e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended April 30,
2010
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number 0-27130
NetApp, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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77-0307520
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(State or other jurisdiction
of
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(IRS Employer
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incorporation or
organization)
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Identification
No.)
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495 East Java Drive,
Sunnyvale, California 94089
(Address of principal
executive offices, including zip code)
Registrants telephone number, including area code:
(408) 822-6000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Exchange on Which Registered
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Common Stock, $0.001 Par Value
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by a check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of voting stock held by
non-affiliates of the registrant, as of October 30, 2009,
the last day of registrants most recently completed second
fiscal quarter, was $8,339,377,099 (based on the closing price
for shares of the registrants common stock as reported by
the NASDAQ Global Select Market for the last business day prior
to that date). Shares of common stock held by each executive
officer, director, and holder of 5% or more of the outstanding
common stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
On June 4, 2010, 352,541,867 shares of the
registrants common stock, $0.001 par value, were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The information called for by Part III of this
Form 10-K
is hereby incorporated by reference from the definitive Proxy
Statement for our annual meeting of stockholders, which will be
filed with the Securities and Exchange Commission not later than
120 days after April 30, 2010.
PART I
Forward
Looking Statements
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act), and is subject to the
safe harbor provisions set forth in the Exchange Act.
Forward-looking statements usually contain the words
estimate, intend, plan,
predict, seek, may,
will, should, would,
could, anticipate, expect,
believe, or similar expressions and variations or
negatives of these words. In addition, any statements that refer
to expectations, projections, or other characterizations of
future events or circumstances, including any underlying
assumptions, are forward-looking statements. All forward-looking
statements, including but not limited to, statements about:
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our future financial and operating results;
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our business strategies;
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managements plans, beliefs and objectives for future
operations, research and development;
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acquisitions and joint ventures, growth opportunities,
investments and legal proceedings;
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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 anticipated tax rate;
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the dilutive effect of our convertible Notes and associated
warrants on our earnings per share;
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the conversion, maturation or repurchase of the Notes,
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compliance with laws, regulations and debt 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 successfully manage our 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 maintain the quality of our hardware, software
and services offerings;
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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 services and support;
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our ability to identify and respond to significant market trends
and emerging standards;
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the impact of industry consolidation;
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our ability to successfully manage 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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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 results of our ongoing litigation, tax audits, government
audits and inquiries; and
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those factors discussed under Risk Factors elsewhere
in this Annual Report on Form
10-K.
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Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date
hereof and are based upon information available to us at this
time. These statements are not guarantees of future performance.
We disclaim any obligation to update information in any
forward-looking statement. Actual results could vary from our
forward looking statements due to foregoing factors as well as
other important factors, including those described in the Risk
Factors included on page 11.
Overview
NetApp, Inc. (NetApp) is a leading provider of storage and data
management solutions. We offer solutions for storing, managing,
protecting and archiving business data. Our solutions are
designed to lower the cost of managing and protecting our
customers data while increasing their agility and
competitiveness.
We offer comprehensive solutions to help customers effectively
streamline operations and lower the cost associated with storing
and managing their data. In an era of increasing constraints on
information technology (IT) spending, our storage efficiency
innovations allow customers to use smaller, more efficient
storage systems in support of primary and secondary storage
applications, helping them manage the issues associated with
continuous data growth. We strive to provide the best experience
in the industry with every interaction customers have with our
people, products and services. In addition to our broad range of
storage and data management solutions, we provide global service
and support and work to simplify customer environments by
utilizing open standards and closely collaborating and
partnering with other industry leaders. We help solve customer
business challenges and help enable them to maximize return on
investment through a combination of products, technologies,
services, and partnerships.
Our products and services are designed to meet the expansive
requirements and demanding service levels of large enterprises
and their mission-critical business applications. To better meet
these needs, we partner with key industry leaders, such as Cisco
Systems, Inc., IBM Corporation, Microsoft Corporation, SAP
Corporation,
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Symantec Corporation and VMware, Inc. to develop integrated
solutions that optimize the performance of customers
applications and their infrastructure. In addition, our products
have been designed to satisfy the demands of high performance
computing and technical data center applications, offering
solutions used in the design of semiconductors and automobiles,
as well as graphics rendering and seismic exploration.
We were incorporated in 1992 and shipped the worlds first
networked storage appliance a year later. Since then, we have
brought to market many innovations in storage and data
management. We have grown to over 8,300 employees with
operations in over 130 locations around the world.
NetApp
Product Overview
We offer highly available, scalable and cost-effective storage
solutions that incorporate our unified storage platform and the
feature-rich functionality of our data and storage resource
management software. We believe that our solutions help improve
enterprise productivity, performance and profitability, while
providing investment protection and enhanced asset utilization.
Our enterprise-class storage solutions are complemented by our
services expertise to enable interoperability and optimization
in the context of the application and IT infrastructure within
which they are deployed.
Data
ONTAP Software
Our Fabric-Attached Storage (FAS) and V-Series storage solutions
are based on Data
ONTAP®,
a highly scalable and flexible operating system that uniquely
supports any mix of storage area network (SAN), network-attached
storage (NAS) and Internet Small Computer System Interface
(iSCSI) environments concurrently. This unified storage software
platform is compatible with
UNIX®,
Linux®,
Windows®
and Web environments.
The Data ONTAP operating system provides the foundation to build
a shared storage infrastructure and an enterprise-wide data
fabric for the full breadth of business applications and data
storage and protection requirements. Data ONTAP features
scalability, secure multi-tenancy and unification across
protocols and disks. Data ONTAP also unifies storage efficiency,
data management and data protection delivery. We believe
customers can benefit from these capabilities as they
increasingly virtualize application environments. Our
deduplication for primary and secondary storage, thin
provisioning, and highly efficient hardware help maximize
utilization while reducing data center footprint and lowering
storage-related power and cooling consumption. A few of the
technology features we offer with Data ONTAP include:
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FlexShare®
technology directs how storage system resources are used to
deliver an appropriate level of service for each application ;
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FlexCache®
technology allows performance acceleration through the creation
of read-only cached volumes by creating caching volumes on
multiple storage controllers; and
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MultiStore®
software allows partitioning of individual physical storage
systems into multiple secure and separate logical partitions.
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Storage
Efficiency
NetApps portfolio of efficiency technologies helps our
customers reduce their storage spending and get more from
storage assets they already own. Some of the efficiency
technologies we offer include:
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FlexVol®
technology provides thin provisioning through virtual volumes,
enabling storage architectures to be more efficient and achieve
higher utilization using flexible volumes that do not require
repartitioning of physical storage space;
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FlexClone®
technology enables true data cloning using logical copies that
do not require additional physical storage space, and allows for
instant replication of data volumes and data sets; and
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Deduplication technology provides the ability to
eliminate duplicate data within primary and secondary disk
storage environments, resulting in greater efficiency and higher
utilization of storage capacity.
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Storage
Management and Application Integration Software
Our management software family of products provides a broad
range of storage and data management tools to simplify IT
administration and enhance flexibility and productivity. We
deliver differentiated products and collaborate with industry
open standards and interfaces to deliver this value to
customers. We have four suites of products targeted to different
IT administrative roles: Storage Suite, Server Suite, Database
Suite and Application Suite. The software products within these
suites are tightly integrated with database and business
application software from partners such as Microsoft, Oracle,
SAP and VMware, in order to optimize the performance of those
applications on our storage systems. Our product offering
extends into data center automation, which provides the
capability to monitor service levels, manage performance and
support change management in complex enterprise SAN
environments. We help customers optimize shared infrastructures
by supporting individual application performance, service level
and security needs even while the storage is shared across
multiple applications.
FAS Storage
Systems Family
Our family of modular, scalable, highly available, unified
networked storage systems provides access to a full range of
enterprise data for users on a variety of platforms. The
FAS 6000, FAS 3000, and the FAS 2000 series of
fabric-attached enterprise storage systems are designed to
consolidate UNIX, Windows, NAS, iSCSI, SAN and Web data in
central locations running over standard connection types:
Gigabit Ethernet, FC and parallel SCSI (for backup). Our design
optimizes and consolidates high-performance data access for
individuals in multi-user environments as well as for
application servers and server clusters with dedicated access.
All of our FAS systems are interoperable and run the highly
efficient Data ONTAP operating system.
V-Series Family
Our V-Series is a network-based virtualization solution that
consolidates storage from different suppliers behind our data
management interface, providing SAN, iSCSI and NAS access to the
data stored in heterogeneous storage arrays. With the V-Series
solution, customers are able to: transform existing
heterogeneous, multi-vendor storage systems into a single
storage pool; simplify storage provisioning and management with
Data ONTAP thin provisioning; and dramatically lower backup
time, space and cost with Data ONTAP
Snapshottm
copies. The V-Series is compatible with the FAS family of
storage systems.
Data
Protection Software Products
We offer a broad range of integrated data protection solutions
for enterprise customer environments:
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Snapshot technology enables near-instantaneous, space
efficient online backups of large data sets without affecting
system performance;
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SnapRestore®
technology uses stored
Snapshottm
backups to recover entire file systems or data volumes in
seconds, regardless of capacity or number of files;
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SnapVault®
and Open Systems SnapVault technologies provide network-
and storage-optimized
disk-to-disk
backup solutions;
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MetroCluster is a unique solution that combines
array-based clustering with synchronous mirroring designed to
deliver continuous availability and zero data loss;
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SnapMirror®
data replication solution provides disaster recovery protection
for business-critical data matched to the recovery point
objectives and recovery time objectives of customer environments.
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Data
Retention and Archive Products
To meet growing regulatory compliance demands faced by most
enterprises, we offer a broad suite of products to help enable
data permanence, accessibility and privacy across a variety of
different regulations such as the Sarbanes-Oxley Act,
21 CFR Part 11, SEC
Rule 17a-4
and HIPAA. Immutable, cost-effective, resilient and reliable
storage architectures can be created utilizing
SnapLock®
products.
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Flash
Cache
Our
NetApp®
Flash Cache modules optimize the performance of random read
intensive workloads such as file services and messaging. These
intelligent read caches speed access to user data, reducing
latency by a factor of 10 or more compared to disk drives.
Faster response times can translate into higher throughput for
random I/O workloads. NetApp Flash Cache and PAM give users
performance that is comparable to that of solid state disks
(SSDs) without the complexity of another storage tier.
Storage
Security Products
Our DataFort storage security appliance provides a unified
platform for data security and key management across NAS, IP
SAN, and tape backup environments. The platform combines
wire-speed encryption, access controls, authentication and
automated key management to provide strong security for data at
rest, while still allowing the capability to search compliant
data for legal discovery purposes if the need arises. NetApp has
partnered with Brocade Communications Systems, Inc. to provide
advanced fabric services for SANs. These high-speed, highly
reliable hardware devices deliver fabric-based encryption
services to secure data assets either selectively or
comprehensively.
NetApp
Services
Our customers demand high availability and reliability of their
storage infrastructure to ensure the successful, ongoing
operation of their businesses. NetApps services are
designed with this in mind. We provide professional services,
global support solutions and customer education and training to
help customers most effectively manage their data. The
professional services and support solutions we offer help our
customers to resolve business problems, reduce costs, keep
businesses up and running continuously, comply with regulations
and policies and improve overall operational results. We utilize
a global, integrated model to provide consistent service
delivery and global support during every phase of the customer
engagement, including assessment and analysis, planning, design,
installation, implementation, integration, optimization, ongoing
support and remote management and monitoring. Services and
support often involve phased rollouts, technology transitions
and migrations and other long-term engagements.
Sales,
Principal Markets and Distribution Channels
We market and sell our products in numerous countries throughout
the world and we continue to make investments in our multi-year
branding and awareness campaign to increase visibility of NetApp
in the broader IT segment.
Our diversified customer base spans a number of customer
segments and vertical markets, including energy, financial
services, government, high technology, internet, life sciences
and healthcare services, major manufacturing, media,
entertainment, animation and video postproduction and
telecommunications. We focus primarily on the data management
and storage markets, offering an array of solutions from our
high-end products designed for large enterprise customers to
entry-level products designed for mid-sized enterprise customers.
Our solutions are positioned to address the emerging
opportunities presented by cloud computing. Our unified storage
architecture, secure multi-tenancy capability, scalable systems,
efficiency technologies and data management software
functionality provide a powerful combination both for
enterprises wanting to develop internal private clouds, and for
service providers who want to build IT, Software, Storage and
Infrastructure as a Service offerings.
As of the end of fiscal 2010, our worldwide sales and marketing
function consisted of managers, sales representatives, and
technical support personnel. We have field sales offices in more
than 45 countries. We employ a multi-channel distribution
strategy, selling products and services to end users and service
providers through a direct sales force and through channel
partners, including value-added resellers, system integrators,
original equipment manufacturers (OEMs) and distributors. During
fiscal year 2010, sales through our indirect channels
represented 69% of our total revenues. Sales to customers Arrow
and Avnet, who are distributors, accounted for approximately 14%
and 11% of our net revenues, respectively, in fiscal 2010 and
for approximately 11% and 10% of our net revenues, respectively,
for fiscal 2009. No individual customer accounted for ten
percent or more of our net
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revenues during fiscal 2008. Information about our segment
disclosures, foreign operations and net sales attributable to
our geographic regions is included in Note 16 of the
accompanying consolidated financial statements.
Seasonality
We have historically experienced a decline in revenues in the
first quarter of our fiscal year, as the sales organization
spends time developing new business after higher close rates in
the fourth quarter, and because sales to European customers are
historically weaker during the summer months. During the second
quarter of our fiscal year, we have historically experienced
increased sales, driven by the government sector, concurrent
with the end of the U.S. federal governments fiscal
year in September, as well as an increase in business from
European markets. We derive a majority of our revenue in any
given quarter from orders booked in the same quarter. Bookings
and revenues typically follow intraquarter seasonality patterns
weighted toward the back end of the quarter.
Backlog
We manufacture products based on a combination of specific order
requirements and forecasts of our customers demand. Orders
are generally placed by customers on an as-needed basis. A
substantial portion of our products are sold on the basis of
standard purchase orders that are cancellable prior to shipment
without penalty. In certain circumstances, purchase orders are
subject to change with respect to quantity of product or timing
of delivery resulting from changes in customer requirements. Our
business is characterized by seasonal and intra-quarter
variability in demand, as well as short lead-times and product
delivery schedules. Accordingly, backlog at any given time may
not be a meaningful indicator of future revenue.
Manufacturing
and Supply Chain
We have outsourced manufacturing operations to third parties
located in Memphis, Tennessee; Livingston, Scotland; Schiphol
Airport, The Netherlands; Shanghai, China; and Singapore. These
operations include materials procurement, commodity management,
component engineering, test engineering, manufacturing
engineering, product assembly, product assurance, quality
control, final test, and global logistics. We rely on a limited
number of suppliers for materials, as well as several key
subcontractors for the production of certain subassemblies and
finished systems. We multi-source wherever possible to mitigate
supply risk. Our strategy has been to develop close
relationships with our suppliers, exchanging critical
information and implementing joint quality programs. We also use
contract manufacturers for the production of major subassemblies
to improve our manufacturing redundancy. This manufacturing
strategy minimizes capital investments and overhead expenditures
and creates flexibility for rapid expansion.
We were awarded ISO 9001 certification on May 29, 1997 and
continue to be ISO 9001 certified. We were awarded ISO 14001
certification on December 8, 2004 and continue to be ISO
14001 certified.
Research
and Development
We conduct research and development activities in various
locations throughout the world. In fiscal 2010, 2009 and 2008,
research and development expenses represented 14%, 15% and 14%
of our net revenues, respectively. These costs relate primarily
to personnel and related costs incurred to conduct product
development activities. Although we develop many of our products
internally, we may acquire technology through business
combinations or through licensing from third parties when
appropriate. We believe that technical leadership is essential
to our success and we expect to continue to commit substantial
resources to research and development.
Competition
We compete with many companies in the markets we serve,
including companies that offer a broad spectrum of IT products
and services and others that offer specific storage and data
management products or services. In the storage market, our
primary 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
Oracle Corporation, through its acquisition of 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
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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 Oracle
Corporation, through its acquisition of Sun Microsystems.
We believe that most of these companies compete based on their
market presence, products, service or price. Some of these
companies also compete by offering storage and data management
products or services together with other IT products or
services, at minimal or no additional cost in order to preserve
or gain market share.
We believe that we have a number of competitive advantages over
many of these companies, including product innovation and the
relationships we have with our customers and partners. We
believe the advantages of our products include functionality,
scalability, performance, quality and operational efficiency. We
believe we have an advantage in the nature of the relationships
we form with our customers and partners worldwide. We strive to
deliver an outstanding experience in every interaction we have
with our customers and partners through our product, service and
support offerings that enable us to provide our customers with a
full range of expertise before, during and after their purchase
from us or from one of our partners.
An increase in 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, including
some of our partners. It is possible that new competitors or
alliances among competitors may emerge and rapidly acquire
significant market share.
Proprietary
Rights
We currently rely on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures, contractual
provisions, and patents to protect our proprietary rights. We
seek to protect our software, documentation, and other written
materials under trade secret, copyright, and patent laws, which
afford only limited protection. We have registered our NetApp
name and logo, Network
Appliancetm
name and logo, Data ONTAP,
DataFabric®,
FAServer®,
FlexVol,
FilerView®,
NearStore®,
SecureShare®,
SnapDrive®,
SnapLock,
SnapManager®,
SnapMirror, SnapRestore, SnapVault,
WAFL®,
and others as trademarks in the United States. Other
U.S. trademarks and U.S. registered trademarks are
registered internationally as well. We will continue to evaluate
the registration of additional trademarks as appropriate. We
generally enter into confidentiality agreements with our
employees, resellers, customers, and suppliers. We currently
have multiple U.S. and international patent applications
pending and multiple U.S. patents issued.
In addition, through various licensing arrangements, we receive
certain rights to intellectual property of others. We expect to
maintain current licensing arrangements and to secure licensing
arrangements in the future, as needed and to the extent
available on reasonable terms and conditions, to support
continued development and sales of our products and services.
Some of these licensing arrangements require or may require
royalty payments and other licensing fees. The amount of these
payments and fees may depend on various factors, including but
not limited to: the structure of royalty payments, offsetting
considerations, if any, and the degree of use of the licensed
technology.
The industry in which we compete is characterized by rapidly
changing technology, a large number of patents, and frequent
claims and related litigation regarding patent and other
intellectual property rights, and we are exposed to various
risks related to legal proceedings or claims and protection of
intellectual property rights. If we are unable to protect our
intellectual property, we may be subject to increased
competition that could materially and adversely affect our
operating results.
Environmental
Disclosure
We seek to comply with all applicable statutory and
administrative requirements concerning environmental quality and
worker health and safety. We have made, and will continue to
make, expenditures for environmental compliance and protection.
Such expenditures have not had, and are not expected to have, a
material effect on our capital expenditures, results of
operations or competitive position.
We are voluntarily assessing our greenhouse gas emissions, and
have begun to take action to reduce such emissions, for example
through establishing employee commuter programs and evaluating
the energy efficiency of
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our buildings. Various laws and regulations have been
implemented or are under consideration to mitigate the effects
of climate change caused by greenhouse gas emissions.
Environmental laws are complex, change frequently and have
tended to become more stringent over time. It is often difficult
to estimate the future impact of environmental matters. Based on
current information and subject to the finalization of the
proposed regulations, we believe that our primary risk related
to climate change is the risk of increased energy costs.
However, because we are not an energy intensive business, we do
not anticipate being subject to a cap and trade system or any
other mitigation measures that would be material to our
operations.
We are also subject to other federal, state and local
regulations regarding workplace safety and protection of the
environment. Various international, federal, state and local
provisions regulate the use and discharge of certain hazardous
materials used in the manufacture of our products. Failure to
comply with environmental regulations in the future could cause
us to incur substantial costs or subject us to business
interruptions. We believe we are substantially compliant with
all applicable environmental laws. All of our products meet the
requirements for WEEE, RoHS and China RoHS compliance. We have
maintained an Environmental Management System since December
2004 as well as our ISO 14001 certification. As part of ISO
14001 requirements, we conduct an annual review of our
operations and we monitor environmental legislation and
requirements to help ensure we are taking necessary measures to
remain in compliance with applicable laws.
Working
Capital Practices
Information about our working capital practices is included in
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operation
under the heading Liquidity and Capital Resources
and is incorporated herein by reference.
Employees
As of April 30, 2010, we had 8,333 employees, of
which, 2,346 were in research and development, 3,912 were in
sales and marketing, 1,215 were in services and manufacturing
operations, and 860 were in finance and administration. We have
never had a work stoppage and consider relations with our
employees to be good. Competition for technical personnel in the
industry in which we compete is intense. We believe that our
future success depends in part on our continued ability to hire,
assimilate, and retain qualified personnel. To date, we believe
that we have been successful in recruiting qualified employees,
but there is no assurance that we will continue to be successful
in the future.
Executive
Officers
Our executive officers and their ages as of May 25, 2010,
are as follows:
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Name
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Age
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Position
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Thomas Georgens
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50
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President, Chief Executive Officer, Director
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Manish Goel
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45
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Executive Vice President, Products
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Steven J. Gomo
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58
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Executive Vice President, Finance and Chief Financial Officer
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Andrew Kryder
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57
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Senior Vice President, General Counsel, Secretary
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Robert E. Salmon
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49
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Executive Vice President, Field Operations
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Thomas Georgens is the president and chief executive
officer of the Company. Previously, Mr. Georgens served as
president and chief operating officer responsible for all
product operations and field operations worldwide from February
2008 to August 2009. Mr. Georgens has also been a member of
the Board of Directors at NetApp since March 2008.
Mr. Georgens joined NetApp in October 2005 as executive
vice president and general manager of enterprise storage systems
and was named executive vice president of product operations
where he served in that role from January 2007 to February 2008.
Before joining NetApp, Mr. Georgens spent nine years at
Engenio, a subsidiary of LSI Corporation, with the last two
years as chief executive officer. He has also served in various
other positions, including president of LSI Logic Storage
Systems and executive vice president of LSI Corporation. Prior
to LSI Corporation, Mr. Georgens spent 11 years at EMC
in a variety of engineering and marketing positions.
10
Mr. Georgens holds a B.S. degree and an M.E. degree in
Computer and Systems Engineering from Rensselaer Polytechnic
Institute as well as an M.B.A. degree from Babson College.
Manish Goel was appointed the executive vice president of
product operations in June 2009, overseeing all aspects of
technology strategy and product engineering across the
Companys product portfolio. Mr. Goel has held a
variety of leadership roles in corporate development, sales, and
business unit general management since he joined NetApp in 2002.
Prior to NetApp, Mr. Goel led corporate and business
development activities for Cadence Design Systems and Copper
Mountain Networks. Prior to that, he spent four years as a
strategy consultant for McKinsey and Co. and six years as a
systems software engineer. Mr. Goel holds a B.S. in
electrical engineering from IIT Chennai, and an MBA in finance
from the Wharton School of Business.
Steven J. Gomo joined NetApp in August 2002 as senior
vice president of finance and chief financial officer. He was
appointed executive vice president of finance and chief
financial officer in October 2004. Prior to joining the Company,
he served as chief financial officer for Gemplus International
S.A., headquartered in Luxembourg from November 2000 to April
2002 and as chief financial officer of Silicon Graphics, Inc.,
from February 1998 to August 2000. Prior to February 1998, he
worked at Hewlett-Packard Company for 24 years in various
positions, including financial management, corporate finance,
general management, and manufacturing. Mr. Gomo currently
serves on the board of SanDisk Corporation. Mr. Gomo holds
an M.B.A. degree from Santa Clara University and a B.S.
degree in business administration from Oregon State University.
Andrew Kryder is the Senior Vice President, General
Counsel, Secretary of the Company. He was promoted to Senior
Vice President Tax and General Counsel in June 2006.
Mr. Kryder joined NetApp in August 2000 as Vice President,
Legal and Tax and General Counsel. He has served as the
Companys Secretary since 2001. Prior to joining NetApp, he
served as General Counsel and Vice President, Tax with Quantum
Corporation, headquartered in Santa Clara, California, from
November 1990 to August 2000 and was a tax partner and staff
accountant with Ernst & Young from June 1977 to
November 1990. Mr. Kryder currently serves on the board of
JW house, a charitable organization. Mr. Kryder received
his Juris Doctorate and Masters of Business Administration from
Santa Clara University in 1977 and his B.S. degree in
business administration also from Santa Clara University in
1974.
Robert E. Salmon joined NetApp in January 1994 and was
appointed executive vice president, field operations in December
2005. Mr. Salmon has served as the Companys executive
vice president of worldwide sales since September 2004. From
August 2003 to September 2004, Mr. Salmon served as the
Companys senior vice president of worldwide sales and from
May 2000 to August 2003, Mr. Salmon served as the
Companys vice president of North American sales. Prior to
his tenure at NetApp Mr. Salmon spent nearly ten years with
Sun Microsystems and Data General Corporation. Mr. Salmon
graduated from California State University, Chico with a B.S.
degree in computer science.
Additional
Information
Our Internet address is www.netapp.com. We make available
through our Internet Web site our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
SEC.
The SEC maintains an Internet site (www.sec.gov) that
contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the
SEC. The public also may read and copy these filings at the
SECs Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549. Information about this Public
Reference Room is available by calling (800) SEC-0330.
The following risk factors and other information included in
this Annual Report on
Form 10-K
should be carefully considered. The risks and uncertainties
described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we presently
deem less significant may also impair our business operations.
Please see page 3 of this Annual Report on
Form 10-K
for additional discussion of these
11
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 uncertain
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:
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Reduced demand for our products as a result of constraints on IT
related spending by our customers;
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Increased price competition for our products from competitors;
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Deferment of purchases and orders by customers due to budgetary
constraints or changes in current or planned utilization of our
systems;
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Risk of excess and obsolete inventories;
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Risk of supply constraints:
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Excess facilities costs;
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Higher overhead costs as a percentage of revenues;
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Negative impacts from increased financial pressures on
customers, distributors and resellers;
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Negative impacts from increased financial pressures on key
suppliers or contract manufacturers; and
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Potential discontinuance of product lines or businesses and
related asset impairments.
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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 during times of economic volatility.
These factors include, but are not limited to, the following:
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Fluctuations in demand for our products and services, in part
due to changes in general economic conditions and specific
economic conditions in the storage and data management market;
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A shift in federal government spending patterns;
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Changes in sales and implementation cycles for our products and
reduced visibility into our customers spending plans and
associated revenues;
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The level of price and product competition in our target product
markets;
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The impact of economic uncertainty on our customers
budgets and IT spending capacity;
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Our ability to maintain appropriate inventory levels and
purchase commitments;
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Our reliance on a limited number of suppliers, and industry
consolidation in our supply base, which could subject us to
periodic
supply-and-demand,
price rigidity, and quality issues with our components;
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The timing of bookings, the cancellation of significant orders
and the management of our backlog;
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Product configuration and mix;
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The extent to which our customers renew their service and
maintenance contracts with us;
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12
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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;
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Linearity, such as our historical intraquarter bookings and
revenue pattern in which a disproportionate percentage of each
quarters total bookings and related revenue occur in the
last month of the quarter;
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Announcements and introductions of, and transitions to, new
products by us or our competitors;
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Deferrals of customer orders in anticipation of new products or
product enhancements introduced by us or our competitors;
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Our ability to develop, introduce, and market new products and
enhancements in a timely manner;
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Our levels of expenditure on research and development and sales
and marketing programs;
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Our ability to effectively manage our operating expenses;
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Adverse movements in foreign currency exchange rates in the
countries in which we do business;
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The dilutive impact of our $1.265 billion of 1.75%
convertible senior notes due June 2013 (the Notes)
and related warrants on our earnings per share;
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Excess or inadequate facilities;
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Actual events, circumstances, outcomes and amounts differing
from judgments, assumptions, and estimates used in determining
the values of certain assets (including the amounts of valuation
allowances), liabilities, and other items reflected in our
consolidated financial statements;
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Disruptions resulting from new systems and processes as we
continue to enhance and scale our system infrastructure; and
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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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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 times of economic uncertainty. Our revenues 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.
We derive a majority of our revenues 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. Additionally, due
to the complexities associated with revenue recognition, we may
not accurately forecast our non-deferred and deferred revenues,
which could adversely impact our results of operations.
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
13
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 revenues varies from customer to customer,
can be difficult to estimate, and requires management judgment,
and also because customers purchasing decisions are
subject to delay, reduction or cancellation. 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.
Economic uncertainties have caused, and may in the future again
cause, consumers, businesses and governments to defer purchases
in response to tighter budgets, 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.
Changing market conditions and economic uncertainty create a
challenging operating environment for our business. It is
critical that we maintain appropriate alignment between our cost
structure and our expected growth and revenues, while at the
same time, continue to make 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 periods of uneven growth, we may incur costs before we
realize the anticipated related benefits, which could harm our
operating results. We have made, and will continue to make,
significant investments in engineering, sales, service and
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
related anticipated benefits (revenue growth), 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 also experience an adverse impact to our
business, operating results and financial condition. If the
storage and data management market fails to grow, or grows
slower than we expect, our revenues will be adversely affected.
Also, even if IT spending increases, our revenues 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 total gross margins are impacted by the mix of product,
software entitlements and maintenance and services revenues.
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, sales 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 products;
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The mix of sales to commercial and U.S. government sector
end users;
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The timing and amount of revenue recognized and deferred;
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New product introductions and enhancements;
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Licensing and royalty arrangements;
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14
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Excess inventory levels or purchase commitments as a result of
changes in demand forecasts or last time buy purchases;
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Possible product and software defects as we transition our
products; and
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The cost of components, contract manufacturing costs, 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; 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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Spares stocking requirements to support new product
introductions;
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The volume, cost 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.
An
increase in competition and industry consolidation could
materially and adversely affect our operating
results.
The storage and data management 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
Oracle Corporation, through its acquisition of 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 Oracle
Corporation, through its acquisition of Sun Microsystems.
There has been a trend toward industry consolidation in our
markets for several years. For example, in January 2010, Oracle
Corporation, one of our strategic partners, completed its
acquisition of 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 become unable to maintain
their competitive positions or 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 strategic alliances among
themselves or with third parties, including some of our
partners. For example, in November 2009, Cisco and EMC together
with VMware announced a Virtual Computing Environment coalition.
It is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market
share. We may not be able to compete successfully against
current or future competitors. Competitive pressures we face
could materially and adversely affect our business and operating
results.
15
Disruption
of or changes in our distribution model could harm our
sales.
If we fail to develop and maintain strong relationships with our
distributors, or if our distributors fail to effectively manage
the sale of our products or services on our behalf, our revenues
and gross margins could be adversely affected.
We market and sell our storage data management 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 revenues from these
indirect channels. During fiscal 2010, revenues generated from
sales from our indirect channel distribution accounted for 69%
of our revenues. In order for us to maintain or increase our
revenues, we must effectively manage our relationships with
channel partners.
Several factors could result in disruption of or changes in our
indirect channel distribution model, which could materially harm
our revenues and gross margins, including the following:
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Our indirect channel partners may compete directly with other
channel partners or with our direct sales force. Due to these
conflicts, our indirect channel partners could stop or reduce
their efforts in marketing our products.
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Our indirect 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 indirect 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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Our indirect channel partners financial condition or
operations may weaken.
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There is no assurance that we will be able to attract new
indirect channel partners, retain these indirect channel
partners or that we will be able to secure additional or
replacement indirect channel partners in the future, especially
in light of changes in end customer demand patterns and changes
in available and competing technologies from competitors. The
loss of one or more of our key indirect channel partners in a
given geographic area could harm our operating results within
that area, as qualifying and developing new indirect channel
partners typically requires a significant investment of time and
resources before acceptable levels of productivity are met. Our
inability to effectively establish, train, retain and manage our
distribution channel could harm our sales.
In addition, we depend on our indirect 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.
Our
OEM relationship may not continue to generate significant
revenues.
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 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 generate significant revenues.
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 our OEM relationship increase,
we may experience distribution channel conflicts between our
direct sales force and the OEM or among our channel partners. If
we fail to minimize channel conflicts, or if our OEM
relationship does not continue to generate significant revenues,
our operating results and financial condition could be harmed.
16
A
portion of our revenues is generated by large, recurring
purchases from various customers, resellers and distributors. A
loss, cancellation or delay in purchases by any of these parties
has and in the future could negatively affect our
revenues.
During fiscal 2010, sales to distributors Arrow and Avnet
accounted for approximately 14% and 11%, respectively of our net
revenues. The loss of orders from these, or any of our more
significant customers, strategic partners, distributors or
resellers could cause our revenues and profitability to suffer.
Our ability to attract new customers will depend on a variety of
factors, including the cost-effectiveness, reliability,
scalability and comprehensiveness of our product offerings, and
our ability to address customer demands.
We also have an agreement with Fujitsu Technology Solutions
(Fujitsu), which enables Fujitsu to lease, sell,
market and resell NetApp products to end users and Fujitsu sales
partners worldwide and to integrate NetApp products into Fujitsu
bundled offerings, as well as to market NetApps support
services.
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.
Unfavorable economic conditions may 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 uncertainty
in the economy continues, or conditions deteriorate, and our
sales decline, our financial condition and operating results
could be adversely impacted.
Because our expenses are based on our revenue forecasts, a
substantial reduction or delay in sales of our products to, or
unexpected returns from customers and resellers, or the loss of
any significant customer or reseller, could harm our business.
We expect that our largest customers in the future could be
different from our largest customers today. End users could stop
purchasing and indirect channel partners could stop marketing
our products at any time. The loss of one or more of our key
indirect channel partners or the failure to obtain and ship a
number of large orders each quarter could harm our operating
results. In addition, a change in the pricing practices of one
or more of our large customers could adversely affect our
revenues and gross margins.
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 and data management market and for us; however,
government demand is unpredictable, and there can be no
assurance that we will maintain or grow our revenues 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 U.S. government regulatory
requirements could subject us to fines and other penalties,
which could have a material adverse effect on our revenues,
operating results and financial position.
If we
are unable to maintain our existing relationships and develop
new relationships with major strategic partners, our revenues
may be impacted negatively.
An element of our strategy to increase revenues is to
strategically partner with major third-party software and
hardware vendors to integrate our products into their products
and also co-market our products with the vendors. We have
significant partner relationships with database, business
application, backup management and server
17
virtualization companies, including Microsoft, Oracle, SAP,
Symantec and VMware. In addition, in November 2009, we announced
our intention to expand our relationship with Fujitsu, and in
January 2010, we announced an expansion of our collaboration
with Cisco and VMware, including a cooperative support
arrangement. A number of these strategic partners are industry
leaders that offer us expanded access to segments of the storage
and data management 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 revenues or may not continue to be
in effect for any specific period of time. If these
relationships fail to materialize as expected, we could
experience lower than expected revenue growth, suffer delays in
product development, or other operational difficulties.
In addition, some of our partners, including Oracle, Cisco and
VMware, are also partnering with other storage vendors which may
increase the availability of competing solutions, harm our
ability to continue as the vendor of choice for those partners
and harm our ability to grow our business with those partners.
We intend to continue to establish and maintain business
relationships with technology companies to expand our marketing
reach and accelerate the development of our storage and data
management solutions. To the extent that we are unsuccessful in
developing new relationships or maintaining our existing
relationships, our future revenues 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.
Our
future financial performance depends on growth in the storage
and data management markets. If the performance of these markets
does not meet the expectations 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 recently adversely impacted by the global
economic uncertainty, and as a result of continued uncertainty,
the markets 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. We rely on a limited number of suppliers for components
utilized in the assembly of our products, which has and could
subject us to future periodic supply constraints and price
rigidity.
Financial problems of either contract manufacturers, component
suppliers or other parties in our supply chain and reservation
of manufacturing capacity at our contract manufacturers by other
companies, inside or outside of our industry, could either limit
supply or increase costs of our products. Qualifying a new
contract manufacturer and
18
commencing volume production is expensive and time-consuming,
and disruption or termination of manufacturing capacity from any
contract manufacturer could negatively impact our ability to
manufacture and sell our products.
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. A reduction or interruption in supply; a significant
increase in the price of one or more components; a failure to
adequately procure inventory by our contract manufacturers; a
failure to appropriately cancel, reschedule, or adjust our
requirements based on our business needs; or a decrease in
demand for our products could materially adversely affect our
business, operating results, and financial condition and could
materially damage customer relationships. 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. 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, our gross margins could decrease. As the demand
for our products has increased, we have experienced, and may
continue to experience tightening of supply of some components
leading to longer lead times and component supply constraints,
which has and in the future could continue to result in the
delay of shipments.
We are
exposed to the credit and non-payment risk of our customers,
resellers, and distributors, especially during times of economic
uncertainty and tight credit 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. While we monitor
individual customer payment capability in granting such open
credit arrangements, and seek to limit such open credit to
amounts we believe are reasonable, we may experience losses due
to a customers inability to pay.
Beyond our open credit arrangements, we also have recourse and
nonrecourse customer financing leasing arrangements using third
party leasing companies. 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 of end-user customer
default. We also offer financing arrangements whereby the
end-user customer pays a fixed monthly amount plus a variable
amount based on actual storage capacity used. These arrangements
subject us to additional risk around revenue recognition and
profitability due to the uncertainties associated with the
variable portion of the arrangements. 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 uncertainty, our exposure to credit risks
from our customers increases. In addition, our exposure to
credit risks of our customers may increase further if our
customers and their customers or their lease financing sources
are adversely affected by global economic conditions.
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. We may be subject
to similar losses 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 substantial fluctuation in the future. These factors
include but are not limited to:
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Fluctuations in our operating results compared to prior periods
and forecasts;
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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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Industry consolidation and the resulting perception of increased
competition;
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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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Changes in our relationships with our suppliers, customers,
channel and strategic partners;
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Announcements of the completion or dissolution of strategic
alliances within the industry;
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Dilutive impacts of our convertible Notes and related warrants;
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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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Inquiries by the SEC, NASDAQ, law enforcement, or other
regulatory bodies; and
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General market conditions, including recent global or regional
economic uncertainties.
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In addition, the stock market has experienced volatility that
has particularly affected the market prices of the equity
securities of many technology companies. Certain macroeconomic
factors such as changes in interest rates, the market climate
for the technology sector, and levels of corporate spending on
IT, could continue to have an impact on the trading price of our
stock, and the market price of our common stock may fluctuate
significantly in the future.
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 decide 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,
including 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.
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 interoperability and
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 subject us to additional financial and operational
risks. If they are not managed effectively, we could experience
material risks to our operations, financial condition and
business model.
As new or enhanced products are introduced, we must successfully
manage the interoperability and 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.
20
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.
Risks
inherent in our international operations could have a material
adverse effect on our business.
A substantial portion of our revenues are derived from sales
outside of the United States. During fiscal 2010, our
international revenues accounted for 50% of our total revenues.
A substantial portion of our products are manufactured outside
of the U.S., and we have research and development and service
centers overseas. Accordingly, our business and our future
operating results could be adversely affected by a variety of
factors affecting our international operations, some of which
are beyond our control, including regulatory, political, or
economic conditions in a specific country or region, trade
protection measures and other regulatory requirements,
government spending patterns, and acts of terrorism and
international conflicts. In addition, we may not be able to
maintain or increase international market demand for our
products.
We face exposure to adverse movements in foreign currency
exchange rates as a result of our international operations.
These exposures may change over time as business practices
evolve, and they could have a material adverse impact on our
financial results and cash flows. Our international sales are
denominated in U.S. dollars and in foreign currencies. An
increase in the value of the U.S. dollar relative to
foreign currencies could make our products more expensive and
therefore potentially less competitive in foreign markets.
Conversely, lowering our price in local currency may result in
lower
U.S.-based
revenues. A decrease in the value of the U.S. dollar
relative to foreign currencies could increase operating expenses
in foreign markets. Additionally, we have exposures to emerging
market currencies, which can experience extreme volatility. We
utilize forward and option contracts to hedge our foreign
currency exposure associated with certain assets and liabilities
as well as anticipated foreign currency cash flows on a
short-term basis. All balance sheet hedges are marked to market
through earnings every quarter. The time-value component of our
cash flow hedges is recorded in earnings while all other gains
and losses are marked to market through other comprehensive
income until forecasted transactions occur, at which time such
realized gains and losses are recognized in earnings. These
hedges attempt to reduce, but do not always entirely eliminate,
the impact of currency exchange movements. Factors that could
have a negative impact on the effectiveness of our hedging
program include inaccuracies in forecasting, widening interest
rate differentials, and volatility in the foreign exchange
market. Our hedging strategies may not be successful and
currency exchange rate fluctuations could have a material
adverse effect on our operating results.
Certain United States Government export restrictions impede our
ability to sell to certain end users certain of our products.
The United States, through the Bureau of Industry Security,
places restrictions on the export of certain encryption
technology. These restrictions may include: the requirement to
have a license to export the technology; the requirement to have
software licenses approved before export is allowed; and
outright bans on the licensing of certain encryption technology
to particular end users or to all end users in a particular
country. Certain of our products are subject to various levels
of export restrictions. These export restrictions could
negatively impact our business. Our international operations are
subject to other risks, including general import/export
restrictions, regulations related to data privacy, and other
complex rules and regulations under which we must conduct
business in foreign countries. We are also subject to the
potential loss of proprietary information due to piracy,
misappropriation or laws that may be less protective of our
intellectual property rights than U.S. law. Such factors
could have an adverse impact on our business, operating results
and financial position.
Additional risks inherent in our international business
activities generally include, among others, longer accounts
receivable payment cycles and difficulties in managing
international operations.
Moreover, in many foreign countries, particularly in those with
developing economies, it is common to engage in business
practices that are prohibited by regulations applicable to us,
such as the Foreign Corrupt Practices Act. Although we implement
policies and procedures designed to ensure compliance with these
laws, our employees, contractors and agents, as well as those
companies to which we outsource certain of our business
operations, may take actions in violation of these policies. Any
such violation could subject us to fines and other penalties,
which could have a material adverse effect on our business,
financial condition or results of operations.
21
Changes
in our effective tax rate or adverse outcomes resulting from
examination of our income tax returns could adversely affect our
results.
Our effective tax rate could be adversely affected by several
factors, many of which are outside of our control, including:
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Earnings being lower than anticipated in countries where we are
taxed at lower rates as compared to the U.S. statutory tax
rate;
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Material differences between forecasted and actual tax rates as
a result of a shift in the mix of pretax profits and losses by
tax jurisdiction, our ability to use tax credits, or effective
tax rates by tax jurisdiction that differ from our estimates;
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Changing tax laws or related interpretations, accounting
standards, regulations, and interpretations in multiple tax
jurisdictions in which we operate, as well as the requirements
of certain tax rulings;
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An increase in expenses not deductible for tax purposes,
including certain stock-based compensation expense, write-offs
of acquired in-process research and development, and impairment
of goodwill;
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The tax effects of purchase accounting for acquisitions and
restructuring charges that may cause fluctuations between
reporting periods;
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Changes related to our ability to ultimately realize future
benefits attributed to our deferred tax assets, including those
related to
other-than-temporary
impairments;
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Tax assessments resulting from income tax audits or any related
tax interest or penalties could significantly affect our income
tax provision for the period in which the settlements take
place; and
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A change in our decision to indefinitely reinvest foreign
earnings.
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We receive significant tax benefits from sales to our
non-U.S. customers.
These benefits are contingent upon existing tax regulations in
the United States and in the countries in which our
international operations are located. Future changes in domestic
or international tax regulations could adversely affect our
ability to continue to realize these tax benefits. We have not
provided for United States federal and state income taxes or
foreign withholding taxes that may result on future remittances
of undistributed earnings of foreign subsidiaries. The Obama
administration has announced several proposals to reform United
States tax rules, including proposals that may result in a
reduction or elimination of the deferral of United States income
tax on our future unrepatriated earnings. Should such
anti-deferral provisions be enacted, our effective tax rate
could be adversely affected.
We are currently undergoing federal income tax audits in the
United States and several foreign tax jurisdictions. The rights
to some of our intellectual property (IP) are owned
by certain of our foreign subsidiaries, and payments are made
between U.S. and foreign tax jurisdictions relating to the
use of this IP in a qualified cost sharing arrangement. In
recent years, several other U.S. companies have had their
foreign IP arrangements challenged as part of IRS examinations,
which has resulted in material proposed assessments
and/or
litigation with respect to those companies.
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 subsequently received a rebuttal from the IRS
examination team in response to our protest. We recently were
informed by the IRS that this audit will proceed to the IRS
Appeals level for further administrative review. The Notices of
Proposed Adjustments in this audit 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.
The IRS recently commenced the examination of our fiscal 2005
through 2007 federal income tax returns, and in addition, the
California Franchise Tax Board has notified us of their intent
to examine our fiscal 2007 and 2008 California tax returns. The
scope of the IRS and California Franchise Tax Board examinations
are unclear at this time.
If the ultimate determination of income taxes assessed under the
current IRS audits or under audits being conducted in any of the
other tax jurisdictions in which we operate results in an amount
in excess of the tax provision we have recorded or reserved for,
our operating results, cash flows and financial condition could
be adversely affected.
22
Our international operations currently benefit from a tax ruling
concluded in the Netherlands which expires on April 30,
2015 and results in a lower level of earnings subject to tax in
the Netherlands. If we are unable to negotiate a similar tax
ruling upon expiration of the current ruling, our effective tax
rate could increase and our operating results could be adversely
affected. Our effective tax rate could also be adversely
affected by different and evolving interpretations of existing
law or regulations, which in turn would negatively impact our
operating and financial results as a whole. Our effective tax
rate could also be adversely affected if there is a change in
international operations and how the operations are managed and
structured. The price of our common stock could decline to the
extent that our financial results are materially affected by an
adverse change in our effective tax rate.
Our
leverage and debt service obligations may adversely affect our
financial condition, results of operations and our earnings per
share.
As a result of the sale of our Notes, we have a greater amount
of long-term debt than we have maintained in the past. In
addition, we have various synthetic lease arrangements related
to some of our facilities at our corporate headquarters in
Sunnyvale, California, and, subject to the restrictions in our
existing and any future financing agreements, we may incur
additional debt. Our maintenance of higher levels of
indebtedness could have adverse consequences including:
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Impacting our ability to satisfy our obligations;
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Increasing the portion of our cash flows from operations may
have to be dedicated to interest and principal payments and may
not be available for operations, working capital, capital
expenditures, expansion, acquisitions or general corporate or
other purposes;
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Impairing our ability to obtain additional financing in the
future;
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Limiting our flexibility in planning for, or reacting to,
changes in our business and industry; and
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Making us more vulnerable to downturns in our business, our
industry or the economy in general.
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Our ability to meet our expenses and debt obligations will
depend on our future performance, which will be affected by
financial, business, economic, regulatory and other factors. We
will not be able to control many of these factors, such as
economic conditions and governmental regulations. Furthermore,
our operations may not generate sufficient cash flows to enable
us to meet our expenses and service our debt. As a result, we
may be required to repatriate funds from our foreign
subsidiaries which could result in a significant tax liability
to us. If we are unable to generate sufficient cash flows from
operations, or if we are unable to repatriate sufficient or any
funds from our foreign subsidiaries, in order to meet our
expenses and debt service obligations, we may need to enter into
new financing arrangements to obtain the necessary funds, or we
may be required to raise additional funds through other means.
If we determine it is necessary to seek additional funding for
any reason, we may not be able to obtain such funding or, if
funding is available, obtain it on acceptable terms. If we fail
to make a payment on our debt, we could be in default on such
debt, and this default could cause us to be in default on our
other outstanding indebtedness.
The
note hedges and warrant transactions that we entered into in
connection with the sale of the Notes may affect the trading
price of our common stock.
In connection with the issuance of the Notes, we entered into
privately negotiated convertible note hedge transactions with
certain option counterparties (the Counterparties),
which are expected to offset the potential dilution to our
common stock upon any conversion of the Notes. At the same time,
we also entered into warrant transactions with the
Counterparties pursuant to which we may issue shares of our
common stock above a certain strike price. In connection with
these hedging transactions, the Counterparties may have entered
into various
over-the-counter
derivative transactions with respect to our common stock or
purchased shares of our common stock in secondary market
transactions at or following the pricing of the Notes. Such
activities may have had the effect of increasing the price of
our common stock. The Counterparties are likely to modify their
hedge positions from time to time prior to conversion or
maturity of the Notes by purchasing and selling shares of our
common stock or entering into other derivative transactions.
Additionally, these transactions may expose us to counterparty
credit risk for nonperformance. The effect, if any, of any of
these transactions and activities on the market price of our
common stock or the Notes will depend, in part, on market
conditions and cannot be ascertained at this time, but any
23
of these activities could adversely affect the value of our
common stock. In addition, if our stock price exceeds the strike
price for the warrants, there could be additional dilution to
our shareholders, which could adversely affect the value of our
common stock.
Lehman Brothers OTC Derivatives, Inc. (Lehman OTC)
was 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. In
April 2010, we terminated the hedge transaction with Lehman OTC
in exchange for an unsecured bankruptcy claim, which we
subsequently sold to a third party for approximately
$14 million. Because we have decided not to replace the
hedge, we are subject to potential dilution on the 20% unhedged
portion of our Notes upon conversion 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 termination
of this hedge.
The price of our common stock could also be affected by sales of
our common stock by investors who view the Notes as a more
attractive means of equity participation in our company and by
hedging or arbitrage trading activity that we expect to develop
involving our common stock by holders of the Notes. The hedging
or arbitrage could, in turn, affect the trading price of the
Notes and warrants.
Future
issuances of common stock related to our Notes, warrants, stock
options, restricted stock units, and our Employee Stock Purchase
Plan may adversely affect the trading price of our common stock
and the Notes.
The conversion of some or all of our outstanding Notes will
dilute the ownership interest of existing stockholders to the
extent we deliver common stock upon conversion of the Notes. We
will satisfy our obligation upon conversion by delivering cash
for the principal amount of the Notes and shares of common
stock, if any, to the extent the conversion value exceeds the
principal amount. Any new issuance of equity securities,
including the issuance of shares upon conversion of the Notes or
the exercise of related warrants which are not offset by our
Note hedges, could dilute the interests of our then-existing
stockholders, including holders who receive shares upon
conversion of their Notes, and could substantially decrease the
trading price of our common stock and the Notes. In addition,
any sales in the public market of any common stock issuable upon
such conversion or the exercise of warrants could adversely
affect prevailing market prices of our common stock.
As of April 30, 2010, we had options to purchase
approximately 35 million shares of our common stock
outstanding and a total of approximately 9 million
restricted shares and restricted stock units outstanding. If all
of these outstanding options were exercised, and all of the
outstanding restricted stock and restricted stock units vested,
the proceeds to the Company would average approximately $18 per
share. We also had 15.5 million shares of our common stock
reserved for issuance under our stock plans with respect to
equity awards that have not been granted. The exercise of all of
the outstanding options
and/or the
vesting of all outstanding restricted shares and restricted
stock units would dilute the interests of our then-existing
stockholders, and any sales in the public market of the common
stock issuable upon such exercise could adversely affect the
trading price of our common stock.
In addition, we have an Employee Stock Purchase Plan (ESPP)
under which 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. As of April 30,
2010, we had approximately 5.0 million shares of our common
stock available for issuance under the ESPP. The issuance of
shares under the ESPP would dilute the interests of our
then-existing stockholders, and any sales in the public market
of the common stock issuable upon such exercise could adversely
affect the trading price of our common stock.
We may issue equity securities in the future for a number of
reasons, including to finance our operations related to business
strategy (including in connection with acquisitions, strategic
alliances or other transactions), to increase our capital, to
adjust our ratio of debt to equity, to satisfy our obligations
upon the exercise of outstanding warrants or options upon
conversion of the Notes, or for other reasons.
24
We are
exposed to fluctuations in the market values of our portfolio
investments and in interest rates; impairment of our investments
could harm our financial results.
At April 30, 2010, we had $3.8 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,
commercial paper, U.S. government agency bonds, corporate
bonds, auction rate securities, certificates of deposit, and
money market funds. 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. For
instance, as a result of the bankruptcy filing of Lehman
Brothers, which occurred during fiscal 2009, we recorded an
other-than-temporary
impairment charge of $11.8 million on our corporate bonds
related to investments in Lehman Brothers securities and
approximately $9.3 million on our investments in the
Primary Fund that held Lehman Brothers investments. Any
investment securities that we hold or the issues of such
securities 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.
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 April 30, 2010, we had an investment with
the carrying value of $1.4 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.
In the event of adverse conditions in the credit and capital
markets, our investment portfolio may be impacted and we could
determine that some or all of our investments have experienced
an
other-than-temporary
decline in fair value, requiring further impairments, which
could adversely impact our financial position and operating
results.
A
significant portion of our cash and cash equivalents balances
are held overseas. If we are not able to generate sufficient
cash domestically in order to fund our U.S. operations and
strategic opportunities, and to service our debt, we may incur a
significant tax liability in order to repatriate the overseas
cash balances, or we may need to raise additional capital in the
future.
A portion of our earnings which is generated from our
international operations is held and invested by certain of our
foreign subsidiaries. These amounts are not freely available for
dividend repatriation to the United States without triggering
significant adverse tax consequences, which could adversely
affect our financial results. As a result, if the cash generated
by our domestic operations is not sufficient to fund our
domestic operations, our broader corporate initiatives such as
stock repurchases, acquisitions, and other strategic
opportunities, and to service our outstanding indebtedness, we
may need to raise additional funds through public or private
debt or equity financings, or we may need to obtain new credit
facilities to the extent we choose not to repatriate our
overseas cash. Such
25
additional financing may not be available on terms favorable to
us, or at all, and any new equity financings or offerings would
dilute our current stockholders ownership. Furthermore,
lenders, particularly in light of the current challenges in the
credit markets, may not agree to extend us new, additional or
continuing credit. If adequate funds are not available, or are
not available on acceptable terms, we may be forced to
repatriate our foreign cash and incur a significant tax expense
or we may not be able to take advantage of strategic
opportunities, develop new products, respond to competitive
pressures or repay our outstanding indebtedness. In any such
case, our business, operating results or financial condition
could be adversely impacted.
Our
synthetic leases are off-balance sheet arrangements that could
negatively affect our financial condition and operating results.
We have invested substantial resources in new facilities and
physical infrastructure, which will increase our fixed costs.
Our operating results could be harmed if our business does not
grow proportionately to our increase in fixed
costs.
We have various synthetic lease arrangements with BNP Paribas
Leasing Corporation as lessor (BBPPLC) for our
headquarters office buildings and land in Sunnyvale, California.
These synthetic leases qualify for operating lease accounting
treatment under the accounting guidance for leases and are not
considered variable interest entities under applicable
accounting guidance. Therefore, we do not include the properties
or the associated debt on our condensed consolidated balance
sheet. However, if circumstances were to change regarding our or
BNPPLCs ownership of the properties, or in BNPPLCs
overall portfolio, we could be required to consolidate the
entity, the leased facilities and the associated debt.
Our future minimum lease payments under these synthetic leases
limit our flexibility in planning for, or reacting to, changes
in our business by restricting the funds available for use in
addressing such changes. If we are unable to grow our business
and revenues proportionately to our increase in fixed costs, our
operating results will be harmed. If we elect not to purchase
the properties at the end of the lease term, we have guaranteed
a minimum residual value to BNPPLC. If the fair value of the
properties declines below that guaranteed minimum residual
value, our residual value guarantee would require us to pay the
difference to BNPPLC. As of April 30, 2010, the estimated
fair value of the properties was approximately
$36.9 million below the guaranteed minimum residual value,
which we will accrue over the remaining term of the respective
leases. Any further decline in the fair value of the properties
could adversely impact our cash flows, financial condition and
operating results.
As a result of excess capacity in our Sunnyvale facilities,
certain of our facilities subject to synthetic lease
arrangements have been subleased or are vacant. These subleases
will expire through 2012 and we may not be able to generate
sufficient sublease income to cover the carrying costs of these
facilities. In addition, we may experience changes in our
operations in the future that could result in additional excess
capacity and vacant facilities. We will continue to be
responsible for all carrying costs of these facilities under
operating leases until such time as we can sublease these
facilities or terminate the applicable leases based on the
contractual terms of the operating lease agreements, and these
costs may have an adverse effect on our business, operating
results and financial condition.
We
have credit exposure to our hedging
counterparties.
In order to minimize volatility in earnings associated with
fluctuations in the value of foreign currency relative to the
U.S. Dollar, we utilize forward and option contracts to
hedge our exposure to foreign currencies. As a result of
entering into these hedging contracts with major financial
institutions, we may be subject to counterparty nonperformance
risk. Should there be a counterparty default, we could be
exposed to the net losses on the hedged arrangements or be
unable to recover anticipated net gains from the transactions.
We are
subject to restrictive and financial covenants in our synthetic
lease arrangements. The restrictive covenants may restrict our
ability to operate our business.
Our ongoing extension of credit under our synthetic lease
arrangements are subject to continued compliance with financial
covenants. If we do not comply with these restrictive and
financial covenants or otherwise default under the arrangements,
we may be required to repay any outstanding amounts or
repurchase the properties which are subject to the synthetic
lease arrangements. If we lose access to the synthetic lease
arrangements, we may not be able to obtain alternative financing
on acceptable terms, which could limit our operating flexibility.
26
The agreements governing our synthetic lease arrangements
contain restrictive covenants that limit our ability to operate
our business, including restrictions on our ability to:
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Incur indebtedness;
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Incur indebtedness at the subsidiary level;
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Grant liens;
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Sell all or substantially all our assets:
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Enter into certain mergers;
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Change our business;
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Enter into swap agreements;
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Enter into transactions with our affiliates; and
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Enter into certain restrictive agreements.
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As a result of these restrictive covenants, our ability to
respond to changes in business and economic conditions and to
obtain additional financing, if needed, may be restricted. We
may also be prevented from engaging in transactions that might
otherwise be beneficial to us, such as strategic acquisitions or
joint ventures.
Our failure to comply with the restrictive and financial
covenants could result in a default under our synthetic lease
arrangements, which would give the counterparties thereto the
ability to exercise certain rights, including the right to
accelerate the amounts owed thereunder and to terminate the
arrangement. In addition, our failure to comply with these
covenants and the acceleration of amounts owed under synthetic
lease arrangements could result in a default under the Notes,
which could permit the holders to accelerate the Notes. If all
of our debt is accelerated, we may not have sufficient funds
available to repay such debt.
Funds
associated with certain of our auction rate securities may not
be accessible for more than 12 months and our auction rate
securities may experience further
other-than-temporary
declines in value, which would adversely affect our
earnings.
Auction rate securities (ARSs) held by us are securities with
long-term nominal maturities, which, in accordance with
investment policy guidelines, had credit ratings of AAA and Aaa
at time of purchase. Interest rates for ARS are reset through a
Dutch auction each month, which prior to February
2008 had provided a liquid market for these securities.
All of our ARSs are backed by pools of student loans guaranteed
by the U.S. Department of Education, and we believe the
credit quality of these securities is high based on this
guarantee. However, liquidity issues in the global credit
markets resulted in the failure of auctions for certain of our
ARS investments, with a par value of $73.8 million. For
each failed auction, the interest rate resets to a maximum rate
defined for each security, and the ARS continue to pay interest
in accordance with their terms, although the principal
associated with the ARS will not be accessible until there is a
successful auction or such time as other markets for ARS
investments develop or the final maturity of the individual
securities.
As of April 30, 2010, we determined there was a total
decline in the fair value of our ARS investments of
approximately $4.7 million, of which we have recorded
cumulative temporary impairment charges of $2.6 million,
and $2.1 million was recognized as an
other-than-temporary
impairment charge. In addition, we have classified all of our
auction rate securities as long-term assets in our consolidated
balance sheets at April 30, 2010 as our ability to
liquidate such securities in the next 12 months is
uncertain. Although we currently have the ability and intent to
hold these ARS investments until recovery in market value or
until maturity, if current market conditions deteriorate
further, or the anticipated recovery in market liquidity does
not occur, we may be required to record additional impairment
charges in future quarters.
27
We may
need to undertake cost-reduction initiatives and restructuring
initiatives in the future.
We have previously recognized restructuring charges related to
initiatives to realign our business strategies and resize our
business in response to economic and market conditions,
including those announced in February 2009 and December 2008. 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.
Our
acquisitions may not provide the anticipated benefits and may
disrupt our existing business.
As part of our strategy, we are continuously evaluating
opportunities to buy other businesses or technologies that would
complement our current products, expand the breadth of our
markets, or enhance our technical capabilities. The success of
our acquisitions is impacted by a number of factors, and may be
subject to the following risks:
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The inability to successfully integrate the operations,
technologies, products and personnel of the acquired companies;
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The diversion of managements attention from normal daily
operations of the business;
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The loss of key employees;
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Substantial transaction costs and accounting charges; and
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Exposure to litigation related to acquisitions.
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Any future acquisitions may also result in risks to our existing
business, including:
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Dilution of our current stockholders percentage ownership
to the extent we issue new equity;
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Assumption of additional liabilities;
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Incurrence of additional debt or a decline in available cash;
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Adverse effects to our financial statements, such as the need to
make large and immediate write-offs or the incurrence of
restructuring and other related expenses;
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Liability for intellectual property infringement and other
litigation claims, which we may or may not be aware of at the
time of acquisition; and
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Creation of goodwill or other intangible assets that could
result in significant future amortization expense or impairment
charges.
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The failure to achieve the anticipated benefits of an
acquisition may also result in impairment charges for goodwill
or acquired intangibles. For example, in fiscal 2009, we
announced our decision to cease the development and availability
of our SMOS product, which was originally acquired through our
acquisition of Topio, Inc. in fiscal 2007, resulting in the
impairment of acquired intangibles related to such acquisition.
Additional or realized risks of this nature could have a
material adverse effect on our business, financial condition and
results of operations.
The occurrence of any of the above risks could seriously harm
our business.
If we
are unable to establish fair value for any undelivered element
of a sales arrangement, all or a portion of the revenues
relating to the arrangement could be deferred to future
periods.
In the course of our sales efforts, we often enter into multiple
element arrangements that include our systems and one or more of
the following undelivered software-related elements: software
entitlements and maintenance, premium hardware maintenance, and
storage review services. If we are required to change the
pricing of our software-related elements through discounting, or
otherwise introduce variability in the pricing of such elements,
we may be unable to maintain Vendor Specific Objective Evidence
of fair value of the undelivered elements of the arrangement,
and would therefore be required to delay the recognition of all
or a portion of the related arrangement. A delay in the
recognition of revenues may cause fluctuations in our financial
results and may adversely affect our operating margins.
28
We are
continually seeking ways to make our cost structure and business
processes more efficient, including moving activities from
higher-cost to lower-cost owned locations, as well as
outsourcing certain business process functions. Problems with
the execution of these activities could have an adverse effect
on our business or results of operations.
We continuously seek to make our cost structure and business
processes more efficient. We are focused on increasing workforce
flexibility and scalability, and improving overall
competitiveness by leveraging our global capabilities, as well
as external talent and skills worldwide. For example, certain
engineering activities and projects that were formerly performed
in the U.S. have been moved to lower cost international
locations and we rely on partners or third party service
providers for the provision of certain business process
functions and activities in IT, human resources and accounting.
The challenges involved with these initiatives include executing
business functions in accordance with local laws and other
obligations while maintaining adequate standards, controls and
procedures. We are also subject to increased business continuity
risks as we increase our reliance on such parties. For example,
we may no longer be able to exercise control over some aspects
of the future development, support or maintenance of outsourced
operations and processes, including the management and internal
controls associated with those outsourced business operations
and processes, which could adversely affect our business. If we
are unable to effectively utilize or integrate and interoperate
with external resources or if our partners or third party
service providers experience business difficulties or are unable
to provide business services as anticipated, we may need to seek
alternative service providers or resume providing these business
processes internally, which could be costly and time-consuming
and have a material adverse effect on our operating results. In
addition, we may not achieve the expected benefits of our
business process improvement initiatives.
We are
subject to risks related to the provision of employee health
care benefits.
We use a combination of insurance and self-insurance for
workers compensation coverage and health care plans. We
record expenses under these plans based on estimates of the
number and costs of expected claims, administrative costs and
stop-loss premiums. These estimates are then adjusted each year
to reflect actual costs incurred. Actual costs under these plans
are subject to variability depending primarily upon participant
enrollment and demographics, the actual number and costs of
claims made and whether and how much the stop-loss insurance we
purchase covers the cost of these claims. In the event that our
cost estimates differ from actual costs, we could incur
additional unplanned health care costs which could adversely
impact our financial condition.
In March 2010, comprehensive health care reform legislation
under the Patient Protection and Affordable Care Act (HR
3590) and the Health Care Education and Affordability
Reconciliation Act (HR 4872) (collectively, the
Acts) was passed and signed into law. Among other
things, the health reform legislation includes guaranteed
coverage requirements, eliminates pre-existing condition
exclusions and annual and lifetime maximum limits, restricts the
extent to which policies can be rescinded, and imposes new and
significant taxes on health insurers and health care benefits.
Provisions of the health reform legislation become effective at
various dates over the next several years. The Department of
Health and Human Services, the National Association of Insurance
Commissioners, the Department of Labor and the Treasury
Department have yet to issue necessary enabling regulations and
guidance with respect to the health care reform legislation.
Due to the breadth and complexity of the health reform
legislation, the lack of implementing regulations and
interpretive guidance, and the phased-in nature of the
implementation, it is difficult to predict the overall impact of
the health reform legislation on our business over the coming
years. Possible adverse affects of the health reform legislation
include reduced revenues, increased costs, exposure to expanded
liability and requirements for us to revise the ways in which we
conduct business or risk of loss of business. In addition, our
results of operations, financial position, and cash flows could
be materially adversely affected.
We
depend on attracting and retaining qualified personnel. If we
are unable to attract and retain such personnel, our operating
results could be materially and adversely
impacted.
Our continued success depends, in part, on our ability to
identify, attract, motivate and retain qualified personnel.
Because our future success is dependent on our ability to
continue to enhance and introduce new
29
products, we are particularly dependent on our ability to
identify, attract, motivate and retain qualified engineers with
the requisite education, background and industry experience.
Competition for qualified employees, particularly in Silicon
Valley, can be intense. The loss of the services of a
significant number of our employees, particularly our engineers,
salespeople and key managers, could be disruptive to our
development efforts or business relationships and could
materially and adversely affect our operating results.
Additionally, a component of our strategy to hire and retain
personnel consists of long-term compensation in the form of
equity-based grants. We face increased risk of the inability to
continue to offer equity if we are unable to obtain shareholder
approval in light of increased shareholder activism and
heightened focus on corporate compensation practices. Such
inability could adversely impact our ability to continue to
attract and retain employees.
Our
business could be materially and adversely affected as a result
of a natural disaster, terrorist acts or other catastrophic
events.
We depend on the ability of our personnel, raw materials,
equipment and products to move reasonably unimpeded around the
world. Any political, military, terrorism, global trade, world
health or other issue that hinders this movement or restricts
the import or export of materials could lead to significant
business disruptions. Furthermore, any strike, economic failure
or other material disruption caused by fire, floods, hurricanes,
volcanoes, power loss, power shortages, environmental disasters,
telecommunications failures, break-ins and similar events could
also adversely affect our ability to conduct business. If such
disruptions result in cancellations of customer orders or
contribute to a general decrease in economic activity or
corporate spending on information technology, or directly impact
our marketing, manufacturing, financial and logistics functions,
our results of operations and financial condition could be
materially adversely affected. In addition, our headquarters are
located in Northern California, an area susceptible to
earthquakes. If any significant disaster were to occur, our
ability to operate our business could be impaired.
Undetected
software errors, hardware errors, or failures found in new
products may result in loss of or delay in market acceptance of
our products, which could increase our costs and reduce our
revenues. Product quality problems could lead to reduced
revenues, gross margins and operating results.
Our products may contain undetected software errors, hardware
errors or failures when first introduced or as new versions are
released. Despite testing by us and by current and potential
customers, errors may not be found in new products until after
commencement of commercial shipments, resulting in loss of or
delay in market acceptance, which could materially and adversely
affect our operating results.
In addition, if we fail to remedy a product defect, we may
experience a failure of a product line, temporary or permanent
withdrawal from a product or market, damage to our reputation,
inventory costs or product reengineering expenses, and these
occurrences could have a material impact on our revenues, gross
margins and operating results. We may be subject to losses that
may result from or are alleged to result from defects in our
products, which could subject us to claims for damages,
including consequential damages.
We are
exposed to various risks related to legal proceedings or claims
and protection of intellectual property rights, which could
adversely affect our operating results.
We are a party to lawsuits in the normal course of our business,
including our ongoing litigation with Sun Microsystems which was
recently acquired by Oracle Corporation. Litigation can be
expensive, lengthy and disruptive to normal business operations.
Moreover, the results of complex legal proceedings are difficult
to predict. An unfavorable resolution of a particular lawsuit
could have a material adverse effect on our business, operating
results, or financial condition.
If we are unable to protect our intellectual property, we may be
subject to increased competition that could materially and
adversely affect our operating results. Our success depends
significantly upon our proprietary technology. We rely on a
combination of copyright and trademark laws, trade secrets,
confidentiality procedures, contractual provisions, and patents
to protect our proprietary rights. We seek to protect our
software, documentation and other written materials under trade
secret, copyright and patent laws, which afford only limited
protection.
30
Some of our U.S. trademarks are registered internationally
as well. We will continue to evaluate the registration of
additional trademarks as appropriate. We generally enter into
confidentiality agreements with our employees and with our
resellers, strategic partners and customers. We currently have
multiple U.S. and international patent applications pending
and multiple U.S. patents issued. The pending applications
may not be approved, and our existing and future patents may be
challenged. If such challenges are brought, the patents may be
invalidated. We may not be able to develop proprietary products
or technologies that are patentable, or where any issued patent
will provide us with any competitive advantages or will not be
challenged by third parties. Further, the patents of others may
materially and adversely affect our ability to do business. In
addition, a failure to obtain and defend our trademark
registrations may impede our marketing and branding efforts and
competitive position.
Litigation may be necessary to protect our proprietary
technology. Any such litigation may be time-consuming and
costly. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products
or obtain and use information that we regard as proprietary. In
addition, the laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the
United States. Our means of protecting our proprietary rights
may not be adequate or our competitors may independently develop
similar technology, duplicate our products, or design around
patents issued to us or other intellectual property rights of
ours.
We are subject to intellectual property infringement claims. We
may, from time to time, receive claims that we are infringing
third parties intellectual property rights. Third parties
may in the future, claim infringement by us with respect to
current or future products, patents, trademarks or other
proprietary rights. We expect that companies in the network
storage and data management market will increasingly be subject
to infringement claims as the number of products and competitors
in our industry segment grows and the functionality of products
in different industry segments overlaps. Any such claims could
be time consuming, result in costly litigation, cause product
shipment delays, require us to redesign our products or enter
into royalty or licensing agreements, any of which could
materially and adversely affect our operating results. Such
royalty or licensing agreements, if required, may not be
available on terms acceptable to us or at all.
Our
business could be materially adversely affected by changes in
regulations or standards regarding energy efficiency of our
products and climate change issues.
We continually seek ways to increase the energy efficiency of
our products. Recent analyses have estimated the amount of
global carbon emissions that are due to information technology
products. As a result, governmental and non-governmental
organizations have turned their attention to development of
regulations and standards to drive technological improvements
and reduce such amount of carbon emissions. There is a risk that
the development of these standards will not fully address the
complexity of the technology developed by the IT industry or
will favor certain technological approaches. Depending on the
regulations or standards that are ultimately adopted, compliance
could adversely affect our business, financial condition or
operating results.
Climate change issues, energy usage and emissions controls may
result in new environmental legislation and regulations, at any
or all of the international, federal and state levels, that may
unfavorably impact us, our suppliers, and our customers in how
we conduct our business including the design, development, and
manufacturing of our products. This could cause us to incur
additional direct costs in complying with any new environmental
regulations, as well as increased indirect costs resulting from
our customers, suppliers or both incurring additional compliance
costs that get passed on to us. These costs may adversely impact
our operations and financial condition.
Our business and results of operations could be adversely
impacted as a consequence of regulations or business trends such
as:
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Decreased demand for storage products that produce significant
greenhouse gases
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Increased demand for storage products that produce lower
emissions and are more energy efficient, and increased
competition to develop such products; and
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Reputational risk based on negative public perception of
publicly reported data on our greenhouse gas emissions.
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31
Our
business is subject to increasingly complex corporate
governance, public disclosure, accounting and tax requirements
that have increased both our costs and the risk of
noncompliance.
Because our common stock is publicly traded, we are subject to
certain rules and regulations of federal, state and financial
market exchange entities charged with the protection of
investors and the oversight of companies whose securities are
publicly traded. These entities, including the Public Company
Accounting Oversight Board, the SEC, and NASDAQ, have
implemented requirements and regulations and continue developing
additional regulations and requirements in response to corporate
scandals and laws enacted by Congress, most notably the
Sarbanes-Oxley Act of 2002. Our efforts to comply with these
regulations have resulted in, and are likely to continue
resulting in, increased general and administrative expenses and
diversion of management time and attention from
revenue-generating activities to compliance activities.
We completed our evaluation of our internal controls over
financial reporting for the fiscal year ended April 30,
2010 as required by Section 404 of the Sarbanes-Oxley Act
of 2002. Although our assessment, testing and evaluation
resulted in our conclusion that as of April 30, 2010, our
internal controls over financial reporting were effective, we
cannot predict the outcome of our testing in future periods. If
our internal controls are ineffective in future periods, our
business and reputation could be harmed. We may incur additional
expenses and commitment of managements time in connection
with further evaluations, both of which could materially
increase our operating expenses and accordingly reduce our
operating results.
Because new and modified laws, regulations, and standards are
subject to varying interpretations in many cases due to their
lack of specificity, their application in practice may evolve
over time as new guidance is provided by regulatory and
governing bodies. This evolution may result in continuing
uncertainty regarding compliance matters and additional costs
necessitated by ongoing revisions to our disclosure and
governance practices.
Changes
in financial accounting standards may cause adverse unexpected
fluctuations and affect our reported results of
operations.
A change in accounting standards or practices and varying
interpretations of existing accounting pronouncements, such as
changes to standards related to revenue recognition standards
recently adopted by the FASB, the increased use of fair value
measure, and the potential requirement that
U.S. registrants prepare financial statements in accordance
with International Financial Reporting Standards
(IFRS), could have a significant effect on our
reported financial results or the way we conduct our business.
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Item 1B.
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Unresolved
Staff Comments
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None.
We own approximately 0.9 million square feet of facilities
at our Sunnyvale, California headquarters, of which we occupy
approximately 0.8 million square feet. In addition, we have
commitments related to various lease arrangements with BNP
Paribas LLC (BNP) for approximately 0.6 million
square feet of additional facilities, of which we occupy
approximately 0.3 million square feet (as further described
below under Contractual Obligations in Item 7
and Note 18 of the accompanying consolidated financial
statements under Item 8). Our headquarters site supports
corporate general administration, sales and marketing, research
and development, global services, and operations.
We own approximately 0.6 million square feet of facilities
in Research Triangle Park (RTP), North Carolina, of which we
occupy approximately 0.5 million square feet. This site
supports sales and marketing, research and development, and
global services.
We lease and occupy approximately 0.3 million square feet
of facilities in Bangalore, India. We also own fifteen acres of
land in Bangalore, India to be developed for future use. This
site supports sales and marketing, research and development, and
global services.
32
We lease other sales offices and research and development
facilities throughout the U.S. and internationally. We
expect that our existing facilities and those being developed
worldwide are suitable and adequate for our requirements over at
least the next two years and that additional space will be
available as needed.
See additional discussion regarding properties in Note 18
of the accompanying consolidated financial statements under
Item 8. and Item 7. Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
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Item 3.
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Legal
Proceedings
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On September 5, 2007, we filed a patent infringement
lawsuit in the Eastern District of Texas seeking compensatory
damages and a permanent injunction against Sun Microsystems. On
October 25, 2007, Sun Microsystems filed a counter
claim against us in the Eastern District of Texas seeking
compensatory damages and a permanent injunction. On
October 29, 2007, Sun filed a second lawsuit against us in
the Northern District of California asserting additional patents
against us. The Texas court granted a joint motion to transfer
the Texas lawsuit to the Northern District of California on
November 26, 2007. On March 26, 2008, Sun filed a
third lawsuit in federal court that extends the patent
infringement charges to storage management technology we
acquired in January 2008. In January 2010, Oracle acquired Sun.
The three lawsuits are currently in the discovery and motion
phase and no trial dates have been set, so we are unable at this
time to determine the likely outcome of these various patent
litigations. Since we are unable to reasonably estimate the
amount or range of any potential settlement, no accrual has been
recorded as of April 30, 2010.
33
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Our common stock commenced trading on the NASDAQ Global Select
Market (and its predecessor, the Nasdaq National Market) on
November 21, 1995, and is traded under the symbol
NTAP. As of June 4, 2010 there were 866 holders
of record of the common stock. The closing price for our common
stock on June 4, 2010 was $37.88. The following table sets
forth for the periods indicated the high and low closing sale
prices for our common stock as reported on the NASDAQ Global
Select Market.
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Fiscal 2010
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Fiscal 2009
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High
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Low
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High
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Low
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First Quarter
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$
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23.56
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$
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16.93
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$
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27.31
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$
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21.66
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Second Quarter
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29.50
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21.55
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26.42
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12.20
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Third Quarter
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34.54
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27.60
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15.32
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10.39
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Fourth Quarter
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36.17
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29.83
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18.84
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12.52
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The following graph shows a five-year comparison of cumulative
total return on our common stock, the NASDAQ Composite Index and
the S&P 500 Information Technology Index from
April 30, 2005 through April 30, 2010. The past
performance of our common stock is no indication of future
performance.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among NetApp, Inc., The NASDAQ Composite Index
And The S&P Information Technology Index
* $100 invested on
4/30/05 in
stock or index, including reinvestment of dividends.
Fiscal year ending April 30.
Copyright©
2010 S&P, a division of The McGraw-Hill Companies Inc. All
rights reserved.
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4/05
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4/06
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4/07
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4/08
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4/09
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4/10
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NetApp, Inc.
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100.00
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|
|
|
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139.00
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|
|
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139.52
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|
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90.74
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|
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68.62
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|
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130.00
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|
NASDAQ Composite
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100.00
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|
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|
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121.25
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134.58
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127.40
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89.92
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129.99
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S&P Information Technology
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100.00
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116.84
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128.45
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129.74
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95.11
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136.47
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34
We believe that a number of factors may cause the market price
of our common stock to fluctuate significantly. See
Item 1A. Business Risk Factors.
Dividend
Policy
We have never paid cash dividends on our capital stock. We
currently anticipate retaining all available funds, if any, to
finance internal growth and product development as well as other
possible management initiatives, including stock repurchases and
acquisitions. Payment of dividends in the future will depend
upon our earnings and financial condition and such other factors
as the Board of Directors may consider or deem appropriate at
the time.
Securities
Authorized for Issuance under Equity Compensation
Plans
Information regarding securities authorized for issuance under
equity compensation plans is incorporated by reference to our
Proxy Statement for the 2010 Annual Meeting of Stockholders.
Unregistered
Securities Sold in Fiscal 2010
We did not sell any unregistered securities during fiscal 2010.
Issuer
Purchases of Equity Securities
On May 13, 2003, we announced that our Board of Directors
had authorized a stock repurchase program. As of April 30,
2010, our Board of Directors had authorized the repurchase of up
to $4,023.6 million of common stock under this program. We
did not repurchase any common stock during the three month
period ended April 30, 2010. As of April 30, 2010, we
had repurchased 104.3 million shares of our common stock at
a weighted-average price of $28.06 per share for an aggregate
purchase price of $2,927.4 million since inception of the
stock repurchase program, and the remaining authorized amount
for stock repurchases under this program was
$1,096.3 million with no termination date.
35
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Item 6.
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Selected
Financial Data
|
The following selected consolidated financial data set forth
below was derived from our historical audited consolidated
financial statements and should be read in conjunction with,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Financial
Statements and Supplementary Data, and other financial
data included elsewhere in this Annual Report on
Form 10-K.
Our historical results of operations are not necessarily
indicative of results of operations to be expected for any
future period.
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Fiscal Year Ended
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April 30,
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April 24,
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April 25,
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April 27,
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April 28,
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2010
|
|
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2009
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|
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2008
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|
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2007
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|
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2006
|
|
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(In millions, except per-share amounts)
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Net revenues(1)
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$
|
3,931.4
|
|
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$
|
3,406.4
|
|
|
$
|
3,303.2
|
|
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$
|
2,804.3
|
|
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$
|
2,066.5
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|
Total cost of revenue
|
|
|
1,412.2
|
|
|
|
1,416.5
|
|
|
|
1,289.8
|
|
|
|
1,099.8
|
|
|
|
810.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Gross profit
|
|
|
2,519.2
|
|
|
|
1,989.9
|
|
|
|
2,013.4
|
|
|
|
1,704.5
|
|
|
|
1,256.5
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Total operating expenses
|
|
|
2,030.8
|
|
|
|
1,942.7
|
|
|
|
1,699.8
|
|
|
|
1,403.3
|
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|
|
948.2
|
|
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Income from operations
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|
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488.4
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|
|
|
47.2
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|
|
|
313.6
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|
|
|
301.2
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|
|
|
308.3
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|
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|
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|
|
|
|
|
|
|
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|
|
|
|
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Net income(1)
|
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$
|
400.4
|
|
|
$
|
64.6
|
|
|
$
|
309.7
|
|
|
$
|
297.7
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|
|
$
|
266.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net income per share, basic
|
|
$
|
1.18
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|
|
$
|
0.20
|
|
|
$
|
0.88
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|
|
$
|
0.80
|
|
|
$
|
0.72
|
|
|
|
|
|
|
|
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|
|
|
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|
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|
|
|
|
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|
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Net income per share, diluted
|
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$
|
1.13
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|
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$
|
0.19
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|
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$
|
0.86
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|
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$
|
0.77
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$
|
0.69
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|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
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Shares used in basic net income per share calculation
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|
|
339.6
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|
|
|
330.3
|
|
|
|
351.7
|
|
|
|
371.2
|
|
|
|
371.1
|
|
|
|
|
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|
|
|
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|
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|
|
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Shares used in diluted net income per share calculation
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|
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353.2
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|
|
|
334.6
|
|
|
|
361.1
|
|
|
|
388.5
|
|
|
|
388.4
|
|
|
|
|
|
|
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|
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|
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|
April 30,
|
|
|
April 24,
|
|
|
April 25,
|
|
|
April 27,
|
|
|
April 28,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
3,724.0
|
|
|
$
|
2,604.3
|
|
|
$
|
1,164.4
|
|
|
$
|
1,308.8
|
|
|
$
|
1,322.9
|
|
Working capital
|
|
|
2,626.1
|
|
|
|
1,759.5
|
|
|
|
653.3
|
|
|
|
1,053.3
|
|
|
|
1,116.0
|
|
Total assets
|
|
|
6,494.4
|
|
|
|
5,384.4
|
|
|
|
4,071.0
|
|
|
|
3,658.5
|
|
|
|
3,261.0
|
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Short-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85.1
|
|
|
|
166.2
|
|
Long-term debt and other
|
|
|
1,273.4
|
|
|
|
1,219.3
|
|
|
|
318.7
|
|
|
|
9.5
|
|
|
|
138.2
|
|
Total stockholders equity
|
|
|
2,530.5
|
|
|
|
1,784.2
|
|
|
|
1,700.3
|
|
|
|
1,989.0
|
|
|
|
1,923.5
|
|
|
|
|
(1) |
|
Net revenues and net income for fiscal 2009 included a GSA
settlement of $128.7 million. Net income for fiscal 2006
included an income tax provision of $22.5 million related
to the American Jobs Creation Act and the repatriation of
foreign subsidiary earnings back to the United States of America. |
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|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion of our financial condition and results
of operations should be read together with the financial
statements and the related notes set forth under
Item 8. Financial Statements and Supplementary
Data. The following discussion also contains trend
information and other forward looking statements that involve a
number of risks and uncertainties. The Risk Factors set forth in
Item 1. Business are hereby incorporated into
the discussion by reference.
36
Overview
Revenues for fiscal 2010 were $3.9 billion, up
$0.5 billion, or 15%, from fiscal 2009. Improved revenue
performance in fiscal 2010 was the result of improvements in
product, software entitlements and maintenance and service
revenues. Revenues in fiscal 2009 were negatively impacted by a
$128.7 million settlement with the General Services
Administration (GSA). The dispute regarded our discounting
practices and compliance with the price reduction provisions of
GSA contracts between August 1997 and February 2005.
Gross profit margins increased during fiscal 2010 due largely to
reductions in product materials cost, partially offset by a
decrease in the overall average selling prices of our products,
as well as an increase in our SEM and services revenues mix
relative to product revenues. In addition, our gross profit
margin in fiscal 2009 was negatively impacted by the GSA
settlement.
During fiscal 2010, sales and marketing, research and
development, and general and administrative expenses totaled
$2.1 billion, up 10% from fiscal 2009 and reflected the
impact of an increase in incentive compensation and commissions
expense related to our stronger sales and operating profit
performance, as well as having 53 weeks in fiscal 2010
compared to 52 weeks in fiscal 2009.
During fiscal 2010, 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.
Critical
Accounting Estimates and Policies
Our discussion and analysis of financial condition and results
of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of such statements requires us to make
estimates and assumptions that affect the reported amounts of
revenues and expenses during the reporting period and the
reported amounts of assets and liabilities as of the date of the
financial statements. Our estimates are based on historical
experience and other assumptions that we consider to be
appropriate in the circumstances. However, actual future results
may vary from our estimates.
We believe that the following accounting policies are
significantly affected by critical accounting estimates and that
they are both highly important to the portrayal of our financial
condition and results and require difficult management judgments
and assumptions about matters that are inherently uncertain.
Note 2 of the accompanying consolidated financial
statements describes the significant accounting policies used in
the preparation of the consolidated financial statements.
Certain of these significant accounting policies are considered
to be critical accounting policies.
We believe the accounting policies described below are the ones
that most frequently require us to make estimates and judgments
and therefore are critical to the understanding of our results
of operations.
Revenue
Recognition, Reserves and Allowances
We apply the provisions of the accounting guidance for software
revenue recognition to our product sales, both hardware and
software, because our software is essential to the performance
of our hardware. We recognize revenue when:
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|
|
Persuasive evidence of an arrangement
exists: It is our customary practice to have a
purchase order
and/or
contract prior to recognizing revenue on an arrangement from our
end users, customers, value-added resellers, or distributors.
|
|
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|
Delivery has occurred: Our product is
physically delivered to our customers, generally with standard
transfer terms such as FOB origin. We typically do not allow for
restocking rights with any of our value-added resellers or
distributors. Products shipped with acceptance criteria or
return rights are not recognized as revenue until all criteria
are achieved. If undelivered products or services exist that are
essential to the functionality of the delivered product in an
arrangement, delivery is not considered to have occurred.
|
37
|
|
|
|
|
The fee is fixed or determinable: Arrangements
with payment terms extending beyond our standard terms,
conditions and practices are not considered to be fixed or
determinable. Revenue from such arrangements is recognized at
the earlier of customer payment or when the fees become due and
payable. We typically do not allow for price-protection rights
with any of our value-added resellers or distributors.
|
|
|
|
Collection is probable: If there is
considerable doubt surrounding the credit worthiness of a
customer at the outset of an arrangement, the associated revenue
is deferred and recognized upon cash receipt.
|
Our multiple element arrangements include our systems and one or
more of the following undelivered software-related elements:
software entitlements and maintenance, premium hardware
maintenance and storage review services. Our software
entitlements and maintenance entitle our customers to receive
unspecified product upgrades and enhancements on a
when-and-if-available
basis, bug fixes, and patch releases. Premium hardware
maintenance services include contracts for technical support and
minimum response times. Revenues from software entitlements and
maintenance, premium hardware maintenance services and storage
review services are recognized ratably over the contractual
term, generally from one to three years. We also offer extended
service contracts (which extend our standard parts warranty and
may include premium hardware maintenance) at the end of the
warranty term; revenues from these contracts are recognized
ratably over the contract term. We typically sell professional
services separately from any of our other revenue elements,
either on a time and materials basis or for fixed price standard
projects; we recognize revenue for these services as they are
performed. Revenue from hardware installation services is
recognized in the period the services are delivered. For
arrangements with multiple elements, we recognize as revenue the
difference between the total arrangement price and the greater
of fair value or stated price for any undelivered elements
(the residual method).
For our undelivered software-related elements, we determine fair
value of these undelivered elements based on vendor-specific
objective evidence (VSOE) of fair value, which for
us consists of the prices charged when these services are sold
separately. To determine the fair value of these elements, we
analyze both the selling prices when elements are sold
separately as well as the concentrations of those prices. We
believe those concentrations have been sufficient to enable us
to establish VSOE of fair value for the undelivered elements. If
VSOE cannot be obtained to establish fair value of the
undelivered elements, it is required that revenue from the
entire arrangement be initially deferred and recognized ratably
over the period these elements are delivered.
For purposes of presentation in the statement of operations,
once fair value has been determined for our undelivered bundled
elements, we allocate revenue first to software entitlements and
maintenance, based on VSOE of its fair value, with the remainder
allocated to other service revenues.
We record reductions to revenue for estimated sales returns at
the time of shipment. Sales returns are estimated based on
historical sales returns, current trends, and our expectations
regarding future experience. We monitor and analyze the accuracy
of sales returns estimates by reviewing actual returns and
adjust them for future expectations to determine the adequacy of
our current and future reserve needs. Our reserve levels have
been sufficient to cover actual returns and have not required
material changes in subsequent periods. While we currently have
no expectations for significant changes to these reserves, if
actual future returns and allowances differ from past
experience, additional allowances may be required.
We also maintain a separate allowance for doubtful accounts for
estimated losses based on our assessment of the collectibility
of specific customer accounts and the aging of the accounts
receivable. We analyze accounts receivable and historical bad
debts, customer concentrations, customer solvency, current
economic and geographic trends, and changes in customer payment
terms and practices when evaluating the adequacy of our current
and future allowance. In circumstances where we are aware of a
specific customers inability to meet its financial
obligations to us, a specific allowance for bad debt is
estimated and recorded, which reduces the recognized receivable
to the estimated amount we believe will ultimately be collected.
We monitor and analyze the accuracy of our allowance for
doubtful accounts estimate by reviewing past collectibility and
adjusting it for future expectations to determine the adequacy
of our current and future allowance. Our reserve levels have
generally been sufficient to cover credit losses. Our allowance
for doubtful accounts as of April 30, 2010 was
$1.6 million, compared to $3.1 million as of
April 24, 2009. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required.
38
Inventory
Valuation and Purchase Order Accruals
Inventories are stated at the lower of cost or market (which
approximates actual cost on a
first-in,
first-out basis). We perform an excess and obsolete analysis of
our inventory based upon assumptions about future demand and
market conditions. We adjust the inventory value based on
estimated excess and obsolete inventories determined primarily
by future demand forecasts. Although we strive for accuracy in
our forecasts of future product demand, any significant
unanticipated changes in demand or technological developments
could have a significant impact on the value of our inventory
commitments and on our reported results. If actual market
conditions are less favorable than those projected, additional
write-downs and other charges against earnings may be required.
If actual market conditions are more favorable, we may realize
higher gross profits in the period when the written-down
inventory is sold. Historically, our inventory reserves have
been sufficient to cover any excess and obsolete exposure and
have not required material adjustments in subsequent periods.
In the normal course of business we make commitments to our
third party contract manufacturers to manage 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.
We are subject to a variety of federal, state, local, and
foreign environmental regulations relating to the use, storage,
discharge, and disposal of hazardous chemicals used in the
manufacture of our products, which may require design changes or
recycling of products we manufacture. We will continue to
monitor our compliance with these regulations, which may require
us to incur higher costs, and adversely impact our operating
results.
Valuation
of Goodwill and Intangibles
Purchased intangible assets are amortized over their useful
lives unless these lives are determined to be indefinite.
In-process research and development is capitalized at fair value
and classified as indefinite-lived assets until completion or
abandonment and is subject to periodic review for impairment.
Accordingly, the allocation of acquisition cost to identifiable
intangible assets has a significant impact on our future
operating results. The allocation process requires extensive use
of estimates and assumptions, including estimates of future cash
flows expected to be generated by the acquired assets. Should
conditions be different than managements assessment,
material write-downs of the fair value of intangible assets may
be required. We periodically review the estimated remaining
useful lives of our intangible assets. A reduction in the
estimate of remaining useful life could result in accelerated
amortization expense or a write-down in future periods. As such,
any future write-downs of these assets would adversely affect
our operating results.
We perform an annual review of the valuation of goodwill in the
fourth quarter of each fiscal year, or more often if indicators
of impairment exist. Triggering events for impairment reviews
may be indicators such as adverse industry or economic trends,
restructuring actions, lower projections of profitability, or a
sustained decline in our market capitalization. Evaluations of
possible impairment and, if applicable, adjustments to carrying
values require us to estimate, among other factors, future cash
flows, useful lives, and fair market values of our reporting
units and assets. When we conduct our evaluation of goodwill,
the fair value of goodwill is assessed using valuation
techniques that require significant management judgment. Should
conditions be different from managements last assessment,
significant write-downs of goodwill may be required, which would
adversely affect our operating results. In fiscal 2010 we
performed such evaluation and found no impairment of goodwill.
Restructuring
Reserves
We recognize a liability for restructuring costs when the
liability is incurred. The restructuring accruals are based upon
management estimates at the time they are recorded. These
estimates can change depending upon changes in facts and
circumstances subsequent to the date the original liability was
recorded. The main components of our restructuring charges are
workforce reduction, intangibles and fixed assets write-offs and
non-cancelable lease costs related to excess facilities.
Severance-related charges are accrued when it is determined that
a liability has been incurred, which is generally when
individuals have been notified of their termination dates and
expected severance payments. We record contract cancellation
costs when contracts are terminated. The decision to eliminate
39
excess facilities results in charges for lease termination fees
and future commitments to pay lease charges, net of estimated
future sublease income. We recognize charges for elimination of
excess facilities when we have vacated the premises. Intangible
asset write-offs consist of impairment of acquired intangible
assets related to our decision to cease the development and
availability of specific products. Fixed assets write-offs
primarily consist of equipment, software and furniture
associated with excess facilities being eliminated, and are
based on an estimate of the amounts and timing of future cash
flows related to the expected future remaining use and ultimate
sale or disposal of the equipment and furniture.
Our estimates involve a number of risks and uncertainties, some
of which are beyond our control, including future real estate
market conditions and our ability to successfully enter into
subleases or lease termination agreements with terms as
favorable as those assumed when arriving at our estimates. We
regularly evaluate a number of factors to determine the
appropriateness and reasonableness of our restructuring
accruals, including the various assumptions noted above. If
actual results differ significantly from our estimates, we may
be required to adjust our restructuring accruals in the future.
Product
Warranties
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.
Stock-Based
Compensation
We account for stock-based compensation using the Black-Scholes
option pricing model to estimate the fair value of each option
grant on the date of grant. Our option pricing model requires
the input of highly subjective assumptions, including the
expected stock price volatility, expected term, and forfeiture
rate. Any changes in these highly subjective assumptions
significantly impact stock-based compensation expense.
Loss
Contingencies
We are subject to the possibility of various loss contingencies
arising in the course of business. We consider the likelihood of
the loss or impairment of an asset or the incurrence of a
liability as well as our ability to reasonably estimate the
amount of loss in determining loss contingencies. An estimated
loss contingency is accrued when it is probable that a liability
has been incurred or an asset has been impaired and the amount
of loss can be reasonably estimated. We regularly evaluate
current information available to us to determine whether such
accruals should be adjusted.
Fair
Value Measurements and Impairments
All of our
available-for-sale
investments and nonmarketable securities are subject to periodic
impairment review. Investments are considered to be impaired
when a decline in fair value is judged to be
other-than-temporary.
This determination requires significant judgment. For publicly
traded investments, impairment is determined based upon the
specific facts and circumstances present at the time, including
factors such as current economic and market conditions, the
credit rating of the securitys issuer, the length of time
an investments fair value has been below our carrying
value, and our ability and intent to hold investments to
maturity or for a period of time sufficient to allow for any
anticipated recovery in fair value. If an investments
decline in fair value, caused by factors other than changes in
interest rates, is deemed to be
other-than-temporary,
we reduce its carrying value to its estimated fair value, as
determined based on quoted market prices, liquidation values or
other metrics. For investments in publicly held companies, we
recognize an impairment charge when the decline in the fair
value of our investment is below its cost basis and is judged to
be
other-than-temporary.
The ultimate value realized on these investments is subject to
market price volatility until they are sold.
40
Pursuant to the accounting guidance for fair value measurement
and its subsequent updates, fair value is defined as the price
that would be received to sell an asset or paid to transfer a
liability (i.e., the exit price) in an orderly
transaction between market participants at the measurement date.
The accounting guidance establishes a hierarchy for inputs used
in measuring fair value that minimizes the use of unobservable
inputs by requiring the use of observable market data when
available. Observable inputs are inputs that market participants
would use in pricing the asset or liability based on active
market data. Unobservable inputs are inputs that reflect the
assumptions market participants would use in pricing the asset
or liability based on the best information available in the
circumstances.
The fair value hierarchy is broken down into the three input
levels summarized below:
|
|
|
|
|
Level 1 Valuations are based on quoted prices
in active markets for identical assets or liabilities, and
readily accessible by us at the reporting date. Examples of
assets and liabilities utilizing Level 1 inputs are certain
money market funds, U.S. Treasuries and trading securities
with quoted prices on active markets.
|
|
|
|
Level 2 Valuations based on inputs other than
the quoted prices in active markets that are observable either
directly or indirectly in active markets. Examples of assets and
liabilities utilizing Level 2 inputs are
U.S. government agency bonds, corporate bonds, commercial
paper, certificates of deposit and
over-the-counter
derivatives.
|
|
|
|
Level 3 Valuations based on unobservable inputs
in which there is little or no market data, which require us to
develop our own assumptions. Examples of assets and liabilities
utilizing Level 3 inputs are cost method investments,
auction rate securities (ARS) and the Primary Fund.
|
We measure our
available-for-sale
securities at fair value on a recurring basis.
Available-for-sale
securities include U.S. Treasury securities,
U.S. government agency bonds, corporate bonds, commercial
paper, ARSs, money market funds and certificates of deposit.
Where possible, we utilize quoted market prices to measure and
such items are classified as Level 1 in the hierarchy. When
quoted market prices for identical assets are unavailable,
varying valuation techniques are used. Such assets are
classified as Level 2 or Level 3 in the hierarchy. We
classify items in Level 2 if investments are valued using
observable inputs to quoted market prices, benchmark yields,
reported trades, broker/dealer quotes or alternative pricing
sources with reasonable levels of price transparency. We
classify items in Level 3 if investments are valued using a
pricing model, based on unobservable inputs in the market or
that require us to develop our own assumptions. Our assessment
of the significance of a particular input to the fair value
measurement in its entirety requires judgment and considers
factors specific to the investment.
We are also exposed to market risk relating to our
available-for-sale
investments due to uncertainties in the credit and capital
markets. The fair value of our investments may change
significantly due to events and conditions in the credit and
capital markets. These securities/issuers could be subject to
review for possible downgrade. Any downgrade in these credit
ratings may result in an additional decline in the estimated
fair value of our investments. We monitor and evaluate the
accounting for our investment portfolio on a quarterly basis for
additional
other-than-temporary
impairment charges.
We actively review current investment ratings, company specific
events, and general economic conditions in managing our
investments and determining whether there is a significant
decline in fair value that is
other-than-temporary.
As of April 30, 2010 and April 24, 2009, our
short-term and long-term investments in marketable securities
have been classified as
available-for-sale
and are carried at fair value.
Available-for-sale
investments with original maturities of greater than three
months at the date of purchases are classified as short-term
investments as these investments generally consist of marketable
securities that are intended to be available to meet current
cash requirements. Currently, all marketable securities held by
us are classified as
available-for-sale
and our entire ARS portfolio is classified as long-term
investments.
Our ARS portfolio consists of securities with long-term nominal
maturities which, in accordance with investment policy
guidelines, had credit ratings of AAA and Aaa at the time of
purchase. During fiscal 2008, we reclassified all of our
investments in ARS from short-term investments to long-term
investments as we believed our ability to liquidate these
investments in the next twelve months was uncertain. Based on an
analysis of the fair value and marketability of these
investments, we recorded temporary impairment charges of
approximately $3.3 million during fiscal 2010, partially
offset by $0.7 million in unrealized gains within other
comprehensive income (loss).
41
During fiscal 2009, we recorded temporary impairment charges of
approximately $7.0 million, partially offset by
$0.3 million in unrealized gains within other comprehensive
income (loss). In addition, during fiscal 2009, we recorded an
other-than-temporary
impairment loss of $2.1 million due to a significant
decline in the estimated fair values of certain of our ARS
related to credit quality risk and rating downgrades.
The valuation models used to estimate the fair value of our ARS
included numerous assumptions such as assessments of the
underlying structure of each security, expected cash flows,
discount rates, credit ratings, workout periods, and overall
capital market liquidity. These assumptions, assessments and the
interpretations of relevant market data are subject to
uncertainties, are difficult to predict and require significant
judgment. The use of different assumptions, or applying
different judgments to inherently subjective matters and changes
in future market conditions could result in significantly
different estimates of fair value. There is no assurance as to
when the market for auction rate securities will stabilize. The
fair value of our ARS could change significantly based on market
conditions and continued uncertainties in the credit markets. If
these uncertainties continue or if these securities experience
credit rating downgrades, we may incur additional temporary
impairment related to our auction rate securities portfolio. We
will continue to monitor the fair value of our ARS and relevant
market conditions and will record additional temporary or
other-than-temporary
impairments if future circumstances warrant such charges.
As a result of the bankruptcy filing of Lehman Brothers, which
occurred during fiscal 2009, we recorded an
other-than-temporary
impairment charge of $11.8 million on our corporate bonds
related to investments in Lehman Brothers securities and
approximately $9.3 million on our investments in the
Primary Fund that held Lehman Brothers investments. During
fiscal 2010, we sold our remaining holdings of Lehman Brothers
bonds and the Primary Fund made multiple distributions of its
assets to its investors, and as of April 30, 2010, we
recovered our recorded investment, with the exception of
$0.2 million, for which we recognized an additional loss.
As of April 30, 2010, we no longer had any direct or
indirect investments related to Lehman Brothers and have
recognized all related losses in our statement of operations.
During fiscal 2010, 2009 and 2008, recognized gains and losses
on
available-for-sale
investments were not material. Management determines the
appropriate classification of investments at the time of
purchase and reevaluates the classification at each reporting
date. The fair value of our marketable securities, including
those included in cash equivalents and long-term investments,
was $3,605.2 million and $2,596.6 million as of
April 30, 2010 and April 24, 2009, respectively.
To determine the fair value of nonmarketable investments, we use
the most recent information available to us, including new
financings or estimates of current fair value, as well as
through traditional valuation techniques. It is our policy to
review the fair value of these investments on a regular basis to
determine whether the investments in these companies are
other-than-temporarily
impaired. In the case of privately-held companies, this
evaluation is based on information that we request from these
companies. If we believe the carrying value of an investment is
in excess of fair value, and this difference is
other-than-temporary,
it is our policy to write down the investment to fair value. The
carrying value of our investments in privately-held companies
was $1.4 million and $3.9 million as of April 30,
2010 and April 24, 2009, respectively. During fiscal 2010
and 2009, we recorded $3.4 million of gains and
$6.3 million of net impairment charges in our consolidated
statements of operations, respectively, for our investments in
privately-held companies, and adjusted the carrying amount of
those investments to fair value, as we deemed the decline in the
value of these assets to be
other-than-temporary.
Income
Taxes
The determination of our tax provision is subject to judgments
and estimates due to the complexity of the tax law that we are
subject to in several tax jurisdictions. Earnings derived from
our international business are generally taxed at rates that are
lower than U.S. rates, resulting in a lower effective tax
rate than the U.S. statutory tax rate of 35.0%. The ability
to maintain our current effective tax rate is contingent on
existing tax laws in both the United States and the
respective countries in which our international subsidiaries are
located. Future changes in domestic or international tax laws
could affect the continued realization of the tax benefits we
are currently receiving. In addition, a decrease in the
percentage of our total earnings from international business or
a change in the mix of international business among particular
tax jurisdictions could increase our overall effective tax rate.
42
We account for income taxes by recognizing deferred tax assets
and liabilities for the effect of temporary differences between
the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
We reduce deferred tax assets by a valuation allowance if it is
more likely than not that some or all of the deferred tax asset
will not be realized. Tax attributes related to the exercise of
employee stock options are not realized until they result in a
reduction of taxes payable. We do not include unrealized stock
option attributes as components of our gross deferred tax assets
and corresponding valuation allowance disclosures.
We have provided a valuation allowance of $28.3 million as
of April 30, 2010, compared to $28.0 million as of
April 24, 2009 and $28.6 million as of April 25,
2008, on certain of our deferred tax assets. The changes in
valuation allowance in fiscal 2010 and 2009 were primarily
related to changes in the blended state tax rates. The tax
effected amounts of gross unrealized net operating loss and
business tax credit carryforwards, net of their corresponding
valuation allowance at April 30, 2010 are
$358.6 million.
We recognize tax liabilities for uncertain tax positions by
applying a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. We
recognize the tax liability for uncertain income tax positions
on income tax returns based on a two-step process. The first
step is to determine whether it is more likely than not that
each income tax position would be sustained upon audit. The
second step is to estimate and measure the tax benefit as the
amount that has a greater than 50% likelihood of being realized
upon ultimate settlement with the tax authority. Estimating
these amounts requires us to determine the probability of
various possible outcomes. We evaluate these uncertain tax
positions on a quarterly basis. This evaluation is based on the
consideration of several factors, including changes in facts or
circumstances, changes in applicable tax law, settlement of
issues under audit and new exposures. If we later determine that
our exposure is lower or that the liability is not sufficient to
cover our revised expectations, we adjust the liability and
effect a related change in our tax provision during the period
in which we make such determination.
New
Accounting Standards
See Note 4 of the accompanying consolidated financial
statements for a full description of new accounting
pronouncements, including the respective expected dates of
adoption and effects on results of operations and financial
condition.
43
Results
of Operations
The following table sets forth certain Consolidated Statements
of Operations data as a percentage of net revenues for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 30,
|
|
|
April 24,
|
|
|
April 25,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
60.6
|
%
|
|
|
63.2
|
%
|
|
|
67.9
|
%
|
Software entitlements and maintenance
|
|
|
17.3
|
|
|
|
18.2
|
|
|
|
14.7
|
|
Service
|
|
|
22.1
|
|
|
|
22.4
|
|
|
|
17.4
|
|
GSA settlement
|
|
|
|
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
|
|
24.8
|
|
|
|
29.6
|
|
|
|
28.4
|
|
Cost of software entitlements and maintenance
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.3
|
|
Cost of service
|
|
|
10.8
|
|
|
|
11.7
|
|
|
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
64.1
|
|
|
|
58.4
|
|
|
|
60.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
32.9
|
|
|
|
34.8
|
|
|
|
32.6
|
|
Research and development
|
|
|
13.6
|
|
|
|
14.6
|
|
|
|
13.7
|
|
General and administrative
|
|
|
6.1
|
|
|
|
6.0
|
|
|
|
5.2
|
|
Restructuring and other charges
|
|
|
0.1
|
|
|
|
1.6
|
|
|
|
|
|
Acquisition related income, net
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
51.7
|
|
|
|
57.0
|
|
|
|
51.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
12.4
|
|
|
|
1.4
|
|
|
|
9.4
|
|
Other income (expenses), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
0.9
|
|
|
|
1.7
|
|
|
|
2.0
|
|
Interest expense
|
|
|
(1.9
|
)
|
|
|
(1.9
|
)
|
|
|
(0.2
|
)
|
Other income (expenses), net
|
|
|
|
|
|
|
(1.0
|
)
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses), net
|
|
|
(1.0
|
)
|
|
|
(1.2
|
)
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
11.4
|
|
|
|
0.2
|
|
|
|
11.6
|
|
Provision for (benefit from) income taxes
|
|
|
1.2
|
|
|
|
(1.7
|
)
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
10.2
|
%
|
|
|
1.9
|
%
|
|
|
9.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discussion
and Analysis of Results of Operations
Net Revenues Our net revenues for fiscal
2010, 2009 and 2008 were as follows (in millions, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
April 30, 2010
|
|
April 24, 2009
|
|
% Change
|
|
April 25, 2008
|
|
% Change
|
|
Net revenues
|
|
$
|
3,931.4
|
|
|
$
|
3,406.4
|
|
|
|
15
|
%
|
|
$
|
3,303.2
|
|
|
|
3
|
%
|
Net revenues increased by $525.0 million, or 15%, in fiscal
2010 compared to fiscal 2009 and by $103.2 million, or 3%
in fiscal 2009 compared to fiscal 2008. The increase in our net
revenues for fiscal 2010 was primarily related to an increase in
product revenues, while the increase in fiscal 2009 was due to
increases in software entitlements and
44
maintenance (SEM) and services revenues, partially offset by
decreases in product revenues. Additionally, net revenues for
fiscal 2009 were negatively impacted by the $128.7 million
GSA settlement.
Sales through our indirect channels represented 69%, 69% and 63%
of net revenues for fiscal 2010, 2009 and 2008, respectively.
The indirect channel mix for 2009 would have been 3% higher if
not for the impact of the GSA settlement.
The following table sets forth sales to customers, who are
distributors, who accounted for 10% or more of revenues (in
millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
April 30,
|
|
% of
|
|
April 24,
|
|
% of
|
|
April 25,
|
|
% of
|
|
|
2010
|
|
Revenues
|
|
2009
|
|
Revenues
|
|
2008
|
|
Revenues
|
|
Arrow
|
|
$
|
550.7
|
|
|
|
14
|
%
|
|
$
|
360.3
|
|
|
|
11
|
%
|
|
|
< 10
|
%
|
|
|
< 10
|
%
|
Avnet
|
|
|
444.0
|
|
|
|
11
|
%
|
|
|
356.4
|
|
|
|
10
|
%
|
|
|
< 10
|
%
|
|
|
< 10
|
%
|
Product
Revenues (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
April 30, 2010
|
|
April 24, 2009
|
|
% Change
|
|
April 25, 2008
|
|
% Change
|
|
Product revenues
|
|
$
|
2,381.1
|
|
|
$
|
2,152.7
|
|
|
|
11
|
%
|
|
$
|
2,242.5
|
|
|
|
(4
|
)%
|
Product revenues increased by $228.4 million, or 11%, in
fiscal 2010 compared to fiscal 2009, and decreased by
$89.8 million, or 4% in fiscal 2009 compared to fiscal
2008. Our configured systems comprise bundled hardware and
software products. Configured systems unit volume increased by
19% in fiscal 2010 compared to fiscal 2009, with the largest
increase in low-end systems, and increased by 14% in fiscal 2009
compared to fiscal 2008, reflecting an increase in low-end
systems, partially offset by decreases in mid-range and high-end
systems.
During fiscal 2010, high-end, midrange and low-end systems
generated approximately 23%, 56% and 21% of configured systems
revenues, respectively, compared to approximately 24%, 55% and
21%, respectively in fiscal 2009, and approximately 25%, 59% and
16%, respectively, in fiscal 2008. Overall average selling
prices (ASPs) declined in fiscal 2010 compared to fiscal 2009
due primarily to a shift in mix towards low-end systems, as well
as lower ASPs per unit in midrange and low-end systems. ASPs
declined in fiscal 2009 compared to fiscal 2008, due primarily
to lower ASPs in all systems ranges and a shift in mix towards
low-end systems.
In addition, our net add-on hardware, software and other product
revenues accounted for an $88.5 million increase in fiscal
2010 compared to fiscal 2009 and a $102.4 million increase
in fiscal 2009 compared to fiscal 2008 due to customers
increasing the capacity of their storage systems.
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 revenues, cost of revenues, and gross profit performance.
Price changes, unit volumes, customer mix and product
configuration can also impact revenues, cost of revenues and
gross profit 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 profit
margins on our disk drives. While our sales price per terabyte
continues to decline, improved system performance, increased
capacity and software to manage this increased capacity have an
offsetting impact on product revenues.
Software
Entitlements and Maintenance Revenues (in millions, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
April 30, 2010
|
|
April 24, 2009
|
|
% Change
|
|
April 25, 2008
|
|
% Change
|
|
Software entitlements and maintenance revenues
|
|
$
|
679.8
|
|
|
$
|
618.3
|
|
|
|
10
|
%
|
|
$
|
486.9
|
|
|
|
27
|
%
|
SEM revenues increased by $61.5 million, or 10%, in fiscal
2010 compared to fiscal 2009 and increased by
$131.4 million, or 27% in fiscal 2009 compared to fiscal
2008. These increases were the result of an increase in the
45
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 (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
April 30, 2010
|
|
April 24, 2009
|
|
% Change
|
|
April 25, 2008
|
|
% Change
|
|
Service revenues
|
|
$
|
870.5
|
|
|
$
|
764.1
|
|
|
|
14
|
%
|
|
$
|
573.8
|
|
|
|
33
|
%
|
Service revenues include hardware maintenance, professional
services and educational and training services. Service revenues
increased by $106.4 million, or 14%, in fiscal 2010,
compared to fiscal 2009 and by $190.3 million, or 33% in
fiscal 2009, compared to fiscal 2008.
Service maintenance contract revenues increased 20% in fiscal
2010 compared to fiscal 2009 and increased 35% in fiscal 2009
compared to fiscal 2008, as a result of an increase in the
installed base of service contracts and the timing of
recognition of the related revenue. Professional services and
educational and training services revenues increased 4% for
fiscal 2010, compared to fiscal 2009, and increased 32% in
fiscal 2009, compared to fiscal 2008.
GSA
settlement (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
April 30, 2010
|
|
April 24, 2009
|
|
% Change
|
|
April 25, 2008
|
|
% Change
|
|
GSA settlement
|
|
$
|
|
|
|
$
|
(128.7
|
)
|
|
|
(100
|
)%
|
|
$
|
|
|
|
|
NM
|
|
NM Not meaningful.
During fiscal 2009 we recorded $128.7 million as a
reduction of revenues for the GSA settlement.
Revenues
by Geographic Area (in millions, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 30, 2010
|
|
|
April 24, 2009
|
|
|
% Change
|
|
|
April 25, 2008
|
|
|
% Change
|
|
|
Americas (United States, Canada and Latin America)*
|
|
$
|
2,208.1
|
|
|
$
|
1,805.2
|
|
|
|
22
|
%
|
|
$
|
1,829.4
|
|
|
|
(1
|
)%
|
Europe, Middle East and Africa (EMEA)
|
|
|
1,329.1
|
|
|
|
1,213.3
|
|
|
|
11
|
%
|
|
|
1,083.8
|
|
|
|
12
|
%
|
Asia Pacific and Japan (APAC)
|
|
|
394.2
|
|
|
|
387.9
|
|
|
|
1
|
%
|
|
|
390.0
|
|
|
|
(0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
3,931.4
|
|
|
$
|
3,406.4
|
|
|
|
|
|
|
$
|
3,303.2
|
|
|
|
|
|
|
|
|
* |
|
Sales to the United States accounted for 89%, 90% and 91% of
Americas revenues in fiscal 2010, 2009 and 2008,
respectively. |
Revenues from the Americas geographic area increased by
$402.9 million in fiscal 2010 compared to fiscal 2009, due
to an increase in gross revenues of $531.6 million and the
negative impact in fiscal 2009 of the $128.7 million GSA
settlement. Sales to Germany accounted for 11% of net revenues
in each of fiscal 2010 and 2009, and less than 10% of net
revenues in fiscal 2008. No other single foreign country
accounted for ten percent or more of net revenues in any of the
years presented.
Cost
of Revenues
Our cost of revenues consists of three elements: (1) cost
of product revenues, which includes the costs of manufacturing
and shipping of our storage systems, amortization of purchased
intangible assets, inventory write-downs, and warranty costs;
(2) cost of software maintenance and entitlements, which
includes the costs of providing software entitlements and
maintenance and third party royalty costs, and (3) cost of
service, which reflects costs
46
associated with providing support center activities for
hardware, global support partnership programs, professional
services and educational and training services.
Our gross profits are impacted by a variety of factors including
pricing and discount practices, channel sales mix, revenue mix
and product material costs. Service gross profit 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 profit are adversely affected,
whether by economic uncertainties or for other reasons, our
gross profit could decline.
Cost
of Product Revenues (in millions, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
April 30, 2010
|
|
April 24, 2009
|
|
% Change
|
|
April 25, 2008
|
|
% Change
|
|
Cost of product revenues
|
|
$
|
976.4
|
|
|
$
|
1,007.6
|
|
|
|
(3
|
)%
|
|
$
|
938.4
|
|
|
|
7
|
%
|
Cost of product revenues decreased by $31.2 million, or 3%,
in fiscal 2010 compared to fiscal 2009 as a result of lower
materials costs, warranty costs and demonstration equipment
reserves, partially offset by higher unit volume. Cost of
product revenues increased by $69.2 million, or 7%, in
fiscal 2009 compared to fiscal 2008, primarily due to increased
materials cost as a result of increased unit volume and higher
per unit costs in all products ranges.
The decrease in cost of product revenues in fiscal 2010 compared
to fiscal 2009 reflected a decrease in materials costs of
$9.9 million despite an increase in total units shipped.
Our material costs were favorably impacted in fiscal 2010 by
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 offset by
higher unit volume and higher average per unit materials costs
in our high-end systems. In addition, our cost of product
revenues were favorably impacted in fiscal 2010 compared to
fiscal 2009 as a result of a decrease of $11.3 million in
warranty costs and $8.6 million in reserves for evaluation
equipment due to higher than anticipated sales of such equipment
to customers. Cost of product revenues were negatively impacted
in fiscal 2009 compared to fiscal 2008 as a result of
approximately $9.7 million of incremental inventory
writedowns.
Cost of product revenues represented 41% of product revenue for
2010 compared to 47% for 2009, and 42% in fiscal 2008. The
overall reduction of costs as a percentage of revenues in fiscal
2010 was the result of per unit materials cost reductions
outpacing sales price reductions. The increase in materials
costs as a percentage of revenues in fiscal 2009 reflected
higher per unit materials costs compared to the prior year.
Cost of product revenues increased (decreased) due to the
following:
|
|
|
|
|
|
|
|
|
|
|
Year % Change
|
|
|
Year % Change
|
|
|
|
Fiscal 2009 to
|
|
|
Fiscal 2008 to
|
|
|
|
Fiscal 2010
|
|
|
Fiscal 2009
|
|
|
Materials costs
|
|
|
1
|
%
|
|
|
6
|
%
|
Excess and obsolete inventory
|
|
|
(2
|
)
|
|
|
1
|
|
Warranty
|
|
|
(1
|
)
|
|
|
|
|
Other
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change
|
|
|
(3
|
)%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
Cost
of Software Entitlements and Maintenance Revenues (in millions,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
April 30, 2010
|
|
April 24, 2009
|
|
% Change
|
|
April 25, 2008
|
|
% Change
|
|
Cost of software entitlements and maintenance revenues
|
|
$
|
12.3
|
|
|
$
|
9.2
|
|
|
|
34
|
%
|
|
$
|
8.6
|
|
|
|
7
|
%
|
47
Cost of SEM revenues increased due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year % Change
|
|
|
Year % Change
|
|
|
|
|
|
|
Fiscal 2009 to
|
|
|
Fiscal 2008 to
|
|
|
|
|
|
|
Fiscal 2010
|
|
|
Fiscal 2009
|
|
|
|
|
|
Field service engineering costs
|
|
|
29
|
%
|
|
|
30
|
%
|
|
|
|
|
Royalties
|
|
|
5
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change
|
|
|
34
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of SEM revenues increased by $3.1 million, or 34%, in
fiscal 2010 compared to fiscal 2009 and increased by
$0.6 million, or 7%, in fiscal 2009 compared to fiscal 2008
due to an increase in field service engineering costs. Cost of
SEM revenues represented 2% of SEM revenues for each of the
fiscal 2010, 2009 and 2008, respectively.
Cost
of Service Revenues (in millions, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
April 30, 2010
|
|
April 24, 2009
|
|
% Change
|
|
April 25, 2008
|
|
% Change
|
|
Cost of service revenues
|
|
$
|
423.5
|
|
|
$
|
399.7
|
|
|
|
6
|
%
|
|
$
|
342.8
|
|
|
|
17
|
%
|
Cost of service revenues increased by $23.8 million, or 6%,
in fiscal 2010 compared to fiscal 2009 due to increased
commissions and incentive compensation plan expenses, as well as
an increase in service and support purchased from third parties,
and increased by $56.9 million, or 17%, in fiscal 2009
compared to fiscal 2008 due to increases in professional support
engineer costs, support center activities, and global service
partnership programs. Costs represented 49%, 52% and 60%,
respectively, of service revenues for fiscal 2010, 2009 and
2008. The decrease in service cost of revenues as a percentage
of service revenue was primarily due to 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 employee
incentive compensation plan costs. Compensation costs included
in operating expenses increased approximately
$108.6 million, or 11%, during fiscal 2010 compared to
fiscal 2009, primarily due to (i) a $75.6 million
increase in employee incentive compensation due to stronger
operating profit performance, (ii) a $16.4 million
increase in stock based compensation, and (iii) a
$16.5 million increase in salaries, benefits and other
compensation related costs. In addition, sales and marketing
expenses reflected an increase in commissions expense of
$60.7 million during fiscal 2010, reflecting stronger sales
performance compared to fiscal 2009.
Compensation costs included in operating expenses increased
approximately $111.4 million, or 12%, during fiscal 2009
compared to fiscal 2008, primarily due to (i) an
$113.1 million increase in salaries, benefits and other
compensation related costs, reflecting an increase in average
headcount and (ii) a $7.3 million increase in employee
incentive compensation, partially offset by a $9.0 million
decrease in stock-based compensation expense.
Sales and
Marketing (in millions, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
April 30, 2010
|
|
April 24, 2009
|
|
% Change
|
|
April 25, 2008
|
|
% Change
|
|
Sales and marketing expenses
|
|
$
|
1,293.7
|
|
|
$
|
1,186.1
|
|
|
|
9
|
%
|
|
$
|
1,075.7
|
|
|
|
10
|
%
|
Sales and marketing expense consists primarily of compensation
costs, commissions, allocated facilities and IT costs,
advertising and marketing promotional expense, and travel and
entertainment expense. In addition, during
48
fiscal 2009, we recorded a $9.4 million loss on impairment
of a sales force automation tool. Sales and marketing expenses
increased due to the following:
|
|
|
|
|
|
|
|
|
|
|
Year % Change
|
|
|
Year % Change
|
|
|
|
Fiscal 2009 to
|
|
|
Fiscal 2008 to
|
|
|
|
Fiscal 2010
|
|
|
Fiscal 2009
|
|
|
Salaries
|
|
|
|
%
|
|
|
6
|
%
|
Incentive plan compensation
|
|
|
3
|
|
|
|
|
|
Stock based compensation
|
|
|
1
|
|
|
|
|
|
Other compensation related costs
|
|
|
1
|
|
|
|
|
|
Commissions
|
|
|
5
|
|
|
|
|
|
Advertising and marketing promotional expense
|
|
|
(1
|
)
|
|
|
|
|
IT expenses related to software implementation and IT support
|
|
|
1
|
|
|
|
3
|
|
Travel and entertainment expense
|
|
|
(1
|
)
|
|
|
|
|
Asset impairment
|
|
|
(1
|
)
|
|
|
1
|
|
Other
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change
|
|
|
9
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
Research
and Development (in millions, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
April 30, 2010
|
|
April 24, 2009
|
|
% Change
|
|
April 25, 2008
|
|
% Change
|
|
Research and development expenses
|
|
$
|
535.7
|
|
|
$
|
498.5
|
|
|
|
7
|
%
|
|
$
|
452.2
|
|
|
|
10
|
%
|
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:
|
|
|
|
|
|
|
|
|
|
|
Year % Change
|
|
|
Year % Change
|
|
|
|
Fiscal 2009 to
|
|
|
Fiscal 2008 to
|
|
|
|
Fiscal 2010
|
|
|
Fiscal 2009
|
|
|
Salaries
|
|
|
(1
|
)%
|
|
|
7
|
%
|
Incentive plan compensation
|
|
|
6
|
|
|
|
1
|
|
Stock based compensation
|
|
|
|
|
|
|
(2
|
)
|
Facilities and IT support costs
|
|
|
2
|
|
|
|
2
|
|
NRE charges
|
|
|
1
|
|
|
|
1
|
|
Other
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total change
|
|
|
7
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
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.
General
and Administrative (in millions, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
April 30, 2010
|
|
April 24, 2009
|
|
% Change
|
|
April 25, 2008
|
|
% Change
|
|
General and administrative expenses
|
|
$
|
238.8
|
|
|
$
|
203.7
|
|
|
|
17
|
%
|
|
$
|
171.5
|
|
|
|
19
|
%
|
49
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:
|
|
|
|
|
|
|
|
|
|
|
Year % Change
|
|
|
Year % Change
|
|
|
|
Fiscal 2009 to
|
|
|
Fiscal 2008 to
|
|
|
|
Fiscal 2010
|
|
|
Fiscal 2009
|
|
|
Salaries
|
|
|
1
|
%
|
|
|
5
|
%
|
Incentive plan compensation
|
|
|
8
|
|
|
|
1
|
|
Stock based compensation
|
|
|
4
|
|
|
|
|
|
Other compensation related costs
|
|
|
3
|
|
|
|
1
|
|
Professional and corporate legal fees
|
|
|
(2
|
)
|
|
|
8
|
|
IT costs
|
|
|
2
|
|
|
|
4
|
|
Other
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change
|
|
|
17
|
%
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
Restructuring
and Other Charges (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
April 30, 2010
|
|
April 24, 2009
|
|
% Change
|
|
April 25, 2008
|
|
% Change
|
|
Restructuring and other charges
|
|
$
|
2.5
|
|
|
$
|
54.4
|
|
|
|
(95
|
)%
|
|
$
|
0.4
|
|
|
|
13,500
|
%
|
Fiscal 2009 Restructuring Plans In February
2009, we announced our decision to execute a worldwide
restructuring program, which included a reduction in workforce,
the closing or downsizing of certain facilities, and the
establishment of a plan to outsource certain internal
activities. In December 2008, we announced our decision to cease
the development and availability of SnapMirror for Open Systems
(SMOS), which was originally acquired through our acquisition of
Topio in fiscal 2007. As part of this decision, we also
announced the closure of our engineering facility in Haifa,
Israel. These restructuring activities resulted in restructuring
charges in fiscal 2009 totaling $51.5 million of
severance-related amounts and other charges attributable to the
termination of approximately 450 regular positions, abandoned
excess facilities, charges relating to non-cancelable lease
costs, (which are net of expected sublease income); contract
cancellation charges; outplacement expenses; fixed assets and
intangibles write-offs; as well as $2.9 million of other
charges to support our restructuring initiatives. In fiscal
2010, we recorded additional charges of $2.5 million
primarily related to adjustments to future lease commitments and
employee severance costs associated with our fiscal 2009
restructuring plan.
In recording the facility lease restructuring reserve, we made
certain estimates and assumptions related to the (i) time
period over which the relevant buildings would remain vacant,
(ii) sublease terms, and (iii) sublease rates.
Fiscal 2002 Restructuring Plan As of
April 30, 2010, we had $0.5 million remaining in
facility restructuring reserves established as part of a
restructuring in fiscal 2002 related to future lease commitments
on exited facilities, net of expected sublease income. We
reevaluate our estimates and assumptions periodically and make
adjustments as necessary based on the time period over which the
facilities will be vacant, expected sublease terms, and expected
sublease rates.
As of April 30, 2010, the remaining balance of the
restructuring reserve related to the fiscal 2009 and 2002
restructuring plans consisted of approximately $4.1 million
of facilities-related lease payments, which we expect to be
substantially paid by January 2013.
See Note 13 of the accompanying consolidated financial
statements for further discussion of our restructuring
activities.
Acquisition
Related Income, Net (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
April 30, 2010
|
|
April 24, 2009
|
|
% Change
|
|
April 25, 2008
|
|
% Change
|
|
Acquisition related income, net
|
|
$
|
(39.9
|
)
|
|
$
|
|
|
|
|
NM
|
|
|
$
|
|
|
|
|
NM
|
|
NM Not meaningful.
50
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 $57.0 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 consolidated statement of
operations during fiscal 2010. During fiscal 2010, we paid
$1.2 million of acquisition related expenses related to the
acquisition of Bycast Inc. (see Note 20 of the accompanying
consolidated financial statements).
Other
Income and Expense
Interest
Income (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 30, 2010
|
|
|
April 24, 2009
|
|
|
% Change
|
|
|
April 25, 2008
|
|
|
% Change
|
|
|
Interest income
|
|
$
|
31.2
|
|
|
$
|
57.6
|
|
|
|
(46
|
)%
|
|
$
|
64.6
|
|
|
|
(11
|
)%
|
The decrease in interest income for fiscal 2010 compared to
fiscal 2009, and in fiscal 2009 compared to fiscal 2008, was
primarily due to lower market yields on our cash and investment
portfolio. In fiscal 2009, this yield decline was partially
offset by an increase in our cash and investment balances due to
the issuance of the Convertible Notes (the Note),
(see Note 10 of the accompanying consolidated financial
statements).
Interest Expense (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 30, 2010
|
|
|
April 24, 2009
|
|
|
% Change
|
|
|
April 25, 2008
|
|
|
% Change
|
|
|
Interest expense
|
|
$
|
(74.1
|
)
|
|
$
|
(63.4
|
)
|
|
|
17
|
%
|
|
$
|
(8.0
|
)
|
|
|
693
|
%
|
Interest expense increased $10.7 million for fiscal 2010
compared to fiscal 2009, primarily due to interest expense on
our 1.75% Notes, issued on June 10, 2008, which were
outstanding for the full year ended April 30, 2010 but only
a partial period in the prior year.
During fiscal 2010 and fiscal 2009, we recognized approximately
$50.8 million and $41.0 million, respectively, in
incremental non-cash interest expense from the amortization of
debt discount and issuance costs relating to our Notes. The
coupon interest expense related to the Notes was
$22.5 million and $19.4 million, respectively, for
fiscal 2010 and fiscal 2009.
The increase in interest expense in fiscal 2009 compared to
fiscal 2008 was primarily due to interest expense and
amortization of debt issuance costs on our Notes, partially
offset by lower interest expense related to the reduced
outstanding balance on our secured credit agreement we entered
into with JPMorgan in October 2007.
Other
Income (Expense), Net (in millions, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 30, 2010
|
|
|
April 24, 2009
|
|
|
% Change
|
|
|
April 25, 2008
|
|
|
% Change
|
|
|
Realized gain (loss) on investments, net
|
|
$
|
3.9
|
|
|
$
|
|
|
|
|
NM
|
|
|
$
|
12.6
|
|
|
|
(100
|
)%
|
Impairment of investments
|
|
|
|
|
|
|
(29.5
|
)
|
|
|
(100
|
)%
|
|
|
|
|
|
|
NM
|
|
Other expenses, net
|
|
|
(2.4
|
)
|
|
|
(3.6
|
)
|
|
|
(33
|
)%
|
|
|
(0.1
|
)
|
|
|
2,600
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
1.5
|
|
|
$
|
(33.1
|
)
|
|
|
NM
|
|
|
$
|
12.5
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM Not meaningful
Other income (expense), net in fiscal 2010 included
$3.9 million of net gains on investments, consisting
primarily of a gain on investments in privately held companies
of $3.7 million and $1.0 million net gain on our
investment in the Primary Fund and Lehman Brothers securities,
offset by net losses on other investments of $0.8 million.
Other expenses included $5.3 in net losses on foreign currency
transactions and related hedging activities, partially offset by
other income of $2.9 million.
51
Other income (expense), net in fiscal 2009 included a net
impairment loss related to our investments in privately held
companies of $6.3 million, an
other-than-temporary
impairment charge on our
available-for-sale
investments related to direct and indirect investments in Lehman
Brothers securities of $21.1 million, and an
other-than-temporary
decline in the value of our ARS of $2.1 million. Other
expenses included $5.0 in net exchange losses from foreign
currency transactions and related hedging activities, partially
offset by other income of $1.4 million.
Other income (expense), net in fiscal 2008 consisted primarily
of a gain of $13.6 million related to the sale of shares of
Blue Coat common stock, partially offset by a net impairment of
$1.0 million for our investments in privately-held
companies. Other expense included $0.7 in net exchange losses
from foreign currency transactions and related hedging
activities, partially offset by other income of
$0.6 million.
Provision
for (Benefit from) Income Taxes (in millions, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 30, 2010
|
|
|
April 24, 2009
|
|
|
% Change
|
|
|
April 25, 2008
|
|
|
% Change
|
|
|
Provision for (benefit from) income taxes
|
|
$
|
46.6
|
|
|
$
|
(56.3
|
)
|
|
|
NM
|
|
|
$
|
73.0
|
|
|
|
NM
|
|
NM Not meaningful.
Our effective tax rate for fiscal 2010 was 10.4%, compared to an
effective tax benefit of 681.5% for fiscal 2009 and an effective
tax rate of 19.1% for fiscal 2008. Our effective tax rate
reflects our corporate legal entity structure and the global
nature of our business with a significant amount of our profits
generated and taxed in foreign jurisdictions at rates below the
U.S. statutory tax rate. The effective tax rate for fiscal
2010 was favorably impacted by the geographic mix of profits.
The tax benefit rate for fiscal 2009 reflected losses generated
in the U.S. during that period that were partially offset
by profits generated in foreign tax jurisdictions where the tax
rates were below the U.S. statutory rate.
The effective tax rate of 10.4% in fiscal 2010 included a
benefit of $105.3 million, or 23.5 percentage points,
related to foreign income tax rates that are lower than the
U.S. federal statutory rate of 35%, a benefit of
$7.8 million, or 1.7 percentage points, related to
research and development tax credits, a benefit of
$2.6 million, or 0.6 percentages points, related to
stock-based compensation, partially offset by the unfavorable
impact of $2.6 million, or 0.6 percentage points,
related to state income taxes.
The effective tax benefit of 681.5% for fiscal 2009 included the
benefit of $51.0 million, or 616.8 percentage points,
related to foreign income tax rates that are lower than the
U.S. federal statutory rate of 35%, a benefit of
$9.2 million, or 111.1 percentage points, related to
research and development tax credits, a benefit of
$7.9 million, or 95.5 percentage points, related to
state income taxes, partially offset by the unfavorable impact
of $10.2 million, or 122.9 percentage points, related
to stock-based compensation.
The effective tax rate of 19.1% for fiscal 2008 included a
benefit of $67.6 million, or 17.7 percentage points,
related to foreign income tax rates that are lower than the
U.S. federal statutory rate, a benefit of
$4.7 million, or 1.2 percentage points, related to
research and development tax credits, partially offset by the
unfavorable impact of $11.02 million, or
2.9 percentages points, related to stock-based
compensation, and $2.2 million, or 0.6 percentage
points, related to state income taxes.
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 obligors closely. We believe our cash equivalents and
short-term investments are liquid and accessible. We are not
aware of any significant deterioration in the fair value of our
cash equivalents or investments from the values reported as of
April 30, 2010.
52
Liquidity
Sources, Cash Requirements
Our principal sources of liquidity as of April 30, 2010
consisted of approximately $3.7 billion in cash, cash
equivalents and short-term investments and cash we expect to
generate from operations.
Cash, cash equivalents and investments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
April 30, 2010
|
|
|
April 24, 2009
|
|
|
Cash and cash equivalents
|
|
$
|
1,705.0
|
|
|
$
|
1,494.2
|
|
Short-term investments
|
|
|
2,019.0
|
|
|
|
1,110.1
|
|
Long-term investments and restricted cash
|
|
|
72.8
|
|
|
|
127.3
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and investments
|
|
$
|
3,796.8
|
|
|
$
|
2,731.6
|
|
|
|
|
|
|
|
|
|
|
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 satisfy our
working capital needs, capital expenditures, investment
requirements, stock repurchases, contractual obligations,
commitments, interest payments on our Notes and other liquidity
requirements associated with 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 contractual obligations as of April 30, 2010 are
summarized below in the Contractual Obligations tables.
Our investment portfolio, including auction rate securities has
been and will continue to be exposed to market risk due to
trends 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, 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, hiring plans and our
decisions related to financing our facilities requirement. We
expect that our existing facilities and those being developed in
Sunnyvale, California; RTP, North Carolina; and worldwide are
adequate for our requirements over at least the next two years
and that additional space will be available as needed.
Acquisition
Related Requirements
On April 6, 2010, we entered into a definitive agreement to
acquire Bycast Inc. for approximately $80 million in cash.
The merger was completed on May 13, 2010.
53
Cash
Flows
As of April 30, 2010, compared to April 24, 2009, our
cash and cash equivalents and short-term investments increased
by $1.1 billion to $3.7 billion. The increase in cash
and cash equivalents and short-term investments was primarily a
result of cash provided by operating activities and issuances 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 April 30, 2010
decreased to 37 days, compared to 46 days as of
April 24, 2009, primarily due to improvements in shipment
linearity and collections performance. Working capital increased
by $0.9 billion to $2.6 billion as of April 30,
2010, compared to $1.8 billion as of April 24, 2009,
primarily due to an increase in cash, cash equivalents and
short-term investments of $1.1 billion.
Cash
Flows from Operating Activities
During fiscal 2010 and 2009, we generated cash flows from
operating activities of $975.0 million and
$889.2 million, respectively. The primary sources of cash
from operations in fiscal 2010 consisted of net income of
$400.4 million, adjusted by non-cash stock-based
compensation expense of $159.8 million and depreciation and
amortization expense of $166.0 million. Significant changes
in assets and liabilities impacting operating cash flows in
fiscal 2010 included an increase in deferred revenue of
$176.7 million, and an increase in accrued compensation and
other current liabilities of $53.2 million. The primary
sources of cash from operations in fiscal 2009 consisted of net
income of $64.6 million, adjusted by non-cash stock-based
compensation expense of $140.8 million, depreciation and
amortization expense of $170.5 million and a deferred tax
provision of $124.6 million. Significant changes in assets
and liabilities impacting operating cash flows in fiscal 2009
included a decrease in accounts receivable of
$128.7 million, an increase in deferred revenue of
$219.3 million, and an increase in other current
liabilities of $128.7 million related to the GSA settlement.
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 performance,
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 fiscal 2010 were $135.6 million,
which included the purchase of fifteen acres of land in
Bangalore, India for approximately $28.5 million, compared
to $289.6 million in fiscal 2009. We paid
$860.3 million for net purchases and redemptions of
short-term investments in fiscal 2010, compared to
$116.8 million in fiscal 2009. In addition, in fiscal 2009
we reclassified $598.0 million of cash equivalents related
to the Primary Fund to short-term investments.
Cash
Flows from Financing Activities
We received $219.9 million and $696.6 million from
financing activities in fiscal 2010 and 2009, respectively.
Proceeds from employee equity award plans, net of shares
withheld for taxes were $197.1 million in fiscal 2010,
compared to $85.9 million in fiscal 2009. In fiscal 2010,
we received $14.2 million from the settlement of a Note
hedge with Lehman Brothers. In fiscal 2009, we issued
$1.265 billion of convertible notes, received proceeds of
$163.1 million for sale of related common stock warrants,
and paid $254.9 million for purchase of related note
hedges, made repayments of $172.6 million against our
Secured Credit Agreement and the Term Loan and repurchased
17.0 million shares of common stock for a total of
$400.0 million.
Net proceeds from the issuance of common stock related to
employee participation in employee equity award programs have
historically been a significant component of our liquidity. The
extent to which our employees exercise stock options or
participate in our ESPP program 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 these programs and related tax benefits
will vary.
54
Stock
Repurchase Program
At April 30, 2010, $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 April 30, 2010, we had $1.265 billion principal
amount of 1.75% Convertible Senior Notes due 2013 (See
Note 10 of the accompanying consolidated financial
statements). The Notes will mature on June 1, 2013, unless
earlier repurchased or converted. As of April 30, 2010, 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
Facility
Effective December 22, 2009, we terminated our senior
unsecured credit agreement as further discussed in Note 10
of the accompanying Consolidated Financial Statements.
Contractual
Obligations
The following summarizes our contractual obligations at
April 30, 2010 and the effect such obligations are expected
to have on our liquidity and cash flows in future periods (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
Total
|
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office operating lease payments
|
|
$
|
26.7
|
|
|
$
|
22.3
|
|
|
$
|
17.8
|
|
|
$
|
15.1
|
|
|
$
|
13.0
|
|
|
$
|
20.4
|
|
|
$
|
115.3
|
|
Real estate lease payments(1)
|
|
|
3.6
|
|
|
|
3.6
|
|
|
|
129.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136.7
|
|
Less: sublease income
|
|
|
(5.8
|
)
|
|
|
(0.8
|
)
|
|
|
(0.6
|
)
|
|
|
(0.4
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
(7.8
|
)
|
Equipment operating lease payments
|
|
|
24.3
|
|
|
|
10.7
|
|
|
|
4.6
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
40.0
|
|
Purchase commitments with contract manufacturers(2)
|
|
|
139.4
|
|
|
|
3.6
|
|
|
|
3.6
|
|
|
|
1.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
148.0
|
|
Other purchase obligations(3)
|
|
|
49.4
|
|
|
|
10.2
|
|
|
|
3.4
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
63.3
|
|
1.75% Convertible notes(4)
|
|
|
22.1
|
|
|
|
22.1
|
|
|
|
22.1
|
|
|
|
1,276.1
|
|
|
|
|
|
|
|
|
|
|
|
1,342.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total by period
|
|
$
|
259.7
|
|
|
$
|
71.7
|
|
|
$
|
180.4
|
|
|
$
|
1,292.7
|
|
|
$
|
13.0
|
|
|
$
|
20.4
|
|
|
$
|
1,837.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uncertain tax positions(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,960.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial Commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit
|
|
$
|
4.1
|
|
|
$
|
0.4
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.6
|
|
|
$
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
(1) |
|
Included in real estate lease payments pursuant to four
financing arrangements with BNP Paribas LLC (BNPPLC) are
(i) lease commitments of $3.6 million in each of the
fiscal years 2011 and 2012; and $2.4 million in fiscal
2013, which are based on either the LIBOR rate at April 30,
2010 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. |
|
(2) |
|
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 |
55
|
|
|
|
|
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 April 30, 2010, the
liability for these purchase commitments in excess of future
demand was approximately $3.8 million and is recorded in
other current liabilities. |
|
(3) |
|
Purchase obligations represent an estimate of all open purchase
orders and contractual obligations in the ordinary course of
business, other than commitments with contract manufacturers and
suppliers, for which we have not received the goods or services.
Purchase obligations do not include contracts that may be
cancelled without penalty. Although open purchase orders are
considered enforceable and legally binding, the terms generally
allow us the option to cancel, reschedule, and adjust our
requirements based on our business needs prior to the delivery
of goods or performance of services. |
|
(4) |
|
Included in these amounts are obligations related to the
$1.265 billion principal amount of 1.75% Notes due
2013 (see Note 10 of the accompanying consolidated
financial statements). Estimated interest payments for the Notes
are $77.4 million for fiscal 2011 through fiscal 2014. |
|
(5) |
|
As of April 30, 2010, our liability for uncertain tax
positions was $122.4 million, which due to the uncertainty
of the timing of future payments, are presented in the total
column on a separate line in this table. |
As of April 30, 2010, we have four leasing arrangements
(Leasing Arrangements 1, 2, 3 and 4) with BNPPLC which
requires us to lease certain of our land to BNPPLC for a period
of 99 years and to lease approximately 0.6 million
square feet of office space for our headquarters in Sunnyvale,
which had an original cost of $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 April 30, 2010 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
|
|
|
|
1.08
|
%
|
|
December 2007
|
|
|
5 years
|
|
|
3
|
|
|
$
|
10.5
|
|
|
$
|
8.9
|
|
|
|
3.97
|
%
|
|
December 2007
|
|
|
5 years
|
|
|
4
|
|
|
$
|
10.6
|
|
|
$
|
9.0
|
|
|
|
3.99
|
%
|
|
December 2007
|
|
|
5 years
|
|
All leases require us to maintain specified financial covenants
with which we were in compliance as of April 30, 2010. 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.
As of April 30, 2010, we estimated that the fair value of
the properties under synthetic lease was $36.9 million less
than their aggregate residual guarantees. We are accruing for
this deficiency over the remaining terms of the respective
leases.
56
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
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. In January 2010, Oracle acquired Sun.
The three lawsuits are currently in the discovery and motion
phase and no trial dates have been set, so we are unable at this
time to determine the likely outcome of these various patent
litigations. In addition, as we are unable to reasonably
estimate the amount or range of the potential settlement, no
accrual has been recorded as of April 30, 2010.
In addition, we are subject to various legal proceedings and
claims which have arisen or may arise in the normal course of
business. While the outcome of these legal matters is currently
not determinable, we do not believe that any current litigation
or claims will have a material adverse effect on our business,
cash flow, operating results, or financial condition.
Off-Balance
Sheet Arrangements
During the ordinary course of business, we provide standby
letters of credit or other guarantee instruments to third
parties as required for certain transactions initiated either by
us or our subsidiaries. As of April 30, 2010, 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 April 30, 2010, our notional fair value of foreign
exchange forward and foreign currency option contracts totaled
$484.2 million. We do not believe that these derivatives
present significant credit risks, because of the short term
maturity of the outstanding contracts at any point in time, 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 12 of the accompanying 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 18 of the
accompanying consolidated financial statements for more
information related to these financing arrangements.
57
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 0.6 million square feet of office
space for our headquarters in Sunnyvale, California (as further
described above under Contractual Obligations).
We have evaluated our accounting for these leases 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 $136.7 million as
discussed in above in Contractual Obligations.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We are exposed to market risk related to fluctuations in
interest rates, market prices, and foreign currency exchange
rates. We use certain derivative financial instruments to manage
these risks. We do not use derivative financial instruments for
speculative or trading purposes. All financial instruments are
used in accordance with management-approved policies.
Market
Risk and Market Interest Risk
Investment and Interest Income As of
April 30, 2010, we had
available-for-sale
investments of $2.1 billion. 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,
commercial paper, 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
April 30, 2010 would cause the fair value of these
available-for-sale
investments to decline by approximately $3.6 million.
Volatility in market interest rates over time will 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 monitor and evaluate the accounting for our investment
portfolio on a quarterly basis for additional
other-than-temporary
impairment charges.
58
We are also exposed to market risk relating to our auction rate
securities due to uncertainties in the credit and capital
markets. As of April 30, 2010, we recorded cumulative
unrealized loss of $3.3 million, offset by
$0.7 million 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 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, 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 of the accompanying consolidated
financial statements in Part II, Item 8;
Managements Discussion and Analysis of Financial Condition
and Results of Operations, Liquidity and Capital
Resources, in Part II, Item 7; and Risk Factors
in Part I, Item 1A of this Annual Report on
Form 10-K
for a description of recent market events that may affect the
value and liquidity of the investments in our portfolio that we
held at April 30, 2010.
Lease Commitments As of April 30, 2010,
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 April 30, 2010 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, including, but not limited to:
|
|
|
|
|
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 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.
Upon conversion, a holder will receive cash in an amount equal
to the lesser of the conversion value and the principal amount
of the Notes, and any shares of our common stock for any
conversion value in excess of the principal amount of the Notes.
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. In fiscal
2010, we terminated the hedge transaction with a counterparty to
20% of our Note hedges, and because we have decided not to
replace the hedge, we are subject to potential dilution on the
20% unhedged portion of our Notes upon conversion if on the date
of conversion the per-share market price of our common stock
exceeds the conversion price of $31.85.
59
As of April 30, 2010, 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. Based on the closing
price of our common stock of $34.67 on April 30, 2010, the
if-converted value of our Notes exceeded their principal amount
by approximately $112 million.
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
April 30, 2010, 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 $1.5 billion based on the closing trading price of $120
per $100 of our Notes as of that date.
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 April 30, 2010, the time-value component is
recorded in earnings while all other gains or losses were
included in other comprehensive income.
We do not enter into foreign exchange contracts for speculative
or trading purposes. In entering into forward and option foreign
exchange contracts, we have assumed the risk that might arise
from the possible inability of counterparties to meet the terms
of their contracts. We attempt to limit our exposure to credit
risk by executing foreign exchange contracts with creditworthy
multinational commercial banks. All contracts have a maturity of
less than one year.
The following table provides information about our currency
forward contracts outstanding on April 30, 2010 and
April 24, 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2010
|
|
|
April 24, 2009
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
Local
|
|
|
Contract
|
|
|
Fair
|
|
|
Local
|
|
|
Contract
|
|
|
Fair
|
|
|
|
Currency
|
|
|
Amount
|
|
|
Value
|
|
|
Currency
|
|
|
Amount
|
|
|
Value
|
|
Currency
|
|
Amount
|
|
|
(USD)
|
|
|
(USD)
|
|
|
Amount
|
|
|
(USD)
|
|
|
(USD)
|
|
|
Euro
|
|
|
235.9
|
|
|
$
|
313.5
|
|
|
$
|
313.6
|
|
|
|
126.2
|
|
|
$
|
166.9
|
|
|
$
|
166.9
|
|
British Pound Sterling
|
|
|
49.7
|
|
|
|
76.0
|
|
|
|
75.9
|
|
|
|
46.6
|
|
|
|
68.2
|
|
|
|
68.3
|
|
Canadian Dollar
|
|
|
28.6
|
|
|
|
28.1
|
|
|
|
28.1
|
|
|
|
24.7
|
|
|
|
20.5
|
|
|
|
20.5
|
|
Australian Dollar
|
|
|
25.0
|
|
|
|
23.2
|
|
|
|
23.0
|
|
|
|
34.7
|
|
|
|
24.9
|
|
|
|
24.9
|
|
Other
|
|
|
N/A
|
|
|
|
43.6
|
|
|
|
43.6
|
|
|
|
N/A
|
|
|
|
33.5
|
|
|
|
33.5
|
|
60
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
NetApp, Inc.
Sunnyvale, California
We have audited the accompanying consolidated balance sheets of
NetApp, Inc. and subsidiaries (collectively, the
Company) as of April 30, 2010 and
April 24, 2009, and the related consolidated statements of
operations, cash flows, and stockholders equity and
comprehensive income for each of the three years in the period
ended April 30, 2010. Our audits also included the
financial statement schedule listed in Item 15. These
consolidated financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of April 30, 2010 and April 24, 2009, and
the results of its operations and its cash flows for each of the
three years in the period ended April 30, 2010, in
conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth
therein.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
April 30, 2010, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated June 18, 2010 expressed an
unqualified opinion on the Companys internal control over
financial reporting.
/s/ DELOITTE &
TOUCHE LLP
San Jose, California
June 18, 2010
61
NETAPP,
INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
April 24,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In millions, except
|
|
|
|
par value)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,705.0
|
|
|
$
|
1,494.2
|
|
Short-term investments
|
|
|
2,019.0
|
|
|
|
1,110.1
|
|
Accounts receivable, net of allowances of $1.6 million and
$3.1 million at April 30, 2010 and April 24,
2009, respectively
|
|
|
471.5
|
|
|
|
446.5
|
|
Inventories
|
|
|
112.9
|
|
|
|
61.1
|
|
Other current assets
|
|
|
228.7
|
|
|
|
326.9
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
4,537.1
|
|
|
|
3,438.8
|
|
Property and Equipment, Net
|
|
|
804.4
|
|
|
|
807.9
|
|
Goodwill
|
|
|
681.0
|
|
|
|
681.0
|
|
Other Intangible Assets, Net
|
|
|
25.1
|
|
|
|
45.7
|
|
Long-Term Investments and Restricted Cash
|
|
|
72.8
|
|
|
|
127.3
|
|
Other Non-Current Assets
|
|
|
374.0
|
|
|
|
283.7
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,494.4
|
|
|
$
|
5,384.4
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
184.6
|
|
|
$
|
137.8
|
|
Accrued compensation and related benefits
|
|
|
379.1
|
|
|
|
204.2
|
|
Other current liabilities
|
|
|
212.2
|
|
|
|
323.7
|
|
Short-term deferred revenue
|
|
|
1,135.1
|
|
|
|
1,013.6
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,911.0
|
|
|
|
1,679.3
|
|
1.75% Convertible Senior Notes Due 2013
|
|
|
1,101.5
|
|
|
|
1,054.7
|
|
Other Long-Term Liabilities
|
|
|
171.9
|
|
|
|
164.6
|
|
Long-Term Deferred Revenue
|
|
|
779.5
|
|
|
|
701.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,963.9
|
|
|
|
3,600.2
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 18)
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 5.0 shares
authorized; no shares issued or outstanding in 2010 and 2009
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 885.0 shares
authorized; 451.6 and 436.6 shares issued at April 30,
2010 and April 24, 2009
|
|
|
0.5
|
|
|
|
0.4
|
|
Additional paid-in capital
|
|
|
3,453.7
|
|
|
|
3,115.9
|
|
Treasury stock at cost (104.3 shares at April 30, 2010
and April 24, 2009)
|
|
|
(2,927.4
|
)
|
|
|
(2,927.4
|
)
|
Retained earnings
|
|
|
2,000.9
|
|
|
|
1,600.5
|
|
Accumulated other comprehensive income (loss)
|
|
|
2.8
|
|
|
|
(5.2
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
2,530.5
|
|
|
|
1,784.2
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,494.4
|
|
|
$
|
5,384.4
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
62
NETAPP,
INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 30,
|
|
|
April 24,
|
|
|
April 25,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions, except per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
2,381.1
|
|
|
$
|
2,152.7
|
|
|
$
|
2,242.5
|
|
Software entitlements and maintenance
|
|
|
679.8
|
|
|
|
618.3
|
|
|
|
486.9
|
|
Service
|
|
|
870.5
|
|
|
|
764.1
|
|
|
|
573.8
|
|
GSA settlement
|
|
|
|
|
|
|
(128.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
3,931.4
|
|
|
|
3,406.4
|
|
|
|
3,303.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
|
|
976.4
|
|
|
|
1,007.6
|
|
|
|
938.4
|
|
Cost of software entitlements and maintenance
|
|
|
12.3
|
|
|
|
9.2
|
|
|
|
8.6
|
|
Cost of service
|
|
|
423.5
|
|
|
|
399.7
|
|
|
|
342.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
1,412.2
|
|
|
|
1,416.5
|
|
|
|
1,289.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,519.2
|
|
|
|
1,989.9
|
|
|
|
2,013.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
1,293.7
|
|
|
|
1,186.1
|
|
|
|
1,075.7
|
|
Research and development
|
|
|
535.7
|
|
|
|
498.5
|
|
|
|
452.2
|
|
General and administrative
|
|
|
238.8
|
|
|
|
203.7
|
|
|
|
171.5
|
|
Restructuring and other charges
|
|
|
2.5
|
|
|
|
54.4
|
|
|
|
0.4
|
|
Acquisition related income, net
|
|
|
(39.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,030.8
|
|
|
|
1,942.7
|
|
|
|
1,699.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
488.4
|
|
|
|
47.2
|
|
|
|
313.6
|
|
Other Income (Expenses), Net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
31.2
|
|
|
|
57.6
|
|
|
|
64.6
|
|
Interest expense
|
|
|
(74.1
|
)
|
|
|
(63.4
|
)
|
|
|
(8.0
|
)
|
Other income (expenses), net
|
|
|
1.5
|
|
|
|
(33.1
|
)
|
|
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses), net
|
|
|
(41.4
|
)
|
|
|
(38.9
|
)
|
|
|
69.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes
|
|
|
447.0
|
|
|
|
8.3
|
|
|
|
382.7
|
|
Provision for (Benefit from) Income Taxes
|
|
|
46.6
|
|
|
|
(56.3
|
)
|
|
|
73.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
400.4
|
|
|
$
|
64.6
|
|
|
$
|
309.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.18
|
|
|
$
|
0.20
|
|
|
$
|
0.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.13
|
|
|
$
|
0.19
|
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Used in Net Income per Share Calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
339.6
|
|
|
|
330.3
|
|
|
|
351.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
353.2
|
|
|
|
334.6
|
|
|
|
361.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
63
NETAPP,
INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 30,
|
|
|
April 24,
|
|
|
April 25,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
400.4
|
|
|
$
|
64.6
|
|
|
$
|
309.7
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
166.0
|
|
|
|
170.5
|
|
|
|
148.1
|
|
Stock-based compensation
|
|
|
159.8
|
|
|
|
140.8
|
|
|
|
148.0
|
|
Accretion of discount and issuance costs on notes
|
|
|
50.8
|
|
|
|
41.0
|
|
|
|
|
|
Deferred income taxes
|
|
|
(11.3
|
)
|
|
|
(124.6
|
)
|
|
|
(53.0
|
)
|
Tax benefit (charges) from stock-based compensation
|
|
|
(0.9
|
)
|
|
|
45.4
|
|
|
|
48.2
|
|
Excess tax benefit from stock-based compensation
|
|
|
(8.6
|
)
|
|
|
(36.7
|
)
|
|
|
(45.4
|
)
|
Other non-cash items, net
|
|
|
9.7
|
|
|
|
57.8
|
|
|
|
(10.0
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(21.3
|
)
|
|
|
128.7
|
|
|
|
(27.7
|
)
|
Inventories
|
|
|
(52.1
|
)
|
|
|
9.1
|
|
|
|
(15.4
|
)
|
Other operating assets
|
|
|
(36.8
|
)
|
|
|
(0.8
|
)
|
|
|
(7.6
|
)
|
Accounts payable
|
|
|
42.7
|
|
|
|
(27.0
|
)
|
|
|
20.0
|
|
Accrued compensation and other current liabilities
|
|
|
53.2
|
|
|
|
190.5
|
|
|
|
(24.5
|
)
|
Deferred revenue
|
|
|
176.7
|
|
|
|
219.3
|
|
|
|
401.0
|
|
Other operating liabilities
|
|
|
46.7
|
|
|
|
10.6
|
|
|
|
117.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
975.0
|
|
|
|
889.2
|
|
|
|
1,008.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
(2,632.6
|
)
|
|
|
(1,152.5
|
)
|
|
|
(1,053.5
|
)
|
Redemptions of investments
|
|
|
1,772.3
|
|
|
|
1,035.7
|
|
|
|
1,429.9
|
|
Reclassification from cash and cash equivalents to short-term
investments
|
|
|
|
|
|
|
(598.0
|
)
|
|
|
|
|
Purchases of property and equipment
|
|
|
(135.6
|
)
|
|
|
(289.6
|
)
|
|
|
(188.3
|
)
|
Acquisition of businesses, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(99.4
|
)
|
Other investing activities, net
|
|
|
8.2
|
|
|
|
1.1
|
|
|
|
14.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(987.7
|
)
|
|
|
(1,003.3
|
)
|
|
|
102.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
197.1
|
|
|
|
85.9
|
|
|
|
108.7
|
|
Repurchases of common stock
|
|
|
|
|
|
|
(400.0
|
)
|
|
|
(903.7
|
)
|
Excess tax benefit from stock-based compensation
|
|
|
8.6
|
|
|
|
36.7
|
|
|
|
45.4
|
|
Issuance of long-term debt
|
|
|
|
|
|
|
1,238.4
|
|
|
|
318.7
|
|
Sale of common stock warrants
|
|
|
|
|
|
|
163.1
|
|
|
|
|
|
Settlement (purchase) of note hedge
|
|
|
14.2
|
|
|
|
(254.9
|
)
|
|
|
|
|
Repayment of long-term debt
|
|
|
|
|
|
|
(172.6
|
)
|
|
|
(231.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used in) by financing activities
|
|
|
219.9
|
|
|
|
696.6
|
|
|
|
(662.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on Cash and Cash
Equivalents
|
|
|
3.6
|
|
|
|
(24.8
|
)
|
|
|
(2.0
|
)
|
Net Increase in Cash and Cash Equivalents
|
|
|
210.8
|
|
|
|
557.7
|
|
|
|
447.4
|
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
1,494.2
|
|
|
|
936.5
|
|
|
|
489.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
1,705.0
|
|
|
$
|
1,494.2
|
|
|
$
|
936.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
64
NETAPP,
INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
|
|
|
Treasury
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Balances, April 27, 2007
|
|
|
421.6
|
|
|
$
|
0.4
|
|
|
$
|
2,380.6
|
|
|
|
(54.6
|
)
|
|
$
|
(1,623.7
|
)
|
|
$
|
1,226.2
|
|
|
$
|
5.5
|
|
|
$
|
1,989.0
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
309.7
|
|
|
|
|
|
|
|
309.7
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.1
|
|
|
|
1.1
|
|
Unrealized gain on investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7.7
|
)
|
|
|
(7.7
|
)
|
Unrealized gain on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.9
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
305.0
|
|
Issuance of common stock, net of taxes
|
|
|
7.5
|
|
|
|
|
|
|
|
108.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108.7
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32.8
|
)
|
|
|
(903.7
|
)
|
|
|
|
|
|
|
|
|
|
|
(903.7
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
147.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147.9
|
|
Stock-based compensation related to acquisition
|
|
|
|
|
|
|
|
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.2
|
|
Income tax benefit from employee stock transactions
|
|
|
|
|
|
|
|
|
|
|
48.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, April 25, 2008
|
|
|
429.1
|
|
|
|
0.4
|
|
|
|
2,690.6
|
|
|
|
(87.4
|
)
|
|
|
(2,527.4
|
)
|
|
|
1,535.9
|
|
|
|
0.8
|
|
|
|
1,700.3
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64.6
|
|
|
|
|
|
|
|
64.6
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.8
|
)
|
|
|
(4.8
|
)
|
Unrealized gain on investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.0
|
)
|
|
|
(2.0
|
)
|
Unrealized gain on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58.6
|
|
Issuance of common stock, net of taxes
|
|
|
7.5
|
|
|
|
|
|
|
|
85.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85.9
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16.9
|
)
|
|
|
(400.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(400.0
|
)
|
Purchase of note hedges
|
|
|
|
|
|
|
|
|
|
|
(254.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(254.9
|
)
|
Sale of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
163.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163.1
|
|
Convertible debt discount
|
|
|
|
|
|
|
|
|
|
|
248.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
248.0
|
|
Issuance costs related to equity component of convertible notes
|
|
|
|
|
|
|
|
|
|
|
(5.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.2
|
)
|
Net tax effect of issuance costs related to convertible notes
|
|
|
|
|
|
|
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.2
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
140.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140.8
|
|
Income tax benefit from employee stock transactions
|
|
|
|
|
|
|
|
|
|
|
45.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, April 24, 2009
|
|
|
436.6
|
|
|
|
0.4
|
|
|
|
3,115.9
|
|
|
|
(104.3
|
)
|
|
|
(2,927.4
|
)
|
|
|
1,600.5
|
|
|
|
(5.2
|
)
|
|
|
1,784.2
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400.4
|
|
|
|
|
|
|
|
400.4
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
|
|
1.5
|
|
Unrealized gain on investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.3
|
|
|
|
5.3
|
|
Unrealized gain on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.2
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
408.4
|
|
Issuance of common stock, net of taxes
|
|
|
15.0
|
|
|
|
0.1
|
|
|
|
197.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197.1
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
159.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159.6
|
|
Income tax charge from employee stock transactions
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
Settlement of note hedge
|
|
|
|
|
|
|
|
|
|
|
14.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.2
|
|
Taxes on settlement of note hedge
|
|
|
|
|
|
|
|
|
|
|
(32.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, April 30, 2010
|
|
|
451.6
|
|
|
$
|
0.5
|
|
|
$
|
3,453.7
|
|
|
|
(104.3
|
)
|
|
$
|
(2,927.4
|
)
|
|
$
|
2,000.9
|
|
|
$
|
2.8
|
|
|
$
|
2,530.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
65
NETAPP,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Based in Sunnyvale, California, NetApp, Inc. (we or
the Company) was incorporated in California in
April 1992 and reincorporated in Delaware in November 2001;
in March 2008, the Company changed its name from Network
Appliance, Inc. to NetApp, Inc. The Company is a supplier of
enterprise storage and data management software and hardware
products and services. Our solutions help global enterprises
meet major information technology challenges such as managing
storage growth, assuring secure and timely information access,
protecting data and controlling costs by providing innovative
solutions that simplify the complexity associated with managing
corporate data.
|
|
2.
|
Significant
Accounting Policies
|
Fiscal Year We operate on a 52-week or
53-week year ending on the last Friday in April. Fiscal 2010 was
a 53-week fiscal year and fiscal 2009 and 2008 were 52-week
fiscal years.
Basis of Presentation The consolidated
financial statements include the Company and its wholly-owned
subsidiaries. Intercompany accounts and transactions are
eliminated in consolidation.
Financial Statements Presentation Certain
prior period amounts have been combined in the accompanying
financial statements to conform to current year presentation.
Retrospective Application of Accounting Standard to
Previously Issued Financial Statements In May
2008, the Financial Accounting Standards Board (FASB) issued
updated guidance which required that the liability and equity
components of convertible debt instruments that may be settled
in cash upon conversion (including partial cash settlement) be
separately accounted for in a manner that reflects an
issuers non-convertible debt borrowing rate. The guidance
applied to the $1.265 billion aggregate principal amount of
1.75% Convertible Senior Notes (the Notes) and was adopted
by us on a retrospective basis as of April 24, 2009 and for
the fiscal year then ended.
Use of Estimates The preparation of the
consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America
(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, reserve
and allowances; inventory valuation and purchase order accruals;
valuation of goodwill and intangibles; restructuring reserves;
product warranties; self-insurance; stock-based compensation;
loss contingencies; investment impairments; income taxes, and
fair value measurements. Actual results could differ from those
estimates.
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 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 debt investments with original maturities of three
months or less at time of purchase to be cash equivalents. Cash
equivalents consist primarily of money market funds, for which
the carrying amounts are reasonable estimates of fair value.
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 of the accompanying
consolidated financial statements. 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
66
NETAPP,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recovery in fair market value. We classify our investments as
current or noncurrent based on the nature of the investments and
their availability for use in current operations.
Unrealized gains and temporary losses, net of related taxes, 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
related to investments 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 of operations and other losses are included in AOCI.
Investments in Privately-held Companies We
have certain investments in privately-held companies, which we
account for under the cost method, subject to periodic reviews
for impairment.
Fair Value Measurements and Impairments All
of our
available-for-sale
investments and nonmarketable equity securities are subject to a
periodic impairment review. Investments are considered to be
impaired when a decline in fair value is judged to be
other-than-temporary.
This determination requires significant judgment.
For publicly traded investments, impairment is determined based
upon the specific facts and circumstances present at the time,
including factors such as current economic and market
conditions, the credit rating of the securitys issuer, the
length of time an investments fair value has been below
our carrying value, the extent to which fair value was below
cost, and our ability and intent to hold investments for a
period of time sufficient to allow for anticipated recovery in
value. If an investments decline in fair value, caused by
factors other than changes in interest rates, is deemed to be
other-than-temporary,
we reduce its carrying value to its estimated fair value, as
determined based on quoted market prices or liquidation values.
Declines in value judged to be
other-than-temporary,
if any, are recorded in operations as incurred.
For long-term investments, such as auction rate securities,
impairment is determined based on fair value and marketability
of these investments. The valuation models we used to estimate
fair value included numerous assumptions such as assessments of
the underlying structure of each security, expected cash flows,
discount rates, credit ratings, workout periods, and overall
capital market liquidity.
For nonmarketable investments, impairment is based on the most
recent information available to us, including new financings or
estimates of current fair value, as well as through traditional
valuation techniques. It is our policy to review the fair value
of these investments on a regular basis to determine whether the
investments in these companies are
other-than-temporarily
impaired. In the case of privately-held companies, this
evaluation is based on information that we request from these
companies. If we believe the carrying value of an investment is
in excess of fair value, and this difference is
other-than-temporary,
it is our policy to write down the investment to fair value.
Inventories Inventories are stated at the
lower of cost or market, which approximates actual cost on a
first-in,
first out basis. We write down for excess and obsolete inventory
based on the difference between the cost of inventory and the
estimated fair value based upon assumptions about future demand
and market conditions. In addition, we record a liability for
firm, noncancelable, and unconditional purchase commitments with
contract manufacturers and suppliers for quantities in excess of
our future demand forecasts consistent with our valuation of
excess and obsolete inventory.
67
NETAPP,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property and Equipment Property and equipment
are recorded at cost. Depreciation and amortization is computed
using the straight-line method, generally over the following
periods:
|
|
|
|
|
Depreciation Life (years)
|
|
Buildings
|
|
40 years
|
Building improvements
|
|
10 years
|
Furniture and fixtures
|
|
5 years
|
Computer, production, engineering, and other equipment and
purchased software
|
|
3 to 5 years
|
Leasehold improvements
|
|
Shorter of remaining lease term or useful life
|
Construction in progress will be amortized over the estimated
useful lives of the respective assets when they are ready for
their intended use.
Software Development Costs The costs for the
development of new software products and substantial
enhancements to existing software products are expensed as
incurred until technological feasibility has been established,
at which time any additional costs would be capitalized in
accordance with the accounting guidance for software. Because
our current process for developing software is essentially
completed concurrently with the establishment of technological
feasibility, which occurs upon the completion of a working
model, no costs have been capitalized for any of the periods
presented.
Sales and Value Added Taxes Taxes collected
from customers and remitted to governmental authorities are
presented on a net basis in the accompanying consolidated
statements of operations.
Goodwill and Purchased Intangible Assets
Goodwill is recorded when the consideration paid for an
acquisition exceeds the fair value of net tangible and
intangible assets acquired. Acquisition-related intangible
assets are amortized on a straight-line basis over their
economic lives of five years for patents, four to five years for
existing technology, two to eight years for customer
relationships and two to seven years for trademarks and
tradenames as we believe this method would most closely reflect
the pattern in which the economic benefits of the assets will be
consumed.
Goodwill is measured and tested for impairment on an annual
basis in the fourth quarter of our fiscal year or more
frequently if we believe indicators of impairment exist.
Triggering events for impairment reviews may be indicators such
as adverse industry or economic trends, restructuring actions,
lower projections of profitability, or a sustained decline in
our market capitalization. The performance of the test involves
a two-step process. The first step requires comparing the fair
value of the each of our reporting units to its net book value,
including goodwill. We have three reporting units, the fair
value of which is determined based on an allocation of our
entity level market capitalization, as determined through quoted
market prices. A potential impairment exists if the fair value
of the reporting unit is lower than its net book value. The
second step of the process is only performed if a potential
impairment exists, and it involves determining the difference
between the fair value of the reporting units net assets
other than goodwill to the fair value of the reporting unit and
if the difference is less than the net book value of goodwill,
an impairment exists and is recorded. We have not been required
to perform this second step of the process because the fair
value of our reporting units has exceeded the net book value at
every measurement date.
Impairment of Long-Lived Assets We review the
carrying values of long-lived assets whenever events and
circumstances, such as reductions in demand, lower projections
of profitability, significant changes in the manner of our use
of acquired assets, or significant negative industry or economic
trends, indicate that the net book value of an asset may not be
recovered through expected future cash flows from its use and
eventual disposition. If this review indicates that there is an
impairment, the impaired asset is written down to its fair
value, which is typically calculated using: (i) quoted
market prices
and/or
(ii) discounted expected future cash flows utilizing a
discount rate. Our estimates regarding future anticipated net
revenue and cash flows, the remaining economic life of the
products and technologies, or both, may differ from those used
to assess the recoverability of assets. In that event,
impairment
68
NETAPP,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
charges or shortened useful lives of certain long-lived assets
may be required, resulting in a reduction in net income or an
increase to net loss in the period when such determinations are
made.
Derivative Instruments Derivatives that are
not designated as hedges are adjusted to fair value through
earnings. If the derivative is designated as a hedge, depending
on the nature of the exposure being hedged, changes in fair
value will either be offset against the change in fair value of
the hedged items through earnings or recognized in AOCI until
the hedged item is recognized in earnings. The ineffective
portion of the hedge is recognized in earnings immediately.
As a result of our significant international operations, we are
subject to risks associated with fluctuating exchange rates. We
use derivative financial instruments, principally currency
forward contracts and currency options, to attempt to minimize
the impact of exchange rate movements on our balance sheet and
operating results. Factors that could have an impact on the
effectiveness of our hedging program include the accuracy of
forecasts and the volatility of foreign currency markets. These
programs reduce, but do not always entirely eliminate, the
impact of currency exchange movements. The maturities of these
instruments are generally less than one year.
Currently, we do not enter into any foreign exchange forward
contracts to hedge exposures related to firm commitments or
nonmarketable investments. Cash flows from our derivative
programs are included under operating activities in the
consolidated statement of cash flows with the exception of cash
flows from the derivatives used to hedge the convertible notes
issued June 10, 2008. The cash flows related to the Note
hedges are included under financing activities.
Residual Guarantees We record
liabilities in other accrued liabilities for the fair value of
residual guarantees relating to certain properties under our
synthetic leases. In the event that the fair values of the
properties, as determined by appraisals, are below the residual
guarantees, we accrue for the deficiencies over the remaining
term of the respective leases.
Revenue Recognition We apply the provisions
of the accounting guidance for software revenue recognition to
our product sales, both hardware and software, because our
software is essential to the performance of our hardware. We
recognize revenue when:
|
|
|
|
|
Persuasive evidence of an arrangement
exists: It is our customary practice to have a
purchase order
and/or
contract prior to recognizing revenue on an arrangement from our
end users, customers, value-added resellers, or distributors.
|
|
|
|
Delivery has occurred: Our product is
physically delivered to our customers, generally with standard
transfer terms such as FOB origin. We typically do not allow for
restocking rights with any of our value- added resellers or
distributors. Products shipped with acceptance criteria or
return rights are not recognized as revenue until all criteria
are achieved. If undelivered products or services exist that are
essential to the functionality of the delivered product in an
arrangement, delivery is not considered to have occurred.
|
|
|
|
The fee is fixed or determinable: Arrangements
with payment terms extending beyond our standard terms,
conditions and practices are not considered to be fixed or
determinable. Revenue from such arrangements is recognized at
the earlier of customer payment or when the fees become due and
payable. We typically do not allow for price-protection rights
with any of our value-added resellers or distributors.
|
|
|
|
Collection is probable: If there is
considerable doubt surrounding the credit worthiness of a
customer at the outset of an arrangement, the associated revenue
is deferred and recognized upon cash receipt.
|
Our multiple element arrangements include our systems and one or
more of the following undelivered software-related elements:
software entitlements and maintenance, premium hardware
maintenance, and storage review services. Our software
entitlements and maintenance entitle our customers to receive
unspecified product upgrades and enhancements on a
when-and-if-available
basis, bug fixes, and patch releases. Premium hardware
maintenance services include contracts for technical support and
minimum response times. Revenues from software
69
NETAPP,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
entitlements and maintenance, premium hardware maintenance
services and storage review services are recognized ratably over
the contractual term, generally from one to three years. We also
offer extended service contracts (which extend our standard
parts warranty and may include premium hardware maintenance) at
the end of the warranty term; revenues from these contracts are
recognized ratably over the contract term. We typically sell
professional services separately from any of our other revenue
elements, either on a time and materials basis or for fixed
price standard projects; we recognize revenue for these services
as they are performed. Revenue from hardware installation
services is recognized in the period the services are delivered.
For arrangements with multiple elements, we recognize as revenue
the difference between the total arrangement price and the
greater of fair value or stated price for any undelivered
elements (the residual method).
For our undelivered software-related elements, we determine fair
value of these undelivered elements based on vendor-specific
objective evidence (VSOE) of fair value, which for
us consists of the prices charged when these services are sold
separately. To determine the fair value of these elements, we
analyze both the selling prices when elements are sold
separately as well as the concentrations of those prices. We
believe those concentrations have been sufficient to enable us
to establish VSOE of fair value for the undelivered elements. If
VSOE cannot be obtained to establish fair value of the
undelivered elements, it is required that revenue from the
entire arrangement be initially deferred and recognized ratably
over the period these elements are delivered.
For purposes of presentation in the statement of operations,
once fair value has been determined for our undelivered bundled
elements, we allocate revenue first to software entitlements and
maintenance, based on VSOE of its fair value with the remainder
allocated to other service revenues.
We record reductions to revenue for estimated sales returns at
the time of shipment. Sales returns are estimated based on
historical sales returns, current trends, and our expectations
regarding future experience. We monitor and analyze the accuracy
of sales returns estimates by reviewing actual returns and
adjust them for future expectations to determine the adequacy of
our current and future reserve needs. If actual future returns
and allowances differ from past experience, additional
allowances may be required.
Product Warranties 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.
Foreign Currency Translation For subsidiaries
whose functional currency is the local currency, gains and
losses resulting from translation of these foreign currency
financial statements into U.S. dollars are recorded in
AOCI. For subsidiaries where the functional currency is the
U.S. dollar, gains and losses resulting from the process of
remeasuring foreign currency financial statements into
U.S. dollars are included in other income (expenses), net.
Stock-Based Compensation We measure and
recognize stock-based compensation expense for all stock-based
awards, including employee stock options, restricted stock units
and rights to purchase shares under our ESPP, based on their
estimated fair value, and recognize the costs in our financial
statements over the employees requisite service period.
The fair value of employee restricted stock units is equal to
the market value of our common stock on the date the award is
granted. Calculating the fair value of employee stock options
and the rights to purchase shares under the ESPP requires
estimates and significant judgment. The fair value of each
option grant is estimated on the date of grant using the
Black-Scholes option pricing model, and is not remeasured as a
result of subsequent stock price fluctuations. Option-pricing
models require the input of highly subjective assumptions,
including the expected term of options, and the expected price
volatility of the stock underlying such options. Our expected
term assumption is based primarily on historical exercise and
post-vesting forfeiture experience. Our stock price volatility
assumption
70
NETAPP,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
is based on an implied volatility of call options and dealer
quotes on call options, generally having a term of greater than
twelve months. The risk-free interest rate is based upon United
States Treasury bills with equivalent expected terms, and the
expected dividend is based on our history and expected dividend
payouts. Changes in the subjective assumptions required in the
valuation models may significantly affect the estimated value of
our stock-based awards and the related stock-based compensation
expense. Likewise, the shortening of the contractual life of our
options could change the estimated exercise behavior in a manner
other than currently expected.
In addition, we estimate the number of stock-based awards that
will be forfeited due to employee turnover. Our forfeiture
assumption is based primarily on historical experience. Changes
in the estimated forfeiture rate can have a significant effect
on reported stock-based compensation expense, as the effect of
adjusting the rate is recognized in the period the forfeiture
estimate is changed.
Income Taxes Deferred income tax assets and
liabilities are provided for temporary differences that will
result in tax deductions or income in future periods, as well as
the future benefit of tax credit carryforwards. A valuation
allowance reduces tax assets to their estimated realizable value.
Determining the liability for uncertain tax positions requires
us to make significant estimates and judgments as to whether,
and the extent to which, additional taxes may be due based on
potential tax audit issues in the U.S. and other tax
jurisdictions throughout the world. Our estimates are based on
the outcomes of previous audits, as well as the precedents set
in cases in which others have taken similar tax positions to
those taken by us. If we later determine that our exposure is
lower or that the liability is not sufficient to cover our
revised expectations, we adjust the liability and effect a
related change in our tax provision during the period in which
we make such a determination.
The accounting guidance for income taxes prescribes a
comprehensive model for how a company should recognize, measure,
present, and disclose in its financial statements uncertain tax
positions that we have taken or expect to take on a tax return
(including a decision whether to file or not to file a return in
a particular jurisdiction). We recognize the tax liability for
uncertain income tax positions on the income tax return based on
the two-step process prescribed in the interpretation. The first
step is to determine whether it is more likely than not that
each income tax position would be sustained upon audit. The
second step is to estimate and measure the tax benefit as the
amount that has a greater than 50% likelihood of being realized
upon ultimate settlement with the tax authority. Estimating
these amounts requires us to determine the probability of
various possible outcomes. We evaluate these uncertain tax
positions on a quarterly basis. See Note 14 of the
accompanying consolidated financial statements for further
discussion.
Net Income per Share Basic net income per
share is computed by dividing income available to common
stockholders by the weighted average number of common shares
outstanding, excluding common shares subject to repurchase for
that period. Diluted net income per share is computed giving
effect to all dilutive potential shares that were outstanding
during the period. Dilutive potential common shares consist of
incremental common shares subject to repurchase, common shares
issuable upon exercise of stock options, restricted stock
awards, ESPP shares, warrants, and assumed conversion of our
Notes.. 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.
Financial instruments that potentially subject us to
concentrations of credit risk consist primarily of cash
equivalents, investments, foreign exchange contracts and
accounts receivable. Cash equivalents and short-term investments
consist primarily of corporate bonds, U.S. government
agency securities, and money market funds, all of which are
considered high investment grade. Our policy is to limit the
amount of credit exposure through diversification and investment
in highly rated securities. We further mitigate concentrations
of credit risk in our investments by limiting our investments in
the debt securities of a single issuer and by diversifying risk
across geographies and type of issuer.
71
NETAPP,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our long term investments, including auction rate securities,
have been and will continue to be exposed to market risk due to
uncertainties in the credit and capital markets.
In entering into forward foreign exchange contracts, we have
assumed the risk that might arise from the possible inability of
counterparties to meet the terms of their contracts. The
counterparties to these contracts are major multinational
commercial banks, and we do not expect any losses as a result of
counterparty defaults.
We sell our products primarily to large organizations in
different industries and geographies. We do not require
collateral or other security to support accounts receivable. In
addition, we maintain an allowance for potential credit losses.
To reduce credit risk, we perform ongoing credit evaluations on
our customers financial condition. We establish an
allowance for doubtful accounts based upon factors surrounding
the credit risk of customers, historical trends and other
information and, to date, such losses have been within
managements expectations. Concentrations of credit risk
with respect to trade accounts receivable are limited due to the
wide variety of customers who are dispersed across many
geographic regions.
There are no concentrations of business transacted with a
particular market that would severely impact our business in the
near term. However, we currently rely on a limited number of
suppliers for certain key components and a few key contract
manufacturers to manufacture most of our products; any
disruption or termination of these arrangements could materially
adversely affect our operating results.
|
|
4.
|
Recently
Issued Accounting Standards
|
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. We are required to adopt this standard at the
beginning of fiscal 2011. We are currently evaluating the impact
of the adoption of this guidance on our consolidated financial
statements, but do not expect the adoption to have a material
impact on our financial statements.
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 best estimate of selling prices (BESP) 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 required to adopt this
standard at the beginning of fiscal 2012, which begins on
72
NETAPP,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
April 30, 2011. We are assessing the impact of the new
accounting standards on our financial position and results of
operations.
In January 2010, the FASB issued revised guidance on disclosures
related to fair value measurements. This guidance requires new
disclosures about significant transfers in and out of
Level 1 and Level 2 and separate disclosures about
purchases, sales, issuances, and settlements with respect to
Level 3 measurements. The guidance also clarifies existing
fair value disclosures about valuation techniques and inputs
used to measure fair value. The new disclosures and
clarifications of existing disclosures were effective for us in
fiscal 2010, except for the disclosures about purchases, sales,
issuances, and settlements relating to Level 3
measurements, which will be effective for us in the first
quarter of fiscal 2012. We do not expect the adoption to have a
material impact on our financial statements.
|
|
5.
|
Statements
of Cash Flows
|
Supplemental cash flows and noncash investing and financing
activities are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 30,
|
|
|
April 24,
|
|
|
April 25,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Noncash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment on account
|
|
$
|
17.2
|
|
|
$
|
13.2
|
|
|
$
|
27.3
|
|
Taxes on settlement of note hedge
|
|
$
|
32.1
|
|
|
$
|
|
|
|
$
|
|
|
Options assumed for acquired businesses
|
|
|
|
|
|
$
|
|
|
|
$
|
5.2
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
28.5
|
|
|
$
|
26.3
|
|
|
$
|
29.3
|
|
Income taxes refunded
|
|
$
|
5.7
|
|
|
$
|
10.1
|
|
|
$
|
2.2
|
|
Interest paid on debt
|
|
$
|
22.1
|
|
|
$
|
12.7
|
|
|
$
|
8.1
|
|
|
|
6.
|
Business
Combinations and Divestiture
|
Acquisition
of Onaro
On January 28, 2008, we acquired Onaro, Inc. (Onaro), a
privately-held company based in Boston, Massachusetts, that
provided software solutions for enterprises to increase service
quality, return on storage, and compliance by managing storage
as a service, for a total purchase of $110.7 million. We
allocated the purchase price to the estimated tangible and
intangible assets acquired and liabilities assumed, based on
their estimated fair values as follows (in millions):
|
|
|
|
|
Tangible assets, net
|
|
$
|
7.2
|
|
Identifiable intangible assets
|
|
|
36.0
|
|
Goodwill
|
|
|
79.2
|
|
Deferred income taxes
|
|
|
(11.7
|
)
|
|
|
|
|
|
|
|
$
|
110.7
|
|
|
|
|
|
|
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 $57.0 million
termination fee. We incurred $15.9 million of incremental
third-party costs relating
73
NETAPP,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to the terminated merger transaction during the same period,
resulting in a net amount of $41.1 million which is
included in acquisition related income, net in the consolidated
statement of operations.
|
|
7.
|
Goodwill
and Purchase Intangible Assets
|
Goodwill as of April 30, 2010 and April 24, 2009 was
$681.0 million. We conducted our annual goodwill impairment
test in the three month period ended April 30, 2010. 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 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2010
|
|
|
April 24, 2009
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
Assets
|
|
|
Amortization
|
|
|
Assets
|
|
|
Assets
|
|
|
Amortization
|
|
|
Assets
|
|
|
Identified Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10.0
|
|
|
$
|
(9.9
|
)
|
|
$
|
0.1
|
|
Existing technology
|
|
|
75.1
|
|
|
|
(55.5
|
)
|
|
|
19.6
|
|
|
|
107.9
|
|
|
|
(71.2
|
)
|
|
|
36.7
|
|
Trademarks/tradenames
|
|
|
6.4
|
|
|
|
(4.3
|
)
|
|
|
2.1
|
|
|
|
6.6
|
|
|
|
(3.4
|
)
|
|
|
3.2
|
|
Customer contracts/relationships
|
|
|
12.2
|
|
|
|
(8.8
|
)
|
|
|
3.4
|
|
|
|
12.5
|
|
|
|
(6.8
|
)
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identified intangible assets, net
|
|
$
|
93.7
|
|
|
$
|
(68.6
|
)
|
|
$
|
25.1
|
|
|
$
|
137.0
|
|
|
$
|
(91.3
|
)
|
|
$
|
45.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for identified intangible assets is
summarized below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Statement of Operations
|
|
|
April 30, 2010
|
|
|
April 24, 2009
|
|
|
April 25, 2008
|
|
|
Classifications
|
|
Patents
|
|
$
|
0.1
|
|
|
$
|
0.5
|
|
|
$
|
2.0
|
|
|
Research and development
|
Existing technology
|
|
|
17.1
|
|
|
|
24.5
|
|
|
|
22.5
|
|
|
Cost of product revenues
|
Other identified intangibles
|
|
|
3.4
|
|
|
|
4.4
|
|
|
|
4.4
|
|
|
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20.6
|
|
|
$
|
29.4
|
|
|
$
|
28.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2009, we ceased development and availability of our
SnapMirror for Open Systems product, and as a result recorded
impairment charges of $14.9 million attributable to
identified intangible assets related to this product line.
As of April 30, 2010, future amortization expense related
to identifiable intangible assets was as follows (in millions):
|
|
|
|
|
Fiscal Year
|
|
Amount
|
|
|
2011
|
|
$
|
11.7
|
|
2012
|
|
|
7.1
|
|
2013
|
|
|
5.0
|
|
2014
|
|
|
0.6
|
|
2015 and thereafter
|
|
|
0.7
|
|
|
|
|
|
|
Total
|
|
$
|
25.1
|
|
|
|
|
|
|
74
NETAPP,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)