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EX-31.1 - EX-31.1 - QLOGIC CORPqlgc-ex311_7.htm
EX-31.2 - EX-31.2 - QLOGIC CORPqlgc-ex312_8.htm
EX-10.4 - EX-10.4 - QLOGIC CORPqlgc-ex104_83.htm
EX-10.3 - EX-10.3 - QLOGIC CORPqlgc-ex103_319.htm
EX-32 - EX-32 - QLOGIC CORPqlgc-ex32_6.htm

 

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

For the quarterly period ended September 27, 2015

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)

(949) 389-6000

(Registrant’s 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer þ

 

Accelerated filer o

 

Non-accelerated filer o

 

Smaller reporting company o

 

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  þ

As of October 23, 2015, 83,836,000 shares of the Registrant’s common stock were outstanding.

 

 

 

 

 


QLOGIC CORPORATION

INDEX

PART I. FINANCIAL INFORMATION

 

 

 

 

Page

 

 

 

Item 1.

 

Financial Statements:

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 27, 2015 and March 29, 2015

1

 

 

 

 

 

Condensed Consolidated Statements of Income for the three and six months ended September 27, 2015 and September 28, 2014

2

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended
September 27, 2015 and September 28, 2014

3

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended September 27, 2015 and September 28, 2014

4

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

11

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

18

 

 

 

Item 4.

 

Controls and Procedures

18

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

 

Legal Proceedings

19

 

 

 

Item 1A.

 

Risk Factors

19

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

 

 

Item 6.

 

Exhibits

31

 

 

 

 

 

Signatures

32

 

 

 

 

i


PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

QLOGIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

September 27,

2015

 

 

March 29,

2015

 

 

 

(Unaudited; In thousands,

except share and per

share amounts)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

101,870

 

 

$

115,241

 

Marketable securities

 

 

205,819

 

 

 

201,174

 

Accounts receivable, less allowance for doubtful accounts of $868 and $1,297

   as of September 27, 2015 and March 29, 2015, respectively

 

 

59,217

 

 

 

87,436

 

Inventories

 

 

50,111

 

 

 

29,978

 

Deferred tax assets

 

 

12,023

 

 

 

12,545

 

Other current assets

 

 

17,197

 

 

 

21,802

 

Total current assets

 

 

446,237

 

 

 

468,176

 

Property and equipment, net

 

 

75,279

 

 

 

78,501

 

Goodwill

 

 

167,232

 

 

 

167,232

 

Purchased intangible assets, net

 

 

70,176

 

 

 

77,659

 

Deferred tax assets

 

 

32,853

 

 

 

36,335

 

Other assets

 

 

20,045

 

 

 

20,752

 

 

 

$

811,822

 

 

$

848,655

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

33,063

 

 

$

40,497

 

Accrued compensation

 

 

13,878

 

 

 

22,476

 

Accrued taxes

 

 

1,694

 

 

 

2,711

 

Other current liabilities

 

 

16,174

 

 

 

11,718

 

Total current liabilities

 

 

64,809

 

 

 

77,402

 

Accrued taxes

 

 

15,008

 

 

 

14,516

 

Other liabilities

 

 

7,796

 

 

 

9,721

 

Total liabilities

 

 

87,613

 

 

 

101,639

 

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; 217,782,000 and

   215,549,000 shares issued as of September 27, 2015 and March 29, 2015, respectively

 

 

218

 

 

 

215

 

Additional paid-in capital

 

 

1,004,659

 

 

 

983,579

 

Retained earnings

 

 

1,727,458

 

 

 

1,722,664

 

Accumulated other comprehensive loss

 

 

(661

)

 

 

(99

)

Treasury stock, at cost: 132,557,000 and 128,329,000 shares as of September 27, 2015 and

   March 29, 2015, respectively

 

 

(2,007,465

)

 

 

(1,959,343

)

Total stockholders’ equity

 

 

724,209

 

 

 

747,016

 

 

 

$

811,822

 

 

$

848,655

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

1


QLOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

September 27,

2015

 

 

September 28,

2014

 

 

September 27,

2015

 

 

September 28,

2014

 

 

 

(Unaudited; In thousands, except per share amounts)

 

Net revenues

 

$

103,354

 

 

$

127,503

 

 

$

216,759

 

 

$

246,952

 

Cost of revenues

 

 

42,175

 

 

 

52,093

 

 

 

89,242

 

 

 

100,847

 

Gross profit

 

 

61,179

 

 

 

75,410

 

 

 

127,517

 

 

 

146,105

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Engineering and development

 

 

32,255

 

 

 

35,480

 

 

 

67,861

 

 

 

73,301

 

Sales and marketing

 

 

13,624

 

 

 

15,453

 

 

 

29,110

 

 

 

31,487

 

General and administrative

 

 

4,925

 

 

 

8,697

 

 

 

12,001

 

 

 

17,597

 

Special charges

 

 

8,154

 

 

 

2,259

 

 

 

9,233

 

 

 

4,803

 

Total operating expenses

 

 

58,958

 

 

 

61,889

 

 

 

118,205

 

 

 

127,188

 

Operating income

 

 

2,221

 

 

 

13,521

 

 

 

9,312

 

 

 

18,917

 

Interest and other income, net

 

 

153

 

 

 

296

 

 

 

512

 

 

 

438

 

Income before income taxes

 

 

2,374

 

 

 

13,817

 

 

 

9,824

 

 

 

19,355

 

Income taxes

 

 

136

 

 

 

2,807

 

 

 

5,030

 

 

 

2,345

 

Net income

 

$

2,238

 

 

$

11,010

 

 

$

4,794

 

 

$

17,010

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

 

$

0.13

 

 

$

0.06

 

 

$

0.19

 

Diluted

 

$

0.03

 

 

$

0.12

 

 

$

0.05

 

 

$

0.19

 

Number of shares used in per share calculations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

86,911

 

 

 

87,914

 

 

 

87,122

 

 

 

87,654

 

Diluted

 

 

87,407

 

 

 

88,102

 

 

 

88,160

 

 

 

88,177

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

2


QLOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

September 27,

2015

 

 

September 28,

2014

 

 

September 27,

2015

 

 

September 28,

2014

 

 

 

(Unaudited; In thousands)

 

Net income

 

$

2,238

 

 

$

11,010

 

 

$

4,794

 

 

$

17,010

 

Other comprehensive income (loss), net of income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair value of marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in unrealized gains

 

 

214

 

 

 

(347

)

 

 

(241

)

 

 

(148

)

Net realized losses (gains) reclassified into earnings

 

 

(27

)

 

 

64

 

 

 

(1

)

 

 

127

 

 

 

 

187

 

 

 

(283

)

 

 

(242

)

 

 

(21

)

Foreign currency translation adjustments

 

 

(436

)

 

 

(269

)

 

 

(320

)

 

 

(211

)

Total other comprehensive loss

 

 

(249

)

 

 

(552

)

 

 

(562

)

 

 

(232

)

Comprehensive income

 

$

1,989

 

 

$

10,458

 

 

$

4,232

 

 

$

16,778

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

3


QLOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Six Months Ended

 

 

 

September 27,

2015

 

 

September 28,

2014

 

 

 

(Unaudited; In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

4,794

 

 

$

17,010

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

21,037

 

 

 

23,855

 

Stock-based compensation

 

 

7,921

 

 

 

10,275

 

Deferred income taxes

 

 

4,045

 

 

 

4,077

 

Asset impairments

 

 

1,237

 

 

 

1,011

 

Other non-cash items, net

 

 

98

 

 

 

810

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

28,579

 

 

 

(20,287

)

Inventories

 

 

(20,133

)

 

 

(12,106

)

Other assets

 

 

649

 

 

 

(840

)

Accounts payable

 

 

92

 

 

 

6,162

 

Accrued compensation

 

 

(8,598

)

 

 

(7,256

)

Accrued taxes, net

 

 

(4,785

)

 

 

(3,012

)

Other liabilities

 

 

1,179

 

 

 

(7,930

)

Net cash provided by operating activities

 

 

36,115

 

 

 

11,769

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of available-for-sale securities

 

 

(93,765

)

 

 

(84,318

)

Proceeds from sales and maturities of available-for-sale securities

 

 

87,997

 

 

 

80,376

 

Purchases of property and equipment

 

 

(18,778

)

 

 

(12,068

)

Proceeds from disposition of assets held for sale

 

 

7,553

 

 

 

 

    Net cash used in investing activities

 

 

(16,993

)

 

 

(16,010

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock under stock-based awards

 

 

18,728

 

 

 

3,536

 

Minimum tax withholding paid on behalf of employees for restricted stock units

 

 

(5,566

)

 

 

(3,450

)

Purchases of treasury stock

 

 

(46,770

)

 

 

 

Other financing activities

 

 

1,115

 

 

 

(173

)

Net cash used in financing activities

 

 

(32,493

)

 

 

(87

)

Net decrease in cash and cash equivalents

 

 

(13,371

)

 

 

(4,328

)

Cash and cash equivalents at beginning of period

 

 

115,241

 

 

 

91,258

 

Cash and cash equivalents at end of period

 

$

101,870

 

 

$

86,930

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

4


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 Company’s 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 Company’s Annual Report on Form 10-K for the fiscal year ended March 29, 2015. The results of operations for the three and six months ended September 27, 2015 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 Company’s 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, income taxes, inventories, goodwill and long-lived assets. The actual results experienced by the Company could differ materially from management’s estimates.

 

 

Note 2. Marketable Securities

The Company’s portfolio of available-for-sale marketable securities consists of the following:

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

 

 

(In thousands)

 

September 27, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

75,175

 

 

$

222

 

 

$

(8

)

 

$

75,389

 

Corporate debt obligations

 

 

89,321

 

 

 

89

 

 

 

(143

)

 

 

89,267

 

Mortgage-backed securities

 

 

22,683

 

 

 

151

 

 

 

(42

)

 

 

22,792

 

Municipal bonds

 

 

14,238

 

 

 

52

 

 

 

(3

)

 

 

14,287

 

Other debt securities

 

 

4,078

 

 

 

6

 

 

 

 

 

 

4,084

 

 

 

$

205,495

 

 

$

520

 

 

$

(196

)

 

$

205,819

 

March 29, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

54,279

 

 

$

173

 

 

$

(12

)

 

$

54,440

 

Corporate debt obligations

 

 

99,117

 

 

 

257

 

 

 

(51

)

 

 

99,323

 

Mortgage-backed securities

 

 

26,676

 

 

 

182

 

 

 

(36

)

 

 

26,822

 

Municipal bonds

 

 

16,647

 

 

 

76

 

 

 

(2

)

 

 

16,721

 

Other debt securities

 

 

3,860

 

 

 

8

 

 

 

 

 

 

3,868

 

 

 

$

200,579

 

 

$

696

 

 

$

(101

)

 

$

201,174

 

 

The amortized cost and estimated fair value of debt securities as of September 27, 2015, 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 marketable securities based on their ability to be traded on active markets and availability for current operations.

 

 

 

Amortized

Cost

 

 

Estimated

Fair Value

 

 

 

(In thousands)

 

Due in one year or less

 

$

47,304

 

 

$

47,329

 

Due after one year through three years

 

 

125,140

 

 

 

125,208

 

Due after three years through five years

 

 

19,496

 

 

 

19,631

 

Due after five years

 

 

13,555

 

 

 

13,651

 

 

 

$

205,495

 

 

$

205,819

 

 

 

 

 

5


QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table presents the Company’s marketable securities with unrealized losses by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 27, 2015 and March 29, 2015.

 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

Description of Securities

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

 

(In thousands)

 

September 27, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

17,998

 

 

$

(8

)

 

$

 

 

$

 

 

$

17,998

 

 

$

(8

)

Corporate debt obligations

 

 

48,435

 

 

 

(143

)

 

 

 

 

 

 

 

 

48,435

 

 

 

(143

)

Mortgage-backed securities

 

 

6,944

 

 

 

(32

)

 

 

1,730

 

 

 

(10

)

 

 

8,674

 

 

 

(42

)

Municipal bonds

 

 

1,408

 

 

 

(3

)

 

 

 

 

 

 

 

 

1,408

 

 

 

(3

)

 

 

$

74,785

 

 

$

(186

)

 

$

1,730

 

 

$

(10

)

 

$

76,515

 

 

$

(196

)

March 29, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

16,607

 

 

$

(12

)

 

$

 

 

$

 

 

$

16,607

 

 

$

(12

)

Corporate debt obligations

 

 

28,421

 

 

 

(51

)

 

 

 

 

 

 

 

 

28,421

 

 

 

(51

)

Mortgage-backed securities

 

 

4,174

 

 

 

(8

)

 

 

4,581

 

 

 

(28

)

 

 

8,755

 

 

 

(36

)

Municipal bonds

 

 

921

 

 

 

(2

)

 

 

 

 

 

 

 

 

921

 

 

 

(2

)

 

 

$

50,123

 

 

$

(73

)

 

$

4,581

 

 

$

(28

)

 

$

54,704

 

 

$

(101

)

 

As of September 27, 2015 and March 29, 2015, the fair value of certain of the Company’s available-for-sale securities was less than their cost basis. Management reviewed various factors in determining whether to recognize an impairment charge related to these unrealized losses, including the current financial and credit market environment, the financial condition and near-term prospects of the issuer of the security, the magnitude of the unrealized loss compared to the cost of the investment, the length of time the investment had been in a loss position and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery of market value. As of September 27, 2015 and March 29, 2015, the Company determined that the unrealized losses were temporary in nature and recorded them as a component of accumulated other comprehensive income.

 


 

6


QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Note 3. Fair Value of Financial Instruments

The Company’s financial instruments consist principally of cash and cash equivalents, marketable securities, accounts receivable and accounts payable. The carrying value of cash equivalents, accounts receivable and accounts payable approximates fair value because of the nature and short-term maturity of these financial instruments.

A summary of the assets measured at fair value on a recurring basis as of September 27, 2015 and March 29, 2015 are as follows:

 

 

 

Fair Value Measurements Using

 

 

 

Level 1

 

 

Level 2

 

 

Total

 

 

 

(In thousands)

 

September 27, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

101,870

 

 

$

 

 

$

101,870

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 

75,389

 

 

 

 

 

 

75,389

 

Corporate debt obligations

 

 

 

 

 

89,267

 

 

 

89,267

 

Mortgage-backed securities

 

 

 

 

 

22,792

 

 

 

22,792

 

Municipal bonds

 

 

 

 

 

14,287

 

 

 

14,287

 

Other debt securities

 

 

 

 

 

4,084

 

 

 

4,084

 

 

 

 

75,389

 

 

 

130,430

 

 

 

205,819

 

 

 

$

177,259

 

 

$

130,430

 

 

$

307,689

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 29, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

115,241

 

 

$

 

 

$

115,241

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 

54,440

 

 

 

 

 

 

54,440

 

Corporate debt obligations

 

 

 

 

 

99,323

 

 

 

99,323

 

Mortgage-backed securities

 

 

 

 

 

26,822

 

 

 

26,822

 

Municipal bonds

 

 

 

 

 

16,721

 

 

 

16,721

 

Other debt securities

 

 

 

 

 

3,868

 

 

 

3,868

 

 

 

 

54,440

 

 

 

146,734

 

 

 

201,174

 

 

 

$

169,681

 

 

$

146,734

 

 

$

316,415

 

 

The Company’s 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. The Company obtained documentation from the pricing service as to the methodology and summary of inputs used for the various types of securities. The pricing service maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs. These observable inputs include reported trades and broker/dealer quotes of the same or similar securities, issuer credit spreads, benchmark securities and other observable inputs. The Company compares valuation information from the pricing service with other pricing sources to validate the reasonableness of the valuations.

 

 

Note 4. Inventories

Components of inventories are as follows:

 

 

 

September 27, 2015

 

 

March 29,

2015

 

 

 

(In thousands)

 

Raw materials

 

$

9,099

 

 

$

4,311

 

Finished goods

 

 

41,012

 

 

 

25,667

 

 

 

$

50,111

 

 

$

29,978

 

 

 

 

7


QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Note 5. Special Charges

A summary of the special charges recorded during the three and six months ended September 27, 2015 and September 28, 2014, respectively, including the costs associated with all of the restructuring plans discussed below, is as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

September 27,

2015

 

 

September 28, 2014

 

 

September 27,

2015

 

 

September 28, 2014

 

 

 

(In thousands)

 

Exit costs

 

$

6,917

 

 

$

2,259

 

 

$

7,996

 

 

$

3,292

 

Asset impairments

 

 

1,237

 

 

 

 

 

 

1,237

 

 

 

1,011

 

Other charges

 

 

 

 

 

 

 

 

 

 

 

500

 

 

 

$

8,154

 

 

$

2,259

 

 

$

9,233

 

 

$

4,803

 

 

September 2015 Initiative

In September 2015, the Company commenced a restructuring plan (September 2015 Initiative) designed to align its future operating expenses with its revenue expectations.  The restructuring plan includes a workforce reduction and the consolidation and elimination of certain engineering activities.  

During the three and six months ended September 27, 2015, the Company recorded special charges of $8.1 million related to the September 2015 Initiative, consisting of $6.9 million of exit costs and $1.2 million of asset impairment charges related to property and equipment.  The exit costs consisted entirely of severance and related costs associated with involuntarily terminated employees.  The Company expects to record between $1 million and $2 million of additional charges related to the September 2015 Initiative during fiscal 2016 and expects to substantially complete the related restructuring actions during fiscal 2016.

Activity and liability balances related to the September 2015 Initiative are as follows:

 

 

 

Workforce

Reduction

 

 

 

(In thousands)

 

Charged to costs and expenses

 

$

6,869

 

Payments

 

 

(2,042

)

Balance as of September 27, 2015

 

$

4,827

 

The unpaid exit costs related to the September 2015 Initiative are expected to be paid during fiscal 2016.

May 2015 Initiative

In May 2015, the Company commenced a restructuring plan (May 2015 Initiative) designed to streamline business operations and recorded special charges of $0.7 million during the three months ended June 28, 2015. The special charges consisted entirely of exit costs associated with severance benefits for the involuntarily terminated employees. The Company completed these restructuring activities and all amounts were paid as of September 27, 2015.

March 2014 Initiative

In March 2014, the Company commenced a restructuring plan (March 2014 Initiative) primarily designed to consolidate its Ethernet product roadmap following the acquisition of certain Ethernet controller-related assets. This restructuring plan primarily consisted of a workforce reduction and the consolidation and elimination of certain engineering activities. The Company completed these restructuring activities and all amounts were paid as of March 29, 2015.

During the three and six months ended September 28, 2014, the Company recorded special charges of $2.0 million and $3.7 million, respectively, in connection with the March 2014 Initiative. Special charges for the three months ended September 28, 2014 consisted entirely of exit costs.  Special charges for the six months ended September 28, 2014 consisted of $2.7 million of exit costs

 

8


QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

and $1.0 million of asset impairment charges related to abandoned property and equipment. The exit costs include severance and related costs associated with involuntarily terminated employees.

June 2013 Initiative

In June 2013, the Company commenced a restructuring plan (June 2013 Initiative) designed to enhance product focus and streamline business operations. The restructuring plan includes a workforce reduction and the consolidation and elimination of certain engineering activities. In connection with this plan, the Company ceased development of future application-specific integrated circuits for switch products.

In connection with the June 2013 Initiative, the Company recorded special charges of $0.1 million and $0.5 million during the three and six months ended September 27, 2015, respectively, and $0.3 million and $0.6 million for the three and six months ended September 28, 2014, respectively.  Special charges for all periods consisted entirely of exit costs associated with severance and related costs for involuntarily terminated employees. Certain employees that were notified of their termination are required to provide future services for varying periods in excess of statutory notice periods. Severance costs related to these services are recognized ratably over the estimated requisite service period. The Company expects to incur approximately $1 million of additional severance costs in connection with these employees over the requisite service period.

The aggregate amount of the special charges recorded in connection with the June 2013 Initiative is $25.5 million and consisted of $15.1 million of severance and related costs associated with involuntarily terminated employees, $5.9 million of facilities and other costs and $4.5 million of asset impairment charges primarily related to abandoned property and equipment.

Activity and liability balances for exit costs related to the June 2013 Initiative are as follows:

 

 

 

Workforce

Reduction

 

 

Facilities

and Other

 

 

Total

 

 

 

(In thousands)

 

Balance as of March 29, 2015

 

$

2,476

 

 

$

7,576

 

 

$

10,052

 

Charged to costs and expenses

 

 

479

 

 

 

 

 

 

479

 

Payments

 

 

(984

)

 

 

(1,040

)

 

 

(2,024

)

Balance as of September 27, 2015

 

$

1,971

 

 

$

6,536

 

 

$

8,507

 

 

The total unpaid exit costs related to the June 2013 Initiative are expected to be paid over the terms of the related agreements through fiscal 2018.

A summary of the total unpaid exit costs for all restructuring plans, by classification, included in the condensed consolidated balance sheets is as follows:

 

 

 

September 27,

2015

 

 

March 29,

2015

 

 

 

(In thousands)

 

Other current liabilities

 

$

7,590

 

 

$

3,664

 

Other liabilities

 

 

5,744

 

 

 

7,553

 

 

 

$

13,334

 

 

$

11,217

 

 

 

Note 6. Income Taxes

The Company’s provision for income taxes was $0.1 million and $5.0 million for the three and six months ended September 27, 2015, respectively, and $2.8 million and $2.3 million for the three and six months ended September 28, 2014, respectively. The provision for income taxes for the six months ended September 27, 2015 and September 28, 2014 was impacted by the effect of a discrete tax-related item associated with the difference between stock-based compensation expense and the deduction related to stock-based awards on income tax returns.  The provision for income taxes for the six months ended September 28, 2014 includes a benefit associated with adjustments to previously recognized uncertain tax position liabilities as a result of additional information received during the fiscal period related to these tax positions and certain other discrete items.  The Company’s provision for income taxes is based on the estimated income for the year, the composition of the estimated income in different tax jurisdictions, and the tax effect, if

 

9


QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

any, in the applicable quarterly periods of newly enacted tax legislation, resolution of tax audits, changes in uncertain tax positions, and other discrete tax-related items. The allocation of taxable income to domestic and foreign tax jurisdictions impacts the effective tax rate, as the Company’s income tax rate in foreign jurisdictions is generally lower than its income tax rate in the United States.

 

 

Note 7. Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

September 27,

2015

 

 

September 28,

2014

 

 

September 27,

2015

 

 

September 28,

2014

 

 

 

(In thousands, except per share amounts)

 

Net income

 

$

2,238

 

 

$

11,010

 

 

$

4,794

 

 

$

17,010

 

Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding — basic

 

 

86,911

 

 

 

87,914

 

 

 

87,122

 

 

 

87,654

 

Dilutive potential common shares, using treasury stock method

 

 

496

 

 

 

188

 

 

 

1,038

 

 

 

523

 

Weighted-average shares outstanding — diluted

 

 

87,407

 

 

 

88,102

 

 

 

88,160

 

 

 

88,177

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

 

$

0.13

 

 

$

0.06

 

 

$

0.19

 

Diluted

 

$

0.03

 

 

$

0.12

 

 

$

0.05

 

 

$

0.19

 

 

Stock-based awards, including stock options and restricted stock units, representing 7.3 million and 6.7 million shares of common stock have been excluded from the diluted per share calculations for the three and six months ended September 27, 2015, respectively, and 11.0  million and 11.5  million shares of common stock have been excluded from diluted per share calculations for the three and six months ended September 28, 2014, respectively. These stock-based awards have been excluded from the diluted per share calculations because their effect would have been antidilutive.

 

 

Note 8. Subsequent Events

 

On September 28, 2015, a purported class action was commenced in the U.S. District Court for the Central District of California asserting claims arising under federal securities laws against the Company and certain individual defendants.  The plaintiff purports to represent a class of persons who purchased the Company’s common stock between April 30, 2015 and July 30, 2015.  The plaintiff alleges that the defendants engaged in a scheme to inflate the Company’s stock price by making false and misleading statements regarding the Company’s operations, financial results and future business prospects in violation of federal securities laws.  The plaintiff seeks compensatory damages, interest and an award of reasonable attorneys’ fees and costs.  The Company has not yet been served with the complaint. 

 

On October 23, 2015, Stephen Kramer filed a shareholder derivative complaint in the Orange County, California, Superior Court purportedly on behalf of the Company against certain current and former officers and directors of the Company.  The plaintiff alleges breaches of fiduciary duty, unjust enrichment, corporate waste, aiding and abetting breaches of fiduciary duty, and improper insider sales of stock in violation of California law based on the allegation that, since October 17, 2014, the individual defendants engaged in a scheme to inflate the Company’s stock price by making false and misleading statements regarding the Company’s operations, financial results, internal controls and future business prospects.  The plaintiff seeks an award of damages and restitution to the Company from the individual defendants, disgorgement of the defendants’ profits and compensation, an order requiring the Company to reform and improve its corporate governance, and an award of costs and attorneys’ fees to the plaintiff and its counsel.  The Company has not yet been served with the complaint.  

 

The Company currently believes that the disposition of these matters is not likely to have a material adverse effect on the Company’s financial condition or results of operations.

 

 

 

 

 

 

10


 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations 

This Management’s 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 design and supply high performance server and storage networking connectivity products that provide, enhance and manage computer data communication. These products facilitate the rapid transfer of data and enable efficient resource sharing between servers, networks and storage. Our products are used in enterprise, managed service provider, consumer web, and cloud service provider data centers, along with other environments dependent on high performance, reliable data networking.

Our products are based primarily on Fibre Channel and Ethernet technologies and are used in connection with storage networks, local area networks, and converged networks. Storage networks are used to provide data across enterprise environments. Fibre Channel is currently the dominant technology for enterprise storage networking. Local area networks (LANs) are used to provide workstation-to-server, server-to-server, and server-to-storage connectivity using Ethernet. 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 LANs, using Ethernet speeds of 10Gb per second and greater. Fibre Channel over Ethernet (FCoE) is a converged networking technology that uses an Ethernet LAN for both storage and local area data transmission, thus combining the benefits of Fibre Channel technology with the pervasiveness of Ethernet-based networks. Similarly, Internet Small Computer System Interface (iSCSI) is an alternative to FCoE and provides storage over Ethernet capabilities. Our converged network products can operate individually as 10Gb Ethernet products, FCoE products, iSCSI products, or in combination as multi-protocol products.

We classify our products into two categories – Advanced Connectivity Platforms and Legacy Connectivity Products. Advanced Connectivity Platforms are comprised primarily of adapters and application-specific integrated circuits (ASICs) for server and storage connectivity applications. Legacy Connectivity Products are comprised primarily of Fibre Channel switch products.

Our products are sold worldwide, primarily to original equipment manufacturers (OEMs) and distributors. Our customers rely on our various server and storage connectivity products to deliver solutions to information technology professionals in virtually every business sector. Our products are found primarily in server and storage subsystem solutions that are used by enterprises with critical business data requirements. These products are incorporated in solutions from a number of server and storage system OEM customers, including Cisco Systems, Inc., Dell Inc., EMC Corporation, Fujitsu Ltd., Hewlett-Packard Company, Huawei Technologies Co. Ltd., Inspur Group Co., Ltd., International Business Machines Corporation, Lenovo Group Ltd., NetApp, Inc. and Oracle Corporation.

 

11


 

Second Quarter Financial Highlights

A summary of our financial performance during the second quarter of fiscal 2016 is as follows:

 

Net revenues for the second quarter of fiscal 2016 were $103.4 million compared to $113.4 million in the first quarter of fiscal 2016. Revenues from Advanced Connectivity Platforms were $93.4 million during the second quarter of fiscal 2016 compared to $102.6 million in the first quarter of fiscal 2016. Revenues from Legacy Connectivity Products were $10.0 million in the second quarter of fiscal 2016 compared to $10.8 million in the first quarter of fiscal 2016.

 

Gross profit as a percentage of net revenues increased to 59.2% in the second quarter of fiscal 2016 from 58.5% in the first quarter of fiscal 2016.

 

Operating income for the second quarter of fiscal 2016 was $2.2 million compared to $7.1 million in the first quarter of fiscal 2016. We recorded special charges of $8.2 million during the second quarter of fiscal 2016 and $1.1 million during the first quarter of fiscal 2016.

 

Net income was $2.2 million, or $0.03 per diluted share, in the second quarter of fiscal 2016 compared to net income of $2.6 million, or $0.03 per diluted share in the first quarter of fiscal 2016.

 

Cash, cash equivalents and marketable securities totaled $307.7 million as of September 27, 2015 compared to $308.9 million as of June 28, 2015.

Results of Operations

Net Revenues

A summary of our net revenues by product category is as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

September 27,

2015

 

 

September 28,

2014

 

 

September 27,

2015

 

 

September 28,

2014

 

 

 

(Dollars in millions)

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advanced Connectivity Platforms

 

$

93.4

 

 

$

114.9

 

 

$

195.9

 

 

$

219.6

 

Legacy Connectivity Products

 

 

10.0

 

 

 

12.6

 

 

 

20.9

 

 

 

27.4

 

 

 

$

103.4

 

 

$

127.5

 

 

$

216.8

 

 

$

247.0

 

Percentage of net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advanced Connectivity Platforms

 

 

90

%

 

 

90

%

 

 

90

%

 

 

89

%

Legacy Connectivity Products

 

 

10

 

 

 

10

 

 

 

10

 

 

 

11

 

 

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

 

Historically, the global marketplace for server and storage connectivity solutions has expanded in response to the information requirements of enterprise, managed service provider, consumer web, and cloud service provider data centers, along with other environments dependent on high performance, reliable data networking. 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 for existing products over time.

The market for our Fibre Channel products is mature and has declined during recent periods. The lack of growth in the Fibre Channel market may be the result of a shift in the information technology (IT) data center deployment model, as more enterprise data centers are using private or public clouds to provide a portion of their requirements. This shift has adversely impacted the enterprise server and storage markets. To the extent the Fibre Channel market declines, our quarterly operating results would be negatively impacted. In addition, certain countries around the world have experienced, and are continuing to experience, economic weakness and uncertainty. Political instability in certain regions of the world is significantly contributing to this economic uncertainty. Economic uncertainty is adversely affecting, and in the future may continue to adversely affect, IT spending rates, which may have a negative impact on our revenue and operating results. Further, some of our customers may purchase products strategically in advance of demand to take advantage of favorable pricing or to mitigate risks around product availability. As a result of these and other factors, it is extremely difficult for us to forecast future sales levels and historical information may not be indicative of future trends.

Net revenues of $103.4 million for the three months ended September 27, 2015 decreased from $127.5 million for the three months ended September 28, 2014. The decrease in net revenues was the result of a $21.5 million, or 19%, decrease in revenue from Advanced Connectivity Platforms, and a $2.6 million, or 21%, decrease in revenue from Legacy Connectivity Products. The decrease in revenue from Advanced Connectivity Platforms was primarily due to a decrease in the units sold. The decrease in revenue from Legacy Connectivity Products was also primarily due to a decrease in the units sold. We expect net revenue from our Legacy

 

12


 

Connectivity Products to continue to decline over time. As part of the restructuring plan we implemented in June 2013, we ceased development of future ASICs for switch products; however, we will continue to sell and support products based on the current generation switch ASICs.

Net revenues of $216.8 million for the six months ended September 27, 2015 decreased from $247.0 million for the six months ended September 28, 2014. The decrease in net revenues was the result of a $23.7 million, or 11%, decrease in revenue from Advanced Connectivity Platforms, and a $6.5 million, or 24%, decrease in revenue from Legacy Connectivity Products. The decrease in revenue from Advanced Connectivity Platforms was primarily due to a decrease in the units sold.  The decrease in revenue from Legacy Connectivity Products was also primarily due to a decrease in the units 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 80% and 84% of net revenues during the six months ended September 27, 2015 and September 28, 2014, respectively.

We believe 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

 

 

Six Months Ended

 

 

 

September 27,

2015

 

 

September 28,

2014

 

 

September 27,

2015

 

 

September 28,

2014

 

 

 

(Dollars in millions)

 

United States

 

$

39.0

 

 

$

47.1

 

 

$

74.9

 

 

$

94.4

 

Asia-Pacific and Japan

 

 

43.7

 

 

 

55.5

 

 

 

101.5

 

 

 

105.8

 

Europe, Middle East and Africa

 

 

18.0

 

 

 

20.3

 

 

 

34.7

 

 

 

38.2

 

Rest of world

 

 

2.7

 

 

 

4.6

 

 

 

5.7

 

 

 

8.6

 

 

 

$

103.4

 

 

$

127.5

 

 

$

216.8

 

 

$

247.0

 

 

Revenues by geographic area are presented based upon the ship-to location of the customer, which is not necessarily indicative of the location of the ultimate end-user of our products. The United States, China and Hong Kong are the only countries that represented 10% or more of net revenues during the three and six months ended September 27, 2015. Net revenues from customers in China were $14.9 million and $38.8 million during the three and six months ended September 27, 2015, respectively. Net revenues from customers in Hong Kong were $15.1 million and $26.9 million during the three and six months ended September 27, 2015, respectively. The United States and China are the only countries that represented 10% or more of net revenues during the three and six months ended September 28, 2014. Net revenues from customers in China were $22.2 million and $41.3 million for the three and six months ended September 28, 2014, 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 and other assets. A summary of our gross profit and related percentage of net revenues is as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

September 27,

2015

 

 

September 28,

2014

 

 

September 27,

2015

 

 

September 28,

2014

 

 

 

(Dollars in millions)

 

Gross profit

 

$

61.2

 

 

$

75.4

 

 

$

127.5

 

 

$

146.1

 

Percentage of net revenues

 

 

59.2

%

 

 

59.1

%

 

 

58.8

%

 

 

59.2

%

 

Gross profit for the three months ended September 27, 2015 decreased $14.2 million, or 19%, from gross profit for the three months ended September 28, 2014. The gross profit percentage for the three months ended September 27, 2015 was 59.2%, comparable to the 59.1% for the three months ended September 28, 2014.  The decrease in gross profit was primarily due to a decrease in net revenues.

 

 

13


 

Gross profit for the six months ended September 27, 2015 decreased $18.6 million, or 13%, from gross profit for the six months ended September 28, 2014. The gross profit percentage for the six months ended September 27, 2015 decreased to 58.8% from 59.2% for the corresponding quarter in the prior year. The decrease in gross profit was primarily due to decreased revenues.

Our ability to maintain our current gross profit percentage may be significantly affected by factors such as the mix of products shipped, manufacturing volumes over which fixed costs are absorbed, sales discounts and customer incentives, component costs, 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 and other assets. We anticipate that it will continue to be difficult to reduce manufacturing costs. As a result of these and other factors, our gross profit percentage may vary over time and could decline in future periods.

Operating Expenses

Our operating expenses are summarized in the following table:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

September 27,

2015

 

 

September 28,

2014

 

 

September 27,

2015

 

 

September 28,

2014

 

 

 

(Dollars in millions)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Engineering and development

 

$

32.3

 

 

$

35.5

 

 

$

67.9

 

 

$

73.3

 

Sales and marketing

 

 

13.6

 

 

 

15.4

 

 

 

29.1

 

 

 

31.5

 

General and administrative

 

 

4.9

 

 

 

8.7

 

 

 

12.0

 

 

 

17.6

 

Special charges

 

 

8.2

 

 

 

2.3

 

 

 

9.2

 

 

 

4.8

 

 

 

$

59.0

 

 

$

61.9

 

 

$

118.2

 

 

$

127.2

 

Percentage of net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Engineering and development

 

 

31.2

%

 

 

27.8

%

 

 

31.3

%

 

 

29.7

%

Sales and marketing

 

 

13.2

 

 

 

12.1

 

 

 

13.4

 

 

 

12.8

 

General and administrative

 

 

4.7

 

 

 

6.8

 

 

 

5.5

 

 

 

7.1

 

Special charges

 

 

7.9

 

 

 

1.8

 

 

 

4.3

 

 

 

1.9

 

 

 

 

57.0

%

 

 

48.5

%

 

 

54.5

%

 

 

51.5

%

 

Engineering and Development. Engineering and development expenses consist primarily of compensation and related employee benefit costs, outside service and material costs, occupancy and equipment costs and related computer support costs. During the three months ended September 27, 2015, engineering and development expenses decreased to $32.3 million from $35.5 million for the three months ended September 28, 2014. The decrease was primarily due to a $1.6 million decrease in cash compensation and related employee benefit costs, a $1.1 million decrease in equipment depreciation and maintenance costs, and a $0.7 million decrease in stock-based compensation.

During the six months ended September 27, 2015, engineering and development expenses decreased to $67.9 million from $73.3 million for the six months ended September 28, 2014.  The decrease was primarily due to a $3.7 million decrease in cash compensation and related employee benefit costs and a $1.4 million decrease in equipment depreciation and maintenance costs.  

We believe continued investments in engineering and development activities are critical to achieving future design wins, expansion of our customer base and revenue growth opportunities.

Sales and Marketing. Sales and marketing expenses consist primarily of compensation and related employee benefit costs, sales commissions, promotional activities and travel for sales and marketing personnel. Sales and marketing expenses decreased to $13.6 million for the three months ended September 27, 2015 from $15.4 million for the three months ended September 28, 2014.  The decrease was primarily due to a $1.3 million decrease in cash compensation and related employee benefit costs and a $0.7 million decrease in stock-based compensation.

During the six months ended September 27, 2015, sales and marketing expenses decreased to $29.1 million from $31.5 million for the six months ended September 28, 2014. The decrease was primarily due to a decrease in cash compensation and related employee benefit costs.

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

 

14


 

corporate expenses. General and administrative expenses decreased to $4.9 million for the three months ended September 27, 2015 from $8.7 million for the three months ended September 28, 2014. The decrease was primarily due to a $1.4 million decrease in cash compensation and related employee benefit costs and a $1.4 million decrease in stock-based compensation.

General and administrative expenses decreased to $12.0 million for the six months ended September 27, 2015 from $17.6 million for the six months ended September 28, 2014. The decrease was primarily due to a $2.2 million decrease in cash compensation and related employee benefit costs, a $1.4 million decrease in consulting and outside services and a $1.3 million decrease in stock-based compensation.

Special Charges. During the three and six months ended September 27, 2015, we recorded special charges of $8.2 million and $9.2 million, respectively.  The special charges for the three months ended September 27, 2015 consisted of $7.0 million of exit costs and $1.2 million of asset impairment charges.  The special charges for the six months ended September 27, 2015 consisted of $8.0 million of exit costs and $1.2 million of asset impairment charges.  

During the three and six months ended September 28, 2014, we recorded special charges of $2.3 million and $4.8 million, respectively. The special charges for the three months ended September 28, 2014 consisted entirely of exit costs.  The special charges for the six months ended September 28, 2014 consisted of $3.3 million of exit costs, $1.0 million of asset impairment charges and $0.5 million of other charges.

Exit costs include severance and related costs associated with involuntarily terminated employees. Certain employees that were notified of their termination are required to provide future services for varying periods in excess of statutory notice periods. Severance costs related to these services are recognized ratably over the estimated requisite service period.

In connection with all of our restructuring initiatives, we expect to incur between $2 million and $3 million of additional charges.

The total unpaid exit costs of $13.3 million as of September 27, 2015 are expected to be paid over the terms of the related agreements through fiscal 2018, including $7.6 million during the next twelve months.

 

Income Taxes

Our provision for income taxes was $5.0 million and $2.3 million for the six months ended September 27, 2015 and September 28, 2014, respectively. The increase in the income taxes was primarily due to (i) an increase in a discrete tax-related item associated with the difference between stock-based compensation expense and the deduction related to stock-based awards on income tax returns and (ii) income tax benefits recognized during the six months ended September 28, 2014 due to adjustments to previously recognized uncertain tax position liabilities.

Considering the global scope of our operations and the complexity of global tax and transfer pricing rules and regulations, it is 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 and dispositions, changes to tax laws or regulations, examinations by tax authorities, stock-based compensation, uncertain tax positions and changes in our ability to realize deferred tax assets.

Liquidity and Capital Resources

Our combined balances of cash, cash equivalents and marketable securities decreased to $307.7 million as of September 27, 2015 from $316.4 million as of March 29, 2015. As of September 27, 2015 and March 29, 2015, our international subsidiaries held $251.3 million and $248.0 million, respectively, of our total cash, cash equivalents and marketable securities. These holdings by our international subsidiaries 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. We currently intend to invest the funds held outside of the United States in our international operations and, as a result, do not intend to repatriate these funds. Should we decide to repatriate funds held outside of the United States, we may incur a significant tax obligation.

We believe that existing cash, cash equivalents, marketable 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.

 

15


 

Revolving Credit Facility

We have a credit agreement that provides us with a $125 million unsecured revolving credit facility that matures in March 2018. Borrowings under the credit agreement may be used for general corporate purposes, including permitted share repurchases and acquisitions. Under the credit agreement, we may increase the revolving commitments or obtain incremental term loans in an aggregate amount up to $100 million, subject to certain conditions. There were no borrowings outstanding under the credit agreement as of September 27, 2015.

Operating, Investing and Financing Activities

Cash provided by operating activities increased to $36.1 million for the six months ended September 27, 2015 from $11.8 million for the six months ended September 28, 2014. Operating cash flow for the six months ended September 27, 2015 consisted of our net income of $4.8 million and net non-cash expenses of $34.3 million, partially offset by net cash used as a result of changes in operating assets and liabilities of $3.0 million. Net non-cash expenses consisted primarily of $21.0 million of depreciation and amortization and $7.9 million of stock-based compensation. The changes in operating assets and liabilities during this period consisted primarily of a $20.1 million increase in inventory, an $8.6 million decrease in accrued compensation and a $4.8 million decrease in accrued taxes, net, partially offset by a $28.6 million decrease in accounts receivable.  The increase in inventory was primarily due to product purchases in connection with our transition away from one of our contract manufacturers and in support of anticipated future customer demand, as well as changes in our product fulfillment model.  The decrease in accrued compensation was primarily due to the timing of payment obligations.  The decrease in accrued taxes, net, was primarily due to lower taxable income. The decrease in accounts receivable was primarily due to a decrease in net revenues, as well as the timing of customer shipments and cash collections during the period.

Operating cash flow for the six months ended September 28, 2014 consisted of our net income of $17.0 million and net non-cash expenses of $40.0 million, partially offset by net cash used as a result of changes in operating assets and liabilities of $45.2 million.  The changes in operating assets and liabilities included a $20.3 million increase in accounts receivable, a $12.1 million increase in inventory and a $7.9 million decrease in other liabilities. The increase in accounts receivable was primarily due to customer mix and an increase in revenue, as well as the timing of customer shipments and cash collections during the period.  The increase in inventory was primarily due to product purchases in support of anticipated future customer demand and advanced purchases of ASICs due to long lead times. The decrease in other liabilities was primarily due to the payment of severance and related costs associated with our restructuring plans.  

Cash used in investing activities was $17.0 million for the six months ended September 27, 2015 and consisted of $18.8 million of purchases of property and equipment and $5.8 million of net purchases of available-for-sale securities, partially offset by $7.6 million of proceeds from the disposition of assets held for sale. During the six months ended September 28, 2014, cash used in investing activities was $16.0 million and consisted of $12.1 million of purchases of property and equipment and $3.9 million of net purchases of available-for-sale securities.

We expect capital expenditures to remain significant in the future as we continue to invest in more costly engineering and production tools for new technologies, machinery and equipment, and enhancements to our corporate information technology infrastructure.

Cash used in financing activities was $32.5 million for the six months ended September 27, 2015 and consisted primarily of our purchase of $46.8 million of common stock under our stock repurchase program and $5.6 million for minimum tax withholdings paid on behalf of employees for restricted stock units that vested during the period, partially offset by $18.7 million of proceeds from the issuance of common stock under stock-based awards. During the six months ended September 28, 2014, cash used in financing activities was $0.1 million.

Since fiscal 2003, we have had various stock repurchase programs that authorized the purchase of our outstanding common stock. In October 2014, our Board of Directors approved a program authorizing the purchase of up to $100 million of our outstanding common stock over a period of up to 18 months. As of September 27, 2015, we had repurchased a total of 132.6 million shares of common stock under our stock repurchase programs for an aggregate purchase price of $2.01 billion. Pursuant to the existing stock repurchase program, we are authorized to purchase additional shares with an aggregate cost of up to $29.8 million as of September 27, 2015.

 

16


 

Contractual Obligations and Commitments

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 September 27, 2015, and their impact on our cash flows in future fiscal years, is as follows:

 

 

 

2016

(Remaining

six months)

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

Thereafter

 

 

Total

 

Operating leases

 

$

5.2

 

 

$

6.9

 

 

$

3.7

 

 

$

1.5

 

 

$

1.2

 

 

$

0.5

 

 

$

19.0

 

Non-cancelable purchase obligations

 

 

44.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

44.7

 

 

 

$

49.9

 

 

$

6.9

 

 

$

3.7

 

 

$

1.5

 

 

$

1.2

 

 

$

0.5

 

 

$

63.7

 

 

Our liability for unrecognized tax benefits, including related accrued interest and penalties, was $15.0 million as of September 27, 2015. We are not able to provide a reasonable estimate of the timing of future tax payments related to these obligations.

Goodwill

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. Goodwill is not amortized but instead is tested annually for impairment, or more frequently when events or changes in circumstances indicate that the asset might be impaired, by comparing the carrying value to the fair value of the reporting unit to which the goodwill is assigned. Our most recent annual impairment test was performed as of the first day of our fourth quarter of fiscal 2015. As a result of the decline in our stock price during fiscal 2016, we continue to evaluate the potential impact of that decline to the fair value of our sole reporting unit. We believe the fair value of our sole reporting unit continues to exceed its carrying value. A further decline in our stock price may result in the determination that an interim evaluation of goodwill is appropriate. The outcome of any evaluation of goodwill could result in the recognition of an impairment charge.

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, in making judgments about the carrying values of assets and liabilities.

For a description of the accounting policies that we believe to be our most critical accounting policies and estimates, see Critical Accounting Policies and Estimates included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended March 29, 2015. There have been no material changes in any of our critical accounting policies and estimates during the six months ended September 27, 2015. These accounting policies are significantly affected 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.

Recently Issued Accounting Standards Not Yet Effective

In May 2014, the Financial Accounting Standards Board (FASB) issued an accounting standard update which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance when it becomes effective. In July 2015, the FASB amended the standard to defer the effective date by one year and permit early adoption as of the original effective date. The amended standard is effective for us in the first quarter of fiscal 2019. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the effect this new guidance will have on our consolidated financial statements and related disclosures, and have not yet selected a transition method.

Off-Balance Sheet Arrangements

During the periods presented, we did not have any off-balance sheet arrangements other than operating leases.

 


 

17


 

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 September 27, 2015, the carrying value of our cash and cash equivalents approximates fair value.

We maintain a portfolio of marketable securities consisting primarily of U.S. government and agency securities, corporate debt obligations and mortgage-backed securities, 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 expected duration of our portfolio of marketable securities, 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 marketable securities as of September 27, 2015 consists of $205.8 million of securities, all of which are classified as available-for-sale. As of September 27, 2015, we had gross unrealized losses associated with our available-for-sale securities of $0.2 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 principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Our management evaluated, with the participation of our principal executive officer and principal 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 principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 27, 2015. There was no change in our internal control over financial reporting during our quarter ended September 27, 2015 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

18


 

PART II.

OTHER INFORMATION

Item 1.       Legal Proceedings

On September 28, 2015, a purported class action was commenced in the U.S. District Court for the Central District of California asserting claims arising under federal securities laws against the Company and certain individual defendants.  The plaintiff purports to represent a class of persons who purchased the Company’s common stock between April 30, 2015 and July 30, 2015.  The plaintiff alleges that the defendants engaged in a scheme to inflate the Company’s stock price by making false and misleading statements regarding the Company’s operations, financial results and future business prospects in violation of federal securities laws.  The plaintiff seeks compensatory damages, interest and an award of reasonable attorneys’ fees and costs.  The Company has not yet been served with the complaint.

On October 23, 2015, Stephen Kramer filed a shareholder derivative complaint in the Orange County, California, Superior Court purportedly on behalf of the Company against certain current and former officers and directors of the Company.  The plaintiff alleges breaches of fiduciary duty, unjust enrichment, corporate waste, aiding and abetting breaches of fiduciary duty, and improper insider sales of stock in violation of California law based on the allegation that, since October 17, 2014, the individual defendants engaged in a scheme to inflate the Company’s stock price by making false and misleading statements regarding the Company’s operations, financial results, internal controls and future business prospects.  The plaintiff seeks an award of damages and restitution to the Company from the individual defendants, disgorgement of the defendants’ profits and compensation, an order requiring the Company to reform and improve its corporate governance, and an award of costs and attorneys’ fees to the plaintiff and its counsel.  The Company has not yet been served with the complaint.  

The Company currently believes that the disposition of the matters described above is not likely to have a material adverse effect on the Company’s financial condition or results of operations.

Various other lawsuits, claims and proceedings have been or may be instituted against us. The outcome of litigation cannot be predicted with certainty and some lawsuits, claims and proceedings may be disposed of unfavorably to us. Many intellectual property disputes have a risk of injunctive relief and there can be no assurance that a license will be granted. Injunctive relief could have a material adverse effect on our financial condition or results of operations. Based on an evaluation of such other matters that are pending or asserted, we believe the disposition of such matters will not have a material adverse effect on our financial condition or results of operations.

Item 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 29, 2015, 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 29, 2015.

Our operating results may fluctuate in future periods, which could cause our stock price to decline.

We have experienced, are currently experiencing, and expect to experience in future periods, fluctuations in sales and operating results from quarter to quarter. For example, the market for our Fibre Channel products is mature and has declined during recent periods. The lack of growth in the Fibre Channel market may be the result of a shift in the information technology (IT) data center deployment model, as more enterprise data centers are using private or public clouds to provide a portion of their requirements. This shift has adversely impacted the enterprise server and storage markets. To the extent the Fibre Channel market declines, our quarterly operating results would be negatively impacted.

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. Accordingly, it is extremely difficult for us to forecast future sales levels and historical information may not be indicative of future trends. In addition, there can be no assurance that we will maintain our current gross margins or profitability in the future.

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;

 

server refresh cycles, including the timing, rate of market acceptance and growth in volume shipments of products based on the new technology;

 

19


 

 

industry consolidation among our competitors, our customers or our suppliers; 

 

customer 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 application-specific integrated circuits (ASICs);

 

variations in product development costs, especially related to advanced technologies;

 

variations in operating expenses;

 

impairments of long-lived assets, including goodwill, purchased intangible assets, and property and equipment;

 

changes in effective income tax rates, including those resulting from changes in tax laws;

 

our ability to timely produce products that comply with new environmental restrictions or related requirements of our original equipment manufacturer (OEM) and original design manufacturer (ODM) 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 marketable securities; or

 

changes in accounting rules or our accounting policies.

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 primarily due to product mix.

Our gross margin is expected to vary over time primarily due to product mix. Our gross margins may be adversely affected by numerous factors, including:

 

changes in product mix, including the mix of Fibre Channel and Ethernet product sales;

 

transitions into new markets, which may have lower gross margins;

 

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;

 

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;

 

20


 

 

increased warranty costs; and 

 

acquisitions and dispositions of businesses, technologies or product lines.

A decrease in our gross margin could adversely affect the market price of our common stock.

Our operating results have been, are being, and may in the future be, adversely affected by unfavorable economic conditions.

Certain countries around the world have experienced, and are continuing to experience, economic weakness and uncertainty. Political instability in certain regions of the world is significantly contributing to this economic uncertainty. Economic uncertainty is adversely affecting, and in the future may continue to adversely affect, IT spending rates. For example, certain of our large OEM customers are reporting significant weakness in particular markets and geographies. Reductions in IT spending rates have resulted in reduced sales volumes, and could result in lower prices for our products, longer sales cycles, increased inventory provisions and increased production costs, all of which could negatively impact our results of operations.

As a result of worldwide economic weakness and uncertainty, it is extremely difficult for us and our customers to forecast future revenue levels based on historical information and trends. To the extent that we do not achieve our anticipated level of revenue, our operating results could be adversely affected.

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:

 

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 or 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, which could have a material adverse impact on investor confidence and employee retention.

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, local area and converged networks, and therefore our business is dependent on these markets. Our success in generating revenue in these markets will depend on, among other things, our ability to:

 

educate potential OEM and ODM 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 and ODM 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.

If we are not successful in any or all of these items, our business and results of operations could be materially and adversely affected.

 

21


 

Competition within the markets for products such as ours is intense and includes various established competitors.

The markets for networking connectivity products 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, local area and converged networking, we compete with many companies. In the traditional enterprise storage Fibre Channel adapter and ASIC markets, our primary competitor has historically been Emulex Corporation (Emulex), who was acquired by Avago Technologies Limited (Avago) in May 2015. In the 10Gb Ethernet adapter and ASIC markets, which include converged networking products such as Fibre Channel over Ethernet (FCoE) and Internet Small Computer Systems Interface (iSCSI), we compete primarily with Emulex (now Avago), Mellanox Technologies, Ltd., Chelsio Communications, Inc. and Intel Corporation (Intel). 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.

Some of our competitors, including Avago and Intel, have significantly more engineering, sales and marketing resources than us to dedicate to developing and penetrating markets, offer a much broader portfolio of products to customers, and may have cost advantages over us due to their greater scale of operations. Should these companies successfully leverage these competitive advantages, our business could significantly deteriorate and our results of operations would be materially and adversely affected.

As noted above, Avago acquired Emulex in May 2015 and, as a result, Avago is a competitor in both the Fibre Channel and Ethernet markets. Avago has announced its intention to acquire Broadcom Corporation (Broadcom), which is our primary supplier of Ethernet ASICs. Avago is our primary Fibre Channel ASIC supplier and, if it completes the acquisition of Broadcom, will become our primary Ethernet ASIC supplier. We have long-term supply contracts in place that we believe safeguard our supply of Fibre Channel and Ethernet ASICs. Should our suppliers fail to adhere to the terms of our supply contracts and if the remedies in the contracts fail to adequately protect us, our supply of Fibre Channel and Ethernet ASICs could be at risk or more costly, and our business and results of operations could be materially and adversely affected.

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. If we are unable to design, develop or introduce competitive new products on a timely basis, or if our competitors introduce new products that are more successful than ours in the marketplace, our future operating results may be materially and adversely affected.

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 ASIC design personnel and software developers. Our Chief Executive Officer resigned in August 2015 and we have appointed Jean Hu as Acting Chief Executive Officer and Christine King as Executive Chairman. It is important that we retain key personnel. If we lose the services of key personnel, 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, we have periodically experienced difficulty in attracting and retaining qualified engineers and other technical personnel and anticipate that competition for such personnel will increase 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 equity awards and our employee stock purchase program 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, the guidelines of proxy advisory firms relating to stockholder approval of shares available under equity compensation plans and share usage could make it more difficult for us to obtain such approval and therefore 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 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 for the foreseeable future. Our top ten customers accounted for 80% and 84% of net revenues for the six months ended September 27, 2015 and September 28, 2014, respectively. Total revenue from our three largest customers, Hewlett-Packard Company (HP), Dell, Inc. (Dell), and Lenovo Group Ltd. (Lenovo), collectively accounted for more than 50% of net revenues for the six months ended September 27, 2015. Total revenue from our three largest customers, HP, Dell, and International Business Machines Corporation (IBM), collectively accounted for more than 50% of net

 

22


 

revenues for the six months ended September 28, 2014. In October 2014, HP announced that it will separate itself into two new public companies. And more recently, IBM and Lenovo completed the closing for Lenovo’s acquisition of IBM’s x86 server business. To the extent unexpected delays or transition issues occur in connection with either of these transactions, we could experience an adverse effect on our business or results of operations.

A significant portion of the products we sell are incorporated into servers manufactured by our major customers for use in enterprise environments. Certain of our large OEM customers are reporting weakness in this market. If server sales by our major customers continue to be adversely affected by the IT spending environment or server market factors (such as an acceleration in the shift from servers used in enterprise environments to servers used in cloud environments), demand for our products could decrease further, 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 instead of long-term supply contracts and, therefore, are generally not obligated to purchase products from us for any extended period. Customers typically incorporate our products into complex devices and systems, which creates supply chain cross-dependencies. Accordingly, supply chain disruptions affecting components of our customers’ devices and/or systems could negatively impact the demand for our products, even if the supply of our products is not directly affected. Major customers also have significant leverage over us and may attempt to change the sales terms, including pricing, customer incentives and payment terms, or insist that we undertake or fund significant aspects of the design, qualification and testing that our customers have typically been responsible for, either of which could have a material adverse effect on our business, financial condition or results of operations. As our 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. For example, Dell Inc. has announced its intention to acquire EMC Corporation. There is also a possibility that one of our large customers could acquire one of our current competitors. As a result of such transactions, demand for our products could decrease, which could have a material adverse effect on our business, financial condition or results of operations.

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 technologies, evolving industry standards and continuing improvements in products and services. Examples of these changing technologies include system-on-chip products and both software-defined-networking and software-defined-storage products. 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, ODM and end-user customer requirements and achieve market acceptance.

We believe that to remain competitive, we will need to continue to develop new products and enter new markets, which will require significant investment. Some new markets may require engagement with customers with whom we have limited or no prior experience. Our competitors may be developing alternative technologies, or entering into exclusive strategic alliances with our major customers, either of which may adversely affect the market acceptance of our products, our ability to enter new markets, or our ability to secure customer design wins. 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 in time, we may not be able to manufacture them at competitive prices or in sufficient volumes.

Some of our products are based on FCoE or 10Gb Ethernet technologies. FCoE is a converged networking technology that provides a unified storage and data network over Enhanced Ethernet, while preserving the investment by end users in their existing Fibre Channel infrastructure and storage. 10Gb Ethernet is a technology for use in enterprise data centers. The market for 10Gb Ethernet products includes well-established participants who have significantly more engineering, sales and marketing resources to dedicate to developing and penetrating the market than we do. An inability to maintain, or build on, our market share in the Fibre Channel, converged or 10Gb Ethernet markets, or the failure of these markets to expand, could have a material adverse effect on our business or results of operations.

 

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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. ASICs are purchased from single sources. For example, in connection with our acquisition of certain 10/40/100Gb Ethernet controller-related assets, we entered into a development and supply agreement which requires us to purchase the ASICs used in the related products exclusively from Broadcom. Other key components such as microprocessors, 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 or significantly change 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.

Avago, our primary Fibre Channel ASIC supplier, acquired Emulex in May 2015. Emulex has historically been our principal competitor in the Fibre Channel market. Avago has announced its intention to acquire Broadcom, which is our primary supplier of Ethernet ASICs. We have long-term supply contracts in place that we believe safeguard our supply of Fibre Channel and Ethernet ASICs. Should our suppliers fail to adhere to the terms of our supply contracts and if the remedies in the contracts fail to adequately protect us, our supply of Fibre Channel and Ethernet ASICs could be at risk or more costly, and our business and results of operations could be materially and adversely affected.

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 its facilities, experiences power outages, natural disasters, labor shortages or labor strikes, 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 or on commercially acceptable terms.

In addition, the loss of any of our major third-party contract manufacturers outside of our planned consolidation 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. If we are required to change a contract manufacturer or if a contract manufacturer experiences delays, disruptions, capacity constraints, component part shortages or quality control problems in its manufacturing operations, shipment of our products to our customers could be delayed, resulting in loss or postponement of revenues and potential harm to our competitive position and relationships with customers.

We are currently transitioning away from one of our contract manufacturers as part of a consolidation plan. We have already begun the transition of certain product lines and expect to complete the transition by the end of calendar year 2015. We believe that our remaining contract manufacturers have sufficient capacity and redundancy such that their ability to produce products for us will not be significantly impacted. However, we might incur significant expenses in connection with our transition, including expenses related to excess and obsolete inventory, equipment transportation, qualification of new manufacturing lines at existing contract manufacturers, and increased product costs. The incurrence of any such expenses, or any delay in the transition, could have a material adverse effect on our business, financial condition or results of operations.

We may engage in mergers, acquisitions, divestitures 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 businesses, technologies or product lines. Mergers and acquisitions involve numerous risks, including:

 

the failure of markets for the products of acquired businesses, technologies or product lines to develop as expected;

 

uncertainties in identifying and pursuing acquisition targets;

 

the challenges in achieving strategic objectives, cost savings and other benefits expected from acquisitions;

 

the risk that the financial returns on acquisitions will not support the expenditures incurred to acquire such businesses or the capital expenditures needed to develop such businesses;

 

difficulties in assimilating the acquired businesses, technologies or product lines;

 

the failure to successfully manage additional business locations, including the additional infrastructure and resources necessary to support and integrate such locations;

 

24


 

 

the existence of unknown product defects related to acquired businesses, technologies or product lines that may not be identified due to the inherent limitations involved in the due diligence process of an acquisition; 

 

the diversion of management’s 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 businesses, technologies or product lines;

 

risks related to the effect that internal control processes of acquired businesses might have on our financial reporting and management’s 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 customers of acquired businesses;

 

the inability to qualify the acquired products with OEM partners on a timely basis, or at all;

 

the potential loss of key employees related to acquired businesses, technologies or product lines; 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 or divestiture. 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 condition or results of operations. Divestitures involve risks, such as difficulty splitting up businesses, distracting employees, potential loss of revenue and negatively impacting margins, and potentially disrupting customer relationships. In addition, our effective tax rate for future periods could be negatively impacted by acquisitions or divestitures.

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 condition and results of operations.

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 problems. 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, any of which could materially and adversely affect our operating results.

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, the market opportunities we are pursuing in managed service provider, consumer web, and cloud service provider data centers are more price competitive than other markets we serve. 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. 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


 

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. In addition, our customers are demanding a higher level of customization for new products, which prevents us from fully leveraging our product design work and adds to our new product development costs. When we introduce new products and product enhancements, we face additional risks relating to product transitions, including risks relating to forecasting demand and longer lead times associated with smaller product geometries and more complex production operations. Any such adverse event or increased costs 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 connectivity products to lower-cost products.

Sales and purchasing patterns with our customers and suppliers are uneven and subject to seasonal fluctuations.

A large percentage of our products are sold to customers who experience seasonality and uneven sales patterns in their own businesses. As a result, we experience similar seasonality and uneven sales and purchasing patterns with our customers and suppliers. We believe the variability in sales and purchasing patterns results from many factors, including:

 

spikes in sales during the fourth quarter of each calendar year typically experienced by our customers, which in turn leads to higher sales volume in our fiscal third quarter;

 

the tendency of our customers to close a disproportionate percentage of their sales transactions in the last month, weeks and days of each quarter, which in turn leads to an increase in our sales during those same time periods; and

 

strategic purchases, including entering into non-cancelable purchase commitments, by us or our customers in advance of demand to take advantage of favorable pricing or to mitigate risks around product availability.

This variability makes it extremely difficult to predict the demand and buying patterns of our customers and, in turn, causes challenges for us in sourcing goods and services from our suppliers, adjusting manufacturing capacity, and forecasting cash flow and working capital needs. 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 be completed at an increased cost, which could have a material adverse effect on our business, financial condition or results of operations.

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 tax rate has 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, or by changes in the valuation of our deferred tax assets and liabilities. Our effective tax rate is also affected by intercompany transactions for licenses, services, funding and other items. Given the global scope of our operations, and the complexity of global tax and transfer pricing rules and regulations, it is 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, dispositions, changes to tax laws or regulations, examinations by tax authorities, stock-based compensation, uncertain tax positions, and changes in our ability to realize deferred tax assets. Significant judgment and estimates are required in determining the impact on our effective tax rate related to these items, including whether it is more likely than not that some or all of our deferred tax assets will be realized. Such estimates are subject to uncertainty due to various factors, including the economic environment, industry and market conditions, and the length of time of the projections included in the analyses. If our actual results are less favorable than current estimates, or we revise our estimates downward in future analyses, a valuation allowance may be required related to our deferred tax assets with a corresponding adjustment to earnings in the period in which such determination is made, which could have a material effect on our results of operations. In addition, the Organisation for Economic Co-operation and Development (OECD), an international association of 34

 

26


 

countries including the United States, as well as other taxing authorities have made or are contemplating changes to numerous long-standing tax principles. Any enacted or contemplated changes may increase tax uncertainty and adversely affect our provision for income taxes.

Finally, we are subject to examination of our income tax returns by the United States Internal Revenue Service and other tax authorities, which may result in the assessment of additional income taxes. We regularly assess the likelihood of adverse outcomes resulting from 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.

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 65% and 62% of our net revenues for the six months ended September 27, 2015 and September 28, 2014, 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 September 27, 2015, our international subsidiaries held $251.3 million of our total cash, cash equivalents and marketable 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.

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 at, or damages 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 that have historically experienced natural disasters. Furthermore, as a result of a natural disaster, our major customers may face shortages of components that could negatively impact their ability to build the servers and data center devices into which our products are integrated, thereby negatively impacting the demand for our products even if the supply of our products is not directly affected by the natural disaster. Any earthquake or other natural disaster, including a hurricane, flood, volcanic eruption, tsunami or fire, affecting any of these regions could adversely affect our business, results of operations and financial condition.


 

27


 

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 or others whom we are contractually obligated to indemnify, with respect to existing and future products. In addition, our supply of ASICs and other components can also be interrupted by intellectual property infringement claims against our suppliers.

Individuals and groups are purchasing intellectual property assets for the sole purpose of making claims of infringement and attempting to extract settlements from companies such as ours. Although patent and intellectual property disputes may be settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and the necessary licenses or similar arrangements may not be available to us on satisfactory terms, or at all. As a result, we could be prevented from manufacturing and selling some of our products. In addition, if we litigate these kinds of claims, the litigation could be expensive, time consuming and could divert management’s attention from other matters and there is no guarantee we would prevail. Our business could suffer regardless of the outcome of the litigation.

Our distributors may not effectively sell our products and their reseller customers may purchase products from our competitors, which could negatively affect our results of operations.

Our distributors, which currently account for less than 15% of our net revenues, 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 selling products from other suppliers, thus reducing their efforts 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 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.

Our portfolio of marketable securities could experience a decline in market value, which could materially and adversely affect our financial results.

As of September 27, 2015, we held short-term marketable securities totaling $205.8 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. A deterioration in the economy, including tightening of credit markets or significant volatility in interest rates, could cause declines in value of our marketable 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.

Changes in and compliance with regulations could materially and adversely affect us.

Our business, results of operations or financial condition could be materially and adversely affected if new laws, regulations or standards relating to us or our products are implemented or existing ones are changed. In addition, our compliance with existing regulations may have a material adverse impact on us. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) was enacted in 2010. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that require the U.S. Securities and Exchange Commission to adopt additional rules and regulations

 

28


 

in these areas. The U.S. Securities and Exchange Commission has also issued disclosure requirements relating to the sourcing of so-called conflict minerals from the Democratic Republic of Congo and certain other adjoining countries. Our disclosures have been and will be predicated upon the timely receipt of accurate information from suppliers, who may be unwilling or unable to provide us with the relevant information. As a result, these requirements could adversely affect our costs, the availability of minerals used in our products and our relationships with customers and suppliers.

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.

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 and other anti-bribery laws. Although we have 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 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.

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.

We may experience difficulties in transitioning to smaller geometry process technologies.

We expect to continue to transition our ASICs 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.

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, 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 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 or stop distributing that work.


 

29


 

System security risks, data protection breaches and cyber-attacks could disrupt our internal operations, and any such disruption could reduce our expected revenues, increase our expenses, damage our reputation and adversely affect our stock price.

Experienced computer programmers and hackers may be able to penetrate our network and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant and, if our efforts to address these problems are not successful, this could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions.

We manage and store various proprietary information and sensitive or confidential data relating to our business. We have also outsourced a number of our business functions to third party contractors. Breaches of our or our third party contractors’ security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us or our customers, including the potential loss or disclosure of such information or data as a result of fraud, trickery or other forms of deception, could expose us or our customers to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. In addition, the cost and operational consequences of implementing further data protection measures could be significant.

Our ability to borrow and maintain outstanding borrowings under our credit agreement is subject to certain covenants.

We have a credit agreement that provides us with a $125 million unsecured revolving credit facility that matures in March 2018. Borrowings under the credit agreement may be used for general corporate purposes, including permitted share repurchases and acquisitions. Under the credit agreement, we may increase the revolving commitments or obtain incremental term loans in an aggregate amount up to $100 million, subject to certain conditions. Our ability to borrow under the credit agreement is subject to continued compliance with certain financial and non-financial covenants. In addition, a breach of any of the covenants or other provisions in the credit agreement could result in an event of default, which if not cured or waived, could result in outstanding borrowings becoming immediately due and payable. We may be unable to maintain compliance with these covenants and, if we fail to do so, we may be unable to obtain waivers or amend the covenants. In the event that some or all of our outstanding borrowings are accelerated and become immediately due and payable, we may not have the funds to repay, or the ability to refinance, our borrowings. There were no borrowings outstanding under the credit agreement as of September 27, 2015.

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds

In October 2014, our Board of Directors approved a program to repurchase up to $100 million of our common stock over a period of up to 18 months. Set forth below is information regarding our stock repurchases made during the second quarter of fiscal 2016 under this program.

 

Period

 

Total Number of

Shares Purchased

 

 

Average Price

Paid per Share

 

 

Total Number of

Shares Purchased

as Part of Publicly

Announced Plan

 

 

Approximate Dollar

Value of Shares that

May Yet be Purchased

Under the Plan

 

June 29, 2015 – July 26, 2015

 

 

230,000

 

 

$

12.39

 

 

 

230,000

 

 

$

57,703,000

 

July 27, 2015 – August 23, 2015

 

 

1,054,000

 

 

$

9.39

 

 

 

1,054,000

 

 

$

47,809,000

 

August 24, 2015 – September 27, 2015

 

 

1,787,000

 

 

$

10.06

 

 

 

1,787,000

 

 

$

29,837,000

 

 

 

 

3,071,000

 

 

$

10.00

 

 

 

3,071,000

 

 

$

29,837,000

 

 

 

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Item 6.       Exhibits

Exhibits

 

 

 

 

Exhibit No.

 

 

 

 

10.1

 

QLogic Corporation 1998 Employee Stock Purchase Plan, Amended and Restated Effective May 28, 2015 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on August 21, 2015).*

 

 

 

10.2

 

General Release Agreement, dated September 3, 2015, by and between the Company and Prasad Rampalli (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on September 4, 2015).*

 

 

 

10.3

 

Form of Terms and Conditions of Performance Share Award under the QLogic Corporation 2005 Performance Incentive Plan, as amended.*

 

 

 

10.4

 

Terms and Conditions of Performance Share Award for Christine King under the QLogic Corporation 2005 Performance Incentive Plan, as amended.*

 

 

 

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.

 

 

101.INS

 

XBRL Instance Document

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

* Compensation plan, contract or arrangement required to be filed as an exhibit pursuant to applicable rules of the Securities and Exchange Commission.

 

31


 

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/ JEAN HU

 

Jean Hu

 

Acting Chief Executive Officer,

 

Senior Vice President and

 

Chief Financial Officer

 

(Principal Financial and Accounting Officer)

Date: October 29, 2015

 

32


 

EXHIBIT INDEX

 

Exhibit No.

  

 

 

 

 

10.1

 

QLogic Corporation 1998 Employee Stock Purchase Plan, Amended and Restated Effective May 28, 2015 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on August 21, 2015).*

 

 

 

10.2

 

General Release Agreement, dated September 3, 2015, by and between the Company and Prasad Rampalli (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on September 4, 2015).*

 

 

 

10.3

 

Form of Terms and Conditions of Performance Share Award under the QLogic Corporation 2005 Performance Incentive Plan, as amended.*

 

 

 

10.4

 

Terms and Conditions of Performance Share Award for Christine King under the QLogic Corporation 2005 Performance Incentive Plan, as amended.*

 

 

 

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.

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

* Compensation plan, contract or arrangement required to be filed as an exhibit pursuant to applicable rules of the Securities and Exchange Commission.

 

33