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EMULEX CORP /DE/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Executive Overview
Emulex designs and markets high speed enterprise-class products that are used to
connect servers and storage arrays. The world's leading server and storage
Original Equipment Manufacturers (OEM's) depend on our broad range
of products to help build high performance, highly reliable, and scalable Fibre
Channel Storage Area Networks (SAN) and Ethernet Converged Networking solutions.
Our Company operates within a single business segment that has two market
focused product lines. Beginning the first quarter of fiscal 2012, these primary
product lines are Network Connectivity Products (NCP) and Storage Connectivity
Products (SCP). We believe this new product line reporting is more consistent
with how third party analysts view our addressable markets, and will provide a
more transparent view of our business. Customers in the NCP market use our
industry standard Fibre Channel and Ethernet solutions to provide server
Input/Output (I/O) and target storage array connectivity to create networks for
mission critical enterprise and cloud data centers. These products enable
servers to reliably and efficiently connect to Local Area Networks (LANs), SANs,
and Network Attached Storage (NAS) by offloading data communication processing
tasks from the server as information is delivered and sent to the network. Our
products use industry standard protocols including Fibre Channel Protocol (FCP),
Internet Protocol (IP), Transmission Control Protocol (TCP)/IP, Internet Small
Computer System Interface (iSCSI), NAS, and Fibre Channel over Ethernet (FCoE).
Our Ethernet products include Universal Local Area Network on Motherboard
application specific integrated circuits (ULOMs), OneConnect Universal Converged
Network Adapters (UCNAs), and custom form factor solutions for OEM blade servers
that enable high performance, scalable networks and convergence. Our Fibre
Channel based products include Fibre Channel application specific integrated
circuits (ASICs), LightPulse® Host Bus Adaptors (HBAs), and custom form factor
solutions for OEM blade servers.
SCP includes our InSpeed®, FibreSpy®, switch-on-a-chip (SOC) or backend
connectivity, bridge, and router products. SCP are deployed inside storage
arrays, tape libraries, and other storage appliances, connect storage
controllers to storage capacity, delivering improved performance, reliability,
and connectivity. Our products use industry standard protocols including Fibre
Channel, Serial Attached Small Computer Interface (SAS), and Serial Advanced
Technology Attachment (SATA).
Our Advanced Technology and Other Products (ATP) category primarily consists of
Integrated Baseboard Management Controllers (iBMC), OneCommand® Vision products,
certain legacy products and other products and services.
We rely almost exclusively on OEMs and sales through distribution channels for
our revenue. Our significant OEM customers include the world's leading server
and storage providers, including Cisco Systems, Inc. (Cisco), Dell Inc. (Dell),
EMC Corporation (EMC), Fujitsu Ltd. (Fujitsu), Groupe Bull (Bull),
Hewlett-Packard Company (Hewlett-Packard), Hitachi Data Systems (HDS), Hitachi
Limited (Hitachi), Huawei Technologies Company Ltd. (Huawei), Intel Corporation
(Intel), International Business Machines Corporation (IBM), NEC Corporation
(NEC), Network Appliance, Inc. (NetApp), Oracle Corporation (Oracle), Quantum
Corporation (Quantum), Unisys Corporation (Unisys), and Xyratex Ltd. (Xyratex).
Our significant distributors include Arrow ECS Denmark A/S (Arrow), ASI Computer
Technologies, Inc. (ASI), Avnet, Inc. (Avnet), Digital China Technology Limited,
Info X Distribution, LLC (Info X), Ingram Micro Inc. (Ingram Micro), Macnica
Networks Corporation (Macnica), Netmarks Inc. (Netmarks), SYNNEX Corporation
(SYNNEX), Tech Data Corporation (Tech Data), and Tokyo Electron Device Ltd.
(TED). The market for networking infrastructure solutions is concentrated among
large OEMs, and as such, a significant portion of our revenues are generated
from sales to a limited number of customers.
As of January 1, 2012, we had a total of 984 employees.
Our corporate headquarters are located at 3333 Susan Street, Costa Mesa,
California 92626. Our periodic and current reports filed with, or furnished to,
the Securities and Exchange Commission pursuant to the requirements of the
Securities and Exchange Act of 1934 are available free of charge through our
website (www.emulex.com) as soon as reasonably practicable after such reports
are electronically filed with, or furnished to, the Securities and Exchange
Commission. References contained herein to "Emulex," the "Company," the
"Registrant," "we," "our," and "us" refer to Emulex Corporation and its
subsidiaries.
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Consolidation of Facilities
During fiscal 2011, we commenced the consolidation of certain leased facilities
in Colorado and Washington. The consolidation of facilities was completed during
the first quarter of fiscal 2012. Total charges related to the facility
consolidation and related workforce reductions were approximately $4.1 million,
of which $1.0 million was recorded in fiscal 2012 and $3.1 million was recorded
in fiscal 2011. The charges consisted primarily of salaries and benefits based
on continuous employment of affected employees through the facility closure
dates. In fiscal 2012, the charges were comprised of salaries and benefits
expense of approximately $0.4 million, acceleration of rent expense of
approximately $0.5 million, and other costs of approximately $ 0.1 million. In
fiscal 2011, the charges were comprised of salaries and benefits expense of
approximately $2.6 million, acceleration of fixed assets depreciation expense of
approximately $0.3 million, and other costs of approximately $0.2 million.
Business Combination
On August 25, 2010, we acquired 100% of the outstanding common shares of
ServerEngines Corporation (ServerEngines), a privately-held, fabless
semiconductor company located in Sunnyvale, California. The combination of
Emulex and ServerEngines' technology creates a unique offering to deliver I/O
connectivity for converged networking solutions, including adapters, mezzanine
cards and LAN on Motherboard (LOM) solutions. In addition, the acquisition adds
the ServerEngines' PilotTM family of Servers Management Controllers, which
reside on the motherboard, enabling remote IP based "lights out" management
capabilities.
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Results of Operations
The following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements included elsewhere herein.
Percentage of Net Revenues Percentage of Net Revenues
Three Months Ended Six Months Ended
January 1, December 26, January 1, December 26,
2012 2010 2012 2010
Net revenues 100 % 100 % 100 % 100 %
Cost of sales
Cost of goods sold 37 36 37 37
Amortization of core and
developed technology
intangible assets 4 9 6 8
Cost of sales 41 45 43 45
Gross profit 59 55 57 55
Operating expenses:
Engineering and development 29 37 33 37
Selling and marketing 12 12 12 12
General and administrative 7 12 8 14
Amortization of other
intangible assets 1 3 2 3
Total operating expenses 49 64 55 66
Operating income (loss) 10 (9 ) 2 (11 )
Non-operating income
(expense), net:
Interest income - - - -
Interest expense - - - -
Other expense, net - - - -
Total non-operating income
(expense), net - - - -
Income (loss) before income
taxes 10 (9 ) 2 (11 )
Income tax (benefit)
provision (2 ) 27 (1 ) 12
Net income (loss) 12 % (36 )% 3 % (23 )%
Three months ended January 1, 2012, compared to three months ended December 26,
2010
Net Revenues. Net revenues for the second quarter of fiscal 2012 ended
January 1, 2012, increased by approximately $14.7 million, or 13%, to
approximately $128.7 million, compared to approximately $114.0 million for the
same quarter of fiscal 2011 ended December 26, 2010.
Net Revenues by Product LineNet revenues by product line were as follows:
Net Revenues by Product Line
Three Months Three Months
Ended Percentage Ended Percentage
January 1, of Net December 26, of Net Increase/ Percentage
(in thousands) 2012 Revenues 2010 Revenues (Decrease) Change
Network Connectivity Products $ 96,620 75 % $ 92,256 81 % $ 4,364 5 %
Storage Connectivity Products 27,583 21 % 16,691 15 % 10,892 65 %
Advanced Technology & Other Products 4,468 4 % 5,051 4 % (583 ) (12 )%
Total net revenues $ 128,671 100 % $ 113,998 100 % $ 14,673 13 %
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NCP primarily consists of standup HBAs, mezzanine cards, I/O ASICs, ULOMs, and
UCNAs. For the three months ended January 1, 2012, our Fibre Channel based
products accounted for greater than 71% of total NCP revenues, however, our
Ethernet based products revenue grew by approximately 80% compared to the same
period in the prior year primarily due to the strength in our 10Gb Ethernet
products. The increase in our NCP revenue for the three months ended January 1,
2012 compared to the three months ended December 26, 2011 was primarily due to
an increase in units shipped of approximately 5%, partially offset by a decrease
in average selling price of approximately 1%.
SCP primarily consists of our InSpeed®, FibreSpy®, SOC or backend connectivity,
and bridge and router products. For the three months ended January 1, 2012, our
backend connectivity products revenue grew by approximately 71%. The increase in
our SCP net revenue for the three months ended January 1, 2012 compared to the
three months ended December 26, 2011 was primarily due to an increase in units
shipped of approximately 75%, partially offset by a decrease in average selling
price of approximately 5%.
ATP primarily consists of our iBMCs, which are products sold by ServerEngines
prior to our acquisition on August 25, 2010, OneCommand® Vision software
products, certain legacy products and other products and services. For the three
months ended January 1, 2012, our iBMC based products accounted for essentially
all of total ATP revenues. The increase in our iBMC based revenue for the three
months ended January 1, 2012 was primarily due to an increase in units shipped
of approximately 48%, partially offset by a decrease in average selling price of
approximately 2%.
Net Revenues by Major Customers
In addition to direct sales, some of our larger OEM customers purchase or market
products indirectly through distributors, resellers or other third parties. If
these indirect sales are purchases of customer-specific models, we are able to
track these sales. However, if these indirect sales are purchases of our
standard models, we are not able to distinguish them by OEM customer. Customers
whose direct net revenues, or total direct and indirect net revenues (including
customer-specific models purchased or marketed indirectly through distributors,
resellers and other third parties), exceeded 10% of our net revenues were as
follows:
Net Revenues by Major Customers
Direct Revenues Total Direct and Indirect Revenues (2)
Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
January 1, December 26, January 1, December 26,
2012 2010 2012 2010
Net revenue percentage (1):
OEM:
Hewlett-Packard 22 % 18 % 25 % 21 %
IBM 37 % 28 % 41 % 38 %
(1) Amounts less than 10% are not presented.
(2) Customer-specific models purchased or marketed indirectly through
distributors, resellers, and other third parties are included with the OEM's
revenues in these columns rather than as revenue for the distributors,
resellers or other third parties.
Direct sales to our top five customers accounted for approximately 73% of total
net revenues for the three months ended January 1, 2012, compared to
approximately 68% for the three months ended December 26, 2010. Direct and
indirect sales to our top five customers accounted for approximately 81% of
total net revenues for both the three months ended January 1, 2012 and the three
months ended December 26, 2010. Our net revenues from customers can be
significantly impacted by changes to our customers' business and their business
models.
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Net Revenues by Sales ChannelNet revenues by sales channel were as follows:
Net Revenues by Sales Channel
Three Months Three Months
Ended Percentage Ended Percentage
January 1, of Net December 26, of Net Increase/ Percentage
(in thousands) 2012 Revenues 2010 Revenues (Decrease) Change
OEM $ 117,925 92 % $ 100,554 88 % $ 17,371 17 %
Distribution 10,733 8 % 13,441 12 % (2,708 ) (20 )%
Other 13 - 3 - 10 333 %
Total net revenues $ 128,671 100 % $ 113,998 100 % $ 14,673 13 %
The increase in OEM net revenues for the three months ended January 1, 2012
compared to the three months ended December 26, 2010 was primarily due to an
increase of approximately 69% in SCP revenues generated through our OEMs. The
decrease in distribution net revenues for the three months ended January 1, 2012
compared to the three months ended December 26, 2010 was primarily due to a
decrease of approximately 17% in NCP net revenues generated through distribution
partners. We believe that our net revenues are being generated primarily as a
result of product certifications and qualifications with our OEM customers,
which take products directly and indirectly through distribution and contract
manufacturers. We view product certifications and qualifications as an important
indicator of our future revenue opportunities and growth. However, product
certifications and qualifications do not necessarily ensure continued market
acceptance of our products by our OEM customers. It is also very difficult to
determine the future impact, if any, of product certifications and
qualifications on our revenues.
Net Revenues by Geographic Territory
Our net revenues by geographic territory based on billed-to location were as
follows:
Net Revenues by Geographic Territory
Three Months Three Months
Ended Percentage Ended Percentage
January 1, of Net December 26, of Net Increase/ Percentage
(in thousands) 2011 Revenues 2010 Revenues (Decrease) Change
Asia Pacific $ 80,391 63 % $ 58,052 51 % $ 22,339 38 %
United States 31,394 24 % 31,903 28 % (509 ) (2 )%
Europe, Middle East, and Africa 16,473 13 % 21,965 19 % (5,492 ) (25 )%
Rest of the world 413 - 2,078 2 % (1,665 ) (80 )%
Total net revenues $ 128,671 100 % $ 113,998 100 % $ 14,673 13 %
We believe the increase in Asia Pacific net revenues and decrease in Europe,
Middle East, and Africa (EMEA) and rest of the world net revenues as a
percentage of total net revenues for the three months ended January 1, 2012
compared to the three months ended December 26, 2010 was primarily due to our
OEM customers continuing to migrate towards using contract manufacturers that
are predominately located in Asia Pacific. However, as we sell to OEMs and
distributors who ultimately resell our products to their customers, the
geographic mix of our net revenues based on billed-to location may not be
reflective of the geographic mix of end-user demand or installations.
Gross Profit. Gross profit consists of net revenues less cost of sales. Our
gross profit was as follows (in thousands):
Gross Profit
Three Months Ended Percentage of Three Months Ended Percentage of Increase/ Percentage
January 1, 2012 Net Revenues December 26, 2010 Net Revenues (Decrease) Points Change
$75,423 59% $62,934 55% $12,489 4%
Cost of sales includes the cost of producing, supporting, and managing our
supply of finished products. Cost of sales also included approximately $5.1
million and $9.6 million of amortization of technology intangible assets for the
three months ended January 1, 2012 and December 26, 2010, respectively.
Approximately $0.3 million and $0.4 million of share-based compensation expense
was included in cost of sales for the three months ended January 1,
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2012 and December 26, 2010, respectively. Gross margin percentage was favorably
impacted due to higher volume and product mix which was partially offset by
approximately $2.1 million of additional expedite and freight charges in
connection with our activities to mitigate the impact of the recent floods in
Thailand at one of our contract manufacturers. We do not expect to incur any
significant costs related to such flood mitigation activities for the remainder
of the fiscal year. In addition, although gross margin improved in the current
three months ended January 1, 2012, we expect the trend toward increased sales
of lower margin products to continue in the future.
Engineering and Development. Engineering and development expenses consist
primarily of salaries and related expenses for personnel engaged in the design,
development, and support of our products. These expenses also include
third-party fees paid to consultants, prototype development expenses, and
computer service costs related to supporting computer tools used in the design
process. Engineering and development expenses were as follows (in thousands):
Engineering and DevelopmentThree Months Ended Percentage of Three Months Ended Percentage of Increase/ Percentage
January 1, 2012 Net Revenues December 26, 2010 Net Revenues (Decrease) Points Change
$37,671 29% $41,668 37% $(3,997) (8)%
Engineering and development expenses for the three months ended January 1, 2012
compared to the three months ended December 26, 2010 decreased approximately
$4.0 million, or 10%. Approximately $2.4 million and $3.4 million of share-based
compensation expense were included in engineering and development costs for the
three months ended January 1, 2012 and December 26, 2010, respectively, with
approximately $0.5 million and $1.2 million being related to the ServerEngines
acquisition for the three months ended January 1, 2012 and December 26, 2010,
respectively. Engineering and development headcount increased to 629 at
January 1, 2012, from 616 at December 26, 2010. The increase in headcount
resulted in a net increase in salary expense which was more than fully offset by
lower fringe related expenses compared to the same period in fiscal 2011. The
reduction in engineering and development expenses during the three months ended
January 1, 2012 was also due to a decrease in nonrecurring engineering,
prototypes, and related costs associated with new product development of
approximately $1.7 million, lower depreciation expense of approximately $0.6
million, and a decrease in facilities expense due to the consolidation of
certain leased facilities in Colorado and Washington of approximately $0.5
million. We plan to continue to invest in engineering and development costs even
though it decreased in the current three month period.
Selling and Marketing. Selling and marketing expenses consist primarily of
salaries, commissions, and related expenses for personnel engaged in the
marketing and sales of our products, as well as trade shows, product literature,
promotional support costs, and other advertising related costs. Sales and
marketing expenses were as follows (in thousands):
Selling and Marketing
Three Months Ended Percentage of Three Months Ended Percentage of Increase/ Percentage
January 1, 2012 Net Revenues December 26, 2010 Net Revenues (Decrease) Points Change
$15,260 12% $14,226 12% $1,034 -
Selling and marketing expenses for the three months ended January 1, 2012
compared to the three months ended December 26, 2010 increased approximately
$1.0 million, or 7%. Approximately $0.9 million and $1.2 million of share-based
compensation expense were included in selling and marketing costs for the three
months ended January 1, 2012 and December 26, 2010, respectively. Selling and
marketing headcount increased to 150 at January 1, 2012 from 135 at December 26,
2010. The increase in headcount resulted in a net increase of approximately $0.4
million in salary and related expenses as compared to the same period in fiscal
2011. The remaining increase in selling and marketing expenses during the three
months ended January 1, 2012 was primarily due to an increase in marketing and
advertising costs of approximately $0.7 million, an increase in performance
based compensation of approximately $0.2 million, and an increase in outside
services costs of approximately $0.2 million. We will continue to closely manage
and target advertising, market promotions, and brand awareness expenses for our
new and existing products in an effort to provide overall revenue growth.
General and Administrative. Ongoing general and administrative expenses consist
primarily of salaries and related expenses for executives, financial accounting
support, human resources, administrative services, professional fees, and other
corporate expenses. General and administrative expenses were as follows (in
thousands):
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General and Administrative
Three Months Ended Percentage of Three Months Ended Percentage of Increase/ Percentage
January 1, 2012 Net Revenues December 26, 2010 Net Revenues (Decrease) Points Change
$9,123 7% $13,663 12% $(4,540) (5)%
General and administrative expenses for the three months ended January 1, 2012
compared to the three months ended December 26, 2010 decreased approximately
$4.5 million, or 33%. Approximately $2.5 million and $3.6 million of share-based
compensation expense were included in general and administrative costs for the
three months ended January 1, 2012 and December 26, 2010, respectively, with
approximately $0.8 million and $2.0 million being related to the ServerEngines
acquisition for the three months ended January 1, 2012 and December 26, 2010,
respectively. General and administrative headcount decreased slightly to 139 at
January 1, 2012 from 140 at December 26, 2010. Although headcount decreased
slightly as of the end of the current three month period ended January 1, 2012,
salary and related expenses increased approximately $0.3 million due to the
higher headcount for most of the current three month period compared to the same
period in fiscal 2011. The remaining change was primarily due to a decrease in
litigation costs of approximately $2.5 million, which included reimbursements
received from our suppliers related to the Broadcom litigation of approximately
$1.1 million, and the non-recurrence of acquisition related costs that were
incurred in the same period in fiscal 2011 for the acquisition of ServerEngines
of approximately $0.9 million.
Amortization of Other Intangible Assets. Amortization of other intangible assets
consists of amortization of intangible assets such as patents, customer
relationships, tradenames with estimable lives, covenants not to compete, and
backlog. Amortization expense was as follows (in thousands):
Amortization of Other Intangible Assets
Three Months Ended Percentage of Three Months Ended Percentage of Increase/ Percentage
January 1, 2012 Net Revenues December 26, 2010 Net Revenues (Decrease) Points Change
$1,602 1% $3,465 3% $(1,863) (2)%
Amortization of other intangible assets for the three months ended January 1,
2012 compared to the three months ended December 26, 2010 decreased by
approximately $1.9 million, or 54%. The decrease was primarily due to certain
intangible assets being fully amortized in the prior period.
Non-operating Income (Expense), net. Non-operating income (expense), net,
consists primarily of interest income, interest expense, and other non-operating
income and expense items. Our non-operating income (expense), net, was as
follows (in thousands):
Non-operating Income (Expense), net
Three Months Ended Percentage of Three Months Ended Percentage of Increase/ Percentage
January 1, 2012 Net Revenues December 26, 2010 Net Revenues (Decrease) Points Change
$171 -% $(34) -% $205 -
Our non-operating income (expense), net, for the three months ended January 1,
2012 compared to the three months ended December 26, 2012 increased
approximately $0.2 million, or 602%. The net increase was primarily due to
foreign exchange gains of approximately $0.1 million.
Income Taxes. Income taxes were as follows (in thousands):
Income Taxes
Three Months Ended Percentage of Three Months Ended Percentage of Increase/ Percentage
January 1, 2012 Net Revenues December 26, 2010 Net Revenues (Decrease) Points Change
$(3,056) (2)% $30,854 27% $(33,910) (29)%
Income taxes for the three months ended January 1, 2012 compared to the three
months ended December 26, 2010 decreased approximately $33.9 million. Our
effective tax (benefit)/expense rate was approximately (26%) and 305% for the
three months ended January 1, 2012 and December 26, 2010, respectively. The
decrease in our effective tax rate for the three months ended January 1, 2012
compared to the three months ended December 26, 2010 was primarily due to a
platform contribution transaction entered into by our U.S. and international
subsidiaries during the same period of the prior year which resulted in
incremental tax expense of approximately $36.7 million for fiscal 2011. In
addition, higher projected worldwide income, an increase in the mix of revenue
from international versus U.S. locations, and a reduction in non-deductible
stock-based compensation expense related to the ServerEngines acquisition also
decreased our effective tax rate for the three months ended January 1, 2012.
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We expect the annual effective tax benefit rate for fiscal 2012 to be
approximately 25%. Our expected annual effective tax rate is lower than the U.S.
federal statutory rate primarily due to the mix of earnings in international
versus U.S. tax jurisdictions that are generally subject to lower statutory
income tax rates. Changes in the mix of U.S. versus international earnings and
changing tax laws could affect our actual tax expense for the full fiscal year
2012. As estimates and judgments are used to project such earnings, the impact
to our tax provision could vary if the current planning or assumptions change.
In addition, we do not forecast discrete events, such as a settlement of tax
audits with governmental authorities or changes in tax laws, due to their
inherent uncertainty. Such discrete events could materially impact our tax
expense. As the tax rate is driven by various factors, it is not possible to
estimate our future tax rate with a high degree of certainty.
Six months ended January 1, 2012, compared to six months ended December 26, 2010
Net Revenues. Net revenues for the six months ended January 1, 2012, increased
by approximately $30.0 million, or 14%, to approximately $247.1 million compared
to approximately $217.1 million for the six months ended December 26, 2010.
Net Revenues by Product LineNet revenues by product line were as follows:
Net Revenues by Product Line
Six Months Six Months
Ended Percentage Ended Percentage
January 1, of Net December 26, of Net Increase/ Percentage
(in thousands) 2012 Revenues 2010 Revenues (Decrease) Change
Network Connectivity Products $ 183,209 74 % $ 168,466 78 % $ 14,743 9 %
Storage Connectivity Products 51,465 21 % 38,296 18 % 13,169 34 %
Advanced Technology & Other Products 12,394 5 % 10,333 4 % 2,061 20 %
Total net revenues $ 247,068 100 % $ 217,095 100 % $ 29,973 14 %
NCP primarily consists of standup HBAs, mezzanine cards, I/O ASICs, ULOMs, and
UCNAs. For the six months ended January 1, 2012, our Fibre Channel based
products accounted for greater than 72% of total NCP revenues, however, our
Ethernet based products revenue grew by approximately 97% compared to the same
period in the prior year primarily due to the strength in our 10Gb Ethernet
products. The increase in our NCP revenue for the six months ended January 1,
2012 compared to the six months ended December 26, 2011 was primarily due to an
increase in units shipped of approximately 22%, partially offset by a decrease
in average selling price of approximately 11%.
SCP primarily consists of our InSpeed®, FibreSpy®, SOC or backend connectivity,
and bridge and router products. For the six months ended January 1, 2012, our
backend connectivity products revenue grew by approximately 51%. The increase in
our SCP net revenue for the six months ended January 1, 2012 compared to the six
months ended December 26, 2011 was primarily due to an increase in units shipped
of approximately 29%, combined with an increase in average selling price of
approximately 5%.
ATP primarily consists of our iBMCs, which are products sold by ServerEngines
prior to our acquisition on August 25, 2010, OneCommand® Vision software
products, certain legacy products and other products and services. For the six
months ended January 1, 2012, our iBMC based products accounted for greater than
91% of total ATP revenues. The increase in our iBMC based revenue for the six
months ended January 1, 2012 was primarily due to an increase in units shipped
of approximately 123%, which includes units shipped for a full six months in the
current period, partially offset by a decrease in average selling price of
approximately 2%.
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Net Revenues by Major Customers
Customers whose direct net revenues, or total direct and indirect net revenues
(including customer-specific models purchased or marketed indirectly through
distributors, resellers and other third parties), exceeded 10% of our net
revenues were as follows:
Net Revenues by Major Customers
Direct Revenues Total Direct and Indirect Revenues (2)
Six Months Six Months Six Months Six Months
Ended Ended Ended Ended
January 1, December 26, January 1, December 26,
Net revenue percentage (1): 2012 2010 2012 2010
OEM:
EMC - - - 10 %
Hewlett-Packard 23 % 17 % 26 % 19 %
IBM 32 % 25 % 37 % 35 %
(1) Amounts less than 10% are not presented.
(2) Customer-specific models purchased or marketed indirectly through
distributors, resellers, and other third parties are included with the OEM's
revenues in these columns rather than as revenue for the distributors,
resellers or other third parties.
Direct sales to our top five customers accounted for approximately 72% of total
net revenues for the six months ended January 1, 2012, compared to approximately
63% for the six months ended December 26, 2010. Direct and indirect sales to our
top five customers accounted for approximately 80% of total net revenues for the
six months ended January 1, 2012, compared to approximately 78% for the six
months ended December 26, 2010. Our net revenues from customers can be
significantly impacted by changes to our customers' business and their business
models.
Net Revenues by Sales Channel
Net revenues by sales channel were as follows:
Net Revenues by Sales Channel
Six Months Six Months
Ended Percentage Ended Percentage
January 1, of Net December 26, of Net Increase/ Percentage
(in thousands) 2012 Revenues 2010 Revenues (Decrease) Change
OEM $ 221,961 90 % $ 186,860 86 % $ 35,101 19 %
Distribution 25,049 10 % 30,215 14 % (5,166 ) (17 )%
Other 58 - 20 - 38 190 %
Total net revenues $ 247,068 100 % $ 217,095 100 % $ 29,973 14 %
The increase in OEM net revenues for the six months ended January 1, 2012
compared to the six months ended December 26, 2010 was primarily due to an
increase of approximately 37% in SCP revenues combined with an increase of
approximately 13% in NCP revenues generated through our OEMs. The decrease in
distribution net revenues for the six months ended January 1, 2012 compared to
the six months ended December 26, 2010 was primarily due to a decrease of
approximately 14% in NCP net revenues generated through distribution partners.
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Net Revenues by Geographic Territory
Our net revenues by geographic territory based on billed-to location were as
follows:
Net Revenues by Geographic Territory
Six Months Six Months
Ended Percentage Ended Percentage
January 1, of Net December 26, of Net Increase/ Percentage
(in thousands) 2012 Revenues 2010 Revenues (Decrease) Change
Asia Pacific $ 147,054 60 % $ 101,479 47 % $ 45,575 45 %
United States 64,042 26 % 65,323 30 % (1,281 ) (2 )%
Europe, Middle East, and Africa 35,348 14 % 46,717 21 % (11,369 ) (24 )%
Rest of the world 624 - 3,576 2 % (2,952 ) (83 )%
Total net revenues $ 247,068 100 % $ 217,095 100 % $ 29,973 14 %
We believe the increase in Asia Pacific net revenues and decrease in EMEA and
rest of the world net revenues as a percentage of total net revenues for the six
months ended January 1, 2012 compared to the six months ended December 26, 2012
was primarily due to our OEM customers continuing to migrate towards using
contract manufacturers that are predominately located in Asia Pacific. The
United States net revenues as a percentage of total net revenues essentially
remained unchanged. However, as we sell to OEMs and distributors who ultimately
resell our products to their customers, the geographic mix of our net revenues
based on billed-to location may not be reflective of the geographic mix of
end-user demand or installations.
Gross Profit. Gross profit consists of net revenues less cost of sales. Our
gross profit was as follows (in thousands):
Gross Profit
Six Months Ended Percentage of Six Months Ended Percentage of Increase/ Percentage
January 1, 2012 Net Revenues December 26, 2010 Net Revenues (Decrease) Points Change
$140,994 57% $119,831 55% $21,163 2%
Cost of sales includes the cost of producing, supporting, and managing our
supply of quality finished products. Cost of sales also included approximately
$13.7 million and $16.0 million of amortization of technology intangible assets
for the six months ended January 1, 2012 and December 26, 2010, respectively,
with approximately $10.3 million and $6.8 million being related to the
ServerEngines acquisition in the six months ended January 1, 2012 and
December 26, 2010, respectively. Approximately $0.8 million and $0.9 million of
share-based compensation expense was included in cost of sales for the six
months ended January 1, 2012 and December 26, 2010, respectively. Gross margin
percentage was favorably impacted due to higher volume and product mix which was
partially offset by approximately $2.1 million of additional expedite and
freight charges in connection with our activities to mitigate the impact of the
recent floods in Thailand at one of our contract manufacturers. We do not expect
to incur any significant costs related to such flood mitigation activities for
the remainder of the fiscal year. In addition, although gross margin improved in
the first half of fiscal year 2012, we expect the trend toward increased sales
of lower margin products to continue in the future.
Engineering and Development. Engineering and development expenses were as
follows (in thousands):
Engineering and Development
Six Months Ended Percentage of Six Months Ended Percentage of Increase/ Percentage
January 1, 2012 Net Revenues December 26, 2010 Net Revenues (Decrease) Points Change
$80,946 33% $79,932 37% $1,014 (4)%
Engineering and development expenses for the six months ended January 1, 2012
compared to the six months ended December 26, 2010 increased approximately $1.0
million, or 1%. Approximately $5.3 million and $9.5 million of share-based
compensation expense were included in engineering and development costs for the
six months ended January 1, 2012 and December 26, 2010, respectively, with
approximately $1.0 million and $5.3 million being related to the ServerEngines
acquisition in the six months ended January 1, 2012 and December 26, 2010,
respectively. Engineering and development headcount increased to 629 at
January 1, 2012 from 616 at December 26, 2010. The increase in headcount
resulted in a net increase of approximately $4.3 million in salary and related
expenses primarily due to recognizing six months of salary and related expenses
from the ServerEngines acquisition during the current six months ended
January 1, 2012 compared to four months of salary and related expenses in the
prior year period. The increase in expenses during the six months ended
January 1, 2012 was also due to an increase performance-based compensation of
approximately $1.0 million, an increase in nonrecurring engineering, prototypes,
and related costs associated with new product development of approximately $1.0
million, partially offset by lower depreciation of approximately $0.8 million.
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Selling and Marketing. Sales and marketing expenses were as follows (in
thousands):
Selling and Marketing
Six Months Ended Percentage of Six Months Ended Percentage of Increase/ Percentage
January 1, 2012 Net Revenues December 26, 2010 Net Revenues (Decrease) Points Change
$29,877 12% $26,935 12% $2,942 -
Selling and marketing expenses for the six months ended January 1, 2012 compared
to the six months ended December 26, 2010 increased approximately $2.9 million,
or 11%. Approximately $1.9 million and $2.3 million of share-based compensation
expense were included in selling and marketing costs for the six months ended
January 1, 2012 and December 26, 2010, respectively. Selling and marketing
headcount increased to 150 at January 1, 2012 from 135 at December 26, 2010. The
increase in headcount resulted in a net increase of approximately $1.0 million
in salary and related expenses as compared to the same period in fiscal 2011.
The increase in selling and marketing expenses during the six months ended
January 1, 2012 was primarily due to an increase in marketing and advertising
costs of approximately $1.5 million and an increase in performance based
compensation of approximately $0.7 million.
General and Administrative General and administrative expenses were as follows
(in thousands):
General and Administrative
Six Months Ended Percentage of Six Months Ended Percentage of Increase/ Percentage
January 1, 2012 Net Revenues December 26, 2010 Net Revenues (Decrease) Points Change
$20,988 8% $31,282 14% $(10,294) (6)%
General and administrative expenses for the six months ended January 1, 2012
compared to the six months ended December 26, 2010 decreased approximately $10.3
million, or 33%. Approximately $4.6 and $11.3 million of share-based
compensation expense were included in general and administrative costs for the
six months ended January 1, 2012 and December 26, 2010, respectively, with
approximately $1.7 million and $8.6 million being related to the ServerEngines
acquisition in the six months ended December 26, 2010. General and
administrative headcount decreased slightly to 139 at January 1, 2012 from 140
at December 26, 2010. Although headcount decreased slightly as of the end of the
current six month period ended January 1, 2012, salary and related expenses
increased approximately $1.1 million due to the higher headcount for most of the
current six month period compared to the same period in fiscal 2011. The
remaining change was primarily due to a decrease in litigation costs of
approximately $3.7 million, which included reimbursements received from our
suppliers related to the Broadcom litigation of approximately $1.6 million, and
the non-recurrence of acquisition related costs that were incurred in the same
period in fiscal 2011 for the acquisition of ServerEngines of approximately $1.2
million.
Amortization of Other Intangible Assets. Amortization expense was as follows (in
thousands):
Amortization of Other Intangible AssetsSix Months Ended Percentage of Six Months Ended Percentage of Increase/ Percentage
January 1, 2012 Net Revenues December 26, 2010 Net Revenues (Decrease) Points Change
$3,364 2% $5,809 3% $(2,445) (1)%
Amortization of other intangible assets for the six months ended January 1, 2012
compared to the six months ended December 26, 2010 decreased by approximately
$2.4 million, or 42%. The decrease was primarily due to a lower intangible
assets balance at the beginning of the current six month period as a result of
certain intangible assets being fully amortized at the end of fiscal 2011.
Non-operating Income (Expense), net. Non-operating income (expense), net, was as
follows (in thousands):
Non-operating Income (Expense), net
Six Months Ended Percentage of Six Months Ended Percentage of Increase/ Percentage
January 1, 2012 Net Revenues December 26, 2010 Net Revenues (Decrease) Points Change
$593 -% $(541) -% $1,134 -
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Our non-operating income (expense), net, for the six months ended January 1,
2012 compared to the six months ended December 26, 2010 increased approximately
$1.1 million, or 210%. The net increase was primarily due to foreign exchange
gains of approximately $0.5 million combined with the absence of a one-time
charge recorded in the prior year period for the settlement of our notes
receivable from ServerEngines in connection with the acquisition in August 2010,
as required by the authoritative guidance for business combinations of
approximately $0.4 million.
Income Taxes. Income taxes were as follows (in thousands):
Income Taxes
Six Months Ended Percentage of Six Months Ended Percentage of Increase/ Percentage
January 1, 2012 Net Revenues December 26, 2010 Net Revenues (Decrease) Points Change
$(1,423) (1)% $24,932 12% $(26,355) (13)%
Income taxes for the six months ended January 1, 2012 compared to the six months
ended December 26, 2010 decreased approximately $26.4 million. Our effective tax
(benefit)/expense rate was approximately (22%) and 101% for the six months ended
January 1, 2012 and December 26, 2010, respectively. The decrease in our
effective tax rate for the six months ended January 1, 2012 compared to the six
months ended December 26, 2010 was primarily due to a platform contribution
transaction entered into by our U.S. and international subsidiaries during the
same period of the prior year which resulted in incremental tax expense of
approximately $36.7 million for fiscal 2011. In addition, higher projected
worldwide income, an increase in the mix of revenue from international versus
U.S. locations, and a reduction in non-deductible stock-based compensation
expense related to the ServerEngines acquisition also decreased our effective
tax rate for the six months ended January 1, 2012.
Critical Accounting Policies
The preparation of our condensed consolidated financial statements requires
estimation and judgment that affect the reported amounts of net revenues,
expenses, assets, and liabilities in accordance with accounting principles
generally accepted in the United States. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances and which form the basis for making judgments about the
carrying values of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the periods
presented. Critical accounting policies are defined as those that are reflective
of significant judgments and uncertainties.
Changes in judgments and uncertainties relating to these estimates could
potentially result in materially different results under different assumptions
and conditions. If these estimates differ significantly from actual results, the
impact to the condensed consolidated financial statements may be material. We
believe that the critical accounting policies that are the most significant for
purposes of fully understanding and evaluating our reported financial results
include the following:
Revenue Recognition. We generally recognize revenue at the time of shipment when
title and risk of loss have passed, evidence of an arrangement has been
obtained, pricing is fixed or determinable, and collectibility is reasonably
assured (Basic Revenue Recognition Criteria). We make certain sales through two
tier distribution channels and have various distribution agreements with
selected distributors and Master Value Added Resellers (collectively, the
Distributors). These distribution agreements may be terminated upon written
notice by either party. Additionally, these Distributors are generally given
privileges to return a portion of inventory and to participate in price
protection and cooperative marketing programs. Therefore, we recognize revenue
on our standard products sold to our Distributors based on data received from
the Distributors and management's estimates to approximate the point that these
products have been resold by the Distributors. OEM-specific models sold to our
Distributors are governed under the related OEM agreements rather than under
these distribution agreements. We recognize revenue at the time of shipment for
OEM specific products shipped to the Distributors when the Basic Revenue
Recognition Criteria have been met. Additionally, we maintain sales related
reserves for our sales incentive programs. We classify the costs of these
incentive programs based on the benefit received, if applicable, as a reduction
of revenue, a cost of sale, or an operating expense.
Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts
based upon historical write-offs as a percentage of net revenues and
management's review of outstanding accounts receivable. Amounts due from
customers are charged against the allowance for doubtful accounts when
management believes that
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collectibility of the amount is unlikely. Although we have not historically
experienced significant losses on accounts receivable, our accounts receivable
are concentrated with a small number of customers. Consequently, any write-off
associated with one of these customers could have a significant impact on our
allowance for doubtful accounts and results of operations.
Inventories. Inventories are stated at the lower of cost, on a first-in,
first-out basis, or market. We use a standard cost system to determine cost. The
standard costs are adjusted periodically to represent actual cost. We regularly
compare forecasted demand and the composition of the forecast against inventory
on hand and open purchase commitments in an effort to ensure that the carrying
value of inventory does not exceed net realizable value. Accordingly, we may
have to reduce the carrying value of excess and obsolete inventory if forecasted
demand decreases.
Intangible Assets and Other Long-Lived Assets. Intangible assets resulting from
acquisitions or licensing agreements are carried at cost less accumulated
amortization and impairment charges, if any. For assets with determinable useful
lives, amortization is computed using the straight-line method over the
estimated economic lives of the respective intangible assets, ranging from two
to ten years. Furthermore, we assess whether our intangible assets and other
long-lived assets should be tested for recoverability periodically and whenever
events or circumstances indicate that their carrying value may not be
recoverable. The amount of impairment, if any, is measured based on fair value,
which is determined using projected discounted future operating cash flows.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less selling costs.
Goodwill. Goodwill is not amortized, but instead is tested at least annually for
impairment, or more frequently when events or changes in circumstances indicate
that goodwill might be impaired. Management considers our business as a whole to
be its reporting unit for purposes of testing for impairment. The annual
impairment test is performed during the fourth fiscal quarter.
We elected to early adopt the Financial Accounting Standards Board's (FASB)
Accounting Standards Update 2011-08, "Intangibles - Goodwill and Other (Topic
350): Testing Goodwill for Impairment" (ASU 2011-08) guidance during the first
fiscal quarter ended October 2, 2011. There was no financial statement impact as
a result of our early adoption of this guidance in the six month period ended
January 1, 2012. We will continue to perform our annual impairment test during
the fourth fiscal quarter. As of January 1, 2012, the fair value of the
reporting unit exceeded its carrying value.
Under ASU 2011-08, we have the option to first assess the qualitative factors to
determine whether the existence of events or circumstances leads to a
determination that it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. If, after assessing the totality of
events or circumstances, we determine it is not more likely than not that the
fair value of a reporting unit is less than its carrying amount, then performing
the two-step impairment test is unnecessary. However, if we conclude otherwise,
then we are required to perform the first step of the two-step impairment test.
If the carrying amount of a reporting unit exceeds its fair value, then we are
required to perform the second step of the goodwill impairment test to measure
the amount of the impairment loss, if any. We also have the option to bypass the
qualitative assessment for any reporting unit in any period and proceed directly
to performing the first step of the two-step goodwill impairment test. We may
resume performing the qualitative assessment in any subsequent period.
A two-step test is used to identify the potential impairment and to measure the
amount of goodwill impairment, if any. The first step is to compare the fair
value of the reporting unit with its carrying amount, including goodwill. If the
fair value of the reporting unit exceeds its carrying amount, goodwill is
considered not impaired; otherwise, goodwill is impaired and the loss is
measured by performing step two. Under step two, the impairment loss is measured
by comparing the implied fair value of the reporting unit goodwill with the
carrying amount of goodwill.
Income Taxes. We account for income taxes using the asset and liability method,
under which we recognize deferred tax assets and liabilities for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and for net operating loss and tax credit carryforwards.
Tax positions that meet a more-likely-than-not recognition threshold are
recognized in the financial statements.
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As a multinational corporation, we are subject to complex tax laws and
regulations in various jurisdictions. The application of tax laws and
regulations is subject to legal and factual interpretation, judgment, and
uncertainty. Tax laws themselves are subject to change as a result of changes in
fiscal policy, changes in legislation, evolution of regulations and court
rulings. Therefore, the actual liability for U.S. or foreign taxes may be
materially different from our estimates, which could result in the need to
record additional liabilities or potentially to reverse previously recorded tax
liabilities.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date. A valuation allowance is recorded by the Company
against any deferred tax assets when, in the judgment of management, it is more
likely than not that all of a deferred tax asset will not be realized. In
assessing the need for a valuation allowance, we consider all positive and
negative evidence, including recent financial performance, scheduled reversals
of temporary differences, projected future taxable income, availability of
taxable income in carryback periods and tax planning strategies to form a
conclusion. Based on a review of such information, we believe that sufficient
positive evidence exists in the form of historical taxable income, projections
of taxable income in future years and available tax planning strategies to
conclude that it is more likely than not that we would realize our federal,
foreign and certain state deferred tax assets. However, we believe that
sufficient negative evidence exists to support that we will not be able to
realize other state deferred tax assets and, therefore, we continue to carry a
full valuation allowance against such state deferred tax assets.
Stock-Based Compensation. We account for our stock-based awards to employees and
non-employees using the fair value method. Stock-based compensation cost is
measured at grant date, based on the fair value of the award, and is recognized
as expense over the requisite service period. Although we grant both unvested
stock awards and stock options, the majority of the awards granted and stock
based compensation recognized consists of unvested stock awards. The fair value
of each unvested stock award is determined based on the closing price of our
common stock at grant date. For stock options, the measurement of stock-based
compensation cost is based on several criteria including, but not limited to,
the valuation model used and associated input factors principally stock price
volatility and award forfeiture rate and, to a lesser extent, expected term,
dividend rate, and risk free interest rate. The input factors used in the
valuation model are based on subjective future expectations combined with
management judgment. If there is a difference between the forfeiture assumptions
used in determining stock-based compensation costs and the actual forfeitures,
which become known over time, we may change the assumptions used in determining
stock-based compensation costs. These changes may materially impact our results
of operations in the period such changes are made. See Note 10 in the
accompanying notes to condensed consolidated financial statements included in
this Form 10-Q for additional information and related disclosures.
Litigation Costs. We record a charge equal to at least the minimum estimated
liability for a loss contingency when both of the following conditions are met:
(i) information available prior to issuance of the financial statements
indicates that it is probable that a liability had been incurred at the date of
the financial statements and (ii) the range of loss can be reasonably estimated.
Legal and other litigation related costs are recognized as the services are
provided. We record insurance recoveries for litigation costs for which both of
the following conditions are met: (i) the recovery is probable and
(ii) collectability is reasonably assured. The insurance recoveries recorded are
only to the extent the litigation costs have been incurred and recognized in the
financial statements; however, it is reasonably possible that the actual
recovery may be significantly different from our estimates. There are many
uncertainties associated with any litigation, and we cannot provide assurance
that any actions or other third party claims against us will be resolved without
costly litigation or substantial settlement charges. If any of those events were
to occur, our business, financial condition and results of operations could be
materially and adversely affected.
Recently Adopted and Recently Issued Accounting Standards
See Note 1 in the accompanying notes to condensed consolidated financial
statements included in Part I, Item I of this Form 10-Q for a description of the
recently adopted accounting standards.
Liquidity and Capital Resources
Our principal sources of liquidity consist of our existing cash balances and
investments, as well as funds expected to be generated from operations. At
January 1, 2012, we had approximately $257.6 million in working capital and
approximately $191.7 million in cash and cash equivalents and current
investments. At July 3, 2011, we had approximately $230.9 million in working
capital and approximately $168.2 million in cash and cash equivalents and
current investments. We maintain an investment portfolio of various security
holdings, types, and maturities.
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We invest in instruments that meet credit quality standards in accordance with
our investment guidelines. We limit our exposure to any one issuer or type of
investment with the exception of U.S. Government issued or U.S. Government
sponsored entity securities. Our investments consisted mostly of term deposits,
fixed income securities and corporate bonds as of January 1, 2012 and we did not
hold any auction rate securities or direct investments in mortgage-backed
securities.
Our cash balances and investments are held in numerous locations throughout the
world. As of January 1, 2012, our international subsidiaries held approximately
13% of our total cash, cash equivalents and investment securities, the majority
of which will be used to repay obligations to U.S. affiliate entities that arise
in the normal course of business and would not result in additional U.S. tax
liabilities upon repatriation.
Our accounts receivable are primarily with large multinational OEM customers and
denominated in U.S. dollars. As of January 1, 2012, approximately 10% of our
accounts receivable are related to customers with a European billing address.
However, we do not believe that the ongoing European Sovereign debt crisis will
materially impact the collectability of our accounts receivable or adversely
affect our financial position or liquidity.
Cash Flows
The following table summarizes our cash flows:
Six Months Ended
January 1, December 26,
2012 2010
(In thousands)
Net cash provided by (used in):
Operating activities $ 38,131 $ 17,012
Investing activities (13,425 ) (29,805 )
Financing activities (22,972 ) (67,341 )
Effect of foreign currency translation on cash
and cash equivalents (554 ) 111
Increase (decrease) in cash and cash equivalents: $ 1,180 $ (80,023 )
Operating Activities
Cash provided by operating activities during the six months ended January 1,
2012 was approximately $38.1 million compared to approximately $17.0 million
during the six months ended December 26, 2010. The current period cash provided
by operating activities was primarily due to net income of approximately $7.8
million, non-cash adjustments for amortization of intangible assets of
approximately $17.1 million, share-based compensation expense of approximately
$12.6 million, depreciation and amortization of property and equipment of
approximately $9.2 million, and deferred income taxes of approximately $1.7
million, and changes in operating assets and liabilities including an increase
in accounts receivable of approximately $14.8 million, a decrease in accounts
payable, accrued liabilities and other liabilities of approximately $9.2
million, and an increase in inventories of approximately $2.2 million.
Investing Activities
Cash used in investing activities during the six months ended January 1, 2012
was approximately $13.4 million compared to approximately $29.8 million during
the six months ended December 26, 2010. The current period usage of cash was
primarily due to approximately $6.1 million in purchases of property and
equipment and purchases of investments partially offset by maturities of
investments that were not reinvested.
Financing Activities
Cash used in financing activities during the six months ended January 1, 2012
was approximately $23.0 million compared to approximately $67.3 million during
the six months ended December 26, 2010. The current period usage of cash was
primarily due to the purchase of treasury stock of approximately $20.1 million.
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Prospective Capital Needs
In early August 2008, our Board of Directors authorized a plan to repurchase up
to $100.0 million of our outstanding common stock. In April 2009, upon receipt
of an unsolicited takeover proposal and related tender offer of Broadcom to
acquire us, our Board of Directors elected to temporarily suspend any activity
under the share repurchase plan. In light of Broadcom allowing its tender offer
to expire on July 14, 2009, Emulex's Board of Directors elected to reactivate
the $100.0 million share repurchase plan effective July 15, 2009. From June 29,
2009 through January 1, 2012, the Company repurchased approximately 9.0 million
shares of its common stock for an aggregate purchase price of approximately
$78.4 million at an average purchase price of $8.67 per share under this plan.
Approximately 2.9 million shares for an aggregate purchase price of
approximately $20.1 million at an average purchase price of $6.83 per share were
purchased during the six months ended January 1, 2012. Our Board of Directors
has not set an expiration date for the plan. Therefore, we may repurchase
additional shares under this plan from time to time through open market
purchases or privately negotiated transactions. It is expected that any future
share repurchases will be financed by available cash and cash from operations.
We plan to continue our strategic investment in research and development, sales
and marketing, capital equipment, and facilities. We may also consider internal
and external investment opportunities in order to achieve our growth and market
leadership goals, including licensing and joint-development agreements with our
suppliers, customers, and other third parties. We believe that our existing cash
and cash equivalents, current investments, and anticipated cash flows from
operating activities will be sufficient to support our working capital needs,
capital expenditure requirements and stock repurchasing expenditures for at
least the next 12 months. We currently do not have any outstanding lines of
credit or other borrowings.
We have disclosed outstanding legal proceedings in Note 8 in the accompanying
notes to condensed consolidated financial statements included in Part I, Item I
of this Form 10-Q. The legal proceedings include the consolidated patent
infringement lawsuit filed by Broadcom against us. This lawsuit continues to
present risks that could have a material adverse effect on our business,
financial condition, or results of operations, including loss of patent rights,
monetary damages, and injunction against the sale of accused products. We
continue to present a vigorous post-trial defense against this lawsuit,
including a potential appeal of the trial verdict. We accrued the approximately
$0.4 million of damages liability during our quarter ended October 2, 2011 as a
result of the jury's determination rendered on October 12, 2011 that we are to
pay these damages to Broadcom, but we are unable to determine whether any
further loss will occur or to estimate the range of such further loss.
Therefore, no further loss has been accrued. See "Third party claims of
intellectual property infringement could adversely affect our business" and "We
are dependent on sole source and limited source third party suppliers and EMS
providers for our products" in Item 1A-Risk Factors of this Form 10-Q for a
description of certain risks relating to the litigation with Broadcom that could
impact our liquidity and prospective capital needs.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that
generate material relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or for other contractually narrow or
limited purposes. As of January 1, 2012, we did not have any significant
off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC
Regulation S-K.
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Contractual Obligations and Commercial Commitments
The following summarizes our contractual obligations as of January 1, 2012, and
the effect such obligations are expected to have on our liquidity in future
periods. The estimated payments reflected in this table are based on
management's estimates and assumptions about these obligations. Because these
estimates and assumptions are necessarily subjective, the actual cash outflows
in future periods will vary, possibly materially, from those reflected in the
table.
Payments Due by Period
(in thousands)
Remaining
Total 2012 2013 2014 2015 2016 Thereafter
Leases (1) $ 12,132 $ 2,681 $ 4,179 $ 1,465 $ 1,403 $ 1,429 $ 975
Purchase commitments 75,003 75,003 - - - - -
Other commitments (2) 9,954 2,157 2,979 1,407 1,761 942 707
Total (3) $ 97,089 $ 79,841 $ 7,158 $ 2,872 $ 3,164 $ 2,371 $ 1,682
(1) Lease payments include common area maintenance (CAM) charges.
(2) Consists primarily of commitments for software licenses of approximately $4.1
million and non-recurring engineering services of approximately $3.3 million.
(3) Excludes approximately $33.8 million of liabilities for uncertain tax
positions for which we cannot make a reasonably reliable estimate of the
period of payment.
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