e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
October 30,
2009
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OR
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o
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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
(State or other jurisdiction
of
incorporation or organization)
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77-0307520
(IRS Employer
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
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 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
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(a
Rule 12b-2
of the Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
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Class
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Outstanding at November 25, 2009
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Common Stock
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338,906,046
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TABLE OF
CONTENTS
TRADEMARKS
©
2009 NetApp. All rights reserved. Specifications are subject to
change without notice. NetApp, the NetApp logo, Go further,
faster, NearStore, and SnapMirror are trademarks or registered
trademarks of NetApp, Inc. in the United States
and/or other
countries. Windows is a registered trademark of Microsoft
Corporation. UNIX is a registered trademark of The Open Group.
All other brands or products are trademarks or registered
trademarks of their respective holders and should be treated as
such.
2
PART I.
FINANCIAL INFORMATION
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Item 1.
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Condensed
Consolidated Financial Statements (Unaudited)
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NETAPP,
INC.
(In thousands)
(Unaudited)
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October 30,
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April 24,
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2009
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2009
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$
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1,728,841
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$
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1,494,153
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Short-term investments
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1,226,697
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1,110,053
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Accounts receivable, net of allowances of $2,142 and $3,068 at
October 30, 2009, and April 24, 2009, respectively
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318,033
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446,537
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Inventories
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61,141
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|
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61,104
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Prepaid expenses and other assets
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115,525
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119,887
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Short-term deferred income taxes
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140,352
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207,050
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Total current assets
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3,590,589
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3,438,784
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Property and Equipment, Net
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780,378
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807,923
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Goodwill
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680,986
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680,986
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Intangible Assets, Net
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34,970
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45,744
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Long-Term Investments and Restricted Cash
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116,406
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127,317
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Long-Term Deferred Income Taxes and Other Assets
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361,178
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283,625
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$
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5,564,507
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$
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5,384,379
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current Liabilities:
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Accounts payable
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$
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118,807
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$
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137,826
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Accrued compensation and related benefits
|
|
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220,778
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|
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204,168
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Other accrued liabilities
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179,087
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|
|
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190,315
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Accrual for GSA settlement
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|
|
|
|
|
|
128,715
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Income taxes payable
|
|
|
3,020
|
|
|
|
4,732
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Deferred revenue
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|
|
1,017,067
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|
|
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1,013,569
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|
|
|
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Total current liabilities
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1,538,759
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1,679,325
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1.75% Convertible Senior Notes Due 2013
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1,078,016
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1,054,717
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Other Long-Term Obligations
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139,402
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|
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164,499
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Long-Term Deferred Revenue
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704,836
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701,649
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|
|
|
|
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3,461,013
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3,600,190
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Commitments and Contingencies (Note 16)
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Stockholders Equity:
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Common stock (442,003 and 436,565 shares issued at
October 30, 2009 and April 24, 2009, respectively)
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442
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437
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Additional paid-in capital
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3,276,172
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3,115,796
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Treasury stock at cost (104,325 shares at October 30,
2009 and April 24, 2009)
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(2,927,376
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)
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(2,927,376
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)
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Retained earnings
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1,747,831
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1,600,490
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Accumulated other comprehensive income (loss)
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6,425
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(5,158
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)
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Total stockholders equity
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2,103,494
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1,784,189
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$
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5,564,507
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$
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5,384,379
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|
|
|
|
|
|
|
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See accompanying notes to condensed consolidated financial
statements.
3
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Three Months Ended
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Six Months Ended
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October 30,
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October 24,
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October 30,
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October 24,
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2009
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2008
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2009
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2008
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Revenues:
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Product
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$
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525,148
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$
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570,436
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$
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1,003,394
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|
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$
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1,118,291
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Software entitlements and maintenance
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169,815
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|
|
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152,722
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|
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335,105
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|
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297,134
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Service
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|
|
215,064
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|
|
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188,473
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409,489
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|
|
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364,982
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|
|
|
|
|
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|
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|
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Net revenues
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|
910,027
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911,631
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1,747,988
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1,780,407
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Cost of Revenues:
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Cost of product
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199,134
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|
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260,332
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|
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|
411,669
|
|
|
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510,110
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Cost of software entitlements and maintenance
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|
|
3,106
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|
|
|
2,259
|
|
|
|
6,218
|
|
|
|
4,445
|
|
Cost of service
|
|
|
101,106
|
|
|
|
102,884
|
|
|
|
200,927
|
|
|
|
203,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total cost of revenues
|
|
|
303,346
|
|
|
|
365,475
|
|
|
|
618,814
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|
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|
717,603
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|
|
|
|
|
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|
|
|
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|
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Gross margin
|
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606,681
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|
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|
546,156
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|
1,129,174
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|
1,062,804
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|
|
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|
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|
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Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Sales and marketing
|
|
|
300,835
|
|
|
|
304,045
|
|
|
|
602,268
|
|
|
|
607,152
|
|
Research and development
|
|
|
132,354
|
|
|
|
125,496
|
|
|
|
262,671
|
|
|
|
250,848
|
|
General and administrative
|
|
|
56,939
|
|
|
|
51,011
|
|
|
|
116,490
|
|
|
|
100,474
|
|
Restructuring and other charges
|
|
|
1,179
|
|
|
|
|
|
|
|
2,675
|
|
|
|
|
|
Merger termination proceeds, net
|
|
|
|
|
|
|
|
|
|
|
(41,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
491,307
|
|
|
|
480,552
|
|
|
|
942,984
|
|
|
|
958,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
115,374
|
|
|
|
65,604
|
|
|
|
186,190
|
|
|
|
104,330
|
|
Other Income (Expenses), Net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
6,979
|
|
|
|
17,619
|
|
|
|
15,596
|
|
|
|
33,094
|
|
Interest expense
|
|
|
(17,916
|
)
|
|
|
(17,807
|
)
|
|
|
(37,117
|
)
|
|
|
(27,319
|
)
|
Gain (loss) on investments, net
|
|
|
2,805
|
|
|
|
(22,613
|
)
|
|
|
2,713
|
|
|
|
(25,234
|
)
|
Other expenses, net
|
|
|
(1,270
|
)
|
|
|
(479
|
)
|
|
|
(2,218
|
)
|
|
|
(2,468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses, net
|
|
|
(9,402
|
)
|
|
|
(23,280
|
)
|
|
|
(21,026
|
)
|
|
|
(21,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
105,972
|
|
|
|
42,324
|
|
|
|
165,164
|
|
|
|
82,403
|
|
Provision (Benefit) for Income Taxes
|
|
|
10,295
|
|
|
|
(729
|
)
|
|
|
17,823
|
|
|
|
4,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
95,677
|
|
|
$
|
43,053
|
|
|
$
|
147,341
|
|
|
$
|
77,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.28
|
|
|
$
|
0.13
|
|
|
$
|
0.44
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.27
|
|
|
$
|
0.13
|
|
|
$
|
0.43
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Used in Net Income per Share Calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
336,667
|
|
|
|
327,319
|
|
|
|
335,602
|
|
|
|
330,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
349,751
|
|
|
|
333,385
|
|
|
|
344,313
|
|
|
|
337,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements.
4
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
October 30, 2009
|
|
|
October 24, 2008
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
147,341
|
|
|
$
|
77,776
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
85,189
|
|
|
|
85,467
|
|
Stock-based compensation
|
|
|
85,429
|
|
|
|
64,167
|
|
Gain (loss) on investments
|
|
|
(2,537
|
)
|
|
|
15,936
|
|
Asset impairment and write-offs
|
|
|
1,140
|
|
|
|
760
|
|
Allowance for doubtful accounts
|
|
|
9
|
|
|
|
1,704
|
|
Accretion of discount and issuance costs on notes
|
|
|
25,291
|
|
|
|
17,076
|
|
Deferred income taxes
|
|
|
(1,919
|
)
|
|
|
(47,300
|
)
|
Deferred rent
|
|
|
(829
|
)
|
|
|
3,011
|
|
Tax benefit from stock-based compensation
|
|
|
14,410
|
|
|
|
45,549
|
|
Excess tax benefit from stock-based compensation
|
|
|
(1,350
|
)
|
|
|
(34,311
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
131,717
|
|
|
|
211,207
|
|
Inventories
|
|
|
334
|
|
|
|
(8,014
|
)
|
Prepaid expenses and other assets
|
|
|
(1,071
|
)
|
|
|
(20,002
|
)
|
Accounts payable
|
|
|
(16,858
|
)
|
|
|
(16,333
|
)
|
Accrued compensation and related benefits
|
|
|
9,561
|
|
|
|
(30,756
|
)
|
Other accrued liabilities
|
|
|
(19,456
|
)
|
|
|
4,909
|
|
Accrual for GSA settlement
|
|
|
(128,715
|
)
|
|
|
|
|
Income taxes payable
|
|
|
(1,608
|
)
|
|
|
(536
|
)
|
Long-term other liabilities
|
|
|
(6,334
|
)
|
|
|
(818
|
)
|
Deferred revenue
|
|
|
(14,215
|
)
|
|
|
88,143
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
305,529
|
|
|
|
457,635
|
|
|
|
|
|
|
|
|
|
|
Cash Flows used in Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
(883,231
|
)
|
|
|
(483,962
|
)
|
Redemptions of investments
|
|
|
780,808
|
|
|
|
263,643
|
|
Reclassification from cash and cash equivalents to short-term
investments
|
|
|
|
|
|
|
(597,974
|
)
|
Change in restricted cash
|
|
|
(827
|
)
|
|
|
682
|
|
Proceeds from nonmarketable securities
|
|
|
4,480
|
|
|
|
807
|
|
Purchases of property and equipment
|
|
|
(47,490
|
)
|
|
|
(103,967
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(146,260
|
)
|
|
|
(920,771
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock related to employee stock
transactions
|
|
|
65,888
|
|
|
|
45,566
|
|
Tax withholding payments reimbursed by employee stock
transactions
|
|
|
(5,717
|
)
|
|
|
(2,591
|
)
|
Excess tax benefit from stock-based compensation
|
|
|
1,350
|
|
|
|
34,311
|
|
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
|
|
|
|
|
|
|
(107,251
|
)
|
Repurchases of common stock
|
|
|
|
|
|
|
(399,982
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
61,521
|
|
|
|
716,633
|
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on Cash and Cash
Equivalents
|
|
|
13,898
|
|
|
|
(18,947
|
)
|
Net Increase in Cash and Cash Equivalents
|
|
|
234,688
|
|
|
|
234,550
|
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
1,494,153
|
|
|
|
936,479
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
1,728,841
|
|
|
$
|
1,171,029
|
|
|
|
|
|
|
|
|
|
|
Noncash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment on account
|
|
$
|
7,123
|
|
|
$
|
21,320
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
16,483
|
|
|
$
|
13,694
|
|
Income taxes refunded
|
|
$
|
867
|
|
|
$
|
6,658
|
|
Interest paid on debt
|
|
$
|
11,069
|
|
|
$
|
1,780
|
|
See accompanying notes to condensed consolidated financial
statements.
5
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.
|
Condensed
Consolidated Financial Statements
|
The accompanying unaudited condensed consolidated financial
statements have been prepared by NetApp, Inc. without audit and
reflect all adjustments, consisting only of normal recurring
adjustments which are, in the opinion of management, necessary
for a fair presentation of our financial position, results of
operations, and cash flows for the interim periods presented.
The statements have been prepared in accordance with accounting
principles generally accepted in the United States of America
(GAAP) for interim financial information and in accordance with
the instructions to
Form 10-Q
and
Rule 10-01
of
Regulation S-X.
Accordingly, they do not include all information and footnotes
required by GAAP for annual consolidated financial statements,
and should be read in conjunction with the Companys
audited consolidated financial statements as of and for the
fiscal year ended April 24, 2009 contained in the
Companys Annual Report on
Form 10-K
filed on June 17, 2009, as revised in the Companys
Current Report on
Form 8-K
filed on September 30, 2009. The results of operations for
the three and six month periods ended October 30, 2009 are
not necessarily indicative of the operating results to be
expected for the full fiscal year or future operating periods.
The Company evaluated subsequent events for disclosure through
December 2, 2009, the date the financial statements were
issued.
We operate on a 52-week or 53-week fiscal year ending on the
last Friday in April. The first six month period of fiscal 2010
was a 27-week, or
189-day
period, and the first six month period of fiscal 2009 was a
26-week, or
182-day
period.
Effective April 25, 2009, we adopted the new guidance for
accounting for convertible debt, which requires retrospective
adoption to previously disclosed consolidated financial
statements. As such, certain prior period amounts have been
revised in the unaudited condensed consolidated financial
statements to reflect the adoption of this guidance for all
periods presented. See Note 7 for a discussion of the
impact of the implementation of this standard.
Recent
Accounting Pronouncements
In August 2009, the Financial Accounting Standards Board (FASB)
issued revised guidance for the fair value measurement of
liabilities. The purpose of this revision is to reduce ambiguity
in financial reporting when measuring the fair value of
liabilities. The revised guidance was effective for us during
the interim period ending on October 30, 2009 and did not
have a material impact on our financial statements.
In June 2009, the FASB issued revised guidance for the
accounting for variable interest entities (VIEs). The scope
within the revised standard now includes qualifying
special-purpose entities and provides revised guidance on
(1) determining the primary beneficiary of the VIE,
(2) how power is shared, (3) consideration for
kick-out, participating and protective rights,
(4) reconsideration of the primary beneficiary,
(5) reconsideration of a VIE, (6) fees paid to
decision makers or service providers, and (7) presentation
requirements. This accounting guidance is effective as of the
first three month period of fiscal 2011, and early adoption is
prohibited. We are currently evaluating the impact of the
adoption of this guidance on our consolidated financial
statements.
6
In October 2009, the FASB amended the accounting standards for
multiple deliverable revenue arrangements to:
|
|
|
|
(i)
|
provide updated guidance on whether multiple deliverables exist,
how the deliverables in an arrangement should be separated, and
how the consideration should be allocated;
|
|
|
(ii)
|
require an entity to allocate revenue in an arrangement using
estimated selling prices (ESP) of deliverables if a vendor does
not have vendor-specific objective evidence of selling price
(VSOE) or third-party evidence of selling price (TPE);
|
|
|
(iii)
|
eliminate the use of the residual method and require an entity
to allocate revenue using the relative selling price
method; and
|
|
|
(iv)
|
expand the disclosure requirements to require an entity to
provide both qualitative and quantitative information about the
significant judgments made in applying the revised guidance and
subsequent changes in those judgments that may significantly
affect the timing or amount of revenue recognition.
|
In addition, in October 2009, the FASB amended the accounting
standards for revenue recognition to exclude tangible products
containing software components and non-software components that
function together to deliver the tangible products
essential functionality from the scope of the software revenue
recognition guidance. The revised revenue recognition accounting
standards are effective for revenue arrangements entered into or
materially modified in fiscal years beginning on or after
June 15, 2010 and shall be applied on a prospective basis.
Earlier application is permitted. We are assessing the impact of
the new accounting standards on our financial position and
results of operations.
Sales to Arrow and Avnet, who are U.S. distributors, each
accounted for 12% and 11% of our net revenues, respectively, for
each of the three and six month periods ended October 30,
2009, and 11% and 10% of our revenues, respectively, for each of
the three and six month periods ended October 24, 2008.
During the three and six month periods ended October 30,
2009, sales to customers in Germany accounted for 12% and 10% of
our net revenues, respectively. During each of the three and six
month periods ended October 24, 2008, sales to customers in
Germany accounted for 10% of our net revenues.
The preparation of the consolidated financial statements in
conformity with GAAP 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 awards granted under our stock-based compensation plans; and
loss contingencies. Actual results could differ from those
estimates.
|
|
5.
|
Significant
Accounting Policies
|
With the exception of the adoption of revised accounting
guidance as described above, there have been no significant
changes in our significant accounting policies for the three and
six month periods ended October 30, 2009, as compared to
the significant accounting policies described in our Annual
Report on
Form 10-K
for the fiscal year ended April 24, 2009, as revised to
reflect the adoption of the new guidance on accounting for
convertible debt by our Current Report on
Form 8-K
filed on September 30, 2009.
Financial
Instruments
For certain financial instruments, including cash and cash
equivalents, short-term investments, accounts receivable,
accounts payable and other current liabilities, the carrying
amounts approximate their fair value due to
7
the relatively short maturity of these balances. The following
methods were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate
that value:
Cash and Cash Equivalents. We consider all
highly liquid investments with an original maturity of three
months or less to be cash equivalents. Cash equivalents are
recognized at fair value.
Short-Term Investments. Short-term investments
consist of marketable debt or equity securities which are
classified as
available-for-sale
and are recognized at fair value. The determination of fair
value is further detailed in Note 9. We regularly review
our investment portfolio to identify and evaluate investments
that have indications of possible impairment. Factors considered
in determining whether a loss is
other-than-temporary
include: the length of time and extent to which the fair market
value has been lower than the cost basis, the financial
condition and near-term prospects of the investee, credit
quality, likelihood of recovery, and our intent and ability to
hold the investment for a period of time sufficient to allow for
any anticipated recovery in fair market value.
Unrealized gains and temporary losses, net of tax, are included
with accumulated other comprehensive income (loss) (AOCI). Upon
realization, those amounts are reclassified from AOCI to results
of operations. The amortization of premiums and discounts on the
investments and realized gains and losses are included in
results of operations.
Other-than-temporary
impairments on
available-for-sale
debt securities are determined to be either credit losses or
losses due to other factors. Credit losses are recognized in our
results from operations and other losses are included in AOCI.
|
|
6.
|
Termination
of Proposed Merger with Data Domain, Inc.
|
On May 20, 2009, we announced that we had entered into a
merger agreement with Data Domain, Inc. (Data Domain) under
which we would acquire Data Domain in a stock and cash
transaction. On July 8, 2009, Data Domains Board of
Directors terminated the merger agreement and, pursuant to the
terms of the agreement, Data Domain paid us a $57,000
termination fee. We incurred $15,880 of incremental third-party
costs relating to the terminated merger transaction during the
same period, resulting in a net amount of $41,120 reported as
merger termination proceeds, net in the condensed consolidated
statement of operations for the six month period ended
October 30, 2009.
|
|
7.
|
Convertible
Notes and Credit Facilities
|
1.75% Convertible
Senior Notes Due 2013
On June 10, 2008, we issued $1,265,000 aggregate principal
amount of 1.75% Convertible Senior Notes due 2013 (the
Notes) to initial purchasers who resold the Notes to qualified
institutional buyers as defined in Rule 144A under the
Securities Act of 1933, as amended. The Notes are unsecured,
unsubordinated obligations of the Company. Interest is payable
in cash at a rate of 1.75% per annum. The net proceeds from the
offering, after deducting the initial purchasers issue
costs and offering expenses of $26,581, were $1,238,419.
On April 25, 2009, we adopted new guidance related to the
accounting for convertible debt instruments and allocated the
initial proceeds of the Notes between a liability (debt) and an
equity component based on the fair value of the debt component
as of the issuance date. The initial debt component of the Notes
was valued at $1,016,962 based on the contractual cash flows
discounted at an appropriate comparable market non-convertible
debt borrowing rate at the date of issuance of 6.31%, with the
equity component representing the residual amount of the
proceeds of $248,038 which was recorded as a debt discount.
Issuance costs were allocated pro rata based on the relative
initial carrying amounts of the debt and equity components. As a
result, $5,212 of the issuance costs were allocated to the
equity component of the Notes, and $21,369 of the issuance costs
remained classified as long-term other assets. The debt discount
and the issuance costs allocated to the debt component are
amortized as additional interest expense over the term of the
Notes using the effective interest method and an effective
interest rate of 6.31% for all periods presented.
8
The statements of operations for the three and six month periods
ended October 24, 2008 were impacted by the adoption of the
new guidance as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Three Months Ended October 24, 2008
|
|
|
October 24, 2008
|
|
|
|
As Previously
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
Reported
|
|
|
As Adjusted
|
|
|
Reported
|
|
|
As Adjusted
|
|
|
Interest expense
|
|
$
|
(7,542
|
)
|
|
$
|
(17,807
|
)
|
|
$
|
(12,117
|
)
|
|
$
|
(27,319
|
)
|
Provision (benefit) for income taxes
|
|
|
3,407
|
|
|
|
(729
|
)
|
|
|
10,752
|
|
|
|
4,627
|
|
Net income
|
|
|
49,182
|
|
|
|
43,053
|
|
|
|
86,853
|
|
|
|
77,776
|
|
Net income per share basic
|
|
$
|
0.15
|
|
|
$
|
0.13
|
|
|
$
|
0.26
|
|
|
$
|
0.24
|
|
Net income per share diluted
|
|
$
|
0.15
|
|
|
$
|
0.13
|
|
|
$
|
0.26
|
|
|
$
|
0.23
|
|
The amortization of the debt discount is a non-cash expense and
has no impact on total operating, investing and financing cash
flows in the prior period condensed consolidated statements of
cash flows.
The following table reflects the carrying value of our
convertible debt as of October 30, 2009 and April 24,
2009:
|
|
|
|
|
|
|
|
|
|
|
October 30,
|
|
|
April 24,
|
|
|
|
2009
|
|
|
2009
|
|
|
1.75% Convertible Notes Due 2013
|
|
$
|
1,265,000
|
|
|
$
|
1,265,000
|
|
Less: Unamortized discount
|
|
|
(186,984
|
)
|
|
|
(210,283
|
)
|
|
|
|
|
|
|
|
|
|
Net long-term carrying amount of Notes
|
|
$
|
1,078,016
|
|
|
$
|
1,054,717
|
|
|
|
|
|
|
|
|
|
|
The following table presents the amount of interest cost
recognized relating to both the contractual interest coupon and
the amortization of the discount and issuance costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
October 30,
|
|
|
October 24,
|
|
|
October 30,
|
|
|
October 24,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Contractual interest coupon
|
|
$
|
5,534
|
|
|
$
|
5,473
|
|
|
$
|
11,437
|
|
|
$
|
8,302
|
|
Amortization of debt discount
|
|
|
11,249
|
|
|
|
10,604
|
|
|
|
23,302
|
|
|
|
15,724
|
|
Amortization of issuance costs
|
|
|
962
|
|
|
|
905
|
|
|
|
1,989
|
|
|
|
1,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest cost recognized
|
|
$
|
17,745
|
|
|
$
|
16,982
|
|
|
$
|
36,728
|
|
|
$
|
25,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining debt discount and issuance cost of $186,984 and
$16,138, respectively, as of October 30, 2009 will be
amortized over the expected remaining life of the Notes, which
is approximately 3.6 years.
Maturity The Notes will mature on
June 1, 2013 unless repurchased or converted in accordance
with their terms prior to such date.
Redemption The Notes are not redeemable by us
prior to the maturity date, but the holders may require us to
repurchase the Notes following a fundamental change, which is
deemed to have occurred upon a change of control, liquidation or
a termination of trading. Holders of the Notes who convert their
Notes in connection with a fundamental change will, under
certain circumstances, be entitled to a make-whole premium in
the form of an increase in the conversion rate. Additionally, in
the event of a fundamental change, holders of the Notes may
require us to repurchase all or a portion of their Notes at a
repurchase price equal to 100% of the principal amount of the
Notes plus accrued and unpaid interest, if any, to, but not
including, the fundamental change repurchase date.
Conversion Holders of the Notes may convert
their Notes on or after March 1, 2013 until the close of
business on the scheduled trading day immediately preceding the
maturity date. Upon conversion, we will satisfy our conversion
obligation by delivering cash and shares of our common stock, if
any, based on a daily settlement
9
amount. Prior to March 1, 2013, holders of the Notes may
convert their Notes, under any of the following conditions:
|
|
|
|
|
during the five business day period after any five consecutive
trading day period in which the trading price of the Notes for
each day in this five consecutive trading day period was less
than 98% of an amount equal to (i) the last reported sale
price of our common stock multiplied by (ii) the conversion
rate on such day;
|
|
|
|
during any calendar quarter beginning after June 30, 2008
(and only during such calendar quarter), if the last reported
sale price of our common stock for 20 or more trading days in a
period of 30 consecutive trading days ending on the last trading
day of the immediately preceding calendar quarter exceeds 130%
of the applicable conversion price in effect for the Notes on
the last trading day of such immediately preceding calendar
quarter; or
|
|
|
|
upon the occurrence of specified corporate transactions under
the indenture for the Notes.
|
The Notes are convertible into the right to receive cash in an
amount up to the principal amount and shares of our common stock
for the conversion value in excess of the principal amount, if
any, at an initial conversion rate of 31.4006 shares of
common stock per one thousand principal amount of Notes, subject
to adjustment as described in the indenture governing the Notes,
which represents an initial conversion price of $31.85 per share.
As of October 30, 2009, none of the conditions allowing the
holders of the Notes to convert had been met and we had not
issued any shares related to the Notes. As of October 30,
2009, the if-converted value of the Notes did not exceed their
face value.
Note
Hedges and Warrants
Concurrent with the issuance of the Notes, we entered into note
hedge transactions (the Note Hedges), which are designed to
mitigate potential dilution from the conversion of the Notes in
the event that the market value per share of our common stock at
the time of exercise is greater than $31.85 per share, subject
to adjustments. The Note Hedges generally cover, subject to
anti-dilution adjustments, the net shares of our common stock
that would be deliverable to converting Note holders in the
event of a conversion of the Notes. The Note Hedges expire at
the earlier of (i) the last day on which any Notes remain
outstanding and (ii) the scheduled trading day immediately
preceding the maturity date of the Notes. We also entered into
separate warrant transactions whereby we sold to the same
financial institutions warrants (the Warrants) to acquire,
subject to anti-dilution adjustments, 39,700 shares of our
common stock at an exercise price of $41.28 per share, subject
to adjustment, on a series of days commencing on
September 3, 2013. Upon exercise of the Warrants, we have
the option to deliver cash or shares of our common stock equal
to the difference between the then market price and the strike
price of the Warrants. As of October 30, 2009, we had not
received any shares related to the Note Hedges or delivered cash
or shares related to the Warrants.
If the market value per share of our common stock at the time of
conversion of the Notes is above the strike price of the Note
Hedges, the Note Hedges will generally entitle us to receive net
shares of our common stock (and cash for any fractional share
amount) based on the excess of the then current market price of
our common stock over the strike price of the Note Hedges, which
is designed to offset any shares that we may have to deliver to
the Note holders. Additionally, at the time of exercise of the
Warrants, if the market price of our common stock exceeds the
strike price of the Warrants, we will owe the option
counterparties net shares of our common stock (and cash for any
fractional share amount) or cash in an amount based on the
excess of the then current market price of our common stock over
the strike price of the Warrants.
The cost of the Note Hedges was $254,898 and has been accounted
for as an equity transaction. We received proceeds of $163,059
related to the sale of the Warrants, which has also been
classified as equity.
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 the counterparty under such
transaction. We have not terminated the Note Hedge transaction
with Lehman OTC, and will continue to carefully monitor the
developments impacting Lehman OTC. The event of
default is not expected to have an impact on our financial
position or results of operations. However, we could incur
significant costs to
10
replace this hedge transaction originally held with Lehman OTC
if we elect to do so. 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.
Earnings per share impact on the Notes, Note Hedges and
Warrants The Notes will have no impact on
diluted earnings per share unless the price of our common stock
exceeds the conversion price (initially $31.85 per share)
because the principal amount of the Notes will be settled in
cash upon conversion. The Note Hedges are not included for
purposes of calculating earnings per share in the periods
presented, as their effect would be anti-dilutive. Upon
conversion of the Notes, the Note Hedges are designed to
neutralize the dilutive effect of the Notes when the stock price
is above $31.85 per share. Also, the Warrants will have no
impact on earnings per share until our common stock share price
exceeds $41.28. Prior to conversion of the Notes or exercise of
the Note Hedges, we will include the effect of additional shares
that may be issued if our common stock price exceeds the
conversion price, using the treasury stock method.
Fair
Value of Notes
As of October 30, 2009, the approximate fair value of the
principal amount of our Notes, which includes the debt and
equity components, was approximately $1,389,919, or 109.9% of
the face value of the Notes, based upon quoted market
information.
Unsecured
Credit Agreement
On November 2, 2007, we entered into a senior unsecured
credit agreement (the Unsecured Credit Agreement) with certain
lenders and BNP Paribas, as syndication agent, and JPMorgan
Chase Bank National Association, as administrative agent. The
Unsecured Credit Agreement provides for a revolving unsecured
credit facility that is comprised of commitments from various
lenders who agree to make revolving loans and swingline loans
and issue letters of credit of up to an aggregate amount of
$250,000 with a term of five years. Revolving loans may be, at
our option, Alternative Base Rate borrowings or Eurodollar
borrowings. Interest on Eurodollar borrowings accrues at a
floating rate based on LIBOR for the interest period specified
by us plus a spread based on our leverage ratio. Interest on
Alternative Base Rate borrowings, swingline loans, and letters
of credit accrues at a rate based on the Prime Rate in effect on
such day. The proceeds of the loans may be used for our general
corporate purposes, including stock repurchases and working
capital needs. As of October 30, 2009, no amount was
outstanding under this facility. The amounts allocated under the
Unsecured Credit Agreement to support certain of our outstanding
letters of credit as of October 30, 2009 were immaterial.
As of October 30, 2009, we were in compliance with all
covenants as required by the Unsecured Credit Agreement.
|
|
8.
|
Stock-Based
Compensation, Equity Incentive Programs and Stockholders
Equity
|
Stock-Based
Compensation Expense
Stock-based compensation expense included in the condensed
consolidated statements of operations for the three and six
month periods ended October 30, 2009 and October 24,
2008, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
October 30,
|
|
|
October 24,
|
|
|
October 30,
|
|
|
October 24,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Cost of product revenues
|
|
$
|
510
|
|
|
$
|
624
|
|
|
$
|
1,730
|
|
|
$
|
1,572
|
|
Cost of service revenues
|
|
|
2,942
|
|
|
|
2,419
|
|
|
|
7,461
|
|
|
|
5,460
|
|
Sales and marketing
|
|
|
15,690
|
|
|
|
12,849
|
|
|
|
39,655
|
|
|
|
29,191
|
|
Research and development
|
|
|
7,909
|
|
|
|
7,482
|
|
|
|
20,625
|
|
|
|
17,669
|
|
General and administrative
|
|
|
6,194
|
|
|
|
4,389
|
|
|
|
15,958
|
|
|
|
10,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
33,245
|
|
|
$
|
27,763
|
|
|
$
|
85,429
|
|
|
$
|
64,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
The following table summarizes stock-based compensation expense
associated with each type of award:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
October 30,
|
|
|
October 24,
|
|
|
October 30,
|
|
|
October 24,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Employee stock options
|
|
$
|
11,111
|
|
|
$
|
14,726
|
|
|
$
|
40,508
|
|
|
$
|
38,057
|
|
Restricted stock units (RSUs) and restricted stock awards (RSAs)
|
|
|
13,668
|
|
|
|
7,409
|
|
|
|
30,484
|
|
|
|
15,098
|
|
Employee Stock Purchase Plan (ESPP)
|
|
|
8,727
|
|
|
|
5,608
|
|
|
|
14,808
|
|
|
|
10,989
|
|
Change in amounts capitalized in inventory
|
|
|
(261
|
)
|
|
|
20
|
|
|
|
(371
|
)
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
33,245
|
|
|
$
|
27,763
|
|
|
$
|
85,429
|
|
|
$
|
64,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six month periods ended October 30, 2009 and
October 24, 2008, total income tax benefits associated with
employee stock transactions and recognized in stockholders
equity was $14,410 and $45,549, respectively.
Valuation
Assumptions
We estimated the fair value of stock options using the
Black-Scholes model on the date of the grant. Assumptions used
in the Black-Scholes valuation model were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
ESPP
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
October 30,
|
|
October 24,
|
|
October 30,
|
|
October 24,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Expected term in years(1)
|
|
|
4.7
|
|
|
|
3.9
|
|
|
|
N/A*
|
|
|
|
N/A*
|
|
Risk-free interest rate(2)
|
|
|
2.38% - 2.44
|
%
|
|
|
2.36% - 3.05
|
%
|
|
|
|
|
|
|
|
|
Volatility(3)
|
|
|
40% - 44
|
%
|
|
|
39% - 69
|
%
|
|
|
|
|
|
|
|
|
Expected dividend(4)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
ESPP
|
|
|
Six Months Ended
|
|
Six Months Ended
|
|
|
October 30,
|
|
October 24,
|
|
October 30,
|
|
October 24,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Expected term in years(1)
|
|
|
4.2
|
|
|
|
4.0
|
|
|
|
1.3
|
|
|
|
1.3
|
|
Risk-free interest rate(2)
|
|
|
1.89% - 2.58
|
%
|
|
|
2.36% - 3.69
|
%
|
|
|
0.25% - 0.97
|
%
|
|
|
2.05% - 2.52
|
%
|
Volatility(3)
|
|
|
40% - 49
|
%
|
|
|
38% - 69
|
%
|
|
|
44% - 47
|
%
|
|
|
39% - 41
|
%
|
Expected dividend(4)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
* |
|
N/A- No new employee purchase rights were granted under the ESPP
during the three month periods ended October 30, 2009 or
October 24, 2008. |
|
(1) |
|
The expected term of the options represents the estimated period
of time until exercise and is based on historical experience of
similar awards, giving consideration to the contractual terms,
vesting schedules, and expectations of future employee behavior.
The expected term for the ESPP is based on the term of the
purchase period. |
|
(2) |
|
The risk-free interest rate is based upon United States Treasury
bills with equivalent expected terms. |
|
(3) |
|
The volatility rate is based on the implied volatility of traded
options. |
|
(4) |
|
The expected dividend is based on our history and expected
dividend payouts. |
Our forfeiture rate is based on historical termination behavior
and we recognize compensation expense only for those equity
awards expected to vest.
Stock
Option Exchange
On April 21, 2009, our stockholders approved a stock option
exchange program (the Exchange) pursuant to which eligible
employees were able to exchange some or all of their outstanding
options with an exercise price
12
greater than or equal to $22.00 per share that were granted
before June 20, 2008, whether vested or unvested, for new
RSUs. The number of RSUs granted in exchange for the options
depended on the exercise price of the options exchanged. The
vesting schedule of the RSUs was determined on a
grant-by-grant
basis and depended on the extent to which the options
surrendered in exchange for such RSUs had vested at the time of
such exchange and, for surrendered options that were fully
vested, the exercise price. Vesting of the RSUs is conditioned
upon continued service with the Company through each applicable
vesting date. On May 22, 2009, we commenced the Exchange,
which expired on June 19, 2009. In connection with the
Exchange, we accepted for exchange options to purchase
24,484 shares of our common stock. All surrendered options
were cancelled, and immediately thereafter, we issued a total of
3,226 RSUs in exchange. One share of our common stock is
issuable upon the vesting of each RSU. The fair value of the
RSUs issued was measured as the total of the unrecognized
compensation cost of the options surrendered and the incremental
value of the RSUs issued, measured as the excess of the fair
value of the RSUs over the fair value of the options tendered
immediately before the exchange. The incremental cost of the
RSUs was $5,768. The value of the RSUs, totaling $70,110, is
being amortized over the weighted average vesting period of the
RSUs of 3.5 years.
In addition, under the terms of the Exchange, option holders who
would have otherwise received fewer than forty RSUs for options
tendered received cash payments equal to the number of RSUs
otherwise issuable times the market value of our common stock as
of the close of market on the day preceding the completion of
the Exchange. A total of $465 in cash payments was made, and we
recorded a charge to stock-based compensation expense of $508,
which represented the acceleration of the unamortized expense
related to the options tendered and their incremental value as
of the date of the Exchange.
In connection with the incentive stock options tendered for RSUs
under the Exchange, we recorded $10,013 of deferred tax benefits
which had not been previously recognized related to the
cumulative amortized stock-based compensation expense related to
such options which had not been previously benefited for income
tax purposes.
Stock
Options
A summary of the combined activity under our stock option plans
and agreements is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Numbers of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
Outstanding at April 24, 2009
|
|
|
66,119
|
|
|
$
|
29.27
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
4,021
|
|
|
|
21.86
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(2,382
|
)
|
|
|
16.93
|
|
|
|
|
|
|
|
|
|
Options cancelled in the Exchange
|
|
|
(24,484
|
)
|
|
|
39.05
|
|
|
|
|
|
|
|
|
|
Options forfeitures and cancellations
|
|
|
(3,073
|
)
|
|
|
34.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 30, 2009
|
|
|
40,201
|
|
|
|
22.93
|
|
|
|
4.45
|
|
|
$
|
252,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest as of October 30, 2009
|
|
|
36,831
|
|
|
|
23.11
|
|
|
|
4.32
|
|
|
$
|
229,215
|
|
Exercisable at October 30, 2009
|
|
|
27,328
|
|
|
|
24.04
|
|
|
|
3.76
|
|
|
$
|
161,209
|
|
The intrinsic value of stock options represents the difference
between the exercise price of stock options and the market price
of our stock on that day for all
in-the-money
options. Additional information related to our stock options is
summarized below (in thousands except per share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
October 30,
|
|
|
October 24,
|
|
|
October 30,
|
|
|
October 24,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Weighted-average fair value per share granted
|
|
$
|
9.70
|
|
|
$
|
7.91
|
|
|
$
|
8.14
|
|
|
$
|
8.31
|
|
Intrinsic value of options exercised
|
|
$
|
12,369
|
|
|
$
|
10,600
|
|
|
$
|
16,491
|
|
|
$
|
20,317
|
|
Proceeds received from the exercise of stock options
|
|
$
|
27,385
|
|
|
$
|
10,038
|
|
|
$
|
40,337
|
|
|
$
|
19,516
|
|
Fair value of option vested
|
|
$
|
35,894
|
|
|
$
|
32,831
|
|
|
$
|
81,936
|
|
|
$
|
80,617
|
|
13
There was $91,694 of total unrecognized compensation expense as
of October 30, 2009 related to options. The unrecognized
compensation expense will be amortized on a straight-line basis
over a weighted-average remaining period of 2.9 years.
The following table summarizes activity related to our RSUs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Numbers of
|
|
|
Grant Date Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
Outstanding at April 24, 2009
|
|
|
5,453
|
|
|
$
|
22.38
|
|
RSUs granted
|
|
|
1,043
|
|
|
|
21.13
|
|
RSUs issued in the Exchange
|
|
|
3,226
|
|
|
|
21.73
|
|
RSUs vested
|
|
|
(852
|
)
|
|
|
27.23
|
|
RSUs forfeitures and cancellations
|
|
|
(329
|
)
|
|
|
23.53
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 30, 2009
|
|
|
8,541
|
|
|
|
21.46
|
|
|
|
|
|
|
|
|
|
|
As of October 30, 2009, there was $118,787 of total
unrecognized compensation expense related to RSUs. The
unrecognized compensation expense will be amortized on a
straight-line basis over a weighted-average remaining vesting
period of 2.8 years.
The following table summarizes activity related to our RSAs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Average Grant
|
|
|
|
Shares
|
|
|
Date Fair Value
|
|
|
Nonvested at April 24, 2009
|
|
|
81
|
|
|
$
|
36.68
|
|
Awards vested
|
|
|
(11
|
)
|
|
|
28.89
|
|
|
|
|
|
|
|
|
|
|
Nonvested at October 30, 2009
|
|
|
70
|
|
|
|
37.93
|
|
|
|
|
|
|
|
|
|
|
Although nonvested shares are legally issued, they are
considered contingently returnable shares subject to repurchase
by the Company when employees terminate their employment. The
total fair value of shares vested during the three and six month
periods ended October 30, 2009 was $33 and $325,
respectively. The total fair value of shares vested during the
three and six month periods ended October 24, 2008 was $15
and $208, respectively. There was $1,082 of total unrecognized
compensation expense as of October 30, 2009 related to RSAs
that will be amortized on a straight-line basis over a
weighted-average remaining period of 1.0 years.
Employee Stock Purchase Plan Under the
Employee Stock Purchase Plan (ESPP), employees are entitled to
purchase shares of our common stock at 85% of the fair market
value at certain specified dates over a two-year period. The
weighted average fair value of purchase rights granted under the
ESPP during the six month periods ended October 30, 2009
and October 24, 2008 was $7.07 and $7.82, respectively.
During the six month periods ended October 30, 2009 and
October 24, 2008, 2,507 shares and 1,257 shares
were issued under the ESPP at a weighted average price of $10.38
and $20.72, respectively. No shares were issued under the ESPP
during the three month periods ended October 30, 2009 or
October 24, 2008.
Stock
Repurchase Program
Since the inception of our stock repurchase programs on
May 13, 2003 through October 30, 2009, we have
purchased a total of 104,325 shares of our common stock at
an average price of $28.06 per share for an aggregate purchase
price of $2,927,376. As of October 30, 2009, our Board of
Directors had authorized the repurchase of up to $4,023,639 of
common stock under various stock repurchase programs, and
$1,096,262 remains available under these authorizations. The
stock repurchase programs may be suspended or discontinued at
any time.
During the six month period ended October 30, 2009, we did
not repurchase any shares of our common stock under the stock
repurchase program. During the six month period ended
October 24, 2008, we repurchased 16,960 shares of our
common stock at an aggregate cost of $399,981, or a weighted
average price of $23.58 per share. The repurchases were recorded
as treasury stock and resulted in a reduction of
stockholders equity.
14
|
|
9.
|
Financial
Instruments and Fair Value
|
Pursuant to the accounting guidance for fair value measurements
and its subsequent updates, we measure assets and liabilities at
fair value based upon exit price, representing the amount that
would be received on the sale of an asset or paid to transfer a
liability, as the case may be, in an orderly transaction between
market participants. As such, fair value may be based on
assumptions that market participants would use in pricing an
asset or liability. The accounting guidance provides a framework
for measuring fair value on either a recurring or nonrecurring
basis whereby inputs, used in valuation techniques, are assigned
a hierarchical level. The following are the hierarchical levels
of inputs to measure fair value:
Level 1: Observable inputs that reflect quoted
prices (unadjusted) for identical assets or liabilities in
active markets.
Level 2: Inputs reflect quoted prices for identical
assets or liabilities in markets that are not active; quoted
prices for similar assets or liabilities in active markets;
inputs other than quoted prices that are observable for the
assets or liabilities; or inputs that are derived principally
from or corroborated by observable market data by correlation or
other means.
Level 3: Unobservable inputs reflecting our own
assumptions incorporated in valuation techniques used to
determine fair value. These assumptions are required to be
consistent with market participant assumptions that are
reasonably available.
We consider an active market to be one in which transactions for
the asset or liability occur with sufficient frequency and
volume to provide pricing information on an ongoing basis, and
view an inactive market as one in which there are few
transactions for the asset or liability, the prices are not
current, or price quotations vary substantially either over time
or among market makers. Where appropriate, our own or the
counterpartys non-performance risk is considered in
determining the fair values of liabilities and assets,
respectively.
Investments
The following is a summary of investments at October 30,
2009 and April 24, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30, 2009
|
|
|
April 24, 2009
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
|
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Corporate bonds
|
|
$
|
437,362
|
|
|
$
|
5,594
|
|
|
$
|
(43
|
)
|
|
$
|
442,913
|
|
|
$
|
486,151
|
|
|
$
|
2,318
|
|
|
$
|
(1,802
|
)
|
|
$
|
486,667
|
|
Auction rate securities
|
|
|
72,578
|
|
|
|
187
|
|
|
|
(3,780
|
)
|
|
|
68,985
|
|
|
|
73,278
|
|
|
|
296
|
|
|
|
(7,037
|
)
|
|
|
66,537
|
|
U.S. government agency bonds
|
|
|
632,816
|
|
|
|
2,158
|
|
|
|
(111
|
)
|
|
|
634,863
|
|
|
|
80,359
|
|
|
|
1,415
|
|
|
|
|
|
|
|
81,774
|
|
U.S. Treasuries
|
|
|
51,661
|
|
|
|
683
|
|
|
|
|
|
|
|
52,344
|
|
|
|
31,862
|
|
|
|
773
|
|
|
|
|
|
|
|
32,635
|
|
Corporate securities
|
|
|
20,090
|
|
|
|
|
|
|
|
|
|
|
|
20,090
|
|
|
|
486,546
|
|
|
|
1
|
|
|
|
(464
|
)
|
|
|
486,083
|
|
Municipal bonds
|
|
|
1,500
|
|
|
|
6
|
|
|
|
|
|
|
|
1,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
175,000
|
|
|
|
|
|
|
|
(19
|
)
|
|
|
174,981
|
|
|
|
115,002
|
|
|
|
83
|
|
|
|
|
|
|
|
115,085
|
|
Money market funds
|
|
|
1,568,706
|
|
|
|
|
|
|
|
|
|
|
|
1,568,706
|
|
|
|
1,327,794
|
|
|
|
|
|
|
|
|
|
|
|
1,327,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt and equity securities
|
|
|
2,959,713
|
|
|
|
8,628
|
|
|
|
(3,953
|
)
|
|
|
2,964,388
|
|
|
|
2,600,992
|
|
|
|
4,886
|
|
|
|
(9,303
|
)
|
|
|
2,596,575
|
|
Less cash equivalents
|
|
|
1,628,927
|
|
|
|
|
|
|
|
|
|
|
|
1,628,927
|
|
|
|
1,368,355
|
|
|
|
|
|
|
|
|
|
|
|
1,368,355
|
|
Less long-term investments
|
|
|
112,357
|
|
|
|
187
|
|
|
|
(3,780
|
)
|
|
|
108,764
|
|
|
|
124,908
|
|
|
|
296
|
|
|
|
(7,037
|
)
|
|
|
118,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
1,218,429
|
|
|
$
|
8,441
|
|
|
$
|
(173
|
)
|
|
$
|
1,226,697
|
|
|
$
|
1,107,729
|
|
|
$
|
4,590
|
|
|
$
|
(2,266
|
)
|
|
$
|
1,110,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Fair
Value of Financial Instruments
The following table summarizes our financial assets and
liabilities measured at fair value on a recurring basis as of
October 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
442,913
|
|
|
$
|
|
|
|
$
|
442,913
|
|
|
$
|
|
|
Trading securities
|
|
|
11,484
|
|
|
|
11,484
|
|
|
|
|
|
|
|
|
|
U.S. government agency bonds
|
|
|
634,863
|
|
|
|
|
|
|
|
634,863
|
|
|
|
|
|
U.S. Treasuries
|
|
|
52,344
|
|
|
|
52,344
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
|
1,506
|
|
|
|
|
|
|
|
1,506
|
|
|
|
|
|
Corporate securities
|
|
|
20,090
|
|
|
|
|
|
|
|
20,090
|
|
|
|
|
|
Certificates of deposit
|
|
|
174,981
|
|
|
|
|
|
|
|
174,981
|
|
|
|
|
|
Money market funds
|
|
|
1,568,706
|
|
|
|
1,528,927
|
|
|
|
|
|
|
|
39,779
|
|
Auction rate securities
|
|
|
68,985
|
|
|
|
|
|
|
|
|
|
|
|
68,985
|
|
Investment in nonpublic companies
|
|
|
1,986
|
|
|
|
|
|
|
|
|
|
|
|
1,986
|
|
Foreign currency contracts
|
|
|
189
|
|
|
|
|
|
|
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,978,047
|
|
|
$
|
1,592,755
|
|
|
$
|
1,274,542
|
|
|
$
|
110,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
$
|
1,190
|
|
|
$
|
|
|
|
$
|
1,190
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents(1)
|
|
$
|
1,628,927
|
|
|
$
|
1,528,927
|
|
|
$
|
100,000
|
|
|
$
|
|
|
Short-term investments(2)
|
|
|
1,226,697
|
|
|
|
52,344
|
|
|
|
1,174,353
|
|
|
|
|
|
Trading securities(3)
|
|
|
11,484
|
|
|
|
11,484
|
|
|
|
|
|
|
|
|
|
Long-term investments(4)
|
|
|
110,750
|
|
|
|
|
|
|
|
|
|
|
|
110,750
|
|
Foreign currency contracts(5)
|
|
|
189
|
|
|
|
|
|
|
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,978,047
|
|
|
$
|
1,592,755
|
|
|
$
|
1,274,542
|
|
|
$
|
110,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts(6)
|
|
$
|
1,190
|
|
|
$
|
|
|
|
$
|
1,190
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in Cash and cash equivalents in the accompanying
condensed consolidated balance sheet, in addition to $99,914 of
cash. Cash equivalents consist of instruments with remaining
maturities of three months or less at the date of purchase and
consists primarily of certain money market funds, for which the
carrying amounts is a reasonable estimate of fair value. |
|
(2) |
|
Our short-term investments include U.S. Treasury securities,
U.S. government agency bonds, corporate bonds, corporate
securities, and certificates of deposit. |
|
(3) |
|
Trading securities relate to a deferred compensation plan;
$2,018 of the deferred compensation plan assets were included in
prepaid expenses and other assets and $9,466 of the deferred
compensation plan assets were |
16
|
|
|
|
|
included in long-term deferred income taxes and other assets in
the accompanying condensed consolidated balance sheet. |
|
(4) |
|
Long-term investments consist of auction rate securities and the
Primary Fund (as defined below), and are included in long-term
investments and restricted cash in the accompanying condensed
consolidated balance sheet, in addition to $5,656 of long-term
restricted cash. |
|
(5) |
|
Included in prepaid expenses and other assets in the
accompanying condensed consolidated balance sheet. |
|
(6) |
|
Included in other accrued liabilities in the accompanying
condensed consolidated balance sheet. |
We classify investments within Level 1 if quoted prices are
available in active markets. Level 1 investments generally
include U.S. Treasury notes, trading securities with quoted
prices on active markets, and money market funds, with the
exception of the Primary Fund, which is classified in
Level 3.
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.
These investments include: corporate bonds, corporate
securities, U.S. government agency bonds, municipal bonds,
certificates of deposit, and foreign currency contracts.
Investments are held by a custodian who obtains investment
prices from a third party pricing provider that uses standard
inputs to models which vary by asset class. We corroborate the
prices obtained from the pricing service against other
independent sources and, as of October 30, 2009, have not
found it necessary to make any adjustments to the prices
obtained.
The unrealized losses on our
available-for-sale
investments in corporate bonds, U.S. government agency
bonds, and certificates of deposit were caused by market value
declines as a result of the recent economic environment, as well
as fluctuations in market interest rates. Because the decline in
market value is attributable to changes in market conditions and
not credit quality, and because we do not intend to sell and we
will not be likely to be required to sell those investments
prior to a recovery of par value, we do not consider these
investments to be other-than temporarily impaired at
October 30, 2009.
Our foreign currency forward exchange contracts are also
classified within Level 2. We determine the fair value of
these instruments by considering the estimated amount we would
pay or receive to terminate these agreements at the reporting
date. We use observable inputs, including quoted prices in
active markets for similar assets or liabilities. Our foreign
currency derivative contracts are classified within Level 2
as the valuation inputs are based on quoted market prices of
similar instruments in active markets. In the three month period
ended October 30, 2009, net losses generated by hedged
assets and liabilities totaled $1,028, and losses on the related
derivative instruments totaled $515. In the six month period
ended October 30, 2009, net gains generated by hedged
assets and liabilities totaled $8,721, which were offset by
losses on the related derivative instruments of $12,265. In the
three and six month periods ended October 24, 2008, net
losses generated by hedged assets and liabilities totaled
$25,425 and $25,106, respectively, which were offset by gains on
the related derivative instruments of $24,764 and $22,147,
respectively.
We classify items in Level 3 if the investments are valued
using a pricing model or based on unobservable inputs in the
market. These investments include auction rate securities, the
Primary Fund and cost method investments.
As of October 30, 2009 and April 24, 2009, we had a
remaining investment of $39,779 and $51,630, with a par value of
$49,077 and $60,928, respectively, in the Reserve Primary Fund
(the Primary Fund), which is a money-market fund that suspended
redemptions in September 2008 and is in the process of
liquidating its portfolio of investments. All amounts invested
in the Primary Fund are included in long-term investments given
the lack of liquidity of the fund and the uncertainty as to the
timing and the amount of the final distributions of the fund. On
December 3, 2008, the Primary Fund announced a plan for
liquidation and distribution of assets that included 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. However, on
November 25, 2009, the U.S. District Court issued an
order enjoining the Primary Funds liquidation plan and
ordered that the remaining assets of the Primary Fund be
liquidated and distributed on a pro rata basis to all Primary
Fund shareholders who have not received $1.00 per share owned on
or after September 15, 2008, provided however, that an
expense fund of
17
$83.5 million to cover claims for indemnification and
management fees and expenses shall be set aside and be withheld
from distribution. As of October 30, 2009, we have received less
than $1 per share owned of our original investment. We received
distributions of $11,851 during the three and six month periods
ended October 30, 2009 and received $546,344 during fiscal
2009 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.
As of October 30, 2009 and April 24, 2009, we had
auction rate securities (ARSs) with a par value of $74,700 and
$75,400, respectively, and an estimated fair value of $68,985
and $66,537, respectively, which are classified as long-term
investments. Substantially all of our ARSs are backed by pools
of student loans guaranteed by the U.S. Department of
Education. As of October 30, 2009, we recorded cumulative
temporary losses of $3,593 within AOCI. In addition, we recorded
other-than-temporary
losses of $2,122 in other income (expense), net, during the
three and six month periods ended October 24, 2008 based on
an analysis of the fair value and marketability of these
investments. We estimated the fair value for each individual ARS
using an income (discounted cash flow) approach which
incorporates both observable and unobservable inputs to discount
the expected future cash flows. Based on our ability to access
our cash and other short-term investments, our expected
operating cash flows, and our other sources of cash, we do not
intend to sell these investments prior to recovery of value. We
will continue to monitor our ARS investments in light of the
current debt market environment and evaluate our accounting for
these investments.
As of October 30, 2009 and April 24, 2009, we held
investments in a private equity fund of $1,986 and $2,023,
respectively. In addition, at April 24, 2009, we held
equity investments in privately held companies of $1,946. For
the three and six month periods ended October 30, 2009, we
recorded a gain of $2,805 and $2,713, respectively, and for the
three and six month periods ended October 24, 2008, we
recorded a gain of $638 and losses of $1,983, respectively, on
these investments.
The table below provides a reconciliation of our Level 3
financial assets measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) for
the three and six month periods ended October 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary
|
|
|
Auction Rate
|
|
|
Private Equity
|
|
|
Nonpublic
|
|
|
|
Fund
|
|
|
Securities
|
|
|
Fund
|
|
|
Companies
|
|
|
Balance at April 24, 2009
|
|
$
|
51,630
|
|
|
$
|
66,537
|
|
|
$
|
2,023
|
|
|
$
|
1,946
|
|
Total unrealized gains included in other comprehensive income
|
|
|
|
|
|
|
2,664
|
|
|
|
|
|
|
|
|
|
Total realized gains (losses) included in earnings
|
|
|
|
|
|
|
|
|
|
|
110
|
|
|
|
(202
|
)
|
Purchases, sales and settlements, net
|
|
|
|
|
|
|
(250
|
)
|
|
|
(137
|
)
|
|
|
(1,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2009
|
|
|
51,630
|
|
|
|
68,951
|
|
|
|
1,996
|
|
|
|
311
|
|
Total unrealized gains included in other comprehensive income
|
|
|
|
|
|
|
484
|
|
|
|
|
|
|
|
|
|
Total realized gains included in earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,805
|
|
Purchases, sales and settlements, net
|
|
|
(11,851
|
)
|
|
|
(450
|
)
|
|
|
(10
|
)
|
|
|
(3,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 30, 2009
|
|
$
|
39,779
|
|
|
$
|
68,985
|
|
|
$
|
1,986
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Derivative
Financial Instruments
|
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. Our derivatives expose us
to credit risk to the extent that the counterparties may be
unable to meet the terms of the agreement. We seek to mitigate
such risk by limiting our counterparties to major financial
institutions. In addition, the potential risk of loss with any
one counterparty resulting from this type of credit risk is
monitored on an ongoing basis. We also have in place a master
netting arrangement to mitigate the credit risk of our
counterparty and potentially to reduce our losses due to
counterparty nonperformance. All contracts have a maturity of
less than six months.
18
We recognize derivative instruments as either assets or
liabilities on the balance sheet at fair value. Changes in fair
value (i.e. gains or losses) of the derivatives are recorded as
revenues or other income (expense), or as AOCI. 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 in AOCI until the hedged item is
recognized in earnings. Any ineffective portion of the hedge is
recognized in earnings immediately.
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:
Balance Sheet. We utilize monthly foreign
currency forward and options contracts to hedge exchange rate
fluctuations related to certain foreign monetary assets and
liabilities. These derivative instruments do not subject us to
material balance sheet risk due to exchange rate movements
because gains and losses on these derivatives are intended to
offset gains and losses on the assets and liabilities being
hedged and the net amount is included in earnings.
Forecasted Transactions. 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. The contracts
are carried on the balance sheet at fair value, and the
effective portion of the contracts gains and losses is
recorded as AOCI until the forecasted transaction occurs. When
the forecasted transaction occurs, we reclassify the related
gain or loss on the cash flow hedge to revenue. If the
underlying forecasted transactions do not occur, or it becomes
probable that they will not occur, the gain or loss on the
related cash flow hedge is recognized immediately in earnings.
We measure the effectiveness of hedges of forecasted
transactions on a monthly basis by comparing the fair values of
the designated currency forward contracts with the fair values
of the forecasted transactions. Any ineffective portion of the
derivative hedging gain or loss as well as changes in the fair
value of the derivatives time value (which are excluded
from the assessment of hedge effectiveness) is recognized in
current period earnings. During the three and six month periods
ended October 30, 2009, no ineffectiveness was recognized
in earnings and the time value component in our cash flow hedges
of $2 and $21, respectively, was recognized as a reduction to
other expenses, net.
Over the next twelve months, it is expected that $375 of
derivative net losses recorded in AOCI as of October 30,
2009 will be reclassified into earnings as an adjustment to
revenues. The maximum length of time over which forecasted
foreign denominated revenues are hedged is six months.
As of October 30, 2009, we had the following outstanding
currency forward contracts that were entered into to hedge
forecasted foreign denominated sales and our balance sheet
monetary asset and liability exposures:
Cash Flow
Hedges:
|
|
|
|
|
|
|
|
|
Currency
|
|
Buy/Sell
|
|
Notional
|
|
Euro (EUR)
|
|
|
Sell
|
|
|
$
|
69,914
|
|
British pound (GBP)
|
|
|
Sell
|
|
|
|
15,933
|
|
Balance
Sheet contracts:
|
|
|
|
|
|
|
|
|
Currency
|
|
Buy/Sell
|
|
|
Notional
|
|
|
Euro (EUR)
|
|
|
Sell
|
|
|
$
|
138,063
|
|
British pound (GBP)
|
|
|
Sell
|
|
|
|
36,265
|
|
Canadian dollar (CAD)
|
|
|
Sell
|
|
|
|
17,338
|
|
Other
|
|
|
Sell
|
|
|
|
20,859
|
|
Australia Dollar (AUD)
|
|
|
Buy
|
|
|
|
35,870
|
|
Other
|
|
|
Buy
|
|
|
|
10,674
|
|
Put Option (EUR)
|
|
|
Sell
|
|
|
|
13,238
|
|
19
We net derivative assets and liabilities in the consolidated
balance sheets to the extent that master netting arrangements
meet the requirements of accounting guidance on balance sheet
offsetting.
The fair value of derivative instruments in our condensed
consolidated balance sheets as of October 30, 2009 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivative Instruments
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
Balance Sheet
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
Location
|
|
Fair Value
|
|
|
Location
|
|
Fair Value
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Prepaid expense
and other assets
|
|
$
|
66
|
|
|
Other accrued
liabilities
|
|
$
|
(442
|
)
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Prepaid expense
and other assets
|
|
|
1,978
|
|
|
Other accrued
liabilities
|
|
|
(2,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
2,044
|
|
|
|
|
$
|
(3,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of derivative instruments designated as cash flow
hedges on our condensed consolidated statements of operations
for the three and six month periods ended October 30, 2009
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 30, 2009
|
|
Six Months Ended October 30, 2009
|
|
|
|
|
Loss
|
|
|
|
|
|
Loss
|
|
Loss
|
|
|
Loss
|
|
Reclassified
|
|
Loss
|
|
Loss
|
|
Reclassified
|
|
Recognized in
|
Derivatives in Cash Flow
|
|
Recognized in
|
|
from AOCI into
|
|
Recognized in
|
|
Recognized in
|
|
from AOCI into
|
|
Income
|
Hedging Relationships
|
|
OCI(1)
|
|
Income(2)
|
|
Income(3)
|
|
OCI(1)
|
|
Income(2)
|
|
(3)
|
|
Foreign exchange forward contracts
|
|
$
|
(779
|
)
|
|
$
|
(1,584
|
)
|
|
$
|
(2
|
)
|
|
$
|
(5,617
|
)
|
|
$
|
(5,764
|
)
|
|
$
|
(21
|
)
|
|
|
|
(1) |
|
Amount recognized in AOCI (effective portion). |
|
(2) |
|
Amount of loss reclassified from AOCI into income (effective
portion) located in revenue. |
|
(3) |
|
No ineffectiveness was recognized during the period. Amount of
loss recognized in income on derivatives relate to the time
value amount being excluded from the effectiveness testing. Such
amount is located in other expenses, net. |
The effect of derivative instruments not designated as hedges on
our condensed consolidated statements of operations for the
three and six month periods ended October 30, 2009 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
October 30, 2009
|
|
October 30, 2009
|
Derivatives Not Designated as Hedging Instruments
|
|
Loss Recognized(*)
|
|
Foreign exchange forward contracts
|
|
$
|
(513
|
)
|
|
$
|
(12,244
|
)
|
|
|
|
(*) |
|
Amount of loss recognized in income located in other expenses,
net. |
Inventories are stated at the lower of cost or market, with cost
determined on a first in, first out basis. Inventories consist
of the following:
|
|
|
|
|
|
|
|
|
|
|
October 30, 2009
|
|
|
April 24, 2009
|
|
|
Purchased components
|
|
$
|
1,640
|
|
|
$
|
5,034
|
|
Work-in-process
|
|
|
236
|
|
|
|
56
|
|
Finished goods
|
|
|
59,265
|
|
|
|
56,014
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
61,141
|
|
|
$
|
61,104
|
|
|
|
|
|
|
|
|
|
|
20
|
|
12.
|
Goodwill
and Purchased Intangible Assets
|
Goodwill as of October 30, 2009 and April 24, 2009 was
$680,986. We conducted our annual goodwill impairment test in
the three month period ended April 24, 2009. Based on this
analysis, we determined that there was no impairment to
goodwill. We will continue to monitor conditions and changes
that could indicate that our recorded goodwill may be impaired.
Identified intangible assets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30, 2009
|
|
|
April 24, 2009
|
|
|
|
Amortization
|
|
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
Period (Years)
|
|
Gross Assets
|
|
|
Amortization
|
|
|
Assets
|
|
|
Gross Assets
|
|
|
Amortization
|
|
|
Assets
|
|
|
Identified Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
5
|
|
$
|
895
|
|
|
$
|
(835
|
)
|
|
$
|
60
|
|
|
$
|
10,040
|
|
|
$
|
(9,891
|
)
|
|
$
|
149
|
|
Existing technology
|
|
4 - 5
|
|
|
80,100
|
|
|
|
(52,438
|
)
|
|
|
27,662
|
|
|
|
107,860
|
|
|
|
(71,210
|
)
|
|
|
36,650
|
|
Trademarks/tradenames
|
|
2 - 7
|
|
|
6,400
|
|
|
|
(3,733
|
)
|
|
|
2,667
|
|
|
|
6,600
|
|
|
|
(3,419
|
)
|
|
|
3,181
|
|
Customer contracts/relationships
|
|
2 - 8
|
|
|
12,200
|
|
|
|
(7,619
|
)
|
|
|
4,581
|
|
|
|
12,500
|
|
|
|
(6,736
|
)
|
|
|
5,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identified intangible assets, net
|
|
|
|
$
|
99,595
|
|
|
$
|
(64,625
|
)
|
|
$
|
34,970
|
|
|
$
|
137,000
|
|
|
$
|
(91,256
|
)
|
|
$
|
45,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for identified intangible assets is
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
October 30,
|
|
|
October 24,
|
|
|
October 30,
|
|
|
October 24,
|
|
|
Statement of Operations
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Classifications
|
|
Patents
|
|
$
|
45
|
|
|
$
|
45
|
|
|
$
|
90
|
|
|
$
|
390
|
|
|
Research and development
|
Existing technology
|
|
|
4,273
|
|
|
|
6,748
|
|
|
|
8,988
|
|
|
|
13,496
|
|
|
Cost of product revenues
|
Other identified intangibles
|
|
|
849
|
|
|
|
1,259
|
|
|
|
1,697
|
|
|
|
2,518
|
|
|
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,167
|
|
|
$
|
8,052
|
|
|
$
|
10,775
|
|
|
$
|
16,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on the identified intangible assets recorded at
October 30, 2009, future amortization expense for the next
five fiscal years is as follows:
|
|
|
|
|
Fiscal Year
|
|
Amount
|
|
|
Remainder of 2010
|
|
$
|
9,862
|
|
2011
|
|
|
11,701
|
|
2012
|
|
|
7,150
|
|
2013
|
|
|
4,963
|
|
2014
|
|
|
554
|
|
Thereafter
|
|
|
740
|
|
|
|
|
|
|
Total
|
|
$
|
34,970
|
|
|
|
|
|
|
|
|
13.
|
Restructuring
and Other Charges
|
In the three and six month periods ended October 30, 2009,
we recorded restructuring expense of $1,179, and $2,675, net,
respectively, primarily related to adjustments to future lease
commitments and employee severance costs associated with our
fiscal 2009 restructuring plan.
Fiscal
2009 Restructuring Plan
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 our
SnapMirror®
for Open Systems product, which was originally acquired through
our acquisition of Topio, Inc. in fiscal 2007. As part of this
decision, we also announced the closure of our engineering
facility in Haifa, Israel.
21
As of October 30, 2009, approximately $5,149 of the costs
associated with these activities was unpaid. We expect that
severance-related charges and other costs will be substantially
paid by January 2010 and the facilities-related lease payments
to be substantially paid by January 2013.
Fiscal
2002 Restructuring Plan
As of October 30, 2009, we also have $920 remaining in
facility restructuring reserves established as part of a
restructuring plan in fiscal 2002 related to future lease
commitments on exited facilities, net of expected sublease
income. We expect to substantially fulfill the remaining
contractual obligations related to this facility restructuring
reserve by fiscal 2011.
Activities related to the restructuring reserves for the three
and six month periods ended October 30, 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance-
|
|
|
|
|
|
Contract
|
|
|
|
|
|
|
|
|
|
Related
|
|
|
|
|
|
Cancellation
|
|
|
|
|
|
|
|
|
|
Charges
|
|
|
Facilities
|
|
|
Costs
|
|
|
Other
|
|
|
Total
|
|
|
Reserve balance at April 24, 2009
|
|
$
|
10,282
|
|
|
$
|
5,446
|
|
|
$
|
199
|
|
|
$
|
1,234
|
|
|
$
|
17,161
|
|
Adjustments to accrual and other charges
|
|
|
993
|
|
|
|
114
|
|
|
|
(1
|
)
|
|
|
390
|
|
|
|
1,496
|
|
Cash payments
|
|
|
(8,450
|
)
|
|
|
(944
|
)
|
|
|
(78
|
)
|
|
|
(927
|
)
|
|
|
(10,399
|
)
|
Foreign currency changes
|
|
|
195
|
|
|
|
328
|
|
|
|
13
|
|
|
|
(106
|
)
|
|
|
430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance at July 31, 2009
|
|
$
|
3,020
|
|
|
$
|
4,944
|
|
|
$
|
133
|
|
|
$
|
591
|
|
|
$
|
8,688
|
|
Adjustments to accrual and other charges
|
|
|
(242
|
)
|
|
|
1,401
|
|
|
|
(7
|
)
|
|
|
27
|
|
|
|
1,179
|
|
Cash payments
|
|
|
(2,206
|
)
|
|
|
(798
|
)
|
|
|
(6
|
)
|
|
|
(540
|
)
|
|
|
(3,550
|
)
|
Foreign currency changes
|
|
|
32
|
|
|
|
75
|
|
|
|
5
|
|
|
|
4
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance at October 30, 2009
|
|
$
|
604
|
|
|
$
|
5,622
|
|
|
$
|
125
|
|
|
$
|
82
|
|
|
$
|
6,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the reserve balance at October 30, 2009, $3,889 was
included in other accrued liabilities, and the remaining $2,544
was classified as other long-term obligations.
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, restricted stock units, ESPP shares, warrants, and
restricted stock awards.
Certain equity awards outstanding, representing 20,305 and
31,016 shares of common stock for the three and six month
periods ended October 30, 2009, respectively, and 50,015
and 48,183 shares of common stock for the three and six
month periods ended October 24, 2008, respectively, have
been excluded from the diluted net income per share
calculations, because their effect would have been antidilutive.
Dilutive shares outstanding do not include any effect resulting
from the conversion of our Notes issued in June 2008 and
warrants as their impact would be anti-dilutive for all periods
presented.
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.
22
The following is a reconciliation of the numerators and
denominators of the basic and diluted net income per share
computations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
October 30,
|
|
|
October 24,
|
|
|
October 30,
|
|
|
October 24,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Net Income (Numerator):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, basic and diluted
|
|
$
|
95,677
|
|
|
$
|
43,053
|
|
|
$
|
147,341
|
|
|
$
|
77,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (Denominator):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
336,738
|
|
|
|
327,445
|
|
|
|
335,676
|
|
|
|
330,718
|
|
Weighted average common shares outstanding subject to repurchase
|
|
|
(71
|
)
|
|
|
(126
|
)
|
|
|
(74
|
)
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in basic computation
|
|
|
336,667
|
|
|
|
327,319
|
|
|
|
335,602
|
|
|
|
330,587
|
|
Weighted average common shares outstanding subject to repurchase
|
|
|
71
|
|
|
|
126
|
|
|
|
74
|
|
|
|
131
|
|
Dilutive weighted average shares outstanding
|
|
|
13,013
|
|
|
|
5,940
|
|
|
|
8,637
|
|
|
|
6,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in diluted computation
|
|
|
349,751
|
|
|
|
333,385
|
|
|
|
344,313
|
|
|
|
337,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.28
|
|
|
$
|
0.13
|
|
|
$
|
0.44
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.27
|
|
|
$
|
0.13
|
|
|
$
|
0.43
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of comprehensive income were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
October 30,
|
|
|
October 24,
|
|
|
October 30,
|
|
|
October 24,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Net income
|
|
$
|
95,677
|
|
|
$
|
43,053
|
|
|
$
|
147,341
|
|
|
$
|
77,776
|
|
Change in currency translation adjustments
|
|
|
421
|
|
|
|
(3,563
|
)
|
|
|
2,800
|
|
|
|
(3,879
|
)
|
Change in unrealized gain (loss) on
available-for-sale
investments, net of related tax effect
|
|
|
1,695
|
|
|
|
(8,908
|
)
|
|
|
8,635
|
|
|
|
(11,356
|
)
|
Change in unrealized gain on derivatives qualifying as cash flow
hedges
|
|
|
805
|
|
|
|
3,579
|
|
|
|
149
|
|
|
|
4,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
98,598
|
|
|
$
|
34,161
|
|
|
$
|
158,925
|
|
|
$
|
66,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive income (loss)
were as follows:
|
|
|
|
|
|
|
|
|
|
|
October 30,
|
|
|
April 24,
|
|
|
|
2009
|
|
|
2009
|
|
|
Accumulated translation adjustments
|
|
$
|
2,468
|
|
|
$
|
(332
|
)
|
Accumulated unrealized gain (loss) on
available-for-sale
investments
|
|
|
4,332
|
|
|
|
(4,303
|
)
|
Accumulated unrealized loss on derivatives qualifying as cash
flow hedges
|
|
|
(375
|
)
|
|
|
(523
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income (loss)
|
|
$
|
6,425
|
|
|
$
|
(5,158
|
)
|
|
|
|
|
|
|
|
|
|
23
|
|
16.
|
Commitments
and Contingencies
|
The following summarizes our commitments and contingencies at
October 30, 2009, and the effect such obligations may have
on our future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010*
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
Total
|
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office operating lease
payments(1)
|
|
$
|
14,494
|
|
|
$
|
24,794
|
|
|
$
|
20,349
|
|
|
$
|
17,057
|
|
|
$
|
15,023
|
|
|
$
|
34,021
|
|
|
$
|
125,738
|
|
Real estate lease payments(2)
|
|
|
1,826
|
|
|
|
3,651
|
|
|
|
3,651
|
|
|
|
129,444
|
|
|
|
|
|
|
|
|
|
|
|
138,572
|
|
Equipment operating lease payments
|
|
|
15,840
|
|
|
|
21,297
|
|
|
|
8,436
|
|
|
|
1,217
|
|
|
|
33
|
|
|
|
|
|
|
|
46,823
|
|
Purchase commitments with contract manufacturers(3)
|
|
|
90,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,693
|
|
Other purchase orders and commitments
|
|
|
19,317
|
|
|
|
16,868
|
|
|
|
11,004
|
|
|
|
4,608
|
|
|
|
1,200
|
|
|
|
200
|
|
|
|
53,197
|
|
Capital expenditures
|
|
|
970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash Obligations
|
|
$
|
143,140
|
|
|
$
|
66,610
|
|
|
$
|
43,440
|
|
|
$
|
152,326
|
|
|
$
|
16,256
|
|
|
$
|
34,221
|
|
|
$
|
455,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial Commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit
|
|
$
|
3,698
|
|
|
$
|
400
|
|
|
$
|
363
|
|
|
$
|
67
|
|
|
$
|
|
|
|
$
|
617
|
|
|
$
|
5,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Reflects the remaining six months of fiscal year 2010. |
|
(1) |
|
Sublease income of $665 in the remainder of fiscal 2010, $1,114
in fiscal 2011, $364 in fiscal 2012, $359 in fiscal 2013, $370
in fiscal 2014 and $246 thereafter has been excluded from the
table. |
|
(2) |
|
Included in real estate lease payments pursuant to four
financing arrangements with BNP Paribas Leasing Corporation
(BNPPLC) are (i) lease commitments of $1,826 in the
remainder of fiscal 2010; $3,651 in each of the fiscal years
2011 and 2012; $2,326 in fiscal 2013, which are based on the
LIBOR rate at October 30, 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 $127,118 in the event that we
elect not to purchase or arrange for sale of the buildings.
Sublease income of $5,280 in the remainder of fiscal 2010,
$4,678 in fiscal 2011, $396 in fiscal 2012 and $264 in fiscal
2013 has been excluded from the table. |
|
(3) |
|
Contract manufacturer commitments consist of obligations for on
hand inventories and non-cancelable purchase orders 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 with the valuation of our excess and obsolete
inventory. As of October 30, 2009, the liability for these
purchase commitments in excess of future demand was
approximately $3,178 and is recorded in other accrued
liabilities. |
As of October 30, 2009, we have four leasing arrangements
(Leasing Arrangements 1, 2, 3 and 4) with BNPPLC which
require us to lease our land to BNPPLC for a period of
99 years, and to lease approximately 564,274 square
feet of office space for our headquarters in Sunnyvale costing
up to $149,550. Under these leasing arrangements, we pay 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 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
24
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 October 30, 2009, and
the date we began to make payments for each of our leasing
arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIBOR
|
|
|
|
|
|
|
|
|
|
|
plus
|
|
Lease
|
|
|
Leasing
|
|
|
|
Residual
|
|
Spread or
|
|
Commencement
|
|
|
Arrangements
|
|
Cost
|
|
Guarantee
|
|
Fixed Rate
|
|
Date
|
|
Term
|
|
|
1
|
|
|
$
|
48,500
|
|
|
$
|
41,225
|
|
|
|
3.99
|
%
|
|
|
January 2008
|
|
|
|
5 years
|
|
|
2
|
|
|
$
|
79,950
|
|
|
$
|
67,958
|
|
|
|
1.10
|
%
|
|
|
December 2007
|
|
|
|
5 years
|
|
|
3
|
|
|
$
|
10,475
|
|
|
$
|
8,904
|
|
|
|
3.97
|
%
|
|
|
December 2007
|
|
|
|
5 years
|
|
|
4
|
|
|
$
|
10,625
|
|
|
$
|
9,031
|
|
|
|
3.99
|
%
|
|
|
December 2007
|
|
|
|
5 years
|
|
These leases require us to maintain specified financial
covenants with which we were in compliance as of
October 30, 2009. Such financial covenants include a
maximum ratio of Total Debt to Earnings before Interest, Taxes,
Depreciation and Amortization and a minimum amount of
Unencumbered Cash and Short-Term Investments.
Warranty
Reserve
We provide customers a warranty on software of ninety days and a
warranty on hardware with terms ranging from one to three years.
Estimated future warranty costs are expensed as a cost of
product revenues when revenue is recognized, based on estimates
of the costs that may be incurred under our warranty obligations
including material, distribution and labor costs. Our accrued
liability for estimated future warranty costs is included in
other accrued liabilities and other long-term obligations on the
accompanying consolidated balance sheets. Factors that affect
our warranty liability include the number of installed units,
estimated material costs, estimated distribution costs and
estimated labor costs. We periodically assess the adequacy of
our warranty accrual and adjust the amount as considered
necessary. Changes in warranty reserves during the three and six
month periods ended October 30, 2009 and October 24,
2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
October 30,
|
|
|
October 24,
|
|
|
October 30,
|
|
|
October 24,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Warranty reserve at beginning of period
|
|
$
|
40,297
|
|
|
$
|
41,929
|
|
|
$
|
42,325
|
|
|
$
|
42,815
|
|
Expense accrued during the period
|
|
|
2,321
|
|
|
|
9,495
|
|
|
|
7,624
|
|
|
|
15,095
|
|
Warranty costs incurred
|
|
|
(6,757
|
)
|
|
|
(6,495
|
)
|
|
|
(14,088
|
)
|
|
|
(12,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty reserve at end of period
|
|
$
|
35,861
|
|
|
$
|
44,929
|
|
|
$
|
35,861
|
|
|
$
|
44,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Guarantees
We have both nonrecourse and recourse lease financing
arrangements with third-party leasing companies through new and
preexisting relationships with customers. In addition, from time
to time we provide guarantees for a portion of other financing
arrangements under which we could be called upon to make
payments to our third-party funding companies in the event of
nonpayment by end-user customers. Under the terms of the
nonrecourse leases, we do not have any continuing obligations or
liabilities to the third-party leasing companies. Under the
terms of the recourse leases, which are generally three years or
less, we remain liable for the aggregate unpaid remaining lease
payments to the third-party leasing companies in the event of
end-user customer default. These arrangements are generally
collateralized by a security interest in the underlying assets.
Where we provide a guarantee, we defer the revenue associated
with the end-user financing arrangement in accordance with our
revenue recognition policies. As of October 30, 2009, the
maximum guaranteed payment contingencies under our financing
arrangements totaled approximately $75,200; and the related
deferred revenue and cost of revenue totaled approximately
$76,300 and $6,500, respectively. To date, we have not
experienced material losses under our lease financing programs
or other financing arrangements.
25
Purchase
Commitments
In the normal course of business we make commitments to our
third party contract manufacturers, to manage manufacturer lead
times and meet product forecasts, and to other parties, to
purchase various key components used in the manufacture of our
products. We establish accruals for estimated losses on
purchased components for which we believe it is probable that
they will not be utilized in future operations. To the extent
that such forecasts are not achieved, our commitments and
associated accruals may change.
Indemnification
agreements
We enter into standard indemnification agreements in the
ordinary course of business. Pursuant to these agreements, we
agree to defend and indemnify other parties, primarily our
customers or business partners or subcontractors, for damages
and reasonable costs incurred in any suit or claim brought
against them alleging that our products sold to them infringe
any U.S. patent, copyright, trade secret, or similar right.
If a product becomes the subject of an infringement claim, we
may, at our option: (i) replace the product with another
noninfringing product that provides substantially similar
performance; (ii) modify the infringing product so that it
no longer infringes but remains functionally equivalent;
(iii) obtain the right for the customer to continue using
the product at our expense and for the reseller to continue
selling the product; (iv) take back the infringing product
and refund to customer the purchase price paid less depreciation
amortized on a straight-line basis. We have not been required to
make material payments pursuant to these provisions
historically. We have not recorded any liability at
October 30, 2009 related to these guarantees since the
maximum amount of potential future payments under such
guarantees, indemnities and warranties is not determinable,
other than as described above.
Legal
Contingencies
We are subject to various legal proceedings and claims which may
arise in the normal course of business.
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 paid the United States $128,000, plus interest of $715,
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 September
2009, we received a letter from the GSA confirming that the
Company will not be excluded from further government contracting
as a result of this dispute.
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
October 30, 2009.
Our effective tax rate for the six month period ended
October 30, 2009 was 10.8% compared with 5.6% for the six
month period ended October 24, 2008. Our effective tax rate
reflects the impact of a significant amount of our earnings
being taxed in foreign jurisdictions at rates below the
U.S. statutory tax rate. The increase in the effective tax
rate for the six month period ended October 30, 2009
relative to the rate for the same period last year is primarily
due to the geographic mix of profits which resulted in an
increase in the proportion of U.S. earnings to foreign
earnings. The earnings from U.S. operations are generally
subject to higher income tax rates.
We maintain liabilities for uncertain tax positions. These
liabilities involve considerable judgment and estimation and are
continuously monitored by management based on the best
information available, including changes in tax
26
regulations, the outcome of relevant court cases, and other
information. We are currently under examination by various
taxing authorities. Although the outcome of any tax audit is
uncertain, we believe we have adequately provided in our
condensed consolidated financial statements for any additional
taxes that we may be required to pay as a result of such
examinations. If the payment ultimately proves to be
unnecessary, the reversal of these tax liabilities would result
in tax benefits being recognized in the period we determine such
liabilities are no longer necessary. However, if an ultimate tax
assessment exceeds our estimate of tax liabilities, additional
tax expense will be recorded.
As of October 30, 2009, our unrecognized tax benefits were
$145,176 of which $108,263, if recognized, would affect our
provision for income taxes. In the six month period ended
October 30, 2009, we recognized deferred tax assets of
$8,290, which had a corresponding increase to additional paid in
capital, to reflect the related additional recognition of tax
benefits from stock options.
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 returns. We filed a
protest with the IRS in response to the Notices of Proposed
Adjustments and recently received a rebuttal from the IRS
examination team in response to our protest. 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
this audit, the ultimate determination of our taxes owed in the
U.S. 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.
On November 18, 2009, we entered into an agreement to
purchase fifteen acres of land in Bangalore, India for an
aggregate purchase price of Rs. 121,50,00,000, or
approximately $26.2 million. We expect to complete the
purchase during the three months ending January 29, 2010.
27
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
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This Quarterly Report on
Form 10-Q
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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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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our restructuring plans and estimates;
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our anticipated tax rate;
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the conversion, maturation or repurchase of the Notes,
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compliance with laws, regulations and loan covenants,
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the continuation of our stock repurchase program; and
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the impact of completed acquisitions
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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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acceptance of, and demand for, our products;
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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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demand for our global service and support and professional
services;
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28
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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 Quarterly Report on Form
10-Q.
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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 46.
Overview
Revenue for the three month period ended October 30, 2009
was $910.0 million, nearly flat from the comparable period
in the prior year, and for the six month period ended
October 30, 2009 was $1,748.0 million, down 2% from
the comparable period in the prior year. Better than anticipated
three and six month revenue performance was driven by
stabilization in the macroeconomic environment, as well as
strong demand for our storage efficiency and data management
solutions.
Gross margins strengthened during the current three and six
month periods due largely to improvements in product materials
cost and an increase in software entitlements and maintenance in
the revenue mix.
During the six month period ended October 30, 2009, we
entered into a merger agreement with Data Domain, Inc., which
was subsequently terminated on July 8, 2009. In accordance
with the agreement, we received a $57.0 million termination
fee, which, when netted against $15.9 million of
incremental third-party costs we incurred relating to the
terminated merger transaction, resulted in net proceeds of
$41.1 million.
During the three and six month periods ended October 30,
2009, sales and marketing, research and development, and general
and administrative expenses totaled $490.1 million and
$981.4 million, respectively, up 2% each from the
comparable periods of the prior year and reflected the impact of
having 14 weeks in the first three month period of fiscal
2010 compared to 13 weeks in the same period of the prior
year, as well as an increase in incentive compensation plan
expense. These increases were almost entirely offset by
decreases in salaries and related expenses resulting from our
restructuring plans and a reduction in other operations-related
expenses due to our continuing focus on maintaining spending
discipline in light of the current business conditions.
29
Critical
Accounting Estimates and Policies
Our discussion and analysis of financial conditions 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 the accounting policies and estimates discussed under
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations in our
Annual Report on
Form 10-K
for the fiscal year ended April 24, 2009 as revised in our
Current Report on
Form 8-K
filed on September 30, 2009, affect our more significant
judgments and estimates used in the preparation of the condensed
consolidated financial statements. There have been no material
changes to the critical accounting policies and estimates as
filed in such report, except for the retrospective adoption of
new guidance for accounting for convertible debt.
Recent
Accounting Pronouncements
Information regarding recent accounting pronouncements is
provided in Note 2 of the notes to condensed consolidated
financial statements.
Results
of Operations
The following table sets forth certain consolidated statements
of operations data as a percentage of net revenues for the
periods indicated:
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Three Months Ended
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Six Months Ended
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October 30, 2009
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October 24, 2008
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October 30, 2009
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October 24, 2008
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Revenues:
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Product
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57.7
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%
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62.5
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%
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57.4
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%
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62.8
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%
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Software entitlements and maintenance
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18.7
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16.8
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19.2
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16.7
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Service
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23.6
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20.7
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23.4
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20.5
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100.0
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100.0
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100.0
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100.0
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Cost of Revenues:
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Cost of product
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21.9
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28.6
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23.5
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28.7
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Cost of software entitlements and maintenance
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0.3
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0.2
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0.4
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0.2
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Cost of service
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11.1
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11.3
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11.5
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11.4
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Gross Margin
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66.7
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59.9
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64.6
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59.7
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Operating Expenses:
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Sales and marketing
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33.1
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33.3
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34.5
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34.1
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Research and development
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14.5
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13.8
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15.0
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14.1
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General and administrative
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6.3
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5.6
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6.7
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5.6
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Restructuring and other charges
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0.1
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0.2
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Merger termination proceeds, net
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(2.4
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)
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Total Operating Expenses
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54.0
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52.7
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54.0
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53.8
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Income from Operations
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12.7
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7.2
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10.6
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5.9
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Other Income (Expenses), Net:
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Interest income
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0.7
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2.0
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0.8
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1.8
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Interest expense
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(2.0
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)
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(2.0
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)
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(2.1
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)
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(1.5
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)
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Gain (loss) on investments, net
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0.3
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(2.5
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)
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0.2
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(1.4
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)
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Other expenses, net
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(0.1
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)
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(0.1
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(0.1
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(0.1
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)
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Total Other Expenses, Net
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(1.1
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)
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(2.6
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(1.2
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)
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(1.2
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)
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Income Before Income Taxes
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11.6
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4.6
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9.4
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4.7
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Provision (Benefit) for Income Taxes
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1.1
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(0.1
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)
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1.0
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0.3
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Net Income
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10.5
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%
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4.7
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%
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8.4
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%
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4.4
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%
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30
Discussion
and Analysis of Results of Operations
Net Revenues Our net revenues for the three
and six month periods ended October 30, 2009 and
October 24, 2008 were as follows:
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Three Months Ended
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Six Months Ended
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October 30,
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October 24,
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October 30,
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October 24,
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2009
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|
2008
|
|
% Change
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2009
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2008
|
|
% Change
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(In millions)
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(In millions)
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Net revenues
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$
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910.0
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$
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911.6
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0
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%
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|
$
|
1,748.0
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$
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1,780.4
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(2
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)%
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Net revenues for the three month period ended October 30,
2009 decreased by $1.6 million, or were nearly flat,
compared to the comparable period of the prior year, and for the
six month period ended October 30, 2009, decreased by
$32.4 million, or 2%, from the comparable period in the
prior year. The decrease in net revenues for both periods was
due to decreases in product revenues, partially offset by
increases in software entitlements and maintenance revenues, as
well as in service revenues.
Sales through our indirect channels represented 67% and 68% of
net revenues for the three month periods ended October 30,
2009 and October 24, 2008, respectively, and represented
68% and 64% of net revenues for the six month periods ended
October 30, 2009 and October 24, 2008, respectively.
Sales to Arrow and Avnet, who are U.S. distributors, each
accounted for 12% and 11% of our net revenues, respectively, for
each of the three and six month periods ended October 30,
2009 and 11% and 10% of our revenues, respectively, for each of
the three and six month periods ended October 24, 2008.
Product
Revenues
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|
Three Months Ended
|
|
Six Months Ended
|
|
|
October 30,
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|
October 24,
|
|
|
|
October 30,
|
|
October 24,
|
|
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
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|
|
(In millions)
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|
|
|
|
|
(In millions)
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|
|
|
Product revenues
|
|
$
|
525.1
|
|
|
$
|
570.4
|
|
|
|
(8
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)%
|
|
$
|
1,003.4
|
|
|
$
|
1,118.3
|
|
|
|
(10
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)%
|
Product revenues decreased by $45.3 million, or 8%, for the
three month period ended October 30, 2009 from the
comparable period in the prior year. Our configured systems
comprise bundled hardware and software products. Unit volume
decreased by 6% for the three month period ended
October 30, 2009 compared to the prior year, with the
largest decrease related to low-end systems. During the three
month period ended October 30, 2009, high-end, midrange and
low-end systems generated approximately 23%, 58% and 19% of
configured systems revenue, respectively, compared to
approximately 26%, 52% and 22%, respectively, in the prior year.
Product revenues decreased by $114.9 million, or 10%, for
the six month period ended October 30, 2009 from the
comparable period in the prior year. Unit volume decreased by 6%
for the six month period ended October 30, 2009 compared to
the prior year, with the largest decrease related to low-end
systems. During the six month period ended October 30,
2009, high-end, midrange and low-end systems generated
approximately 22%, 58% and 20% of configured systems revenue,
respectively, compared to approximately 27%, 52% and 21%,
respectively, in the prior year.
This trend reflects a shift in customer buying patterns from our
higher priced systems towards our midrange systems, which is the
core strength of our product offerings. In addition, average
selling prices declined in all ranges, driven by lower list
prices, unfavorable configuration mix (consisting of hardware
and software components, disk capacity and disk price) and
higher discounting.
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
31
performance, increased capacity and software to manage this
increased capacity have an offsetting impact on product revenue.
Software
Entitlements and Maintenance Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
October 30,
|
|
October 24,
|
|
|
|
October 30,
|
|
October 24,
|
|
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
|
|
|
Software entitlements and maintenance revenues
|
|
$
|
169.8
|
|
|
$
|
152.7
|
|
|
|
11
|
%
|
|
$
|
335.1
|
|
|
$
|
297.1
|
|
|
|
13
|
%
|
Software entitlements and maintenance (SEM) revenues increased
by $17.1 million, or 11%, for the three month period ended
October 30, 2009, and by $38.0 million, or 13%, for
the six month period ended October 30, 2009, from the
comparable periods in the prior year. These increases were
driven by an increase in the aggregate contract value of the
installed base under SEM contracts, which is recognized as
revenue ratably over the terms of the underlying contracts.
Service
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
October 30,
|
|
October 24,
|
|
|
|
October 30,
|
|
October 24,
|
|
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
|
|
|
Service revenues
|
|
$
|
215.1
|
|
|
$
|
188.5
|
|
|
|
14
|
%
|
|
$
|
409.5
|
|
|
$
|
365.0
|
|
|
|
12
|
%
|
Service revenues increased by $26.6 million, or 14%, for
the three month period ended October 30, 2009, and by
$44.5 million, or 12%, for the six month period ended
October 30, 2009, from the comparable periods in the prior
year. Service maintenance contract revenues increased 20% for
each of the three and six month periods ended October 30,
2009, driven by an increase in the installed base under service
contracts and the timing of recognition of the related revenue.
Professional services and educational and training services
revenues increased 5% and 1% for the three and six month periods
ended October 30, 2009, respectively, compared to the prior
year.
.
Revenues
by Geographic Area
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
October 30,
|
|
|
October 24,
|
|
|
|
|
|
October 30,
|
|
|
October 24,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
International
|
|
$
|
416.7
|
|
|
$
|
410.9
|
|
|
|
1
|
%
|
|
$
|
781.5
|
|
|
$
|
810.4
|
|
|
|
(4
|
)%
|
United States
|
|
|
493.3
|
|
|
|
500.7
|
|
|
|
(1
|
)%
|
|
|
966.5
|
|
|
|
970.0
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
910.0
|
|
|
$
|
911.6
|
|
|
|
|
|
|
$
|
1,748.0
|
|
|
$
|
1,780.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The slight increase in international revenues for the three
month period ended October 30, 2009 from the comparable
period in the prior year was primarily due to an increase in
sales to customers in Germany, while the decrease in United
States revenues was due to a decrease in sales to
U.S. commercial customers, partially offset by an increase
in sales to the U.S. public sector. The decrease in
international revenues for the six month period ended
October 30, 2009 from the comparable period in the prior
year was due to a decrease in sales to customers in Europe.
Total international revenues (including U.S. exports) were
approximately 46% and 45% of net revenues for the three and six
month periods ended October 30, 2009, respectively,
compared to 45% and 46% for the comparable periods in the prior
year.
Cost
of Revenues
Our cost of revenues includes: (1) cost of product
revenues, which includes the costs of manufacturing and shipping
of our storage systems, and amortization of purchased intangible
assets, inventory write-downs, and
32
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.
Our gross margins are impacted by a variety of factors including
pricing and discount practices, channel sales mix, revenue mix
and product material costs. Service gross margin is also
typically impacted by factors such as changes in the size of our
installed base of products, as well as the timing of support
service initiations and renewals, and incremental investments in
our customer support infrastructure. If our shipment volumes,
product and services mix, average selling prices and pricing
actions that impact our gross margin are adversely affected,
whether by the economic downturn or for other reasons, our gross
margin could decline.
Cost
of Product Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
October 30,
|
|
October 24,
|
|
|
|
October 30,
|
|
October 24,
|
|
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
|
|
|
Cost of product revenues
|
|
$
|
199.1
|
|
|
$
|
260.3
|
|
|
|
(24
|
)%
|
|
$
|
411.7
|
|
|
$
|
510.1
|
|
|
|
(19
|
)%
|
Cost of product revenues decreased by $61.2 million, or
24%, for the three month period ended October 30, 2009 from
the comparable period in the prior year, primarily due to
decreased materials cost of $41.0 million. Our material
costs were favorably impacted by lower unit volume in our
high-end and low-end systems, and lower average per unit
materials costs in our midrange and low-end systems due to
favorable materials pricing, which we expect to continue. These
favorable impacts were partially offset by higher unit volume in
our midrange systems and higher average per unit materials costs
in our high-end systems. Cost of product revenues represented
38% and 46% of product revenue for the three month periods ended
October 30, 2009 and October 24, 2008, respectively,
reflecting the overall reduction in materials costs as a
percentage of revenues.
Cost of product revenues decreased by $98.4 million, or
19%, for the six month period ended October 30, 2009, from
the comparable period in the prior year, primarily due to
decreased materials cost of $73.7 million resulting from
lower unit volume in our midrange and low-end systems, partially
offset by higher average per unit materials costs in our
high-end systems. Cost of product revenues represented 41% and
46% of product revenue for the six month periods ended
October 30, 2009 and October 24, 2008, respectively,
reflecting the overall reduction in materials costs as a
percentage of revenues.
Cost of product revenues decreased due to the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months % Change
|
|
|
Six Months % Change
|
|
|
|
Fiscal 2009 to Fiscal 2010
|
|
|
Fiscal 2009 to Fiscal 2010
|
|
|
Materials costs
|
|
|
(16
|
)%
|
|
|
(14
|
)%
|
Excess and obsolete inventory
|
|
|
(3
|
)
|
|
|
(2
|
)
|
Warranty
|
|
|
(3
|
)
|
|
|
(2
|
)
|
Other
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Total change
|
|
|
(24
|
)%
|
|
|
(19
|
)%
|
|
|
|
|
|
|
|
|
|
Cost
of Software Entitlements and Maintenance Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
October 30,
|
|
October 24,
|
|
|
|
October 30,
|
|
October 24,
|
|
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
|
|
|
Cost of software entitlements and maintenance revenues
|
|
$
|
3.1
|
|
|
$
|
2.3
|
|
|
|
37
|
%
|
|
$
|
6.2
|
|
|
$
|
4.4
|
|
|
|
40
|
%
|
Cost of software entitlements and maintenance revenues (SEM)
increased $0.8 million, or 37%, and $1.8 million, or
40% for the three and six month periods ended October 30,
2009, respectively, from the comparable periods in the prior
year, due to an increase in field service engineering costs.
Cost of SEM revenue
33
represented 2% and 1% of SEM revenue for the three month periods
ended October 30, 2009 and October 24, 2008,
respectively. Cost of SEM revenue represented 2% and 2% of SEM
revenue for the six month periods ended October 30, 2009
and October 24, 2008, respectively.
Cost
of Service Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
October 30,
|
|
October 24,
|
|
|
|
October 30,
|
|
October 24,
|
|
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
|
|
|
Cost of service revenues
|
|
$
|
101.1
|
|
|
$
|
102.9
|
|
|
|
(2
|
)%
|
|
$
|
200.9
|
|
|
$
|
203.0
|
|
|
|
(1
|
)%
|
Cost of service revenues decreased by $1.8 million, or 2%,
and by $2.1 million, or 1%, for the three and six month
periods ended October 30, 2009, respectively, from the
comparable periods in the prior year. Cost of service revenues
represented 47% and 55% of service revenue for the three month
periods ended October 30, 2009 and October 24, 2008,
respectively, and represented 49% and 56% of service revenue for
the six month periods ended October 30, 2009 and
October 24, 2008, respectively, reflecting improved
productivity.
Operating
Expenses
Sales and
Marketing, Research and Development, and General and
Administrative Expenses
Compensation costs comprise the largest component of operating
expenses. Included in compensation costs are salaries and
related benefits, stock-based compensation costs and performance
based employee incentive plan compensation costs. Compensation
costs included in operating expenses increased approximately
$21 million, or 9%, during the three month period ended
October 30, 2009 compared to the three month period ended
October 24, 2008, primarily due to a $27 million
increase in employee incentive compensation and a
$5 million increase in stock-based compensation, offset by
an $11 million decrease in salaries, benefits and other
compensations costs associated with a 3% decrease in headcount.
Compensation costs included in operating expenses increased
approximately $45 million, or 9%, during the six month
period ended October 30, 2009 compared to the six months
ended October 24, 2008, primarily due to a $31 million
increase in employee incentive compensation and a
$19 million increase in stock-based compensation, offset by
a $5 million decrease in salaries, benefits and other
compensations costs associated with a 3% decrease in headcount.
In addition, operating expenses were higher for the six month
period ended October 30, 2009 due to additional employee
compensation related to having 14 weeks in the first three
month period of fiscal 2010 compared to 13 weeks in the
prior year.
Sales and
Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
October 30,
|
|
October 24,
|
|
|
|
October 30,
|
|
October 24,
|
|
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
|
|
|
Sales and marketing expenses
|
|
$
|
300.8
|
|
|
$
|
304.0
|
|
|
|
(1
|
)%
|
|
$
|
602.3
|
|
|
$
|
607.2
|
|
|
|
(1
|
)%
|
34
Sales and marketing expense consists primarily of compensation
costs, commissions, allocated facilities and IT costs,
advertising and marketing promotional expense, travel and
entertainment expense. Sales and marketing expenses decreased
due to the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months % Change
|
|
|
Six Months % Change
|
|
|
|
Fiscal 2009 to Fiscal 2010
|
|
|
Fiscal 2009 to Fiscal 2010
|
|
|
Incentive plan compensation
|
|
|
4
|
%
|
|
|
2
|
%
|
Stock based compensation
|
|
|
1
|
|
|
|
2
|
|
Other compensation costs, including impact of headcount
reductions
|
|
|
(3
|
)
|
|
|
(1
|
)
|
Commissions
|
|
|
2
|
|
|
|
|
|
Advertising and marketing promotional expense
|
|
|
(2
|
)
|
|
|
(2
|
)
|
IT expenses related to software implementations and IT support
|
|
|
1
|
|
|
|
2
|
|
Travel and entertainment expense
|
|
|
(1
|
)
|
|
|
(2
|
)
|
Other
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
Total change
|
|
|
(1
|
)%
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
Research
and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
October 30,
|
|
October 24,
|
|
|
|
October 30,
|
|
October 24,
|
|
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
|
|
|
Research and development expenses
|
|
$
|
132.4
|
|
|
$
|
125.5
|
|
|
|
5
|
%
|
|
$
|
262.7
|
|
|
$
|
250.8
|
|
|
|
5
|
%
|
Research and development expense consists primarily of
compensation costs, allocated facilities and IT costs,
depreciation and amortization, and prototype, non-recurring
engineering (NRE) charges and other outside services costs.
Research and development expenses increased due to the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months % Change
|
|
|
Six Months % Change
|
|
|
|
Fiscal 2009 to Fiscal 2010
|
|
|
Fiscal 2009 to Fiscal 2010
|
|
|
Incentive plan compensation
|
|
|
8
|
%
|
|
|
5
|
%
|
Stock based compensation
|
|
|
|
|
|
|
1
|
|
Other compensation costs, including impact of headcount
reductions
|
|
|
(2
|
)
|
|
|
(1
|
)
|
Facilities and IT support costs
|
|
|
2
|
|
|
|
2
|
|
NRE charges
|
|
|
1
|
|
|
|
1
|
|
Outside services
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Other
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Total change
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
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 continue to spend on current
and future product development efforts, broaden our existing
product offerings and introduce new products that expand our
solutions portfolio.
35
General
and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
October 30,
|
|
October 24,
|
|
|
|
October 30,
|
|
October 24,
|
|
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
|
|
|
General and administrative expenses
|
|
$
|
56.9
|
|
|
$
|
51.0
|
|
|
|
12
|
%
|
|
$
|
116.5
|
|
|
$
|
100.5
|
|
|
|
16
|
%
|
General and administrative expense consists primarily of
compensation costs, professional and corporate legal fees,
recruiting expenses, and allocated facilities and IT costs.
General and administrative expenses increased due to the
following:
|
|
|
|
|
|
|
|
|
|
|
Three Months % Change
|
|
|
Six Months % Change
|
|
|
|
Fiscal 2009 to Fiscal 2010
|
|
|
Fiscal 2009 to Fiscal 2010
|
|
|
Incentive plan compensation
|
|
|
11
|
%
|
|
|
7
|
%
|
Stock based compensation
|
|
|
4
|
|
|
|
6
|
|
Other compensation costs
|
|
|
|
|
|
|
3
|
|
Professional and corporate legal fees
|
|
|
(3
|
)
|
|
|
(1
|
)
|
IT costs
|
|
|
1
|
|
|
|
1
|
|
Other
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change
|
|
|
12
|
%
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
Restructuring
and Other Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
October 30,
|
|
October 24,
|
|
|
|
October 30,
|
|
October 24,
|
|
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
|
|
|
Restructuring and other charges
|
|
$
|
1.2
|
|
|
$
|
|
|
|
|
N/A
|
|
|
$
|
2.7
|
|
|
$
|
|
|
|
|
N/A
|
|
In the three and six month periods ended October 30, 2009,
we recorded restructuring expense of $1.2 million and
$2.7 million, net, respectively, primarily related to
adjustments to future lease commitments and employee severance
costs associated with our fiscal 2009 restructuring plan, which
included a program for a reduction in workforce, the closing or
downsizing of certain facilities, and the establishment of a
plan to outsource certain internal activities.
As of October 30, 2009, approximately $6.1 million of
the costs associated with restructuring activities were unpaid.
We expect that severance-related charges and other costs
totaling $0.8 million will be substantially paid by the
three month period ending January 29, 2010 and the
facilities-related lease payments totaling $5.3 million to
be substantially paid by January 2013.
See Note 13 to our condensed consolidated financial
statements for further discussion of our restructuring
activities.
Merger
Termination Proceeds, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
October 30,
|
|
October 24,
|
|
|
|
October 30,
|
|
October 24,
|
|
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
|
|
|
Merger termination proceeds, net
|
|
$
|
|
|
|
$
|
|
|
|
|
N/A
|
|
|
$
|
(41.1
|
)
|
|
$
|
|
|
|
|
N/A
|
|
On May 20, 2009, we announced that we had entered into a
merger agreement with Data Domain, Inc. (Data Domain) under
which we would acquire Data Domain in a stock and cash
transaction. On July 8, 2009, Data Domains Board of
Directors terminated the merger agreement and pursuant to the
terms of the agreement, Data
36
Domain paid us a $57.0 million termination fee. We incurred
$15.9 million of incremental third-party costs relating to
the terminated merger transaction during the same period,
resulting in net proceeds of $41.1 million recorded in the
condensed consolidated statement of operations for the six month
period ended October 30, 2009.
Other
Income and Expense
Interest Income Interest income for the three
and six month periods ended October 30, 2009 and
October 24, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
October 30,
|
|
October 24,
|
|
|
|
October 30,
|
|
October 24,
|
|
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
|
|
|
Interest income
|
|
$
|
7.0
|
|
|
$
|
17.6
|
|
|
|
(60
|
)%
|
|
$
|
15.6
|
|
|
$
|
33.1
|
|
|
|
(53
|
)%
|
The decrease in interest income for the three and six month
periods ended October 30, 2009 compared to the prior year
was primarily due to lower market yields on our cash and
investment portfolio.
Interest Expense Interest expense for the
three and six month periods ended October 30, 2009 and
October 24, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
October 30,
|
|
October 24,
|
|
|
|
October 30,
|
|
October 24,
|
|
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
|
|
|
Interest expense
|
|
$
|
(17.9
|
)
|
|
$
|
(17.8
|
)
|
|
|
1
|
%
|
|
$
|
(37.1
|
)
|
|
$
|
(27.3
|
)
|
|
|
36
|
%
|
On April 25, 2009, as required by new guidance on
accounting for convertible debt, we retrospectively revised our
accounting for 1.75% Convertible Notes Due 2013 (the Notes)
by allocating the initial proceeds from the Notes between a
liability component and an equity component. Accordingly, we
recorded additional interest expense on the debt component of
our Notes using an effective interest rate of 6.31% for all
periods. As a result of this adoption, we recognized
approximately $12.2 million and $25.3 million,
respectively, in incremental non-cash interest expense during
the three and six month periods ended October 30, 2009 from
the amortization of debt discount and issuance costs.
Interest expense was relatively flat for the three month period
ended October 30, 2009 compared to the prior year. Interest
expense increased $9.8 million for the six month period
ended October 30, 2009 compared to the prior year,
primarily due to interest expense on our Notes, issued on
June 10, 2008, which were outstanding for the full six
month period ended October 30, 2009 but only a partial
period in the comparable period of the prior year.
Gain
(Loss) on Investments, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
October 30,
|
|
October 24,
|
|
|
|
October 30,
|
|
October 24,
|
|
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
|
|
|
Gain (Loss) on investments, net
|
|
$
|
2.8
|
|
|
$
|
(22.6
|
)
|
|
|
(112
|
)%
|
|
$
|
2.7
|
|
|
$
|
(25.2
|
)
|
|
|
(111
|
)%
|
During the three and six month periods ended October 30,
2009, we recorded gain on investments in privately held
companies of $2.8 million and $2.7 million,
respectively. During the three month period ended
October 24, 2008, net loss on investments included an
other-than-temporary
impairment charge of $21.1 million on our
available-for-sale
investments related to direct and indirect investments in Lehman
Brothers securities and an
other-than-temporary
decline of $2.1 million in the value of our auction rate
securities, partially offset by a gain of $0.6 million for
our investments in privately-held companies. During the six
month period ended October 24, 2008, net loss on
investments included a net write-down of $2.0 million for
our investments in privately-held companies, an
other-than-temporary
impairment charge of $21.1 million on our
available-for-sale
investments related to direct and indirect investments in Lehman
Brothers securities and an
other-than-temporary
impairment of $2.1 million due to a decline in the value of
our auction rate securities.
37
Other
Expenses, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
October 30,
|
|
October 24,
|
|
|
|
October 30,
|
|
October 24,
|
|
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
|
|
|
Other expenses, net
|
|
$
|
(1.3
|
)
|
|
$
|
(0.5
|
)
|
|
|
165
|
%
|
|
$
|
(2.2
|
)
|
|
$
|
(2.5
|
)
|
|
|
(10
|
)%
|
Other expense, net, consists of primarily net exchange losses
from foreign currency transactions and related hedging
activities.
Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
October 30,
|
|
October 24,
|
|
|
|
October 30,
|
|
October 24,
|
|
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
|
|
|
Provision for income taxes
|
|
$
|
10.3
|
|
|
$
|
(0.7
|
)
|
|
|
n/a
|
|
|
$
|
17.8
|
|
|
$
|
4.6
|
|
|
|
285
|
%
|
Our effective tax rate for the six month period ended
October 30, 2009 was 10.8%, compared with 5.6% for the six
month period ended October 24, 2008. Our effective tax rate
reflects the impact of a significant amount of our earnings
being taxed in foreign jurisdictions at rates below the
U.S. statutory tax rate. Our effective tax rate for the six
month period ended October 30, 2009 increased relative to
the six month period ended October 24, 2008 primarily due
to the geographic mix of profits which resulted in an increase
in the ratio of U.S. earnings to foreign earnings for
fiscal 2010. The earnings from U.S. operations are
generally subject to higher income tax rates. The provision for
income taxes for the six month period ended October 30,
2009 included a discrete charge of approximately
$7.8 million, primarily attributable to a
$16.4 million charge for the tax impact of the net merger
termination fees and a $3.8 million increase in our reserve
for uncertain tax positions, offset by a $12.4 million
benefit related to stock-based compensation. The provision for
income taxes for the six month period ended October 30,
2008 included a discrete benefit of approximately
$5.4 million, primarily attributable to a $3.5 million
decrease in our reserve for uncertain tax positions, and a
$1.9 million benefit 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 cost
sharing agreement and must, therefore, be allocated among the
participants based on anticipated benefits. The Court is
considering a review of the decision by the full Ninth Circuit
panel of justices. The Courts reversal of the prior
U.S. Tax Court decision impacts our estimate of tax
benefits that are required to be recognized under accounting
guidance. We evaluated the impact of the Xilinx case on our
provision for income taxes for the six month period ended
October 30, 2009 and established additional liabilities for
uncertain tax positions of $32.6 million. This additional
reserve for uncertain tax positions resulted in a reduction of
our unrecognized tax attributes.
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 returns. We filed a
protest with the IRS in response to the Notices of Proposed
Adjustments and recently received a rebuttal from the IRS
examination team in response to our protest. 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
this audit the ultimate determination of our taxes owed in the
U.S. 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.
Liquidity
and Capital Resources
The following sections discuss our principal liquidity
requirements, as well as our sources and uses of cash flows 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
38
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
October 30, 2009.
Liquidity
Sources, Cash Requirements
Our principal sources of liquidity as of October 30, 2009
consisted of: (1) approximately $3.0 billion in cash,
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. Our
principal liquidity requirements are primarily to meet our
working capital needs, support ongoing business activities,
research and development, capital expenditure needs, 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. 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 cash contractual obligations and commitments as of
October 30, 2009 are summarized below in the Contractual
Obligations and Commitments tables.
Our investment portfolio, including auction rate securities and
our investment in the Primary Fund (as described in Note 9
to our condensed consolidated financial statements) has been and
will continue to be exposed to market risk due to uncertainties
in the credit and capital markets. 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 periods.
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 existing cash, cash
equivalents, investments and cash generated from operations. The
timing and amount of our capital requirements cannot be
precisely determined at this time and will 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.
Cash
Flows
As of October 30, 2009, compared to April 24, 2009,
our cash and cash equivalents and short-term investments
increased by $351.3 million to $3.0 billion. The
increase in cash and cash equivalents and short-term investments
was primarily a result of cash provided by operating activities,
issuance of common stock related to employee stock option
exercises and employee stock purchase plan, partially offset by
capital expenditures. We derive our liquidity and capital
resources primarily from our cash flow from operations and from
working capital. Days sales outstanding as of October 30,
2009 decreased to 32 days, compared to 46 days as of
April 24, 2009, primarily
39
due to collection efficiencies. Working capital increased by
$292.4 million to $2,051.8 million as of
October 30, 2009, compared to $1,759.5 million as of
April 24, 2009.
Cash
Flows from Operating Activities
During the six month period ended October 30, 2009, we
generated cash flows from operating activities of
$305.5 million. We recorded net income of
$147.3 million for the six month period ended
October 30, 2009. Significant changes in noncash
adjustments affecting net income included stock-based
compensation expense of $85.4 million; depreciation and
amortization expense of $85.2 million; non-cash interest
expense from the accretion of debt discount and issuance costs
of $25.3 million, and tax benefits from stock options of
$14.4 million. Significant changes in assets and
liabilities impacting operating cash flows included a decrease
in accounts receivable of $131.7 million and a decrease in
the accrual for the GSA settlement of $128.7 million due to
payment.
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, shipment
linearity, accounts receivable collections, inventory and supply
chain management, tax benefits from stock-based compensation,
and the timing and amount of compensation and other payments.
Cash
Flows from Investing Activities
Capital expenditures for the six month period ended
October 30, 2009 were $47.5 million. We paid
$102.4 million for net purchases and redemptions of
short-term investments and received $4.5 million from the
sale of nonmarketable and marketable securities.
Cash
Flows from Financing Activities
We received $61.5 million from financing activities for the
six month period ended October 30, 2009. Proceeds from
employee stock option exercises and employee stock purchase plan
were $65.9 million. We withheld shares with an aggregate
value of $5.7 million in connection with the vesting of
certain employees restricted stock units for purposes of
satisfying those employees federal, state, and local
withholding tax obligations.
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 October 30, 2009, $1.1 billion 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
As of October 30, 2009, we had $1.265 billion
principal amount of 1.75% Convertible Senior Notes due 2013
(See Note 7 to our condensed consolidated financial
statements). The Notes will mature on June 1, 2013, unless
earlier repurchased or converted. As of October 30, 2009,
the Notes have not been repurchased or converted. We also have
not received any shares under the related Note Hedges or
delivered cash or shares under the related Warrants.
Credit
Facilities
As of October 30, 2009, we have an unsecured revolving
credit facility totaling $250.0 million, of which
$0.6 million was allocated as of October 30, 2009 to
support certain of our outstanding letters of credit.
This credit facility requires us to maintain specified financial
covenants, with which we were in compliance as of
October 30, 2009. Such specified financial covenants
include a maximum ratio of Total Debt to Earnings before
40
Interest, Taxes, Depreciation and Amortization 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 facility, 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.
Contractual
Obligations
The following summarizes our contractual obligations at
October 30, 2009 and the effect such obligations are
expected to have on our liquidity and cash flows in future
periods (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010*
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
Total
|
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office operating lease payments(1)
|
|
$
|
14.5
|
|
|
$
|
24.8
|
|
|
$
|
20.3
|
|
|
$
|
17.1
|
|
|
$
|
15.0
|
|
|
$
|
34.0
|
|
|
$
|
125.7
|
|
Real estate lease payments(2)
|
|
|
1.8
|
|
|
|
3.7
|
|
|
|
3.7
|
|
|
|
129.4
|
|
|
|
|
|
|
|
|
|
|
|
138.6
|
|
Equipment operating lease payments
|
|
|
15.8
|
|
|
|
21.3
|
|
|
|
8.5
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
46.8
|
|
Purchase commitments with contract
manufacturers(3)
|
|
|
90.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90.7
|
|
Other purchase orders and commitments
|
|
|
19.3
|
|
|
|
16.9
|
|
|
|
11.0
|
|
|
|
4.6
|
|
|
|
1.2
|
|
|
|
0.2
|
|
|
|
53.2
|
|
Capital expenditures
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
1.75% Convertible notes(4)
|
|
|
11.1
|
|
|
|
22.1
|
|
|
|
22.1
|
|
|
|
22.1
|
|
|
|
1,276.1
|
|
|
|
|
|
|
|
1,353.5
|
|
Uncertain tax positions(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96.0
|
|
|
|
96.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash Obligations
|
|
$
|
154.2
|
|
|
$
|
88.8
|
|
|
$
|
65.6
|
|
|
$
|
174.4
|
|
|
$
|
1,292.3
|
|
|
$
|
130.2
|
|
|
$
|
1,905.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial Commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit
|
|
$
|
3.7
|
|
|
$
|
0.4
|
|
|
$
|
0.3
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
0.6
|
|
|
$
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
* |
|
Reflects the remaining six months of fiscal 2010. |
|
(1) |
|
Sublease income of $0.7 million in the remainder of fiscal
2010, $1.1 million in fiscal 2011, $0.4 million in
each of the fiscal years 2012, 2013 and 2014, and
$0.2 million thereafter has been excluded from the table. |
|
(2) |
|
Included in real estate lease payments pursuant to four
financing arrangements with BNP Paribas LLC (BNPPLC) are
(i) lease commitments of $1.8 million in the remainder
of fiscal 2010; $3.7 million in each of the fiscal years
2011 and 2012; and $2.3 million in fiscal 2013, which are
based on either the LIBOR rate at October 30, 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 16 to our
condensed consolidated financial statements. Sublease income of
$5.3 million in the remainder of fiscal 2010,
$4.7 million in fiscal 2011, $0.4 million in fiscal
2012 and $0.3 million in fiscal 2013 has been excluded from
the table. |
|
(3) |
|
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 with the valuation of our excess and obsolete
inventory. As of October 30, 2009, the liability for these
purchase commitments in excess of future demand was
approximately $3.2 million and is recorded in other accrued
liabilities. |
41
|
|
|
(4) |
|
Included in these amounts are obligations related to the
$1.265 billion principal amount of 1.75% Notes due
2013 (see Note 7 to our condensed consolidated financial
statements). Estimated interest payments for the Notes are
$88.5 million for fiscal 2010 through fiscal 2014. |
|
(5) |
|
As of October 30, 2009, our liability for uncertain tax
positions was $96.0 million. |
As of October 30, 2009, we have four leasing arrangements
(Leasing Arrangements 1, 2, 3 and 4) with BNPPLC which
requires us to lease our land to BNPPLC for a period of
99 years, and to lease approximately 564,274 square
feet of office space for our headquarters in Sunnyvale costing
up to $149.6 million. Under these leasing arrangements, we
pay 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 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 October 30, 2009, and the date we began to make
payments for each of our leasing arrangements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
1.10
|
%
|
|
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 October 30, 2009.
Such financial covenants include a maximum ratio of Total Debt
to Earnings before Interest, Taxes, Depreciation and
Amortization 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.
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.
Legal
Contingencies
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 paid 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 September 2009, we received a letter from the
GSA confirming that the Company will not be excluded from
further government contracting as a result of this dispute.
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
42
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
October 30, 2009.
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 October 30, 2009, our
financial guarantees of $5.1 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 October 30, 2009, our notional fair value of foreign
exchange forward and foreign currency option contracts totaled
$358.0 million. We do not believe that these derivatives
present significant credit risks, because the counterparties to
the derivatives consist of major financial institutions, and we
manage the notional amount of contracts entered into with any
one counterparty. 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. See Note 10 to our condensed
consolidated financial statements for more information related
to our hedging activities.
In the ordinary course of business, we enter into recourse lease
financing arrangements with third-party leasing companies and
from time to time provide guarantees for a portion of other
financing arrangements under which we could be called upon to
make payments to the third-party funding companies in the event
of nonpayment by end-user customers. See Note 16 of our
condensed consolidated financial statements for more information
related to these financing arrangements.
We enter 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 under accounting guidance.
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).
43
We have evaluated our accounting for these leases as required by
guidance on accounting for variable interest entities 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 current accounting guidance, 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 $138.6 million as
discussed in above in Contractual Obligations.
|
|
Item 3.
|
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
October 30, 2009, we had
available-for-sale
investments of $1,335.5 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, and certificates of deposit, 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
October 30, 2009 would cause the fair value of these
available-for-sale
investments to decline by approximately $1.0 million.
Volatility in market interest rates over time will, however,
cause variability in 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.
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 October 30, 2009, we recorded cumulative
unrealized loss of $3.8 million, offset by an immaterial
amount of unrealized gains related to these securities. 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
44
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 9 to our condensed consolidated
financial statements in Part I, Item 1;
Managements Discussion and Analysis of Financial Condition
and Results of Operations, Liquidity and Capital
Resources, in Part I, Item 2; and Risk Factors
in Part II, Item 1A of this Quarterly Report on
Form 10-Q
for a description of recent market events that may affect the
value and liquidity of the investments in our portfolio that we
held at October 30, 2009.
Lease Commitments As of October 30,
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 an initial
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 October 30, 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.
Convertible Notes In June 2008, we issued
$1.265 billion principal amount of 1.75% Notes due
2013, of which $1.017 billion was allocated to debt and
$0.248 billion was allocated to equity. Holders may convert
the 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.
The fair value of our Notes is subject to interest rate risk,
market risk and other factors due to the convertible feature.
Generally, the fair value of Notes will increase as interest
rates fall
and/or our
common stock price increases, and decrease as interest rates
rise and/or
our common stock price decreases. The interest and market value
changes affect the fair value of our Notes, but do not impact
our financial position, cash flows, or results of operations due
to the fixed nature of the debt obligations. We do not carry the
Notes at fair value, but present the fair value of the principal
amount of our Notes for disclosure purposes. As of
October 30, 2009, the principal amount of our Notes, which
consists of the combined debt and equity components, was
$1.265 billion, and the total estimated fair value of such
was $1.4 billion based on the closing trading price of
$109.9 per $100 of our Notes as of that date.
Nonmarketable Securities Our investments in
nonmarketable securities had a carrying amount of
$2.0 million as of October 30, 2009. 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 impairment as an investment loss in our
condensed consolidated statements of operations.
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 accounting
guidance for derivatives and hedging. For cash flow hedges
outstanding at October 30, 2009, the time-value component
is recorded in earnings while all other gains or losses were
included in other comprehensive income.
45
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.
The following table provides information about our foreign
exchange forward contracts outstanding (based on trade date) on
October 30, 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
|
|
|
Notional Contract
|
|
|
Notional Fair
|
|
Currency
|
|
Buy/Sell
|
|
|
Amount
|
|
|
Value in USD
|
|
|
Value in USD
|
|
|
Forward Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EUR
|
|
|
Sell
|
|
|
|
141.4
|
|
|
$
|
208.0
|
|
|
$
|
208.0
|
|
GBP
|
|
|
Sell
|
|
|
|
31.8
|
|
|
$
|
52.2
|
|
|
$
|
52.2
|
|
CAD
|
|
|
Sell
|
|
|
|
18.8
|
|
|
$
|
17.3
|
|
|
$
|
17.3
|
|
Other
|
|
|
Sell
|
|
|
|
N/A
|
|
|
$
|
20.9
|
|
|
$
|
20.9
|
|
AUD
|
|
|
Buy
|
|
|
|
40.0
|
|
|
$
|
35.9
|
|
|
$
|
35.9
|
|
Other
|
|
|
Buy
|
|
|
|
N/A
|
|
|
$
|
10.7
|
|
|
$
|
10.7
|
|
Option Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EUR
|
|
|
Sell
|
|
|
|
9.0
|
|
|
$
|
13.2
|
|
|
$
|
13.0
|
|
|
|
Item 4.
|
Controls
and Procedures
|
Disclosure controls are controls and procedures designed to
ensure that information required to be disclosed in our reports
filed or submitted under the Securities Exchange Act of 1934, as
amended (the Exchange Act), such as this Quarterly
Report on
Form 10-Q,
is recorded, processed, summarized, and reported within the time
periods specified in the U.S. Securities and Exchange
Commissions rules and forms. Disclosure controls and
procedures are also designed to ensure that such information is
accumulated and communicated to our management, including the
CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure.
Under the supervision and with the participation of our
management, including our CEO and CFO, we conducted an
evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act, as of October 30, 2009, the end of
the fiscal period covered by this Quarterly Report on
Form 10-Q
(the Evaluation Date). Based on this evaluation, our
CEO and CFO concluded as of the Evaluation Date that our
disclosure controls and procedures were effective such that the
information relating to NetApp, including its consolidated
subsidiaries, required to be disclosed in its Securities and
Exchange Commission (SEC) reports (i) is
recorded, processed, summarized, and reported within the time
periods specified in SEC rules and forms, and (ii) is
accumulated and communicated to NetApp management, including our
CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure.
There was no change in our internal control over financial
reporting that occurred during the period covered by this
Quarterly Report on
Form 10-Q
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II.
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
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 paid 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 the 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. We made
the settlement payment on
46
April 27, 2009. In September 2009, we received a letter
from the GSA confirming that the Company will not be excluded
from further government contracting as a result of this dispute.
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
October 30, 2009.
On June 12, 2009, a purported class action lawsuit was
filed on behalf of the shareholders of Data Domain, Inc. (Data
Domain) in the Court of Chancery of the State of Delaware (the
Delaware Suit). In addition, on June 19, 2009, a purported
class action lawsuit was filed on behalf of Data Domains
shareholders in the Superior Court of the State of California,
County of Santa Clara (the California Suit). These lawsuits
named as defendants the Data Domain directors, and NetApp and
its merger subs (with the California Suit also naming Data
Domain itself), and alleged breach of fiduciary duty by the Data
Domain board of directors and aiding and abetting such breach by
NetApp. Both complaints initially sought injunctive relief and
damages. On July 23, 2009, the plaintiff in the California
Suit purported to serve an amended complaint alleging a single
claim for attorneys fees and expenses based on the benefit
allegedly conferred by the plaintiffs lawsuit upon Data
Domains shareholders. On August 26, 2009, the
plaintiff in the Delaware Suit moved to dismiss its action and
requested attorneys fees and expenses based on the benefit
allegedly conferred by the plaintiffs lawsuit upon Data
Domains shareholders. On October 16, 2009, the
plaintiff in the California suit dismissed by stipulation all
claims against us and our merger subs. In addition, on
November 6, 2009, the plaintiff in the Delaware Suit
confirmed by stipulation that its request for attorneys
fees and expenses was not directed against us and that it did
not seek any award of fees or expenses from us or our merger
subs.
The following risk factors and other information included in
this Quarterly Report on
Form 10-Q
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 27 of this Quarterly Report on
Form 10-Q
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.
We are subject to the effects of general global economic and
market conditions. Challenging economic conditions worldwide
have from time to time contributed to slowdowns in the computer,
storage, and networking industries at large, as well as the
information technology (IT) market, resulting in:
|
|
|
|
|
Reduced demand for our products as a result of constraints on IT
related spending by our customers;
|
|
|
|
Increased price competition for our products from competitors;
|
|
|
|
Deferment of purchases and orders by customers due to budgetary
constraints or changes in current or planned utilization of our
systems;
|
|
|
|
Risk of excess and obsolete inventories;
|
|
|
|
Excess facilities costs;
|
|
|
|
Higher overhead costs as a percentage of revenue;
|
|
|
|
Increased risk of losses or impairment charges related to our
investment portfolio;
|
47
|
|
|
|
|
Negative impacts from increased financial pressures on
customers, distributors and resellers;
|
|
|
|
Negative impacts from increased financial pressures on key
suppliers or contract manufacturers; and
|
|
|
|
Potential discontinuance of product lines or businesses and
related asset impairments.
|
Any of the above mentioned factors could have a material and
adverse effect on our business and financial performance.
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:
|
|
|
|
|
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;
|
|
|
|
A shift in federal government spending patterns;
|
|
|
|
Changes in sales and implementation cycles for our products and
reduced visibility into our customers spending plans and
associated revenue;
|
|
|
|
The level of price and product competition in our target product
markets;
|
|
|
|
The impact of the economic and credit environment on our
customers, channel partners, and suppliers, including their
ability to obtain financing or to fund capital expenditures;
|
|
|
|
The overall movement toward industry consolidation among both
our competitors and our customers;
|
|
|
|
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;
|
|
|
|
The timing of bookings or the cancellation of significant orders;
|
|
|
|
Product configuration and mix;
|
|
|
|
The extent to which our customers renew their service and
maintenance contracts with us;
|
|
|
|
Market acceptance of new products and product enhancements;
|
|
|
|
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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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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48
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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, changes
in accounting standards related to revenue recognition, 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 recent 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 recent 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 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.
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 recent global financial crisis has led to a worldwide
economic downturn that has created a challenging operating
environment for our business. If the economy does not improve or
worsens, demand for our products and services and our revenues
may be adversely impacted. A prolonged downturn can adversely
affect our revenues,
49
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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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
restructuring plan announced earlier in calendar year
2009 may disrupt our operations and adversely affect our
operations and financial results.
In February 2009, in response to 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) products, and as a result
recorded restructuring 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 realize the expected benefits of these
restructuring plans. Our restructuring plans 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 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 NetApp
unified 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
51
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.
We may
face increased risks and uncertainties related to our current or
future investments in private companies, and these investments
may not achieve our objectives.
On occasion, we make strategic investments in other companies,
including private equity funds, which may decline in value
and/or not meet desired objectives. The success of these
investments depends on various factors over which we may have
limited or no control. As of October 30, 2009, we had an
investment with the carrying value of $2.0 million in a
private equity fund. The risks to our strategic investment
portfolio may be exacerbated by unfavorable financial market and
macroeconomic conditions and, as a result, the value of the
investment portfolio could be negatively impacted and lead to
impairment charges. If we determine that an other-than-temporary
impairment has occurred, we write down the investment to its
estimated fair value, based on available information such as
pricing in recent rounds of financing, current cash positions,
earnings and cash flow forecasts, recent operational performance
and any other readily available market data.
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. In addition, in November 2009, we announced our
intention to expand our relationship with Fujitsu. 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 the three and six month periods ended
October 30, 2009, revenues generated from sales through our
channel partners accounted for 67% and 68% of our revenues,
respectively. In order for us to maintain or increase our
revenues, we must effectively manage our relationships with
channel partners.
52
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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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.
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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. 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 paid 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. 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.
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 in the future could negatively affect our
revenue.
During the three and six month periods ended October 30,
2009, sales to Arrow and Avnet, who are U.S. distributors,
each accounted for approximately 12% and 11% of our revenues,
respectively. The loss of 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.
53
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, 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 and 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. In
addition, from time to time we provide guarantees for a portion
of other financing arrangements under which we could be called
upon to make payments to our funding parties in the event of
nonpayment by end-user customers. 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 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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54
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 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, one of our competitors; in
addition, in July 2009, EMC, one of our competitors, acquired
Data Domain. 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. For example, in November 2009, Cisco and EMC together
with VMware announced a Virtual Computing Environment coalition.
Accordingly, it is possible that new competitors or alliances
among competitors may emerge and rapidly
55
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.
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 global economic
downturn and may not grow as anticipated or may 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 increases our
costs or causes 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.
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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 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.
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 October 30, 2009, we had $3.1 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
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Brothers investments. As of October 30, 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 $49.1 million
and an estimated fair value of $39.8 million, 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 $3.5 billion of
the funds remaining assets as the special
reserve which may be increased or decreased as further
information becomes available. However, on November 25,
2009, the U.S. District Court issued an order enjoining the
Primary Funds liquidation plan and ordered that the
remaining assets of the Primary Fund be liquidated and
distributed on a pro rata basis to all Primary Fund shareholders
who have not received $1.00 per share owned on or after
September 15, 2008, provided however, that an expense fund
of $83.5 million to cover claims for indemnification and
management fees and expenses shall be set aside and be withheld
from distribution. As of October 30, 2009, we have received
less than $1 per share owned of our original investment. 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.
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