility restructuring reserves established as part of a
restructuring in fiscal 2002 related to future lease commitments
on exited facilities, net of expected sublease income. We
reevaluate our estimates and assumptions periodically and make
adjustments as necessary based on the time period over which the
facilities will be vacant, expected sublease terms, and expected
sublease rates. During fiscal 2009, we recorded restructuring
recoveries of $0.1 million resulting from a change in the
estimated operating expenses relating to this facility
restructuring reserve. We expect to substantially fulfill the
remaining contractual obligations related to this facility
restructuring reserve by fiscal 2011.
Of the restructuring reserve balance at April 24, 2009,
$14.7 million was included in other accrued liabilities,
and the remaining $2.5 million was classified as other
long-term obligations.
See Note 13, Restructuring and Other Charges,
of the Notes to our consolidated financial statements for
further discussion of our restructuring activities.
Other
Income and Expense
Interest Income Interest income for fiscal
2009, 2008 and 2007 was as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 24, 2009
|
|
|
April 25, 2008
|
|
|
% Change
|
|
|
April 27, 2007
|
|
|
% Change
|
|
|
|
(In millions)
|
|
|
Interest income
|
|
$
|
57.6
|
|
|
$
|
64.6
|
|
|
|
(10.8
|
)%
|
|
$
|
68.8
|
|
|
|
(6.1
|
)%
|
The decrease in interest income in fiscal 2009 compared to
fiscal 2008 was primarily due to lower market yields on our cash
and investment portfolio, in part due to a shift of our
portfolio to shorter term investments with lower risk. This
yield decline was partially offset by an increase in our cash
and investment balances due to the issuance of the Convertible
Notes (the Note), see Note 4, Convertible
Notes and Credit Facilities of the consolidated financial
statements. The decrease in interest income in fiscal 2008
compared to fiscal 2007 was primarily driven by lower average
interest rates on our investment portfolio and lower cash and
investment balances.
We expect that period-to-period changes in interest income will
continue to be impacted by the volatility of market interest
rates, cash and investment balances, cash generated by
operations, timing of our stock repurchases, cash used in
acquisitions, capital expenditures, and payments of our
contractual obligations.
Interest Expense Interest expense for fiscal
2009, 2008 and 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 24, 2009
|
|
|
April 25, 2008
|
|
|
% Change
|
|
|
April 27, 2007
|
|
|
% Change
|
|
|
|
(In millions)
|
|
|
Interest expense
|
|
$
|
(26.9
|
)
|
|
$
|
(8.0
|
)
|
|
|
236.2
|
%
|
|
$
|
(11.6
|
)
|
|
|
(31.4
|
)%
|
The increase in interest expense in fiscal 2009 compared to
fiscal 2008 was primarily due to interest expense and
amortization of debt issuance costs on our 1.75% convertible
senior notes (the Notes), partially offset by lower
interest expense related to the reduced outstanding balance on
our secured credit agreement we entered into with JPMorgan in
October 2007. The decrease in interest expense in fiscal 2008
compared to fiscal 2007 was due to full repayment of the loan
agreement entered with JPMorgan (Loan Agreement),
partially offset by increased interest expense on the
$250.0 million outstanding under the revolving secured
credit agreement with JPMorgan Securities during fiscal 2008.
52
We expect period-to-period changes in interest expense to
fluctuate based on market interest rate volatility and amounts
that may be due from time to time under various outstanding debt
agreements. In addition, upon adoption of the new FSP APB
No. 14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash Upon Conversion (FSP APB
No. 14-1),
we will account separately for the estimated liability and
equity components of our Notes. As a result, we will record
incremental interest expense in connection with the
nonconvertible debt borrowing rate in our Consolidated
Statements of Operations.
Gain
(Loss) on Investments, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 24, 2009
|
|
|
April 25, 2008
|
|
|
% Change
|
|
|
April 27, 2007
|
|
|
% Change
|
|
|
|
(In millions)
|
|
|
Gain (loss) on investments, net
|
|
$
|
(29.6
|
)
|
|
$
|
12.6
|
|
|
|
(334.4
|
)%
|
|
$
|
(1.5
|
)
|
|
|
(920.2
|
)%
|
During fiscal 2009, net loss on investments of
$29.6 million included a net impairment loss related to our
investments in privately held companies of $6.3 million, an
other-than-temporary impairment charge on our available-for-sale
investments related to direct and indirect investments in Lehman
Brothers securities of $21.1 million, and a decline in the
value of our auction rate securities of $2.1 million.
Net gain on sale of investments was $12.6 million for
fiscal 2008. Net gain for fiscal 2008 consisted primarily of a
gain of $13.6 million related to the sale of shares of Blue
Coat common stock offset by a net write-down of
$1.0 million for our investments in privately-held
companies. For fiscal 2007, net loss on sale of investments was
$1.5 million, including a net write-down of
$2.1 million related to the impairment of our investment in
privately-held companies.
Other
Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 24, 2009
|
|
|
April 25, 2008
|
|
|
% Change
|
|
|
April 27, 2007
|
|
|
% Change
|
|
|
|
(In millions)
|
|
|
Other income (expense), net
|
|
$
|
(3.5
|
)
|
|
$
|
(0.1
|
)
|
|
|
2507.4
|
%
|
|
$
|
2.8
|
|
|
|
(104.8
|
)%
|
Other income (expense), net, consists of primarily net exchange
losses and gains from foreign currency transactions and related
hedging activities. We believe that period-to-period changes in
foreign exchange gains or losses will continue to be impacted by
hedging costs associated with our forward and option activities
and forecast variance.
Provision
(Benefit) for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 24, 2009
|
|
|
April 25, 2008
|
|
|
% Change
|
|
|
April 27, 2007
|
|
|
% Change
|
|
|
|
(In millions)
|
|
|
Provision (Benefit) for Income Taxes
|
|
$
|
(41.7
|
)
|
|
$
|
73.0
|
|
|
|
(157.2
|
)%
|
|
$
|
62.0
|
|
|
|
17.7
|
%
|
For fiscal 2009, we applied to pretax income an effective tax
rate benefit of 77.6% before discrete reporting items. After
taking into account the tax effect of federal research tax
credit and other immaterial items, the effective tax rate
benefit for fiscal 2009 was 93.1%, and the effective tax rate
expense for fiscal 2008 and 2007 was 19.1% and 17.2%,
respectively. Our effective tax rate for fiscal, 2009, which was
negative and thus a benefit, decreased relative to the effective
tax rate for fiscal, 2008 primarily due to the decrease in the
U.S. portion of our income and to the benefits generated
from the retroactive extension of the research and development
tax credit which was part of the Emergency Economic
Stabilization Act of 2008. The geographic composition of our
consolidated income was impacted by losses generated in the
U.S. for restructuring charges and the GSA settlement.
These charges resulted in a taxable loss in the U.S. which
primarily drove the tax benefit.
For fiscal 2008 and 2007, we applied to pretax income an annual
effective tax rate before discrete reporting items of 13.3% and
19.0%, respectively. The decrease in the annual effective tax
rate in fiscal 2008 compared to fiscal 2007 was primarily
attributable to a relative increase in the benefits attributable
to our foreign operations, as well as to a relative decrease in
the tax impact of nondeductible stock-based compensation,
brought about in part by
53
our decision to cease granting incentive stock options. Since we
have replaced the granting of incentive stock options with the
granting of nonqualified stock options, this gives rise to the
recognition of more income tax benefits as stock-based
compensation is recognized.
Liquidity
and Capital Resources
The following sections discuss our principal liquidity
requirements, as well as our sources and uses of cash flow on
our liquidity and capital resources. The principal objectives of
our investment policy are the preservation of principal and
maintenance of liquidity. We attempt to mitigate default risk by
investing in high-quality investment grade securities, limiting
the time to maturity and by monitoring the counter-parties and
underlying obligors closely. We believe our cash equivalents and
short-term investments are liquid and accessible. We are not
aware of any significant deterioration in the fair value of our
cash equivalents or investments from the values reported as of
April 24, 2009.
Liquidity
Sources, Cash Requirements
Our principal sources of liquidity as of April 24, 2009,
consisted of: (1) approximately $2.6 billion in cash
and cash equivalents and short-term investments, (2) cash
we expect to generate from operations, and (3) an unsecured
revolving credit facility totaling $250.0 million, of which
$0.6 million has been allocated as of April 24, 2009
to support certain of our outstanding letters of credit. Our
principal liquidity requirements are primarily to meet our
working capital needs, including a one-time payment of
$128.7 million related to our GSA settlement, support
ongoing business activities, implement restructuring plans,
research and development, capital expenditure needs, the
proposed Data Domain acquisition and other business
acquisitions, investment in critical or complementary
technologies, and to service our debt and synthetic leases.
Key factors that could affect our cash flows include changes in
our revenue mix and profitability as well as our ability to
effectively manage our working capital, in particular, accounts
receivable and inventories and whether or not we ultimately
complete the merger with Data Domain discussed below. Based on
our current business outlook, we believe that our sources of
cash will be sufficient to fund our operations and meet our cash
requirements for at least the next 12 months. However, in
the event our liquidity is insufficient, we may be required to
further curtail spending and implement additional cost saving
measures and restructuring actions. In light of the current
economic and market conditions, we cannot be certain that we
will continue to generate cash flows at or above current levels
or that we will be able to obtain additional financing, if
necessary, on satisfactory terms, if at all.
Our investment portfolio, including the Primary Fund and auction
rate securities has been and will continue to be exposed to
market risk due to uncertainties in the credit and capital
markets. In fiscal 2009, we recorded an other-than-temporary
impairment charge to earnings of $21.1 million related to
Lehman Brothers corporate bonds and the Primary Fund that held
Lehman Brothers investments. In addition, we also recorded an
other-than-temporary impairment of $2.1 million relating to
certain auction rate securities. We could realize additional
losses in our holdings of the Primary Fund and may not receive
all or a portion of our remaining balance in the Primary Fund as
a result of market conditions and ongoing litigation against the
fund. However, we are not dependent on liquidating these
investments in the next twelve months in order to meet our
liquidity needs. We continue to closely monitor current economic
and market events to minimize our market risk on our investment
portfolio. Based on our ability to access our cash and
short-term investments, our expected operating cash flows, and
our other potential sources of cash, we do not anticipate that
the lack of liquidity of these investments will impact our
ability to fund working capital needs, capital expenditures,
acquisitions or other cash requirements. We intend to and
believe that we have the ability to hold these investments until
the market recovers. If current market conditions deteriorate
further, or the anticipated recovery in market values does not
occur, we may be required to record additional charges to
earnings in future quarters.
Capital
Expenditure Requirements
We expect to fund our capital expenditures, including our
commitments related to facilities and equipment operating leases
over the next few years through cash generated from operations,
existing cash, cash equivalents and investments. The timing and
amount of our capital requirements cannot be precisely
determined at this time and will
54
depend on a number of factors including future demand for
products, product mix, changes in the network storage industry,
economic conditions and market competition. We expect that our
existing facilities in Sunnyvale, California; Research Triangle
Park, North Carolina; and worldwide are adequate for our
requirements over at least the next two years, and that
additional space will be available as needed. However, if
current economic conditions deteriorate further, we may be
required to implement additional restructuring plans to
eliminate or consolidate excess facilities, incur cancellation
penalties and impair fixed assets.
Acquisition
Related Requirements
On May 20, 2009, we announced our entry into a definitive
agreement with Data Domain, Inc. to acquire such company in a
merger for an aggregate merger consideration of approximately
$1.5 billion in cash and common stock (net of Data
Domains cash balances). On June 3, 2009, we revised
the terms of the definitive agreement to increase the aggregate
merger consideration to $1.9 billion (net of Data
Domains cash balance). If the acquisition is completed
under the current terms, we expect that we will have to use at
least $1 billion of our cash, cash equivalent and
investments for cash consideration to Data Domain shareholders
and transaction costs. The merger is subject to customary
closing conditions, including regulatory approvals. The
transaction is valued at approximately $2 billion and is
expected to be completed in 60 to 120 days.
Cash
Flows
As of April 24, 2009, compared to April 25, 2008, our
cash and cash equivalents and short-term investments increased
by $1,439.8 million to $2,604.2 million. The increase
in cash and cash equivalents and short-term investments was
primarily a result of net proceeds from issuance of the Notes
and warrants, cash provided by operating activities, issuance of
common stock related to employee stock option exercises and
employee stock purchases, partially offset by stock repurchases,
execution of the Note Hedge, capital expenditures, and repayment
of the secured revolving credit facility. We derive our
liquidity and capital resources primarily from our cash flow
from operations and from working capital. Working capital
increased by $1,106.1 million to $1,759.5 million as
of April 24, 2009, compared to $653.3 million as of
April 25, 2008.
Cash
Flows from Operating Activities
During fiscal 2009, we generated cash flows from operating
activities of $873.4 million, compared with
$1,008.9 million and $864.5 million for fiscal 2008
and fiscal 2007, respectively. We recorded net income of
$86.5 million for fiscal 2009, compared to
$309.7 million and $297.7 million for fiscal 2008 and
fiscal 2007, respectively. A summary of the significant changes
in noncash adjustments affecting net income and changes in
assets and liabilities impacting operating cash flows is as
follows:
|
|
|
|
|
Stock-based compensation expense was $140.8 million in
fiscal 2009, compared to $148.0 million and
$163.0 million in fiscal 2008 and 2007, respectively. The
decrease in stock-based compensation was primarily a result of a
lower fair value of equity awards driven by our declining stock
price.
|
|
|
|
Depreciation and amortization expense was $170.5 million,
$144.2 million, and $110.8 million in fiscal 2009,
2008 and 2007, respectively. The increase for depreciation was
due to continued capital expansion during fiscal 2009 and 2008.
The increase for amortization expense was due to an increase in
intangibles related to the Onaro acquisition in fiscal 2008,
partially offset by the impairment of certain acquired
intangible assets related to the Topio acquisition in fiscal
2009.
|
|
|
|
Asset impairment charges and write-offs of $31.6 million
during fiscal 2009 related to impairment of intangibles and
leasehold improvements in connection with our restructuring
plans in fiscal 2009, as well as a write-off related to a sales
force automation tool recorded in fiscal 2009.
|
|
|
|
Impairment losses (gains) on investment consist of
other-than-temporary impairment of $20.3 million related to
investments in Lehman Brothers securities, a decline in the
value of our auction rate securities and impairment losses on
investment in privately held companies during fiscal 2009. A
gain on sale of investments of $12.6 million during fiscal
2008 included sale of Blue Coat common shares of
$13.6 million.
|
55
|
|
|
|
|
Deferred income tax provisions of $108.4 million,
$53.0 million and $146.0 million were due to temporary
tax differences associated with such items as accruals, deferred
revenue, stock compensation tax benefits, and net operating
losses and credit carryforwards.
|
|
|
|
The decrease in accounts receivable of $128.7 million
during fiscal 2009 was due to improved collections. The increase
in accounts receivable of $27.7 million and
$175.2 million in fiscal 2008 and 2007, respectively, was
due to increased shipment levels weighted towards the end of the
fourth quarter, offset by timing of collections.
|
|
|
|
The decrease in inventories of $9.1 million during fiscal
2009 was due to increased inventory reserves as a result of
lower customer demand due to depressed economic conditions.
Inventories increased $15.4 million in fiscal 2008 due to
higher inventory required to support revenue growth during the
fourth quarter of fiscal 2008. Inventories decreased
$9.9 million for fiscal 2007, primarily due to higher
inventory at fiscal 2006 year end associated with the new
FAS 6000 launch.
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|
|
|
The increases in deferred revenues of $219.3 million and
$401.0 million during fiscal 2009 and 2008, respectively,
were primarily due to increased service contract and software
entitlement and maintenance contract sales, partially offset by
the recognition of previously deferred revenues. An increase in
deferred revenue of $421.3 million in fiscal 2007 was due
to larger installed base renewals for service contracts and
software entitlement and maintenance contracts, upgrades and an
increased number of new enterprise customers purchasing software
entitlement and maintenance contracts.
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|
|
|
The decrease in accounts payable of $27.0 million during
fiscal 2009 was due to timing of payment activities. The
increase in accounts payable of $20.0 million and
$36.6 million in fiscal 2008 and 2007, respectively, was
primarily attributable to elevated purchasing activity required
to support our business growth and facilities expansion projects.
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|
|
The accrual for the GSA settlement of $128.7 million in
fiscal 2009 consisted of the unpaid liability related to that
matter.
|
|
|
|
The increase in accrued compensation and related benefits of
$12.9 million, $18.8 million and $43.6 million in
fiscal 2009, 2008 and 2007, respectively, reflected increased
headcount and the timing of payroll accruals versus payments.
|
Other changes in prepaid expenses, other accrued liabilities,
income taxes payable, and other liabilities balances were due to
timing of payments versus recognition of assets or liabilities.
We expect that cash provided by operating activities may
fluctuate in future periods as a result of a number of factors,
including fluctuations in our operating results, the rate at
which products are shipped during the quarter (which we refer to
as shipment linearity), accounts receivable collections,
inventory and supply chain management, excess tax benefits from
stock-based compensation, and the timing and amount of tax and
other payments.
Cash
Flows from Investing Activities
Capital expenditures for fiscal 2009 were $289.7 million as
compared to $188.3 million and $165.8 million in
fiscal 2008 and 2007, respectively. We used $116.8 million
in fiscal 2009 and received $376.4 million and
$187.9 million in fiscal 2008 and 2007, respectively, for
net purchases and redemptions of short-term investments, and
restricted investments. During fiscal 2009, we reclassified
$598.0 million of cash equivalents relating to the Primary
Fund to short-term investments. In fiscal 2009, 2008 and 2007,
we received $1.1 million, $19.2 million and
$2.8 million, respectively, from the sale of nonmarketable
and marketable securities. In fiscal 2009, 2008 and 2007, we
also used $0.3 million, $4.2 million and
$1.6 million for purchases of nonmarketable and marketable
securities. In fiscal 2008, we acquired Onaro, Inc. and remitted
total cash payments including related transaction costs totaling
$99.6 million and received $0.2 million escrow related
to our Topio acquisition. In fiscal 2007, we acquired Topio,
Inc. and remitted total cash payments including related
transaction costs totaling $131.2 million. In fiscal 2007,
we received $23.9 million in cash in connection with the
sale of certain assets to Blue Coat.
56
Cash
Flows from Financing Activities
We received $696.6 million in fiscal 2009 and used
$662.4 million and $747.3 million in fiscal 2008 and
2007, respectively from financing activities. During fiscal
2009, 2008 and 2007, we made repayments of $172.6 million,
$231.5 million and $214.9 million, respectively, in
connection with our Secured Credit Agreement and the Term Loan.
We repurchased 17.0 million, 32.8 million and
22.6 million shares of common stock for a total of
$400.0 million, $903.7 million and $805.7 million
in fiscal 2009, 2008 and 2007, respectively. Proceeds from
employee stock option exercises and employee stock purchases
were $91.0 million, $114.7 million and
$215.5 million in fiscal 2009, 2008 and 2007, respectively.
Tax benefits, related to tax deductions in excess of stock-based
compensation expense recognized, of $36.7 million,
$45.4 million and $63.2 million for 2009, 2008 and
2007, respectively. During fiscal 2009, 2008 and 2007, we
withheld shares with an aggregate value of $5.1 million,
$6.0 million and $5.3 million, respectively, in
connection with the vesting of certain employees
restricted stock units for purposes of satisfying those
employees federal, state, and local withholding tax
obligations. In addition, during fiscal 2009, we issued
$1.265 billion of convertible notes and paid financing
costs of $26.6 million. We also received proceeds of
$163.1 million for sale of common stock warrants, and paid
$254.9 million for purchase of Note Hedges. During fiscal
2008, we borrowed $318.8 million through a Secured Credit
Agreement.
Net proceeds from the issuance of common stock related to
employee participation in employee stock programs have
historically been a significant component of our liquidity. The
extent to which our employees participate in these programs
generally increases or decreases based upon changes in the
market price of our common stock. As a result, our cash flow
resulting from the issuance of common stock in connection with
employee participation in employee stock programs and related
tax benefits will vary.
Stock
Repurchase Program
At April 24, 2009, $1,096.3 million remained available
for future repurchases under plans approved as of that date. The
stock repurchase program may be suspended or discontinued at any
time.
Convertible
Notes
In June 2008, we issued $1.265 billion of
1.75% Convertible Senior Notes due 2013 and concurrently
entered into Note Hedges and separate warrant transactions. See
Note 4, Convertible Notes and Credit Facilities
of the consolidated financial statements. The Notes will mature
on June 1, 2013, unless earlier repurchased or converted.
As of April 24, 2009, the Notes have not been repurchased
or converted. We also have not received any shares under the
Note Hedges or delivered cash or shares under the Warrants.
Credit
Facilities
As of April 24, 2009, we have an unsecured revolving credit
facility totaling $250.0 million, of which
$0.6 million has been allocated as of April 24, 2009
to support certain of our outstanding letters of credit (See
Note 4 of the consolidated financial statements.)
This credit facility requires us to maintain specified financial
covenants, with which we were in compliance as of April 24,
2009. Such specified financial covenants include a maximum ratio
of Total Debt to Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA) and a minimum amount of
Unencumbered Cash and Short-Term Investments. Our failure to
comply with these financial covenants could result in a default
under the credit facilities, which would give the counterparties
thereto the ability to exercise certain rights, including the
right to accelerate the amounts outstanding thereunder and to
terminate the facility. We were in compliance with all of our
financial covenants at April 24, 2009.
57
Contractual
Obligations
The following summarizes our contractual obligations at
April 24, 2009 and the effect such obligations are expected
to have on our liquidity and cash flow in future periods:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
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|
|
Thereafter
|
|
|
Total
|
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|
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(In millions)
|
|
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Contractual Obligations:
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|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Office operating lease payments(1)
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$
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28.5
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|
|
$
|
24.2
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|
|
$
|
18.3
|
|
|
$
|
15.1
|
|
|
$
|
12.7
|
|
|
$
|
30.2
|
|
|
$
|
129.0
|
|
Real estate lease payments(2)
|
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|
3.9
|
|
|
|
3.9
|
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|
|
3.9
|
|
|
|
129.4
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|
|
|
|
|
|
|
|
|
|
|
141.1
|
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Equipment operating lease payments(3)
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|
|
19.1
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|
|
|
11.1
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|
|
3.4
|
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|
|
1.2
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|
|
|
|
|
|
|
|
|
|
34.8
|
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Venture capital funding commitments(4)
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0.2
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|
|
0.1
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
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Purchase commitments with contract manufacturers(5)
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|
|
83.7
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83.7
|
|
Capital expenditures(6)
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|
|
6.5
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.5
|
|
Communications and maintenance(7)
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|
|
25.0
|
|
|
|
14.5
|
|
|
|
3.6
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
43.5
|
|
1.75% Convertible notes(8)
|
|
|
22.1
|
|
|
|
22.1
|
|
|
|
22.1
|
|
|
|
22.1
|
|
|
|
1,276.1
|
|
|
|
|
|
|
|
1,364.5
|
|
Uncertain tax positions(9)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105.8
|
|
|
|
105.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash Obligations
|
|
$
|
189.0
|
|
|
$
|
75.9
|
|
|
$
|
51.3
|
|
|
$
|
168.2
|
|
|
$
|
1,288.8
|
|
|
$
|
136.0
|
|
|
$
|
1,909.2
|
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|
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|
|
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|
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|
|
|
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|
|
2010
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|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
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Thereafter
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Letters of credit(10)
|
|
$
|
4.8
|
|
|
$
|
0.2
|
|
|
$
|
0.3
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
0.5
|
|
|
$
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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For purposes of the above table, contractual obligations for the
purchase of goods and services are defined as agreements that
are enforceable, are legally binding on us, and subject us to
penalties if we cancel the agreement. Some of the figures we
include in this table are based on managements estimates
and assumptions about these obligations, including their
duration, the possibility of renewal or termination, anticipated
actions by management and third parties, and other factors.
Because these estimates and assumptions are necessarily
subjective, our actual future obligations may vary from those
reflected in the table.
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(1) |
|
We enter into operating leases in the normal course of business.
We lease sales offices, research and development facilities, and
other property and equipment under operating leases throughout
the United States and internationally, which expire on various
dates through fiscal year 2019. Substantially all lease
agreements have fixed payment terms based on the passage of time
and contain payment escalation clauses. Some lease agreements
provide us with the option to renew or terminate the associated
lease. Our future operating lease obligations would change if we
were to exercise these options and if we were to enter into
additional operating lease agreements. In addition, facilities
operating lease payments also include the leases that were
impacted by the restructurings described in Note 13 of the
consolidated financial statements. |
|
(2) |
|
Included in real estate lease payments pursuant to four
financing arrangements with BNP Paribas LLC (BNPPLC)
are (i) lease commitments of $3.9 million in each of
the fiscal years 2010, 2011 and 2012; and $2.3 million in
fiscal 2013, which are based on either the LIBOR rate at
April 24, 2009 plus a spread or a fixed rate for terms of
five years, and (ii) at the expiration or termination of
the lease, a supplemental payment obligation equal to our
minimum guarantee of $127.1 million in the event that we
elect not to purchase or arrange for sale of the buildings. See
Note 15 of the consolidated financial statements. |
|
(3) |
|
Equipment operating leases include servers and IT equipment used
in our engineering labs and data centers. |
|
(4) |
|
Venture capital funding commitments include a quarterly
committed management fee based on a percentage of our committed
funding to be payable through June 2011. |
|
(5) |
|
Contract manufacturer commitments consist of obligations for on
hand inventories and non-cancelable purchase order with our
contract manufacturer . We record a liability for firm,
noncancelable, and nonreturnable purchase commitments for
quantities in excess of our future demand forecasts, which is
consistent |
58
|
|
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|
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with the valuation of our excess and obsolete inventory. As of
April 24, 2009, the liability for these purchase
commitments in excess of future demand was approximate
$3.2 million and is recorded in other current liabilities. |
|
(6) |
|
Capital expenditures include worldwide contractual commitments
to purchase equipment and to construct building and leasehold
improvements, which will be ultimately recorded as property and
equipment. |
|
(7) |
|
Communication and maintenance represents payments we are
required to make based on minimum volumes under certain
communication contracts with major telecommunication companies
as well as maintenance contracts with multiple vendors. Such
obligations expire in September 2012. |
|
(8) |
|
Included in these amounts is the $1.265 billion
1.75% Notes due 2013 (see Note 4 of the consolidated
financial statements). Estimated interest payments for the Notes
are $99.6 million for fiscal 2009 through fiscal 2014. |
|
(9) |
|
As discussed in Note 6 to the consolidated financial
statements, at April 24, 2009, our liability for uncertain
tax positions was $105.8 million. |
|
(10) |
|
The amounts outstanding under these letters of credit relate to
workers compensation, a customs guarantee, a corporate
credit card program, foreign rent guarantees, and surety bonds,
which were primarily related to self-insurance. |
We have commitments related to four lease arrangements with
BNPPLC for approximately 564,274 square feet of office
space for our headquarters in Sunnyvale, California. As of
April 24, 2009, we have a leasing arrangements
(Leasing Arrangements 1) which requires us to lease
a portion of our land in Sunnyvale to BNPPLC for a period of
99 years and to lease approximately 190,000 square
feet of space costing up to $48.5 million. As of
April 24, 2009, we also have commitments relating to
financing and operating leasing arrangements with BNPPLC
(Leasing Arrangements 2, 3, 4) for land and
approximately 374,274 square feet of buildings located in
Sunnyvale, California, costing up to $101.1 million. Under
these leasing arrangements, we began paying BNPPLC minimum lease
payments, which vary based on LIBOR plus a spread or a fixed
rate on the costs of the facilities on the respective lease
commencement dates. We will make payments for each of the leases
for a term of five years. We have the option to renew each of
the leases for two consecutive five-year periods upon approval
by BNPPLC. Upon expiration (or upon any earlier termination) of
the lease terms, we must elect one of the following options:
(i) purchase the buildings from BNPPLC at cost;
(ii) if certain conditions are met, arrange for the sale of
the buildings by BNPPLC to a third party for an amount equal to
at least 85% of the costs (residual guarantee), and be liable
for any deficiency between the net proceeds received from the
third party and such amounts; or (iii) pay BNPPLC
supplemental payments for an amount equal to at least 85% of the
costs (residual guarantee), in which event we may recoup some or
all of such payments by arranging for a sale of each or all
buildings by BNPPLC during the ensuing two-year period. The
following table summarizes the costs, the residual guarantee,
the applicable LIBOR plus spread or fixed rate at April 24,
2009, and the date we began to make payments for each of our
leasing arrangements:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIBOR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus
|
|
|
Lease
|
|
|
|
Leasing
|
|
|
|
|
|
Residual
|
|
|
Spread or
|
|
|
Commencement
|
|
|
|
Arrangements
|
|
|
Cost
|
|
|
Guarantee
|
|
|
Fixed Rate
|
|
|
Date
|
|
Term
|
|
|
|
1
|
|
|
$
|
48.5
|
|
|
$
|
41.2
|
|
|
|
3.99
|
%
|
|
January 2008
|
|
|
5 years
|
|
|
2
|
|
|
$
|
80.0
|
|
|
$
|
68.0
|
|
|
|
1.36
|
%
|
|
December 2007
|
|
|
5 years
|
|
|
3
|
|
|
$
|
10.5
|
|
|
$
|
8.9
|
|
|
|
3.97
|
%
|
|
December 2007
|
|
|
5 years
|
|
|
4
|
|
|
$
|
10.6
|
|
|
$
|
9.0
|
|
|
|
3.99
|
%
|
|
December 2007
|
|
|
5 years
|
|
All leases require us to maintain specified financial covenants
with which we were in compliance as of April 24, 2009. Such
specified financial covenants include a maximum ratio of Total
Debt to Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA) and a minimum amount of
Unencumbered Cash and Short-Term Investments. Our failure to
comply with these financial covenants could result in a default
under the leases which, subject to our right and ability to
exercise our purchase option, would give BNPPLC the right to,
among other things, (i) terminate our possession of the
leased property and require us to pay lease termination damages
and other amounts as set forth in the lease agreements, or
(ii) exercise certain foreclosure remedies. If we were to
exercise our purchase option, or be required to pay lease
termination damages, these payments would significantly reduce
our available liquidity, which could constrain our operating
flexibility.
59
We may from time to time terminate one or more of our leasing
arrangements and repay amounts outstanding in order to meet our
operating or other objectives. For example, on April 1,
2009, we terminated two leasing arrangement in connection with
two buildings located in Sunnyvale, California and Research
Triangle Park, North Carolina and repaid
$119.3 million of the outstanding balance under the leasing
arrangements. On December 1, 2008, we terminated a leasing
arrangement in connection with a separate building located in
Sunnyvale, California and repaid $8.1 million of the
outstanding balance drawn under the construction allowance. As a
result of these terminations, we are no longer contractually
obligated to pay the lease payments for the lease periods and
the residual guarantees.
Legal
Contingencies
On September 5, 2007, we filed a patent infringement
lawsuit in the Eastern District of Texas seeking compensatory
damages and a permanent injunction against Sun Microsystems. On
October 25, 2007, Sun Microsystems filed a counter
claim against us in the Eastern District of Texas seeking
compensatory damages and a permanent injunction. On
October 29, 2007, Sun filed a second lawsuit against us in
the Northern District of California asserting additional patents
against us. The Texas court granted a joint motion to transfer
the Texas lawsuit to the Northern District of California on
November 26, 2007. On March 26, 2008, Sun filed a
third lawsuit in federal court that extends the patent
infringement charges to storage management technology we
acquired in January 2008. The three lawsuits are currently in
the discovery phase and no trial date has been set, so we are
unable at this time to determine the likely outcome of these
various patent litigations. In addition, as we are unable to
reasonably estimate the amount or range of the potential
settlement, no accrual has been recorded as of April 24,
2009.
In April 2009, we entered into a settlement agreement with the
United States of America, acting through the United States
Department of Justice (DOJ) and on behalf of the
General Services Administration (the GSA), under
which we agreed to pay the United States $128.0 million,
plus interest of $0.7 million, related to a dispute
regarding our discount practices and compliance with the price
reduction clause provisions of GSA contracts between August 1997
and February 2005.
In addition, we are subject to various legal proceedings and
claims which have arisen or may arise in the normal course of
business. While the outcome of these legal matters is currently
not determinable, we do not believe that any current litigation
or claims will have a material adverse effect on our business,
cash flow, operating results, or financial condition.
Off-Balance
Sheet Arrangements
During the ordinary course of business, we provide standby
letters of credit or other guarantee instruments to third
parties as required for certain transactions initiated either by
us or our subsidiaries. As of April 24, 2009, our financial
guarantees of $5.9 million that were not recorded on our
balance sheet consisted of standby letters of credit related to
workers compensation, a customs guarantee, a corporate
credit card program, foreign rent guarantees and surety bonds,
which were primarily related to self-insurance.
We use derivative instruments to manage exposures to foreign
currency risk. Our primary objective in holding derivatives is
to reduce the volatility of earnings and cash flows associated
with changes in foreign currency. The program is not designated
for trading or speculative purposes Currently, we do not enter
into any foreign exchange forward contracts to hedge exposures
related to firm commitments or nonmarketable investments. Our
major foreign currency exchange exposures and related hedging
programs are described below:
|
|
|
|
|
We utilize monthly foreign currency forward and options
contracts to hedge exchange rate fluctuations related to certain
foreign monetary assets and liabilities.
|
|
|
|
We use currency forward contracts to hedge exposures related to
forecasted sales denominated in certain foreign currencies.
These contracts are designated as cash flow hedges and in
general closely match the underlying forecasted transactions in
duration.
|
As of April 24, 2009, our notional fair value of foreign
exchange forward and foreign currency option contracts totaled
$314.0 million. We do not believe that these derivatives
present significant credit risks, because the
60
counterparties to the derivatives consist of major financial
institutions, and we manage the notional amount of contracts
entered into with any one counterparty. We do not enter into
derivative financial instruments for speculative or trading
purposes. Other than the risk associated with the financial
condition of the counterparties, our maximum exposure related to
foreign currency forward and option contracts is limited to the
premiums paid.
We have entered into indemnification agreements with third
parties in the ordinary course of business. Generally, these
indemnification agreements require us to reimburse losses
suffered by the third party due to various events, such as
lawsuits arising from patent or copyright infringement. These
indemnification obligations are considered off-balance sheet
arrangements in accordance with FASB Interpretation 45, of
FIN No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others.
We have commitments related to four lease arrangements with
BNPPLC for approximately 564,274 square feet of office
space for our headquarters in Sunnyvale, California (as further
described above under Contractual Obligations).
We have evaluated our accounting for these leases under the
provisions of FIN No. 46R and have determined the
following:
|
|
|
|
|
BNPPLC is a leasing company for BNP Paribas in the United
States. BNPPLC is not a special purpose entity
organized for the sole purpose of facilitating the leases to us.
The obligation to absorb expected losses and receive expected
residual returns rests with the parent, BNP Paribas. Therefore,
we are not the primary beneficiary of BNPPLC as we do not absorb
the majority of BNPPLCs expected losses or expected
residual returns; and
|
|
|
|
BNPPLC has represented in the related closing agreements that
the fair value of the property leased to us by BNPPLC is less
than half of the total of the fair values of all assets of
BNPPLC, excluding any assets of BNPPLC held within a silo.
Further, the property leased to NetApp is not held within a
silo. The definition of held within a silo means
that BNPPLC has obtained funds equal to or in excess of 95% of
the fair value of the leased asset to acquire or maintain its
investment in such asset through nonrecourse financing or other
contractual arrangements, the effect of which is to leave such
asset (or proceeds thereof) as the only significant asset of
BNPPLC at risk for the repayment of such funds.
|
Accordingly, under the provisions of FIN No. 46R, we
are not required to consolidate either the leasing entity or the
specific assets that we lease under the BNPPLC lease. Our future
minimum lease payments and residual guarantees under these real
estate leases will amount to a total of $141.1 million as
reported under our Note 15, Commitments and
Contingencies.
We also have operating leases for various facilities. Total
rental expense for operating leases was $28.8 million for
fiscal 2009, $29.6 million for fiscal 2008, and
$24.0 million for fiscal 2007.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We are exposed to market risk related to fluctuations in
interest rates, market prices, and foreign currency exchange
rates. We use certain derivative financial instruments to manage
these risks. We do not use derivative financial instruments for
speculative or trading purposes. All financial instruments are
used in accordance with management-approved policies.
Market
Risk and Market Interest Risk
Investment and Interest Income As of
April 24, 2009, we had available-for-sale investments of
$1,228.2 million. Our investment portfolio primarily
consists of investments with original maturities at the date of
purchase of greater than three months, which are classified as
available-for-sale. These investments, consisting primarily of
corporate bonds, corporate securities, U.S. government
agency bonds, U.S. Treasuries, certificates of deposit, and
money market funds, are subject to interest rate and interest
income risk and will decrease in value if market interest rates
increase. A hypothetical 10 percent increase in market
interest rates from levels at April 24, 2009 would cause
the fair value of these available-for-sale investments to
decline by approximately $1.6 million.
61
Because we have the ability to hold these investments until
maturity, we would not expect any significant decline in value
of our investments caused by market interest rate changes.
Declines in interest rates over time will, however, reduce our
interest income. We do not use derivative financial instruments
in our investment portfolio.
Our investment policy is to limit credit exposure through
diversification and investment in highly rated securities. We
further mitigate concentrations of credit risk in our
investments by limiting our investments in the debt securities
of a single issuer and by diversifying risk across geographies
and type of issuer. We actively review, along with our
investment advisors, current investment ratings, company
specific events, and general economic conditions in managing our
investments and in determining whether there is a significant
decline in fair value that is other-than-temporary. As a result
of the bankruptcy filing of Lehman Brothers, we recorded in
fiscal 2009 an other-than-temporary impairment charge of
$11.8 million on our corporate bonds related to investments
in Lehman Brothers securities and approximately
$9.3 million on our investments in the Reserve Primary
Fund, which also held Lehman Brothers investments. We will
continue to monitor and evaluate the accounting for our
investment portfolio on a quarterly basis for additional
other-than-temporary impairment charges. We could realize
additional losses in our holdings of the Primary Fund and may
not receive all or a portion of our remaining balance in the
Primary Fund as a result of market conditions and ongoing
litigation against the fund.
We are also exposed to market risk relating to our auction rate
securities due to uncertainties in the credit and capital
markets. As of April 24, 2009, we determined there was a
total decline in the fair value of our auction rate securities
investments of approximately $8.8 million, of which we
recorded temporary impairment charges of $7.0 million,
offset by unrealized gains of $0.3 million, and
$2.1 million was recognized as an other-than-temporary
impairment charge. The fair value of our auction rate securities
may change significantly due to events and conditions in the
credit and capital markets. These securities/issuers could be
subject to review for possible downgrade. Any downgrade in these
credit ratings may result in an additional decline in the
estimated fair value of our auction rate securities. Changes in
the various assumptions used to value these securities and any
increase in the markets perceived risk associated with
such investments may also result in a decline in estimated fair
value.
If current market conditions deteriorate further, or the
anticipated recovery in market values does not occur, we may be
required to record additional unrealized losses in other
comprehensive income (loss) or other-than-temporary impairment
charges to earnings in future quarters. We intend and have the
ability to hold these investments until the market recovers. We
do not believe that the lack of liquidity relating to our
portfolio investments will impact our ability to fund working
capital needs, capital expenditures or other operating
requirements. See Note 8, Fair Value
Measurement, to the consolidated financial statements in
Part II, Item 8; Managements Discussion and
Analysis of Financial Condition and Results of Operations,
Liquidity and Capital Resources, in Part II,
Item 7; and Risk Factors in Part I, Item 1A of
this Annual Report on
Form 10-K
for a description of recent market events that may affect the
value and liquidity of the investments in our portfolio that we
held at April 24, 2009.
Lease Commitments As of April 24, 2009,
one of our four lease arrangements with BNPPLC is based on a
floating interest rate. The minimum lease payments will vary
based on LIBOR plus a spread. All of our leases have a term of
five years, and we have the option to renew these leases for two
consecutive five-year periods upon approval by BNPPLC. A
hypothetical 10 percent increase in market interest rate
from the level at April 24, 2009 would increase our lease
payments on this one floating lease arrangement under the
initial five-year term by an immaterial amount. We do not
currently hedge against market interest rate increases. As
additional cash flow generated from operations is invested at
current market rates, it will offer a natural hedge against
interest rate risk from our lease commitments in the event of a
significant change in market interest rate.
Convertible Notes In June 2008, we issued
$1.265 billion principal amount of 1.75% Notes due
2013. Holders may convert their Notes prior to maturity upon the
occurrence of certain circumstances. Upon conversion, we would
pay the holder the cash value of the applicable number of shares
of our common stock, up to the principal amount of the Note.
Amounts in excess of the principal amount, if any, may be paid
in cash or in stock at our option. Concurrent with the issuance
of the Notes, we entered into convertible note hedge
transactions and separately, warrant transactions, to reduce the
potential dilution from the conversion of the Notes and to
mitigate any negative effect such conversion may have on the
price of our common stock.
62
Our Notes have fixed annual interest rates at 1.75% and
therefore, we do not have significant interest rate exposure on
our Notes. However, we are exposed to interest rate risk.
Generally, the fair market value of our fixed interest rate
Notes will increase as interest rates fall and decrease as
interest rates rise. In addition, the fair value of our Notes is
affected by our stock price. The carrying value of our Notes was
$1.265 billion, excluding $22.2 million of deferred
debt issuance costs and total estimated fair value of our
convertible debt at April 24, 2009 was $1.143 billion.
The fair value was determined based on the closing trading price
per $100 of our 1.75% Notes as of the last day of trading
for the fourth quarter of fiscal 2009, which was $90.38.
Nonmarketable Securities We have from time to
time made cash investments in companies with distinctive
technologies that are potentially strategically important to us.
Our investments in nonmarketable securities would be negatively
affected by an adverse change in equity market prices, although
the impact cannot be directly quantified. Such a change, or any
negative change in the financial performance or prospects of the
companies whose nonmarketable securities we own, would harm the
ability of these companies to raise additional capital and the
likelihood of our being able to realize any gains or return of
our investments through liquidity events such as initial public
offerings, acquisitions, and private sales. These types of
investments involve a high degree of risk, and there can be no
assurance that any company we invest in will grow or be
successful. We do not currently engage in any hedging activities
to reduce or eliminate equity price risk with respect to such
nonmarketable investments. Accordingly, we could lose all or
part of these investments if there is an adverse change in the
market price of a company we invest in. Our investments in
nonmarketable securities had a carrying amount of
$4.0 million as of April 24, 2009 and
$11.2 million as of April 25, 2008. If we determine
that an other-than-temporary decline in fair value exists for a
nonmarketable equity security, we write down the investment to
its fair value and record the related write-down as an
investment loss in our Consolidated Statements of Operations.
During fiscal 2009, we recorded net losses of $6.3 million
for our investments in privately held companies.
Foreign
Currency Exchange Rate Risk and Foreign Exchange Forward
Contracts
We hedge risks associated with foreign currency transactions to
minimize the impact of changes in foreign currency exchange
rates on earnings. We utilize forward and option contracts to
hedge against the short-term impact of foreign currency
fluctuations on certain assets and liabilities denominated in
foreign currencies. All balance sheet hedges are marked to
market through earnings every period. We also use foreign
exchange forward contracts to hedge foreign currency forecasted
transactions related to forecasted sales transactions. These
derivatives are designated as cash flow hedges under
SFAS No. 133. For cash flow hedges outstanding at
April 24, 2009, the time-value component is recorded in
earnings while all other gains or losses were included in other
comprehensive income.
We do not enter into foreign exchange contracts for speculative
or trading purposes. In entering into forward and option foreign
exchange contracts, we have assumed the risk that might arise
from the possible inability of counterparties to meet the terms
of their contracts. We attempt to limit our exposure to credit
risk by executing foreign exchange contracts with creditworthy
multinational commercial banks. All contracts have a maturity of
less than one year.
63
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
NetApp, Inc.
Sunnyvale, California
We have audited the accompanying consolidated balance sheets of
NetApp, Inc. and subsidiaries (collectively, the
Company) as of April 24, 2009 and
April 25, 2008, and the related consolidated statements of
operations, cash flows, and stockholders equity and
comprehensive income for each of the three years in the period
ended April 24, 2009. Our audits also included the
consolidated financial statement schedule listed in
Item 15. These financial statements and the financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
financial statements and the financial statement schedule based
on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
NetApp, Inc. and subsidiaries as of April 24, 2009 and
April 25, 2008, and the results of their operations and
their cash flows for each of the three years in the period ended
April 24, 2009, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial
statements, in the year ended April 25, 2008, the Company
changed its method of measuring and recognizing tax benefits
associated with uncertain tax positions in accordance with
Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
April 24, 2009, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated June 16, 2009 expressed an
unqualified opinion on the Companys internal control over
financial reporting.
/s/ DELOITTE &
TOUCHE LLP
San Jose, California
June 16, 2009
64
NETAPP,
INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
April 24,
|
|
|
April 25,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except par value)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,494,153
|
|
|
$
|
936,479
|
|
Short-term investments
|
|
|
1,110,053
|
|
|
|
227,911
|
|
Accounts receivable, net of allowances of $3,068 at
April 24, 2009, and $2,439 at April 25, 2008
|
|
|
446,537
|
|
|
|
582,110
|
|
Inventories
|
|
|
61,104
|
|
|
|
70,222
|
|
Prepaid expenses and other assets
|
|
|
119,887
|
|
|
|
123,514
|
|
Short-term deferred income taxes
|
|
|
207,050
|
|
|
|
127,197
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,438,784
|
|
|
|
2,067,433
|
|
Property and Equipment, Net
|
|
|
807,923
|
|
|
|
693,792
|
|
Goodwill
|
|
|
680,986
|
|
|
|
680,054
|
|
Intangible Assets, Net
|
|
|
45,744
|
|
|
|
90,075
|
|
Long-Term Investments and Restricted Cash
|
|
|
127,317
|
|
|
|
331,105
|
|
Long-Term Deferred Income Taxes and Other Assets
|
|
|
372,065
|
|
|
|
208,529
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,472,819
|
|
|
$
|
4,070,988
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
137,826
|
|
|
$
|
178,233
|
|
Accrued compensation and related benefits
|
|
|
204,168
|
|
|
|
202,929
|
|
Other accrued liabilities
|
|
|
190,315
|
|
|
|
154,331
|
|
Accrual for GSA settlement
|
|
|
128,715
|
|
|
|
|
|
Income taxes payable
|
|
|
4,732
|
|
|
|
6,245
|
|
Deferred revenue
|
|
|
1,013,569
|
|
|
|
872,364
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,679,325
|
|
|
|
1,414,102
|
|
Revolving Credit Facilities
|
|
|
|
|
|
|
172,600
|
|
1.75% Convertible Senior Notes Due 2013
|
|
|
1,265,000
|
|
|
|
|
|
Other Long-Term Obligations
|
|
|
164,499
|
|
|
|
146,058
|
|
Long-Term Deferred Revenue
|
|
|
701,649
|
|
|
|
637,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,810,473
|
|
|
|
2,370,649
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 14)
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 5,000 shares
authorized; shares outstanding: none in 2009 and 2008
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 885,000 shares
authorized; 436,565 shares issued at April 24, 2009,
and 429,080 shares issued at April 25, 2008
|
|
|
437
|
|
|
|
429
|
|
Additional paid-in capital
|
|
|
2,971,995
|
|
|
|
2,690,629
|
|
Treasury stock at cost (104,325 shares at April 24,
2009, and 87,365 shares at April 25, 2008)
|
|
|
(2,927,376
|
)
|
|
|
(2,527,395
|
)
|
Retained earnings
|
|
|
1,622,448
|
|
|
|
1,535,903
|
|
Accumulated other comprehensive income (loss)
|
|
|
(5,158
|
)
|
|
|
773
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,662,346
|
|
|
|
1,700,339
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,472,819
|
|
|
$
|
4,070,988
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
65
NETAPP,
INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 24,
|
|
|
April 25,
|
|
|
April 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
2,152,657
|
|
|
$
|
2,242,474
|
|
|
$
|
2,085,898
|
|
Software entitlements and maintenance
|
|
|
618,352
|
|
|
|
486,896
|
|
|
|
341,258
|
|
Service
|
|
|
764,099
|
|
|
|
573,797
|
|
|
|
377,126
|
|
GSA settlement
|
|
|
(128,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
3,406,393
|
|
|
|
3,303,167
|
|
|
|
2,804,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
|
|
1,007,642
|
|
|
|
938,431
|
|
|
|
838,010
|
|
Cost of software entitlements and maintenance
|
|
|
9,179
|
|
|
|
8,572
|
|
|
|
10,210
|
|
Cost of service
|
|
|
399,657
|
|
|
|
342,788
|
|
|
|
251,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
1,416,478
|
|
|
|
1,289,791
|
|
|
|
1,099,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
1,989,915
|
|
|
|
2,013,376
|
|
|
|
1,704,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
1,186,141
|
|
|
|
1,075,588
|
|
|
|
895,813
|
|
Research and development
|
|
|
498,495
|
|
|
|
452,205
|
|
|
|
385,357
|
|
General and administrative
|
|
|
203,698
|
|
|
|
171,536
|
|
|
|
147,501
|
|
Restructuring and other charges (recoveries)
|
|
|
54,406
|
|
|
|
447
|
|
|
|
(74
|
)
|
Gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
(25,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,942,740
|
|
|
|
1,699,776
|
|
|
|
1,403,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
47,175
|
|
|
|
313,600
|
|
|
|
301,242
|
|
Other Income (Expenses), Net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
57,610
|
|
|
|
64,610
|
|
|
|
68,837
|
|
Interest expense
|
|
|
(26,865
|
)
|
|
|
(7,990
|
)
|
|
|
(11,642
|
)
|
Gain (loss) on investments, net
|
|
|
(29,571
|
)
|
|
|
12,614
|
|
|
|
(1,538
|
)
|
Other income (expense), net
|
|
|
(3,520
|
)
|
|
|
(135
|
)
|
|
|
2,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
(2,346
|
)
|
|
|
69,099
|
|
|
|
58,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
44,829
|
|
|
|
382,699
|
|
|
|
359,728
|
|
Provision (Benefit) for Income Taxes
|
|
|
(41,716
|
)
|
|
|
72,961
|
|
|
|
61,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
86,545
|
|
|
$
|
309,738
|
|
|
$
|
297,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.26
|
|
|
$
|
0.88
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.26
|
|
|
$
|
0.86
|
|
|
$
|
0.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Used in Net Income per Share Calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
330,279
|
|
|
|
351,676
|
|
|
|
371,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
334,575
|
|
|
|
361,090
|
|
|
|
388,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
66
NETAPP,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 24,
|
|
|
April 25,
|
|
|
April 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
86,545
|
|
|
$
|
309,738
|
|
|
$
|
297,735
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
170,538
|
|
|
|
144,184
|
|
|
|
110,833
|
|
Stock-based compensation
|
|
|
140,754
|
|
|
|
147,964
|
|
|
|
163,033
|
|
Impairment loss (gain) of investments
|
|
|
20,273
|
|
|
|
(12,614
|
)
|
|
|
1,538
|
|
Gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
(25,339
|
)
|
Asset impairment and write-offs
|
|
|
31,573
|
|
|
|
1,841
|
|
|
|
773
|
|
Allowance for doubtful accounts
|
|
|
1,146
|
|
|
|
818
|
|
|
|
928
|
|
Deferred income taxes
|
|
|
(108,371
|
)
|
|
|
(53,031
|
)
|
|
|
(145,989
|
)
|
Deferred rent
|
|
|
4,789
|
|
|
|
3,912
|
|
|
|
1,033
|
|
Tax benefit from stock-based compensation
|
|
|
43,855
|
|
|
|
48,195
|
|
|
|
175,036
|
|
Excess tax benefit from stock-based compensation
|
|
|
(36,702
|
)
|
|
|
(45,391
|
)
|
|
|
(63,159
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
128,692
|
|
|
|
(27,741
|
)
|
|
|
(175,231
|
)
|
Inventories
|
|
|
9,126
|
|
|
|
(15,382
|
)
|
|
|
9,908
|
|
Prepaid expenses and other assets
|
|
|
3,596
|
|
|
|
(7,549
|
)
|
|
|
(6,366
|
)
|
Accounts payable
|
|
|
(26,969
|
)
|
|
|
20,031
|
|
|
|
36,589
|
|
Accrued compensation and related benefits
|
|
|
12,874
|
|
|
|
18,754
|
|
|
|
43,612
|
|
Other accrued liabilities
|
|
|
50,295
|
|
|
|
3,974
|
|
|
|
16,903
|
|
Accrual for GSA settlement
|
|
|
128,715
|
|
|
|
|
|
|
|
|
|
Income taxes payable
|
|
|
(1,443
|
)
|
|
|
(47,300
|
)
|
|
|
1,556
|
|
Long term other liabilities
|
|
|
10,643
|
|
|
|
117,469
|
|
|
|
(265
|
)
|
Deferred revenue
|
|
|
219,301
|
|
|
|
401,014
|
|
|
|
421,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
889,230
|
|
|
|
1,008,886
|
|
|
|
864,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
(1,152,505
|
)
|
|
|
(1,053,450
|
)
|
|
|
(2,630,350
|
)
|
Redemptions of investments
|
|
|
1,035,722
|
|
|
|
1,429,899
|
|
|
|
2,818,207
|
|
Reclassification from cash and cash equivalents to short-term
investments
|
|
|
(597,974
|
)
|
|
|
|
|
|
|
|
|
Change in restricted cash
|
|
|
336
|
|
|
|
(793
|
)
|
|
|
290
|
|
Proceeds from sale of assets
|
|
|
|
|
|
|
|
|
|
|
23,914
|
|
Proceeds from sale of nonmarketable and marketable securities
|
|
|
1,057
|
|
|
|
19,154
|
|
|
|
2,813
|
|
Purchases of nonmarketable securities
|
|
|
(300
|
)
|
|
|
(4,235
|
)
|
|
|
(1,583
|
)
|
Purchases of property and equipment
|
|
|
(289,657
|
)
|
|
|
(188,280
|
)
|
|
|
(165,828
|
)
|
Purchase of businesses, net of cash acquired
|
|
|
|
|
|
|
(99,390
|
)
|
|
|
(131,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(1,003,321
|
)
|
|
|
102,905
|
|
|
|
(83,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock related to employee stock
transactions
|
|
|
91,014
|
|
|
|
114,697
|
|
|
|
215,453
|
|
Tax withholding payments reimbursed by restricted stock
|
|
|
(5,115
|
)
|
|
|
(6,020
|
)
|
|
|
(5,272
|
)
|
Excess tax benefit from stock-based compensation
|
|
|
36,702
|
|
|
|
45,391
|
|
|
|
63,159
|
|
Proceeds from revolving credit facility
|
|
|
|
|
|
|
318,754
|
|
|
|
|
|
Proceeds from issuance of convertible notes
|
|
|
1,265,000
|
|
|
|
|
|
|
|
|
|
Payment of financing costs
|
|
|
(26,581
|
)
|
|
|
|
|
|
|
|
|
Sale of common stock warrants
|
|
|
163,059
|
|
|
|
|
|
|
|
|
|
Purchase of note hedges
|
|
|
(254,898
|
)
|
|
|
|
|
|
|
|
|
Repayment of revolving credit facility and debt
|
|
|
(172,600
|
)
|
|
|
(231,510
|
)
|
|
|
(214,890
|
)
|
Repurchases of common stock
|
|
|
(399,981
|
)
|
|
|
(903,704
|
)
|
|
|
(805,708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
696,600
|
|
|
|
(662,392
|
)
|
|
|
(747,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on Cash and Cash
Equivalents
|
|
|
(24,835
|
)
|
|
|
(1,999
|
)
|
|
|
(5,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents
|
|
|
557,674
|
|
|
|
447,400
|
|
|
|
27,823
|
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
936,479
|
|
|
|
489,079
|
|
|
|
461,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
1,494,153
|
|
|
$
|
936,479
|
|
|
$
|
489,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
67
NETAPP,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
|
|
|
Treasury
|
|
|
Stock
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balances, April 30, 2006
|
|
|
407,994
|
|
|
$
|
408
|
|
|
$
|
1,872,962
|
|
|
|
(31,996
|
)
|
|
$
|
(817,983
|
)
|
|
$
|
(49,266
|
)
|
|
$
|
928,430
|
|
|
$
|
(11,098
|
)
|
|
$
|
1,923,453
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
297,735
|
|
|
|
|
|
|
|
297,735
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,954
|
|
|
|
2,954
|
|
Unrealized gain on investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,183
|
|
|
|
15,183
|
|
Unrealized gain on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,537
|
)
|
|
|
(1,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314,335
|
|
Issuance of common stock related to employee transactions
|
|
|
13,308
|
|
|
|
14
|
|
|
|
215,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
215,453
|
|
Restricted stock awards issued
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards cancelled
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units vested
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decru NQ auto exercises
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units exercises
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock withheld for taxes
|
|
|
(150
|
)
|
|
|
|
|
|
|
(5,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,272
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,597
|
)
|
|
|
(805,708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(805,708
|
)
|
Repurchase of restricted stock Decru
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Assumption of options in connection with acquisition of Topio
|
|
|
|
|
|
|
|
|
|
|
8,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,369
|
|
Deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
(49,266
|
)
|
|
|
|
|
|
|
|
|
|
|
49,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense employee
|
|
|
|
|
|
|
|
|
|
|
163,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163,356
|
|
Income tax benefit from employee stock transactions
|
|
|
|
|
|
|
|
|
|
|
175,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, April 27, 2007
|
|
|
421,623
|
|
|
$
|
422
|
|
|
$
|
2,380,623
|
|
|
|
(54,593
|
)
|
|
$
|
(1,623,691
|
)
|
|
$
|
|
|
|
$
|
1,226,165
|
|
|
$
|
5,502
|
|
|
$
|
1,989,021
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
309,738
|
|
|
|
|
|
|
|
309,738
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,111
|
|
|
|
1,111
|
|
Unrealized gain on investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,786
|
)
|
|
|
(7,786
|
)
|
Unrealized gain on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,946
|
|
|
|
1,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
305,009
|
|
Issuance of common stock related to employee transactions
|
|
|
7,711
|
|
|
|
7
|
|
|
|
114,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,702
|
|
Restricted stock awards issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decru NQ auto exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spinnaker restricted stock units exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock withheld for taxes
|
|
|
(196
|
)
|
|
|
|
|
|
|
(6,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,020
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,772
|
)
|
|
|
(903,704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(903,704
|
)
|
Repurchase of restricted stock & RSA
|
|
|
(58
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
Stock compensation expense employee
|
|
|
|
|
|
|
|
|
|
|
147,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147,924
|
|
Assumption of options in connection with acquisition of Onaro
|
|
|
|
|
|
|
|
|
|
|
5,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,217
|
|
Income tax benefit from employee stock transactions
|
|
|
|
|
|
|
|
|
|
|
48,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, April 25, 2008
|
|
|
429,080
|
|
|
$
|
429
|
|
|
$
|
2,690,629
|
|
|
|
(87,365
|
)
|
|
$
|
(2,527,395
|
)
|
|
$
|
|
|
|
$
|
1,535,903
|
|
|
$
|
773
|
|
|
$
|
1,700,339
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,545
|
|
|
|
|
|
|
|
86,545
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,764
|
)
|
|
|
(4,764
|
)
|
Unrealized gain on investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,986
|
)
|
|
|
(1,986
|
)
|
Unrealized gain on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
819
|
|
|
|
819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,614
|
|
Issuance of common stock related to employee transactions
|
|
|
7,770
|
|
|
|
8
|
|
|
|
91,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,014
|
|
Restricted stock withheld for taxes
|
|
|
(279
|
)
|
|
|
|
|
|
|
(5,115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,115
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,960
|
)
|
|
|
(399,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(399,981
|
)
|
Repurchase of restricted stock & RSA
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of Note Hedges, net of tax benefits of $102,698
|
|
|
|
|
|
|
|
|
|
|
(152,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(152,200
|
)
|
Sale of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
163,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163,059
|
|
Stock compensation expense employee
|
|
|
|
|
|
|
|
|
|
|
140,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140,761
|
|
Income tax benefit from employee stock transactions
|
|
|
|
|
|
|
|
|
|
|
43,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, April 24, 2009
|
|
|
436,565
|
|
|
$
|
437
|
|
|
$
|
2,971,995
|
|
|
|
(104,325
|
)
|
|
$
|
(2,927,376
|
)
|
|
$
|
|
|
|
$
|
1,622,448
|
|
|
$
|
(5,158
|
)
|
|
$
|
1,662,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
68
NETAPP,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in thousands, except per-share
data)
Based in Sunnyvale, California, NetApp, Inc. (we or
the Company) was incorporated in California in
April 1992 and reincorporated in Delaware in November 2001;
in March 2008, the Company changed its name from Network
Appliance, Inc. to NetApp, Inc. The Company is a supplier of
enterprise storage and data management software and hardware
products and services. Our solutions help global enterprises
meet major information technology challenges such as managing
storage growth, assuring secure and timely information access,
protecting data and controlling costs by providing innovative
solutions that simplify the complexity associated with managing
corporate data.
|
|
2.
|
Significant
Accounting Policies
|
Fiscal Year We operate on a 52-week or
53-week year ending on the last Friday in April. Fiscal 2009,
2008 and 2007 were all 52-week fiscal years.
Basis of Presentation The consolidated
financial statements include the Company and its wholly-owned
subsidiaries. Intercompany accounts and transactions are
eliminated in consolidation.
Reclassification In the first quarter of
fiscal 2009, we implemented a change in the reporting of
warranty costs and reported these costs in cost of product
revenues. These costs, which were included in cost of service
revenues in previous periods, amounted to $26,997 and $22,082
for fiscal years 2008 and 2007, respectively, and have been
reclassified on the accompanying financial statements to conform
to current year classification. This change had no effect on the
reported amounts of total costs of revenues, total gross margin,
net income or cash flow from operations for any period presented.
Use of Estimates The preparation of the
consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Such estimates
include, but are not limited to, revenue recognition and
allowances; allowance for doubtful accounts; valuation of
goodwill and intangibles; fair value of derivative instruments
and related hedged items; accounting for income taxes; inventory
valuation and contractual commitments; restructuring accruals;
warranty reserve; impairment losses on investments; fair value
of options granted under our stock-based compensation plans; and
loss contingencies. Actual results could differ from those
estimates.
Concentration of Credit Risk Financial
instruments that potentially subject us to concentrations of
credit risk consist primarily of cash equivalents, investments,
foreign exchange contracts and accounts receivable. Cash
equivalents and short-term investments consist primarily of
corporate bonds, U.S. government agency securities, and
money market funds, all of which are considered high investment
grade. Our policy is to limit the amount of credit exposure
through diversification and investment in highly rated
securities. We further mitigate concentrations of credit risk in
our investments by limiting our investments in the debt
securities of a single issuer and by diversifying risk across
geographies and type of issuer.
Our long term investments, including the Primary Fund and
auction rate securities have been and will continue to be
exposed to market risk due to uncertainties in the credit and
capital markets. In fiscal 2009, we recorded an
other-than-temporary impairment charge to earnings of $23,251
related to auction rate securities, Lehman Brothers corporate
bonds and the Primary Fund that held Lehman Brothers investments.
In entering into forward foreign exchange contracts, we have
assumed the risk that might arise from the possible inability of
counterparties to meet the terms of their contracts. The
counterparties to these contracts are major multinational
commercial banks, and we do not expect any losses as a result of
counterparty defaults.
69
NETAPP,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We sell our products primarily to large organizations in
different industries and geographies. We do not require
collateral or other security to support accounts receivable. In
addition, we maintain an allowance for potential credit losses.
To reduce credit risk, we perform ongoing credit evaluations on
our customers financial condition. We establish an
allowance for doubtful accounts based upon factors surrounding
the credit risk of customers, historical trends and other
information and, to date, such losses have been within
managements expectations. No customer represented more
than 10% of accounts receivables in fiscal 2009, 2008 and 2007.
Concentrations of credit risk with respect to trade accounts
receivable are limited due to the wide variety of customers who
are dispersed across many geographic regions.
Risk and Uncertainties There are no
concentrations of business transacted with a particular market
that would severely impact our business in the near term.
However, we currently rely on a limited number of suppliers for
certain key components and a few key contract manufacturers to
manufacture most of our products; any disruption or termination
of these arrangements could materially adversely affect our
operating results.
Comprehensive Income
(Loss) Comprehensive income (loss) is
defined as the change in equity during a period from nonowner
sources. Comprehensive income consists of net income and other
comprehensive income (loss), which is a separate component of
stockholders equity. Other comprehensive income (loss)
includes foreign currency translation adjustments, unrealized
gain, and losses on derivatives and unrealized gains and losses
on our available-for-sale securities, which includes a temporary
impairment charge of $7,037 and $3,500 in fiscal 2009 and 2008,
respectively, associated with our auction rate securities. Refer
to Note 3 for further discussion regarding this unrealized
loss.
Other comprehensive income (loss) for fiscal years 2009, 2008
and 2007 has been disclosed within the consolidated statement of
stockholders equity and comprehensive income.
The components of accumulated other comprehensive income (loss)
at the end of each fiscal year, were as follows (net of related
tax effects):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Accumulated translation adjustments
|
|
$
|
(332
|
)
|
|
$
|
4,432
|
|
|
$
|
3,321
|
|
Accumulated unrealized gain (loss) on available-for-sale
investments
|
|
|
(4,303
|
)
|
|
|
(2,317
|
)
|
|
|
5,469
|
|
Accumulated unrealized loss on derivatives
|
|
|
(523
|
)
|
|
|
(1,342
|
)
|
|
|
(3,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income (loss)
|
|
$
|
(5,158
|
)
|
|
$
|
773
|
|
|
$
|
5,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents We consider all
highly liquid debt investments with original maturities of three
months or less at time of purchase to be cash equivalents.
Marketable Securities As of April 24,
2009 and April 25, 2008, our short-term and long-term
investments in marketable securities have been classified as
available-for-sale and are carried at fair value.
Available-for-sale investments with original maturities of
greater than three months at the date of purchases are
classified as short-term investments as these investments
generally consist of highly marketable securities that are
intended to be available to meet current cash requirements.
Currently, all marketable securities held by us are classified
as available-for-sale and our entire auction rate securities
(ARS) portfolio and our investment in the Reserve Primary Fund
(Primary Fund) are classified as long-term
investments.
Our ARS are securities with long-term nominal maturities which,
in accordance with investment policy guidelines, had credit
ratings of AAA and Aaa at the time of purchase. During the
fourth quarter of fiscal 2008, we reclassified all of our
investments in ARS from short-term investments to long-term
investments as we believed our ability to liquidate these
investments in the next twelve months was uncertain. Based on an
analysis of the fair value and marketability of these
investments, we recorded temporary impairment charges of
approximately $7,037 during fiscal 2009, partially offset by
$296 in unrealized gains within other comprehensive income
(loss). During fiscal
70
NETAPP,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2009, we recorded an other-than-temporary impairment loss of
$2,122 due to a significant decline in the estimated fair values
of certain of our ARS related to credit quality risk and rating
downgrades.
As a result of the bankruptcy filing of Lehman Brothers, which
occurred during fiscal 2009, we recorded an other-than-temporary
impairment charge of $11,831 on our corporate bonds related to
investments in Lehman Brothers securities and approximately
$9,298 on our investments in the Primary Fund that held
Lehman Brothers investments. As of April 24, 2009, we
have an investment in the Primary Fund, an AAA-rated money
market fund at the time of purchase, with a par value of $60,928
and an estimated fair value of $51,630, which suspended
redemptions in September 2008 and is in the process of
liquidating its portfolio of investments. On December 3,
2008, it announced a plan for liquidation and distribution of
assets that includes the establishment of a special reserve to
be set aside out of its assets for pending or threatened claims,
as well as anticipated costs and expenses, including related
legal and accounting fees. On February 26, 2009, the
Primary Fund announced a plan to set aside $3,500,000 of the
funds remaining assets as the special reserve
which may be increased or decreased as further information
becomes available. Our pro rata share of the $3,500,000 special
reserve is approximately $41,455. The Primary Fund announced
plans to continue to make periodic distributions, up to the
amount of the special reserve, on a pro-rata basis. The Primary
Fund has received an United States Security Exchange Commission
order providing that the SEC will supervise the distribution of
assets from the Primary Fund. We could realize additional losses
in our holdings of the Primary Fund and may not receive all or a
portion of our remaining balance in the Primary Fund as a result
of market conditions and ongoing litigation against the fund.
During fiscal 2008 and 2007, recognized gains and losses on
available-for-sale investments were not material. Management
determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates the
classification at each reporting date. The fair value of our
marketable securities, including those included in long-term
investments, was $1,228,220 and $543,226 as of April 24,
2009 and April 25, 2008, respectively.
Investments in Nonpublic Companies We have
certain investments in nonpublicly- traded companies in which we
have less than 20% of the voting rights and in which we do not
exercise significant influence and accordingly, we account for
these investments under the cost method. As of April 24,
2009 and April 25, 2008, $3,969 and $11,169 of these
investments are included in long-term investments on the
accompanying balance sheet. We perform periodic reviews of our
investments for impairment. During fiscal 2009, we recorded a
loss of $6,320 related to our investments in privately held
companies.
Other-than-temporary Impairment All of our
available-for-sale investments and nonmarketable equity
securities are subject to a periodic impairment review.
Investments are considered to be impaired when a decline in fair
value is judged to be other-than-temporary. This determination
requires significant judgment. For publicly traded investments,
impairment is determined based upon the specific facts and
circumstances present at the time, including factors such as
current economic and market conditions, the credit rating of the
securitys issuer, the length of time an investments
fair value has been below our carrying value, the extent to
which fair value was below cost, and our ability and intent to
hold investments for a period of time sufficient to allow for
anticipated recovery in value. If an investments decline
in fair value, caused by factors other than changes in interest
rates, is deemed to be other-than-temporary, we reduce its
carrying value to its estimated fair value, as determined based
on quoted market prices or liquidation values. Declines in value
judged to be other-than-temporary, if any, are recorded in
operations as incurred. For long-term investments, such as
auction rate securities, impairment is determined based on fair
value and marketability of these investments. The valuation
models we used to estimate fair value included numerous
assumptions such as assessments of the underlying structure of
each security, expected cash flows, discount rates, credit
ratings, workout periods, and overall capital market liquidity.
For nonmarketable equity securities, the impairment analysis
requires the identification of events or circumstances that
would likely have a significant adverse effect on the fair value
of the investment, including revenue and earnings trends,
overall business prospects, dilution of valuation due to new
financing, limited capital resources, limited prospects of
receiving additional
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NETAPP,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
financing, limited prospects for liquidity of the related
securities and general market conditions in the investees
industry.
Inventories Inventories are stated at the
lower of cost or market, which approximates actual cost on a
first-in,
first out basis. We write down inventory and record purchase
commitment liabilities for excess and obsolete inventory equal
to the difference between the cost of inventory and the
estimated fair value based upon assumptions about future demand
and market conditions.
Property and Equipment Property and equipment
are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the
assets, which range from three to five years. The land at our
Sunnyvale, California headquarters site and at Research Triangle
Park, North Carolina, is not depreciated. Leasehold improvements
are amortized over the shorter of the estimated useful lives of
the assets or the remaining term of the lease. Buildings and
building improvements are amortized over the estimated lives of
the assets, which range from 10 to 40 years. Construction
in progress will be amortized over the estimated useful lives of
the respective assets when they are ready for their intended use.
We review the carrying values of long-lived assets whenever
events and circumstances indicate that the net book value of an
asset may not be recovered through expected future cash flows
from its use and eventual disposition. The amount of impairment
loss, if any, is measured as the difference between the net book
value and the estimated fair value of the asset.
Goodwill and Purchased Intangible Assets
Goodwill is recorded when the consideration paid for an
acquisition exceeds the fair value of net tangible and
intangible assets acquired. Acquisition-related intangible
assets are amortized on a straight-line basis over their
economic lives of five years for patents, four to five years for
existing technology, 18 months to eight years for customer
relationships and two to seven years for trademarks and
tradenames as we believe this method would most closely reflect
the pattern in which the economic benefits of the assets will be
consumed.
In accordance with SFAS No. 142, Goodwill and
Other Intangible Assets,
(SFAS No. 142) goodwill is measured and
tested on an annual basis in the fourth quarter of our fiscal
year or more frequently if we believe indicators of impairment
exist. Triggering events for impairment reviews may be
indicators such as adverse industry or economic trends,
restructuring actions, lower projections of profitability, or a
sustained decline in our market capitalization. The performance
of the test involves a two-step process. The first step requires
comparing the fair value of the reporting unit to its net book
value, including goodwill. We have one reporting unit, the fair
value of which is determined to equal our market capitalization
as determined through quoted market prices. A potential
impairment exists if the fair value of the reporting unit is
lower than its net book value. The second step of the process is
only performed if a potential impairment exists, and it involves
determining the difference between the fair value of the
reporting units net assets other than goodwill to the fair
value of the reporting unit and if the difference is less than
the net book value of goodwill an impairment exists and is
recorded. We have not been required to perform this second step
of the process since its adoption of SFAS No. 142
because the fair value of the reporting unit has exceeded the
net book value at every measurement date.
Long-Lived Assets We account for
long-lived assets, including other purchased intangible assets
acquired in business combinations, in accordance with
SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets,
(SFAS No. 144), which requires impairment
losses to be recorded on long-lived assets used in operations
when indicators of impairment, such as reductions in demand,
lower projections of profitability, significant changes in the
manner of our use of acquired assets, or significant negative
industry or economic trends are present. Reviews are performed
to determine whether the carrying value of an asset is impaired,
based on comparisons to undiscounted expected future cash flows.
If this comparison indicates that there is impairment, the
impaired asset is written down to fair value, which is typically
calculated using: (i) quoted market prices
and/or
(ii) discounted expected future cash flows utilizing a
discount rate consistent with the guidance provided in FASB
Concepts Statement No. 7, Using Cash Flow
Information and Present Value in Accounting
Measurements.
72
NETAPP,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Impairment is based on the excess of the carrying amount over
the fair value of those assets. We estimate regarding future
anticipated net revenue and cash flows, the remaining economic
life of the products and technologies, or both, may differ from
those used to assess the recoverability of assets. In that
event, impairment charges or shortened useful lives of certain
long-lived assets may be required, resulting in a reduction in
net income or an increase to net loss in the period when such
determinations are made. Due to the recent negative economic
trends, we tested our long-lived assets for impairment as of
April 24, 2009 and determined they were not impaired,
except for an impairment charge of intangibles of $14,917 in
fiscal 2009 related to our decision to cease development and
availability of a certain product.
Revenue Recognition We apply the provisions
of Statement of Position (SOP)
No. 97-2,
Software Revenue Recognition, and related
interpretations to our product sales, both hardware and
software, because our software is essential to the performance
of our hardware. We recognize revenue when:
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Persuasive evidence of an arrangement
exists: It is our customary practice to have a
purchase order
and/or
contract prior to recognizing revenue on an arrangement from our
end users, customers, value-added resellers, or distributors.
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Delivery has occurred: Our product is
physically delivered to our customers, generally with standard
transfer terms such as FOB origin. We typically do not allow for
restocking rights with any of our value- added resellers or
distributors. Products shipped with acceptance criteria or
return rights are not recognized as revenue until all criteria
are achieved. If undelivered products or services exist that are
essential to the functionality of the delivered product in an
arrangement, delivery is not considered to have occurred.
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The fee is fixed or determinable: Arrangements
with payment terms extending beyond our standard terms,
conditions, and practices are not considered to be fixed or
determinable. Revenue from such arrangements is recognized as
the fees become due and payable. We typically do not allow for
price-protection rights with any of our value-added resellers or
distributors.
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Collection is probable: Probability of
collection is assessed on a
customer-by-customer
basis. Customers are subjected to a credit review process that
evaluates the customers financial position and ultimately
their ability to pay. If it is determined at the outset of an
arrangement that collection is not probable based upon our
review process, revenue is recognized upon cash receipt.
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Our multiple element arrangements include our systems and one or
more of the following undelivered software-related elements:
software entitlements and maintenance, premium hardware
maintenance, and storage review services. Our software
entitlements and maintenance entitle our customers to receive
unspecified product upgrades and enhancements on a
when-and-if-available
basis, bug fixes, and patch releases. Premium hardware
maintenance services include contracts for technical support and
minimum response times. Revenues from software entitlements and
maintenance, premium hardware maintenance services and storage
review services are recognized ratably over the contractual
term, generally from one to three years. We also offer extended
service contracts (which extend our standard parts warranty and
may include premium hardware maintenance) at the end of the
warranty term; revenues from these contracts are recognized
ratably over the contract term. We typically sell technical
consulting services separately from any of our other revenue
elements, either on a time and materials basis or for fixed
price standard projects; we recognize revenue for these services
as they are performed. Revenue from hardware installation
services is recognized at the time of delivery and any remaining
costs are accrued, as the remaining undelivered services are
considered to be inconsequential and perfunctory. For
arrangements with multiple elements, we recognize as revenue the
difference between the total arrangement price and the greater
of fair value or stated price for any undelivered elements
(the residual method).
For our undelivered software-related elements, we apply the
provisions of
SOP No. 97-2
and determine fair value of these undelivered elements based on
vendor-specific objective evidence (VSOE), which for
us consists of the prices charged when these services are sold
separately either alone, in the case of software entitlements
and maintenance, or as a bundled element which always includes
software entitlements and maintenance and premium
73
NETAPP,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
hardware maintenance, and may also include storage review
services. To determine the fair value of these elements, we
analyze both the selling prices when elements are sold
separately as well as the concentrations of those prices. We
believe those concentrations have been sufficient to enable us
to establish VSOE of fair value for the undelivered elements. If
VSOE cannot be obtained to establish fair value of the
undelivered elements, paragraph 12 of
SOP No. 97-2
would require that revenue from the entire arrangement be
initially deferred and recognized ratably over the period these
elements are delivered.
For purposes of presentation in the statement of operations,
once fair value has been determined for our undelivered bundled
elements, we allocate revenue first to software entitlements and
maintenance, based on VSOE of its fair value with the remainder
allocated to other service revenues.
We record reductions to revenue for estimated sales returns at
the time of shipment. Sales returns are estimated based on
historical sales returns, current trends, and our expectations
regarding future experience. We monitor and analyze the accuracy
of sales returns estimates by reviewing actual returns and
adjust them for future expectations to determine the adequacy of
our current and future reserve needs. If actual future returns
and allowances differ from past experience, additional
allowances may be required.
We also maintain a separate allowance for doubtful accounts for
estimated losses based on our assessment of the collectibility
of specific customer accounts and the aging of our accounts
receivable. We analyze accounts receivable and historical bad
debts, customer concentrations, customer solvency, current
economic and geographic trends, and changes in customer payment
terms and practices when evaluating the adequacy of the
allowance for doubtful accounts. Our allowance for doubtful
accounts as of April 24, 2009 and April 25, 2008, was
$3,068, and $2,439, respectively. If the financial condition of
our customers deteriorates, resulting in an impairment of their
ability to make payments, additional allowances may be required.
Deferred Revenues Deferred revenues consist
primarily of amounts related to software entitlements and
maintenance, service contracts and other service described in
revenue recognition above.
Software Development Costs The costs for the
development of new software products and substantial
enhancements to existing software products are expensed as
incurred until technological feasibility has been established,
at which time any additional costs would be capitalized in
accordance with SFAS No. 86, Accounting for
the Costs of Software to Be Sold, Leased, or Otherwise
Marketed. Because we believe our current process for
developing software is essentially completed concurrently with
the establishment of technological feasibility, which occurs
upon the completion of a working model, no costs have been
capitalized for any of the periods presented. In accordance with
SOP No. 98-1,
Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use, the cost of internally
developed software is capitalized and included in property and
equipment at the point at which the conceptual formulation,
design, and testing of possible software project alternatives
have been completed and management authorizes and commits to
funding the project. Projects where expected future economic
benefits are less than probable are not capitalized. Internally
developed software costs include the cost of software tools and
licenses used in the development of our systems, as well as
consulting costs. Completed projects are transferred to property
and equipment at cost and are amortized on a straight-line basis
over their estimated useful lives, generally three years. We did
not capitalize any software development costs in fiscal 2009,
2008 or 2007.
Income Taxes Deferred income tax assets and
liabilities are provided for temporary differences that will
result in future tax deductions or income in future periods, as
well as the future benefit of tax credit carryforwards. A
valuation allowance reduces tax assets to their estimated
realizable value.
Determining the liability for uncertain tax positions requires
us to make significant estimates and judgments as to whether,
and the extent to which, additional taxes may be due based on
potential tax audit issues in the U.S. and other tax
jurisdictions throughout the world. Our estimates are based on
the outcomes of previous audits, as well as the precedents set
in cases in which others have taken similar tax positions to
those taken by us. If we later determine
74
NETAPP,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
that our exposure is lower or that the liability is not
sufficient to cover our revised expectations, we adjust the
liability and effect a related change in our tax provision
during the period in which we make such a determination.
Effective April 28, 2007, we adopted Financial Accounting
Standards Board (FASB) Interpretation
(FIN) No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109. FIN No. 48
prescribes a comprehensive model for how a company should
recognize, measure, present, and disclose in its financial
statements uncertain tax positions that we have taken or expect
to take on a tax return (including a decision whether to file or
not to file a return in a particular jurisdiction).
FIN No. 48 is applicable to all uncertain tax
positions for taxes accounted for under SFAS No. 109,
Accounting for Income Taxes, and
substantially changes the applicable accounting model. There was
no cumulative effect from the adoption of FIN No. 48.
As a result of the implementation of FIN No. 48, we
recognize the tax liability for uncertain income tax positions
on the income tax return based on the two-step process
prescribed in the interpretation. The first step is to determine
whether it is more likely than not that each income tax position
would be sustained upon audit. The second step is to estimate
and measure the tax benefit as the amount that has a greater
than 50% likelihood of being realized upon ultimate settlement
with the tax authority. Estimating these amounts requires us to
determine the probability of various possible outcomes. We
evaluate these uncertain tax positions on a quarterly basis. See
Note 6, Income Taxes, for further discussion.
Foreign Currency Translation For subsidiaries
whose functional currency is the local currency, gains and
losses resulting from translation of these foreign currency
financial statements into U.S. dollars are recorded within
stockholders equity and comprehensive income as part of
accumulated other comprehensive income (loss). For subsidiaries
where the functional currency is the U.S. dollar, gains and
losses resulting from the process of remeasuring foreign
currency financial statements into U.S. dollars are
included in other income (expenses), net.
Derivative Instruments We follow
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities as amended.
Derivatives that are not designated as hedges are adjusted to
fair value through earnings. If the derivative is designated as
a hedge, depending on the nature of the exposure being hedged,
changes in fair value will either be offset against the change
in fair value of the hedged items through earnings or recognized
within stockholders equity and comprehensive income (loss)
until the hedged item is recognized in earnings. The ineffective
portion of the hedge is recognized in earnings immediately. For
all periods presented, realized gains and losses on the
ineffective portion of our hedges were not material.
As a result of our significant international operations, we are
subject to risks associated with fluctuating exchange rates. We
use derivative financial instruments, principally currency
forward contracts and currency options, to attempt to minimize
the impact of exchange rate movements on our balance sheet and
operating results. Factors that could have an impact on the
effectiveness of our hedging program include the accuracy of
forecasts and the volatility of foreign currency markets. These
programs reduce, but do not always entirely eliminate, the
impact of currency exchange movements. The maturities of these
instruments are generally less than one year.
Currently, we do not enter into any foreign exchange forward
contracts to hedge exposures related to firm commitments or
nonmarketable investments.
Net Income per Share Basic net income per
share is computed by dividing income available to common
stockholders by the weighted average number of common shares
outstanding, excluding common shares subject to repurchase for
that period. Diluted net income per share is computed giving
effect to all dilutive potential shares that were outstanding
during the period. Dilutive potential common shares consist of
incremental common shares subject to repurchase and common
shares issuable upon exercise of stock options, employee stock
purchase plan (ESPP), warrants, and restricted stock
awards.
Certain awards outstanding, representing 61,050, 39,302, and
22,827 shares of common stock, have been excluded from the
diluted net income per share calculations for fiscal 2009, 2008
and 2007, respectively, because their effect would have been
antidilutive as these options exercise prices were above
the average market prices in
75
NETAPP,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
such periods. Diluted shares outstanding do not include any
effect resulting from the conversion of our Notes issued in June
2008, warrants and ESPP shares as their impact would be
anti-dilutive for all periods presented.
As of April 24, 2009, we have repurchased
104,325 shares of our common stock under various stock
repurchase programs since inception of the repurchase programs
in May 2003. Such repurchased shares are held as treasury stock
and our outstanding shares used to calculate earnings per share
have been reduced by the weighted number of repurchased shares.
The following is a reconciliation of the numerators and
denominators of the basic and diluted net income per share
computations for the periods presented:
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Year Ended
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April 24,
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April 25,
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April 27,
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2009
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2008
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2007
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Net Income (Numerator):
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Net income, basic and diluted
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$
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86,545
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$
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309,738
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$
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297,735
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