MIME-Version: 1.0 X-Document-Type: Workbook Content-Type: multipart/related; boundary="----=_NextPart_d396c29c_a1fb_43bd_8318_263a1415dfe9" This document is a Single File Web Page, also known as a Web Archive file. If you are seeing this message, your browser or editor doesn't support Web Archive files. Please download a browser that supports Web Archive, such as Microsoft Internet Explorer. ------=_NextPart_d396c29c_a1fb_43bd_8318_263a1415dfe9 Content-Location: file:///C:/d396c29c_a1fb_43bd_8318_263a1415dfe9/Workbook.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
This page should be opened with Microsoft Excel XP or newer.------=_NextPart_d396c29c_a1fb_43bd_8318_263a1415dfe9 Content-Location: file:///C:/d396c29c_a1fb_43bd_8318_263a1415dfe9/Worksheets/Sheet01.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
|Document and Entity Information
||6 Months Ended|
|Mar. 31, 2011
||May 03, 2011
|Document and Entity Information|
|Document Period End Date||Mar 31, 2011|
|Document Fiscal Year Focus||2011|
|Document Fiscal Period Focus||Q2|
|Entity Registrant Name||F5 NETWORKS INC|
|Entity Central Index Key||0001048695|
|Current Fiscal Year End Date||--09-30|
|Entity Filer Category||Large Accelerated Filer|
|Entity Common Stock, Shares Outstanding||81,111,096|
|Consolidated Balance Sheets (USD $)
|6 Months Ended||12 Months Ended|
|Mar. 31, 2011
||Sep. 30, 2010
|Cash and cash equivalents||$ 206,215||$ 168,754|
|Accounts receivable, net of allowances of $2,652 and $4,319||142,903||112,132|
|Deferred tax assets||8,759||8,767|
|Other current assets||45,767||37,745|
|Total current assets||690,839||605,955|
|Property and equipment, net||37,533||34,157|
|Deferred tax assets||39,608||37,864|
|Other assets, net||13,923||15,946|
|LIABILITIES AND SHAREHOLDERS' EQUITY|
|Total current liabilities||342,085||287,085|
|Other long-term liabilities||18,952||16,153|
|Deferred revenue, long-term||65,183||55,256|
|Total long-term liabilities||84,135||71,409|
|Commitments and contingencies (Note 5)|
|Preferred stock, no par value; 10,000 shares authorized, no shares outstanding|
|Common stock, no par value; 200,000 shares authorized, 80,709 and 80,355 shares issued and outstanding||515,973||517,215|
|Accumulated other comprehensive loss||(4,632)||(3,241)|
|Total shareholders' equity||1,112,303||1,003,698|
|Total liabilities and shareholders' equity||$ 1,538,523||$ 1,362,192|
|Consolidated Balance Sheets (Parenthetical) (USD $)
|Mar. 31, 2011
||Sep. 30, 2010
|Consolidated Balance Sheets|
|Accounts receivable, allowances||$ 2,652||$ 4,319|
|Preferred stock, par value|
|Preferred stock, shares authorized||10,000||10,000|
|Preferred stock, shares outstanding||0||0|
|Common stock, par value|
|Common stock, shares authorized||200,000||200,000|
|Common stock, shares issued||80,709||80,355|
|Common stock, shares outstanding||80,709||80,355|
|Consolidated Income Statements (USD $)
In Thousands, except Per Share data
|3 Months Ended||6 Months Ended|
|Mar. 31, 2011
||Mar. 31, 2010
||Mar. 31, 2011
||Mar. 31, 2010
|Products||$ 173,710||$ 129,559||$ 345,202||$ 248,777|
|Cost of net revenues|
|Sales and marketing||89,332||69,644||176,157||135,286|
|Research and development||34,507||29,134||67,113||55,854|
|General and administrative||19,846||16,016||40,530||31,969|
|Income from operations||83,214||49,858||163,070||93,570|
|Other income, net||1,568||2,291||4,113||3,996|
|Income before income taxes||84,782||52,149||167,183||97,566|
|Provision for income taxes||29,207||19,005||55,945||35,143|
|Net income||$ 55,575||$ 33,144||$ 111,238||$ 62,423|
|Net income per share - basic||$ 0.69||$ 0.42||$ 1.38||$ 0.79|
|Weighted average shares - basic||80,809||79,394||80,726||79,147|
|Net income per share - diluted||$ 0.68||$ 0.41||$ 1.36||$ 0.77|
|Weighted average shares - diluted||81,622||80,737||81,670||80,630|
|Consolidated Statement of Shareholders' Equity (USD $)
|Common Stock [Member]
||Accumulated Other Comprehensive Income/(Loss) [Member]
||Retained Earnings [Member]
|Balance at Sep. 30, 2010||$ 517,215||$ (3,241)||$ 489,724||$ 1,003,698|
|Balance, shares at Sep. 30, 2010||80,355||80,355|
|Exercise of employee stock options||1,807||1,807|
|Exercise of employee stock options, shares||115|
|Issuance of stock under employee stock purchase plan||7,418||7,418|
|Issuance of stock under employee stock purchase plan, shares||123|
|Issuance of restricted stock, shares||719|
|Repurchase of common stock||(71,526)||(71,526)|
|Repurchase of common stock, shares||(603)|
|Tax benefit from employee stock transactions||16,353||16,353|
|Foreign currency translation adjustment||(428)|
|Unrealized loss on securities, net of tax||(963)|
|Balance at Mar. 31, 2011||$ 515,973||$ (4,632)||$ 600,962||$ 1,112,303|
|Balance, shares at Mar. 31, 2011||80,709||80,709|
|Consolidated Statements of Cash Flows (USD $)
|6 Months Ended|
|Mar. 31, 2011
||Mar. 31, 2010
|Net income||$ 111,238||$ 62,423|
|Adjustments to reconcile net income to net cash provided by operating activities:|
|Realized gain on disposition of assets and investments||(182)||(13)|
|Provisions for doubtful accounts and sales returns||(14)||1,257|
|Depreciation and amortization||10,536||12,088|
|Deferred income taxes||(1,080)||5,340|
|Loss on auction rate securities put option||19|
|Gain on trading auction rate securities||(19)|
|Changes in operating assets and liabilities, net of amounts acquired:|
|Other current assets||(7,798)||(4,481)|
|Accounts payable and accrued liabilities||13,253||(13,283)|
|Net cash provided by operating activities||194,368||151,912|
|Purchases of investments||(441,160)||(331,410)|
|Sales and maturities of investments||342,207||230,595|
|Investment of restricted cash||38||(22)|
|Acquisition of intangible assets, net||(80)|
|Purchases of property and equipment||(11,704)||(6,840)|
|Net cash used in investing activities||(110,699)||(107,677)|
|Excess tax benefits from stock-based compensation||16,286||9,700|
|Proceeds from the exercise of stock options and purchases of stock under employee stock purchase plan||9,218||19,149|
|Repurchase of common stock||(71,526)||(35,000)|
|Net cash used in financing activities||(46,022)||(6,151)|
|Net increase in cash and cash equivalents||37,647||38,084|
|Effect of exchange rate changes on cash and cash equivalents||(186)||(397)|
|Cash and cash equivalents, beginning of period||168,754||110,837|
|Cash and cash equivalents, end of period||$ 206,215||$ 148,524|
|Summary of Significant Accounting Policies
||6 Months Ended|
|Mar. 31, 2011
|Summary of Significant Accounting Policies|
|Summary of Significant Accounting Policies||
1. Summary of Significant Accounting Policies
Description of Business
F5 Networks, Inc. (the "Company") provides products and services to help companies manage their Internet Protocol (IP) traffic and file storage infrastructure efficiently and securely. The Company's application delivery networking products improve the performance, availability and security of applications on Internet-based networks. Internet traffic between network-based applications and clients passes through these devices where the content is inspected to ensure that it is safe and modified as necessary to ensure that it is delivered securely and in a way that optimizes the performance of both the network and the applications. The Company's storage virtualization products simplify and reduce the cost of managing files and file storage devices, and ensure fast, secure, easy access to files for users and applications. The Company also offers a broad range of services that include consulting, training, maintenance and other technical support services.
Basis of Presentation
The year end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for their fair statement in conformity with accounting principles generally accepted in the United States of America. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. The information included in this Form 10-Q should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2010.
Certain reclassifications have been made to the prior year's financial statements to conform to the fiscal year 2011 presentation. Such reclassifications did not affect total revenues, operating income or net income.
The Company sells products through distributors, resellers, and directly to end users. Revenue is recognized provided that all of the following criteria have been met:
Persuasive evidence of an arrangement exists. Evidence of an arrangement generally consists of a purchase order issued pursuant to the terms and conditions of a distributor, reseller or end user agreement.
Delivery has occurred. The Company uses shipping or related documents, or written evidence of customer acceptance, when applicable, to verify delivery or completion of any performance terms.
The sales price is fixed or determinable. The Company assesses whether the sales price is fixed or determinable based on payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.
Collectability is reasonable assured. The Company assesses collectability primarily based on the creditworthiness of the customer as determined by credit checks and related analysis, as well as the Customer's payment history.
In certain regions where the Company does not have the ability to reasonably estimate returns, the Company defers revenue on sales to its distributors until they have received information from the channel partner indicating that the product has been sold to the end-user customer. Payment terms to domestic customers are generally net 30 days to net 45 days. Payment terms to international customers range from net 30 days to net 120 days based on normal and customary trade practices in the individual markets. The Company offers extended payment terms to certain customers, in which case, revenue is recognized when payments are due.
Whenever product, training services and post-contract customer support ("PCS") elements are sold together, a portion of the sales price is allocated to each element based on their respective fair values as determined when the individual elements are sold separately. Revenue from the sale of products is recognized when the product has been shipped and the customer is obligated to pay for the product. When rights of return are present and the Company cannot estimate returns, it recognizes revenue when such rights of return lapse. Revenues for PCS are recognized on a straight-line basis over the service contract term. PCS includes a limited period of telephone support updates, repair or replacement of any failed product or component that fails during the term of the agreement, bug fixes and rights to upgrades, when and if available. Consulting services are customarily billed at fixed hourly rates, plus out-of-pocket expenses, and revenues are recognized when the consulting has been completed. Training revenue is recognized when the training has been completed.
In October 2009, the Financial Accounting Standards Board ("FASB") amended the accounting standards for revenue recognition to remove from the scope of industry-specific software revenue recognition guidance any tangible products containing software components and non-software components that operate together to deliver the products essential functionality. In addition, the FASB amended the accounting standards for certain multiple element revenue arrangements to:
The Company adopted this guidance in the first quarter of fiscal year 2011 on a prospective basis for applicable arrangements originating or materially modified after October 1, 2010. The impact of this adoption was not material to the Company's financial position and results of operations for the three and six months ended March 31, 2011.
The majority of the Company's products are hardware appliances which contain software essential to the overall functionality of the products. Accordingly, the Company no longer recognizes revenue on sales of these products in accordance with the industry-specific software revenue recognition guidance.
For all transactions entered into prior to the first quarter of fiscal year 2011 and for sales of nonessential and stand-alone software after October 1, 2010, the Company allocates revenue for arrangements with multiple elements based on the software revenue recognition guidance. Software revenue recognition guidance requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of those elements. The fair value of an element must be based on VSOE. Where fair value of certain elements is not available, revenue is recognized on the "residual method" based on the fair value of undelivered elements. If evidence of the fair value of one or more undelivered elements does not exist, all revenue is deferred and recognized at the earlier of the delivery of those elements or the establishment of fair value of the remaining undelivered elements.
For transactions entered into subsequent to the adoption of the amended revenue recognition standards that are multiple-element arrangements, the arrangement consideration is allocated to each element based on the relative selling prices of all of the elements in the arrangement using the fair value hierarchy in the amended revenue recognition guidance.
Consistent with the methodology used under the previous accounting guidance, the Company establishes VSOE for its products, training services, PCS and consulting services based on the sales price charged for each element when sold separately. The sales price is discounted from the applicable list price based on various factors including the type of customer, volume of sales, geographic region and program level. The Company's list prices are generally not fair value as discounts may be given based on the factors enumerated above. The Company believes that the fair value of its consulting services is represented by the billable consulting rate per hour, based on the rates they charge customers when they purchase standalone consulting services. The price of consulting services is not based on the type of customer, volume of sales, geographic region or program level.
The Company uses historical sales transactions to determine whether VSOE can be established for each of the elements. In most instances, VSOE of fair value is the sales price of actual standalone (unbundled) transactions within the past 12 month period that are priced within a reasonable range, which the Company has determined to be plus or minus 15% of the median sales price of each respective price list.
VSOE of PCS is based on standalone sales since the Company does not provide stated renewal rates to its customers. In accordance with the Company's PCS pricing practice (supported by standalone renewal sales), renewal contracts are priced as a percentage of the undiscounted product list price. The PCS renewal percentages may vary, depending on the type and length of PCS purchased. The Company offers standard and premium PCS, and the term generally ranges from one to three years. The Company employs a bell-shaped-curve approach in evaluating VSOE of fair value of PCS. Under this approach, the Company considers VSOE of the fair value of PCS to exist when a substantial majority of its standalone PCS sales fall within a narrow range of pricing.
The Company is typically not able to determine TPE for its products or services. TPE is determined based on competitor prices for similar elements when sold separately. Generally, the Company's go-to-market strategy differs from that of other competitive products or services in its markets and the Company's offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine the selling prices on a stand-alone basis of similar products offered by its competitors.
When the Company is unable to establish selling price of its non-software elements using VSOE or TPE, the Company uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company determines BESP for a product or service by considering multiple factors including, but not limited to, cost of products, gross margin objectives, pricing practices, geographies, customer classes and distribution channels.
The Company has established and regularly validates the VSOE of fair value and BESP for elements in its multiple element arrangements. The Company accounts for taxes collected from customers and remitted to governmental authorities on a net basis and excluded from revenues.
Goodwill represents the excess purchase price over the estimated fair value of net assets acquired as of the acquisition date. The Company tests goodwill for impairment on an annual basis and between annual tests when impairment indicators are identified, and goodwill is written down when impaired. Goodwill was recorded in connection with the acquisition of Acopia Networks, Inc. in fiscal year 2007, Swan Labs, Inc. in fiscal year 2006, MagniFire Websystems, Inc. in fiscal year 2004 and uRoam, Inc. in fiscal year 2003.
The Company performs its annual goodwill impairment test during the second fiscal quarter, or whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. The first step of the test identifies whether potential impairment may have occurred, while the second step of the test measures the amount of the impairment, if any. Impairment is recognized when the carrying amount of goodwill exceeds its fair value. For its annual goodwill impairment analysis, the Company operates under one reporting unit. The Company determined the fair value of its reporting unit based on the Company's enterprise value. In March 2011, the Company completed its annual impairment test and concluded there was no impairment of goodwill.
The Company accounts for stock-based compensation using the straight-line attribution method for recognizing compensation expense. The Company recognized $21.8 million and $16.5 million of stock-based compensation expense for the three months ended March 31, 2011 and 2010, respectively, and $44.7 million and $33.6 million for the six months ended March 31, 2011 and 2010, respectively. As of March 31, 2011, there was $70.2 million of total unrecognized stock-based compensation cost, the majority of which will be recognized over the next two years. Going forward, stock-based compensation expenses may increase as the Company issues additional equity-based awards to continue to attract and retain key employees.
The Company issues incentive awards to its employees through stock-based compensation consisting of restricted stock units ("RSUs"). On August 2, 2010, the Company awarded approximately 910,000 RSUs to employees and executive officers pursuant to the Company's annual equity and retention awards programs. The value of RSUs is determined using the fair value method, which in this case, is based on the number of shares granted and the quoted price of the Company's common stock on the date of grant.
The Company recognizes compensation expense for only the portion of restricted stock units that are expected to vest. Therefore, the Company applies estimated forfeiture rates that are derived from historical employee termination behavior. Based on historical differences with forfeitures of stock-based awards granted to the Company's executive officers and Board of Directors versus grants awarded to all other employees, the Company has developed separate forfeiture expectations for these two groups. The Company's estimated forfeiture rate in the second quarter of fiscal year 2011 is 2.7% for grants awarded to the Company's executive officers and Board of Directors, and 9.7% for grants awarded to all other employees. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.
In August 2010, the Company granted 181,334 and 83,000 RSUs to certain current executive officers as part of the annual equity and retention awards programs, respectively. Fifty percent of the aggregate number of RSUs granted as part of the annual equity awards program vest in equal quarterly increments over three years, until such portion of the grant is fully vested on August 1, 2013.
One-sixth of the annual equity awards RSU grant, or a portion thereof, is subject to the Company achieving specified quarterly revenue and EBITDA goals during the period beginning in the fourth quarter of fiscal year 2010 through the third quarter of fiscal year 2011. In each case, 50% of the quarterly performance stock grant is based on achieving at least 80% of the quarterly revenue goal and the other 50% is based on achieving at least 80% of the quarterly EBITDA goal. The quarterly performance stock grant is paid linearly above 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement threshold and 100% over-achievement threshold. The remaining 33.33% of this annual equity awards RSU grant shall be subject to performance based vesting for each of the four quarter periods beginning with the fourth quarters of fiscal years 2011 and 2012 (16.66% in each period). The Compensation Committee of the Board of Directors will set applicable performance targets and vesting formulas for each of these periods. All RSUs granted as part of the retention awards program fully vest on August 1, 2013.
In August 2009, the Company granted 420,000 RSUs to certain current executive officers. Fifty percent of the aggregate number of RSUs granted at such time vest in equal quarterly increments over two years, until such portion of the grant is fully vested on August 1, 2011. Twenty-five percent of the RSU grant, or a portion thereof, was subject to the Company achieving specified quarterly revenue and EBITDA goals during the period beginning in the fourth quarter of fiscal year 2009 through the third quarter of fiscal year 2010 and the remaining twenty-five percent is subject to the Company achieving specified quarterly revenue and EBITDA goals during the period beginning in the fourth quarter of fiscal year 2010 through the third quarter of fiscal year 2011. In each case, 50% of the quarterly performance stock grant is based on achieving at least 80% of the quarterly revenue goal and the other 50% is based on achieving at least 80% of the quarterly EBITDA goal. The quarterly performance stock grant is paid linearly above 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement threshold and 100% over-achievement threshold.
The Company recognizes compensation costs for awards with performance conditions when it concludes it is probable that the performance condition will be achieved. The Company reassesses the probability of vesting at each balance sheet date and adjusts compensation costs based on the probability assessment.
Common Stock Repurchase
On October 22, 2008, the Company announced that its Board of Directors approved a program to repurchase up to an additional $200 million of the Company's outstanding common stock. As of September 30, 2010, the Company had $37.6 million remaining to purchase shares as part of this repurchase program. On October 26, 2010, the Company announced that its Board of Directors approved a new program to repurchase up to an additional $200 million of the Company's outstanding common stock. Acquisitions for the share repurchase programs will be made from time to time in private transactions or open market purchases as permitted by securities laws and other legal requirements. The programs can be terminated at any time. As of May 3, 2011, the Company had repurchased and retired 5,134,929 shares at an average price of $45.51 per share and the Company had $166.0 million remaining to purchase shares as part of its repurchase programs.
Earnings Per Share
Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. The Company's nonvested restricted stock awards and restricted stock units do not have nonforfeitable rights to dividends or dividend equivalents.
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data):
An immaterial amount of common shares potentially issuable from stock options for the three and six months ended March 31, 2011 and 2010, are excluded from the calculation of diluted earnings per share because the exercise price was greater than the average market price of common stock for the respective periods.
Comprehensive income includes certain changes in equity that are excluded from net income. Specifically, unrealized gains (losses) on securities and foreign currency translation adjustments are included in accumulated other comprehensive loss. Comprehensive income and its components were as follows (in thousands):
Recent Accounting Pronouncements
Management believes there have been no significant changes during the six months ended March 31, 2011, to the items disclosed as recently adopted accounting pronouncements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year ended September 30, 2010. For a further discussion, refer to the "Recent Accounting Pronouncements" discussion contained therein.
|Fair Value Measurements
||6 Months Ended|
|Mar. 31, 2011
|Fair Value Measurements|
|Fair Value Measurements||
2. Fair Value Measurements
In accordance with the authoritative guidance on fair value measurements and disclosure under GAAP, the Company determines fair value using a fair value hierarchy that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity, and the reporting entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances and expands disclosure about fair value measurements.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date, essentially the exit price.
The levels of fair value hierarchy are:
Level 1: Quoted prices in active markets for identical assets and liabilities at the measurement date.
Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Unobservable inputs for which there is little or no market data available. These inputs reflect management's assumptions of what market participants would use in pricing the asset or liability.
Level 1 investments are valued based on quoted market prices in active markets and include the Company's cash equivalent investments. Level 2 investments, which include investments that are valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency, include the Company's corporate bonds and notes, municipal bonds and notes and U.S. government securities. Fair values for the Company's level 2 investments are based on similar assets without applying significant judgments. In addition, all of the Company's level 2 investments have a sufficient level of trading volume to demonstrate that the fair values used are appropriate for these investments.
A financial instrument's level within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes "observable" requires significant judgment by the Company. The Company considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.
The Company's financial assets measured at fair value on a recurring basis subject to the disclosure requirements at March 31, 2011, were as follows (in thousands):
The Company's financial assets measured at fair value on a recurring basis subject to the disclosure requirements at September 30, 2010, were as follows (in thousands):
Due to the auction failures of the Company's auction rate securities ("ARS") that began in the second quarter of fiscal year 2008, there are still no quoted prices in active markets for similar assets as of March 31, 2011. Therefore, the Company has classified its ARS as level 3 financial assets. The following table provides a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3) (in thousands):
Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable or there is limited market activity such that the determination of fair value requires significant judgment or estimation. Level 3 investment securities primarily include certain ARS for which there was a decrease in the observation of market pricing. At March 31, 2011, the values of these securities were estimated primarily using discounted cash flow analysis that incorporated transaction details such as contractual terms, maturity, timing and amount of future cash flows, as well as assumptions about liquidity and credit valuation adjustments of marketplace participants at March 31, 2011.
The Company uses the fair value hierarchy for financial assets and liabilities. The Company's non-financial assets and liabilities, which include goodwill, intangible assets, and long-lived assets, are not required to be carried at fair value on a recurring basis. These non-financial assets and liabilities are measured at fair value on a non-recurring basis when there is an indicator of impairment, and they are recorded at fair value only when impairment is recognized. The Company reviews goodwill and intangible assets for impairment annually, during the second quarter of each fiscal year, or as circumstances indicate the possibility of impairment. The Company monitors the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate its carrying amount may not be recoverable. During the three months ended March 31, 2011, the Company did not recognize any impairment charges related to goodwill, intangible assets, or long-lived assets.
|Short-Term and Long-Term Investments
||6 Months Ended|
|Mar. 31, 2011
|Short-Term and Long-Term Investments|
|Short-Term and Long-Term Investments||
3. Short-Term and Long-Term Investments
Short-term investments consist of the following (in thousands):
Long-term investments consist of the following (in thousands):
The amortized cost and fair value of fixed maturities at March 31, 2011, by contractual years-to-maturity, are presented below (in thousands):
The cost or amortized cost values of the Company's fixed maturities include $19.0 million of available-for-sale ARS as of March 31, 2011 and September 30, 2010.
The following table summarizes investments that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for more than 12 months as of March 31, 2011 (in thousands):
The Company invests in securities that are rated investment grade or better. The unrealized losses on investments for the first six months of fiscal year 2011 were primarily caused by reductions in the values of the ARS due to the illiquid markets and were partially offset by unrealized gains related to interest rate decreases.
ARS are variable-rate debt securities. The Company limits its investments in ARS to securities that carry an AAA/A- (or equivalent) rating from recognized rating agencies and limits the amount of credit exposure to any one issuer. At the time of the Company's initial investment and at the date of this report, all ARS were in compliance with the Company's investment policy. In the past, the auction process allowed investors to obtain immediate liquidity if so desired by selling the securities at their face amounts. Liquidity for these securities has historically been provided by an auction process that resets interest rates on these investments on average every 7-35 days. However, as has been reported in the financial press, the disruptions in the credit markets adversely affected the auction market for these types of securities.
Beginning in February 2008, auctions failed for approximately $53.4 million in par value of municipal ARS the Company held because sell orders exceeded buy orders. The funds associated with failed auctions will not be accessible until the issuer calls the security, a successful auction occurs, a buyer is found outside the auction process or the security otherwise matures.
||6 Months Ended|
|Mar. 31, 2011
The Company outsources the manufacturing of its pre-configured hardware platforms to contract manufacturers, who assemble each product to the Company's specifications. As protection against component shortages and to provide replacement parts for its service teams, the Company also stocks limited supplies of certain key product components. The Company reduces inventory to net realizable value based on excess and obsolete inventories determined primarily by historical usage and forecasted demand. Inventories consist of hardware and related component parts and are recorded at the lower of cost or market (as determined by the first-in, first-out method).
Inventories consist of the following (in thousands):
|Commitments and Contingencies
||6 Months Ended|
|Mar. 31, 2011
|Commitments and Contingencies|
|Commitments and Contingencies||
5. Commitments and Contingencies
Guarantees and Product Warranties
In the normal course of business to facilitate sales of its products, the Company indemnifies other parties, including customers, resellers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the other party harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. The Company has entered into indemnification agreements with its officers and directors, and the Company's bylaws contain similar indemnification obligations to the Company's agents. It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement.
The Company offers warranties of one year for hardware for those customers without service contracts, with the option of purchasing additional warranty coverage in yearly increments. The Company accrues for warranty costs as part of its cost of sales based on associated material product costs and technical support labor costs. Accrued warranty costs as of March 31, 2011 and March 31, 2010 were not material.
The Company currently has arrangements with contract manufacturers and other suppliers for the manufacturing of its products. The arrangement with the primary contract manufacturer allows them to procure component inventory on the Company's behalf based on a rolling production forecast provided by the Company. The Company is obligated to the purchase of component inventory that the contract manufacturer procures in accordance with the forecast, unless they give notice of order cancellation in advance of applicable lead times. As of March 31, 2011, the Company was committed to purchase approximately $13.5 million of such inventory during the next quarter.
Derivative Suits. Beginning on or about May 24, 2006, several derivative actions were filed against certain of the Company's current and former directors and officers. These derivative lawsuits were filed in: (1) the Superior Court of King County, Washington, as In re F5 Networks, Inc. State Court Derivative Litigation (Case No. 06-2-17195-1 SEA), which consolidates Adams v. Amdahl, et al. (Case No. 06-2-17195-1 SEA), Wright v. Amdahl, et al. (Case No. 06-2-19159-5 SEA), and Sommer v. McAdam, et al. (Case No. 06-2-26248-4 SEA) (the "State Court Derivative Litigation"); and (2) in the U.S. District Court for the Western District of Washington, as In re F5 Networks, Inc. Derivative Litigation, Master File No. C06-0794RSL, which consolidated Hutton v. McAdam, et al. (Case No. 06-794RSL), Locals 302 and 612 of the International Union of Operating Engineers-Employers Construction Industry Retirement Trust v. McAdam et al. (Case No. C06-1057RSL), and Easton v. McAdam et al. (Case No. C06-1145RSL) (the "Federal Court Derivative Litigation"). On August 2, 2007, another derivative lawsuit, Barone v. McAdam et al. (Case No. C07-1200P) was filed in the U.S. District Court for the Western District of Washington. The Barone lawsuit was designated a related case to the Federal Court Derivative Litigation on September 4, 2007.
On September 24, 2010, the Company entered into a Stipulation of Settlement (the "Stipulation") in connection with the Federal Court Derivative Litigation. On October 21, 2010, the United States District Court for the Western District of Washington issued an order granting preliminary approval of the settlement resolving the claims asserted by the plaintiffs against the individual defendants. On January 6, 2011 the Court entered a final order approving settlement of the Federal Court Derivative Litigation. Effectiveness of the settlement of the Federal Court Derivative Litigation was conditioned on dismissal of the State Court Derivative Litigation. On January 19, 2011, the Superior Court of King County entered a final order dismissing the State Court Derivative Litigation.
The Company is not aware of any additional pending legal proceedings that, individually or in the aggregate, would have a material adverse effect on the Company's business, operating results, or financial condition. The Company may in the future be party to litigation arising in the ordinary course of business, including claims that we allegedly infringe upon third-party intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.
||6 Months Ended|
|Mar. 31, 2011
6. Income Taxes
The effective tax rate was 34.4% and 36.4% for the three months ended March 31, 2011 and 2010, respectively. The decrease in effective tax rate was primarily due to an increased benefit resulting from the United States Domestic Production Activities deduction.
At March 31, 2011, the Company has classified approximately $8.2 million of unrecognized tax liabilities as a non-current liability. It is reasonably possible that the Company's existing liabilities for uncertain tax benefits may change within the next twelve months primarily due to the progression of audits in progress or the expiration of statutes of limitation. Due to the nature of the various audits, the Company cannot reasonably estimate a range of potential changes in such benefits.
The Company recognizes interest and, if applicable, penalties for any uncertain tax positions. This interest and penalty expense will be a component of income tax expense. For the three and six months ended March 31, 2011, the Company accrued an immaterial amount of interest expense related to its liability for unrecognized tax benefits. All unrecognized tax benefits, if recognized, would affect the effective tax rate.
The Company and its subsidiaries are subject to U.S. federal income tax as well as the income tax of multiple state and foreign jurisdictions. Major jurisdictions where there are wholly owned subsidiaries of F5 Networks, Inc. which require income tax filings include the United Kingdom, Japan, Australia and Germany. The earliest periods open for review by local taxing authorities are fiscal years 2008, 2010, 2007 and 2006 for the United Kingdom, Japan, Australia and Germany, respectively. Within the next four fiscal quarters, the statute of limitations will begin to close on the fiscal years ended 2006 and 2007 tax returns filed in various states and the fiscal year ended 2007 federal income tax return.
|Geographic Sales and Significant Customers
||6 Months Ended|
|Mar. 31, 2011
|Geographic Sales and Significant Customers|
|Geographic Sales and Significant Customers||
7. Geographic Sales and Significant Customers
Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company does business in four main geographic regions: the Americas (primarily the United States); Europe, the Middle East, and Africa (EMEA); Japan; and the Asia Pacific region (APAC). The Company's chief operating decision-making group reviews financial information presented on a consolidated basis accompanied by information about revenues by geographic region. The Company's foreign offices conduct sales, marketing and support activities. Revenues are attributed by geographic location based on the location of the customer. The Company's assets are primarily located in the United States and not allocated to any specific region. Therefore, geographic information is presented only for net revenue.
The following presents revenues by geographic region (in thousands):
One worldwide distributor of the Company's products accounted for 19.6% and 19.2% of total net revenue for the three and six month periods ended March 31, 2011, respectively. Two worldwide distributors accounted for 25.0% and 24.6% of total net revenue for the three and six month periods ended March 31, 2010, respectively. No other distributors accounted for more than 10% of total net revenue.