Attached files
file | filename |
---|---|
EXCEL - IDEA: XBRL DOCUMENT - QLOGIC CORP | Financial_Report.xls |
EX-31.2 - EX-31.2 - QLOGIC CORP | a57906exv31w2.htm |
EX-32 - EX-32 - QLOGIC CORP | a57906exv32.htm |
EX-31.1 - EX-31.1 - QLOGIC CORP | a57906exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 2010
Commission file number 0-23298
QLogic Corporation
(Exact name of registrant as specified in its charter)
Delaware | 33-0537669 | |
(State of incorporation) | (I.R.S. Employer | |
Identification No.) |
26650 Aliso Viejo Parkway
Aliso Viejo, California 92656
(Address of principal executive office and zip code)
Aliso Viejo, California 92656
(Address of principal executive office and zip code)
(949) 389-6000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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
þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See 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
As
of January 28, 2011, 105,390,000 shares of the Registrants common stock were outstanding.
QLOGIC CORPORATION
INDEX
i
Table of Contents
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
QLOGIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 26, | March 28, | |||||||
2010 | 2010 | |||||||
(Unaudited; In thousands, | ||||||||
except share and per | ||||||||
share amounts) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 106,292 | $ | 190,308 | ||||
Short-term investment securities |
236,882 | 185,365 | ||||||
Accounts receivable, less allowance for doubtful accounts of $1,659 and $1,505 as of December
26, 2010 and March 28, 2010, respectively |
83,916 | 73,301 | ||||||
Inventories |
25,857 | 19,403 | ||||||
Deferred tax assets |
14,758 | 10,976 | ||||||
Other current assets |
22,950 | 9,845 | ||||||
Total current assets |
490,655 | 489,198 | ||||||
Property and equipment, net |
78,666 | 83,496 | ||||||
Goodwill |
119,748 | 119,748 | ||||||
Purchased intangible assets, net |
14,013 | 17,394 | ||||||
Deferred tax assets |
25,966 | 36,917 | ||||||
Other assets |
2,909 | 3,984 | ||||||
$ | 731,957 | $ | 750,737 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 31,574 | $ | 36,766 | ||||
Accrued compensation |
22,558 | 22,727 | ||||||
Accrued taxes |
3,745 | 2,633 | ||||||
Deferred revenue |
10,424 | 9,240 | ||||||
Other current liabilities |
5,855 | 11,069 | ||||||
Total current liabilities |
74,156 | 82,435 | ||||||
Accrued taxes |
61,268 | 70,577 | ||||||
Deferred revenue |
5,532 | 7,401 | ||||||
Other liabilities |
6,132 | 6,985 | ||||||
Total liabilities |
147,088 | 167,398 | ||||||
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; 207,604,000 and 204,893,000
shares issued as of December 26, 2010 and March 28, 2010, respectively |
208 | 205 | ||||||
Additional paid-in capital |
830,251 | 778,853 | ||||||
Retained earnings |
1,354,449 | 1,248,675 | ||||||
Accumulated other comprehensive income |
448 | 1,206 | ||||||
Treasury stock, at cost: 101,538,000 and 92,586,000 shares as of December 26, 2010 and March
28, 2010, respectively |
(1,600,487 | ) | (1,445,600 | ) | ||||
Total stockholders equity |
584,869 | 583,339 | ||||||
$ | 731,957 | $ | 750,737 | |||||
See accompanying notes to condensed consolidated financial statements.
1
Table of Contents
QLOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended | Nine Months Ended | |||||||||||||||
December 26, | December 27, | December 26, | December 27, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Unaudited; In thousands, except per share amounts) | ||||||||||||||||
Net revenues |
$ | 155,771 | $ | 149,122 | $ | 444,909 | $ | 403,354 | ||||||||
Cost of revenues |
53,000 | 53,020 | 153,112 | 145,258 | ||||||||||||
Gross profit |
102,771 | 96,102 | 291,797 | 258,096 | ||||||||||||
Operating expenses: |
||||||||||||||||
Engineering and development |
33,148 | 33,978 | 100,649 | 102,294 | ||||||||||||
Sales and marketing |
20,103 | 18,812 | 60,953 | 58,268 | ||||||||||||
General and administrative |
9,061 | 8,780 | 25,560 | 24,923 | ||||||||||||
Special charges |
| | 931 | 848 | ||||||||||||
Total operating expenses |
62,312 | 61,570 | 188,093 | 186,333 | ||||||||||||
Operating income |
40,459 | 34,532 | 103,704 | 71,763 | ||||||||||||
Interest and other income, net |
773 | 1,736 | 4,258 | 6,996 | ||||||||||||
Income before income taxes |
41,232 | 36,268 | 107,962 | 78,759 | ||||||||||||
Income taxes |
(9,107 | ) | 7,620 | 2,188 | 18,985 | |||||||||||
Net income |
$ | 50,339 | $ | 28,648 | $ | 105,774 | $ | 59,774 | ||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 0.48 | $ | 0.25 | $ | 0.97 | $ | 0.51 | ||||||||
Diluted |
$ | 0.47 | $ | 0.25 | $ | 0.96 | $ | 0.51 | ||||||||
Number of shares used in per share calculations: |
||||||||||||||||
Basic |
105,830 | 114,695 | 108,492 | 116,935 | ||||||||||||
Diluted |
107,327 | 116,479 | 110,032 | 117,965 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
2
Table of Contents
QLOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended | ||||||||
December 26, | December 27, | |||||||
2010 | 2009 | |||||||
(Unaudited; In thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 105,774 | $ | 59,774 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
22,612 | 23,912 | ||||||
Stock-based compensation |
27,111 | 27,425 | ||||||
Amortization of acquisition-related intangible assets |
3,467 | 6,719 | ||||||
Deferred income taxes |
6,810 | 4,554 | ||||||
Net gains on investment securities |
(2,021 | ) | (2,639 | ) | ||||
Other non-cash items |
1,435 | 1,169 | ||||||
Changes in operating assets and liabilities, net of acquisition: |
||||||||
Accounts receivable |
(10,769 | ) | (17,378 | ) | ||||
Inventories |
(6,454 | ) | 19,503 | |||||
Other assets |
841 | 148 | ||||||
Accounts payable |
(6,232 | ) | (2,446 | ) | ||||
Accrued compensation |
405 | (9,505 | ) | |||||
Accrued taxes |
(21,068 | ) | (19,359 | ) | ||||
Deferred revenue |
(685 | ) | 1,295 | |||||
Other liabilities |
(3,968 | ) | (695 | ) | ||||
Net cash provided by operating activities |
117,258 | 92,477 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of available-for-sale securities |
(221,884 | ) | (213,704 | ) | ||||
Proceeds from sales and maturities of available-for-sale securities |
146,840 | 175,513 | ||||||
Proceeds from disposition of trading securities |
23,800 | 10,525 | ||||||
Distributions from other investment securities |
329 | 3,076 | ||||||
Purchases of property and equipment |
(17,881 | ) | (17,605 | ) | ||||
Acquisition of business, net of cash acquired |
| (14,931 | ) | |||||
Net cash used in investing activities |
(68,796 | ) | (57,126 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of common stock under stock-based awards |
29,637 | 18,966 | ||||||
Excess tax benefits from stock-based awards |
1,610 | (154 | ) | |||||
Minimum tax withholding paid on behalf of employees for restricted stock units |
(6,739 | ) | (2,833 | ) | ||||
Purchases of treasury stock |
(156,986 | ) | (108,976 | ) | ||||
Payoff of line of credit assumed in acquisition |
| (934 | ) | |||||
Net cash used in financing activities |
(132,478 | ) | (93,931 | ) | ||||
Net decrease in cash and cash equivalents |
(84,016 | ) | (58,580 | ) | ||||
Cash and cash equivalents at beginning of period |
190,308 | 203,722 | ||||||
Cash and cash equivalents at end of period |
$ | 106,292 | $ | 145,142 | ||||
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
QLOGIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
In the opinion of management of QLogic Corporation (QLogic or the Company), the accompanying
unaudited condensed consolidated financial statements contain all normal recurring accruals and
adjustments necessary to present fairly the Companys consolidated financial position, results of
operations and cash flows. The accompanying condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements included in the Companys Annual
Report on Form 10-K for the fiscal year ended March 28, 2010. The results of operations for the
three and nine months ended December 26, 2010 are not necessarily indicative of the results that
may be expected for the entire fiscal year. The preparation of financial statements in accordance
with U.S. generally accepted accounting principles requires management to make estimates that
affect the amounts reported in the Companys consolidated financial statements and accompanying
notes. The Company evaluates its estimates on an ongoing basis using historical experience and
other factors, including the current economic environment. 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 actual results experienced by the Company could differ materially from managements
estimates.
Note 2. Investment Securities
Components of investment securities are as follows:
December 26, | March 28, | |||||||
2010 | 2010 | |||||||
(In thousands) | ||||||||
Available-for-sale securities |
$ | 236,882 | $ | 161,609 | ||||
Trading securities |
| 23,756 | ||||||
$ | 236,882 | $ | 185,365 | |||||
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) | ||||||||||||||||
December 26, 2010 |
||||||||||||||||
U.S. government and agency securities |
$ | 62,726 | $ | 160 | $ | (298 | ) | $ | 62,588 | |||||||
Corporate debt obligations |
134,094 | 1,154 | (458 | ) | 134,790 | |||||||||||
Asset and mortgage-backed securities |
20,023 | 336 | (27 | ) | 20,332 | |||||||||||
Municipal bonds |
17,515 | 9 | (24 | ) | 17,500 | |||||||||||
Non-U.S. government and agency securities |
1,674 | | (2 | ) | 1,672 | |||||||||||
$ | 236,032 | $ | 1,659 | $ | (809 | ) | $ | 236,882 | ||||||||
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 | ||||||||||||
$ | 159,337 | $ | 2,339 | $ | (67 | ) | $ | 161,609 | ||||||||
4
Table of Contents
QLOGIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amortized cost and estimated fair value of debt securities included in available-for-sale
securities as of December 26, 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 |
$ | 65,362 | $ | 65,590 | ||||
Due after one year through three years |
118,510 | 119,030 | ||||||
Due after three years through five years |
20,477 | 20,273 | ||||||
Due after five years |
31,683 | 31,989 | ||||||
$ | 236,032 | $ | 236,882 | |||||
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 December 26, 2010 and March 28, 2010.
Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Description of Securities | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
December 26, 2010 |
||||||||||||||||||||||||
U.S. government and agency securities |
$ | 37,430 | $ | (298 | ) | $ | | $ | | $ | 37,430 | $ | (298 | ) | ||||||||||
Corporate debt obligations |
71,794 | (458 | ) | | | 71,794 | (458 | ) | ||||||||||||||||
Asset and mortgage-backed securities |
6,155 | (27 | ) | | | 6,155 | (27 | ) | ||||||||||||||||
Municipal bonds |
1,373 | (24 | ) | | | 1,373 | (24 | ) | ||||||||||||||||
Non-U.S. government and agency securities |
1,672 | (2 | ) | | | 1,672 | (2 | ) | ||||||||||||||||
$ | 118,424 | $ | (809 | ) | $ | | $ | | $ | 118,424 | $ | (809 | ) | |||||||||||
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 | ) | ||||||||||||||||
$ | 21,872 | $ | (67 | ) | $ | | $ | | $ | 21,872 | $ | (67 | ) | |||||||||||
Trading Securities
The Companys portfolio of trading securities consists of the following:
December 26, | March 28, | |||||||
2010 | 2010 | |||||||
(In thousands) | ||||||||
Auction rate debt securities |
$ | | $ | 17,951 | ||||
Auction rate preferred securities |
| 4,366 | ||||||
Put options related to auction rate securities |
| 1,439 | ||||||
$ | | $ | 23,756 | |||||
The Companys trading securities included investments in auction rate securities (ARS).
During late fiscal 2008, the market auctions of many ARS began to fail, including auctions for the
ARS held by the Company. In November 2008, the Company entered into an agreement with the broker
for all of the ARS held by the Company, which provided the Company with certain rights (ARS
Rights), in exchange for the release of potential claims and damages against the broker. The ARS
Rights entitled 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 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.
5
Table of Contents
QLOGIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the three months ended June 27, 2010, the Company received $9.3 million of proceeds in
connection with the redemption of certain ARS by the respective issuers. On June 30, 2010, the
Company exercised the ARS Rights and sold all of its remaining ARS investments to the broker at par
for cash totaling $14.5 million.
Note 3. 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 December 26, 2010 and March 28, 2010
are as follows:
Fair Value Measurements Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(In thousands) | ||||||||||||||||
December 26, 2010 |
||||||||||||||||
Cash and cash equivalents |
$ | 103,218 | $ | 3,074 | $ | | $ | 106,292 | ||||||||
Investment securities: |
||||||||||||||||
U.S. government and agency securities |
62,588 | | | 62,588 | ||||||||||||
Corporate debt obligations |
| 134,790 | | 134,790 | ||||||||||||
Asset and mortgage-backed securities |
| 20,332 | | 20,332 | ||||||||||||
Municipal bonds |
| 17,500 | | 17,500 | ||||||||||||
Non-U.S. government and agency securities |
| 1,672 | | 1,672 | ||||||||||||
$ | 165,806 | $ | 177,368 | $ | | $ | 343,174 | |||||||||
March 28, 2010 |
||||||||||||||||
Cash and cash equivalents |
$ | 190,308 | $ | | $ | | $ | 190,308 | ||||||||
Investment securities: |
||||||||||||||||
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 | ||||||||||||
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 | ||||||||||||
$ | 243,876 | $ | 108,041 | $ | 23,756 | $ | 375,673 | |||||||||
The Companys investments classified within Level 2 were primarily valued based on valuations
obtained from a third-party pricing service. To estimate fair value, the pricing service utilizes
industry standard valuation models, including both income and market-based approaches for which all
significant inputs are observable either directly or indirectly. These inputs include reported
trades and broker/dealer quotes of the same or similar securities, issuer credit spreads, benchmark
securities and other observable inputs.
6
Table of Contents
QLOGIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Companys investments in auction rate securities and the related put options were
classified within Level 3 because there were no active markets for these securities and the Company
was 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.
There were no changes in Level 3 assets measured at fair value during the three months ended
December 26, 2010. A summary of the changes in Level 3 assets measured at fair value on a
recurring basis for the nine months ended December 26, 2010 is as follows:
Balance | Total Realized | Sales and Other | Balance | |||||||||||||
Nine Months Ended December 26, 2010 | March 28, 2010 | Gains (Losses) | Settlements | December 26, 2010 | ||||||||||||
(In thousands) | ||||||||||||||||
Auction rate debt securities |
$ | 17,951 | $ | 1,299 | $ | (19,250 | ) | $ | | |||||||
Auction rate preferred securities |
4,366 | 184 | (4,550 | ) | | |||||||||||
Put options related to auction rate securities |
1,439 | (1,439 | ) | | | |||||||||||
$ | 23,756 | $ | 44 | $ | (23,800 | ) | $ | | ||||||||
Note 4. Inventories
Components of inventories are as follows:
December 26, | March 28, | |||||||
2010 | 2010 | |||||||
(In thousands) | ||||||||
Raw materials |
$ | 5,964 | $ | 6,693 | ||||
Finished goods |
19,893 | 12,710 | ||||||
$ | 25,857 | $ | 19,403 | |||||
Note 5. Treasury Stock
Since fiscal 2003, the Company has had various stock repurchase programs that authorized the
purchase of up to $1.75 billion of the Companys outstanding common stock, including a program
approved in August 2010 authorizing the repurchase of up to $200 million of the Companys
outstanding common stock. During the nine months ended December 26, 2010, the Company purchased
9.0 million shares of its common stock for an aggregate purchase price of $154.9 million. As of
December 26, 2010, the Company had purchased a total of 101.5 million shares of common stock under
these repurchase programs for an aggregate purchase price of $1.6 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 6. Stock-Based Compensation
During the nine months ended December 26, 2010, the Company granted options to purchase 2.7
million shares of common stock and 0.9 million restricted stock units with weighted average grant
date fair values of $6.64 and $17.78 per share, respectively.
A summary of stock-based compensation expense, by functional line item in the condensed
consolidated statements of income, is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
December 26, | December 27, | December 26, | December 27, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands) | ||||||||||||||||
Cost of revenues |
$ | 599 | $ | 650 | $ | 1,962 | $ | 2,039 | ||||||||
Engineering and development |
3,714 | 4,508 | 12,692 | 14,122 | ||||||||||||
Sales and marketing |
1,824 | 1,629 | 5,866 | 5,230 | ||||||||||||
General and administrative |
2,382 | 1,955 | 6,591 | 6,034 | ||||||||||||
$ | 8,519 | $ | 8,742 | $ | 27,111 | $ | 27,425 | |||||||||
7
Table of Contents
QLOGIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7. Special Charges
During the nine months ended December 26, 2010, the Company recorded special charges of $0.9
million consisting of exit costs associated with severance benefits for involuntarily terminated
employees, primarily related to the consolidation of certain engineering functions. As of December
26, 2010, all severance benefits had been paid.
Note 8. Income Taxes
The
Companys provision (benefit) for income taxes was $(9.1)
million and $2.2 million for the three and nine months ended
December 26, 2010, respectively, and $7.6 million and
$19.0 million for the three and nine
months ended December 27, 2009, respectively.
The effective income tax rate
was 2% and 24% for the nine months ended December 26, 2010 and December 27, 2009, respectively.
The effective income tax rate is based upon the estimated income for the year, the composition of
the estimated income in different tax jurisdictions, and the tax effect, if any, in the applicable
quarterly periods of newly enacted tax legislation, resolution of tax audits, establishing or
resolving tax contingencies, and other discrete tax related items. The allocation of taxable
income to domestic and foreign tax jurisdictions impacts the effective tax rate, as the Companys
income tax rate in foreign jurisdictions is generally lower than its income tax rate in the United
States.
The
effective income tax rate during the three and nine months ended December 26, 2010 benefited from a
higher portion of the Companys taxable income generated by its foreign operations, which are taxed
at more favorable rates. In addition, during the three and nine months ended December 26, 2010, the Company
recorded $14.6 million of third quarter specific income tax benefits related to the expiration of
certain statutes of limitation, the retroactive reinstatement of the federal research tax credit
and certain other items.
The Companys federal consolidated income tax returns for fiscal years 2008 and 2009 are
currently under examination by the Internal Revenue Service. Management does not believe that the
results of these examinations will have a material impact on the Companys financial condition or
results of operations.
Note 9. Net Income Per Share
The following table sets forth the computation of basic and diluted net income per share:
Three Months Ended | Nine Months Ended | |||||||||||||||
December 26, | December 27, | December 26, | December 27, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Net income |
$ | 50,339 | $ | 28,648 | $ | 105,774 | $ | 59,774 | ||||||||
Shares: |
||||||||||||||||
Weighted-average shares outstanding basic |
105,830 | 114,695 | 108,492 | 116,935 | ||||||||||||
Dilutive potential common shares, using treasury stock method |
1,497 | 1,784 | 1,540 | 1,030 | ||||||||||||
Weighted-average shares outstanding diluted |
107,327 | 116,479 | 110,032 | 117,965 | ||||||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 0.48 | $ | 0.25 | $ | 0.97 | $ | 0.51 | ||||||||
Diluted |
$ | 0.47 | $ | 0.25 | $ | 0.96 | $ | 0.51 | ||||||||
Stock-based awards, including stock options and restricted stock units, representing an
aggregate of 13.3 million and 15.1 million shares of common stock have been excluded from the
diluted net income per share calculations for the three and nine months ended December 26, 2010,
respectively, and stock-based awards representing an aggregate of 18.1 million and 23.7 million
shares of common stock have been excluded from the diluted net income per share calculations for
the three and nine months ended December 27, 2009, respectively. These stock-based awards have
been excluded from the diluted net income per share calculations because their effect would have
been antidilutive.
8
Table of Contents
QLOGIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10. Comprehensive Income
Components of comprehensive income are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
December 26, | December 27, | December 26, | December 27, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands) | ||||||||||||||||
Net income |
$ | 50,339 | $ | 28,648 | $ | 105,774 | $ | 59,774 | ||||||||
Other comprehensive income: |
||||||||||||||||
Change in unrealized gains/losses on
investment securities, net of income taxes |
(835 | ) | 16 | (758 | ) | 529 | ||||||||||
$ | 49,504 | $ | 28,664 | $ | 105,016 | $ | 60,303 | |||||||||
9
Table of Contents
Item 2. | 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 unaudited condensed 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 II, 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 high performance network infrastructure products that
perform, enhance and manage the communication of data in computer system applications. 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 enterprise environments and primarily use Fibre Channel technology.
HPC Networks utilize advanced parallel processing over a large number of 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 are based on InfiniBand® technology. Converged Networks are
designed to address the evolving data center by consolidating and unifying various classes of
connectivity and networks, such as storage area networks and local area networks, using Ethernet
speeds of 10Gb and greater.
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; and converged network
adapters, which consist of adapters based on 10Gb Ethernet connectivity. 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, Fibre Channel over Ethernet 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.
Third Quarter Financial Highlights and Other Information
The key factors and significant events that impacted our financial performance during the
third quarter of fiscal 2011 are as follows:
| Net revenues of $155.8 million for the third quarter of fiscal 2011 increased sequentially by $9.3 million, or 6%, from $146.5 million in the second quarter of fiscal 2011. Revenues from Host Products of $113.5 million for the third quarter of fiscal 2011 increased sequentially by $9.3 million, or 9%, from $104.2 million in the second quarter of fiscal 2011. Revenues from Network Products of $28.9 million for the third quarter of fiscal 2011 increased sequentially by $1.7 million, or 6%, from $27.2 million in the second quarter of fiscal 2011. |
10
Table of Contents
| Gross profit as a percentage of net revenues increased to 66.0% for the third quarter of fiscal 2011 from 65.6% in the second quarter of fiscal 2011. |
| Operating income as a percentage of net revenues increased to 26.0% for the third quarter of fiscal 2011 from 23.8% in the second quarter of fiscal 2011. |
| Income taxes were a benefit of $9.1 million for the third quarter of fiscal 2011, compared to an expense of $6.7 million for the second quarter of fiscal 2011. During the third quarter of fiscal 2011, we recorded $14.6 million of third quarter specific income tax benefits related to the expiration of certain statutes of limitation, the retroactive reinstatement of the federal research tax credit and certain other items. |
| Net income of $50.3 million, or $0.47 per diluted share, in the third quarter of fiscal 2011 increased sequentially from $30.0 million, or $0.28 per diluted share, in the second quarter of fiscal 2011. |
| Cash, cash equivalents and investment securities increased to $343.2 million at December 26, 2010 from $304.0 million at September 26, 2010. |
| Accounts receivable decreased to $83.9 million as of December 26, 2010 from $86.4 million as of September 26, 2010. Days sales outstanding (DSO) in receivables decreased to 49 days as of December 26, 2010 from 54 days as of September 26, 2010. |
| Inventories were $25.9 million as of December 26, 2010, compared to $24.9 million as of September 26, 2010. Our annualized inventory turns increased to 8.2 turns in the third quarter of fiscal 2011 from 8.1 turns in the second quarter of fiscal 2011. |
Results of Operations
Net Revenues
A summary of our net revenues by product category is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
December 26, | December 27, | December 26, | December 27, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net revenues: |
||||||||||||||||
Host Products |
$ | 113.5 | $ | 110.4 | $ | 320.1 | $ | 292.8 | ||||||||
Network Products |
28.9 | 27.4 | 81.8 | 76.9 | ||||||||||||
Silicon Products |
10.7 | 8.7 | 34.9 | 25.7 | ||||||||||||
Service and other |
2.7 | 2.6 | 8.1 | 8.0 | ||||||||||||
$ | 155.8 | $ | 149.1 | $ | 444.9 | $ | 403.4 | |||||||||
Percentage of net revenues: |
||||||||||||||||
Host Products |
73 | % | 74 | % | 72 | % | 73 | % | ||||||||
Network Products |
18 | 18 | 18 | 19 | ||||||||||||
Silicon Products |
7 | 6 | 8 | 6 | ||||||||||||
Service and other |
2 | 2 | 2 | 2 | ||||||||||||
100 | % | 100 | % | 100 | % | 100 | % | |||||||||
Historically, the global marketplace for network infrastructure solutions has expanded in
response to the information requirements of enterprise business environments. The markets we serve
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 experienced, and may continue to
experience, economic weakness and uncertainty. Economic uncertainty has adversely affected, and in
the future may adversely affect, information technology spending rates. Accordingly, it is
extremely difficult for us to forecast future sales levels and historical information may not be
indicative of future trends.
11
Table of Contents
Our net revenues are derived primarily from the sale of Host Products, Network Products and
Silicon Products. Net revenues increased 4% to $155.8 million for the three months ended December
26, 2010 from $149.1 million for the three months ended December 27, 2009. This increase was
primarily the result of a $3.1 million, or 3%, increase in revenue from Host Products; a $1.5
million, or 6%, increase in revenue from Network Products; and a $2.0 million, or 23%, increase in
revenue from Silicon Products. The increase in revenue from Host Products was primarily due to an
increase in the quantity of adapters sold. The increase in revenue from Network Products was
primarily due to a 17% increase in the quantity of switches sold, partially offset by an 8%
decrease in the average selling prices of these products. The increase in revenue from Silicon
Products was primarily due to an increase in the quantity of chips sold. Net revenues for the
three months ended December 26, 2010 included $2.7 million of service and other revenues compared
with $2.6 million of service and other revenues for the three months ended December 27, 2009. We
do not expect service and other revenues to be significant to our overall revenues.
Net revenues increased 10% to $444.9 million for the nine months ended December 26, 2010 from
$403.4 million for the nine months ended December 27, 2009. This increase was primarily the result
of a $27.3 million, or 9%, increase in revenue from Host Products; a $4.9 million, or 6%, increase
in revenue from Network Products; and a $9.2 million, or 36%, increase in revenue from Silicon
Products. The increase in revenue from Host Products was primarily due to an increase in the
quantity of adapters sold. The increase in revenue from Network Products was primarily due to a
13% increase in the quantity of switches sold, partially offset by a 5% decrease in the average
selling prices of these products. The increase in revenue from Silicon Products was due primarily
to an increase in the quantity of chips sold.
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 84% and 88% of net
revenues during the nine months ended December 26, 2010 and December 27, 2009, respectively.
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.
Net revenues by geographic area are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
December 26, | December 27, | December 26, | December 27, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In millions) | ||||||||||||||||
United States |
$ | 65.7 | $ | 66.5 | $ | 198.2 | $ | 185.9 | ||||||||
Asia-Pacific and Japan |
43.4 | 37.6 | 120.8 | 100.4 | ||||||||||||
Europe, Middle East and Africa |
36.3 | 35.5 | 99.6 | 91.7 | ||||||||||||
Rest of the world |
10.4 | 9.5 | 26.3 | 25.4 | ||||||||||||
$ | 155.8 | $ | 149.1 | $ | 444.9 | $ | 403.4 | |||||||||
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. No individual
country other than the United States and China represented 10% or more of net revenues for the
periods presented. Net revenues from customers in China were $23.9 million and $64.1 million for
the three and nine months ended December 26, 2010, respectively, and $22.2 million and $54.4
million for the three and nine months ended December 27, 2009, respectively.
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 of
purchased intangible assets. A summary of our gross profit and related percentage of net revenues
is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||
December 26, | December 27, | December 26, | December 27, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||
(Dollars in millions) | ||||||||||||||||||
Gross profit |
$ | 102.8 | $ | 96.1 | $ | 291.8 | $ | 258.1 | ||||||||||
Percentage of net revenues |
66.0 | % | 64.4 | % | 65.6 | % | 64.0 | % |
12
Table of Contents
Gross profit for the three months ended December 26, 2010 increased $6.7 million, or 7%, from
gross profit for the three months ended December 27, 2009. The gross profit percentage for the
three months ended December 26, 2010 was 66.0% and increased from 64.4% for the corresponding
period in the prior year. The increase in gross profit percentage was primarily due to higher
volumes to absorb manufacturing costs and a $0.6 million decrease in amortization of purchased
intangible assets.
Gross profit for the nine months ended December 26, 2010 increased $33.7 million, or 13%, from
gross profit for the nine months ended December 27, 2009. The gross profit percentage for the nine
months ended December 26, 2010 was 65.6% and increased from 64.0% for the corresponding period in
the prior year. The increase in gross profit percentage was primarily due to higher volumes to
absorb manufacturing costs and a $1.7 million decrease in amortization of purchased intangible
assets.
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, 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.
Operating Expenses
Our operating expenses are summarized in the following table:
Three Months Ended | Nine Months Ended | |||||||||||||||
December 26, | December 27, | December 26, | December 27, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Operating expenses: |
||||||||||||||||
Engineering and development |
$ | 33.1 | $ | 34.0 | $ | 100.6 | $ | 102.3 | ||||||||
Sales and marketing |
20.1 | 18.8 | 61.0 | 58.3 | ||||||||||||
General and administrative |
9.1 | 8.8 | 25.6 | 24.9 | ||||||||||||
Special charges |
| | 0.9 | 0.8 | ||||||||||||
$ | 62.3 | $ | 61.6 | $ | 188.1 | $ | 186.3 | |||||||||
Percentage of net revenues: |
||||||||||||||||
Engineering and development |
21.3 | % | 22.8 | % | 22.6 | % | 25.4 | % | ||||||||
Sales and marketing |
12.9 | 12.6 | 13.7 | 14.4 | ||||||||||||
General and administrative |
5.8 | 5.9 | 5.8 | 6.2 | ||||||||||||
Special charges |
| | 0.2 | 0.2 | ||||||||||||
40.0 | % | 41.3 | % | 42.3 | % | 46.2 | % | |||||||||
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 the three months ended December 26,
2010, engineering and development expenses decreased to $33.1 million from $34.0 million for the
three months ended December 27, 2009. The decrease was primarily due to a $1.6 million decrease in
outside service costs related to new product development and a $0.8 million decrease in stock-based
compensation, partially offset by a $1.8 million increase in cash compensation and related employee
benefit costs primarily due to an increase in headcount.
During the nine months ended December 26, 2010, engineering and development expenses decreased
to $100.6 million from $102.3 million for the nine months ended December 27, 2009. The decrease was
primarily due to a $3.0 million decrease in outside service costs related to new product
development, a $1.4 million decrease in stock-based compensation and a $1.0 million decrease in
occupancy and related computer support costs, partially offset by a $3.7 million increase in cash
compensation and related employee benefit costs primarily due to an increase in headcount.
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 increased to $20.1 million for the three months
ended December 26, 2010 from $18.8 million for the three months ended December 27, 2009. The
13
Table of Contents
increase in sales and marketing expenses was primarily due to a $1.0 million increase in cash
compensation and related employee benefit costs, primarily due to higher headcount and increased
commissions.
Sales and marketing expenses increased to $61.0 million for the nine months ended December 26,
2010 from $58.3 million for the nine months ended December 27, 2009. The increase in sales and
marketing expenses was primarily due to a $2.4 million increase in cash compensation and related
employee benefit costs, primarily due to higher headcount and increased commissions, a $0.8 million
increase in promotional costs, including the costs for certain sales and marketing programs, and a
$0.7 million increase in travel costs. These increases were partially offset by a $1.9 million
decrease in amortization of purchased intangible assets due to an intangible asset becoming fully
amortized during fiscal 2010.
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 $9.1 million for
the three months ended December 26, 2010 from $8.8 million for the three months ended December 27,
2009.
General and administrative expenses increased to $25.6 million for the nine months ended
December 26, 2010 from $24.9 million for the nine months ended December 27, 2009. The increase in
general and administrative expenses was primarily due to a $1.3 million increase in cash
compensation and related employee benefit costs, partially offset by a $0.6 million decrease in
outside services.
Special Charges. During the nine months ended December 26, 2010, we recorded special charges
of $0.9 million consisting of exit costs associated with severance benefits for involuntarily
terminated employees, primarily related to the consolidation of certain engineering functions.
During the nine months ended December 27, 2009, we recorded special charges of $0.8 million
related to our acquisition of NetXen, Inc. (NetXen). The special charges consisted of exit costs
related to the former NetXen leased facility that we vacated and severance benefits for
involuntarily terminated employees.
Unpaid exit costs related to leased facilities, including the exit costs recorded prior to
fiscal 2011, totaled $2.3 million as of December 26, 2010 and are expected to be paid over the
terms of the related agreements through fiscal 2018. As of December 26, 2010, all severance
benefits had been paid.
Interest and Other Income, Net
Components of our interest and other income, net, are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
December 26, | December 27, | December 26, | December 27, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In millions) | ||||||||||||||||
Interest income |
$ | 0.8 | $ | 1.2 | $ | 2.7 | $ | 4.2 | ||||||||
Net gains on investment securities |
0.3 | 0.5 | 2.0 | 2.6 | ||||||||||||
Other |
(0.3 | ) | | (0.4 | ) | 0.2 | ||||||||||
$ | 0.8 | $ | 1.7 | $ | 4.3 | $ | 7.0 | |||||||||
Interest income is earned on our portfolio of investment securities and cash equivalents. The
decrease in interest income for the three and nine months ended December 26, 2010 from the
corresponding periods in the prior year was primarily due to a decline in interest rates and a
decline in the average balance of our investment securities.
14
Table of Contents
Income Taxes
Our
provision (benefit) for income taxes was $(9.1) million and $2.2
million for the three and nine months ended December 26, 2010,
respectively, and $7.6 million and $19.0 million for the three and
nine months ended December 27, 2009, respectively.
Our effective income tax rate was 2% and 24% for the nine months ended December 26, 2010 and
December 27, 2009, respectively. The decrease in our effective
tax rate for the nine months ended
December 26, 2010 as compared to the nine months ended December 27, 2009 was due to a higher
portion of our taxable income generated by our foreign operations, which are taxed at more
favorable rates. In addition, during the three and nine months ended December 26, 2010, we recorded $14.6
million of third quarter specific income tax benefits related to the expiration of certain statutes
of limitation, the retroactive reinstatement of the federal research tax credit and certain other
items. We expect the annual effective tax rate for fiscal 2011 to approximate 5% as compared to
our actual annual effective tax rate of 50% for fiscal 2010. Our fiscal 2010 annual effective tax
rate was impacted by a $29.7 million tax charge in the fourth quarter of fiscal 2010 related to an
amendment of a technology license agreement with one of our international subsidiaries. As a
result of the amendment, we determined that all payment obligations under the license agreement had
been satisfied.
Our federal consolidated income tax returns for fiscal years 2008 and 2009 are currently under
examination by the Internal Revenue Service. We do not believe that the results of these
examinations will have a material impact on our financial condition or results of operations.
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 and uncertain tax
positions.
Liquidity and Capital Resources
Our combined balances of cash, cash equivalents and investment securities decreased to $343.2
million at December 26, 2010 from $375.7 million at March 28, 2010. As of December 26, 2010 and
March 28, 2010, our international subsidiaries held 60% and 47%, respectively, of our total cash,
cash equivalents and investment securities. These holdings by our international subsidiaries as of
December 26, 2010 consisted primarily of debt securities due from U.S. issuers, including the U.S.
government and related agencies, and U.S. dollar denominated cash and money market funds. 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.
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 increased to $117.3 million for the nine months ended
December 26, 2010 from $92.5 million for the nine months ended December 27, 2009. Operating cash
flow for the nine months ended December 26, 2010 reflects our net income of $105.8 million and net
non-cash charges of $59.4 million, partially offset by a net increase in the non-cash components of
working capital of $47.9 million. The increase in the non-cash components of working capital was
primarily due to a $21.1 million decrease in accrued taxes, a $10.8 million increase in accounts
receivable, a $6.5 million increase in inventories and a $6.2 million decrease in accounts payable.
The decrease in accrued taxes was primarily due to the expiration of certain statutes of
limitation, the retroactive reinstatement of the federal research tax credit and the timing of
payment obligations. The increase in accounts receivable was primarily due to the timing of cash
collections and an increase in net revenues. The increase in inventories was primarily due to
advanced purchases of silicon chips to maintain flexibility due to long lead times for these
products. The decrease in accounts payable was primarily due to the timing of payment obligations.
Cash used in investing activities was $68.8 million for the nine months ended December 26,
2010 and consisted primarily of $75.0 million of net purchases of available-for-sale securities and
$17.9 million of purchases of property and equipment, partially offset by $23.8 million of proceeds
from redemptions of auction rate securities (ARS) at par value. During the nine months ended
December 27, 2009, cash used in investing activities was $57.1 million and consisted primarily of
$38.2 million of net purchases of available-for-sale securities, $17.6 million of purchases of
property and equipment and $14.9 million for the acquisition of NetXen (net of cash acquired),
partially offset by $10.5 million of proceeds from redemptions of ARS at par value.
15
Table of Contents
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 of $132.5 million for the nine months ended December 26,
2010 consisted of our purchase of $157.0 million of common stock under our stock repurchase
programs and $6.7 million for minimum tax withholdings paid on behalf of employees for restricted
stock units that vested during the period, partially offset by $31.2 million of proceeds from the
issuance of common stock and excess tax benefits from stock-based awards. During the nine months
ended December 27, 2009, cash used in financing activities of $93.9 million consisted primarily of
our purchase of $109.0 million of common stock under our stock repurchase program and $2.8 million
for minimum tax withholdings paid on behalf of employees for restricted stock units that vested
during the period, partially offset by $18.8 million of proceeds from the issuance of common stock
and excess tax benefits from stock-based awards.
Since fiscal 2003, we have had various stock repurchase programs that authorized the purchase
of up to $1.75 billion of our outstanding common stock, including a program approved in August 2010
authorizing the repurchase of up to $200 million of our outstanding common stock. As of December
26, 2010, we had repurchased a total of 101.5 million shares of our common stock under our stock
repurchase programs for an aggregate purchase price of $1.6 billion. During the nine months ended
December 26, 2010, we repurchased 9.0 million shares for an aggregate purchase price of $154.9
million. Pursuant to the existing stock repurchase program, we are authorized to repurchase shares
with an aggregate cost of up to $149.5 million as of December 26, 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 December 26, 2010, and their impact on our cash
flows in future fiscal years, is as follows:
2011 | ||||||||||||||||||||||||||||
(Remaining | ||||||||||||||||||||||||||||
three months) | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Operating leases |
$ | 1.6 | $ | 5.6 | $ | 4.2 | $ | 4.1 | $ | 3.1 | $ | 5.9 | $ | 24.5 | ||||||||||||||
Non-cancelable purchase obligations |
57.1 | 6.7 | | | | | 63.8 | |||||||||||||||||||||
$ | 58.7 | $ | 12.3 | $ | 4.2 | $ | 4.1 | $ | 3.1 | $ | 5.9 | $ | 88.3 | |||||||||||||||
The amount of unrecognized tax benefits, including related accrued interest and penalties, was
$61.3 million as of December 26, 2010. We are not able to provide a reasonable estimate of the
timing of future tax payments related to these obligations.
16
Table of Contents
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 that we believe to be reasonable under the circumstances, including the
current economic environment, 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. Service and other 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
17
Table of Contents
forfeitures differ from those estimates. We recognize 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
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% 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
Investment securities include available-for-sale securities, trading securities and other
investment securities. Our investment securities are classified in the consolidated balance sheets
based on the nature of the security and the availability for use in current operations.
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
available-for-sale securities are excluded from earnings and reported as a separate component of
accumulated other comprehensive income until realized.
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.
Other investment securities are accounted for under the cost method and recorded at the lower
of fair value or cost.
18
Table of Contents
We recognize an impairment charge on available-for-sale securities 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 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 and the portion of any
impairment that is due to a credit loss. 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.
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 sell. Estimating future net cash flows
and determining proper asset groupings for the purpose of this impairment test requires the use
19
Table of Contents
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 for revenue arrangements with multiple deliverables by eliminating the criterion
for objective and reliable evidence of fair value for the undelivered products or services. ASU
No. 2009-13 also 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 and 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 and financial position.
Item 3. | 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 December 26, 2010, the carrying value of our cash and
cash equivalents approximates fair value.
We maintain a portfolio of investment securities consisting primarily of U.S. 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 December 26, 2010 consists of $236.9 million of securities that are
classified as available-for-sale. As of December 26, 2010, we had gross unrealized losses
associated with our available-for-sale securities of $0.8 million that were determined by
management to be temporary in nature.
We do not use derivative financial instruments.
Item 4. | 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 Securities Exchange Act of 1934, as
amended, (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
Securities Exchange Act of 1934, as amended. Based on this evaluation, our chief executive officer
and chief financial officer have concluded that our disclosure controls and procedures were
effective as of December 26, 2010. There was no change in our internal control over financial
reporting during our quarter ended December 26, 2010 that materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
20
Table of Contents
PART II.
OTHER INFORMATION
Item 1A. Risk Factors
We have updated the risk factors discussed in Item 1A of our Annual Report on Form 10-K for
the year ended March 28, 2010, as set forth below. We do not believe any of the updates constitute
material changes from the risk factors previously discussed in our Annual Report on Form 10-K for
the year ended March 28, 2010.
Our operating results may be adversely affected by unfavorable economic and market conditions.
The United States and other countries around the world have experienced, and may continue to
experience, economic weakness and uncertainty. Economic uncertainty has adversely affected, and in
the future may adversely affect, information technology, or IT, spending rates. 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, which could negatively
impact our revenue and operating results.
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. We may not be able to identify and
implement appropriate cost savings in a timely manner.
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; | |
| industry consolidation among both our competitors and our 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; | |
| 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; |
21
Table of Contents
| 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; | |
| changes in distribution channels; and | |
| increased warranty costs. |
22
Table of Contents
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 that 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.
23
Table of Contents
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 these 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 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 84% and 88% of net revenues
for the nine months ended December 26, 2010 and December 27, 2009, respectively. Total revenue from
our two largest customers, Hewlett-Packard Company and International Business Machines Corporation,
accounted for over 40% of net revenues during the nine months ended December 26, 2010 and December
27, 2009. We are also subject to credit risk associated with the concentration of our accounts
receivable. In addition, worldwide economic uncertainty 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. 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 achieved. If we are unable to achieve these cost reductions, our gross margins
could decline and such a decline could have a material adverse effect on our business, financial
condition or results of operations.
The ongoing consolidation in the technology industry could adversely impact our business.
There is the potential for some of our customers to merge with or acquire one or more of our other
customers. There is also a potential that one of our large customers could acquire one of our
current competitors. In either case, demand for our products could decrease as a result of such
industry consolidation, which could have a material adverse effect on our business, financial
condition or results of operations.
24
Table of Contents
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 | |
| differences between our quarterly fiscal periods and the fiscal periods of our customers. |
In addition, because our customers require us to maintain products at hub locations near their
facilities, it is 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 10Gb Ethernet adapter market, which
includes converged networking products, we compete with Emulex Corporation, Brocade Communications
Systems, Inc., Broadcom Corporation and Intel 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 either through the development of new products or through industry consolidation.
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.
25
Table of Contents
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.
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.
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 on 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 a
subcontractor experiences capacity constraints or financial difficulties, suffers damage to their
facilities, experiences 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.
Our investment securities portfolio could experience a decline in market value, which could
materially and adversely affect our financial results.
As of December 26, 2010, we held short-term investment securities totaling $236.9 million. We
invest 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. For example, in the past we have 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.
26
Table of Contents
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. 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 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 examination of our income tax returns by the United States Internal
Revenue Service (IRS) and other tax authorities which may result in the assessment of additional
income taxes, and our federal consolidated income tax returns for fiscal years 2008 and 2009 are
currently under examination by the IRS. We regularly assess the likelihood of adverse outcomes
resulting from examinations to determine the adequacy of our provisions for income taxes. However,
unanticipated outcomes from examinations could have a
material adverse effect on our financial condition or results of operations.
27
Table of Contents
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 55% and 54% of our net revenues for the nine months ended
December 26, 2010 and December 27, 2009, 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 outside of the United States; | |
| currency fluctuations; | |
| overlapping or differing tax structures; | |
| political and economic instability, including terrorism and war; and | |
| general trade restrictions. |
As of December 26, 2010, our international subsidiaries held 60% of our total cash, cash
equivalents and investment securities. These holdings by our international subsidiaries consist
primarily of debt securities due from U.S. issuers, including the U.S. government and related
agencies, and U.S. dollar denominated cash and money market funds. 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.
28
Table of Contents
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.
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 could
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.
29
Table of Contents
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. Simon Biddiscombe, our former Chief
Financial Officer, was recently appointed Chief Executive Officer and
H. K. Desai, our former Chief Executive Officer, was appointed
Executive Chairman. Our retention
of both Mr. Biddiscombe and Mr. Desai and the management of this leadership transition are
particularly important to our business. In addition, we are currently conducting a search for a
new Chief Financial Officer to replace Mr. Biddiscombe. If we lose the services of Mr.
Biddiscombe, Mr. Desai or other key personnel, fail to effectively manage this executive transition or do not
hire or retain other 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 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. 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
30
Table of Contents
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), that
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 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 distributing 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 these regulations or standards, once developed,
will not fully address the complexity of the technology developed by the IT industry or will favor
certain technological approaches that we do not currently utilize. 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.
31
Table of Contents
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In August 2010, our Board of Directors approved a program to repurchase up to $200 million of
our common stock over a two-year period. Set forth below is information regarding our stock
repurchases made during the third quarter of fiscal 2011 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 Plans | Under the Plans | ||||||||||||
September 27, 2010 October 24, 2010 |
578,300 | $ | 17.27 | 578,300 | $ | 171,014,000 | ||||||||||
October 25, 2010 November 21, 2010 |
565,400 | $ | 17.68 | 565,400 | $ | 161,016,000 | ||||||||||
November 22, 2010 December 26, 2010 |
648,300 | $ | 17.74 | 648,300 | $ | 149,513,000 | ||||||||||
1,792,000 | $ | 17.57 | 1,792,000 | $ | 149,513,000 | |||||||||||
We previously purchased 1.2 million shares under the August 2010 program for an aggregate
purchase price of $19.0 million.
32
Table of Contents
Item 6. Exhibits
Exhibits |
Exhibit No. | ||||
10.1 | Amendment to Change in Control Severance Agreement,
effective November 15, 2010, by and between QLogic
Corporation and Simon Biddiscombe.* (incorporated by
reference to Exhibit 10.1 of the Registrants Current
Report on Form 8-K filed on October 21, 2010) |
|||
10.2 | Employment Agreement, effective November 15, 2010, by and
between QLogic Corporation and H.K. Desai.* (incorporated
by reference to Exhibit 10.2 of the Registrants Current
Report on Form 8-K filed on October 21, 2010) |
|||
10.3 | Amendment to Change in Control Severance Agreement,
effective November 15, 2010, by and between QLogic
Corporation and H.K. Desai.* (incorporated by reference to
Exhibit 10.3 of the Registrants Current Report on Form
8-K filed on October 21, 2010) |
|||
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. |
33
Table of Contents
SIGNATURES
Pursuant to the requirements 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/ SIMON BIDDISCOMBE | |||||
Simon Biddiscombe | ||||||
President and Chief Executive Officer |
||||||
By: | /s/ DOUGLAS D. NAYLOR | |||||
Douglas D. Naylor | ||||||
Vice President of Finance and Interim Chief Financial Officer (Principal Financial and Accounting Officer) |
Date: February 2, 2011
34
Table of Contents
EXHIBIT INDEX
Exhibit No. | ||||
10.1 | Amendment to Change in Control Severance Agreement,
effective November 15, 2010, by and between QLogic
Corporation and Simon Biddiscombe.* (incorporated by
reference to Exhibit 10.1 of the Registrants Current
Report on Form 8-K filed on October 21, 2010) |
|||
10.2 | Employment Agreement, effective November 15, 2010, by and
between QLogic Corporation and H.K. Desai.* (incorporated
by reference to Exhibit 10.2 of the Registrants Current
Report on Form 8-K filed on October 21, 2010) |
|||
10.3 | Amendment to Change in Control Severance Agreement,
effective November 15, 2010, by and between QLogic
Corporation and H.K. Desai.* (incorporated by reference to
Exhibit 10.3 of the Registrants Current Report on Form
8-K filed on October 21, 2010) |
|||
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. |
35