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EX-23.1 - EX-23.1 - QLOGIC CORP | a56176exv23w1.htm |
EX-31.1 - EX-31.1 - QLOGIC CORP | a56176exv31w1.htm |
EX-21.1 - EX-21.1 - QLOGIC CORP | a56176exv21w1.htm |
EX-31.2 - EX-31.2 - QLOGIC CORP | a56176exv31w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 |
For the fiscal year ended March 28, 2010
Commission File No. 0-23298
QLogic Corporation
(Exact name of registrant as specified in its charter)
Delaware (State of incorporation) |
33-0537669 (I.R.S. Employer Identification No.) |
|
26650 Aliso Viejo Parkway | ||
Aliso Viejo, California | 92656 | |
(Address of principal executive offices) | (Zip Code) |
(949) 389-6000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $0.001 Par Value | The NASDAQ Stock Market LLC | |
(NASDAQ Global Select Market) |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
None
(Title of class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the Registrant was required to submit and post such files). Yes
o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§ 229.405 of this chapter) 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. þ
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.
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
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 the voting stock held by non-affiliates of the Registrant on
September 25, 2009 was $1,990,886,000 (based on the closing price for shares of the Registrants
common stock as reported by the NASDAQ Global Select Market on such date).
As of May 13, 2010, 111,530,000 shares of the Registrants common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement relating to the Registrants 2010 Annual Meeting
of Stockholders are incorporated by reference into Part III of this Form 10-K where indicated.
TABLE OF CONTENTS
Table of Contents
PART I
Item 1. | Business |
Introduction
QLogic Corporation was organized as a Delaware corporation in 1992. Our principal executive
offices are located at 26650 Aliso Viejo Parkway, Aliso Viejo, California 92656, and our telephone
number at that location is (949) 389-6000. Our Internet address is www.qlogic.com. The Companys
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any
amendment to these reports, that we file with the Securities and Exchange Commission (SEC) are
available free of charge on our website as soon as reasonably practicable after those reports are
electronically filed with the SEC.
Unless the context indicates otherwise, we, our, us, QLogic and the Company each
refer to QLogic Corporation and its subsidiaries.
All references to years refer to our fiscal years ended March 28, 2010, March 29, 2009 and
March 30, 2008, as applicable, unless calendar years are specified.
Our Networking Products
We are a designer and supplier of network infrastructure products that enhance, manage and
support the transmission of data from computer servers to storage systems and from computer servers
to other servers. Computing and storage systems handle large volumes of data and require network
infrastructure products that enable fast transfer of data and efficient sharing of resources.
Our products are used in connection with three distinct types of networks: Storage Networks,
High Performance Computing, or HPC, Networks, and Converged Networks. Storage Networks are used to
provide critical data across widely-distributed environments and primarily use Fibre Channel
technology. HPC Networks allow the utilization of advanced parallel processing over multiple
servers and typically are used for applications where very large amounts of data must be processed
quickly and efficiently. The HPC Network products that we sell use InfiniBand® technology.
Converged Networks are designed to address the evolving data center by consolidating and unifying
various classes of connectivity and network traffic. For example, Fibre Channel over Ethernet, or
FCoE, uses one common Ethernet network for both Fibre Channel storage and Ethernet data
transmission, thus combining the benefits of Fibre Channel technology with the pervasiveness of
Ethernet networks, which is what most local area networks utilize.
Our products are sold worldwide, primarily to original equipment manufacturers, or OEMs, and
distributors. Our customers rely on our various networking infrastructure products to deliver
solutions to information technology professionals in virtually every business sector. Our products
are found primarily in server, workstation and storage subsystem solutions that are used by small,
medium and large enterprises with critical business data requirements. The business applications
that drive requirements for our networking infrastructure products include:
| General business information technology requirements; | ||
| Data warehousing, data mining and online transaction processing; | ||
| Media-rich environments such as film and video, broadcast, medical imaging, computer-aided design, or CAD, and computer-aided manufacturing, or CAM; | ||
| Server clustering, high-speed backup and data replication; and | ||
| Research and scientific applications. |
Our products generally include adapters, switches and application-specific integrated
circuits, or ASICs. Adapters physically reside in a server and provide for connectivity from the
server to storage, HPC and converged networks. Switches manage the transmission and routing of data
from servers to storage devices or from servers to servers. The ASICs that we sell are protocol
controller chips that are embedded within a server or storage device.
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We classify our products into three broad categories: Host Products, Network Products and
Silicon Products. Host Products consist of Fibre Channel and Internet Small Computer Systems
Interface, or iSCSI, host bus adapters; InfiniBand host channel adapters; Fibre Channel over
Ethernet, or FCoE, converged network adapters, or CNAs; and Intelligent Ethernet adapters, or IEAs.
Network Products consist of Fibre Channel switches, including stackable edge switches, bladed
switches, virtualized pass-through modules, and high-port count modular-chassis switches;
InfiniBand switches, including high-end multi-protocol directors, edge and bladed switches;
Enhanced Ethernet pass-through modules; and storage routers for bridging Fibre Channel, FCoE and
iSCSI networks. Silicon Products consist of Fibre Channel controllers, iSCSI controllers,
converged network controllers and Ethernet controllers.
Host Products accounted for 72%, 70% and 73% of our net revenues for fiscal 2010, 2009 and
2008, respectively. Network Products accounted for 18%, 18% and 17% of our net revenues for fiscal
2010, 2009 and 2008, respectively.
Storage Networking
Our ability to address the market for Storage Networks stems from our broad product line based
on Fibre Channel and iSCSI technologies. Fibre Channel is currently the dominant technology for
enterprise storage networking, while iSCSI is a lower cost alternative primarily used by small and
medium sized businesses.
We provide Fibre Channel and iSCSI adapters for servers as well as mezzanine adapters for
bladed servers, which connect host computer servers to storage networks. We also provide a broad
line of Fibre Channel switches, including stackable edge switches, bladed switches, virtual
pass-through modules, and high-port count modular-chassis switches. A unique feature of our edge
and modular-chassis switch is its stackability. Stackable switches use dedicated high-speed
stacking ports as inter-switch links, or ISLs, allowing for simplified future expansion and
scalability, reduction in necessary device ports, lower upfront and future expenses, and reduced
management costs and complexities.
In addition, we provide intelligent storage routers for bridging Fibre Channel, FCoE and iSCSI
networks. Our intelligent storage routers provide a cost-effective way for iSCSI-based servers to
access storage devices already deployed on a Fibre Channel storage network.
HPC Networking
Our High Performance Computing Networking products are based on InfiniBand technology.
InfiniBand is an industry-standard specification used to connect servers, communications
infrastructure equipment, storage and embedded systems, and is used primarily within high
performance computing environments where its capability to quickly and efficiently process
data-intense calculations is crucial. Our ability to successfully address the requirements of
server vendors targeting high performance computing environments is enhanced by our experience and
success addressing the server-to-storage connectivity demands of these same customers. These
products provide high performance solutions for cluster and grid computing networks. We offer a
comprehensive, end-to-end portfolio of InfiniBand networking products for HPC Networking including
quad data rate, or QDR, host channel adapters, QDR multi-protocol directors, edge switches and
bladed switches, as well as software tools to install, operate and maintain high performance
networks.
Our QDR InfiniBand switches range from fixed configuration to fully configurable, modular
director class switches. The modularly designed QLogic directors can scale from as few as 18 ports
to the maximum of 864 ports, giving customers the flexibility they demand.
Converged Networking
Our Enhanced Ethernet based portfolio included in our Converged Networking products consists
of CNAs and IEAs. CNAs are a new class of networking products that support the emerging Fibre
Channel over Ethernet technology. FCoE is a converged networking technology that provides a
unified storage and data network over Enhanced Ethernet, while preserving the investment in
existing Fibre Channel infrastructure and storage. Our CNAs enable true network convergence by
combining the benefits of Fibre Channel technology with the pervasiveness of Ethernet networks and
leverage our core technology and expertise, including our mature Fibre Channel driver stack. Based
on QLogics advanced Network Plus Architecture, our CNAs are designed for next-generation,
virtualized and unified data centers with powerful multi-processor, multi-core servers and are
available in multiple adapter form factors, including standard and mezzanine cards. Although we
are shipping FCoE products, as with most emerging technologies, it is expected that the market for
FCoE will take a number of years to fully develop and mature. Our IEAs are designed for various
applications such as virtualization, cluster computing, internet protocol content delivery systems,
grid computing, database clustering, network attached storage, and storage and backup servers.
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The acquisition of NetXen, Inc. in April 2009 expanded our product portfolio to include
Ethernet networking products that are complementary to our existing products. The acquisition also
expanded our expertise to better address a wider range of emerging customer requirements for
converged networks and enhanced our ability to compete for future converged networking design wins.
Customers
Our products are incorporated in solutions from a number of storage system and computer system
OEM customers, including Cisco Systems, Inc., Dell Inc., EMC Corporation, Hewlett-Packard Company,
International Business Machines Corporation, NetApp, Inc., Oracle Corporation and many others. A
small number of these customers account for a substantial portion of our net revenues, and we
expect that a small number of customers will continue to represent a substantial portion of our net
revenues for the foreseeable future. Our top ten customers accounted for 86%, 84% and 85% of net
revenues during fiscal 2010, 2009 and 2008, respectively.
A summary of our customers, including their manufacturing subcontractors, that represent 10%
or more of our net revenues is as follows:
2010 | 2009 | 2008 | ||||||||||
Hewlett-Packard |
24 | % | 21 | % | 20 | % | ||||||
IBM |
20 | % | 18 | % | 16 | % | ||||||
Sun Microsystems (acquired by Oracle in fiscal 2010) |
* | 11 | % | 11 | % |
* | Less than 10% of net revenues. |
We believe that our relationships with our customers are good. However, we believe our major
customers continually evaluate whether or not to purchase products from alternative or additional
sources. Additionally, customers economic and market conditions frequently change. Accordingly,
there can be no assurance that a major customer will not reduce, delay or eliminate its purchases
from us. Any such reduction, delay or loss of purchases could have a material adverse effect on our
business, financial condition or results of operations.
Some of our OEM customers experience seasonality and uneven sales patterns in their
businesses. The seasonality is primarily due to the closing of a disproportionate percentage of
sales transactions in the last month, weeks and days of each quarter and spikes in sales during the
fourth quarter of each calendar year. Although we do not consider our business to be highly
seasonal, we believe that seasonality has and may impact our business. To the extent that we
experience seasonality in our business, it would most likely have a negative impact on the
sequential growth rate of our net revenues during the fourth quarter of our fiscal year.
International revenues accounted for 54%, 52% and 49% of our net revenues for fiscal 2010,
2009 and 2008, respectively. For additional information on our international sales and operations,
see Managements Discussion and Analysis of Financial Condition and Results of Operations, included
in Part II, Item 7 of this report.
Sales and Marketing
Our products are marketed and sold primarily to OEMs by our internal sales team supported by
field sales and systems engineering personnel. In addition, we sell our products through a network
of regional and international distributors.
In domestic and in certain international markets, we maintain both a sales force to serve our
OEM customers and distributors that are focused on medium-sized and emerging accounts. We maintain
a focused business development and outbound marketing organization to assist, train and equip the
sales organizations of our OEM customers and their respective reseller organizations and partners.
We maintain sales offices in the United States and various international locations. For information
regarding revenue by geographic area, see Managements Discussion and Analysis of Financial
Condition and Results of Operations, included in Part II, Item 7 of this report.
We work with our storage system and computer system OEM customers during their design cycles.
We support these customers with pre-sales system design support and services, as well as training
classes and seminars conducted both in the field and from our worldwide offices.
Our sales efforts are focused on establishing and developing long-term relationships with our
OEM customers. The sales cycle typically begins with the identification of an OEMs requirement
that could be potentially fulfilled with an existing QLogic product or a product based on a new
technology. The cycle continues with technical and sales collaboration with the OEM and, if
successful,
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leads to one of our product designs being selected as a component in a potential customers
storage system or computer system. We then work closely with the customer to integrate our products
with the customers current and next generation products or platforms. This cycle, from opportunity
identification to initial production shipment, typically ranges from six to twenty-four months.
In addition to sales and marketing efforts, we actively participate with industry
organizations relating to the development and acceptance of industry standards. We collaborate with
peer companies through open standards bodies, cooperative testing and certifications. To ensure and
promote multi-vendor interoperation, we maintain interoperability certification programs and
testing laboratories.
Engineering and Development
Our industry is subject to rapid and regular technological change. Our ability to compete
depends upon our ability to continually design, develop and introduce new products that take
advantage of market opportunities and address emerging standards. Our strategy is to leverage our
substantial base of architectural and systems expertise to address a broad range of input/output
storage and server networking solutions.
We are engaged in the design and development of application-specific integrated circuits, or
ASICs, adapters and switches based on one or more of Fibre Channel, iSCSI, FCoE and Ethernet
technologies. We also design and develop ASICs, adapters and switches based on InfiniBand
technology for HPC environments; and storage routers for bridging Fibre Channel, FCoE and iSCSI
networks.
We continue to invest in engineering and development to expand our capabilities to address the
emerging technologies in the rapid evolution of storage, HPC and converged networks. During fiscal
2010, 2009 and 2008, we incurred engineering and development expenses of $136.8 million, $133.3
million and $134.7 million, respectively.
Backlog
A substantial portion of our sales with OEM customers are transacted through hub arrangements
whereby our products are purchased on a just-in-time basis and fulfilled from warehouse facilities,
or hubs, in proximity to the facilities of our customers or their contract manufacturers. Our sales
are made primarily pursuant to purchase orders, including blanket purchase orders for hub
arrangements. Because of the hub arrangements with our customers and industry practice that allows
customers to cancel or change orders with limited advance notice, we believe that backlog at any
particular date is not a reliable indicator of our future revenue levels and is not material to
understanding our business.
Competition
The markets for networking infrastructure components are highly competitive and characterized
by short product life cycles, price erosion, rapidly changing technology, frequent product
performance improvements and evolving industry standards. We believe the principal competitive
factors in our industry include:
| time-to-market; |
| features and functionality; |
| product quality, reliability and performance; |
| price; |
| new product innovation; |
| customer relationships; |
| design capabilities; |
| customer service and technical support; and |
| interoperability of components in storage, HPC and converged networks. |
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While we expect competition to continue to increase and evolve, we believe that we compete
effectively with respect to each of these factors.
Due to the diversity of products required in the storage, HPC and converged networking
infrastructure, we compete with many companies. In the traditional enterprise storage Fibre
Channel adapter market, our primary competitor is Emulex Corporation, with Brocade Communications
Systems, Inc. also participating. In the iSCSI adapter market, our primary competitor is Broadcom
Corporation and we also compete indirectly with companies offering software initiator solutions.
In the FCoE adapter market, we compete with Emulex Corporation, and recent entry, Brocade
Communications Systems, Inc. and we also compete with Ethernet adapter suppliers Broadcom
Corporation and Intel Corporation. In the Intelligent Ethernet adapter market, we compete with
Intel Corporation, Broadcom Corporation and Emulex Corporation. In the Fibre Channel switch and
storage router markets, we compete primarily with Brocade Communications Systems, Inc. and Cisco
Systems, Inc. In the InfiniBand adapter and switch markets, we compete primarily with Mellanox
Technologies, Ltd. and Voltaire Ltd.
Manufacturing
We use outside suppliers and foundries to manufacture our products. This approach allows us
to avoid the high costs of owning, operating, maintaining and upgrading wafer fabrication and
assembly facilities. As a result, we focus our resources on product design and development, quality
assurance, sales and marketing, and supply chain management. Prior to the sale of our products,
final tests are performed to ensure quality. Product test, customer-specific configuration and
product localization are completed by third-party service providers or by us. We also provide
fabrication process reliability tests and conduct failure analysis to confirm the integrity of our
quality assurance procedures.
Our semiconductors are currently manufactured by a number of foundries. Our major
semiconductor suppliers are LSI Corporation, International Business Machines Corporation and Taiwan
Semiconductor Manufacturing Company Limited. Most of the ASICs used in our products are
manufactured using 180, 130, 90 or 65 nanometer process technology. In addition, we continually
evaluate smaller geometries. In the past, we have experienced some difficulties in shifting to
smaller geometry process technologies or new manufacturing processes, which resulted in reduced
manufacturing yields, delays in product deliveries and increased expenses. We may face similar
difficulties, delays and expenses as we continue to transition our products to smaller geometry
processes.
We depend on foundries to allocate a portion of their capacity sufficient to meet our needs
and to produce products of acceptable quality and with satisfactory manufacturing yields in a
timely manner. These foundries fabricate products for other companies and, in certain cases,
manufacture products of their own design. We do not have long-term supply agreements with any of
these foundries; we purchase both wafers and finished chips on a purchase order basis. Therefore,
the foundries generally are not obligated to supply products to us for any specific period, in any
specific quantity or at any specific price, except as may be provided in a particular purchase
order. We work with our existing foundries, and intend to qualify new foundries, as needed, to
obtain additional manufacturing capacity. However, there can be no assurance that we will be able
to maintain our current foundry relationships or obtain additional capacity.
We currently purchase our semiconductor products from foundries either in finished or wafer
form. We use subcontractors to assemble our semiconductor products purchased in wafer form. In the
assembly process for our semiconductor products, the silicon wafers are separated into individual
die, which are then assembled into packages and tested.
For our adapter, switch and other products, we use third-party contract manufacturers for
material procurement, assembly, test and inspection in a turnkey model, prior to shipment to our
customers. These contract manufacturers are located outside the United States. To the extent that
we rely on these contract manufacturers, we are not able to directly control product delivery
schedules and quality assurance. The loss of one of our major contract manufacturers could
significantly impact our ability to produce products for an indefinite period of time. Qualifying
a new contract manufacturer and commencing volume production is a lengthy and expensive process.
While we believe that our relationships with our contract manufacturers are good, if we are
required to change a contract manufacturer or if a contract manufacturer experiences delays,
disruptions, capacity constraints, component part shortages or quality control problems in its
manufacturing operations, shipment of our products to our customers could be delayed, resulting in
loss or postponement of revenue and potential harm to our competitive position and relationships
with customers.
Certain key components used in the manufacture of our products are purchased from single or
limited sources. ASICs are purchased from single sources and microprocessors, certain connectors,
logic chips, power supplies and programmable logic devices are purchased from limited sources. If
one of these suppliers experiences an interruption in its ability to supply our needs, or chooses
to sever their relationship with us, we may be unable to produce certain of our products until
alternative suppliers are identified and qualified.
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Many of the component parts used in our adapter, switch and other products are standard
off-the-shelf items, which are, or can be, obtained from more than one source. We select suppliers
on the basis of technology, manufacturing capacity, financial viability, quality and cost. Our
reliance on third-party manufacturers involves risks, including possible limitations on
availability of products due to market abnormalities, geopolitical instability, unavailability of
or delays in obtaining access to certain product technologies, and the absence of complete control
over delivery schedules, manufacturing yields and total production costs. In addition, the global
economic weakness and uncertainty could adversely affect our supplier base and increase the
potential for one or more of our suppliers to experience financial distress or bankruptcy. The
inability of our suppliers to deliver products of acceptable quality and in a timely manner or our
inability to procure adequate supplies of our products could have a material adverse effect on our
business, financial condition or results of operations.
Intellectual Property
While we have a number of patents issued and additional patent applications pending in the
United States, Canada, Europe and Asia, we rely primarily on our trade secrets, trademarks,
copyrights and contractual provisions to protect our intellectual property. We attempt to protect
our proprietary information through confidentiality agreements and contractual provisions with our
customers, suppliers, employees and consultants, and through other security measures. However, the
laws of certain countries in which our products are or may be developed, manufactured or sold,
including various countries in Asia, may not protect our products and intellectual property rights
to the same extent as the laws of the United States, or at all.
Our ability to compete may be affected by our ability to protect our intellectual property.
Although we intend to protect our rights vigorously, there can be no assurance that these measures
will be successful.
We have in the past received notices of claimed infringement of intellectual property rights
and been involved in intellectual property litigation. There can be no assurance that third parties
will not assert additional claims of infringement of intellectual property rights against us, or
against customers who we are contractually obligated to indemnify, with respect to existing and
future products. In the event of a patent or other intellectual property dispute, we may be
required to expend significant resources to defend such claims, develop non-infringing technology
or to obtain licenses to the technology which is the subject of the claim. There can be no
assurance that we would be successful in such development or that any such license would be
available on commercially reasonable terms, if at all. In the event of litigation to determine the
validity of any third partys claims, such litigation could result in significant expense to us,
and divert the efforts of our technical and management personnel, whether or not such litigation is
determined in our favor.
Some of our products are designed to include software or other intellectual property licensed
from third parties. None of these licenses relate to core QLogic developed technology, are material
to our business, or require payment of amounts that are material.
Environment
Our operations are subject to regulation under various federal, state, local and foreign laws
concerning the environment, including laws addressing the discharge of pollutants into the
environment, the management and disposal of hazardous substances and wastes, and the cleanup of
contaminated sites. We could incur substantial costs, including cleanup costs, fines and civil or
criminal sanctions, and third-party damage or personal injury claims, if we violate or become
liable under environmental laws.
Most of our products are also subject to various laws governing chemical substances in
products, including those regulating the manufacture and distribution of chemical substances and
those restricting the presence of certain substances in electronic products. We could incur
substantial costs, or our products could be restricted from entering certain countries, if our
products become non-compliant with environmental laws. We also face increasing complexity in our
product design and procurement operations as we adjust to new and future requirements relating to
the materials composition of our products. For example, the European Union adopted the Waste
Electrical and Electronic Equipment, or WEEE, Directive, which requires European Union countries to
enact legislation to make producers of electrical goods financially responsible for specified
collection, recycling, treatment and disposal of past and future covered products. These and
similar laws adopted in other countries could impose a significant cost of doing business in those
countries.
Environmental costs are presently not material to our results of operations or financial
position, and we do not currently anticipate material capital expenditures for environmental
control facilities.
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Working Capital
Cash provided by operating activities was $161.8 million for fiscal 2010. For additional
information on our working capital, see Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital Resources, included in Part II, Item 7 of this
report.
Employees
We had 1,038 employees as of May 13, 2010. We believe our future prospects will depend, in
part, on our ability to continue to attract, train, motivate, retain and manage skilled
engineering, sales, marketing and executive personnel. Our employees are not represented by a labor
union. We believe that our relations with our employees are good.
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Item 1A. | Risk Factors |
Set forth below and elsewhere in this report and in other documents we file with the
Securities and Exchange Commission are risks and uncertainties that could cause our actual results
of operations to differ materially from the results contemplated by the forward-looking statements
contained in this report or otherwise publicly disclosed by the Company.
Economic weakness and uncertainty has resulted in a decrease in information technology spending
levels and could result in further deterioration of our revenues and operating results.
The United States and other countries around the world have been experiencing economic
weakness and uncertainty. There has been an erosion of global consumer confidence amidst concerns
over declining asset values, energy costs, geopolitical issues, the availability and cost of
credit, rising unemployment, and the stability and solvency of financial institutions, financial
markets, businesses and sovereign nations. We are unable to predict the likely duration and
severity of the disruption in financial markets and adverse economic conditions in the United
States and other countries. The economic uncertainty has resulted in a global downturn in
information technology, or IT, spending rates, which has negatively impacted our revenue and
operating results. Further reductions in IT spending rates could result in longer sales cycles,
increased inventory provisions, increased production costs, lower prices for our products and
reduced sales volumes. Even if IT spending rates were to increase, we cannot be certain that the
market for our networking infrastructure products would be positively impacted. If economic
conditions worsen, there are future reductions in either domestic or international IT spending
rates, or IT spending rates do not increase, our revenues, operating results and financial
condition could deteriorate further.
As a result of worldwide economic uncertainty, it is extremely difficult for us and our
customers to forecast future revenue levels based on historical information and trends. Portions
of our expenses are fixed and others are tied to expected levels of revenue. To the extent that we
do not achieve our anticipated level of revenue, our operating results could be adversely affected
until such expenses are reduced to an appropriate level. In addition, we have implemented various
cost-cutting measures in order to better align our revenues and cost structure. We may not be able
to identify and implement appropriate further cost savings in a timely manner. Additionally, we may
determine that the costs of implementing reductions outweigh the commensurate benefits.
We are also subject to various counterparty risks as a result of the economic slowdown,
including the potential insolvency of key suppliers resulting in product delays, inability of
customers to obtain credit to finance purchases of our products and/or potential customer
insolvencies, increased risk that customers may delay payments or fail to pay, and counterparty
failures, particularly financial institutions, negatively impacting our treasury operations. Any
of these risks could have a material adverse effect on our results of operations or financial
condition.
Our operating results may fluctuate in future periods, which could cause our stock price to
decline.
We have experienced, and expect to experience in future periods, fluctuations in sales and
operating results from quarter to quarter. In addition, there can be no assurance that we will
maintain our current gross margins or profitability in the future. A significant portion of our net
revenues in each fiscal quarter results from orders booked in that quarter. Orders placed by major
customers are typically based on their forecasted sales and inventory levels for our products.
Fluctuations in our quarterly operating results may also be the result of:
| the timing, size and mix of orders from customers; | ||
| gain or loss of significant customers; | ||
| customer policies pertaining to desired inventory levels of our products; | ||
| sales discounts and customer incentives; | ||
| the availability and sale of new products; | ||
| changes in our average selling prices; | ||
| variations in manufacturing capacities, efficiencies and costs; |
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| the availability and cost of components, including silicon chips; | ||
| variations in product development costs, especially related to advanced technologies; | ||
| variations in operating expenses; | ||
| changes in effective income tax rates, including those resulting from changes in tax laws; | ||
| our ability to timely produce products that comply with new environmental restrictions or related requirements of our original equipment manufacturer, or OEM, customers; | ||
| actual events, circumstances, outcomes and amounts differing from judgments, assumptions and estimates used in determining the value of certain assets (including the amounts of related valuation allowances), liabilities and other items reflected in our consolidated financial statements; | ||
| the timing of revenue recognition and revenue deferrals; | ||
| gains or losses related to our investment securities; | ||
| changes in accounting rules or our accounting policies; | ||
| general economic and other conditions affecting the timing of customer orders and capital spending; or | ||
| changes in the global economy that impact IT spending. |
In addition, our quarterly results of operations are influenced by competitive factors,
including the pricing and availability of our products and our competitors products. Furthermore,
communications regarding new products and technologies could cause our customers to defer or cancel
purchases of our products. Order deferrals by our customers, delays in our introduction of new
products, and longer than anticipated design-in cycles for our products have in the past adversely
affected our quarterly results of operations. Due to these factors, as well as other unanticipated
factors, it is likely that in some future quarter or quarters our operating results will be below
the expectations of public market analysts or investors, and as a result, the price of our common
stock could significantly decrease.
We expect gross margin to vary over time, and our recent level of gross margin may not be
sustainable.
Our recent level of gross margin may not be sustainable and may be adversely affected by
numerous factors, including:
| changes in product mix; | ||
| changes in manufacturing volumes over which fixed costs are absorbed; | ||
| increased price competition; | ||
| introduction of new products by us or our competitors, including products with advantages in price, performance or features; | ||
| our inability to reduce manufacturing-related or component costs; | ||
| entry into new markets or the acquisition of new businesses; | ||
| amortization and impairments of purchased intangible assets; | ||
| sales discounts and customer incentives; | ||
| increases in material, labor or overhead costs; | ||
| excess inventory and inventory holding charges; |
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| changes in distribution channels; and | ||
| increased warranty costs. |
Our stock price may be volatile.
The market price of our common stock has fluctuated substantially, and there can be no
assurance that such volatility will not continue. Several factors could impact our stock price
including, but not limited to:
| differences between our actual revenues and operating results and the published expectations of public market analysts; | ||
| quarterly fluctuations in our revenues and operating results; | ||
| introduction of new products or changes in product pricing policies by our competitors or us; | ||
| conditions in the markets in which we operate; | ||
| changes in market projections by industry forecasters; | ||
| changes in estimates of our earnings or rating upgrades/downgrades of our stock by public market analysts; | ||
| operating results or forecasts of our major customers or competitors; | ||
| rumors or dissemination of false information; and | ||
| general economic and geopolitical conditions. |
In addition, stock markets have experienced extreme price and volume volatility in recent
years and stock prices of technology companies have been especially volatile. This volatility has
had a substantial effect on the market prices of securities of many public companies for reasons
frequently unrelated to the operating performance of the specific companies. These broad market
fluctuations could adversely affect the market price of our common stock.
Our business is dependent, in large part, on the continued growth of the networking markets that we
serve and if these markets do not continue to develop, our business will suffer.
Our products are used in storage, high performance computing, or HPC, and converged networks, and therefore our business is
dependent on these network infrastructure markets. Our success in generating revenue in these
markets will depend on, among other things, our ability to:
| educate potential OEM customers, distributors, resellers, system integrators, storage system providers and end-user organizations about the benefits of our products; | ||
| maintain and enhance our relationships with OEM customers, distributors, resellers, system integrators and storage system providers; | ||
| predict and base our products on standards which ultimately become industry standards; and | ||
| achieve and maintain interoperability between our products and other equipment and components from diverse vendors. |
Our business could be adversely affected by a significant increase in the market acceptance of
blade servers.
Blade server products have gained acceptance in the market over the past few years. Blade
servers use custom storage, HPC and converged network infrastructure products, including bladed
switches and mezzanine cards, which have lower average selling prices than the network
infrastructure products used in a non-blade server environment. If blade servers gain an increased
percentage of the overall server market, our business could be adversely affected by the transition
to blade server products. This could have a material adverse effect on our business or results of
operations.
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Our financial condition will be materially harmed if we do not maintain and gain market acceptance
of our products.
The markets in which we compete involve rapidly changing technology, evolving industry
standards and continuing improvements in products and services. Our future success depends, in
part, on our ability to:
| enhance our current products and develop and introduce, in a timely manner, new products that keep pace with technological developments and industry standards; | ||
| compete effectively on the basis of price and performance; and | ||
| adequately address OEM and end-user customer requirements and achieve market acceptance. |
We believe that to remain competitive, we will need to continue to develop new products, which
will require significant investment. Our competitors may be developing alternative technologies,
which may adversely affect the market acceptance of our products. Although we continue to explore
and develop products based on new technologies, a substantial portion of our revenues is generated
today from Fibre Channel technology. If alternative technologies are adopted by the industry, we
may not be able to develop products for new technologies in a timely manner. Further, even if
alternative technologies do augment Fibre Channel revenues, our products may not be fully developed
in time to be accepted by our customers. Even if our new products are developed on time, we may not
be able to manufacture them at competitive prices or in sufficient volumes.
Some of our products are based on the Fibre Channel over Ethernet, or FCoE, protocol. FCoE is
a relatively new converged networking technology that provides a unified storage and data network
over Enhanced Ethernet, while preserving the investment in existing Fibre Channel infrastructure
and storage. As with most emerging technologies, it is expected that the market for FCoE will take
a number of years to fully develop and mature. We expect products based on the FCoE protocol to
supplement, and perhaps replace, certain products based on the Fibre Channel protocol. As a result,
an inability to maintain our market share in the Fibre Channel market and build upon our market
share in the FCoE market could have a material adverse effect on our business or results of
operations.
We depend on a small number of customers, and any decrease in revenues or cash flows from any one
of our major customers could adversely affect our results of operations and cause our stock price
to decline.
A small number of customers account for a substantial portion of our net revenues, and we
expect that a small number of customers will continue to represent a substantial portion of our net
revenues in the foreseeable future. Our top ten customers accounted for 86%, 84% and 85% of our net
revenues for fiscal 2010, 2009 and 2008, respectively. Hewlett-Packard and IBM each accounted for
20% or more of net revenues during fiscal 2010. We are also subject to credit risk associated
with the concentration of our accounts receivable. In addition, the worldwide economic slowdown and
tightening of credit in financial markets may impact the businesses of our customers, which could
have a material adverse effect on our business, financial condition or results of operations.
Our customers generally order products through written purchase orders as opposed to long-term
supply contracts and, therefore, are generally not obligated to purchase products from us for any
extended period. Major customers also have significant leverage over us and may attempt to change
the terms, including pricing, customer incentives and payment terms, which could have a material
adverse effect on our business, financial condition or results of operations. This risk is
increased due to the potential for some of these customers to merge with or acquire one or more of
our other customers. As our OEM customers are pressured to reduce prices as a result of
competitive factors, we may be required to contractually commit to price reductions for our
products before we know how, or if, cost reductions can be obtained. If we are unable to achieve
such cost reductions, our gross margins could decline and such decline could have a material
adverse effect on our business, financial condition or results of operations.
Our business may be subject to seasonal fluctuations and uneven sales patterns in the future.
A large percentage of our products are sold to customers who experience seasonality and uneven
sales patterns in their businesses. As a result, we may experience similar seasonality and uneven
sales patterns. We believe this uneven sales pattern is a result of many factors including:
| the tendency of our customers to close a disproportionate percentage of their sales transactions in the last month, weeks and days of each quarter; | ||
| spikes in sales during the fourth quarter of each calendar year that some of our customers experience; and |
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| differences between our quarterly fiscal periods and the fiscal periods of our customers. |
In addition, as our customers increasingly require us to maintain products at hub locations
near their facilities, it becomes more difficult for us to predict sales trends. Our uneven sales
pattern also makes it extremely difficult to predict the demand of our customers and adjust
manufacturing capacity accordingly. If we predict demand that is substantially greater than actual
customer orders, we will have excess inventory. Alternatively, if customer orders substantially
exceed predicted demand, the ability to assemble, test and ship orders received in the last weeks
and days of each quarter may be limited, or at an increased cost, which could have a material
adverse effect on quarterly revenues and earnings.
Competition within the markets for our products is intense and includes various established
competitors.
The markets for networking infrastructure components are highly competitive and are
characterized by short product life cycles, price erosion, rapidly changing technology, frequent
product performance improvements and evolving industry standards. Due to the diversity of products
required in storage, HPC and converged networking infrastructure, we compete with many companies.
In the traditional enterprise storage Fibre Channel adapter market, our primary competitor is
Emulex Corporation, with Brocade Communications Systems, Inc. also participating. In the iSCSI
adapter market, our primary competitor is Broadcom Corporation and we also compete indirectly with
companies offering software initiator solutions. In the FCoE adapter market, we compete with
Emulex Corporation, and recent entry, Brocade Communications Systems, Inc. and we also compete with
Ethernet adapter suppliers Broadcom Corporation and Intel Corporation. In the Intelligent Ethernet
adapter market, we compete with Intel Corporation, Broadcom Corporation and Emulex Corporation. In
the Fibre Channel switch and storage router markets, we compete primarily with Brocade
Communications Systems, Inc. and Cisco Systems, Inc. In the InfiniBand adapter and switch markets,
we compete primarily with Mellanox Technologies, Ltd. and Voltaire Ltd. We may also compete with
some of our server and storage systems customers, some of which have the capability to develop
products comparable to those we offer.
We need to continue to develop products appropriate to our markets to remain competitive as
our competitors continue to introduce products with improved features. While we continue to devote
significant resources to engineering and development, these efforts may not be successful or
competitive products may not be developed and introduced in a timely manner. In addition, while
relatively few competitors offer a full range of storage, HPC and converged networking
infrastructure products, additional domestic and foreign manufacturers may increase their presence
in these markets. We may not be able to compete successfully against these or other competitors. If
we are unable to design, develop or introduce competitive new products on a timely basis, our
future operating results may be materially and adversely affected.
We expect the pricing of our products to continue to decline, which could reduce our revenues,
gross margins and profitability.
We expect the average unit prices of our products (on a like-for-like product comparison
basis) to decline in the future as a result of competitive pricing pressures, increased sales
discounts and customer incentives, new product introductions by us or our competitors, or other
factors. In addition, there is a general market trend of customers migrating away from the
distribution channel for product purchases to OEMs, where products have a lower average unit price.
If we are unable to offset these factors by increasing sales volumes, or reducing product
manufacturing costs, our total revenues and gross margins may decline. In addition, we must develop
and introduce new products and product enhancements. Moreover, most of our expenses are fixed in
the short-term or incurred in advance of receipt of corresponding revenues. As a result, we may not
be able to decrease our spending to offset any unexpected shortfall in revenues. If this occurs,
our revenues, gross margins and profitability could decline.
Our distributors may not adequately stock and sell our products and their reseller customers may
purchase products from our competitors, which could negatively affect our results of operations.
Our distributors generally offer a diverse array of products from several different
manufacturers and suppliers. Accordingly, we are at risk that these distributors may give higher
priority to stocking and selling products from other suppliers, thus reducing their efforts and
ability to sell our products. A reduction in sales efforts by our current distributors could
materially and adversely impact our business or results of operations. In addition, if we decrease
our distributor-incentive programs (i.e., competitive pricing and rebates), our distributors may
decrease the amount of product purchased from us. This could result in a change of business
behavior, and distributors may decide to decrease the amount of product held and reduce their
inventory levels, which could impact availability of our products to their customers.
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As a result of these factors regarding our distributors or other unrelated factors, the
reseller customers of our distributors could decide to purchase products developed and manufactured
by our competitors. Any loss of demand for our products by value-added resellers and system
integrators could have a material adverse effect on our business or results of operations.
We are dependent on sole source and limited source suppliers for certain key components.
Certain key components used in the manufacture of our products are purchased from single or
limited sources. Application-specific integrated circuits, or ASICs, are purchased from single
sources and microprocessors, certain connectors, logic chips, power supplies and programmable logic
devices are purchased from limited sources. If one of these suppliers experiences an interruption
in its ability to supply our needs, or chooses to sever its relationship with us, we may be unable
to produce certain of our products, which could result in the loss of customers and have a material
adverse effect on our results of operations. The global economic downturn and tightening of credit
in financial markets may adversely impact our suppliers by limiting their ability to finance their
business operations and as a result limit their ability to supply products to us.
We are dependent on worldwide third-party subcontractors and contract manufacturers.
Third-party subcontractors located outside the United States assemble and test certain
products for us. To the extent that we rely upon third-party subcontractors to perform these
functions, we will not be able to directly control product delivery schedules and quality
assurance. This lack of control may result in product shortages or quality assurance problems that
could delay shipments of products or increase manufacturing, assembly, testing or other costs. If
any of these subcontractors experience capacity constraints or financial difficulties, suffer
damage to their facilities, experience power outages or any other disruption of assembly or testing
capacity, we may not be able to obtain alternative assembly and testing services in a timely
manner.
In addition, the loss of any of our major third-party contract manufacturers could
significantly impact our ability to produce products for an indefinite period of time. Qualifying a
new contract manufacturer and commencing volume production is a lengthy and expensive process. Some
customers will not purchase any products, other than a limited number of evaluation units, until
they qualify the manufacturing line for the product, and we may not always be able to satisfy the
qualification requirements of these customers. If we are required to change a contract manufacturer
or if a contract manufacturer experiences delays, disruptions, capacity constraints, component
parts shortages or quality control problems in its manufacturing operations, shipment of our
products to our customers could be delayed, resulting in loss or postponement of revenues and
potential harm to our competitive position and relationships with customers. In addition, the
global economic weakness and tightening of credit markets could adversely affect our third-party
subcontractors or contract manufacturers and increase the potential for one or more of them to
experience financial distress or bankruptcy.
Our investment securities portfolio could experience a decline in market value, which could
materially and adversely affect our financial results.
As of March 28, 2010, we held short-term investment securities totaling $185.4 million. We
invest primarily in debt securities, the majority of which are high investment grade, and we limit
the exposure to credit risk through diversification and investment in highly-rated securities.
However, investing in highly-rated securities does not entirely mitigate the risk of potential
declines in market value. During fiscal 2009, we recorded impairment charges related to investment
securities, including securities issued by companies in the financial services sector that had
previously been rated AA or higher. A deterioration in the economy, including tightening of credit
markets or significant volatility in interest rates, could cause declines in value of our
investment securities or could impact the liquidity of the portfolio. If market conditions
deteriorate significantly, our results of operations or financial condition could be materially and
adversely affected.
Our investment securities include $22.3 million of investments in auction rate debt and
preferred securities (ARS), the majority of which are rated AA or higher. During late fiscal 2008,
the market auctions of many ARS began to fail, including auctions for our ARS. The underlying
assets for auction rate debt securities in our portfolio are student loans, substantially all of
which are backed by the federal government under the Federal Family Education Loan Program. The
underlying assets of our auction rate preferred securities are the respective funds investment
portfolios.
In November 2008, we entered into an agreement with the broker for all of the ARS we currently
hold, which provides us with certain rights (ARS Rights), in exchange for the release of potential
claims and damages against the broker. The ARS Rights entitle us to sell the related ARS back to
the broker for a price equal to the liquidation preference of the ARS plus accrued but unpaid
dividends or interest, if any, which price is referred to as par. The ARS Rights may be
exercised by us at any time between June 30, 2010 and July 2, 2012, if the securities are not
earlier redeemed or sold. Under the ARS Rights, the broker may, at its discretion, purchase the
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ARS at any time through July 2, 2012 without prior notice to us and must pay us par value for
the ARS within one day of the sale transaction settlement. While we expect to ultimately recover
our investments in the ARS at par, we may be unable to liquidate some or all of our ARS should we
need or desire to access the funds invested in those securities prior to redemption by the issuer
or the exercise of the ARS Rights. There is also a risk that our broker will default on its
obligation to purchase the ARS in the event that we exercise the ARS Rights.
Our products are complex and may contain undetected software or hardware errors that could lead to
an increase in our costs, reduce our net revenues or damage our reputation.
Our products are complex and may contain undetected software or hardware errors when first
introduced or as newer versions are released. We are also exposed to risks associated with latent
defects in existing products and to risks that components purchased from third-party subcontractors
and incorporated into our products may not meet our specifications or may otherwise fail
prematurely. From time to time, we have found errors in existing, new or enhanced products. In
addition, our products are frequently combined with other products, including software, from other
vendors, and these products often need to interface with existing networks, each of which have
different specifications and utilize multiple protocol standards and products from other vendors.
As a result, when problems occur, it may be difficult to identify the source of the problem. The
occurrence of hardware or software errors could adversely affect the sales of our products, cause
us to incur significant warranty and repair costs, divert the attention of our engineering
personnel from our product development efforts and cause significant customer relations problems.
The migration of our customers toward new products could adversely affect our results of
operations.
As new or enhanced products are introduced, we must successfully manage the transition from
older products in order to minimize the effects of product inventories that may become excess and
obsolete, as well as ensure that sufficient supplies of new products can be delivered to meet
customer demand. Our failure to manage the transition to newer products in the future or to develop
and successfully introduce new products and product enhancements could adversely affect our
business or results of operations. When we introduce new products and product enhancements, we face
risks relating to product transitions, including risks relating to forecasting demand. Any such
adverse event could have a material adverse effect on our business, financial condition or results
of operations.
Historically, the technology industry has developed higher performance ASICs, which create
chip-level solutions that replace selected board-level or box-level solutions at a significantly
lower average selling price. We have previously offered ASICs to customers for certain applications
that have effectively resulted in a lower-priced solution when compared to an adapter solution.
This transition to ASICs may also occur with respect to other current and future products. The
result of this transition may have an adverse effect on our business, financial condition or
results of operations. In the future, a similar adverse effect to our business could occur if there
were rapid shifts in customer purchases from our midrange networking infrastructure products to
lower-cost products.
Unanticipated changes in our tax provisions or adverse outcomes resulting from examination of our
income tax returns could adversely affect our results of operations.
We are subject to income taxes in the United States and various foreign jurisdictions. Our
effective income tax rates have recently been and could in the future be adversely affected by
changes in tax laws or interpretations of those tax laws, by changes in the mix of earnings in
countries with differing statutory tax rates, by discovery of new information in the course of our
tax return preparation process, or by changes in the valuation of our deferred tax assets and
liabilities. Our effective income tax rates are also affected by intercompany transactions for
licenses, services, funding and other items. Given the increased global scope of our operations,
and the complexity of global tax and transfer pricing rules and regulations, it has become
increasingly difficult to estimate earnings within each tax jurisdiction. If actual earnings
within a tax jurisdiction differ materially from our estimates, we may not achieve our expected
effective tax rate. Additionally, our effective tax rate may be impacted by the tax effects of
acquisitions, examinations by tax authorities, stock-based compensation, uncertain tax positions
and newly enacted tax legislation. For example, proposed changes to certain U.S. tax rules for
U.S. corporations doing business outside the United States include limiting the ability of U.S.
corporations to deduct certain expenses attributable to offshore earnings, modifying the foreign
tax credit rules and accelerating taxes related to certain transfers of intangible assets offshore.
Although the scope of the proposed changes is unclear, it is possible that these or other changes
in the U.S. tax laws could increase our effective tax rate and adversely affect our profitability.
Finally, we are subject to the continuous examination of our income tax returns by the Internal
Revenue Service and other tax authorities which may result in the assessment of additional income
taxes. We regularly assess the likelihood of adverse outcomes resulting from these examinations to
determine the adequacy of our provisions for income taxes. However, unanticipated outcomes from
these continuous examinations could have a material adverse effect on our financial condition or
results of operations.
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Environmental compliance costs could adversely affect our results of operations.
We are subject to various federal, state, local and foreign laws concerning environmental
protection, including laws addressing the discharge of pollutants into the environment, the
management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, the
content of our products and the recycling, treatment and disposal of our products. In particular,
we face increasing complexity in our product design and procurement operations as we adjust to new
and future requirements relating to the chemical and material composition of our products, their
safe use, the energy consumption associated with those products and product take-back legislation
(i.e., legislation that makes producers of electrical goods financially responsible for specified
collection, recycling, treatment and disposal of past and future covered products). We could incur
substantial costs, our products could be restricted from entering certain jurisdictions, and we
could face other sanctions, if we were to violate or become liable under environmental laws or if
our products become non-compliant with environmental laws. Our potential exposure includes fines
and civil or criminal sanctions, third-party property damage or personal injury claims, and clean
up costs. Further, liability under some environmental laws relating to contaminated sites can be
imposed retroactively, on a joint and several basis, and without any finding of noncompliance or
fault. The amount and timing of costs under environmental laws are difficult to predict and could
have a material adverse effect on our results of operations.
Because we have operations in foreign countries and depend on foreign customers and suppliers, we
are subject to international economic, currency, regulatory, political and other risks that could
harm our business, financial condition and results of operations.
International revenues accounted for 54%, 52% and 49% of our net revenues for fiscal 2010,
2009 and 2008, respectively. We expect that international revenues will continue to account for a
significant percentage of our net revenues for the foreseeable future. In addition, we maintain
operations in foreign countries and a significant portion of our inventory purchases are from
suppliers that are located outside the United States. As a result, we are subject to several risks,
which include:
| a greater difficulty of administering and managing our business globally; | ||
| compliance with multiple and potentially conflicting regulatory requirements, such as import or export requirements, tariffs and other barriers; | ||
| less effective intellectual property protections; | ||
| currency fluctuations; | ||
| overlapping or differing tax structures; | ||
| political and economic instability, including terrorism and war; and | ||
| general trade restrictions. |
As of March 28, 2010, our international subsidiaries hold approximately 47% of our total cash,
cash equivalents and investment securities. These holdings by our international subsidiaries
consist primarily of U.S. dollar denominated cash, money market and certificate of deposit
accounts. Certain foreign regulations could impact our ability to transfer funds to the United
States. Additionally, should we decide to repatriate cash held outside of the United States, we
may incur a significant tax obligation.
Our international sales are invoiced in U.S. dollars and, accordingly, if the relative value
of the U.S. dollar in comparison to the currency of our foreign customers should increase, the
resulting effective price increase of our products to such foreign customers could result in
decreased sales. In addition, a significant portion of our inventory is purchased from
international suppliers, who invoice us in U.S. dollars. If the relative value of the U.S. dollar
in comparison to the currency of our foreign suppliers should decrease, our suppliers may increase
prices which could result in a decline of our gross margin. Any of the foregoing factors could
have a material adverse effect on our business, financial condition or results of operations.
In addition, we and our customers are subject to various import and export regulations of the
United States government and other countries. Certain government export regulations apply to the
encryption or other features contained in some of our products. Changes in or violations of any
such import or export regulations could materially and adversely affect our business, financial
condition or results of operations.
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Moreover, in many foreign countries, particularly in those with developing economies, it is
common to engage in business practices that are prohibited by regulations applicable to us, such as
the Foreign Corrupt Practices Act. Although we implement policies and procedures designed to ensure
compliance with these laws, our employees, contractors and agents, as well as those companies to
which we outsource certain of our business operations, may take actions in violation of our
policies. Any such violation, even if prohibited by our policies, could have a material adverse
effect on our business, financial condition or results of operations.
We may engage in mergers, acquisitions and strategic investments and these activities may adversely
affect our results of operations and stock price.
Our future growth may depend in part on our ability to identify and acquire complementary
businesses, technologies or product lines that are compatible with our existing business. Mergers
and acquisitions involve numerous risks, including:
| the failure of markets for the products of acquired companies to develop as expected; | ||
| uncertainties in identifying and pursuing target companies; | ||
| difficulties in the assimilation of the operations, technologies and products of the acquired companies; | ||
| the existence of unknown defects in acquired companies products or assets that may not be identified due to the inherent limitations involved in the due diligence process of an acquisition; | ||
| the diversion of managements attention from other business concerns; | ||
| risks associated with entering markets or conducting operations with which we have no or limited direct prior experience; | ||
| risks associated with assuming the legal obligations of acquired companies; | ||
| risks related to the effect that acquired companies internal control processes might have on our financial reporting and managements report on our internal control over financial reporting; | ||
| the potential loss of, or impairment of our relationships with, current customers or failure to retain the acquired companies customers; | ||
| the potential loss of key employees of acquired companies; and | ||
| the incurrence of significant exit charges if products or technologies acquired in business combinations are unsuccessful. |
Further, we may never realize the perceived benefits of a business combination. Acquisitions
by us could negatively impact gross margins or dilute stockholders investment and cause us to
incur debt, contingent liabilities and amortization/impairment charges related to intangible
assets, all of which could materially and adversely affect our financial position or results of
operations. In addition, our effective tax rate for future periods could be negatively impacted by
mergers and acquisitions.
We have made, and could make in the future, investments in technology companies, including
privately-held companies in a development stage. Many of these private equity investments are
inherently risky because the companies businesses may never develop, and we may incur losses
related to these investments. In addition, we may be required to write down the carrying value of
these investments to reflect other-than-temporary declines in their value, which could have a
material adverse effect on our financial position and results of operations.
If we are unable to attract and retain key personnel, we may not be able to sustain or grow our business.
Our future success largely depends on our key engineering, sales, marketing and executive
personnel, including highly skilled semiconductor design personnel and software developers, and in
particular, our Chief Executive Officer, H.K. Desai. If we lose the services of Mr. Desai or other
key personnel or fail to hire personnel for key positions, our business could be adversely
affected. We believe that the market for key personnel in the industries in which we compete is
highly competitive. In particular, periodically we have experienced difficulty in attracting and
retaining qualified engineers and other technical personnel and anticipate that competition for
such personnel will increase in the future. Our recent implementation of various cost saving
measures, as well as past reductions in force, could negatively impact employee morale and
potentially make attracting and retaining qualified employees more difficult in
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the future. As a result, we may not be able to attract and retain key personnel with the
skills and expertise necessary to develop new products in the future or to manage our business,
both in the United States and abroad.
We have historically used stock options and other forms of stock-based compensation as key
components of our total employee compensation program in order to align employees interests with
the interests of our stockholders, encourage retention of key personnel, and provide competitive
compensation packages. However, applicable stock exchange listing standards relating to obtaining
stockholder approval of equity compensation plans could make it more difficult or expensive for us
to grant stock-based awards to employees in the future, which may result in changes in our
stock-based compensation strategy. These and other developments relating to the provision of
stock-based compensation to employees could make it more difficult to attract, retain and motivate
key personnel.
We may experience difficulties in transitioning to smaller geometry process technologies.
We expect to continue to transition our semiconductor products to increasingly smaller line
width geometries. This transition requires us to modify the manufacturing processes for our
products and to redesign some products as well as standard cells and other integrated circuit
designs that we may use in multiple products. We periodically evaluate the benefits, on a
product-by-product basis, of migrating to smaller geometry process technologies. Currently, most of
our products include ASICs which are manufactured in 180, 130, 90 and 65 nanometer geometry
processes. In addition, we continually evaluate smaller geometries. In the past, we have
experienced some difficulties in shifting to smaller geometry process technologies or new
manufacturing processes, which resulted in reduced manufacturing yields, delays in product
deliveries and increased expenses. We may face similar difficulties, delays and expenses as we
continue to transition our products to smaller geometry processes.
Our proprietary rights may be inadequately protected and difficult to enforce.
In some jurisdictions, we have patent protection on certain aspects of our technology.
However, we rely primarily on trade secrets, trademarks, copyrights and contractual provisions to
protect our proprietary rights. There can be no assurance that these protections will be adequate
to protect our proprietary rights, that others will not independently develop or otherwise acquire
equivalent or superior technology, or that we can maintain such technology as trade secrets. There
also can be no assurance that any patents we possess will not be invalidated, circumvented or
challenged. We have taken steps in several jurisdictions to enforce our trademarks against third
parties. No assurances can be given that we will ultimately be successful in protecting our
trademarks. The laws of certain countries in which our products are or may be developed,
manufactured or sold, including various countries in Asia, may not protect our products and
intellectual property rights to the same extent as the laws of the United States, or at all. If we
fail to protect our intellectual property rights, our business could be negatively impacted.
Disputes relating to claimed infringement of intellectual property rights may adversely affect our business.
We have in the past received notices of claimed infringement of intellectual property rights
and been involved in intellectual property litigation. There can be no assurance that third parties
will not assert future claims of infringement of intellectual property rights against us, or
against customers who we are contractually obligated to indemnify, with respect to existing and
future products. In addition, individuals and groups are purchasing intellectual property assets
for the sole purpose of making claims of infringement and attempting to extract settlements from
companies such as ours. Although patent and intellectual property disputes may be settled through
licensing or similar arrangements, costs associated with these arrangements may be substantial and
the necessary licenses or similar arrangements may not be available to us on satisfactory terms, or
at all. As a result, we could be prevented from manufacturing and selling some of our products. In
addition, if we litigate these kinds of claims, the litigation could be expensive, time consuming
and could divert managements attention from other matters and there is no guarantee we would
prevail. Our business could suffer regardless of the outcome of the litigation. Our supply of
silicon chips and other components can also be interrupted by intellectual property infringement
claims against our suppliers.
If we fail to carefully manage the use of open source software in our products, we may be
required to license key portions of our products on a royalty-free basis or expose key parts of our
source code.
Certain of our software may be derived from open source software that is generally made
available to the public by its authors and/or other third parties. Such open source software is
often made available to us under licenses, such as the GNU General Public License (GPL), which
impose certain obligations on us in the event we were to distribute derivative works of the open
source software. These obligations may require us to make source code for the derivative works
available to the public, and/or license such derivative works under a particular type of license,
rather than the forms of licenses customarily used to protect our intellectual property. In the
event the copyright holder of any open source software were to successfully establish in court that
we had not
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complied with the terms of a license for a particular work, we could be required to release
the source code of that work to the public and/or stop distribution of that work.
Our business could be materially adversely affected by changes in regulations or standards
regarding energy use of our products.
We continually seek ways to increase the energy efficiency of our products. Recent analyses
have estimated the amount of global carbon emissions that are due to information technology
products. As a result, governmental and non-governmental organizations have turned their attention
to development of regulations and standards to drive technological improvements and reduce the
amount of carbon emissions. There is a risk that the rush to development of these standards will
not fully address the complexity of the technology developed by the IT industry or will favor
certain technological approaches. Depending on the regulations or standards that are ultimately
adopted, compliance could adversely affect our business, results of operations or financial
condition.
Computer viruses and other forms of tampering with our computer systems or servers may disrupt our
operations and adversely affect our business.
Despite our implementation of network security measures and anti-virus defenses, our servers
are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering
with our computer systems. Any such event could have a material adverse effect on our business,
results of operations or financial condition.
Our facilities and the facilities of our suppliers and customers are located in regions that are
subject to natural disasters.
Our California facilities, including our principal executive offices, our principal design
facilities and our critical business operations, are located near major earthquake faults. We are
not specifically insured for earthquakes or other natural disasters. Any personal injury or damage
to the facilities as a result of such occurrences could have a material adverse effect on our
business, results of operations or financial condition. Additionally, we have operations, suppliers
and customers in regions which have historically experienced natural disasters. Any earthquake or
other natural disaster, including a hurricane, volcanic eruption, tsunami or fire, affecting any of
these regions could adversely affect our business, results of operations and financial condition.
18
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Item 1B. | Unresolved Staff Comments |
None.
Item 2. | Properties |
Our principal product development, operations, sales and corporate offices are located in
three buildings comprising approximately 165,000 square feet in Aliso Viejo, California. We own
each of these buildings. We also lease one building comprising approximately 100,000 square feet
in Shakopee, Minnesota, that houses product development and operations teams for many of our
Network Products. We lease an operations, sales and fulfillment facility located in Dublin,
Ireland. In addition, we lease facilities in Mountain View and Roseville, California; King of
Prussia, Pennsylvania; and Pune and Bangalore, India. We also maintain sales offices at various
locations in the United States, Europe and Asia. We believe that our existing properties,
including both owned and leased sites, are in good condition and suitable for the conduct of our
business.
Item 3. | Legal Proceedings |
Various lawsuits, claims and proceedings have been or may be instituted against us. The
outcome of litigation cannot be predicted with certainty and some lawsuits, claims and proceedings
may be disposed of unfavorably to us. Many intellectual property disputes have a risk of injunctive
relief and there can be no assurance that a license will be granted. Injunctive relief could have a
material adverse effect on our financial condition or results of operations. Based on an
evaluation of matters that are pending or asserted, we believe the disposition of such matters will
not have a material adverse effect on our financial condition or results of operations.
Item 4. | Removed and Reserved |
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PART II
Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Principal Market and Prices
Shares of our common stock are traded and quoted on the NASDAQ Global Select Market under the
symbol QLGC. The following table sets forth the range of high and low sales prices per share of our
common stock for each quarterly period of the two most recent fiscal years as reported on the
NASDAQ Global Select Market.
Sales Prices | ||||||||
Fiscal 2010 | High | Low | ||||||
First Quarter |
$ | 14.76 | $ | 10.91 | ||||
Second Quarter |
18.20 | 11.99 | ||||||
Third Quarter |
19.62 | 16.39 | ||||||
Fourth Quarter |
21.28 | 16.44 |
Sales Prices | ||||||||
Fiscal 2009 | High | Low | ||||||
First Quarter |
$ | 16.84 | $ | 14.57 | ||||
Second Quarter |
20.21 | 13.64 | ||||||
Third Quarter |
16.37 | 8.69 | ||||||
Fourth Quarter |
13.90 | 8.82 |
Number of Common Stockholders
The number of record holders of our common stock was 499 as of May 13, 2010.
Dividends
We have never paid cash dividends on our common stock. We currently anticipate that we will
retain all of our future earnings for use in the development and expansion of our business and for
general corporate purposes, including repurchases of our common stock. Any determination to pay
dividends in the future will be at the discretion of our board of directors and will depend upon
our operating results, financial condition and other factors as the board of directors deems
relevant.
Recent Sales of Unregistered Securities
We did not issue any unregistered securities during fiscal 2010.
Issuer Purchases of Equity Securities
In November 2008, our Board of Directors approved a program to repurchase up to $300 million
of our common stock over a two-year period. Set forth below is information regarding our stock
repurchases made during the fourth quarter of fiscal 2010 under this program.
Total Number of | Approximate Dollar | |||||||||||||||
Shares Purchased | Value of Shares that | |||||||||||||||
Total Number of | Average Price | as Part of Publicly | May Yet be Purchased | |||||||||||||
Period | Shares Purchased | Paid per Share | Announced Plan | Under the Plan | ||||||||||||
December 28, 2009 January 24, 2010 |
371,400 | $ | 19.33 | 371,400 | $ | 154,065,000 | ||||||||||
January 25, 2010 February 21, 2010 |
1,130,600 | $ | 17.32 | 1,130,600 | $ | 134,481,000 | ||||||||||
February 22, 2010 March 28, 2010 |
1,561,200 | $ | 19.27 | 1,561,200 | $ | 104,401,000 | ||||||||||
Total |
3,063,200 | $ | 18.56 | 3,063,200 | $ | 104,401,000 | ||||||||||
We previously purchased 9.8 million shares under the November 2008 program for an aggregate
purchase price of $138.8 million.
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Stockholder Return Performance
The performance graph below shall not be deemed filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liabilities
under that Section and shall not be deemed to be incorporated by reference into any of our filings
under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that we
specifically incorporate this information by reference, and will not otherwise be deemed filed
under the Acts.
The following graph compares, for the five-year period ended March 28, 2010, the cumulative
total stockholder return for our common stock, the Standard & Poors 500 Index (S&P 500 Index) and
the NASDAQ Computer Index. Measurement points are the last trading day of each of our fiscal years
ended April 3, 2005, April 2, 2006, April 1, 2007, March 30, 2008, March 29, 2009 and March 28,
2010. The graph assumes that $100 was invested on April 3, 2005 in our common stock, the S&P 500
Index and the NASDAQ Computer Index and assumes reinvestment of dividends. The stock price
performance on the following graph is not necessarily indicative of future stock price performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURNS*
AMONG QLOGIC CORPORATION, THE STANDARD & POORS 500 INDEX
AND THE NASDAQ COMPUTER INDEX
AMONG QLOGIC CORPORATION, THE STANDARD & POORS 500 INDEX
AND THE NASDAQ COMPUTER INDEX
Cumulative Total Return | ||||||||||||||||||||||||
4/3/05 | 4/2/06 | 4/1/07 | 3/30/08 | 3/29/09 | 3/28/10 | |||||||||||||||||||
QLogic Corporation |
$ | 100.00 | $ | 95.98 | $ | 84.33 | $ | 76.04 | $ | 58.13 | $ | 100.00 | ||||||||||||
S&P 500 Index |
100.00 | 111.73 | 124.95 | 118.60 | 73.43 | 109.97 | ||||||||||||||||||
NASDAQ Computer Index |
100.00 | 113.57 | 119.86 | 115.99 | 82.23 | 139.54 |
* | $100 invested on 4/3/05 in stock or 3/31/05 in index, including reinvestment of dividends. Indexes calculated on month-end basis. |
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Item 6. | Selected Financial Data |
The following selected financial data should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operations and the consolidated
financial statements and notes thereto appearing elsewhere in this report.
Fiscal Year Ended | ||||||||||||||||||||
March 28, | March 29, | March 30, | April 1, | April 2, | ||||||||||||||||
2010 (1) | 2009 | 2008 | 2007 (2) | 2006 (3) | ||||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||||||
Statement of Operations Data |
||||||||||||||||||||
Net revenues |
$ | 549,070 | $ | 633,862 | $ | 597,866 | $ | 586,697 | $ | 494,077 | ||||||||||
Cost of revenues |
196,127 | 210,075 | 205,959 | 191,982 | 144,246 | |||||||||||||||
Gross profit |
352,943 | 423,787 | 391,907 | 394,715 | 349,831 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Engineering and development |
136,831 | 133,252 | 134,668 | 135,315 | 89,753 | |||||||||||||||
Sales and marketing |
77,601 | 86,959 | 84,166 | 86,731 | 64,416 | |||||||||||||||
General and administrative |
34,242 | 32,639 | 34,049 | 31,044 | 17,295 | |||||||||||||||
Special charges |
5,163 | 4,063 | 5,328 | | | |||||||||||||||
Purchased in-process research and development |
| | | 3,710 | 10,510 | |||||||||||||||
Total operating expenses |
253,837 | 256,913 | 258,211 | 256,800 | 181,974 | |||||||||||||||
Operating income |
99,106 | 166,874 | 133,696 | 137,915 | 167,857 | |||||||||||||||
Interest and other income, net |
10,601 | 2,134 | 14,024 | 16,872 | 32,627 | |||||||||||||||
Income from continuing operations before income taxes |
109,707 | 169,008 | 147,720 | 154,787 | 200,484 | |||||||||||||||
Income taxes |
54,759 | 60,219 | 51,510 | 49,369 | 78,653 | |||||||||||||||
Income from continuing operations |
54,948 | 108,789 | 96,210 | 105,418 | 121,831 | |||||||||||||||
Income from discontinued operations, net of income taxes |
| | | | 161,757 | |||||||||||||||
Net income |
$ | 54,948 | $ | 108,789 | $ | 96,210 | $ | 105,418 | $ | 283,588 | ||||||||||
Income from continuing operations per share: |
||||||||||||||||||||
Basic |
$ | 0.47 | $ | 0.85 | $ | 0.68 | $ | 0.66 | $ | 0.71 | ||||||||||
Diluted |
$ | 0.47 | $ | 0.85 | $ | 0.67 | $ | 0.66 | $ | 0.70 | ||||||||||
Income from discontinued operations per share: |
||||||||||||||||||||
Basic |
$ | | $ | | $ | | $ | | $ | 0.95 | ||||||||||
Diluted |
$ | | $ | | $ | | $ | | $ | 0.93 | ||||||||||
Net income per share: |
||||||||||||||||||||
Basic |
$ | 0.47 | $ | 0.85 | $ | 0.68 | $ | 0.66 | $ | 1.66 | ||||||||||
Diluted |
$ | 0.47 | $ | 0.85 | $ | 0.67 | $ | 0.66 | $ | 1.63 | ||||||||||
Balance Sheet Data |
||||||||||||||||||||
Cash and cash equivalents and investment securities |
$ | 375,673 | $ | 378,269 | $ | 376,409 | $ | 543,922 | $ | 665,640 | ||||||||||
Total assets |
750,737 | 780,290 | 810,966 | 971,359 | 937,707 | |||||||||||||||
Total stockholders equity |
583,339 | 626,545 | 665,916 | 874,531 | 859,354 |
(1) | In fiscal 2010, we completed the acquisition of NetXen, Inc. | |
(2) | In fiscal 2007, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 718, CompensationStock Compensation, which requires the recognition of compensation expense for all stock-based awards made to employees and non-employee directors. In addition, we completed the acquisitions of PathScale, Inc. and SilverStorm Technologies, Inc. | |
(3) | In fiscal 2006, we completed the sale of our hard disk drive controller and tape drive controller business and have presented the operating results of such business as discontinued operations. In addition, we completed the acquisition of Troika Networks, Inc. |
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Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
This Managements Discussion and Analysis of Financial Condition and Results of Operations
should be read in conjunction with our audited consolidated financial statements and related notes.
In this discussion and elsewhere in this report, we make forward-looking statements. These
forward-looking statements are made in reliance upon safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements include, without
limitation, descriptions of our expectations regarding future trends affecting our business and
other statements regarding future events or our objectives, goals, strategies, beliefs and
underlying assumptions that are other than statements of historical fact. When used in this report,
the words anticipates, believes, can, continue, could, estimates, expects, intends,
may, plans, potential, predicts, should, will and similar expressions, or the negative
of such expressions, are intended to identify these forward-looking statements. Statements
concerning current conditions may also be forward-looking if they imply a continuation of current
conditions. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of several factors, including, but not limited to those
factors set forth and discussed in Part I, Item 1A Risk Factors and elsewhere in this report. In
light of the significant uncertainties inherent in the forward-looking information included in this
report, the inclusion of this information should not be regarded as a representation by us or any
other person that our objectives or plans will be achieved. You are cautioned, therefore, not to
place undue reliance on these forward-looking statements, which are made only as of the date of
this report. We undertake no obligation to update or revise these forward-looking statements,
whether as a result of new information, future events or otherwise.
Overview
We are a designer and supplier of network infrastructure products that enhance, manage and
support the transmission of data from computer servers to storage systems and from computer servers
to other servers. Our products are used in connection with three distinct types of networks:
Storage Networks, High Performance Computing, or HPC, Networks, and Converged Networks. Storage
Networks are used to provide critical data across widely-distributed environments and primarily use
Fibre Channel technology. HPC Networks allow the utilization of advanced parallel processing over
multiple servers and typically are used for applications where very large amounts of data must be
processed quickly and efficiently. The HPC Network products that we sell use InfiniBand®
technology. Converged Networks are designed to address the evolving data center by consolidating
and unifying various classes of connectivity and network traffic.
We classify our products into three broad categories: Host Products, Network Products and
Silicon Products. Host Products consist of Fibre Channel and Internet Small Computer Systems
Interface, or iSCSI, host bus adapters; InfiniBand® host channel adapters; Fibre Channel over
Ethernet, or FCoE, converged network adapters or CNAs; and Intelligent Ethernet adapters, or IEAs.
Network Products consist of Fibre Channel switches, including stackable edge switches, bladed
switches, virtualized pass-through modules, and high-port count modular-chassis switches;
InfiniBand switches, including high-end multi-protocol directors, edge and bladed switches;
Enhanced Ethernet pass-through modules; and storage routers for bridging Fibre Channel, FCoE and
iSCSI networks. Silicon Products consist of Fibre Channel controllers, iSCSI controllers,
converged network controllers and Ethernet controllers.
Our products are sold worldwide, primarily to original equipment manufacturers, or OEMs, and
distributors. Our customers rely on our various networking infrastructure products to deliver
solutions to information technology professionals in virtually every business sector. Our products
are found primarily in server, workstation and storage subsystem solutions that are used by small,
medium and large enterprises with critical business data requirements. These products are
incorporated in solutions from a number of storage system and computer system OEM customers,
including Cisco Systems, Inc., Dell Inc., EMC Corporation, Hewlett-Packard Company, International
Business Machines Corporation, NetApp, Inc., Oracle Corporation and many others.
We use a fifty-two/fifty-three week fiscal year ending on the Sunday nearest March 31. Fiscal
years 2010, 2009 and 2008 each comprised fifty-two weeks and ended on March 28, 2010, March 29,
2009 and March 30, 2008, respectively.
Business Combination
In April 2009, we acquired NetXen, Inc. (NetXen) in a merger transaction. Cash consideration
was $17.6 million for all outstanding NetXen capital stock. NetXen developed, marketed and sold
Ethernet adapter and controller products targeted at the enterprise server market. The acquisition
expanded our product portfolio to include Ethernet networking products that are complementary to
our existing products. The acquisition also expanded our expertise to better address a wider range
of emerging customer requirements for converged networks.
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Fiscal Year and Fourth Quarter Financial Highlights and Other Information
Net revenue for fiscal 2010 was $549.1 million compared to $633.9 million in fiscal 2009. Net
income for fiscal 2010 was $54.9 million, or $0.47 per diluted share, compared to $108.8 million,
or $0.85 per diluted share, in fiscal 2009. In addition, we generated $161.8 million in cash from
operations and used $163.4 million of cash to purchase our common stock under our stock repurchase
program during fiscal 2010.
A summary of the key factors and significant events which impacted our financial performance
during the fourth quarter of fiscal 2010 are as follows:
| Net revenues of $145.7 million for the fourth quarter of fiscal 2010 increased 12% from $130.5 million in the fourth quarter of fiscal 2009. Revenue from Host Products was $103.7 million and increased from $88.4 million in the same quarter last year and revenue from Network Products was $22.6 million compared to $25.1 million in the same quarter of fiscal 2009. | ||
| Gross profit as a percentage of net revenues was 65.1% for the fourth quarter of fiscal 2010, compared to 65.9% for the fourth quarter of fiscal 2009. | ||
| Operating income as a percentage of net revenues for the fourth quarter of fiscal 2010 increased to 18.8% from 18.3% in the fourth quarter of fiscal 2009. | ||
| Net loss was $4.8 million, or $0.04 per diluted share, in the fourth quarter of fiscal 2010, compared to net income of $19.2 million, or $0.16 per diluted share, in the fourth quarter of fiscal 2009. Our net loss in the fourth quarter of fiscal 2010 included a $29.7 million tax charge related to our globalization initiative. | ||
| Cash, cash equivalents and investment securities was $375.7 million at March 28, 2010, compared to $378.3 million at March 29, 2009. | ||
| Accounts receivable was $73.3 million as of March 28, 2010, compared to $68.5 million as of March 29, 2009. Days sales outstanding (DSO) in receivables as of March 28, 2010 decreased to 46 days from 48 days as of March 29, 2009. | ||
| Inventories as of March 28, 2010 decreased to $19.4 million from $40.3 million as of March 29, 2009. Our annualized inventory turns in the fourth quarter of fiscal 2010 increased to 10.5 turns from 4.4 turns in the fourth quarter of fiscal 2009. |
As a result of worldwide economic weakness and uncertainty, it is extremely difficult for us
and our customers to forecast future revenue levels based on historical information and trends.
Portions of our expenses are fixed and others are tied to expected levels of revenue. To the
extent that we do not achieve our anticipated level of revenue, our operating results could be
adversely affected until such expenses are reduced to an appropriate level.
Results of Operations
Net Revenues
A summary of our net revenues by product category is as follows:
2010 | 2009 | 2008 | ||||||||||
(Dollars in millions) | ||||||||||||
Net revenues: |
||||||||||||
Host Products |
$ | 396.5 | $ | 440.9 | $ | 437.9 | ||||||
Network Products |
99.5 | 117.6 | 101.8 | |||||||||
Silicon Products |
42.4 | 61.4 | 44.3 | |||||||||
Royalty and Service |
10.7 | 14.0 | 13.9 | |||||||||
Total net revenues |
$ | 549.1 | $ | 633.9 | $ | 597.9 | ||||||
Percentage of net revenues: |
||||||||||||
Host Products |
72 | % | 70 | % | 73 | % | ||||||
Network Products |
18 | 18 | 17 | |||||||||
Silicon Products |
8 | 10 | 8 | |||||||||
Royalty and Service |
2 | 2 | 2 | |||||||||
Total net revenues |
100 | % | 100 | % | 100 | % | ||||||
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Historically, the global marketplace for network infrastructure solutions has expanded in
response to the information storage requirements of enterprise business environments, as well as
the market for solutions in high performance computing environments. These markets have been
characterized by rapid advances in technology and related product performance, which has generally
resulted in declining average selling prices over time. In general, our revenues have been
favorably affected by increases in units sold as a result of market expansion and the release of
new products. The favorable effect on our revenues as a result of increases in volume has been
partially offset by the impact of declining average selling prices.
The United States and other countries around the world have been experiencing economic
weakness and uncertainty. This economic uncertainty has resulted in a global downturn in
information technology spending rates, which has negatively impacted our revenue and operating
results. Accordingly, it is extremely difficult for us to forecast future sales levels and
historical information may not be indicative of future trends.
Our net revenues are derived primarily from the sale of Host Products, Network Products and
Silicon Products. Net revenues decreased 13% to $549.1 million for fiscal 2010 from $633.9 million
for fiscal 2009. This decrease was primarily the result of a $44.4 million, or 10%, decrease in
revenue from Host Products; an $18.1 million, or 15%, decrease in revenue from Network Products;
and a $19.0 million, or 31%, decrease in revenue from Silicon Products. The decrease in revenue
from Host Products was primarily due to a 9% decrease in the quantity of host bus adapters sold and
a 6% decrease in the average selling prices of these products, partially offset by an approximately
800% increase in revenue from the early market acceptance of FCoE adapters and the addition of
Ethernet adapters as a result of the NetXen acquisition. The decrease in revenue from Network
Products was primarily due to an 8% decrease in the number of Fibre Channel switches sold and a 12%
decrease in the average selling prices of these products. The decrease in revenue from Silicon
Products was due primarily to an 18% decrease in the units of protocol chips sold, an 11% decrease
in the average selling prices of these products and a $3.8 million decrease in revenue from
management controller chips, as these products reached end-of-life in fiscal 2009. Net revenues for
fiscal 2010 included $10.7 million of royalty and service revenue compared with $14.0 million of
royalty and service revenue for fiscal 2009. Royalty and service revenues are unpredictable and we
do not expect them to be significant to our overall revenues.
Net revenues increased 6% to $633.9 million for fiscal 2009 from $597.9 million for fiscal
2008. This increase was primarily the result of a $3.0 million, or 1%, increase in revenue from
Host Products; a $15.8 million, or 16%, increase in revenue from Network Products; and a $17.1
million, or 39%, increase in revenue from Silicon Products. The increase in revenue from Host
Products was primarily due to an 8% increase in the quantity of host bus adapters sold, partially
offset by a 7% decrease in average selling prices of these products. The increase in revenue from
Network Products was primarily due to a 40% increase in the number of Fibre Channel switches sold,
partially offset by a 21% decrease in the average selling prices of these products, and a 32%
increase in the number of InfiniBand switches sold, partially offset by an 11% decrease in the
average selling prices of these products. The increase in revenue from Silicon Products from the
prior year was due primarily to a 32% increase in the units of protocol chips sold. Net revenues
for fiscal 2009 included $14.0 million of royalty and service revenue compared with $13.9 million
of royalty and service revenue for fiscal 2008.
A small number of our customers account for a substantial portion of our net revenues, and we
expect that a small number of customers will continue to represent a substantial portion of our net
revenues for the foreseeable future. Our top ten customers accounted for 86%, 84% and 85% of net
revenues during fiscal 2010, 2009 and 2008, respectively.
A summary of our customers, including their manufacturing subcontractors, that represent 10%
or more of our net revenues is as follows:
2010 | 2009 | 2008 | ||||||||||
Hewlett-Packard |
24 | % | 21 | % | 20 | % | ||||||
IBM |
20 | % | 18 | % | 16 | % | ||||||
Sun Microsystems (acquired by Oracle in fiscal 2010) |
* | 11 | % | 11 | % |
* | Less than 10% of net revenues. |
We believe that our major customers continually evaluate whether or not to purchase products
from alternative or additional sources. Accordingly, there can be no assurance that a major
customer will not reduce, delay or eliminate its purchases from us. Any such reduction, delay or
loss of purchases could have a material adverse effect on our business, financial condition or
results of operations.
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Net revenues by geographic area are as follows:
2010 | 2009 | 2008 | ||||||||||
(In millions) | ||||||||||||
United States |
$ | 250.3 | $ | 303.7 | $ | 305.2 | ||||||
Asia-Pacific and Japan |
138.8 | 139.9 | 113.1 | |||||||||
Europe, Middle East and Africa |
127.0 | 154.5 | 144.6 | |||||||||
Rest of world |
33.0 | 35.8 | 35.0 | |||||||||
$ | 549.1 | $ | 633.9 | $ | 597.9 | |||||||
Revenues by geographic area are presented based upon the country of destination, which is not
necessarily indicative of the location of the ultimate end-user of our products. Net revenues from
customers in China were $72.3 million, $58.5 million and $42.4 million for fiscal 2010, 2009 and
2008, respectively. No individual country other than the United States and China represented 10%
or more of net revenues for any of the years presented.
Gross Profit
Gross profit represents net revenues less cost of revenues. Cost of revenues consists
primarily of the cost of purchased products, assembly and test services; costs associated with
product procurement, inventory management, logistics and product quality; and the amortization and
impairment of purchased intangible assets. A summary of our gross profit and related percentage of
net revenues is as follows:
2010 | 2009 | 2008 | ||||||||||
(Dollars in millions) | ||||||||||||
Gross profit |
$ | 352.9 | $ | 423.8 | $ | 391.9 | ||||||
Percentage of net revenues |
64.3 | % | 66.9 | % | 65.6 | % |
Gross profit for fiscal 2010 decreased $70.9 million, or 17%, from gross profit for fiscal
2009 and decreased as a percentage of revenue to 64.3% for fiscal 2010 from 66.9% for the prior
year. The decrease in gross profit percentage was primarily due to lower volumes to absorb
manufacturing costs, a change in product mix and a $3.5 million one-time royalty in fiscal 2009,
partially offset by a $5.4 million decrease in amortization of purchased intangible assets.
Gross profit for fiscal 2009 increased $31.9 million, or 8%, from gross profit for fiscal 2008
and increased as a percentage of revenue to 66.9% in fiscal 2009 from 65.6% for the prior year.
The increase in gross profit percentage was primarily the result of manufacturing related
efficiencies and a decline of $3.5 million in amortization and impairment of purchased intangible
assets in fiscal 2009.
Our ability to maintain our current gross profit percentage can be significantly affected by
factors such as manufacturing volumes over which fixed costs are absorbed, sales discounts and
customer incentives, component costs, the mix of products shipped, the transition to new products,
competitive price pressures, the timeliness of volume shipments of new products, the level of
royalties received, our ability to achieve manufacturing cost reductions, and amortization and
impairments of purchased intangible assets. We anticipate that it will be increasingly difficult
to reduce manufacturing costs. As a result of these and other factors, it may be difficult to
maintain our gross profit percentage consistent with historical periods and it may decline in the
future.
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Operating Expenses
Our operating expenses are summarized in the following table:
2010 | 2009 | 2008 | ||||||||||
(Dollars in millions) | ||||||||||||
Operating expenses: |
||||||||||||
Engineering and development |
$ | 136.8 | $ | 133.2 | $ | 134.7 | ||||||
Sales and marketing |
77.6 | 87.0 | 84.2 | |||||||||
General and administrative |
34.2 | 32.6 | 34.0 | |||||||||
Special charges |
5.2 | 4.1 | 5.3 | |||||||||
Total operating expenses |
$ | 253.8 | $ | 256.9 | $ | 258.2 | ||||||
Percentage of net revenues: |
||||||||||||
Engineering and development |
24.9 | % | 21.0 | % | 22.5 | % | ||||||
Sales and marketing |
14.1 | 13.7 | 14.1 | |||||||||
General and administrative |
6.2 | 5.2 | 5.7 | |||||||||
Special charges |
1.0 | 0.6 | 0.9 | |||||||||
Total operating expenses |
46.2 | % | 40.5 | % | 43.2 | % | ||||||
Engineering and Development. Engineering and development expenses consist primarily of
compensation and related employee benefit costs, service and material costs, occupancy and
equipment costs and related computer support costs. During fiscal 2010, engineering and development
expenses increased to $136.8 million from $133.2 million in fiscal 2009. The increase was primarily
due to a $3.1 million increase in stock-based compensation, including $0.8 million related to
stock-based awards issued to employees that joined QLogic in connection with the acquisition of
NetXen.
During fiscal 2009, engineering and development expenses decreased to $133.2 million from
$134.7 million in fiscal 2008. The decrease was primarily due to a $0.6 million decrease in
stock-based compensation that resulted from headcount reductions in the fourth quarter of fiscal
2009, a $0.9 million decrease in cash compensation and benefit costs and a $0.7 million decrease in
occupancy and related computer support costs that both resulted from a net reduction in headcount,
including a reduction in headcount related to the consolidation and elimination of certain
engineering activities during fiscal 2008. These decreases were partially offset by a $1.2 million
increase in depreciation and equipment costs.
We believe continued investments in engineering and development activities are critical to
achieving future design wins, expansion of our customer base and revenue growth opportunities.
Sales and Marketing. Sales and marketing expenses consist primarily of compensation and
related employee benefit costs, sales commissions, promotional activities and travel for sales and
marketing personnel. Sales and marketing expenses decreased to $77.6 million for fiscal 2010 from
$87.0 million for fiscal 2009. The decrease in sales and marketing expenses was due primarily to a
$4.6 million decrease in promotional costs, including the costs for certain sales and marketing
programs, and a $0.7 million decrease in travel costs, both related to our cost-cutting measures
implemented in the second half of fiscal 2009. In addition, cash compensation and related employee
benefit costs decreased by $1.3 million, primarily due to decreased commissions as a result of
lower revenues; amortization of purchased intangible assets decreased by $1.3 million, due to an
intangible asset becoming fully amortized during fiscal 2010; and occupancy and related computer
support costs decreased by $1.0 million. These decreases were partially offset by a $1.4 million
increase in stock-based compensation expense.
Sales and marketing expenses increased to $87.0 million for fiscal 2009 from $84.2 million for
fiscal 2008. The increase in sales and marketing expenses was due primarily to a $2.4 million
increase in salaries due to increased average headcount during fiscal 2009, a $1.7 million increase
in occupancy and related computer support costs and a $1.4 million increase in commissions. These
increases were partially offset by a $2.2 million decrease in promotional costs, including our
costs for certain sales and marketing programs, and a $0.6 million decrease in travel costs, both
related to our cost cutting measures in the second half of fiscal 2009.
We believe continued investments in our sales and marketing organizational infrastructure and
related marketing programs are critical to the success of our strategy of expanding our customer
base and enhancing relationships with our existing customers.
General and Administrative. General and administrative expenses consist primarily of
compensation and related employee benefit costs for executive, finance, accounting, human
resources, legal and information technology personnel. Non-compensation components of general and
administrative expenses include accounting, legal and other professional fees, facilities expenses
and other corporate expenses. General and administrative expenses increased to $34.2 million for fiscal
2010 from $32.6 million for fiscal 2009.
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The increase in general and administrative expenses was
due primarily to a $1.9 million increase in stock-based compensation, including $0.6 million
related to stock-based awards issued to employees that joined QLogic in connection with the
acquisition of NetXen.
General and administrative expenses decreased to $32.6 million for fiscal 2009 from $34.0
million for fiscal 2008. The decrease in general and administrative expenses was due primarily to a
$2.8 million decrease in stock-based compensation, partially offset by a $1.6 million increase in
cash compensation and related benefit costs due to increased headcount.
Special Charges. During fiscal 2010, we recorded special charges totaling $5.2 million related
to the consolidation of facilities and workforce reductions. The special charges consisted
primarily of $3.1 million of exit costs related to facilities under non-cancellable leases that we
ceased using during fiscal 2010 and $1.5 million of exit costs associated with severance benefits
for involuntarily-terminated employees.
During fiscal 2009, we implemented a workforce reduction initiative, primarily in response to
the macroeconomic environment, and recorded special charges totaling $4.1 million. The special
charges consisted primarily of $3.9 million of exit costs associated with severance benefits for
the affected employees and costs related to a facility under a non-cancelable lease that we ceased
using during fiscal 2009.
During fiscal 2008, we recorded special charges totaling $5.3 million related to workforce
reductions and the consolidation and elimination of certain activities, principally related to
certain engineering functions. The special charges consisted of $5.0 million for exit costs and
$0.3 million for asset impairments. The exit costs include the costs associated with workforce
reductions, the cancellation of a contract and the consolidation of certain facilities.
The total unpaid exit costs as of March 28, 2010 of $4.2 million are expected to be paid over
the terms of the related agreements through fiscal 2018, including $1.9 million in fiscal 2011.
Interest and Other Income, Net
Components of our interest and other income, net, are as follows:
2010 | 2009 | 2008 | ||||||||||
(In millions) | ||||||||||||
Interest income |
$ | 5.4 | $ | 11.3 | $ | 20.6 | ||||||
Net gains on investment securities |
5.0 | 7.1 | 0.6 | |||||||||
Impairment of investment securities |
| (16.4 | ) | (6.9 | ) | |||||||
Other |
0.2 | 0.1 | (0.3 | ) | ||||||||
$ | 10.6 | $ | 2.1 | $ | 14.0 | |||||||
Interest income is earned on our portfolio of investment securities and cash equivalents. The
decrease in interest income for fiscal 2010 from fiscal 2009 was primarily due to a decline in
interest rates. The decrease in interest income for fiscal 2009 from fiscal 2008 was primarily due
to a decrease in the balance of our investment securities and a decline in interest rates.
During fiscal 2010, net gains on investment securities were $5.0 million and included $2.7
million of net gains on sales of available-for-sale securities, a $1.9 million gain from
distributions of our investments in a money market fund and an enhanced cash fund sponsored by The
Reserve (an asset management company), and $0.4 million of net gains on our trading securities.
During fiscal 2009, net gains on investment securities were $7.1 million and included an $8.1
million gain on recognition of put options and $3.6 million of net gains on sales of
available-for-sale securities. These gains were partially offset by a $3.4 million loss upon
initial reclassification of the auction rate securities (ARS) to trading securities and a $1.2
million net loss due to subsequent changes in the fair value of trading securities.
The $8.1 million gain on recognition of put options resulted from an agreement that we entered
into with the broker for our ARS that entitles us to sell the related ARS back to the broker for a
price equal to the liquidation preference of the ARS plus accrued but unpaid dividends or interest,
if any, at any time between June 30, 2010 and July 2, 2012, if the securities are not earlier
redeemed or sold.
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We reviewed various factors in determining whether to recognize an impairment charge related
to our unrealized losses in available-for-sale securities, including the current financial and
credit market environment, the financial condition and near-term prospects of the issuer of the
security, the magnitude of the loss compared to the cost of the investment, the length of time the
investment has been in a loss position and our intent and ability to hold the investment for a
period of time sufficient to allow for any anticipated recovery of market value. Based on this
analysis, we determined that a portion of the unrealized losses for our portfolio of
available-for-sale securities were other-than-temporary and recorded impairment charges of $11.3
million and $6.9 million during fiscal 2009 and 2008, respectively. In addition, during fiscal
2009, we recorded $5.1 million of impairment charges related to our cost basis investments in The
Reserve.
Income Taxes
Our effective income tax rate was 50% in fiscal 2010, 36% in fiscal 2009 and 35% in fiscal
2008. The increase in our effective tax rate in fiscal 2010 is primarily due to a $29.7 million
tax charge recorded in fiscal 2010 related to our globalization initiative, partially offset by the
favorable impact of (i) higher income generated from our foreign operations, which are taxed at
more favorable rates, (ii) an increase in tax benefits related to stock-based awards, (iii) a
reduction in our valuation allowance against deferred tax assets related to impairment charges on
certain investment securities, and (iv) the resolution of various state and foreign tax matters.
We implemented a globalization initiative to expand our worldwide footprint beginning in
fiscal 2005. As part of this initiative, certain intellectual property and other rights were
licensed to one of our international subsidiaries. During the fourth quarter of fiscal 2010, the
license agreement was amended which resulted in a fully paid-up license. The $29.7 million tax
charge recorded in fiscal 2010 was primarily due to the amendment of this license agreement. As a
result of the amendment, we determined that all payment obligations under the license agreement had
been satisfied and, accordingly, management expects a significantly lower effective tax rate in
fiscal 2011 and subsequent years. We currently believe that our effective tax rate will
approximate 20% in fiscal 2011.
Given the increased global scope of our operations, and the complexity of global tax and
transfer pricing rules and regulations, it has become increasingly difficult to estimate earnings
within each tax jurisdiction. If actual earnings within each tax jurisdiction differ materially
from our estimates, we may not achieve our expected effective tax rate. Additionally, our effective
tax rate may be impacted by other items including the tax effects of acquisitions, newly enacted
tax legislation, examinations by tax authorities, stock-based compensation, tax legislation related to the expiration or reinstatement of federal research credits and uncertain tax
positions.
Liquidity and Capital Resources
Our combined balances of cash, cash equivalents and investment securities decreased to $375.7
million at March 28, 2010, from $378.3 million at March 29, 2009. We believe that existing cash,
cash equivalents, investment securities and expected cash flow from operations will provide
sufficient funds to finance our operations for at least the next twelve months. However, it is
possible that we may need to supplement our existing sources of liquidity to finance our activities
beyond the next twelve months or for the future acquisition of businesses, products or technologies
and there can be no assurance that sources of liquidity will be available to us at that time.
Cash provided by operating activities was $161.8 million for fiscal 2010 and $219.7 million
for fiscal 2009. Operating cash flow for fiscal 2010 reflects our net income of $54.9 million, net
non-cash charges of $78.0 million and a net decrease in the non-cash components of working capital
of $28.9 million. The decrease in the non-cash components of working capital was primarily due to
a $21.9 million decrease in inventories and an $11.8 million increase in accrued taxes, partially
offset by a $6.0 million decrease in accrued compensation, primarily related to decreased incentive
compensation. The decrease in inventories was primarily associated with the completion of a planned
contract manufacturer transition in fiscal 2010, which started in fiscal 2009 and resulted in higher inventory levels at the
end of fiscal 2009, and higher product shipments during the fourth quarter of fiscal 2010 compared
to the prior year. The increase in accrued taxes was primarily due to the timing of expected
payment obligations.
Cash used in investing activities was $42.9 million for fiscal 2010 and consisted of $24.5
million of purchases of property and equipment, $20.4 million of net purchases of
available-for-sale securities, and $14.9 million for the acquisition of NetXen (net of cash
acquired), partially offset by $11.4 million of proceeds from redemptions of auction rate
securities at par value and distributions totaling $5.5 million from our investments in a money
market fund and enhanced cash fund sponsored by The Reserve (an asset management company). Cash
provided by investing activities for fiscal 2009 was $5.9 million and consisted of distributions
totaling $48.9 million related to our investments in the funds sponsored by The Reserve, net sales
and maturities of available-for-sale securities of $40.4 million and proceeds from redemptions of
auction rate securities at par value of $4.5 million, partially offset by a $57.2 million
reclassification of certain cash equivalents to investment securities related to our investments in
the funds sponsored by The Reserve and purchases of property and equipment of $30.7 million.
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As our business grows, we expect capital expenditures to increase in the future as we continue
to invest in machinery and equipment, more costly engineering and production tools for new
technologies, and enhancements to our corporate information technology infrastructure.
Cash used in financing activities was $132.3 million for fiscal 2010 and consisted of our
purchase of $163.4 million of common stock under our stock repurchase program, $2.9 million for
minimum tax withholdings paid on behalf of employees for restricted stock units that vested during
the period and the repayment of a $0.9 million line of credit assumed in the NetXen acquisition,
partially offset by $34.9 million of proceeds from the issuance of common stock and excess tax
benefits from stock-based awards. Cash used in financing activities for fiscal 2009 of $181.9
million consisted of our purchase of $205.7 million of common stock under our stock repurchase
programs and $2.0 million for minimum tax withholdings paid on behalf of employees for restricted
stock units that vested during the period, partially offset by $25.8 million of proceeds from the
issuance of common stock and excess tax benefits from stock-based awards.
As of March 28, 2010, our investment securities included $22.3 million of investments in ARS,
the majority of which are rated AA or higher. During late fiscal 2008, the market auctions of many
ARS began to fail, including auctions for our ARS. The underlying assets for auction rate debt
securities in our portfolio are student loans, substantially all of which are backed by the federal
government under the Federal Family Education Loan Program. The underlying assets of our auction
rate preferred securities are the respective funds investment portfolios.
In November 2008, we entered into an agreement with the broker for all of the ARS we currently
hold, which provides us with certain rights (ARS Rights), in exchange for the release of potential
claims and damages against the broker. The ARS Rights entitle us to sell the related ARS back to
the broker for a price equal to the liquidation preference of the ARS plus accrued but unpaid
dividends or interest, if any, which price is referred to as par. The ARS Rights may be exercised
by us at any time between June 30, 2010 and July 2, 2012, if the securities are not earlier
redeemed or sold. Under the ARS Rights, the broker may, at its discretion, purchase the ARS at any
time through July 2, 2012 without prior notice to us and must pay us par value for the ARS within
one day of the sale transaction settlement. While we expect to ultimately recover our investments
in the ARS at par, we may be unable to liquidate some or all of our ARS should we need or desire to
access the funds invested in those securities prior to redemption by the issuer or the exercise of
the ARS Rights. There is also a risk that our broker will default on its obligation to purchase the
ARS in the event that we exercise the ARS Rights.
Our investment securities are valued based on quoted market prices or other observable market
inputs, except for the ARS, the put options related to ARS, and investments accounted for under the
cost method. As of March 28, 2010, the entire $22.3 million portfolio of ARS and the related put
options valued at $1.4 million (collectively, 13% of our investment securities portfolio) were
measured at fair value based primarily on an income approach using estimates of future cash flows.
The assumptions used in preparing the discounted cash flow models included estimates for the amount
and timing of future interest and principal payments, the collateralization of underlying security
investments, the creditworthiness of the issuer and the rate of return required by investors to own
these securities in the current environment, including call and liquidity premiums.
Since fiscal 2003, we have had various stock repurchase programs that authorized the purchase
of up to $1.55 billion of our outstanding common stock, including a program approved in November
2008 authorizing the repurchase of up to $300 million of our outstanding common stock. As of March
28, 2010, we had repurchased a total of 92.6 million shares of our common stock under our stock
repurchase programs for an aggregate purchase price of $1.45 billion. Pursuant to the existing
stock repurchase program, we are authorized to repurchase shares with an aggregate cost of up to
$104.4 million as of March 28, 2010.
We have certain contractual obligations and commitments to make future payments in the form of
non-cancelable purchase orders to our suppliers and commitments under operating lease arrangements.
A summary of our contractual obligations as of March 28, 2010, and their impact on our cash flows
in future fiscal years, is as follows:
2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Operating leases |
$ | 7.6 | $ | 5.3 | $ | 3.7 | $ | 3.7 | $ | 2.9 | $ | 5.9 | $ | 29.1 | ||||||||||||||
Non-cancelable purchase obligations |
72.4 | | | | | | 72.4 | |||||||||||||||||||||
Total |
$ | 80.0 | $ | 5.3 | $ | 3.7 | $ | 3.7 | $ | 2.9 | $ | 5.9 | $ | 101.5 | ||||||||||||||
The amount of unrecognized tax benefits, including related accrued interest and penalties, was
$70.6 million at March 28, 2010. We are not able to provide a reasonable estimate of the timing of
future tax payments related to these obligations.
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Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting
principles requires us to make estimates and judgments that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts of net revenues
and expenses during the reporting period. We base our estimates on historical experience and on
various other factors, including the current economic environment, which we believe to be
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities. We believe the accounting policies described below
to be our most critical accounting policies. These accounting policies are affected significantly
by judgments, assumptions and estimates used in the preparation of the financial statements and
actual results could differ materially from the amounts reported based on these policies.
Revenue Recognition
We recognize revenue from product sales when all of the following fundamental criteria are
met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price
to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable
is reasonably assured.
For all sales, we use a binding purchase order or a signed agreement as evidence of an
arrangement. Delivery occurs when goods are shipped and title and risk of loss transfer to the
customer, in accordance with the terms specified in the arrangement with the customer. The
customers obligation to pay and the payment terms are set at the time of delivery and are not
dependent on the subsequent resale of our product. However, certain of our sales are made to
distributors under agreements that contain a limited right to return unsold product and price
protection provisions. These return rights and price protection provisions limit our ability to
reasonably estimate product returns and the final price of the inventory sold to distributors. As a
result, the price to the customer is not fixed or determinable at the time products are delivered
to distributors. Accordingly, we recognize revenue from these distributors based on the
sell-through method using inventory information provided by the distributor. At times, we provide
standard incentive programs to our customers. We account for our competitive pricing incentives,
which generally reflect front-end price adjustments, as a reduction of revenue at the time of sale,
and rebates as a reduction of revenue in the period the related revenue is recorded based on the
specific program criteria and historical experience. In addition, we record provisions against
revenue and cost of revenue for estimated product returns in the same period that revenue is
recognized. These provisions are based on historical experience as well as specifically identified
product returns. Royalty and service revenue is recognized when earned and receipt is reasonably
assured.
For those sales that include multiple deliverables, we allocate revenue based on the relative
fair values of the individual components. When more than one element, such as hardware and
services, are contained in a single arrangement, we allocate revenue between the elements based on
each elements relative fair value, provided that each element meets the criteria for treatment as
a separate unit of accounting. An item is considered a separate unit of accounting if it has value
to the customer on a standalone basis and there is objective and reliable evidence of the fair
value of the undelivered items. Fair value is generally determined based upon the price charged
when the element is sold separately. In the absence of fair value for a delivered element, we
allocate revenue first to the fair value of the undelivered elements and allocate the residual
revenue to the delivered elements. In the absence of fair value for an undelivered element, the
arrangement is accounted for as a single unit of accounting, resulting in a deferral of revenue
recognition for the delivered elements. Such deferred revenue is recognized over the service period
or when all elements have been delivered.
We sell certain software products and related post-contract customer support (PCS). We
recognize revenue from software products when all of the following fundamental criteria are met:
(i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to
the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is
probable. Revenue is allocated to undelivered elements based upon vendor-specific objective
evidence (VSOE) of the fair value of the element. VSOE of the fair value is based upon the price
charged when the element is sold separately. Revenue allocated to each element is then recognized
when the basic revenue recognition criteria are met for each element. If we are unable to
determine VSOE of fair value for an undelivered element, the entire amount of revenue from the
arrangement is deferred and recognized over the service period or when all elements have been
delivered.
Stock-Based Compensation
We recognize compensation expense for all stock-based awards made to employees and
non-employee directors, including stock options, restricted stock units and stock purchases under
our Employee Stock Purchase Plan (the ESPP), based on estimated fair values on the date of grant.
Stock-based compensation is recognized for the portion of the award that is ultimately expected to
vest. Forfeitures are estimated at the time of grant based on historical trends and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates. We recognize
stock-based compensation expense on a straight-line basis over the requisite
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service period, which is the vesting period for stock options and restricted stock units, and
the offering period for the ESPP. The determination of fair value of stock-based awards on the
date of grant using an option-pricing model is affected by our stock price as well as assumptions
regarding a number of highly complex and subjective variables. These variables include, but are
not limited to, our expected stock price volatility over the term of the awards and actual and
projected employee stock option exercise behaviors. In estimating expected stock price volatility,
we use a combination of both historical volatility, calculated based on the daily closing prices of
our common stock over a period equal to the expected term of the option, and implied volatility,
utilizing market data of actively traded options on our common stock. We believe that the
historical volatility of the price of our common stock over the expected term of the option is a
strong indicator of the expected future volatility. We also believe that implied volatility takes
into consideration market expectations of how future volatility will differ from historical
volatility. Accordingly, we believe a combination of both historical and implied volatility
provides the best estimate of the future volatility of the market price of our common stock.
Changes in the subjective assumptions can materially affect the estimated fair value of stock-based
awards.
Income Taxes
We utilize the asset and liability method of accounting for income taxes. Income tax
positions taken or expected to be taken in a tax return should be recognized in the first reporting
period that it is more likely than not the tax position will be sustained upon examination. A tax
position that meets the more-likely-than-not recognition threshold is initially and subsequently
measured as the largest amount of tax benefit that is greater than 50 percent likely of being
realized upon settlement with a taxing authority that has full knowledge of all relevant
information. Previously recognized income tax positions that fail to meet the recognition
threshold in a subsequent period are derecognized in that period. Differences between actual
results and our assumptions, or changes in our assumptions in future periods, are recorded in the
period they become known. We record potential accrued interest and penalties related to
unrecognized tax benefits in income tax expense.
Deferred income taxes are recognized for the future tax consequences of temporary differences
using enacted statutory tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Temporary differences include the
difference between the financial statement carrying amounts and the tax bases of existing assets
and liabilities and operating loss and tax credit carryforwards. The effect on deferred taxes of a
change in tax rates is recognized in earnings in the period that includes the enactment date.
A valuation allowance is recorded when it is more likely than not that some or all of a
deferred tax asset will not be realized. An adjustment to earnings would occur if we determine that
we are able to realize a different amount of our deferred tax assets than currently expected.
As a multinational corporation, we are subject to complex tax laws and regulations in various
jurisdictions. The application of tax laws and regulations is subject to legal and factual
interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of
changes in fiscal policy, changes in legislation, evolution of regulations and court rulings.
Therefore, the actual liability for U.S. or foreign taxes may be materially different from our
estimates, which could result in the need to record additional liabilities or potentially to
reverse previously recorded tax liabilities. Differences between actual results and our
assumptions, or changes in our assumptions in future periods, are recorded in the period they
become known.
Investment Securities
Our investment securities include available-for-sale securities, trading securities and other
investment securities and are classified in the consolidated balance sheets based on the nature of
the security and the availability for use in current operations.
Our available-for-sale securities are recorded at fair value, based on quoted market prices or
other observable inputs. Unrealized gains and losses, net of related income taxes, on our portfolio
of available-for-sale securities are excluded from earnings and reported as a separate component of
accumulated other comprehensive income until realized.
Our trading securities are recorded at fair value with unrealized holding gains and losses
included in earnings and reported in interest and other income, net. In the absence of quoted
market prices for trading securities, we value these securities based on an income approach using
an estimate of future cash flows.
Our other investment securities are accounted for under the cost method and recorded at the
lower of fair value or cost.
We recognize an impairment charge on our available-for-sale and cost method investments when
the decline in the fair value of an investment below its cost basis is judged to be
other-than-temporary. If we intend to sell the security or it is more likely than not that
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we will be required to sell the security before recovery of its amortized cost basis less any
current-period credit loss, we would recognize the entire impairment in earnings. If we do not
intend to sell the security and it is not more likely than not that we will be required to sell the
security before recovery of its amortized cost basis less any current-period credit loss, the
other-than-temporary impairment is separated into (a) the amount representing the credit loss and
(b) the amount related to all other factors. The amount of the other-than-temporary impairment
related to the credit loss is recognized in earnings. The amount of the other-than-temporary
impairment related to other factors is recognized in other comprehensive income, net of applicable
taxes. Significant judgment is required in determining the fair value of investment securities in
inactive markets as well as determining when declines in fair value constitute an
other-than-temporary impairment. We consider various factors in determining whether to recognize
an impairment charge, including the current financial and credit market environment, the financial
condition and near-term prospects of the issuer of the security, the magnitude of the loss compared
to the cost of the investment, the length of time the investment has been in a loss position and
our intent and ability to hold the investment for a period of time sufficient to allow for any
anticipated recovery of market value.
Realized gains or losses are determined on a specific identification basis and reported in
interest and other income, net, as incurred.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market. We write down the
carrying value of our inventory to estimated net realizable value for estimated excess and obsolete
inventory based upon assumptions about future demand and market conditions. These assumptions are
based on economic conditions and trends (both current and projected), anticipated customer demand
and acceptance of our current products, expected future products and other assumptions. If actual
market conditions are less favorable than those projected by management, additional write-downs may
be required. Once we write down the carrying value of inventory, a new cost basis is established.
Subsequent changes in facts and circumstances do not result in an increase in the newly established
cost basis.
Goodwill and Other Intangible Assets
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for
an acquisition and the fair value of the net tangible and intangible assets acquired. The amounts
and useful lives assigned to intangible assets acquired, other than goodwill, impact the amount and
timing of future amortization. The amount assigned to in-process research and development is
capitalized and accounted for as an indefinite-lived intangible asset until the underlying projects
are completed or abandoned.
Goodwill is not amortized but instead is tested at least annually for impairment, or more
frequently when events or changes in circumstances indicate a potential impairment, by comparing
the carrying value to the fair value of the reporting unit to which the goodwill is assigned. A
two-step test is used to identify the potential impairment and to measure the amount of impairment,
if any. The first step is to compare the fair value of the reporting unit with its carrying amount,
including goodwill. If the fair value of the reporting unit is less than its carrying amount,
goodwill is considered impaired and the loss is measured by performing step two. Under step two,
the impairment loss is measured by comparing the implied fair value of the reporting unit with the
carrying amount of goodwill. We perform the annual test for impairment as of the first day of our
fiscal fourth quarter. During the annual goodwill impairment test in fiscal 2010, we completed step
one and determined that there was no impairment of goodwill since the fair value (based on quoted
market price) of the reporting unit exceeded its carrying value. Based on this impairment test, we
believe that we have no at-risk goodwill.
The initial recording and subsequent evaluation for impairment of goodwill and purchased
intangible assets requires the use of significant management judgment regarding the forecasts of
future operating results. It is possible that our business plans may change and our estimates used
may prove to be inaccurate. If our actual results, or the plans and estimates used in future
impairment analyses, are lower than current estimates used, we could incur impairment charges.
Long-Lived Assets
Long-lived assets, including property and equipment and purchased intangible assets, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset or asset group may not be recoverable. Significant judgment is required in
determining whether a potential indicator of impairment of our long-lived assets exists.
Recoverability of assets to be held and used is measured by the comparison of the carrying amount
of an asset or asset group to future undiscounted net cash flows expected to be generated by the
asset or asset group. If such an asset or asset group is considered to be impaired, the impairment
to be recognized is measured as the amount by which the carrying amount of the asset or asset group
exceeds the fair value of the asset or asset group. Assets to be disposed of are reported at the
lower of their carrying amount or fair value less costs to
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sell. Estimating future net cash flows and determining proper asset groupings for the purpose
of this impairment test requires the use of significant management judgment. If our actual
results, or estimates used in future impairment analyses, are lower than our current estimates, we
could incur impairment charges.
Recently Issued Accounting Standards Not Yet Effective
In September 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2009-13, which provides amendments to Accounting Standards Codification (ASC)
Topic 605 Multiple-Deliverable Revenue Arrangements. ASU No. 2009-13 replaces and significantly
changes certain guidance in ASC Topic 605. ASU No. 2009-13 modifies the separation criteria of ASC
Subtopic 605-25 by eliminating the criterion for objective and reliable evidence of fair value for
the undelivered products or services. Instead, revenue arrangements with multiple deliverables
should be divided into separate units of accounting provided the deliverables meet certain
criteria. ASU No. 2009-13 eliminates the use of the residual method of allocation and requires
that arrangement consideration be allocated at the inception of the arrangement to all deliverables
based on their relative selling price. ASU No. 2009-13 provides a hierarchy for estimating the
selling price for each of the deliverables. ASU No. 2009-13 is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15,
2010. Early adoption is permitted. We are currently assessing the impact ASU No. 2009-13 will
have on our consolidated results of operations or financial position.
In September 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That Include
Software Elements. Pursuant to ASU No. 2009-14, all tangible products containing both software
and non-software components that function together to deliver the products essential functionality
will no longer be within the scope of ASC Subtopic 985-605 and will be required to be accounted for
under the guidance in ASU No. 2009-13. ASU No. 2009-14 provides a list of items to consider when
determining whether the software and non-software components function together to deliver a
products essential functionality. ASU No. 2009-14 is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15,
2010. Early adoption is permitted. We are currently assessing the impact ASU No. 2009-14 will
have on our consolidated results of operations or financial position.
In January 2010, the FASB issued ASU No. 2010-06, which provides amendments to ASC Topic 820,
Fair Value Measurements and Disclosures. ASU No. 2010-06 requires new fair value disclosures and
clarifies certain existing disclosure requirements. ASU No. 2010-06 is effective for fiscal
periods beginning after December 15, 2010 for the requirement to provide information on purchases,
sales, issuances and settlements in the Level 3 rollforward on a gross basis. All other disclosure
requirements under ASU No. 2010-06 are effective for interim and annual reporting periods beginning
after December 15, 2009. We are currently assessing the impact ASU No. 2010-06 will have on our
consolidated financial statements.
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Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Our cash and cash equivalents are not subject to significant interest rate risk due to the
short maturities of these instruments. As of March 28, 2010, the carrying value of our cash and
cash equivalents approximates fair value.
We maintain a portfolio of investment securities consisting primarily of debt securities,
including government and agency securities, corporate debt obligations, asset and mortgage-backed
securities and municipal bonds, the majority of which have remaining terms of three years or less.
We are exposed to fluctuations in interest rates as movements in interest rates can result in
changes in the market value of our investments in debt securities. However, due to the short-term
nature of our investment portfolio we do not believe that we are subject to material interest rate
risk.
In accordance with our investment guidelines, we only invest in instruments with high credit
quality ratings and we limit our exposure to any one issuer or type of investment. Our portfolio of
investment securities as of March 28, 2010 includes $161.6 million of securities that are
classified as available for sale. As of March 28, 2010, we had gross unrealized losses associated
with our available-for-sale securities of less than $0.1 million that were determined by management
to be temporary in nature.
Our portfolio of investment securities as of March 28, 2010 also includes $18.0 million of
auction rate debt securities and $4.4 million of auction rate preferred securities (collectively,
ARS), the majority of which are rated AA or higher, and related put options valued at $1.4 million.
These investment securities are accounted for as trading securities. During late fiscal 2008, the
market auctions of many ARS began to fail, including auctions for our ARS. The underlying assets
for auction rate debt securities in our portfolio are student loans, substantially all of which are
backed by the federal government under the Federal Family Education Loan Program. The underlying
assets of our auction rate preferred securities are the respective funds investment portfolios.
In November 2008, we entered into an agreement with the broker for all of the ARS we currently
hold, which provides us with certain rights (ARS Rights), in exchange for the release of potential
claims and damages against the broker. The ARS Rights entitle us to sell the related ARS back to
the broker for a price equal to the liquidation preference of the ARS plus accrued but unpaid
dividends or interest, if any, which price is referred to as par. The ARS Rights may be exercised
by us at any time between June 30, 2010 and July 2, 2012, if the securities are not earlier
redeemed or sold. Under the ARS Rights, the broker may, at its discretion, purchase the ARS at any
time through July 2, 2012 without prior notice to us and must pay us par value for the ARS within
one day of the sale transaction settlement. While we expect to ultimately recover our investments
in the ARS at par, we may be unable to liquidate some or all of our ARS should we need or desire to
access the funds invested in those securities prior to redemption by the issuer or the exercise of
the ARS Rights. There is also a risk that our broker will default on its obligation to purchase the
ARS in the event that we exercise the ARS Rights.
Based on our existing cash, cash equivalents and investment securities, as well as our
expected cash flows from operating activities, we do not anticipate that the potential lack of
liquidity of our ARS in the near-term will affect our ability to execute our current business plan.
We do not use derivative financial instruments.
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Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
QLogic Corporation:
QLogic Corporation:
We have audited the accompanying consolidated balance sheets of QLogic Corporation and
subsidiaries as of March 28, 2010 and March 29, 2009, and the related consolidated statements of
income, stockholders equity and comprehensive income, and cash flows for each of the years in the
three-year period ended March 28, 2010. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule of valuation and qualifying
accounts as listed in the index under Item 15(a)(2). These consolidated financial statements and
financial statement schedule are the responsibility of the Companys management. Our responsibility
is to express an opinion on these 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, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of QLogic Corporation and subsidiaries as of March 28,
2010 and March 29, 2009, and the results of their operations and their cash flows for each of the
years in the three-year period ended March 28, 2010, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related 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 also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), QLogic Corporations internal control over financial reporting as
of March 28, 2010, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report
dated May 20, 2010, expressed an unqualified opinion on the effectiveness of the Companys internal
control over financial reporting.
/s/ KPMG LLP | ||||
Irvine, California | ||||
May 20, 2010 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
QLogic Corporation:
QLogic Corporation:
We have audited QLogic Corporations internal control over financial reporting as of March 28,
2010, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). QLogic Corporations
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying Managements Report on Internal Control Over Financial Reporting appearing under
Item 9A. Our responsibility is to express an opinion on the Companys internal control over
financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, QLogic Corporation maintained, in all material respects, effective internal
control over financial reporting as of March 28, 2010, based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of QLogic Corporation and
subsidiaries as of March 28, 2010 and March 29, 2009, and the related consolidated statements of
income, stockholders equity and comprehensive income, and cash flows for each of the years in the
three-year period ended March 28, 2010, and our report dated May 20, 2010, expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP | ||||
Irvine, California | ||||
May 20, 2010 | ||||
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QLOGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
March 28, 2010 and March 29, 2009
March 28, 2010 and March 29, 2009
2010 | 2009 | |||||||
(In thousands, except share | ||||||||
and per share amounts) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 190,308 | $ | 203,722 | ||||
Short-term investment securities |
185,365 | 139,561 | ||||||
Accounts receivable, less allowance for doubtful accounts of $1,505 and $1,366 as of March 28, 2010
and March 29, 2009, respectively |
73,301 | 68,519 | ||||||
Inventories |
19,403 | 40,293 | ||||||
Deferred tax assets |
10,976 | 19,002 | ||||||
Other current assets |
9,845 | 10,854 | ||||||
Total current assets |
489,198 | 481,951 | ||||||
Long-term investment securities |
| 34,986 | ||||||
Property and equipment, net |
83,496 | 92,547 | ||||||
Goodwill |
119,748 | 118,859 | ||||||
Purchased intangible assets, net |
17,394 | 19,117 | ||||||
Deferred tax assets |
36,917 | 28,785 | ||||||
Other assets |
3,984 | 4,045 | ||||||
$ | 750,737 | $ | 780,290 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 36,766 | $ | 36,874 | ||||
Accrued compensation |
22,727 | 28,702 | ||||||
Accrued taxes |
2,633 | 13,499 | ||||||
Deferred revenue |
9,240 | 7,470 | ||||||
Other current liabilities |
11,069 | 6,728 | ||||||
Total current liabilities |
82,435 | 93,273 | ||||||
Accrued taxes |
70,577 | 47,116 | ||||||
Deferred revenue |
7,401 | 8,559 | ||||||
Other liabilities |
6,985 | 4,797 | ||||||
Total liabilities |
167,398 | 153,745 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.001 par value; 1,000,000 shares authorized; no shares issued and outstanding |
| | ||||||
Common stock, $0.001 par value; 500,000,000 shares authorized; 204,893,000 and 202,009,000 shares issued at March 28, 2010 and March 29, 2009, respectively |
205 | 202 | ||||||
Additional paid-in capital |
778,853 | 712,064 | ||||||
Retained earnings |
1,248,675 | 1,193,727 | ||||||
Accumulated other comprehensive income |
1,206 | 634 | ||||||
Treasury stock, at cost: 92,586,000 and 82,478,000 shares at March 28, 2010 and March 29, 2009, respectively |
(1,445,600 | ) | (1,280,082 | ) | ||||
Total stockholders equity |
583,339 | 626,545 | ||||||
$ | 750,737 | $ | 780,290 | |||||
See accompanying notes to consolidated financial statements.
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QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended March 28, 2010, March 29, 2009 and March 30, 2008
Years Ended March 28, 2010, March 29, 2009 and March 30, 2008
2010 | 2009 | 2008 | ||||||||||
(In thousands, except per | ||||||||||||
share amounts) | ||||||||||||
Net revenues |
$ | 549,070 | $ | 633,862 | $ | 597,866 | ||||||
Cost of revenues |
196,127 | 210,075 | 205,959 | |||||||||
Gross profit |
352,943 | 423,787 | 391,907 | |||||||||
Operating expenses: |
||||||||||||
Engineering and development |
136,831 | 133,252 | 134,668 | |||||||||
Sales and marketing |
77,601 | 86,959 | 84,166 | |||||||||
General and administrative |
34,242 | 32,639 | 34,049 | |||||||||
Special charges |
5,163 | 4,063 | 5,328 | |||||||||
Total operating expenses |
253,837 | 256,913 | 258,211 | |||||||||
Operating income |
99,106 | 166,874 | 133,696 | |||||||||
Interest and other income, net |
10,601 | 2,134 | 14,024 | |||||||||
Income before income taxes |
109,707 | 169,008 | 147,720 | |||||||||
Income taxes |
54,759 | 60,219 | 51,510 | |||||||||
Net income |
$ | 54,948 | $ | 108,789 | $ | 96,210 | ||||||
Net income per share: |
||||||||||||
Basic |
$ | 0.47 | $ | 0.85 | $ | 0.68 | ||||||
Diluted |
$ | 0.47 | $ | 0.85 | $ | 0.67 | ||||||
Number of shares used in per share calculations: |
||||||||||||
Basic |
116,037 | 127,776 | 142,167 | |||||||||
Diluted |
117,364 | 128,570 | 142,901 | |||||||||
See accompanying notes to consolidated financial statements.
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QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
Years Ended March 28, 2010, March 29, 2009 and March 30, 2008
Years Ended March 28, 2010, March 29, 2009 and March 30, 2008
Accumulated | ||||||||||||||||||||||||||||
Common Stock | Additional | Other | Total | |||||||||||||||||||||||||
Outstanding | Paid-In | Retained | Comprehensive | Treasury | Stockholders | |||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (Loss) | Stock | Equity | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Balance at April 1, 2007 |
155,417 | $ | 198 | $ | 608,515 | $ | 988,728 | $ | 169 | $ | (723,079 | ) | $ | 874,531 | ||||||||||||||
Net income |
| | | 96,210 | | | 96,210 | |||||||||||||||||||||
Change in unrealized gains and losses on investment
securities, net of income taxes |
| | | | (2,699 | ) | | (2,699 | ) | |||||||||||||||||||
Comprehensive income |
93,511 | |||||||||||||||||||||||||||
Issuance of common stock under stock-based awards |
1,591 | 2 | 14,694 | | | | 14,696 | |||||||||||||||||||||
Increase in excess tax benefits from stock-based awards |
| | 288 | | | | 288 | |||||||||||||||||||||
Stock-based compensation |
| | 31,764 | | | | 31,764 | |||||||||||||||||||||
Common stock issued related to business acquisition |
154 | | 2,632 | | | | 2,632 | |||||||||||||||||||||
Purchases of treasury stock |
(24,148 | ) | | | | | (351,506 | ) | (351,506 | ) | ||||||||||||||||||
Balance at March 30, 2008 |
133,014 | 200 | 657,893 | 1,084,938 | (2,530 | ) | (1,074,585 | ) | 665,916 | |||||||||||||||||||
Net income |
| | | 108,789 | | | 108,789 | |||||||||||||||||||||
Change in unrealized gains and losses on investment
securities, net of income taxes |
| | | | 3,164 | | 3,164 | |||||||||||||||||||||
Comprehensive income |
111,953 | |||||||||||||||||||||||||||
Issuance of common stock under stock-based awards |
2,246 | 2 | 23,539 | | | | 23,541 | |||||||||||||||||||||
Increase in excess tax benefits from stock-based awards |
| | 279 | | | | 279 | |||||||||||||||||||||
Stock-based compensation |
| | 28,646 | | | | 28,646 | |||||||||||||||||||||
Common stock issued related to business acquisition |
111 | | 1,707 | | | | 1,707 | |||||||||||||||||||||
Purchases of treasury stock |
(15,840 | ) | | | | | (205,497 | ) | (205,497 | ) | ||||||||||||||||||
Balance at March 29, 2009 |
119,531 | 202 | 712,064 | 1,193,727 | 634 | (1,280,082 | ) | 626,545 | ||||||||||||||||||||
Net income |
| | | 54,948 | | | 54,948 | |||||||||||||||||||||
Change in unrealized gains and losses on investment
securities, net of income taxes |
| | | | 572 | | 572 | |||||||||||||||||||||
Comprehensive income |
55,520 | |||||||||||||||||||||||||||
Issuance of common stock under stock-based awards |
2,772 | 3 | 31,497 | | | | 31,500 | |||||||||||||||||||||
Decrease in excess tax benefits from stock-based awards |
| | (1,278 | ) | | | | (1,278 | ) | |||||||||||||||||||
Stock-based compensation |
| | 35,232 | | | | 35,232 | |||||||||||||||||||||
Common stock issued related to business acquisition |
112 | | 1,338 | | | | 1,338 | |||||||||||||||||||||
Purchases of treasury stock |
(10,108 | ) | | | | | (165,518 | ) | (165,518 | ) | ||||||||||||||||||
Balance at March 28, 2010 |
112,307 | $ | 205 | $ | 778,853 | $ | 1,248,675 | $ | 1,206 | $ | (1,445,600 | ) | $ | 583,339 | ||||||||||||||
See accompanying notes to consolidated financial statements.
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QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 28, 2010, March 29, 2009 and March 30, 2008
Years Ended March 28, 2010, March 29, 2009 and March 30, 2008
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 54,948 | $ | 108,789 | $ | 96,210 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
31,803 | 32,525 | 30,857 | |||||||||
Stock-based compensation |
35,694 | 28,819 | 32,973 | |||||||||
Amortization of acquisition-related intangible assets |
8,331 | 15,032 | 16,725 | |||||||||
Deferred income taxes |
5,999 | 16,660 | (14,549 | ) | ||||||||
Net gains on investment securities |
(4,982 | ) | (7,095 | ) | (607 | ) | ||||||
Impairment of investment securities |
| 16,407 | 6,867 | |||||||||
Impairment of intangible assets |
| | 2,338 | |||||||||
Other non-cash charges |
1,090 | 680 | 1,727 | |||||||||
Changes in operating assets and liabilities, net of acquisition: |
||||||||||||
Accounts receivable |
(4,432 | ) | 12,845 | (8,503 | ) | |||||||
Inventories |
21,920 | (12,773 | ) | 11,415 | ||||||||
Other assets |
487 | (2,126 | ) | 3,593 | ||||||||
Accounts payable |
240 | 707 | 7,282 | |||||||||
Accrued compensation |
(6,036 | ) | (884 | ) | (1,940 | ) | ||||||
Accrued taxes |
11,827 | 7,190 | 20,635 | |||||||||
Deferred revenue |
612 | 2,249 | 6,412 | |||||||||
Other liabilities |
4,271 | 688 | (453 | ) | ||||||||
Net cash provided by operating activities |
161,772 | 219,713 | 210,982 | |||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of available-for-sale securities |
(244,083 | ) | (122,437 | ) | (185,707 | ) | ||||||
Proceeds from sales and maturities of available-for-sale securities |
223,729 | 162,884 | 425,640 | |||||||||
Proceeds from disposition of trading securities |
11,425 | 4,550 | | |||||||||
Reclassification from cash equivalents to other investment securities |
| (57,209 | ) | | ||||||||
Distributions from other investment securities |
5,464 | 48,855 | | |||||||||
Purchases of property and equipment |
(24,528 | ) | (30,721 | ) | (30,001 | ) | ||||||
Acquisition of business, net of cash acquired |
(14,931 | ) | | 67 | ||||||||
Net cash provided by (used in) investing activities |
(42,924 | ) | 5,922 | 209,999 | ||||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of common stock under stock-based awards |
34,375 | 25,522 | 15,960 | |||||||||
Excess tax benefits from stock-based awards |
591 | 279 | 288 | |||||||||
Minimum tax withholding paid on behalf of employees for restricted stock units |
(2,875 | ) | (1,981 | ) | (1,264 | ) | ||||||
Purchases of treasury stock |
(163,419 | ) | (205,742 | ) | (352,760 | ) | ||||||
Payoff of line of credit assumed in acquisition |
(934 | ) | | | ||||||||
Net cash used in financing activities |
(132,262 | ) | (181,922 | ) | (337,776 | ) | ||||||
Net increase (decrease) in cash and cash equivalents |
(13,414 | ) | 43,713 | 83,205 | ||||||||
Cash and cash equivalents at beginning of year |
203,722 | 160,009 | 76,804 | |||||||||
Cash and cash equivalents at end of year |
$ | 190,308 | $ | 203,722 | $ | 160,009 | ||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Cash paid during the year for: |
||||||||||||
Income taxes |
$ | 36,937 | $ | 37,101 | $ | 41,475 | ||||||
See accompanying notes to consolidated financial statements.
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business and Summary of Significant Accounting Policies
General Business Information
QLogic Corporation (QLogic or the Company) is a designer and supplier of network
infrastructure products that enhance, manage and support the transmission of data from computer
servers to storage systems and from computer servers to other servers. The Companys products are
used in connection with three distinct types of networks: Storage Networks, High Performance
Computing Networks and Converged Networks. The Companys products include adapters, switches and
application-specific integrated circuits and are sold worldwide, primarily to original equipment
manufacturers (OEMs) and distributors.
The Company classifies its products into three broad categories: Host Products, Network
Products and Silicon Products. Host Products consist of Fibre Channel and Internet Small Computer
Systems Interface (iSCSI) host bus adapters; InfiniBand® host channel adapters; Fibre Channel over
Ethernet (FCoE) converged network adapters; and Intelligent Ethernet adapters. Network Products
consist of Fibre Channel switches, including stackable edge switches, bladed switches, virtualized
pass-through modules, and high-port count modular-chassis switches; InfiniBand switches, including
high-end multi-protocol directors, edge and bladed switches; Enhanced Ethernet pass-through
modules; and storage routers for bridging Fibre Channel, FCoE and iSCSI networks. Silicon Products
consist of Fibre Channel controllers, iSCSI controllers, converged network controllers and Ethernet
controllers.
Principles of Consolidation
The consolidated financial statements include the financial statements of QLogic Corporation
and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
Financial Reporting Period
The Company uses a fifty-two/fifty-three week fiscal year ending on the Sunday nearest March
31. Fiscal years 2010, 2009 and 2008 each comprised fifty-two weeks and ended on March 28, 2010,
March 29, 2009 and March 30, 2008, respectively.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting
principles requires management to make estimates and judgments that affect the amounts reported in
the Companys consolidated financial statements and accompanying notes. Among the significant
estimates affecting the consolidated financial statements are those related to revenue recognition,
stock-based compensation, income taxes, investment securities, inventories, goodwill and long-lived
assets.
The Company evaluates its estimates on an ongoing basis using historical experience and other
factors, including the current economic environment. The current volatility in the capital markets
and the economy has increased the uncertainty in the Companys estimates, including estimates
impacting investment securities and long-lived assets. Significant judgment is required in
determining the fair value of investment securities in inactive markets, as well as determining
when declines in fair value constitute an other-than-temporary impairment. In addition,
significant judgment is required in determining whether a potential indicator of impairment of the
Companys long-lived assets exists and in estimating future cash flows and determining proper asset
groupings for the purpose of any necessary impairment tests. Significant judgment is also required
in determining the fair value of assets acquired and liabilities assumed in a business combination,
including the fair value of identifiable intangible assets. As future events unfold and their
effects cannot be determined with precision, actual results could differ significantly from
managements estimates.
Revenue Recognition
The Company recognizes revenue from product sales when all of the following fundamental
criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred,
(iii) the price to the customer is fixed or determinable and (iv) collection of the resulting
accounts receivable is reasonably assured.
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For all sales, the Company uses a binding purchase order or a signed agreement as evidence of
an arrangement. Delivery occurs when goods are shipped and title and risk of loss transfer to the
customer, in accordance with the terms specified in the arrangement with the customer. The
customers obligation to pay and the payment terms are set at the time of delivery and are not
dependent on the subsequent resale of the product. However, certain of the Companys sales are made
to distributors under agreements that contain a limited right to return unsold product and price
protection provisions. These return rights and price protection provisions limit the Companys
ability to reasonably estimate product returns and the final price of the inventory sold to
distributors. As a result, the price to the customer is not fixed or determinable at the time
products are delivered to distributors. Accordingly, the Company recognizes revenue from these
distributors based on the sell-through method using inventory information provided by the
distributor. At times, the Company provides standard incentive programs to its customers. The
Company accounts for its competitive pricing incentives, which generally reflect front-end price
adjustments, as a reduction of revenue at the time of sale, and rebates as a reduction of revenue
in the period the related revenue is recorded based on the specific program criteria and historical
experience. In addition, the Company records provisions against revenue and cost of revenue for
estimated product returns in the same period that revenue is recognized. These provisions are
based on historical experience as well as specifically identified product returns. Royalty and
service revenue is recognized when earned and receipt is reasonably assured.
For those sales that include multiple deliverables, the Company allocates revenue based on the
relative fair values of the individual components. When more than one element, such as hardware
and services, are contained in a single arrangement, the Company allocates revenue between the
elements based on each elements relative fair value, provided that each element meets the criteria
for treatment as a separate unit of accounting. An item is considered a separate unit of
accounting if it has value to the customer on a standalone basis and there is objective and
reliable evidence of the fair value of the undelivered items. Fair value is generally determined
based upon the price charged when the element is sold separately. In the absence of fair value for
a delivered element, the Company allocates revenue first to the fair value of the undelivered
elements and allocates the residual revenue to the delivered elements. In the absence of fair
value for an undelivered element, the arrangement is accounted for as a single unit of accounting,
resulting in a deferral of revenue recognition for the delivered elements. Such deferred revenue
is recognized over the service period or when all elements have been delivered.
The Company sells certain software products and related post-contract customer support (PCS).
The Company recognizes revenue from software products when all of the following fundamental
criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred,
(iii) the price to the customer is fixed or determinable and (iv) collection of the resulting
accounts receivable is probable. Revenue is allocated to undelivered elements based upon
vendor-specific objective evidence (VSOE) of the fair value of the element. VSOE of the fair value
is based upon the price charged when the element is sold separately. Revenue allocated to each
element is then recognized when the basic revenue recognition criteria are met for each element.
If the Company is unable to determine VSOE of fair value for an undelivered element, the entire
amount of revenue from the arrangement is deferred and recognized over the service period or when
all elements have been delivered.
Stock-Based Compensation
The Company recognizes compensation expense for all stock-based awards made to employees and
non-employee directors, including stock options, restricted stock units and stock purchases under
the Companys Employee Stock Purchase Plan (the ESPP), based on estimated fair values on the date
of grant. Stock-based compensation is recognized for the portion of the award that is ultimately
expected to vest. Forfeitures are estimated at the time of grant based on historical trends and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company recognizes stock-based compensation expense on a straight-line basis over the requisite
service period, which is the vesting period for stock options and restricted stock units, and the
offering period for the ESPP. The determination of fair value of stock-based awards on the date of
grant using an option-pricing model is affected by the Companys stock price as well as assumptions
regarding a number of highly complex and subjective variables. These variables include, but are
not limited to, the Companys expected stock price volatility over the term of the awards and
actual and projected employee stock option exercise behaviors. In estimating expected stock price
volatility, the Company uses a combination of both historical volatility, calculated based on the
daily closing prices of the Companys common stock over a period equal to the expected term of the
option, and implied volatility, utilizing market data of actively traded options on the Companys
common stock.
Research and Development
Research and development costs, including costs related to the development of new products and
process technology, are expensed as incurred.
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Advertising Costs
The Company expenses all advertising costs as incurred and such costs were not material to the
consolidated statements of income for all periods presented.
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Income
tax positions taken or expected to be taken in a tax return should be recognized in the first
reporting period that it is more likely than not the tax position will be sustained upon
examination. A tax position that meets the more-likely-than-not recognition threshold is initially
and subsequently measured as the largest amount of tax benefit that is greater than 50 percent
likely of being realized upon settlement with a taxing authority that has full knowledge of all
relevant information. Previously recognized income tax positions that fail to meet the recognition
threshold in a subsequent period are derecognized in that period. Differences between actual
results and the Companys assumptions, or changes in its assumptions in future periods, are
recorded in the period they become known. The Company records potential accrued interest and
penalties related to unrecognized tax benefits in income tax expense.
Deferred income taxes are recognized for the future tax consequences of temporary differences
using enacted statutory tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Temporary differences include the
difference between the financial statement carrying amounts and the tax bases of existing assets
and liabilities and operating loss and tax credit carryforwards. The effect on deferred taxes of a
change in tax rates is recognized in earnings in the period that includes the enactment date. A
valuation allowance is recorded when it is more likely than not that some or all of a deferred tax
asset will not be realized.
Net Income per Share
The Company computes basic net income per share based on the weighted-average number of common
shares outstanding during the periods presented. Diluted net income per share is computed based on
the weighted-average number of common and dilutive potential common shares outstanding using the
treasury stock method. The Company has granted stock options, restricted stock units and other
stock-based awards, which have been treated as dilutive potential common shares in computing
diluted net income per share.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of
credit risk consist principally of cash equivalents, investment securities and trade accounts
receivable. Cash and cash equivalents are maintained with several financial institutions. Deposits
held with banks may exceed the amount of insurance provided on such deposits.
The Company invests primarily in debt securities, the majority of which are high investment
grade. The Company, by policy, limits the exposure to credit risk through diversification and
investment in highly-rated securities. A portion of the Companys portfolio of investment
securities includes certain auction rate debt and preferred securities (collectively, ARS), the
majority of which are rated AA or higher. During late fiscal 2008, the market auctions of many ARS
began to fail, including auctions for ARS held by the Company. Accordingly, the Company may be
unable to liquidate some or all of its investments in these securities should it need or desire to
access the funds. There is also a risk that the broker will default on its obligation to purchase
the ARS in the event that the Company exercises the ARS Rights (see Note 3).
The Company sells its products to OEMs and distributors throughout the world. As of March 28,
2010 and March 29, 2009, the Company had three customers and four customers, respectively, which
individually accounted for 10% or more of the Companys accounts receivable. These customers, all
of which were OEMs of servers and workstations, accounted for an aggregate of 75% and 74% of the
Companys accounts receivable at March 28, 2010 and March 29, 2009, respectively. The Company
performs ongoing credit evaluations of its customers financial condition and, generally, requires
no collateral from its customers. Sales to customers are denominated in U.S. dollars. As a result,
the Company believes its foreign currency risk is minimal.
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of
three months or less on their acquisition date to be cash equivalents. The carrying amounts of cash
and cash equivalents approximate their fair values.
Investment Securities
The Companys investment securities include available-for-sale securities, trading securities
and other investment securities and are classified in the consolidated balance sheets based on the
nature of the security and the availability for use in current operations.
The Companys available-for-sale securities are recorded at fair value, based on quoted market
prices or other observable inputs. Unrealized gains and losses, net of related income taxes, on the
Companys portfolio of available-for-sale securities are excluded from earnings and reported as a
separate component of accumulated other comprehensive income until realized.
The Companys trading securities are recorded at fair value with unrealized holding gains and
losses included in earnings and reported in interest and other income, net. In the absence of
quoted market prices for trading securities, the Company values these securities based on an income
approach using an estimate of future cash flows.
The Companys other investment securities are accounted for under the cost method and recorded
at the lower of fair value or cost.
The Company recognizes an impairment charge on its available-for-sale and cost method
investments when the decline in the fair value of an investment below its cost basis is judged to
be other-than-temporary. If the Company intends to sell the security or it is more likely than not
that it will be required to sell the security before recovery of its amortized cost basis less any
current-period credit loss, the Company would recognize the entire impairment in earnings. If the
Company does not intend to sell the security and it is not more likely than not that it will be
required to sell the security before recovery of its amortized cost basis less any current-period
credit loss, the other-than-temporary impairment is separated into (a) the amount representing the
credit loss and (b) the amount related to all other factors. The amount of the other-than-temporary
impairment related to the credit loss is recognized in earnings. The amount of the
other-than-temporary impairment related to other factors is recognized in other comprehensive
income, net of applicable taxes. The Company considers various factors in determining whether to
recognize an impairment charge, including the current financial and credit market environment, the
financial condition and near-term prospects of the issuer of the security, the magnitude of the
loss compared to the cost of the investment, the length of time the investment has been in a loss
position and the Companys intent and ability to hold the investment for a period of time
sufficient to allow for any anticipated recovery of market value.
Realized gains or losses are determined on a specific identification basis and reported in
interest and other income, net, as incurred.
Allowance for Doubtful Accounts
An allowance for doubtful accounts is maintained for estimated losses resulting from the
inability of the Companys customers to make required payments. This reserve is determined by
analyzing specific customer accounts, applying estimated loss rates to the aging of remaining
accounts receivable balances, and considering the impact of the current economic environment where
appropriate.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market. The Company
writes down the carrying value of inventory to estimated net realizable value for estimated excess
and obsolete inventory based upon assumptions about future demand and market conditions. These
assumptions are based on economic conditions and trends (both current and projected), anticipated
customer demand and acceptance of the Companys current products, expected future products and
other assumptions. Once the Company writes down the carrying value of inventory, a new cost basis
is established. Subsequent changes in facts and circumstances do not result in an increase in the
newly established cost basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the straight-line
method over estimated useful lives of 39.5 years for buildings, five to fifteen years for building
and land improvements, and two to five years for other property and
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
equipment. Leasehold
improvements are amortized on a straight-line basis over the shorter of the lease term or the
estimated useful life of the related asset.
Goodwill and Other Intangible Assets
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for
an acquisition and the fair value of the net tangible and intangible assets acquired. The amounts
and useful lives assigned to intangible assets acquired, other than goodwill,
impact the amount and timing of future amortization. The amount assigned to in-process
research and development is capitalized and accounted for as an indefinite-lived intangible asset
until the underlying projects are completed or abandoned.
Goodwill is not amortized but instead is tested at least annually for impairment, or more
frequently when events or changes in circumstances indicate a potential impairment, by comparing
the carrying value to the fair value of the reporting unit to which the goodwill is assigned. A
two-step test is used to identify the potential impairment and to measure the amount of impairment,
if any. The first step is to compare the fair value of the reporting unit with its carrying amount,
including goodwill. If the fair value of the reporting unit is less than its carrying amount,
goodwill is considered impaired and the loss is measured by performing step two. Under step two,
the impairment loss is measured by comparing the implied fair value of the reporting unit with the
carrying amount of goodwill. Management considers the Company as a whole to be its reporting unit
for purposes of testing for impairment. The Company performs the annual test for impairment as of
the first day of its fiscal fourth quarter. During the annual goodwill impairment test in fiscal
2010, the Company completed step one and determined that there was no impairment of goodwill since
the fair value (based on quoted market price) of the reporting unit exceeded its carrying value.
Long-Lived Assets
Long-lived assets, including property and equipment and purchased intangible assets, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and
used is measured by the comparison of the carrying amount of an asset or asset group to future
undiscounted net cash flows expected to be generated by the asset or asset group. If such an asset
or asset group is considered to be impaired, the impairment to be recognized is measured as the
amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset
or asset group. Assets to be disposed of are reported at the lower of their carrying amount or fair
value less costs to sell.
Purchased intangible assets consist primarily of technology and customer relationships
acquired in business acquisitions. Purchased intangible assets that have definite lives are
amortized on a straight-line basis over the estimated useful lives of the related assets, generally
ranging from one to seven years.
Warranty
The Companys products typically carry a warranty for periods of up to five years. The Company
records a liability for product warranty obligations in the period the related revenue is recorded
based on historical warranty experience. Warranty expense and the corresponding liability were not
material to the consolidated financial statements for all periods presented.
Comprehensive Income
Comprehensive income includes all changes in equity other than transactions with stockholders.
The Companys accumulated other comprehensive income consists primarily of unrealized gains
(losses) on available-for-sale securities, net of income taxes.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries that operate where the functional currency is
the local currency are translated to U.S. dollars at exchange rates in effect at the balance sheet
date, and income and expense accounts are translated at average exchange rates during the period.
The resulting translation adjustments are recorded as a component of accumulated other
comprehensive income. Accumulated other comprehensive income related to translation adjustments
was not material to the consolidated financial statements for all periods presented. Gains and
losses resulting from transactions denominated in currencies other than the functional currency are
included in interest and other income, net, and were not material to the consolidated statements of
income for all periods presented.
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recently Adopted Accounting Standards
In December 2007, the Financial Accounting Standards Board (FASB) issued revised guidance on
Accounting Standards Codification (ASC) Topic 805, Business Combinations. This guidance requires
an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions. Acquisition-related costs and restructuring costs that the acquirer
expected, but was not obligated to incur at the acquisition date, are recognized separately from
the business combination. Acquired in-process research and development is capitalized and accounted
for as an indefinite-lived intangible asset until the underlying projects are completed or
abandoned. In addition, this guidance amends ASC Topic 740, Income Taxes, to require the acquirer
to recognize changes in the amount of its deferred tax benefits that are recognizable because of a
business combination either in income in the period of the combination or directly in contributed
capital. This guidance applies prospectively to business combinations in fiscal years beginning on
or after December 15, 2008. The Company adopted this guidance effective March 30, 2009 and its
adoption did not have a material impact on the Companys consolidated financial statements.
In April 2009, the FASB issued revised guidance on ASC Topic 320, InvestmentsDebt and
Equity Securities. This issuance provides guidance in determining whether impairments in debt
securities are other-than-temporary, and modifies the presentation and disclosures surrounding such
instruments. This guidance is effective for interim and annual periods ending after June 15, 2009.
The Company adopted the guidance effective March 30, 2009 and its adoption did not have a material
impact on the Companys consolidated financial statements.
In April 2009, the FASB issued revised guidance on ASC Topic 820, Fair Value Measurements and
Disclosures. This issuance provides additional guidance for estimating fair value when the volume
and level of activity for the asset or liability have significantly decreased. This issuance also
includes guidance on identifying circumstances that indicate a transaction is not orderly. This
issuance was effective for interim and annual periods ending after June 15, 2009. The Company
adopted this guidance effective March 30, 2009 and its adoption did not have a material impact on
the Companys consolidated financial statements.
Note 2. Business Acquisition
On April 27, 2009, the Company acquired NetXen, Inc. (NetXen) in a merger transaction. Cash
consideration was $17.6 million for all outstanding NetXen capital stock. NetXen developed,
marketed and sold Ethernet adapter and controller products targeted at the enterprise server
market. The acquisition expanded the Companys product portfolio to include Ethernet networking
products that are complementary to existing products. The acquisition also expanded the Companys
expertise to better address a wider range of emerging customer requirements for converged networks.
The acquisition agreement required that $5.1 million of the consideration be placed into an escrow
account in connection with certain representations and warranties. The consideration placed in
escrow is scheduled to be released between 18 and 24 months after the date of acquisition. The
escrowed amounts have been accounted for as cash consideration as of the date of acquisition.
The consideration paid in excess of the fair value of the net assets acquired totaled $0.9
million, which has been recorded as goodwill in the consolidated balance sheet as of March 28,
2010. None of the goodwill resulting from the acquisition will be tax deductible.
The following table summarizes the allocation of the purchase price to the fair value of the
assets acquired and liabilities assumed:
(In thousands) | ||||
Cash |
$ | 2,659 | ||
Accounts receivable |
716 | |||
Inventories |
1,030 | |||
Property and equipment |
854 | |||
Goodwill |
889 | |||
Identifiable intangible assets |
6,410 | |||
Deferred tax assets |
8,302 | |||
Other assets |
352 | |||
Accounts payable and other liabilities |
(1,751 | ) | ||
Accrued compensation |
(937 | ) | ||
Line of credit |
(934 | ) | ||
$ | 17,590 | |||
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the purchased intangible assets acquired as part of the acquisition of NetXen and
their respective estimated useful lives are as follows:
Weighted | ||||||||
Average | ||||||||
Useful Lives | Amount | |||||||
(Years) | (In thousands) | |||||||
Intangible Assets: |
||||||||
Core technology |
7 | $ | 5,400 | |||||
Contractual licenses |
5 | 1,010 | ||||||
$ | 6,410 | |||||||
The results of operations for NetXen have been included in the consolidated financial
statements from the date of acquisition. Pro forma results of operations have not been presented
as the results of operations for NetXen are not material to the consolidated financial statements.
Note 3. Investment Securities
Components of investment securities are as follows:
March 28, | March 29, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Available-for-sale securities |
$ | 161,609 | $ | 136,027 | ||||
Trading securities |
23,756 | 34,891 | ||||||
Other investment securities |
| 3,629 | ||||||
Total investment securities |
185,365 | 174,547 | ||||||
Less long-term investment securities |
| 34,986 | ||||||
Short-term investment securities |
$ | 185,365 | $ | 139,561 | ||||
Available-For-Sale Securities
The Companys portfolio of available-for-sale securities consists of the following:
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
March 28, 2010 |
||||||||||||||||
U.S. Government and agency securities |
$ | 37,677 | $ | 326 | $ | (27 | ) | $ | 37,976 | |||||||
Corporate debt obligations |
81,424 | 1,600 | (21 | ) | 83,003 | |||||||||||
Asset and mortgage-backed securities |
18,721 | 410 | (16 | ) | 19,115 | |||||||||||
Municipal bonds |
5,923 | 3 | (3 | ) | 5,923 | |||||||||||
Total debt securities |
143,745 | 2,339 | (67 | ) | 146,017 | |||||||||||
Certificates of deposit |
15,592 | | | 15,592 | ||||||||||||
Total available-for-sale securities |
$ | 159,337 | $ | 2,339 | $ | (67 | ) | $ | 161,609 | |||||||
March 29, 2009 |
||||||||||||||||
U.S. Government and agency securities |
$ | 51,776 | $ | 868 | $ | (4 | ) | $ | 52,640 | |||||||
Corporate debt obligations |
39,434 | 390 | (190 | ) | 39,634 | |||||||||||
Asset and mortgage-backed securities |
20,691 | 418 | (96 | ) | 21,013 | |||||||||||
Municipal bonds |
2,530 | 61 | | 2,591 | ||||||||||||
Total debt securities |
114,431 | 1,737 | (290 | ) | 115,878 | |||||||||||
Certificate of deposit |
20,054 | | | 20,054 | ||||||||||||
Auction rate preferred securities |
100 | | (5 | ) | 95 | |||||||||||
Total available-for-sale securities |
$ | 134,585 | $ | 1,737 | $ | (295 | ) | $ | 136,027 | |||||||
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amortized cost and estimated fair value of debt securities as of March 28, 2010, by
contractual maturity, are presented below. Expected maturities will differ from contractual
maturities because the issuers of securities may have the right to repay obligations without
prepayment penalties. Certain debt instruments, although possessing a contractual maturity greater
than one year, are classified as short-term investment securities based on their ability to be
traded on active markets and availability for current operations.
Amortized | Estimated | |||||||
Cost | Fair Value | |||||||
(In thousands) | ||||||||
Due in one year or less |
$ | 13,884 | $ | 14,322 | ||||
Due after one year through three years |
83,568 | 84,776 | ||||||
Due after three years through five years |
23,038 | 23,277 | ||||||
Due after five years |
23,255 | 23,642 | ||||||
$ | 143,745 | $ | 146,017 | |||||
As of March 28, 2010 and March 29, 2009, the fair value of certain of the Companys
available-for-sale securities was less than their cost basis. Management reviewed various factors
in determining whether to recognize an impairment charge related to these unrealized losses,
including the current financial and credit market environment, the financial condition and
near-term prospects of the issuer of the investment security, the magnitude of the unrealized loss
compared to the cost of the investment, the length of time the investment had been in a loss
position and the Companys intent and ability to hold the investment for a period of time
sufficient to
allow for any anticipated recovery of market value. As of March 28, 2010 and March 29, 2009,
the Company determined that the unrealized losses were temporary in nature and recorded them as a
component of accumulated other comprehensive income.
During fiscal 2009 and 2008, the Company determined that a portion of the unrealized losses
associated with the Companys portfolio of available-for-sale securities were other-than-temporary
and recorded impairment charges of $11.3 million and $6.9 million, respectively, which are included
in interest and other income, net.
The following table presents the Companys investments with unrealized losses by investment
category and length of time that individual securities have been in a continuous unrealized loss
position at March 28, 2010 and March 29, 2009.
Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
Fair | ||||||||||||||||||||||||
Description of Securities | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Value | Unrealized Losses | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
March 28, 2010 |
||||||||||||||||||||||||
U.S. Government and agency securities |
$ | 6,661 | $ | (27 | ) | $ | | $ | | $ | 6,661 | $ | (27 | ) | ||||||||||
Corporate debt obligations |
11,337 | (21 | ) | | | 11,337 | (21 | ) | ||||||||||||||||
Asset and mortgage-backed securities |
3,557 | (16 | ) | | | 3,557 | (16 | ) | ||||||||||||||||
Municipal bonds |
317 | (3 | ) | | | 317 | (3 | ) | ||||||||||||||||
Total |
$ | 21,872 | $ | (67 | ) | $ | | $ | | $ | 21,872 | $ | (67 | ) | ||||||||||
March 29, 2009 |
||||||||||||||||||||||||
U.S. Government and agency securities |
$ | 2,002 | $ | (4 | ) | $ | | $ | | $ | 2,002 | $ | (4 | ) | ||||||||||
Corporate debt obligations |
10,605 | (190 | ) | | | 10,605 | (190 | ) | ||||||||||||||||
Asset and mortgage-backed securities |
2,842 | (96 | ) | | | 2,842 | (96 | ) | ||||||||||||||||
Auction rate preferred securities |
95 | (5 | ) | | | 95 | (5 | ) | ||||||||||||||||
Total |
$ | 15,544 | $ | (295 | ) | $ | | $ | | $ | 15,544 | $ | (295 | ) | ||||||||||
The consolidated statements of cash flows for fiscal 2009 and 2008 have been adjusted to
reflect net gains from the sale of available-for-sale securities as an investing activity. These
adjustments, which were $1.6 million and $0.6 million in fiscal 2009 and 2008, respectively,
resulted in a decrease in cash flows from operating activities and corresponding increase in cash
flows from investing activities in the respective period. The Company has evaluated the
materiality of these adjustments from a qualitative and quantitative perspective and concluded they
are not material.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Trading Securities
The Companys portfolio of trading securities consists of the following:
March 28, | March 29, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Auction rate debt securities |
$ | 17,951 | $ | 20,741 | ||||
Auction rate preferred securities |
4,366 | 4,869 | ||||||
Put options related to auction rate securities |
1,439 | 9,281 | ||||||
Total trading securities |
$ | 23,756 | $ | 34,891 | ||||
The Companys trading securities include investments in auction rate securities (ARS), the
majority of which are rated AA or higher. During late fiscal 2008, the market auctions of many ARS
began to fail, including auctions for the ARS held by the Company. The underlying assets for the
auction rate debt securities in the Companys portfolio are student loans, substantially all of
which are backed by the federal government under the Federal Family Education Loan Program. The
underlying assets of the Companys auction rate preferred securities are the respective funds
investment portfolios.
In November 2008, the Company entered into an agreement with the broker for all of the ARS
currently held by the Company, which provides the Company with certain rights (ARS Rights), in
exchange for the release of potential claims and damages against the broker. The ARS Rights
entitle the Company to sell the related ARS back to the broker for a price equal to the liquidation
preference of the ARS plus accrued but unpaid dividends or interest, if any, which price is
referred to as par. The ARS Rights may be exercised by the Company at any time between June 30,
2010 and July 2, 2012, if the securities are not earlier redeemed or sold. Under the ARS Rights,
the broker may, at its discretion, purchase the ARS at any time through July 2, 2012 without prior
notice to the Company and must pay the Company par value for the ARS within one day of the sale
transaction settlement.
The ARS Rights agreement resulted in put options that were recognized as free standing assets
separate from the ARS. The Company elected to measure the put options at fair value. In
connection with the election to measure the put options at fair value, the Company classified these
financial instruments as trading securities and recorded the initial fair value of $8.1 million in
investment securities. In addition, the Company also recorded a $1.2 million gain related to
subsequent increases in the fair value of these put options during fiscal 2009. These gains are
included in interest and other income, net. The ARS associated with the ARS Rights, previously
classified as available-for-sale securities, were reclassified to trading securities during fiscal
2009. As a result, the Company recognized a loss of $3.4 million, which had previously been
recorded in accumulated other comprehensive income and $2.4 million related to declines in the fair
value of the trading securities subsequent to the reclassification. These losses are included in
interest and other income, net.
As the ARS Rights may be exercised beginning June 30, 2010, the Company has classified its
auction rate debt and preferred securities, as well as the related put options, as short-term
investment securities as of March 28, 2010.
Other Investment Securities
The Companys other investment securities are comprised of a money market fund and an enhanced
cash fund sponsored by The Reserve (an asset management company), which suspended trading and
redemptions in September 2008. These funds are in the process of being liquidated and the Company
expects the liquidation to occur in stages with proceeds distributed as the underlying securities
mature or are sold. These funds do not have readily determinable fair values and thus have been
accounted for under the cost method.
During fiscal 2009, the Company reclassified $57.2 million of investments in the funds
sponsored by The Reserve from cash equivalents to short-term investments. This reclassification
has been presented separately as an investing activity in the consolidated
statement of cash flows for fiscal 2009. In addition, the Company recorded a $5.1 million
impairment charge related to these investments during fiscal 2009 based on the Companys estimate
of the amount that would be recovered from The Reserve, which charge is included in interest and
other income, net.
During fiscal 2010 and 2009, the Company received distributions upon the partial liquidation
of these funds totaling $5.5 million and $48.9 million, respectively. Distributions received by
the Company in fiscal 2010 were in excess of the carrying value of these investment securities and,
accordingly, the Company recorded a gain of $1.8 million which is included in interest and other
income, net.
50
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value Measurements
Fair value is the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date. Valuation techniques
used to measure fair value must maximize the use of observable inputs and minimize the use of
unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the
first two are considered observable and the last unobservable, that may be used to measure fair
value. A description of the three levels of inputs is as follows:
| Level 1 Quoted prices in active markets for identical assets or liabilities. | ||
| Level 2 Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | ||
| Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Assets measured at fair value on a recurring basis as of March 28, 2010 and March 29, 2009 are
as follows:
Fair Value Measurements Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(In thousands) | ||||||||||||||||
March 28, 2010 |
||||||||||||||||
U.S. Government and agency securities |
$ | 37,976 | $ | | $ | | $ | 37,976 | ||||||||
Corporate debt obligations |
| 83,003 | | 83,003 | ||||||||||||
Asset and mortgage-backed securities |
| 19,115 | | 19,115 | ||||||||||||
Municipal bonds |
| 5,923 | | 5,923 | ||||||||||||
Certificates of deposit |
15,592 | | | 15,592 | ||||||||||||
Total available-for-sale securities |
53,568 | 108,041 | | 161,609 | ||||||||||||
Auction rate debt securities |
| | 17,951 | 17,951 | ||||||||||||
Auction rate preferred securities |
| | 4,366 | 4,366 | ||||||||||||
Put options related to auction rate securities |
| | 1,439 | 1,439 | ||||||||||||
Total trading securities |
| | 23,756 | 23,756 | ||||||||||||
Balance as of March 28, 2010 |
$ | 53,568 | $ | 108,041 | $ | 23,756 | $ | 185,365 | ||||||||
Fair Value Measurements Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(In thousands) | ||||||||||||||||
March 29, 2009 |
||||||||||||||||
U.S. Government and agency securities |
$ | 52,640 | $ | | $ | | $ | 52,640 | ||||||||
Corporate debt obligations |
36,586 | 3,048 | | 39,634 | ||||||||||||
Asset and mortgage-backed securities |
3,621 | 17,392 | | 21,013 | ||||||||||||
Municipal bonds |
2,591 | | | 2,591 | ||||||||||||
Certificate of deposit |
20,054 | | | 20,054 | ||||||||||||
Auction rate preferred securities |
| | 95 | 95 | ||||||||||||
Total available-for-sale securities |
115,492 | 20,440 | 95 | 136,027 | ||||||||||||
Auction rate debt securities |
| | 20,741 | 20,741 | ||||||||||||
Auction rate preferred securities |
| | 4,869 | 4,869 | ||||||||||||
Put options related to auction rate securities |
| | 9,281 | 9,281 | ||||||||||||
Total trading securities |
| | 34,891 | 34,891 | ||||||||||||
Balance as of March 29, 2009 |
$ | 115,492 | $ | 20,440 | $ | 34,986 | $ | 170,918 | ||||||||
51
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Companys investments in auction rate securities and the related put options are
classified within Level 3 because there are currently no active markets for these securities and
the Company is unable to obtain independent valuations from market sources. Therefore, the auction
rate securities and the related put options were primarily valued based on an income approach using
estimates of future cash flows. The assumptions used in preparing these discounted cash flow
models included estimates for the amount and timing of future interest and principal payments, the
collateralization of underlying security investments, the creditworthiness of the issuer and the
rate of return required by investors to own these securities in the current environment, including
call and liquidity premiums. The total amount of assets measured using Level 3 valuation
methodologies represented approximately 3% of total assets as of March 28, 2010.
A summary of the changes in Level 3 assets measured at fair value on a recurring basis for
fiscal 2010 and 2009 is as follows:
Balance | Total Realized | Change in Unrealized | Sales and Other | Balance | ||||||||||||||||
Year Ended March 28, 2010 | March 29, 2009 | Gains (Losses) | Losses | Settlements | March 28, 2010 | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Auction rate debt securities |
$ | 20,741 | $ | 2,434 | $ | | $ | (5,224 | ) | $ | 17,951 | |||||||||
Auction rate preferred securities |
4,964 | 5,834 | 5 | (6,437 | ) | 4,366 | ||||||||||||||
Put options related to auction rate securities |
9,281 | (7,842 | ) | | | 1,439 | ||||||||||||||
Total |
$ | 34,986 | $ | 426 | $ | 5 | $ | (11,661 | ) | $ | 23,756 | |||||||||
Balance | Total Realized | Change in Unrealized | Sales and Other | Balance | ||||||||||||||||
Year Ended March 29, 2009 | March 30, 2008 | Gains (Losses) | Losses | Settlements | March 29, 2009 | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Auction rate debt securities |
$ | 24,058 | $ | (3,571 | ) | $ | 1,582 | $ | (1,328 | ) | $ | 20,741 | ||||||||
Auction rate preferred securities |
31,845 | (4,952 | ) | 4,575 | (26,504 | ) | 4,964 | |||||||||||||
Put options related to auction rate securities |
| 9,281 | | | 9,281 | |||||||||||||||
Total |
$ | 55,903 | $ | 758 | $ | 6,157 | $ | (27,832 | ) | $ | 34,986 | |||||||||
Note 4. Inventories
Components of inventories are as follows:
2010 | 2009 | |||||||
(In thousands) | ||||||||
Raw materials |
$ | 6,693 | $ | 15,780 | ||||
Finished goods |
12,710 | 24,513 | ||||||
$ | 19,403 | $ | 40,293 | |||||
Note 5. Property and Equipment
Components of property and equipment are as follows:
2010 | 2009 | |||||||
(In thousands) | ||||||||
Land |
$ | 11,663 | $ | 11,663 | ||||
Buildings and improvements |
40,705 | 39,549 | ||||||
Production and test equipment |
175,901 | 160,978 | ||||||
Furniture and fixtures |
8,033 | 7,909 | ||||||
236,302 | 220,099 | |||||||
Less accumulated depreciation and amortization |
152,806 | 127,552 | ||||||
$ | 83,496 | $ | 92,547 | |||||
52
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6. Goodwill and Purchased Intangible Assets
Goodwill
A rollforward of the activity in goodwill is as follows:
2010 | 2009 | |||||||
(In thousands) | ||||||||
Balance at beginning of year |
$ | 118,859 | $ | 127,409 | ||||
Adjustment to purchase price allocation |
| (8,550 | ) | |||||
NetXen acquisition |
889 | | ||||||
Balance at end of year |
$ | 119,748 | $ | 118,859 | ||||
During fiscal 2009, the Company finalized its determination of the net operating loss
carryforwards and other tax benefits available from an acquisition completed in fiscal 2007,
resulting in an increase in deferred tax assets of $8.6 million and a corresponding decrease in
goodwill.
Purchased Intangible Assets
Purchased intangible assets consist of the following:
March 28, 2010 | March 29, 2009 | |||||||||||||||||||||||
Gross | Net | Gross | Net | |||||||||||||||||||||
Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | |||||||||||||||||||
Value | Amortization | Value | Value | Amortization | Value | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Acquisition-related intangibles: |
||||||||||||||||||||||||
Core/developed technology |
$ | 45,700 | $ | 30,059 | $ | 15,641 | $ | 43,700 | $ | 27,277 | $ | 16,423 | ||||||||||||
Customer relationships |
9,700 | 9,700 | | 9,700 | 7,814 | 1,886 | ||||||||||||||||||
Other |
1,010 | 185 | 825 | 775 | 697 | 78 | ||||||||||||||||||
56,410 | 39,944 | 16,466 | 54,175 | 35,788 | 18,387 | |||||||||||||||||||
Other purchased intangibles: |
||||||||||||||||||||||||
Technology-related |
3,716 | 2,788 | 928 | 2,911 | 2,181 | 730 | ||||||||||||||||||
$ | 60,126 | $ | 42,732 | $ | 17,394 | $ | 57,086 | $ | 37,969 | $ | 19,117 | |||||||||||||
During fiscal 2008, the Company re-evaluated the carrying amount of certain intangible assets
acquired in fiscal 2006 and determined that the carrying amount exceeded the estimated future
undiscounted cash flows expected to be generated by these assets. Accordingly, the Company
recorded a non-cash impairment charge of $2.3 million to write down the carrying value of the
intangible assets to their estimated fair value. This impairment charge is included in cost of
revenues in the consolidated statement of income for fiscal 2008.
A summary of the amortization expense, by classification, included in the consolidated
statements of income is as follows:
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
Cost of revenues |
$ | 7,052 | $ | 12,491 | $ | 13,668 | ||||||
Engineering and development |
| 125 | 314 | |||||||||
Sales and marketing |
1,886 | 3,234 | 3,544 | |||||||||
$ | 8,938 | $ | 15,850 | $ | 17,526 | |||||||
53
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the estimated future amortization expense of purchased intangible
assets as of March 28, 2010:
Fiscal | (In thousands) | |||
2011 |
$ | 4,907 | ||
2012 |
4,922 | |||
2013 |
4,832 | |||
2014 |
1,104 | |||
2015 |
793 | |||
2016 and thereafter |
836 | |||
$ | 17,394 | |||
Note 7. Stockholders Equity
Capital Stock
The Companys authorized capital consists of 1 million shares of preferred stock, par value
$0.001 per share, and 500 million shares of common stock, par value $0.001 per share. As of March
28, 2010 and March 29, 2009, the Company had 204.9 million and 202.0 million shares of common stock
issued, respectively. At March 28, 2010, 39.8 million shares of common stock were reserved for the
exercise of issued and unissued stock-based awards and 2.1 million shares were reserved for
issuance in connection with the Companys Employee Stock Purchase Plan.
Treasury Stock
Since fiscal 2003, the Company has had various stock repurchase programs that authorized the
purchase of up to $1.55 billion of the Companys outstanding common stock, including a program
approved in November 2008 authorizing the repurchase of up to $300 million of the Companys
outstanding common stock. During fiscal 2010, the Company purchased 10.1 million shares of its
common stock for an aggregate purchase price of $165.5 million, of which $3.6 million was pending
settlement and is included in other current liabilities in the consolidated balance sheet as of
March 28, 2010. During fiscal 2009, the Company purchased 15.8 million shares of its common stock
for an aggregate purchase price of $205.5 million, of which $1.5 million was pending settlement and
is included in other current liabilities in the consolidated balance sheet as of March 29, 2009. As
of March 28, 2010, the Company had purchased a total of 92.6 million shares of common stock under
these repurchase programs for an aggregate purchase price of $1.45 billion.
Repurchased shares have been recorded as treasury shares and will be held until the Companys
Board of Directors designates that these shares be retired or used for other purposes.
Note 8. Stock-Based Compensation
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (the ESPP) that operates in accordance with
Section 423 of the Internal Revenue Code. The ESPP is administered by the Compensation Committee of
the Board of Directors. Under the ESPP, employees of the Company who elect to participate are
granted options to purchase common stock at a 15% discount from the lower of the market value of
the common stock at the beginning or end of each three-month offering period. The ESPP permits an
enrolled employee to make contributions to purchase shares of common stock by having withheld from
their salary an amount between 1% and 10% of compensation. As of March 28, 2010 and March 29, 2009,
ESPP participant contributions of $1.2 million and $1.1 million, respectively, were included in
other current liabilities in the consolidated balance sheets. The total number of shares issued
under the ESPP was 560,000, 528,000 and 501,000 during fiscal 2010, 2009 and 2008, respectively.
Stock Incentive Compensation Plans
The Company may grant stock-based awards to employees and directors under the QLogic 2005
Performance Incentive Plan (the 2005 Plan). Prior to the adoption of the 2005 Plan in August 2005,
the Company granted options to purchase shares of the Companys common stock to employees and
directors under certain predecessor stock plans. Additionally, the Company has assumed stock
options as part of acquisitions.
54
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The 2005 Plan provides for the issuance of incentive and non-qualified stock options,
restricted stock units and other stock-based incentive awards for employees. The 2005 Plan permits the Compensation Committee of the Board
of Directors to select eligible employees to receive awards and to determine the terms and
conditions of awards. In general, stock options granted to employees have ten-year terms and vest
over four years from the date of grant. Restricted stock units represent a right to receive a share
of stock at a future vesting date with no cash payment from the holder. In general, restricted
stock units granted to employees vest over four years from the date of grant.
Under the terms of the 2005 Plan, as amended, non-employee directors receive grants of
stock-based awards upon initial election or appointment to the Board of Directors and upon annual
reelection to the Board. The target fair value of such grants are determined by reference to the
equity compensation for non-employee directors of the Companys peer group of companies. The target
value is then allocated 100% to a non-qualified stock option grant in the case of the initial grant
and allocated 35% to a restricted stock unit award and 65% to a non-qualified stock option grant in
the case of the annual grant. All stock options and restricted stock units granted to non-employee
directors have ten-year terms and vest over three years from the date of grant.
The Company also entered into a stock-based performance plan in connection with a business
acquisition in fiscal 2007. During fiscal 2010, 2009 and 2008 the Company issued 112,000 shares of
common stock valued at $1.3 million, 111,000 shares of common stock valued at $1.7 million and
154,000 shares of common stock valued at $2.6 million, respectively, under this performance plan.
As of March 28, 2010, options to purchase 24.3 million shares of common stock and 2.5 million
restricted stock units were held by employees and non-employee directors. Shares available for
future grant were 13.0 million under the 2005 Plan as of March 28, 2010. No further awards can be
granted under any other plans.
A summary of stock option activity is as follows:
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number of | Exercise | Contractual | Intrinsic | |||||||||||||
Shares | Price | Term (Years) | Value | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Outstanding at April 1, 2007 |
26,127 | $ | 21.01 | |||||||||||||
Granted |
4,027 | 16.24 | ||||||||||||||
Exercised |
(954 | ) | 10.32 | |||||||||||||
Forfeited (cancelled pre-vesting) |
(2,054 | ) | 16.91 | |||||||||||||
Expired (cancelled post-vesting) |
(1,067 | ) | 22.36 | |||||||||||||
Outstanding at March 30, 2008 |
26,079 | 20.94 | ||||||||||||||
Granted |
4,117 | 15.07 | ||||||||||||||
Exercised |
(1,485 | ) | 13.09 | |||||||||||||
Forfeited (cancelled pre-vesting) |
(1,121 | ) | 15.93 | |||||||||||||
Expired (cancelled post-vesting) |
(1,650 | ) | 22.42 | |||||||||||||
Outstanding at March 29, 2009 |
25,940 | 20.58 | ||||||||||||||
Granted |
3,853 | 14.06 | ||||||||||||||
Exercised |
(1,878 | ) | 14.89 | |||||||||||||
Forfeited (cancelled pre-vesting) |
(499 | ) | 15.54 | |||||||||||||
Expired (cancelled post-vesting) |
(3,160 | ) | 25.06 | |||||||||||||
Outstanding at March 28, 2010 |
24,256 | $ | 19.50 | 5.2 | $ | 70,223 | ||||||||||
Vested and expected to vest at March 28, 2010 |
23,416 | $ | 19.68 | 5.0 | $ | 65,394 | ||||||||||
Exercisable at March 28, 2010 |
17,509 | $ | 21.34 | 3.9 | $ | 33,589 | ||||||||||
55
Table of Contents
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of restricted stock unit activity is as follows:
Weighted- | ||||||||
Average | ||||||||
Grant | ||||||||
Number of | Date | |||||||
Shares | Fair Value | |||||||
(In thousands) | ||||||||
Outstanding and unvested at April 1, 2007 |
939 | $ | 18.84 | |||||
Granted |
842 | 16.52 | ||||||
Vested |
(214 | ) | 18.79 | |||||
Forfeited |
(294 | ) | 17.72 | |||||
Outstanding and unvested at March 30, 2008 |
1,273 | 17.57 | ||||||
Granted |
944 | 14.89 | ||||||
Vested |
(364 | ) | 17.72 | |||||
Forfeited |
(160 | ) | 16.12 | |||||
Outstanding and unvested at March 29, 2009 |
1,693 | 16.18 | ||||||
Granted |
1,488 | 13.85 | ||||||
Vested |
(533 | ) | 16.65 | |||||
Forfeited |
(134 | ) | 15.85 | |||||
Outstanding and unvested at March 28, 2010 |
2,514 | $ | 14.78 | |||||
During fiscal 2010, 2009 and 2008, the Company issued 334,000, 233,000 and 136,000 shares of
common stock, respectively, in connection with the vesting of restricted stock units. The
difference between the number of restricted stock units vested and the shares of common stock
issued is the result of restricted stock units withheld in satisfaction of minimum tax withholding
obligations associated with the vesting.
Stock-Based Compensation Expense
A summary of stock-based compensation expense, by functional line item in the consolidated
statements of income, is as follows:
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
Cost of revenues |
$ | 2,629 | $ | 2,058 | $ | 2,104 | ||||||
Engineering and development |
18,237 | 15,142 | 15,729 | |||||||||
Sales and marketing |
6,918 | 5,567 | 6,290 | |||||||||
General and administrative |
7,910 | 6,052 | 8,850 | |||||||||
$ | 35,694 | $ | 28,819 | $ | 32,973 | |||||||
In fiscal 2010, the Company granted 464,000 restricted stock units to employees that joined
QLogic in connection with the acquisition of NetXen and recognized $1.6 million of stock-based
compensation related to these awards, which is included in the table above.
In connection with businesses acquired in fiscal 2007 and 2006, the Company entered into
stock-based performance plans with certain employees of the acquired businesses that joined QLogic
as of the respective acquisition date. The Company recognized $0.5 million, $0.2 million and $1.2
million of stock-based compensation expense related to these plans during fiscal 2010, 2009 and
2008, respectively, which is included in the table above.
56
Table of Contents
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of stock-based awards are estimated on the date of grant using an
option-pricing model. The fair value of stock options granted and shares to be purchased under the
ESPP have been estimated at the date of grant using a Black-Scholes option-pricing model. The
weighted-average fair values and underlying assumptions are as follows:
2010 | 2009 | 2008 | ||||||||||||||||||||||
Employee Stock | Employee Stock | Employee Stock | ||||||||||||||||||||||
Stock Options | Purchase Plan | Stock Options | Purchase Plan | Stock Options | Purchase Plan | |||||||||||||||||||
Fair value |
$ | 5.31 | $ | 3.50 | $ | 5.64 | $ | 3.39 | $ | 6.43 | $ | 3.39 | ||||||||||||
Expected volatility |
38 | % | 42 | % | 37 | % | 45 | % | 38 | % | 35 | % | ||||||||||||
Risk-free interest rate |
2.2 | % | 0.1 | % | 3.4 | % | 0.9 | % | 4.7 | % | 4.0 | % | ||||||||||||
Expected life (years) |
5.0 | 0.25 | 5.2 | 0.25 | 5.1 | 0.25 | ||||||||||||||||||
Dividend yield |
| | | | | |
Restricted stock units granted were valued based on the closing market price on the date of
grant.
Stock-based compensation expense for fiscal 2010, 2009 and 2008 was $35.7 million ($29.4
million after income taxes), $28.8 million ($24.1 million after income taxes) and $33.0 million
($27.1 million after income taxes), respectively. Stock-based compensation costs capitalized as
part of the cost of assets for fiscal 2010, 2009 and 2008 were not material.
As of March 28, 2010, there was $60.9 million of total unrecognized compensation costs related
to outstanding stock-based awards. These costs are expected to be recognized over a
weighted-average period of 2.6 years.
During fiscal 2010, 2009 and 2008, the grant date fair value of options vested totaled $20.0
million, $20.5 million and $26.2 million, respectively. The intrinsic value of options exercised
during fiscal 2010, 2009 and 2008 totaled $6.8 million, $6.9 million and $5.7 million,
respectively. Intrinsic value of options exercised is calculated as the difference between the
market price on the date of exercise and the exercise price multiplied by the number of options
exercised.
The fair value of restricted stock units vested during fiscal 2010, 2009 and 2008 totaled $7.7
million, $5.5 million and $3.4 million, respectively.
The Company currently issues new shares to deliver common stock under its stock-based award
plans.
Note 9. Employee Retirement Savings Plan
The Company has established a pretax savings plan under Section 401(k) of the Internal Revenue
Code for substantially all U.S. employees. Under the plan, eligible employees are able to
contribute up to 50% of their compensation, subject to limits specified in the Internal Revenue
Code. Effective May 1, 2009, the Company suspended its matching contributions to the plan.
Previously, Company contributions matched up to 3% of a participants compensation. The Companys
direct contributions on behalf of its employees were $0.1 million, $2.7 million and $2.8 million in
fiscal 2010, 2009 and 2008, respectively.
The Company also maintains retirement plans in certain non-U.S. locations. The total expense
and total obligation of the Company for these plans were not material to the consolidated financial
statements for all periods presented.
Note 10. Special Charges
During fiscal 2010, the Company recorded special charges totaling $5.2 million related to the
consolidation of facilities and workforce reductions. The special charges consisted primarily of
$3.1 million of exit costs related to facilities under non-cancellable leases that the Company
ceased using during fiscal 2010 and $1.5 million of exit costs associated with severance benefits
for involuntarily-terminated employees (collectively, the Fiscal 2010 Initiative). In addition,
the fiscal 2010 special charges included $0.6 million of exit costs related to facilities that the Company
ceased using prior to fiscal 2010, which were associated with the fiscal 2009 and 2008 initiatives.
57
Table of Contents
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Activity and liability balances for the exit costs related to the Fiscal 2010 Initiative are
as follows:
Workforce | ||||||||||||
Reductions | Facility | Total | ||||||||||
(In thousands) | ||||||||||||
Charged to costs and expenses |
$ | 1,542 | $ | 3,076 | $ | 4,618 | ||||||
Cash payments |
(953 | ) | (324 | ) | (1,277 | ) | ||||||
Non-cash adjustments |
| 92 | 92 | |||||||||
Balance as of March 28, 2010 |
$ | 589 | $ | 2,844 | $ | 3,433 | ||||||
During fiscal 2009, the Company implemented a workforce reduction initiative, primarily in
response to the macroeconomic environment, and recorded special charges totaling $4.1 million. The
special charges consisted primarily of $3.9 million of exit costs associated with severance
benefits for the affected employees and costs related to a facility under a non-cancelable lease
that the Company ceased using during fiscal 2009 (collectively, the Fiscal 2009 Initiative).
Activity and liability balances for the exit costs related to the Fiscal 2009 Initiative are
as follows:
Workforce | ||||||||||||
Reductions | Facility | Total | ||||||||||
(In thousands) | ||||||||||||
Charged to costs and expenses |
$ | 3,641 | $ | 285 | $ | 3,926 | ||||||
Cash payments |
(2,343 | ) | | (2,343 | ) | |||||||
Non-cash adjustments |
| 8 | 8 | |||||||||
Balance as of March 29, 2009 |
1,298 | 293 | 1,591 | |||||||||
Charged to costs and expenses |
| 370 | 370 | |||||||||
Cash payments |
(1,298 | ) | (316 | ) | (1,614 | ) | ||||||
Balance as of March 28, 2010 |
$ | | $ | 347 | $ | 347 | ||||||
During fiscal 2008, the Company recorded special charges totaling $5.3 million related to
workforce reductions and the consolidation and elimination of certain activities, principally
related to certain engineering functions. The special charges consisted of $5.0 million for exit
costs and $0.3 million for asset impairments. The exit costs include the costs associated with
workforce reductions, the cancellation of a contract and the consolidation of certain facilities
(collectively, the Fiscal 2008 Initiative).
Activity and liability balances for the exit costs related to the Fiscal 2008 Initiative are
as follows:
Contract | ||||||||||||
Workforce | Cancellation | |||||||||||
Reductions | and Other | Total | ||||||||||
(In thousands) | ||||||||||||
Charged to costs and expenses |
$ | 3,761 | $ | 1,235 | $ | 4,996 | ||||||
Cash payments |
(3,202 | ) | (742 | ) | (3,944 | ) | ||||||
Non-cash adjustments |
| 60 | 60 | |||||||||
Balance as of March 30, 2008 |
559 | 553 | 1,112 | |||||||||
Charged to costs and expenses |
| 137 | 137 | |||||||||
Cash payments |
(559 | ) | (225 | ) | (784 | ) | ||||||
Non-cash adjustments |
| (10 | ) | (10 | ) | |||||||
Balance as of March 29, 2009 |
| 455 | 455 | |||||||||
Charged to costs and expenses |
| 175 | 175 | |||||||||
Cash payments |
| (235 | ) | (235 | ) | |||||||
Non-cash adjustments |
| (16 | ) | (16 | ) | |||||||
Balance as of March 28, 2010 |
$ | | $ | 379 | $ | 379 | ||||||
The total unpaid exit costs related to all initiatives as of March 28, 2010 of $4.2 million
are expected to be paid over the terms of the related agreements through fiscal 2018, including
$1.9 million in fiscal 2011.
58
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11. Interest and Other Income, net
Components of interest and other income, net, are as follows:
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
Interest income |
$ | 5,399 | $ | 11,295 | $ | 20,590 | ||||||
Gain on sales of available-for-sale securities |
4,521 | 4,770 | 804 | |||||||||
Loss on sales of available-for-sale securities |
(1,811 | ) | (1,131 | ) | (197 | ) | ||||||
Net gains on trading securities |
426 | 3,456 | | |||||||||
Gain on distributions of other investment securities |
1,846 | | | |||||||||
Impairment of investment securities |
| (16,407 | ) | (6,867 | ) | |||||||
Other |
220 | 151 | (306 | ) | ||||||||
$ | 10,601 | $ | 2,134 | $ | 14,024 | |||||||
Note 12. Income Taxes
Income before income taxes consists of the following components:
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
United States |
$ | 58,604 | $ | 130,573 | $ | 96,450 | ||||||
International |
51,103 | 38,435 | 51,270 | |||||||||
$ | 109,707 | $ | 169,008 | $ | 147,720 | |||||||
The components of income taxes are as follows:
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
Current: |
||||||||||||
Federal |
$ | 42,350 | $ | 32,147 | $ | 53,371 | ||||||
State |
4,158 | 7,524 | 8,784 | |||||||||
Foreign |
2,252 | 3,888 | 3,904 | |||||||||
Total current |
48,760 | 43,559 | 66,059 | |||||||||
Deferred: |
||||||||||||
Federal |
5,578 | 17,465 | (10,918 | ) | ||||||||
State |
109 | (511 | ) | (3,947 | ) | |||||||
Foreign |
312 | (294 | ) | 316 | ||||||||
Total deferred |
5,999 | 16,660 | (14,549 | ) | ||||||||
Total income taxes |
$ | 54,759 | $ | 60,219 | $ | 51,510 | ||||||
The increase (decrease) in excess tax benefits from stock-based awards of $(1.3) million, $0.3
million and $0.3 million in fiscal 2010, 2009 and 2008, respectively, were recorded directly to
additional paid-in capital. In addition, the tax expense (benefit) associated with the change in
unrealized gains and losses on the Companys investment securities of $0.3 million, $2.2 million
and $(1.8) million in fiscal 2010, 2009 and 2008, respectively, were recorded in other
comprehensive income.
A reconciliation of the income tax provision with the amount computed by applying the federal
statutory tax rate to income before income taxes is as follows:
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
Expected income tax provision at the statutory rate |
$ | 38,397 | $ | 59,153 | $ | 51,702 | ||||||
State income taxes, net of federal tax benefit |
2,282 | 7,370 | 4,954 | |||||||||
Tax rate differential on foreign earnings and other international related tax items |
17,864 | 997 | (5,752 | ) | ||||||||
Benefit from research and other credits |
(4,732 | ) | (5,370 | ) | (4,800 | ) | ||||||
Stock-based compensation |
3,294 | 3,681 | 4,239 | |||||||||
Resolution of prior period tax matters |
(696 | ) | (8,892 | ) | | |||||||
Valuation allowance |
(1,581 | ) | 3,469 | | ||||||||
Other, net |
(69 | ) | (189 | ) | 1,167 | |||||||
$ | 54,759 | $ | 60,219 | $ | 51,510 | |||||||
59
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company implemented a globalization initiative to expand its worldwide footprint beginning
in fiscal 2005. As part of this initiative, certain intellectual property and other rights were
licensed to one of the Companys international subsidiaries. During the fourth quarter of fiscal
2010, the license agreement was amended which resulted in a fully paid-up license. The Company
recorded a tax charge of $29.7 million in fiscal 2010 related to the globalization initiative,
primarily due to the amendment to the license agreement. As a result of the amendment, the Company
determined that all payment obligations under the license agreement had been satisfied.
The components of the deferred tax assets and liabilities are as follows:
2010 | 2009 | |||||||
(In thousands) | ||||||||
Deferred tax assets: |
||||||||
Reserves and accruals not currently deductible |
$ | 22,642 | $ | 21,502 | ||||
Stock-based compensation |
14,859 | 12,322 | ||||||
Net operating loss carryforwards |
13,924 | 5,859 | ||||||
Research credits |
4,132 | 3,804 | ||||||
Property and equipment |
2,887 | 543 | ||||||
Foreign tax credits |
2,571 | 4,278 | ||||||
Investment securities |
1,238 | 3,095 | ||||||
Capital loss carryovers |
1,061 | 7,739 | ||||||
State income taxes |
| 2,572 | ||||||
Other |
1,434 | 1,125 | ||||||
Total gross deferred tax assets |
64,748 | 62,839 | ||||||
Valuation allowance |
(1,888 | ) | (3,469 | ) | ||||
Total deferred tax assets, net of valuation allowance |
62,860 | 59,370 | ||||||
Deferred tax liabilities: |
||||||||
Research and development expenditures |
8,573 | 8,223 | ||||||
Purchased intangible assets |
3,421 | 3,360 | ||||||
State income taxes |
2,973 | | ||||||
Total deferred tax liabilities |
14,967 | 11,583 | ||||||
Net deferred tax assets |
$ | 47,893 | $ | 47,787 | ||||
Based upon the Companys current and historical pre-tax earnings, management believes it is
more likely than not that the Company will realize the full benefit of the existing net deferred
tax assets as of March 28, 2010, except for the deferred tax assets related to certain investment
securities and capital loss carryovers. Management believes the existing net deductible temporary
differences will reverse during periods in which the Company generates net taxable income or that
there would be sufficient tax carrybacks available; however, there can be no assurance that the
Company will generate any earnings or any specific level of continuing earnings in future years.
The Companys deferred tax assets related to investment securities and capital loss carryovers
consist primarily of temporary differences related to other-than-temporary impairments on the
Companys investment securities and realized losses on dispositions of investment securities that
are subject to limitations on deductibility. As a result of limitations on the deductibility of
capital losses and other factors, management is currently unable to assert that it is more likely
than not that the Company will realize the full benefit of these deferred tax assets. Accordingly,
the Company recorded a valuation allowance against these deferred tax assets of $1.9 million and
$3.5 million as of March 28, 2010 and March 29, 2009, respectively.
As of March 28, 2010, the Company has federal net operating loss carryforwards of $23.0
million, which will expire between fiscal 2021 and 2029, if not utilized, and state net operating
loss carryforwards of $67.1 million, which will expire between fiscal 2015 and 2030, if not
utilized. The Company also has state tax credit carryforwards of $3.8 million, of which the
majority have no expiration date. The net operating loss and tax credit carryforwards relating to
acquired companies are subject to limitations on utilization.
As of March 28, 2010, the Company has state capital loss carryovers of $18.1 million which
will expire between fiscal 2013 and 2015, if not utilized.
The Company has made no provision for U.S. income taxes or foreign withholding taxes on the
earnings of its foreign subsidiaries, as these amounts are intended to be indefinitely reinvested
in operations outside the United States. As of March 28, 2010, the
60
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
cumulative amount of undistributed earnings of the Companys foreign subsidiaries was $164.8
million. Because of the availability of U.S. foreign tax credits, it is not practicable to
determine the U.S. federal income tax liability that would be payable if such earnings were not
reinvested indefinitely.
The Company is no longer subject to federal or California income tax examinations prior to
fiscal 2007. The Companys California combined income tax returns for fiscal 2007 and 2008 are
presently under examination by the Franchise Tax Board. With limited exceptions, the Company is no
longer subject to other state and foreign income tax examinations by taxing authorities for periods
prior to fiscal 2007. Management does not believe that the results of these examinations will have
a material impact on the Companys financial condition or results of operations.
A rollforward of the activity in the gross unrecognized tax benefits is as follows:
2010 | 2009 | |||||||
(In thousands) | ||||||||
Balance at beginning of year |
$ | 41,526 | $ | 40,162 | ||||
Additions based on tax positions related to the current year |
33,354 | 14,957 | ||||||
Additions for tax positions of prior years |
2,215 | 5,357 | ||||||
Reductions for tax positions of prior years |
(4,502 | ) | (15,521 | ) | ||||
Settlements with taxing authorities |
(5,603 | ) | (1,848 | ) | ||||
Lapses of statute of limitations |
(1,605 | ) | (1,581 | ) | ||||
Balance at end of year |
$ | 65,385 | $ | 41,526 | ||||
If the unrecognized tax benefits as of March 28, 2010 were recognized, $59.1 million, net of
tax benefits from foreign tax credits, state income taxes and timing adjustments, would favorably
affect the Companys effective income tax rate. It is reasonably possible that the Companys
liability for uncertain tax positions may be reduced by as much as $8.1 million as a result of
either the settlement of tax positions with various tax authorities or by virtue of the statute of
limitations expiring through the end of fiscal 2011.
In addition to the unrecognized tax benefits noted above, the Company had accrued $3.3 million
and $3.5 million of interest expense (net of the related tax benefit) and penalties as of March 28,
2010 and March 29, 2009, respectively. The Company recognized interest expense (net of the related
tax benefit) and penalties aggregating $(0.1) million, $(1.2) million and $0.8 million during
fiscal 2010, 2009 and 2008, respectively.
Note 13. Net Income per Share
The following table sets forth the computation of basic and diluted net income per share:
2010 | 2009 | 2008 | ||||||||||
(In thousands, except per share amounts) | ||||||||||||
Net income |
$ | 54,948 | $ | 108,789 | $ | 96,210 | ||||||
Shares: |
||||||||||||
Weighted-average shares outstanding basic |
116,037 | 127,776 | 142,167 | |||||||||
Dilutive potential common shares, using treasury stock method |
1,327 | 794 | 734 | |||||||||
Weighted-average shares outstanding diluted |
117,364 | 128,570 | 142,901 | |||||||||
Net income per share: |
||||||||||||
Basic |
$ | 0.47 | $ | 0.85 | $ | 0.68 | ||||||
Diluted |
$ | 0.47 | $ | 0.85 | $ | 0.67 | ||||||
Stock-based awards, including stock options and restricted stock units, representing 20.5
million, 25.4 million and 24.5 million shares of common stock have been excluded from the diluted
net income per share calculations for fiscal 2010, 2009 and 2008, respectively. These stock-based
awards have been excluded from the diluted net income per share calculations because their effect
would have been antidilutive.
61
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14. Commitments and Contingencies
Leases
The Company leases certain facilities, software and equipment under operating lease
agreements. A summary of the future minimum lease commitments under non-cancelable operating leases
as of March 28, 2010 is as follows:
Fiscal Year | (In thousands) | |||
2011 |
$ | 7,583 | ||
2012 |
5,280 | |||
2013 |
3,728 | |||
2014 |
3,682 | |||
2015 |
2,858 | |||
Thereafter |
5,948 | |||
Total future minimum lease payments |
$ | 29,079 | ||
Rent expense for fiscal 2010, 2009 and 2008 was $9.4 million, $9.0 million and $9.7 million,
respectively.
Litigation
Various lawsuits, claims and proceedings have been or may be instituted against the Company.
The outcome of litigation cannot be predicted with certainty and some lawsuits, claims and
proceedings may be disposed of unfavorably to the Company. Many intellectual property disputes have
a risk of injunctive relief and there can be no assurance that a license will be granted.
Injunctive relief could have a material adverse effect on the Companys financial condition or
results of operations. Based on an evaluation of matters which are pending or asserted, the Company
believes the disposition of such matters will not have a material adverse effect on the Companys
financial condition or results of operations.
Indemnifications
The Company indemnifies certain of its customers against claims that products purchased from
the Company infringe upon a patent, copyright, trademark or trade secret of a third party. In the
event of such a claim, the Company agrees to pay all litigation costs, including attorney fees, and
any settlement payments or damages awarded directly related to the infringement. The
indemnification provisions generally do not expire. The Company is not currently defending any
intellectual property infringement claims. On occasion, the Company has been made aware of
potential infringement claims. However, based on an evaluation of these potential claims, the
Company believes the disposition of such matters will not have a material adverse effect on the
Companys financial condition or results of operations. Accordingly, the Company has not recorded
a liability related to such indemnifications.
Note 15. Revenue Components, Geographic Revenues and Significant Customers
Operating segments are components of an enterprise for which separate financial information is
available and is evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Company operates in one operating segment.
Revenue Components
A summary of net revenues by product category is as follows:
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
Host Products |
$ | 396,519 | $ | 440,862 | $ | 437,882 | ||||||
Network Products |
99,449 | 117,551 | 101,758 | |||||||||
Silicon Products |
42,368 | 61,426 | 44,323 | |||||||||
Royalty and Service |
10,734 | 14,023 | 13,903 | |||||||||
$ | 549,070 | $ | 633,862 | $ | 597,866 | |||||||
62
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Geographic Revenues
Revenues by geographic area are presented based upon the country of destination. Net revenues
by geographic area are as follows:
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
United States |
$ | 250,333 | $ | 303,729 | $ | 305,146 | ||||||
Asia-Pacific and Japan |
138,775 | 139,850 | 113,063 | |||||||||
Europe, Middle East and Africa |
126,966 | 154,463 | 144,631 | |||||||||
Rest of world |
32,996 | 35,820 | 35,026 | |||||||||
$ | 549,070 | $ | 633,862 | $ | 597,866 | |||||||
Net revenues from customers in China were $72.3 million, $58.5 million and $42.4 million for
fiscal 2010, 2009 and 2008, respectively. No individual country other than the United States and
China represented 10% or more of net revenues for any of the years presented.
Significant Customers
A summary of the Companys customers, including their manufacturing subcontractors, that
represent 10% or more of the Companys net revenues is as follows:
2010 | 2009 | 2008 | ||||||||||
Hewlett-Packard |
24 | % | 21 | % | 20 | % | ||||||
IBM |
20 | % | 18 | % | 16 | % | ||||||
Sun Microsystems (acquired by Oracle in fiscal 2010) |
* | 11 | % | 11 | % |
* | Less than 10% of net revenues |
63
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 16. Condensed Quarterly Results (Unaudited)
The following table summarizes certain unaudited quarterly financial information for fiscal
2010 and 2009:
Three Months Ended | ||||||||||||||||
June | September (1) | December (2) | March (3) | |||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Fiscal 2010: |
||||||||||||||||
Net revenues |
$ | 122,775 | $ | 131,457 | $ | 149,122 | $ | 145,716 | ||||||||
Gross profit |
78,306 | 83,688 | 96,102 | 94,847 | ||||||||||||
Operating income |
16,449 | 20,782 | 34,532 | 27,343 | ||||||||||||
Net income (loss) |
14,963 | 16,163 | 28,648 | (4,826 | ) | |||||||||||
Net income (loss) per share: |
||||||||||||||||
Basic |
0.13 | 0.14 | 0.25 | (0.04 | ) | |||||||||||
Diluted |
0.13 | 0.14 | 0.25 | (0.04 | ) | |||||||||||
Fiscal 2009: |
||||||||||||||||
Net revenues |
$ | 168,427 | $ | 171,197 | $ | 163,691 | $ | 130,547 | ||||||||
Gross profit |
112,669 | 116,183 | 108,921 | 86,014 | ||||||||||||
Operating income |
47,781 | 49,926 | 45,307 | 23,860 | ||||||||||||
Net income |
31,647 | 27,155 | 30,790 | 19,197 | ||||||||||||
Net income per share: |
||||||||||||||||
Basic |
0.24 | 0.21 | 0.24 | 0.16 | ||||||||||||
Diluted |
0.24 | 0.20 | 0.24 | 0.16 |
(1) | During the three months ended September 28, 2008, the Company recorded impairment charges related to investment securities of $5.0 million. | |
(2) | During the three months ended December 28, 2008, the Company recorded impairment charges of $4.3 million related to investment securities, a $4.5 million loss upon the transfer of auction rate securities from the available-for-sale classification to trading securities and an $8.1 million gain for the initial recognition of the put options related to auction rate securities owned by the Company. | |
(3) | During the three months ended March 28, 2010, the Company recorded an income tax charge of $29.7 million related to its globalization initiative, primarily due to an amendment to an intercompany technology license agreement with an international subsidiary which resulted in a fully paid-up license, and special charges of $4.3 million related to certain exit costs. During the three months ended March 29, 2009, the Company recorded impairment charges related to investment securities of $4.4 million and recorded special charges of $2.7 million associated with certain exit costs. |
64
Table of Contents
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Item 9A. | Controls and Procedures |
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures to ensure that information we are required to
disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed,
summarized and reported within the time periods specified in Securities and Exchange Commission
rules and forms and (ii) is accumulated and communicated to our management, including our chief
executive officer and chief financial officer, to allow timely decisions regarding required
disclosure. Our management evaluated, with the participation of our chief executive officer and
chief financial officer, the effectiveness of our disclosure controls and procedures, as such term
is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act. Based on this
evaluation, our chief executive officer and chief financial officer concluded that our disclosure
controls and procedures were effective at a reasonable assurance level as of March 28, 2010.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act. Internal
control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our management evaluated the effectiveness of our internal control over financial reporting
using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control Integrated Framework. Based on this evaluation, our chief
executive officer and chief financial officer concluded that the Companys internal control over
financial reporting was effective at a reasonable assurance level as of March 28, 2010.
The independent registered public accounting firm that audited the consolidated financial
statements included in this annual report has issued an audit report on the effectiveness of the
Companys internal control over financial reporting. See page 37 herein.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting, as defined in Rule
13a-15(f) promulgated under the Exchange Act, that occurred during the fourth quarter of fiscal
2010 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Item 9B. | Other Information |
None.
65
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PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
Reference is made to the Companys Definitive Proxy Statement for its 2010 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end
of fiscal 2010, for information required under this Item 10. Such information is incorporated
herein by reference.
The Company has adopted and implemented a Business Ethics Policy (the Code of Ethics) that
applies to the Companys officers, employees and directors. The Code of Ethics is available on our
website at www.qlogic.com.
Item 11. | Executive Compensation |
Reference is made to the Companys Definitive Proxy Statement for its 2010 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end
of fiscal 2010, for information required under this Item 11. Such information is incorporated
herein by reference.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Reference is made to the Companys Definitive Proxy Statement for its 2010 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end
of fiscal 2010, for information required under this Item 12. Such information is incorporated
herein by reference.
There are no arrangements, known to the Company, which might at a subsequent date result in a
change in control of the Company.
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Reference is made to the Companys Definitive Proxy Statement for its 2010 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end
of fiscal 2010, for information required under this Item 13. Such information is incorporated
herein by reference.
Item 14. | Principal Accountant Fees and Services |
Reference is made to the Companys Definitive Proxy Statement for its 2010 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end
of fiscal 2010, for information required under this Item 14. Such information is incorporated
herein by reference.
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PART IV
Item 15. | Exhibits and Financial Statement Schedules |
(a) (1) Consolidated Financial Statements
The following consolidated financial statements of the Company for the years ended March 28,
2010, March 29, 2009 and March 30, 2008 are filed as part of this report:
FINANCIAL STATEMENT INDEX
Page | ||||
Number | ||||
36 | ||||
38 | ||||
39 | ||||
40 | ||||
41 | ||||
42 |
(a) (2) Financial Statement Schedule
The following consolidated financial statement schedule of the Company for the years ended
March 28, 2010, March 29, 2009 and March 30, 2008 is filed as part of this report and is
incorporated herein by reference:
Schedule II Valuation and Qualifying Accounts
All other schedules have been omitted because the required information is presented in the
financial statements or notes thereto, the amounts involved are not significant or the schedules
are not applicable.
(a) (3) Exhibits
An exhibit index has been filed as part of this report and is incorporated herein by
reference.
67
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
QLOGIC CORPORATION | ||||
By: | /s/ H.K. Desai | |||
H.K. Desai | ||||
Date: May 20, 2010 | Chairman of the Board and Chief Executive Officer |
|||
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes H.K. Desai and/or Simon
Biddiscombe, as attorney-in-fact, to sign on his or her behalf and in each capacity stated below,
and to file all amendments and/or supplements to this Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature | Title | Date | ||
Principal Executive Officer: |
||||
/s/ H.K. Desai
|
Chairman of the Board and | May 20, 2010 | ||
H.K. Desai
|
Chief Executive Officer | |||
Principal Financial and Accounting Officer: |
||||
/s/ Simon Biddiscombe
|
Senior Vice President and | May 20, 2010 | ||
Simon Biddiscombe
|
Chief Financial Officer | |||
/s/ Joel S. Birnbaum
|
Director | May 20, 2010 | ||
Joel S. Birnbaum |
||||
/s/ James R. Fiebiger
|
Director | May 20, 2010 | ||
James R. Fiebiger |
||||
/s/ Balakrishnan S. Iyer
|
Director | May 20, 2010 | ||
Balakrishnan S. Iyer |
||||
/s/ Kathryn B. Lewis
|
Director | May 20, 2010 | ||
Kathryn B. Lewis |
||||
/s/ George D. Wells
|
Director | May 20, 2010 | ||
George D. Wells |
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Table of Contents
SCHEDULE II
QLOGIC CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Additions: | ||||||||||||||||
Charged to | Deductions: | |||||||||||||||
Balance at | Costs and | Amounts | Balance at | |||||||||||||
Beginning of | Expenses | Written Off, Net | End of | |||||||||||||
Year | or Revenues | of Recoveries | Year | |||||||||||||
(In thousands) | ||||||||||||||||
Year ended March 28, 2010: |
||||||||||||||||
Allowance for doubtful accounts |
$ | 1,366 | $ | 366 | $ | 227 | $ | 1,505 | ||||||||
Sales returns and allowances |
$ | 8,848 | $ | 29,311 | $ | 29,883 | $ | 8,276 | ||||||||
Year ended March 29, 2009: |
||||||||||||||||
Allowance for doubtful accounts |
$ | 1,176 | $ | 278 | $ | 88 | $ | 1,366 | ||||||||
Sales returns and allowances |
$ | 7,601 | $ | 37,074 | $ | 35,827 | $ | 8,848 | ||||||||
Year ended March 30, 2008: |
||||||||||||||||
Allowance for doubtful accounts |
$ | 1,075 | $ | 399 | $ | 298 | $ | 1,176 | ||||||||
Sales returns and allowances |
$ | 5,219 | $ | 29,820 | $ | 27,438 | $ | 7,601 |
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EXHIBIT INDEX
Exhibit | ||
No. | Description | |
3.1
|
Certificate of Incorporation of Emulex Micro Devices Corporation, dated November 13, 1992. (incorporated by reference to Exhibit 3.1 of the Registrants Registration Statement on Form 10/A filed on February 15, 1994) | |
3.2
|
EMD Incorporation Agreement, dated as of January 1, 1993. (incorporated by reference to Exhibit 3.2 of the Registrants Registration Statement on Form 10/A filed on February 15, 1994) | |
3.3
|
Certificate of Amendment of Certificate of Incorporation, dated May 26, 1993. (incorporated by reference to Exhibit 3.3 of the Registrants Registration Statement on Form 10/A filed on February 15, 1994) | |
3.4
|
Certificate of Amendment of Certificate of Incorporation, dated February 24, 1994. (incorporated by reference to Exhibit 3.4 of the Registrants Annual Report on Form 10-K for the year ended March 30, 2003) | |
3.5
|
Certificate of Designation of Rights, Preferences and Privileges of Series A Junior Participating Preferred Stock, dated June 4, 1996. (incorporated by reference to Exhibit 3.5 of the Registrants Annual Report on Form 10-K for the year ended March 30, 2003) | |
3.6
|
Certificate of Amendment of Certificate of Incorporation, dated February 5, 1999. (incorporated by reference to Exhibit 3.6 of the Registrants Annual Report on Form 10-K for the year ended March 28, 1999) | |
3.7
|
Certificate of Amendment of Certificate of Incorporation, dated January 4, 2000. (incorporated by reference to Exhibit 3.7 of the Registrants Quarterly Report on Form 10-Q for the quarter ended December 26, 1999) | |
3.8
|
Certificate of Amendment of Certificate of Incorporation, dated September 28, 2000. (incorporated by reference to Exhibit 3.8 of the Registrants Annual Report on Form 10-K for the year ended March 30, 2003) | |
3.9
|
By-Laws of QLogic Corporation, as amended. (incorporated by reference to Exhibit 3.9 of the Registrants Current Report on Form 8-K filed on November 12, 2008) | |
10.1
|
QLogic Corporation Non-Employee Director Stock Option Plan, as amended.* (incorporated by reference to Exhibit 4.1 of the Registrants Registration Statement on Form S-8 filed on February 6, 2004 (File No. 333-112572)) | |
10.2
|
QLogic Corporation Stock Awards Plan, as amended.* (incorporated by reference to Exhibit 4.2 of the Registrants Registration Statement on Form S-8 filed on February 6, 2004 (File No. 333-112572)) | |
10.3
|
Form of Indemnification Agreement between QLogic Corporation and Directors and Executive Officers.* (incorporated by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K filed on April 7, 2006) | |
10.4
|
QLogic Corporation 1998 Employee Stock Purchase Plan, Amended and Restated Effective May 22, 2008.* (incorporated by reference to Exhibit 10.3 of the Registrants Current Report on Form 8-K filed on September 4, 2008) | |
10.5
|
QLogic Corporation 2005 Performance Incentive Plan, Amended and Restated Effective July 16, 2009.* (incorporated by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K filed on August 21, 2009) |
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Exhibit | ||
No. | Description | |
10.6
|
Terms and Conditions of Nonqualified Stock Option under the QLogic Corporation 2005 Performance Incentive Plan.* (incorporated by reference to Exhibit 10.1 of the Registrants Quarterly Report on Form 10-Q for the quarter ended July 2, 2006) | |
10.7
|
Terms and Conditions of Incentive Stock Option under the QLogic Corporation 2005 Performance Incentive Plan.* (incorporated by reference to Exhibit 10.2 of the Registrants Quarterly Report on Form 10-Q for the quarter ended July 2, 2006) | |
10.8
|
Terms and Conditions of Stock Unit Award under the QLogic Corporation 2005 Performance Incentive Plan.* (incorporated by reference to Exhibit 10.1 of the Registrants Quarterly Report on Form 10-Q for the quarter ended December 28, 2008) | |
10.9
|
Change in Control Severance Agreement, dated December 18, 2008, between QLogic Corporation and H.K. Desai.* (incorporated by reference to Exhibit 10.2 of the Registrants Quarterly Report on Form 10-Q for the quarter ended December 28, 2008) | |
10.10
|
Change in Control Severance Agreement, dated December 18, 2008, between QLogic Corporation and Simon Biddiscombe.* (incorporated by reference to Exhibit 10.3 of the Registrants Quarterly Report on Form 10-Q for the quarter ended December 28, 2008) | |
10.11
|
Non-Employee Director Equity Award Program under the QLogic Corporation 2005 Performance Incentive Plan.* (incorporated by reference to Exhibit 10.2 of the Registrants Current Report on Form 8-K filed on September 4, 2008) | |
21.1
|
Subsidiaries of the Registrant. | |
23.1
|
Consent of Independent Registered Public Accounting Firm. | |
24
|
Power of Attorney (included on signature page). | |
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Compensation plan, contract or arrangement required to be filed as an exhibit pursuant to applicable rules of the Securities and Exchange Commission. |
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