Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 27, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 000-27130

 

 

NetApp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   77-0307520
(State or other jurisdiction of   (IRS Employer
incorporation or organization)   Identification No.)

495 East Java Drive,

Sunnyvale, California 94089

(Address of principal executive offices, including zip code)

(408) 822-6000

(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  x    No  ¨

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  x    No  ¨

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. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    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  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at February 21, 2012

Common Stock   362,990,179

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION   

Item 1

   Condensed Consolidated Financial Statements (Unaudited)      3   
  

Condensed Consolidated Balance Sheets as of January 27, 2012 and April 29, 2011

     3   
  

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended January 27, 2012 and January 28, 2011

     4   
  

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended January 27, 2012 and January 28, 2011

     5   
  

Notes to Condensed Consolidated Financial Statements

     6   

Item 2

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      26   

Item 3

   Quantitative and Qualitative Disclosures About Market Risk      41   

Item 4

   Controls and Procedures      43   
PART II — OTHER INFORMATION   

Item 1

   Legal Proceedings      45   

Item 1A

   Risk Factors      45   

Item 2

   Unregistered Sales of Equity Securities and Use of Proceeds      67   

Item 3

   Defaults upon Senior Securities      67   

Item 4

   Mine Safety Disclosures      67   

Item 5

   Other Information      67   

Item 6

   Exhibits      67   

SIGNATURE

     68   

TRADEMARKS

© Copyright 2012 NetApp, Inc. All rights reserved. No portions of this document may be reproduced without prior written consent of NetApp, Inc. NetApp, the NetApp logo, Go further, faster, DataFabric, Data ONTAP, FAServer, FilerView, FlexCache, FlexClone, FlexShare, FlexVol, MultiStore, NearStore, Network Appliance, SecureShare, SnapDrive, SnapLock, SnapManager, SnapMirror, SnapRestore, Snapshot, SnapVault, and WAFL are trademarks or registered trademarks of NetApp, Inc. in the United States and/or other countries. Windows is a registered trademark of Microsoft Corporation. UNIX is a registered trademark of The Open Group. All other brands or products are trademarks or registered trademarks of their respective holders and should be treated as such.

 

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Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

NETAPP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

     January 27,
2012
    April 29,
2011
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 2,420.9      $ 2,757.3   

Short-term investments

     2,445.2        2,417.4   

Accounts receivable, net of allowance of $0.4 million and $0.5 million at January 27, 2012 and April 29, 2011, respectively

     685.4        742.6   

Inventories

     153.8        108.5   

Other current assets

     462.4        339.4   
  

 

 

   

 

 

 

Total current assets

     6,167.7        6,365.2   

Property and equipment, net

     1,081.8        911.6   

Goodwill

     905.2        760.3   

Other intangible assets, net

     257.5        53.0   

Other non-current assets

     409.4        408.7   
  

 

 

   

 

 

 

Total assets

   $ 8,821.6      $ 8,498.8   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 220.2      $ 232.8   

Accrued compensation and related benefits

     269.2        437.2   

Other current liabilities

     358.8        325.8   

1.75% Convertible Senior Notes Due 2013

     0.0        1,150.4   

Short-term deferred revenue

     1,309.3        1,226.6   
  

 

 

   

 

 

 

Total current liabilities

     2,157.5        3,372.8   

1.75% Convertible Senior Notes Due 2013

     1,188.8        0.0   

Other long-term liabilities

     197.3        192.9   

Long-term deferred revenue

     1,236.5        1,088.3   
  

 

 

   

 

 

 

Total liabilities

     4,780.1        4,654.0   
  

 

 

   

 

 

 

Commitments and contingencies (Note 15)

    

1.75% Convertible Senior Notes Due 2013

     0.0        114.6   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock (466.3 and 473.3 shares issued at January 27, 2012 and April 29, 2011, respectively)

     0.5        0.5   

Additional paid-in capital

     4,339.2        3,970.3   

Treasury stock, at cost (104.3 shares at January 27, 2012 and April 29, 2011)

     (2,927.4     (2,927.4

Retained earnings

     2,624.6        2,674.0   

Accumulated other comprehensive income

     4.6        12.8   
  

 

 

   

 

 

 

Total stockholders’ equity

     4,041.5        3,730.2   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 8,821.6      $ 8,498.8   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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NETAPP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)

(Unaudited)

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
    January 28,
2011
    January 27,
2012
    January 28,
2011
 

Revenues:

        

Product

   $ 1,062.7      $ 844.3      $ 3,044.6      $ 2,406.6   

Software entitlements and maintenance

     203.5        182.7        599.7        533.6   

Service

     299.3        262.6        886.4        754.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     1,565.5        1,289.6        4,530.7        3,694.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues:

        

Cost of product

     517.8        328.4        1,415.9        962.9   

Cost of software entitlements and maintenance

     6.2        4.0        17.1        10.9   

Cost of service

     133.0        111.0        379.3        320.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     657.0        443.4        1,812.3        1,293.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     908.5        846.2        2,718.4        2,400.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Sales and marketing

     477.0        397.4        1,385.9        1,134.4   

Research and development

     208.3        166.0        606.6        472.1   

General and administrative

     63.2        61.9        193.4        182.3   

Restructuring and other charges

     0.0        (0.7     0.0        (0.6

Acquisition-related expense

     3.5        0.6        7.4        0.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     752.0        625.2        2,193.3        1,789.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     156.5        221.0        525.1        611.4   

Other expense, net:

        

Interest income

     8.7        10.3        27.6        29.6   

Interest expense

     (18.9     (19.0     (54.7     (56.2

Other income (expense), net

     0.6        0.4        (0.1     1.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (9.6     (8.3     (27.2     (25.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     146.9        212.7        497.9        586.0   

Provision for income taxes

     27.3        26.3        73.2        73.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 119.6      $ 186.4      $ 424.7      $ 512.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

        

Basic

   $ 0.33      $ 0.51      $ 1.17      $ 1.43   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.32      $ 0.46      $ 1.10      $ 1.31   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in net income per share calculations:

        

Basic

     360.3        364.8        364.0        358.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     373.7        406.2        385.1        390.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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NETAPP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

     Nine Months Ended  
     January 27,
2012
    January 28,
2011
 

Cash flows from operating activities:

    

Net income

   $ 424.7      $ 512.5   

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

    

Depreciation and amortization

     210.5        123.3   

Stock-based compensation

     197.8        127.0   

Accretion of discount and issuance costs on notes

     38.7        39.2   

Deferred income taxes

     (64.0     (40.4

Tax benefit from stock-based compensation

     74.7        74.9   

Excess tax benefit from stock-based compensation

     (80.7     (63.3

Other non-cash items, net

     (7.9     14.2   

Changes in assets and liabilities, net of acquisitions of businesses:

    

Accounts receivable

     55.8        (77.5

Inventories

     (8.8     18.8   

Other operating assets

     (49.2     31.7   

Accounts payable

     (10.4     (2.3

Accrued compensation and other current liabilities

     (160.5     (40.6

Deferred revenue

     234.5        151.5   

Other operating liabilities

     24.8        18.5   
  

 

 

   

 

 

 

Net cash provided by operating activities

     880.0        887.5   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of investments

     (1,718.9     (2,190.4

Redemptions of investments

     1,697.7        1,354.9   

Purchases of property and equipment

     (282.9     (149.8

Acquisitions of businesses, net of cash acquired

     (480.0     (74.9

Other investing activities, net

     0.0        0.8   
  

 

 

   

 

 

 

Net cash used in investing activities

     (784.1     (1,059.4
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuance of common stock

     101.0        312.0   

Repurchase and retirement of common stock

     (600.0     0.0   

Excess tax benefit from stock-based compensation

     80.7        63.3   

Other financing activities, net

     3.1        0.4   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (415.2     375.7   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (17.1     10.6   

Net increase (decrease) in cash and cash equivalents

     (336.4     214.4   

Cash and cash equivalents:

    

Beginning of period

     2,757.3        1,705.0   
  

 

 

   

 

 

 

End of period

   $ 2,420.9      $ 1,919.4   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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NETAPP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. The Company

Headquartered in Sunnyvale, California, NetApp, Inc. (“we”, “us”, or “the Company”) is a supplier of enterprise storage and data management software and hardware products and services. Our solutions help global enterprises meet major information technology challenges such as managing storage growth, assuring secure and timely information access, protecting data and controlling costs by providing innovative solutions that simplify the complexity associated with managing corporate data.

2. Condensed Consolidated Financial Statements

Fiscal Year — Our fiscal year is reported on a 52- or 53-week year ending on the last Friday in April. The first, second and third quarters of fiscal 2012 and 2011 were each 13-week periods.

Basis of Presentation — The accompanying unaudited condensed consolidated financial statements have been prepared by the Company, and reflect all adjustments, consisting only of normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of our financial position, results of operations, and cash flows for the interim periods presented. The statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these statements do not include all information and footnotes required by GAAP for annual consolidated financial statements, and should be read in conjunction with our audited consolidated financial statements as of and for the fiscal year ended April 29, 2011 contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 23, 2011. The results of operations for the three and nine months ended January 27, 2012 are not necessarily indicative of the operating results to be expected for the full fiscal year or future operating periods.

Financial Statements Presentation — Certain prior period amounts have been reclassified in the accompanying condensed consolidated financial statements to conform to current year presentation.

3. Significant Accounting Policies

There have been no significant changes in our significant accounting policies as of and for the nine months ended January 27, 2012, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended April 29, 2011.

Accounting Standards Recently Adopted

Revenue Recognition

In October 2009, the Financial Accounting Standards Board (FASB) amended the accounting standards for revenue recognition to exclude tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality from the scope of the software revenue recognition guidance. Concurrently, the FASB also amended the accounting standards for multiple deliverable revenue arrangements to:

 

   

provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the arrangement consideration should be allocated among its elements;

 

   

require an entity to allocate revenue in an arrangement that has separate units of accounting using best estimated selling prices (BESP) of deliverables if a vendor does not have vendor-specific objective evidence (VSOE) of fair value or third-party evidence of selling price (TPE); and

 

   

eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method to the separate units of accounting.

We elected to early adopt these standards in the fourth quarter of fiscal 2011, and the standards were applied retrospectively from the beginning of fiscal 2011 for new and materially modified revenue arrangements originating after April 30, 2010. Previously reported quarterly results have been adjusted to reflect the adoption of these standards and differ from the originally reported results.

 

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The majority of our products are hardware systems containing software components that function together to provide the essential functionality of the product. Therefore, our hardware systems and software components essential to the functionality of the hardware systems are considered non-software deliverables and therefore are not subject to industry-specific software revenue recognition guidance.

Our product revenues also include revenues from the sale of non-essential software products. Non-essential software products may operate on our hardware systems, but are not considered essential to the functionality of the hardware. Non-essential software sales generally include a perpetual license to our software. Non-essential software sales continue to be subject to the industry-specific software revenue recognition guidance. For arrangements within the scope of the new guidance, a deliverable constitutes a separate unit of accounting when it has standalone value and there are no customer-negotiated refunds or return rights for the delivered elements.

For transactions entered into or materially modified after April 30, 2010, we recognize revenue in accordance with the new accounting standards when applicable. Certain arrangements with multiple deliverables may continue to have software deliverables that are subject to the existing software revenue recognition guidance along with non-software deliverables that are subject to the new standards. The revenue for these multiple element arrangements is allocated to the software deliverables and the non-software deliverables as a group based on the relative selling prices of all of the deliverables in the arrangement using the selling price hierarchy set forth in the standards.

For our non-software deliverables, we recognize revenue based on the new standards and allocate the arrangement consideration based on the relative selling price of the deliverables. For our non-software deliverables, we use BESP as our selling price. For our software entitlements and support services, we generally use VSOE as our selling price. When we are unable to establish selling prices using VSOE for our software entitlements and support services, we use BESP in our allocation of arrangement consideration.

VSOE of fair value for elements of an arrangement is based upon the normal pricing and discounting practices for those services when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for an element fall within a reasonably narrow pricing range, generally evidenced by a substantial majority of such historical stand-alone transactions falling within a reasonably narrow range. In addition, we consider major service type, customer classifications, and other variables in determining VSOE.

When VSOE cannot be established, we attempt to establish the selling price of each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis. Therefore, we typically are not able to determine TPE for our products or services.

When we are unable to establish the selling price of our non-software deliverables using VSOE or TPE, we use our BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. BESP is determined for a product or service by considering multiple factors, including, but not limited to, cost of products, gross margin objectives, historical pricing practices, customer classes and distribution channels. In determining BESP, we require that the majority of the selling prices fall within a reasonable pricing range, generally evidenced by a majority of such historical transactions falling within a reasonable range.

We regularly review VSOE, TPE, and BESP and maintain internal controls over the establishment and updates of these estimates.

For sales of software deliverables after April 30, 2010 and for all transactions entered into prior to the first quarter of fiscal year 2011, we recognize revenue based on software revenue recognition guidance. Under the software revenue recognition guidance, we use the residual method to recognize revenue when a multiple element arrangement includes one or more elements to be delivered at a future date and VSOE of fair value of all undelivered elements exists. In the majority of our contracts, the only element that remains undelivered at the time of delivery of the product is software entitlements and maintenance (SEM) and/or service. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the contract fee is recognized as product revenues. If evidence of the fair value of one or more undelivered elements does not exist, all revenue is generally deferred until the earlier of when delivery of those elements occurs or when fair value can be established. In instances where the only undelivered element without fair value is SEM, the entire arrangement is recognized ratably over the maintenance period.

 

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Recent Accounting Standards Not Yet Effective

In May 2011, the FASB issued new guidance for fair value measurements to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards. The guidance changes certain fair value measurement principles and enhances the disclosure requirements, particularly for level 3 fair value measurements. The guidance is effective for us prospectively beginning in our fourth quarter of fiscal 2012. There will be no impact to our results of operations, financial position and cash flows as the guidance relates only to financial statement presentation.

In June 2011, as modified in December 2011, the FASB issued new guidance on the presentation of comprehensive income. Specifically, the new guidance requires an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. The specific requirement to present items that are reclassified from accumulated other comprehensive income to net income separately within their respective components of net income and other comprehensive income has been deferred. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for us beginning in our first quarter of fiscal 2013 and is required to be applied retrospectively. There will be no impact to our results of operations, financial position and cash flows as the guidance relates only to financial statement presentation.

In September 2011, the FASB issued a revised accounting standard intended to simplify how an entity tests goodwill for impairment. The revised standard will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will no longer be required to calculate the fair value of a reporting unit unless it determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This guidance is effective for us beginning in our first quarter of fiscal 2013. We do not expect this guidance to have a material impact on our consolidated financial statements.

In December 2011, the FASB issued new guidance that will require us to disclose information about offsetting arrangements associated with financial and derivative instruments to enable users of our financial statements to understand the effect of those arrangements on our financial position. This guidance is effective for us beginning in our first quarter of fiscal 2014 and is required to be applied retrospectively. We are currently evaluating the impact of adoption on our consolidated financial statements.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates include, but are not limited to, revenue recognition, reserve and allowances; inventory valuation and purchase order accruals; valuation of goodwill and intangibles; restructuring reserves; product warranties; employee benefits; stock-based compensation; loss contingencies; investment impairments; income taxes, and fair value measurements. Actual results could differ materially from those estimates.

4. Statements of Cash Flows

Non-cash investing and financing activities and supplemental cash flow information are as follows (in millions):

 

     Nine Months Ended  
     January  27,
2012
     January  28,
2011
 

Non-cash Investing and Financing Activities:

     

Reclassification of equity component of convertible debt

   $ 114.6       $ 0.0   

Acquisition of property and equipment on account

   $ 37.4       $ 7.8   

Acquisition of property and equipment through long-term financing

   $ 3.0       $ 12.6   

Options assumed from acquired business

   $ 0.0       $ 3.3   

Supplemental Cash Flow Information:

     

Income taxes paid, net of refunds

   $ 39.3       $ 23.4   

Interest paid (net of capitalized interest of $1.3 million and $0.0 million, respectively)

   $ 21.3       $ 22.6   

 

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5. Business Combinations

Fiscal 2012 Acquisition

On May 6, 2011, we completed the acquisition of certain assets related to the Engenio external storage systems business (Engenio) of LSI Corporation (LSI). We paid LSI $480.0 million in cash and also assumed certain liabilities related to Engenio. During the three years following the acquisition, LSI will pay us a total of $13.0 million to service certain LSI customer warranties. This acquisition enables us to address growing customer requirements in the areas of high bandwidth and intensive analytics workloads such as video, including full-motion video capture and digital video surveillance, as well as high-performance computing applications, such as genomics sequencing and scientific research.

The purchase price was allocated to Engenio’s net tangible and intangible assets as of the date of acquisition based on various fair value estimates and analyses, including work performed by third-party valuation specialists.

The following are the preliminary estimated fair value of assets acquired and liabilities assumed as of the closing date (in millions):

 

Current assets

   $ 49.8   

Property and equipment

     33.3   

Identified intangible assets

     272.1   

Goodwill

     143.7   

Other assets

     9.3   
  

 

 

 

Total assets acquired

     508.2   

Current liabilities

     (20.9

Other liabilities

     (7.3
  

 

 

 

Total purchase price

   $ 480.0   
  

 

 

 

Adjustments may be made to the allocation of the purchase price during the measurement period to reflect adjustments related to facts existing at the time of the acquisition.

As this was an asset acquisition, United States (U.S.) goodwill is deductible for income tax purposes. The goodwill is comprised of expected synergies in utilizing Engenio’s technology in our products and channels (and vice versa), reduction in future combined research and development expenses, and intangible assets, such as acquired workforce, that do not qualify for separate recognition.

The identified intangible assets as of the date of acquisition, which are amortized on a straight-line basis over their estimated useful lives, consisted of the following (in millions, except useful life):

 

     Estimated  Fair
Value
     Useful  Life
(Years)
 

Developed technology

   $ 216.0         5   

Customer contracts/relationships

     45.0         2   

Trademarks and trade names

     7.0         2   

Order backlog

     2.5         0   

Covenant not to compete

     1.6         3   
  

 

 

    

Total identified intangible assets

   $ 272.1      
  

 

 

    

Our consolidated net revenues for the three and nine months ended January 27, 2012 included $178.3 million and $517.8 million, respectively, attributable to Engenio since the acquisition. Due to continued integration of the combined businesses since the date of acquisition, it is impracticable to determine the earnings contributed by Engenio.

The following unaudited pro forma condensed combined financial information gives effect to the acquisition of Engenio as if it were consummated on May 1, 2010 (the beginning of the comparable prior annual reporting period). Due to historically differing fiscal year ends of the Company and Engenio, the unaudited pro forma condensed combined financial information for the three and nine months ended January 28, 2011 is based on historical results of the Company for the three and nine months ended January 28, 2011 and the historical results of Engenio for the three and nine months ended December 31, 2010.

 

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Table of Contents

The unaudited pro forma condensed combined financial information is presented for informational purposes only, is not intended to represent or be indicative of the results of operations of the Company that would have been reported had the acquisition occurred on May 1, 2010 and should not be taken as representative of future condensed consolidated results of operations of the combined company (in millions):

 

     Three Months Ended      Nine Months Ended  
     January  27,
2012
     January  28,
2011
     January  27,
2012
     January  28,
2011
 

Net revenues

   $ 1,565.5       $ 1,486.6       $ 4,539.3       $ 4,240.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 119.6       $ 142.8       $ 431.3       $ 459.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

A nonrecurring adjustment of $5.6 million has been reflected in the unaudited pro forma condensed combined information with the effect of increasing net income for the nine months ended January 27, 2012 and decreasing net income for the nine months ended January 28, 2011 to present the impact on cost of revenues from the step-up in inventory as if the acquisition occurred on May 1, 2010.

Acquisition-related expense included in our condensed consolidated statements of operations was:

 

     Three Months
Ended
     Nine Months
Ended
 
     January  27,
2012
     January  27,
2012
 

Acquisition-related expense

   $ 3.5       $ 7.4   
  

 

 

    

 

 

 

For the nine months ended January 27, 2012, acquisition-related expense consisted of due diligence and legal charges of $0.7 million directly related to the acquisition of Engenio and $6.7 million of integration charges related to the combined business.

Fiscal 2011 Acquisitions

During fiscal 2011, we acquired two privately held companies, Akorri Networks, Inc. (Akorri), and Bycast Inc. (Bycast). Akorri, headquartered in Massachusetts, is a provider of data center management software focused on performance and capacity analytics for virtualized, shared information technology infrastructures. The Akorri acquisition extends our offering by adding performance capacity analytics to provide customers greater visibility across the entire IT stack, resulting in further improvement in IT efficiency and flexibility through functions that help control, automate, and analyze their shared IT infrastructure. Bycast, headquartered in Vancouver, Canada, develops and sells software designed to manage petabyte-scale, globally distributed repositories of images, video and records for enterprises and service providers. The Bycast acquisition extends our position in unified storage by adding an object-based storage software offering, which simplifies the task of large-scale storage and improves the ability to search and locate data objects.

The following table summarizes the purchase price components and equity interests acquired as of January 27, 2012 (in millions):

 

     Akorri     Bycast  
Acquisition dates    January 31,
2011
    May 13,
2010
 

Percentage of equity interest acquired

     100     100

Total purchase price

   $ 62.3      $ 83.8   

Cash component of purchase price

   $ 62.3      $ 80.5   

Fair value of vested options assumed

   $ 0.0      $ 3.3   

Purchase price held in escrow to secure obligations of acquired entity

   $ 7.9      $ 0.0   

In the three months ended January 27, 2012, the escrow period for the Bycast acquisition expired and the remaining purchase price of $13.1 million was released to the former shareholders. Subject to any claims for indemnity, the escrow funds for Akorri will be released in July 2012.

A summary of the purchase price allocation as of the respective acquisition dates is as follows (in millions):

 

     Akorri      Bycast  

Cash

   $ 0.7       $ 5.7   

Identified intangible assets

     22.0         23.6   

Goodwill

     23.3         56.0   

Deferred income taxes

     9.9         (3.9

Other assets, net

     6.4         2.4   
  

 

 

    

 

 

 

Total purchase price

   $ 62.3       $ 83.8   
  

 

 

    

 

 

 

 

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Table of Contents

In the three and nine months ended January 27, 2012, an adjustment of $1.2 million was recorded to the value of Akorri goodwill related to an adjustment to deferred income taxes.

Goodwill related to the Akorri and Bycast acquisitions is not deductible for income tax purposes.

The results of operations of Akorri and Bycast are included in our condensed consolidated statements of operations from their respective acquisition dates. Pro forma results of operations have not been presented because the acquisitions were not material to our results of operations.

6. Goodwill and Other Intangible Assets, Net

Goodwill and other intangible assets, net are summarized as follows (in millions):

 

Goodwill:

  

April 29, 2011

   $ 760.3   

Additions

     143.7   

Adjustments

     1.2   
  

 

 

 

January 27, 2012

   $ 905.2   
  

 

 

 

 

     January 27, 2012      April 29, 2011  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Other
Intangible

Assets,  Net
     Gross
Carrying
Amount
     Accumulated
Amortization
    Other
Intangible

Assets,  Net
 

Other Intangible Assets, Net:

               

Developed technology

   $ 282.1       $ (65.0   $ 217.1       $ 66.1       $ (23.2   $ 42.9   

Customer contracts/relationships

     59.5         (26.5     33.0         12.0         (4.6     7.4   

Trademarks and trade names

     14.7         (8.7     6.0         7.7         (5.5     2.2   

Covenants not to compete

     2.2         (0.8     1.4         0.6         (0.1     0.5   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total other intangible assets

   $ 358.5       $ (101.0   $ 257.5       $ 86.4       $ (33.4   $ 53.0   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense for other intangible assets is summarized below (in millions):

 

     Three Months Ended      Nine Months Ended       
     January 27,
2012
     January 28,
2011
     January 27,
2012
     January 28,
2011
     Statements of  Operations
Classifications

Developed technology

   $ 14.0       $ 2.5       $ 41.9       $ 10.2       Cost of product revenues

Customer contracts/relationships

     6.4         0.6         21.8         2.2       Sales and marketing

Trademarks and trade names

     1.0         0.3         3.3         0.9       Sales and marketing

Covenants not to compete

     0.2         0.0         0.6         0.0       Sales and marketing/Research and development
  

 

 

    

 

 

    

 

 

    

 

 

    
   $ 21.6       $ 3.4       $ 67.6       $ 13.3      
  

 

 

    

 

 

    

 

 

    

 

 

    

As of January 27, 2012, future amortization expense related to identifiable intangible assets is as follows (in millions):

 

Fiscal Year

   Amount  

Remainder of 2012

   $ 21.4   

2013

     84.2   

2014

     52.0   

2015

     50.7   

2016

     46.9   

2017

     2.3   
  

 

 

 

Total

   $ 257.5   
  

 

 

 

7. Balance Sheet Details

Cash and cash equivalents (in millions):

 

     January 27,
2012
     April 29,
2011
 

Cash

   $ 754.6       $ 1,169.1   

Cash equivalents

     1,666.3         1,588.2   
  

 

 

    

 

 

 

Cash and cash equivalents

   $ 2,420.9       $ 2,757.3   
  

 

 

    

 

 

 

 

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Table of Contents

Inventories (in millions):

 

     January 27,
2012
     April 29,
2011
 

Purchased components

   $ 15.6       $ 7.5   

Work-in-process

     0.0         0.1   

Finished goods

     138.2         100.9   
  

 

 

    

 

 

 

Inventories

   $ 153.8       $ 108.5   
  

 

 

    

 

 

 

Other current assets (in millions):

 

     January 27,
2012
     April 29,
2011
 

Deferred tax assets, net

   $ 223.2       $ 145.7   

Prepaid expenses and other current assets

     231.1         188.4   

Short-term restricted cash

     8.1         5.3   
  

 

 

    

 

 

 

Other current assets

   $ 462.4       $ 339.4   
  

 

 

    

 

 

 

Property and equipment, net (in millions):

 

     January 27,
2012
    April 29,
2011
 

Land

   $ 206.1      $ 204.7   

Buildings and building improvements

     417.3        406.2   

Leasehold improvements

     92.8        79.3   

Computer, production, engineering and other equipment

     603.1        475.5   

Software

     360.0        270.4   

Furniture and fixtures

     70.5        61.5   

Construction-in-progress

     107.7        91.9   
  

 

 

   

 

 

 
     1,857.5        1,589.5   

Accumulated depreciation and amortization

     (775.7     (677.9
  

 

 

   

 

 

 

Property and equipment, net

   $ 1,081.8      $ 911.6   
  

 

 

   

 

 

 

Software includes capitalized internal-use software development costs. The net book value of computer software is as follows (in millions):

 

     January 27,
2012
     April 29,
2011
 

Computer software

   $ 154.0       $ 88.3   
  

 

 

    

 

 

 

Other non-current assets (in millions):

 

     January 27,
2012
     April 29,
2011
 

Auction rate securities

   $ 51.0       $ 65.1   

Restricted cash

     2.4         2.8   

Deferred tax assets, net

     183.9         213.2   

Other assets

     172.1         127.6   
  

 

 

    

 

 

 

Other non-current assets

   $ 409.4       $ 408.7   
  

 

 

    

 

 

 

Short-term and long-term deferred revenue (in millions):

 

     January 27,
2012
     April 29,
2011
 

Product

   $ 32.8       $ 106.2   

SEM and service

     2,513.0         2,208.7   
  

 

 

    

 

 

 

Total

   $ 2,545.8       $ 2,314.9   
  

 

 

    

 

 

 

Reported as:

     

Short-term

   $ 1,309.3       $ 1,226.6   

Long-term

     1,236.5         1,088.3   
  

 

 

    

 

 

 

Total

   $ 2,545.8       $ 2,314.9   
  

 

 

    

 

 

 

 

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Table of Contents

8.  Financial Instruments and Fair Value

The accounting guidance for fair value measurements provides a framework for measuring fair value on either a recurring or nonrecurring basis whereby the inputs used in valuation techniques are assigned a hierarchical level. The following are the three levels of inputs to measure fair value:

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2: Inputs that reflect quoted prices for identical assets or liabilities in less active markets; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3: Unobservable inputs that reflect our own assumptions incorporated in valuation techniques used to measure fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

We consider an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an on-going basis, and consider an inactive market to be one in which there are infrequent or few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, our own or the counterparty’s non-performance risk is considered in measuring the fair values of liabilities and assets, respectively.

Investments

The following is a summary of our investments as of January 27, 2012 and April 29, 2011, respectively (in millions):

 

     January 27, 2012      April 29, 2011  
            Gross Unrealized                   Gross Unrealized        
     Cost or
Amortized
Cost
     Gains      Losses     Estimated
Fair
Value
     Cost or
Amortized
Cost
     Gains      Losses     Estimated
Fair
Value
 

Corporate bonds

   $ 1,968.6       $ 7.2       $ (2.0   $ 1,973.8       $ 1,643.2       $ 10.2       $ (0.6   $ 1,652.8   

U.S. treasury and government debt securities

     351.4         0.3         0.0        351.7         661.9         0.6         (0.7     661.8   

Commercial paper

     66.2         0.0         0.0        66.2         5.0         0.0         0.0        5.0   

Certificates of deposit

     107.3         0.4         0.0        107.7         96.3         0.0         0.0        96.3   

Money market funds

     1,612.1         0.0         0.0        1,612.1         1,539.6         0.0         0.0        1,539.6   

Auction rate securities

     54.4         0.8         (4.2     51.0         69.2         0.4         (4.5     65.1   

Equity funds

     24.3         0.0         0.0        24.3         20.2         0.0         0.0        20.2   

Private equity fund

     1.0         0.0         0.0        1.0         1.3         0.0         0.0        1.3   

Municipal bonds

     0.0         0.0         0.0        0.0         1.5         0.0         0.0        1.5   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total debt and equity securities

   $ 4,185.3       $ 8.7       $ (6.2   $ 4,187.8       $ 4,038.2       $ 11.2       $ (5.8   $ 4,043.6   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

The following table presents the contractual maturities of our debt investments as of January 27, 2012 (in millions):

 

     Amortized
Cost
     Fair Value  

Due in one year or less

   $ 821.6       $ 823.6   

Due in one through five years

     1,672.0         1,675.8   

Due after ten years*

     54.4         51.0   
  

 

 

    

 

 

 
   $ 2,548.0       $ 2,550.4   
  

 

 

    

 

 

 

 

* Consists of auction rate securities which have contractual maturities of greater than 10 years.

 

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Table of Contents

Fair Value of Financial Instruments

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of January 27, 2012 (in millions):

 

            Fair Value Measurements at Reporting Date Using  
     Total      Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets

           

Corporate bonds

   $ 1,973.8       $ 0.0       $ 1,973.8       $ 0.0   

U.S. treasuries and government debt securities

     351.7         0.0         351.7         0.0   

Commercial paper

     66.2         0.0         66.2         0.0   

Certificates of deposit

     107.7         0.0         107.7         0.0   

Money market funds

     1,612.1         1,612.1         0.0         0.0   

Auction rate securities

     51.0         0.0         0.0         51.0   

Equity funds

     24.3         24.3         0.0         0.0   

Private equity fund

     1.0         0.0         0.0         1.0   

Foreign currency contracts

     4.5         0.0         4.5         0.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,192.3       $ 1,636.4       $ 2,503.9       $ 52.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Foreign currency contracts

   $ 3.8       $ 0.0       $ 3.8       $ 0.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reported as (in millions):

 

            Fair Value Measurements at Reporting Date Using  
     Total      Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets

           

Cash equivalents

   $ 1,666.3       $ 1,612.1       $ 54.2       $ 0.0   

Short-term investments

     2,445.2         0.0         2,445.2         0.0   

Other current assets

     9.8         5.3         4.5         0.0   

Other non-current assets

     71.0         19.0         0.0         52.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,192.3       $ 1,636.4       $ 2,503.9       $ 52.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Other current liabilities

   $ 3.8       $ 0.0       $ 3.8       $ 0.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

The unrealized losses on our available-for-sale investments in corporate bonds were caused by market value declines as a result of the economic environment, as well as fluctuations in market interest rates. Because the decline in market value is attributable to changes in market conditions and not credit quality, and because we neither intend to sell nor are likely to be required to sell these investments prior to a recovery of par value, we do not consider these investments to be other-than temporarily impaired as of January 27, 2012.

The table below provides a reconciliation of the beginning and ending balance of our Level 3 auction rate securities measured at fair value on a recurring basis using significant unobservable inputs as of January 27, 2012 and January 28, 2011, respectively (in millions):

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
    January 28,
2011
    January 27,
2012
    January 28,
2011
 

Balance at beginning of period

   $ 56.0      $ 66.2      $ 65.1      $ 69.0   

Total unrealized gains (losses), net included in other comprehensive income

     (0.7     (0.5     0.6        (1.9

Total realized gains included in earnings

     0.7        0.0        0.7        0.0   

Settlements

     (5.0     (0.6     (15.4     (2.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 51.0      $ 65.1      $ 51.0      $ 65.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

All of our auction rate securities (ARSs) are classified as other non-current assets and are backed by pools of student loans guaranteed by the U.S. Department of Education. As of January 27, 2012, we recorded cumulative net temporary impairment charges of $3.4 million in accumulated other comprehensive income (AOCI). Prior to the three months ended October 28, 2011, we estimated the fair value for each individual ARS using an income (discounted cash flow) approach that incorporates both observable and unobservable inputs to discount the expected future cash flows. Key inputs into the discounted cash flow analysis include managements’ expectation of when the principal amount will be recovered either through redemption at par, a refinancing event by the issuer, and/or marketability adjustments. Beginning October 28, 2011, we included the market approach to the valuation technique in order to incorporate secondary market activity into our estimated fair value for each individual ARS. This change had no material impact on the valuation of our ARS portfolio. Based on our ability to access our cash and other short-term investments, our expected operating cash flows, and our other sources of cash, we do not intend to sell these investments prior to recovery of value. We will continue to monitor our ARS investments in light of the current debt market environment and evaluate these investments for impairment and classification.

 

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Table of Contents

9. Financing Arrangements

1.75% Convertible Senior Notes Due 2013

On June 10, 2008, we issued $1,265.0 million aggregate principal amount of 1.75% Convertible Senior Notes due 2013 (the Notes). The Notes are unsecured, unsubordinated obligations of the Company, which pay interest in cash semi-annually at a rate of 1.75% per annum. The Notes will mature on June 1, 2013 unless earlier repurchased or converted in accordance with their terms prior to such date. The Notes may be converted, under the conditions specified below, based on an initial conversion rate of 31.40 shares of common stock per $1,000 principal amount of Notes (which represents an initial effective conversion price of the Notes of $31.85 per share), subject to adjustment as described in the indenture governing the Notes.

The Notes are not redeemable by us prior to the maturity date. In the event of a fundamental change (as defined in the indenture for the Notes), holders of the Notes may require us to repurchase all or a portion of their Notes at a repurchase price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date.

The holders of the Notes may convert their Notes until the close of business on the scheduled trading day immediately preceding the maturity date if any of the following conditions are met: (1) during the five business day period after any five consecutive trading day period (the measurement period) in which the trading price of the Notes for each day in the measurement period was less than 98% of an amount equal to (i) the last reported sale price of our common stock multiplied by (ii) the conversion rate for the Notes on each such day; (2) during any calendar quarter (and only during such calendar quarter) if the last reported sale price of our common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect for the Notes on the last trading day of such immediately preceding calendar quarter; or (3) upon the occurrence of specified corporate transactions set forth in the indenture for the Notes. On or after March 1, 2013, until the scheduled trading day immediately preceding the maturity date, holders of the Notes may convert their Notes regardless of the foregoing conditions. Upon conversion, a holder will receive cash in an amount equal to the lesser of the conversion value and the principal amount of the Notes, and any shares of our common stock for any conversion value in excess of the principal amount of the Notes, if any. Holders of the Notes who convert their Notes in connection with a fundamental change will, under certain circumstances, be entitled to a make-whole premium in the form of an increase in the conversion rate.

Our common stock price did not exceed the conversion threshold price of $41.41 per share set forth for the Notes for at least 20 trading days during the 30 consecutive trading days ended December 31, 2011. Accordingly, as of January 27, 2012, the Notes were not convertible at the option of the holder and, therefore, the carrying value of the Notes was classified as long-term debt and the difference between the principal amount and the carrying value of the Notes is reflected as equity on our condensed consolidated balance sheet as of that date.

Our common stock price exceeded the conversion threshold for the Notes for at least 20 trading days during the 30 consecutive trading days ended March 31, 2011. Accordingly, as of April 29, 2011, the Notes were convertible at the option of the holder and, therefore, the carrying value of the Notes was classified as short-term debt. Since the Notes were convertible at the option of the holder and the principal amount would have been required to be paid in cash, the difference between the principal amount and the carrying value of the Notes was reflected as convertible debt in mezzanine on our condensed consolidated balance sheet as of April 29, 2011.

The determination of whether or not the Notes are convertible must continue to be performed quarterly. Consequently, the Notes may be convertible in future quarters, and therefore may be classified as short-term debt, if the conversion thresholds are met in such quarters. Additionally, since the Notes would be convertible at the option of the holder and the principal amount would be required to be paid in cash, the difference between the principal amount and the carrying value of the Notes would be reflected as convertible debt in mezzanine on our condensed consolidated balance sheets.

Upon conversion of any Notes, we deliver cash up to the principal amount of the Notes and, with respect to any excess conversion value greater than the principal amount of the Notes, shares of our common stock. As of January 27, 2012, shares issued related to the Notes were minimal. Based on the closing price of our common stock of $37.28 on January 27, 2012, the if-converted value of our Notes exceeded their principal amount by approximately $215.6 million.

 

15


Table of Contents

The following table reflects the carrying value of the Notes (in millions):

 

     January 27,
2012
    April 29,
2011
 

1.75% Convertible Senior Notes Due 2013

   $ 1,265.0      $ 1,265.0   

Less: Unamortized discount

     (76.2     (114.6
  

 

 

   

 

 

 

Net carrying amount of Notes

   $ 1,188.8      $ 1,150.4   
  

 

 

   

 

 

 

We capitalize interest on facility assets under construction and on significant software development projects. The following table presents the amount of interest expense recognized related to the Notes (in millions):

 

     Three Months Ended      Nine Months Ended  
     January 27,
2012
    January 28,
2011
     January 27,
2012
    January 28,
2011
 

Contractual coupon interest expense

   $ 5.5      $ 5.5       $ 16.5      $ 16.5   

Amortization of debt discount

     13.0        12.2         38.4        36.1   

Amortization of debt issuance costs

     1.1        1.1         3.3        3.1   

Less capitalized interest

     (0.9     0.0         (4.3     0.0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense related to Notes

   $ 18.7      $ 18.8       $ 53.9      $ 55.7   
  

 

 

   

 

 

    

 

 

   

 

 

 

The following table reflects the remaining debt discount and issuance costs as of January 27, 2012 (in millions):

 

Remaining debt discount

   $  76.2   

Remaining issuance costs

     6.6   

Remaining life of the Notes (years)

     1.3   

Note Hedges and Warrants

Concurrent with the issuance of the Notes, we purchased Note hedges and sold warrants. The separate Note hedge and warrant transactions are structured to reduce the potential future economic dilution associated with the conversion of the Notes.

 

   

Note Hedges: As of January 27, 2012 and April 29, 2011, we had arrangements with counterparties to buy up to approximately 31.8 million shares, subject to anti-dilution adjustments, of our common stock at a price of $31.85 per share, subject to adjustment. The Note hedge transactions will expire at the earlier of (1) the last day on which any Notes remain outstanding or (2) the scheduled trading day immediately preceding the maturity date of the Notes. Upon exercise of the Note hedges, we have the option to receive cash or shares of our common stock equal to the difference between the then market price and the strike price of the hedges.

 

   

Warrants: As of January 27, 2012 and April 29, 2011, we had outstanding warrants for others to acquire, subject to anti-dilution adjustments, 39.7 million shares of our common stock at an exercise price of $41.28 per share, subject to adjustment, on a series of days commencing on September 3, 2013. Upon exercise of the warrants, we have the option to deliver cash or shares of our common stock equal to the difference between the then market price and the strike price of the warrants.

As of January 27, 2012, we were subject to potential dilution on the approximately 20% unhedged portion of our Notes upon conversion, if on the date of conversion, the per-share market price of our common stock exceeds the conversion price of $31.85.

As of January 27, 2012, we received a minimal number of shares related to the Note hedge transactions and no cash or shares were delivered related to the warrant transactions.

Fair Value of Notes

As of January 27, 2012, the approximate fair value of the principal amount of the Notes, which includes the debt and equity components, was approximately $1,630.8 million, or 129% of the face value of the Notes, based upon quoted market information.

 

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Table of Contents

Other Long-Term Financing Arrangements

The following presents the amounts due under other long-term financing arrangements (in millions):

 

     January 27,
2012
     April 29,
2011
 

Current portion of other long-term financing arrangements

   $ 9.3       $ 5.5   

Non-current portion of other long-term financing arrangements

     5.4         6.0   
  

 

 

    

 

 

 

Total

   $ 14.7       $ 11.5   
  

 

 

    

 

 

 

10. Stockholders’ Equity

Stock Options

A summary of the activity under our stock option plans and agreements is as follows (in millions, except for the exercise price and contractual term):

 

     Number
of  Shares
    Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual Term
(Years)
     Aggregate
Intrinsic
Value
 
          
          
          
          

Outstanding at April 29, 2011

     24.5      $ 26.62         

Options granted

     2.1        51.36         

Options exercised

     (3.0     20.98         

Options forfeitures and cancellations

     (0.7     35.96         
  

 

 

         

Outstanding at January 27, 2012

     22.9        29.28         3.91       $ 239.6   
  

 

 

         

Options vested and expected to vest as of January 27, 2012

     22.1        28.86         3.86         236.7   

Exercisable at January 27, 2012

     15.1        25.64         3.25         188.9   

The aggregate intrinsic value represents the pre-tax difference between the exercise price of stock options and the quoted market price of our stock on that day for all in-the-money options. As of January 27, 2012, the total unrecognized compensation expense related to stock options was $80.8 million, which is expected to be recognized on a straight-line basis over a weighted-average remaining service period of 2.2 years.

Additional information related to our stock options is summarized below (in millions, except per share information):

 

     Three Months Ended      Nine Months Ended  
     January 27,
2012
     January 28,
2011
     January 27,
2012
     January 28,
2011
 

Weighted-average fair value per share granted

   $ 13.26       $ 18.79       $ 16.88       $ 15.72   

Weighted-average fair value per share of options assumed in acquisition

     N/A         N/A         N/A       $ 21.15   

Intrinsic value of options exercised

   $ 21.0       $ 79.4       $ 71.6       $ 294.0   

Proceeds received from the exercise of stock options

   $ 19.5       $ 53.9       $ 62.2       $ 278.8   

Fair value of options vested

   $ 18.1       $ 23.1       $ 56.8       $ 77.5   

 

N/A - Not Applicable

Restricted Stock Units

The following table summarizes activity related to our restricted stock units (RSUs) (in millions, except for the fair value):

 

     Number of
Shares
    Weighted-
Average
Grant Date
Fair Value
 

Outstanding at April 29, 2011

     10.1      $ 35.79   

RSUs granted

     5.3        48.84   

RSUs vested

     (3.1     29.92   

RSUs forfeitures and cancellations

     (0.7     39.90   
  

 

 

   

Outstanding at January 27, 2012

     11.6        43.10   
  

 

 

   

 

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RSUs are converted into common stock upon vesting. Upon the vesting of RSUs, we primarily use the net share settlement approach, where a portion of the shares are withheld and retired as settlement of statutory employee withholding taxes, which decreases the shares issued to the employee by a corresponding value. The number and value of the shares netted for employee taxes are summarized in the table below (in millions):

 

     Three Months Ended      Nine Months Ended  
     January 27,
2012
     January 28,
2011
     January 27,
2012
     January 28,
2011
 

Shares withheld for taxes

     0.4         0.3         1.0         0.8   

Fair value of shares withheld and retired

   $ 16.4       $ 15.9       $ 44.2       $ 35.5   

As of January 27, 2012, the total unrecognized compensation expense related to RSUs was $340.8 million, which is expected to be recognized on a straight-line basis over a weighted-average remaining service period of 2.7 years.

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan (ESPP), employees are entitled to purchase shares of our common stock at a 15% discount from the quoted market price of our common stock at certain specified dates over a two-year period. Additional information related to our purchase rights issued under the ESPP is provided below (in millions, except per share information):

 

     Three Months Ended      Nine Months Ended  
     January 27,
2012
     January 28,
2011
     January 27,
2012
     January 28,
2011
 

Weighted-average fair value per right granted

   $ 12.93       $ 16.54       $ 13.34       $ 15.35   

Shares issued under the ESPP

     1.5         3.2         2.6         6.0   

Weighted-average price per share issued

   $ 31.03       $ 11.87       $ 34.53       $ 11.50   

Stock-Based Compensation Expense

Stock-based compensation expense included in the condensed consolidated statements of operations for the three and nine months ended January 27, 2012 and January 28, 2011, respectively, is as follows (in millions):

 

     Three Months Ended      Nine Months Ended  
     January 27,
2012
     January 28,
2011
     January 27,
2012
     January 28,
2011
 

Cost of product revenues

   $ 1.6       $ 1.0       $ 4.1       $ 2.7   

Cost of service revenues

     5.7         3.6         13.8         10.6   

Sales and marketing

     37.5         21.3         96.5         59.2   

Research and development

     22.8         11.3         57.0         31.6   

General and administrative

     9.1         7.8         26.4         22.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 76.7       $ 45.0       $ 197.8       $ 127.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes stock-based compensation associated with each type of award (in millions):

 

     Three Months Ended      Nine Months Ended  
     January 27,
2012
     January 28,
2011
     January 27,
2012
     January 28,
2011
 

Employee stock options

   $ 13.8       $ 13.8       $ 43.0       $ 39.7   

RSUs and restricted stock awards

     42.1         23.9         115.4         61.7   

ESPP

     20.8         7.3         39.4         25.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 76.7       $ 45.0       $ 197.8       $ 127.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total income tax benefits associated with employee stock transactions and recognized in stockholders’ equity were as follows (in millions):

 

     Nine Months Ended  
     January 27,
2012
     January 28,
2011
 

Income tax benefits associated with employee stock transactions

   $ 74.7       $ 74.9   

 

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Table of Contents

Valuation Assumptions

The fair value of each award is estimated on the grant date using the Black-Scholes option pricing model, assuming no expected dividends and the following weighted-average assumptions:

 

     Stock Options  
     Three Months Ended     Nine Months Ended  
     January 27,
2012
    January 28,
2011
    January 27,
2012
    January 28,
2011
 

Expected term in years

     4.8        4.8        4.8        4.8   

Risk-free interest rate

     0.84     2.07     1.54     1.99

Volatility

     43     37     36     37

 

     ESPP  
     Three Months Ended     Nine Months Ended  
     January 27,
2012
    January 28,
2011
    January 27,
2012
    January 28,
2011
 

Expected term in years

     1.2        1.3        1.2        1.2   

Risk-free interest rate

     0.18     0.35     0.19     0.43

Volatility

     45     39     44     39

Stock Repurchase Program

During the nine months ended January 27, 2012, 14.6 million shares of our common stock were repurchased as described below. Since the May 13, 2003 inception of our stock repurchase program through January 27, 2012, we repurchased a total of 119.0 million shares of our common stock at an average price of $29.65 per share, for an aggregate purchase price of $3.5 billion. As of January 27, 2012, our Board of Directors had authorized the repurchase of up to $4.0 billion of our common stock under this stock repurchase program. As of January 27, 2012, the remaining authorized amount for stock repurchases under this program was $0.5 billion with no termination date. The stock repurchase program may be suspended or discontinued at any time.

Accelerated Share Repurchase Agreements

On July 8, 2011, we entered into a collared accelerated share repurchase agreement (ASR) with Bank of America, N.A, under which we prepaid $200.0 million to purchase shares of our common stock. The aggregate number of shares ultimately purchased was determined based on the volume weighted-average share price of our common stock over a specified period of time. The contract was settled in August 2011. The total number of shares repurchased and retired under this ASR was 4.1 million shares at a price of $48.30.

On August 19, 2011, we entered into an ASR with Wells Fargo Bank, National Association, under which we prepaid $400.0 million to purchase shares of our common stock. The aggregate number of shares ultimately purchased was determined based on the volume weighted-average share price of our common stock over a specified period of time. The contract was settled in November 2011. The total number of shares repurchased and retired under this ASR was 10.5 million shares at a price of $38.08.

The value of the contracts was allocated to the cost of the shares repurchased and to the value of the ASR forward contracts as follows for the nine months ended January 27, 2012 (in millions):

 

     Shares of
Common
Stock
    Additional
Paid-in
Capital
    Retained
Earnings
    Total
Repurchase
Activity
 

Repurchase and retirement of common stock

     (14.6   $ (125.8   $ (474.1   $ (599.9

Value of ASR forward contracts

       (0.1       (0.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cash payment

     (14.6   $ (125.9   $ (474.1   $ (600.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

The components of accumulated other comprehensive income, net of related immaterial tax effects, were as follows (in millions):

 

     January 27,
2012
    April 29,
2011
 

Accumulated translation adjustments

   $ 4.2      $ 11.6   

Accumulated unrealized gains on available-for-sale investments

     1.5        3.4   

Accumulated unrealized gains (losses) on derivatives qualifying as cash flow hedges

     1.9        (2.2

Accumulated defined benefit obligation adjustments

     (3.0     0.0   
  

 

 

   

 

 

 

Total accumulated other comprehensive income

   $ 4.6      $ 12.8   
  

 

 

   

 

 

 

 

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Table of Contents

The components of comprehensive income, net of related immaterial tax effects, were as follows (in millions):

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
    January 28,
2011
    January 27,
2012
    January 28,
2011
 

Net income

   $ 119.6      $ 186.4      $ 424.7      $ 512.5   

Change in currency translation adjustments

     (4.3     0.4        (7.4     4.7   

Change in unrealized gains (losses) on available-for-sale investments

     3.5        (6.4     (1.9     (0.1

Change in unrealized gains (losses) on derivatives qualifying as cash flow hedges

     1.4        2.2        4.1        (0.2

Change in defined benefit obligation adjustments

     (3.0     0.0        (3.0     0.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 117.2      $ 182.6      $ 416.5      $ 516.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

11.  Derivatives and Hedging Activities

We use derivative instruments to manage exposures to foreign currency risk. The maximum length of time over which forecasted foreign denominated revenues are hedged is six months. The notional value of our outstanding foreign currency forward contracts that were entered into to hedge forecasted foreign currency denominated sales and our foreign currency denominated monetary asset and liability exposures consisted of the following (in millions):

 

     January 27,
2012
     April 29,
2011
 

Cash Flow Hedges

     

Euro

   $ 147.9       $ 104.0   

British Pound Sterling

     36.5         20.9   

Balance Sheet Contracts

     

Euro

     256.3         253.7   

British Pound Sterling

     45.4         70.8   

Australian Dollar

     39.8         34.4   

Canadian Dollar

     22.9         56.0   

Other

     63.6         52.6   

As of January 27, 2012 and April 29, 2011, the fair value of our short-term foreign currency contracts was not material. Certain of these contracts are designed to hedge our exposure to foreign currency denominated monetary assets and liabilities and are not designated as hedging instruments. Accordingly, changes in the fair value of these instruments are recognized in earnings during the period of change.

The effect of derivative instruments designated as cash flow hedges recognized in net revenues on our consolidated statements of operations for the three and nine months ended January 27, 2012 and January 28, 2011, respectively, was as follows (in millions):

 

     Three Months Ended January 27, 2012      Three Months Ended January 28, 2011  

Derivatives in Cash Flow Hedging Relationships

   Gain (Loss)
Recognized  in
AOCI
     Gain (Loss)
Reclassified from
AOCI into
Income
     Gain  (Loss)
Recognized
in AOCI
     Gain (Loss)
Reclassified from
AOCI into
Income
 

Foreign exchange forward contracts

   $ 11.9       $ 10.5       $ 6.8       $ 4.6   

 

     Nine Months Ended January 27, 2012      Nine Months Ended January 28, 2011  

Derivatives in Cash Flow Hedging Relationships

   Gain (Loss)
Recognized  in
AOCI
     Gain (Loss)
Reclassified from
AOCI into
Income
     Gain  (Loss)
Recognized
in AOCI
     Gain (Loss)
Reclassified from
AOCI into
Income
 

Foreign exchange forward contracts

   $ 22.2       $ 18.1       $ 8.8       $ 9.0   

The effect of derivative instruments not designated as hedges recognized in other income (expense), net on our consolidated statements of operations for the three and nine months ended January 27, 2012 and January 28, 2011, respectively, was as follows (in millions):

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
     January 28,
2011
    January 27,
2012
     January 28,
2011
 

Derivatives Not Designated as Hedging Instruments

   Gain (Loss) Recognized into Income     Gain (Loss) Recognized into Income  

Foreign exchange forward contracts

   $ 10.7       $ (0.2   $ 24.9       $ (4.4

 

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Table of Contents
12.  Income Taxes

Our effective tax rates for the periods presented were as follows:

 

     Nine Months Ended  
     January 27,
2012
    January 28,
2011
 

Effective tax rates

     14.7     12.5

Our effective tax rates reflect the impact of a significant amount of our earnings being taxed in foreign jurisdictions at rates below the U.S. statutory tax rate.

In January 2012, we reached agreement with the U.S. Internal Revenue Service (IRS) with regards to a tax position taken during prior periods. As a result of the settlement and resulting remeasurement of our tax positions, we recorded a discrete tax expense of $11.7 million, net of federal benefit, during the three and nine months ended January 27, 2012. In addition, we recognized a net increase of $17.4 million to the balance of our unrecognized tax benefits related to prior years as a result of the settlement and remeasurement.

As of January 27, 2012, we had $155.5 million of unrecognized tax benefits, of which $104.3 million has been recorded in other long-term liabilities and $96.6 million, including penalties and interest, would affect our provision for income taxes if recognized. During the nine months ended January 27, 2012, there was a gross increase in our unrecognized tax benefits of $8.0 million for tax positions related to the current year, and a gross increase of $20.3 million and gross decrease of $6.0 million for tax positions related to prior years.

In accordance with our accounting policy, we recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. Interest and penalties recognized through income tax expense during the three and nine months ended January 27, 2012 and January 28, 2011 were not material.

In February 2012, the IRS commenced an examination of our fiscal 2008 through fiscal 2010 income tax returns. We are also under audit by the California Franchise Tax Board for our fiscal 2007 and 2008 California income tax returns. Our open years in U.S. federal jurisdictions are fiscal 2005 and later years. In addition, we are effectively subject to federal tax examination adjustments for tax years ended on or after fiscal year 2000, in that we have tax attribute carryforwards from these years that could be subject to adjustments, if and when utilized.

On September 17, 2010, the Danish Tax Authorities issued a decision concluding that distributions declared in 2005 and 2006 from our Danish subsidiary were subject to Danish at-source dividend withholding tax. We do not believe that our Danish subsidiary is liable for withholding tax and filed an appeal with the Danish Tax Tribunal to that effect. On December 19, 2011, the Danish Tax Tribunal issued a ruling that our Danish subsidiary was not liable for Danish withholding tax. The ruling is subject to appeal to the Danish High Court.

We are in various stages of the examination and appeals process in connection with tax audits worldwide and it is difficult to determine when these examinations will be settled. It is reasonably possible that over the next twelve-month period, we may experience an increase or decrease in unrecognized tax benefits. It is not possible to determine either the magnitude or the range of any increase or decrease at this time.

In April 2010, our Dutch subsidiary received a favorable tax ruling from the Dutch tax authorities effective May 1, 2010 that replaced the previous Dutch tax ruling which expired on April 30, 2010. This ruling resulted in both a lower level of earnings subject to tax in the Netherlands and an extension of the expiration date to April 30, 2015.

On December 17, 2010, the Tax Relief Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Act) was signed into law. Under the Act, the federal research credit was retroactively extended for amounts paid or incurred after December 31, 2009, and before January 1, 2012. Unless retroactively extended again, the federal research credit expired on December 31, 2011.

 

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Table of Contents

13. Net Income per Share

The following is a calculation of basic and diluted net income per share for the periods presented (in millions):

 

     Three Months Ended      Nine Months Ended  
     January 27,
2012
     January 28,
2011
     January 27,
2012
     January 28,
2011
 

Numerator:

           

Net income

   $ 119.6       $ 186.4       $ 424.7       $ 512.5   

Denominator:

           

Shares used in basic computation

     360.3         364.8         364.0         358.8   

Dilutive potential shares related to employee equity award plans

     7.6         14.7         9.1         15.3   

Dilutive impact of assumed conversion of Notes

     5.8         16.9         9.3         11.9   

Dilutive impact of warrants

     0.0         9.8         2.7         4.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Shares used in diluted computation

     373.7         406.2         385.1         390.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income per Share:

           

Basic

   $ 0.33       $ 0.51       $ 1.17       $ 1.43   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.32       $ 0.46       $ 1.10       $ 1.31   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following potential weighted-average shares of common stock have been excluded from the diluted net income per share calculations, as their effect would have been anti-dilutive (in millions):

 

     Three Months Ended      Nine Months Ended  
     January 27,
2012
     January 28,
2011
     January 27,
2012
     January 28,
2011
 

Options and RSUs

     13.5         1.0         10.9         2.8   

Dilutive shares outstanding during the three months ended January 27, 2012 do not include any effect resulting from warrants, as their impact would have been anti-dilutive. The Note hedges (as described in Note 9) are not included in the calculation of earnings per share as their effect would have been anti-dilutive. The Note hedges, if exercised upon conversion of the Notes, are expected to reduce approximately 80% of the dilutive effect of the Notes when our stock price is above $31.85 per share.

14. Segment, Geographic, and Significant Customer Information

We operate in one reportable industry segment: the design, manufacturing, marketing, and technical support of high-performance networked storage solutions. We conduct business globally, and our sales and support activities are managed on a geographic basis. Our management reviews financial information presented on a consolidated basis, accompanied by disaggregated information it receives from its internal management system about revenues by geographic region, based on the location from which the customer relationship is managed, for purposes of allocating resources and evaluating financial performance. We do not allocate costs of revenues, research and development, sales and marketing, or general and administrative expenses to our geographic regions in this internal management system because management does not review operations or operating results, or make planning decisions, below the consolidated entity level.

Summarized revenues by geographic region based on our internal management system and utilized by our Chief Executive Officer, who is considered our Chief Operating Decision Maker, is as follows (in millions):

 

     Three Months Ended      Nine Months Ended  
     January 27,
2012
     January 28,
2011
     January 27,
2012
     January 28,
2011
 

Americas (United States, Canada and Latin America)*

   $ 853.7       $ 702.8       $ 2,564.2       $ 2,094.2   

Europe, Middle East and Africa

     525.5         457.1         1,411.1         1,232.5   

Asia Pacific and Japan

     186.3         129.7         555.4         367.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net revenues

   $ 1,565.5       $ 1,289.6       $ 4,530.7       $ 3,694.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* Americas revenues consist of Americas commercial and U.S. public sector markets. Sales to customers inside the United States comprised $730.5 million and $631.2 million of Americas net revenues during the three months ended January 27, 2012 and January 28, 2011, respectively, and $2,190.2 million and $1,879.9 million of Americas net revenues during the nine months ended January 27, 2012 and January 28, 2011, respectively.

 

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Table of Contents

As of January 27, 2012 and April 29, 2011, the majority of our assets, excluding cash, cash equivalents, restricted cash, investments and accounts receivable, were attributable to our domestic operations. The following table presents cash, cash equivalents, restricted cash and debt investments held in the U.S. and internationally in various foreign subsidiaries (in millions):

 

     January 27,
2012
     April 29,
2011
 

United States

   $ 2,391.9       $ 3,037.5   

International

     2,536.7         2,211.8   
  

 

 

    

 

 

 

Total cash, cash equivalents, restricted cash and debt investments

   $ 4,928.6       $ 5,249.3   
  

 

 

    

 

 

 

With the exception of property and equipment, we do not identify or allocate our long-lived assets by geographic area. The following table presents property and equipment, net for geographic areas based on the physical location of the assets (in millions):

 

     January 27,
2012
     April 29,
2011
 

United States

   $ 982.6       $ 840.2   

International

     99.2         71.4   
  

 

 

    

 

 

 

Total property and equipment, net

   $ 1,081.8       $ 911.6   
  

 

 

    

 

 

 

No more than ten percent of property and equipment was located in any single foreign country.

International sales to a single foreign country that accounted for ten percent or more of net revenues are as follows:

 

     Three Months Ended      Nine Months Ended  
     January 27,
2012
     January 28,
2011
     January 27,
2012
     January 28,
2011
 

Germany

   $ 181.9       $ 164.4       $ 470.9       $ 461.3   

The following customers, each of which is a distributor, accounted for ten percent or more of our net revenues (in millions):

 

     Three Months Ended      Nine Months Ended  
     January 27,
2012
     January 28,
2011
     January 27,
2012
     January 28,
2011
 

Arrow Electronics, Inc.

   $ 238.8       $ 223.4       $ 725.9       $ 619.7   

Avnet, Inc.

     179.3         151.3         537.2         461.9   

The following customers accounted for ten percent or more of net accounts receivable (in millions):

 

     January 27,
2012
     April 29,
2011
 

Arrow Electronics, Inc.

   $  N/A       $ 101.4   

Avnet, Inc.

     70.9         107.5   

 

N/A - Not Applicable

15. Commitments and Contingencies

Lease Commitments

As of January 27, 2012, future annual minimum lease payments under all non-cancelable facilities and equipment operating leases with an initial term in excess of one year totaled $402.7 million.

As of January 27, 2012, we have four leasing arrangements (Leasing Arrangements 1, 2, 3 and 4) with BNP Paribas LLC (BNPPLC), some of which require us to lease certain of our land to BNPPLC for a period of 99 years and to lease approximately 0.6 million square feet of office space from BNPPLC for our headquarters in Sunnyvale, California, which had an original cost of $149.6 million. Under these leasing arrangements, we pay BNPPLC minimum lease payments, which vary based on LIBOR plus a spread or a fixed rate on the costs of the facilities on the respective lease commencement dates. We make payments for each of the leases for a term of five years. We have the option to renew each of the leases for two consecutive five-year periods upon approval by BNPPLC. Upon expiration (or upon any earlier termination) of the lease terms, we must elect one of the following options: (i) purchase the buildings from BNPPLC at cost; (ii) if certain conditions are met, arrange for the sale of the buildings by BNPPLC to a third-party, and be liable for any deficiency between the net proceeds received from the third-party and BNPPLC’s cost, up to 85% of cost (residual guarantee); or (iii) pay BNPPLC supplemental payments for an amount equal to the difference between BNPPLC’s cost and fair value, up to the residual guarantee, in which event we may recoup some or all of such payments by arranging for a sale of each or all buildings by BNPPLC during the ensuing two-year period.

 

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These leases require us to maintain specified financial covenants with which we were in compliance as of January 27, 2012.

As of January 27, 2012, we estimated that the fair value of certain properties under synthetic lease was $51.0 million below the cost of the properties. We are accruing for this deficiency over the remaining terms of the respective leases. As of January 27, 2012, a deficiency reserve of $32.4 million was included in other current liabilities.

Purchase Orders and Other Commitments

In the normal course of business we make commitments to our third-party contract manufacturers, to manage manufacturer lead times and meet product forecasts, and to other parties, to purchase various key components used in the manufacture of our products. We establish accruals for estimated losses on purchased components to the extent we believe it is probable that such components will not be utilized in future operations. To the extent that such forecasts are not achieved, our commitments and associated accruals may change. We had $220.4 million in non-cancelable purchase commitments with our contract manufacturers as of January 27, 2012. In addition, we recorded a liability for firm, non-cancelable and unconditional purchase commitments with contract manufacturers for quantities in excess of our future demand forecasts through a charge to product cost of sales. As of January 27, 2012 and April 29, 2011, such liability amounted to $3.2 million and $4.5 million, respectively, and is included in other current liabilities in the condensed consolidated balance sheets.

In addition to commitments with contract manufacturers and component suppliers, we have open purchase orders and contractual obligations associated with our ordinary course business for which we have not received goods or services. As of January 27, 2012, we had $48.5 million in capital purchase commitments and $230.7 million in other purchase commitments.

Product Warranties

We provide customers a warranty on software of ninety days to five years and a warranty on hardware of one to five years. The following table summarizes our warranty reserves (in millions):

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
    January 28,
2011
    January 27,
2012
    January 28,
2011
 

Beginning balance

   $ 65.0      $ 33.5      $ 40.5      $ 31.9   

Liability assumed in acquisition

     0.0        0.0        17.5        0.0   

Expense accrued during the period

     14.1        8.0        41.5        20.9   

Warranty costs incurred

     (10.9     (5.8     (31.3     (17.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 68.2      $ 35.7      $ 68.2      $ 35.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing Guarantees

We have both nonrecourse and recourse lease financing arrangements with third-party financing companies through new and preexisting relationships with customers. In addition, from time to time we provide guarantees for a portion of financing arrangements under which we could be called upon to make payments to these third-party financing companies in the event of nonpayment by end-user customers. Under the terms of the nonrecourse leases, we do not have any continuing obligations or liabilities to the third-party financing companies. Under the terms of the recourse leases, which are generally three years or less, we remain liable for the aggregate unpaid remaining lease payments to the third-party financing companies in the event of end-user customer default. These arrangements are generally collateralized by a security interest in the underlying assets. Where we provide a guarantee, we defer revenues subject to the industry-specific software revenue recognition guidance, and recognize revenues for non-software deliverables in accordance with our multiple deliverable revenue arrangement policy. As of January 27, 2012, the maximum guaranteed payment contingencies under our financing arrangements totaled approximately $101.2 million, and the related deferred revenue and cost of revenues totaled approximately $98.9 million and $9.6 million, respectively. To date, we have not experienced material losses under our lease financing programs or other financing arrangements.

 

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Table of Contents

Legal Contingencies

We are subject to various legal proceedings and claims which may arise in the normal course of business. No accrual has been recorded as of January 27, 2012, as the outcome of these legal matters is currently not determinable.

On October 13, 2010, Amalgamated Bank (as trustee of the Longview Largecap 500 Index Fund and the Longview Largecap 500 Index Veba Fund) filed a derivative lawsuit on behalf of NetApp, Inc. and NetApp U.S. Public Sector, Inc. in the Superior Court of the State of California, Santa Clara County. The lawsuit named certain of our current and former directors as defendants. On February 3, 2011, the plaintiff filed an amended complaint in response to motions to dismiss that we and the individual defendants had filed. Like the original complaint, the amended complaint included claims of breach of fiduciary duty and waste of corporate assets and alleges that the defendants failed to monitor internal controls to ensure that we complied with legal requirements in our General Services Administration (GSA) contracting activities, resulting in us incurring defense and settlement costs. The amended complaint sought disgorgement of salaries and other compensation from the defendants and additional unspecified damages. We and the individual defendants filed motions to dismiss the amended complaint in early March 2011. Following a hearing on July 15, 2011, the Court granted the motions to dismiss, but permitted plaintiff leave to amend its complaint on or before September 16, 2011.

On August 9, 2011, Amalgamated Bank filed a complaint in Delaware Chancery Court against us for the purpose of obtaining, in a summary proceeding, books and records to help Amalgamated Bank amend its complaint in the California lawsuit. Each of the parties filed cross motions for summary judgment, and a hearing was held before the Delaware Chancery Court on November 16, 2011. Following that hearing, the Court directed Amalgamated Bank to more narrowly tailor its requests. On December 5, 2011, the court allowed plaintiff to conduct a very limited document inspection. On February 6, 2012, the court denied plaintiff’s motion to compel further document production.

The plaintiff filed an amended complaint for a third time on September 15, 2011. This complaint alleged the same claims and requests for relief as the previous complaints. On January 9, 2012, the defendants filed motions to dismiss the amended complaint. A hearing on our motion to dismiss the California lawsuit will be held on March 23, 2012.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is subject to the safe harbor provisions set forth in the Exchange Act. Forward-looking statements usually contain the words “estimate,” “intend,” “plan,” “predict,” “seek,” “may,” “will,” “should,” “would,” “could,” “anticipate,” “expect,” “believe,” or similar expressions and variations or negatives of these words or expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. All forward-looking statements, including but not limited to, statements about:

 

   

our future financial and operating results;

 

   

our business strategies;

 

   

management’s plans, beliefs and objectives for future operations, research and development;

 

   

economic and industry trends or trend analysis;

 

   

product introductions, development, enhancements and acceptance;

 

   

acquisitions and joint ventures, growth opportunities, investments and legal proceedings;

 

   

competitive positions;

 

   

future cash flows and cash deployment strategies;

 

   

short-term and long-term cash requirements, including anticipated capital expenditures;

 

   

our anticipated tax rate;

 

   

the dilutive effect of our convertible notes (the Notes) and associated warrants on our earnings per share;

 

   

the conversion, maturation or repurchase of the Notes;

 

   

compliance with laws, regulations and debt covenants;

 

   

the continuation of our stock repurchase program; and

 

   

the impact of completed acquisitions

are inherently uncertain as they are based on management’s current expectations and assumptions concerning future events, and are subject to numerous known and unknown risks and uncertainties. Therefore, our actual results may differ materially from the forward-looking statements contained herein. Factors that could cause actual results to differ materially from those described herein include, but are not limited to:

 

   

acceptance of, and demand for, our products, including our recent product introductions;

 

   

our ability to increase our customer base, market share and revenue;

 

   

general economic and market conditions, particularly the continuing fiscal challenges in the United States (U.S.) and Europe;

 

   

the effects of the recent flooding in Thailand;

 

   

the amount of orders received in future periods;

 

   

our ability to ship our products in a timely manner;

 

   

our ability to achieve anticipated pricing, cost, and gross margins levels;

 

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our ability to successfully manage our backlog and increase revenue;

 

   

our ability to successfully execute on our strategy;

 

   

our ability to effectively integrate acquired products and technologies;

 

   

our ability to successfully introduce new products and forecast demand for those products;

 

   

our ability to maintain the quality of our hardware, software and services offerings;

 

   

our ability to adapt to changes in market demand;

 

   

demand for our services and support and the growth of the storage markets generally;

 

   

our ability to identify and respond to significant market trends and emerging standards;

 

   

the impact of industry consolidation;

 

   

our ability to successfully manage our investment in people, process, and systems;

 

   

our ability to maintain our partner, supplier and contract manufacturer relationships;

 

   

the ability of our suppliers and contract manufacturers to meet our requirements;

 

   

the ability of our competitors to introduce new products that compete successfully with our products;

 

   

our ability to grow direct and indirect sales and to efficiently utilize global service and support;

 

   

variability in our gross margins;

 

   

our ability to sustain and/or improve our cash and overall financial position;

 

   

our cash requirements and terms and availability of financing;

 

   

valuation and liquidity of our investment portfolio;

 

   

our ability to finance business acquisitions, construction projects and capital expenditures through cash from operations and/or financing;

 

   

the results of our ongoing litigation, tax audits, government audits, inquiries and investigations; and

 

   

those factors discussed under the heading “Risk Factors” elsewhere in this Quarterly Report on Form 10-Q.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based upon information available to us at this time. These statements are not guarantees of future performance. We disclaim any obligation to update information in any forward-looking statement. Actual results could vary from our forward-looking statements due to foregoing factors as well as other important factors, including those described in the Risk Factors included in Part II Item 1A.

Overview

On May 6, 2011, we completed the acquisition of certain assets related to the Engenio external storage systems business (Engenio) of LSI Corporation (LSI). We paid LSI $480.0 million in cash and also assumed certain liabilities related to Engenio. We expect this acquisition to enable us to address growing customer requirements in the areas of high bandwidth and intensive analytics workloads such as video, including full-motion video capture and digital video surveillance, as well as high-performance computing applications, such as genomics sequencing and scientific research. Our consolidated net revenues for the three and nine months ended January 27, 2012 include $178.3 million and $517.8 million, respectively, attributable to Engenio since the acquisition.

 

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Table of Contents

Net revenues for the three and nine months ended January 27, 2012 were $1,565.5 million, up $275.9 million, or 21%, and $4,530.7 million, up $836.4 million, or 23%, respectively, from the comparable periods in the prior year. The revenue growth in each of these periods was primarily due to our acquisition of Engenio, continued demand for our storage efficiency and data management solutions, and an increase in hardware maintenance contract revenue. Gross profit as a percentage of net revenues decreased during the three and nine months ended January 27, 2012 compared to the same periods in the prior year, primarily due to the inclusion of lower gross margin E-Series OEM products resulting from the Engenio acquisition in the revenue mix and the impact of higher discounting. These decreases were partially offset by manufacturing cost reductions.

Sales and marketing, research and development, and general and administrative expenses for the three and nine months ended January 27, 2012 totaled $748.5 million, up 20%, and $2,185.9 million, up 22%, respectively, from the comparable periods in the prior year. These increases were primarily due to a 25% and 27% increase in average headcount in the three and nine months ended January 27, 2012, respectively, from the comparable periods in the prior year. The May 2011 acquisition of Engenio represented approximately 10% of the average headcount for the three and nine months ended January 27, 2012.

Critical Accounting Estimates and Policies

Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of such statements requires us to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting periods and the reported amounts of assets and liabilities as of the date of the financial statements. Our estimates are based on historical experience and other assumptions that we consider to be appropriate under the circumstances. However, future results may vary from our estimates.

We believe the accounting policies discussed under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended April 29, 2011 are significantly affected by critical accounting estimates and that they are both highly important to the portrayal of our financial condition and results and require difficult management judgments and assumptions about matters that are inherently uncertain. There have been no material changes to the critical accounting policies and estimates as filed in such report.

New Accounting Standards

See Note 3 of the accompanying condensed consolidated financial statements for a full description of new accounting pronouncements, including the respective expected dates of adoption and effects on results of operations and financial condition.

All fiscal year 2011 results reflect the adoption of the new accounting standards related to revenue recognition. Previously reported quarterly results for fiscal 2011 have been adjusted to reflect the adoption of these new standards and differ from the originally reported results.

Results of Operations

The following table sets forth certain Condensed Consolidated Statements of Operations data as a percentage of net revenues for the periods indicated:

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
    January 28,
2011
    January 27,
2012
    January 28,
2011
 

Revenues:

        

Product

     67.9     65.5     67.2     65.1

Software entitlements and maintenance

     13.0        14.2        13.2        14.5   

Service

     19.1        20.3        19.6        20.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     100.0        100.0        100.0        100.0   

Cost of revenues:

        

Cost of product

     33.1        25.5        31.2        26.1   

Cost of software entitlements and maintenance

     0.4        0.3        0.4        0.3   

Cost of service

     8.5        8.6        8.4        8.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     58.0        65.6        60.0        65.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Sales and marketing

     30.5        30.8        30.6        30.7   

Research and development

     13.3        12.9        13.4        12.8   

General and administrative

     4.0        4.8        4.3        4.9   

Restructuring and other charges

     —          (0.1     —          —     

Acquisition-related expense

     0.2        —          0.2        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     48.0        48.4        48.5        48.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     10.0        17.2        11.5        16.6   

Other expense, net:

        

Interest income

     0.6        0.8        0.6        0.8   

Interest expense

     (1.2     (1.5     (1.2     (1.5

Other income (expense), net

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (0.6     (0.7     (0.6     (0.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     9.4        16.5        10.9        15.9   

Provision for income taxes

     1.7        2.0        1.6        2.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     7.7     14.5     9.3     13.9
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Discussion and Analysis of Results of Operations

Net Revenues — Net revenues for the three and nine months ended January 27, 2012 and January 28, 2011 were as follows (in millions, except percentages):

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
     January 28,
2011
     % Change     January 27,
2012
     January 28,
2011
     % Change  

Net revenues

   $  1,565.5       $  1,289.6         21   $  4,530.7       $  3,694.3         23

Net revenues increased by $275.9 million, or 21%, and increased by $836.4 million, or 23%, for the three and nine months ended January 27, 2012, respectively, from the comparable periods in the prior year. The increase in our net revenues for both periods was primarily due to an increase in product revenues, which comprised 68% and 67% of net revenues for the three and nine months ended January 27, 2012, respectively compared to 65% in each of the three and nine months ended January 28, 2011.

Sales through our indirect channels represented 79% and 78% of net revenues for the three and nine months ended January 27, 2012, respectively, and represented 74% and 72% of net revenues for the three and nine months ended January 28, 2011, respectively. The increase in our indirect channels as a percentage of net revenues reflects the acquisition of Engenio.

The following customers, each of which is a distributor, accounted for 10% or more of net revenues (in millions, except percentages):

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
     % of Net
Revenues
    January 28,
2011
     % of Net
Revenues
    January 27,
2012
     % of Net
Revenues
    January 28,
2011
     % of Net
Revenues
 

Arrow Electronics, Inc.

   $ 238.8         15   $ 223.4         17   $ 725.9         16   $ 619.7         17

Avnet, Inc.

     179.3         11     151.3         12     537.2         12     461.9         13

Product Revenues (in millions, except percentages):

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
     January 28,
2011
     % Change     January 27,
2012
     January 28,
2011
     % Change  

Product revenues

   $  1,062.7       $  844.3         26   $  3,044.6       $  2,406.6         27

Product revenues increased by $218.4 million, or 26%, and increased by $638.0 million, or 27%, for the three and nine months ended January 27, 2012, respectively, from the comparable periods in the prior year. Product revenues consist of configured systems, which are comprised of bundled hardware and software products, and non-configured products, which consist primarily of add-on hardware, storage, and software products, as well as OEM products.

Total configured system revenues of $540.7 million increased by $42.6 million, or 9%, for the three months ended January 27, 2012, and total configured system revenues of $1,571.9 million increased by $118.4 million, or 8%, for the nine months ended January 27, 2012, compared to the prior year, with the largest increase in the 6000 series systems, partially offset by decreases in the 2000 series systems. Configured systems unit volume increased by 5% and 3% for the three and nine months ended January 27, 2012, respectively, compared to the prior year, with increases in each period in both the 6000 and 3000 series systems, offset by a decrease in each period in the 2000 series systems. The increases in the unit volume of the 6000 and 3000 series in each period were due to customer demand for these newer systems. The decreases in the 2000 series unit volume in each period were primarily due to a decrease in demand for the older products within this series, as well as a shift in demand to the newer 3000 series systems. The average selling prices (ASPs) of total configured systems increased during the three and nine months ended January 27, 2012, compared to the prior year due to a shift in system revenue mix from the lower ASP 2000 series to the higher ASP 3000 and 6000 series. However, ASP’s across each series decreased compared to the same periods in the prior year primarily due to higher discounting and, to a lesser extent, manufacturing cost reductions being passed along to customers as price reductions.

 

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Table of Contents

Non-configured product revenues of $522.0 million increased $175.8 million, or 51%, during the three months ended January 27, 2012, and non-configured product revenues of $1,472.7 million increased $519.6 million, or 55%, during the nine months ended January 27, 2012, compared to the prior year. These increases were primarily due to E-Series OEM product revenues of $174.3 million and $504.1 million during the three and nine months ended January 27, 2012, respectively, that resulted from the Engenio acquisition and a 4% and 3% increase in sales of our add-on storage products during the three and nine months ended January 27, 2012, respectively.

Our systems are highly configurable to respond to customer requirements in the open systems storage markets that we serve. This can cause a wide variation in product configurations that can significantly impact revenues, cost of revenues and gross profit performance. Pricing changes, discounting practices, product competition, foreign currency, unit volumes, customer mix, natural disasters and product material costs can also impact revenues, cost of revenues and/or gross profit performance. Disks are a significant component of our storage systems. Industry disk pricing has fallen every year; however, with the recent flooding in Thailand, disk prices have increased and may continue to do so. To the extent that disk prices increase or decrease, we intend to pass along those price increases or decreases to our customers while working to maintain relatively constant profit margins on our disk drives. As our sales price per terabyte continues to decline, improved system performance, increased capacity and software to manage this increased capacity have an offsetting impact on product revenues.

Software Entitlements and Maintenance Revenues (in millions, except percentages):

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
     January 28,
2011
     % Change     January 27,
2012
     January 28,
2011
     % Change  

Software entitlements and maintenance revenues

   $  203.5       $  182.7         11   $  599.7       $  533.6         12

Software entitlements and maintenance (SEM) revenues increased by $20.8 million, or 11%, and increased by $66.1 million, or 12%, during the three and nine months ended January 27, 2012, respectively, from the comparable periods in the prior year. The increases in each period were due to an increase in the aggregate contract value of the installed base under SEM contracts, which is recognized as revenue ratably over the terms of the underlying contracts.

Service Revenues (in millions, except percentages):

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
     January 28,
2011
     % Change     January 27,
2012
     January 28,
2011
     % Change  

Service revenues

   $  299.3       $  262.6         14   $  886.4       $  754.1         18

Service revenues include hardware maintenance, professional services and educational and training services. Service revenues increased by $36.7 million, or 14%, and by $132.3 million, or 18%, during the three and nine months ended January 27, 2012, respectively, from the comparable periods in the prior year.

Hardware maintenance contract revenues constituted approximately 71% and 70% of our service revenues for the three and nine months ended January 27, 2012, respectively, and 66% and 65% for the three and nine months ended January 28, 2011, respectively. Such revenues increased by $36.6 million, or 21%, and by $128.6 million, or 26%, during the three and nine months ended January 27, 2012, respectively, from the comparable periods in the prior year, as a result of an increase in each period in the installed base under service contracts. Professional services and educational and training services constituted approximately 29% and 30% of our service revenues for the three and nine months ended January 27, 2012, respectively, and 34% and 35% of our service revenues for the three and nine months ended January 28, 2011, respectively.

Revenues by Geographic Area (in millions, except percentages):

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
     January 28,
2011
     % Change     January 27,
2012
     January 28,
2011
     % Change  

Americas (United States, Canada and Latin America)

   $ 853.7       $ 702.8         21   $ 2,564.2       $ 2,094.2         22

Europe, Middle East and Africa (EMEA)

     525.5         457.1         15     1,411.1         1,232.5         14

Asia Pacific and Japan (APAC)

     186.3         129.7         44     555.4         367.6         51
  

 

 

    

 

 

      

 

 

    

 

 

    

Net revenues

   $ 1,565.5       $ 1,289.6         $ 4,530.7       $ 3,694.3      

 

 

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Americas revenues consist of Americas commercial and U.S. public sector markets. Sales to customers inside the United States comprised 86% and 90% of Americas net revenues during the three months ended January 27, 2012 and January 28, 2011, respectively, and 85% and 90% of Americas net revenue during the nine months ended January 27, 2012 and January 28, 2011, respectively. Sales to Germany accounted for 12% and 10% of net revenues during the three and nine months ended January 27, 2012, respectively. Sales to Germany accounted for 13% and 12% of net revenues during the three and nine months ended January 28, 2011, respectively. No other single foreign country accounted for 10% or more of net revenues in any of the periods presented.

Cost of Revenues

Our cost of revenues consists of three elements: (1) cost of product revenues, which includes the costs of manufacturing and shipping of our storage products, amortization of purchased intangible assets, inventory write-downs, and warranty costs; (2) cost of SEM, which includes the costs of providing SEM and third-party royalty costs, and (3) cost of service revenues, which reflects costs associated with providing support activities for hardware, global support partnership programs, professional services and educational and training services.

Our gross profit is impacted by a variety of factors, including pricing changes, discounting practices, foreign currency, product configuration, unit volumes, customer mix, revenue mix, natural disasters and product material costs. Service gross profit is typically impacted by factors such as changes in the size of our installed base of products, as well as the timing of support service initiations and renewals, and incremental investments in our customer support infrastructure. If any of these factors that impact our gross profit are adversely affected, whether by economic uncertainties or for other reasons, our gross profit could decline.

Cost of Product Revenues (in millions, except percentages):

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
     January 28,
2011
     % Change     January 27,
2012
     January 28,
2011
     % Change  

Cost of product revenues

   $  517.8       $  328.4         58   $  1,415.9       $  962.9         47

Cost of product revenues increased by $189.4 million, or 58%, and $453.0 million, or 47%, during the three and nine months ended January 27, 2012, from the comparable periods in the prior year. The changes were comprised of the following elements (in percentage points of the total change):

 

     Three Months Ended
Fiscal 2012 to Fiscal 2011

Percentage Change
Points
    Nine Months Ended Fiscal
2012 to Fiscal 2011

Percentage Change
Points
 

Materials cost

             49                38   

Amortization of developed technology

     4        3   

Warranty

     2        2   

Manufacturing overhead

     2        2   

Excess and obsolete inventory

     (1     1   

Other

     2        1   
  

 

 

   

 

 

 

Total change

     58        47   
  

 

 

   

 

 

 

During the three and nine months ended January 27, 2012, the increase in materials cost was primarily due to $99.6 million and $283.1 million, respectively, in materials cost relating to the sales of E-Series OEM products resulting from the Engenio acquisition. The increase in materials cost was also impacted by the 5% and 3% unit volume increases in configured systems during these periods; however, the average cost per unit of configured systems across all product families decreased as a result of materials cost reductions, partially offsetting volume increases during these reporting periods.

The increase in the amortization of developed technology was due to identified intangible assets acquired from the Engenio acquisition, which are amortized on a straight-line basis over their estimated useful life.

 

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Cost of product revenues represented 49% and 39% of product revenue for the three months ended January 27, 2012 and January 28, 2011, respectively, and 47% and 40% of product revenue for the nine months ended January 27, 2012 and January 28, 2011, respectively. The overall increases in costs as a percentage of revenues for the three and nine months ended January 27, 2012, as compared to the same periods in the prior year, were primarily the result of E-Series OEM products acquired through the Engenio transaction, which have lower material margins than configured systems and add-on products as well as the decrease in ASPs.

Cost of Software Entitlements and Maintenance Revenues (in millions, except percentages):

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
     January 28,
2011
     % Change     January 27,
2012
     January 28,
2011
     % Change  

Cost of software entitlements and maintenance revenues

   $  6.2       $  4.0         55   $  17.1       $  10.9         57

Cost of SEM revenues increased by $2.2 million, or 55%, and $6.2 million, or 57%, during the three and nine months ended January 27, 2012, respectively, from the comparable periods in the prior year, primarily due to an increase in volume-related software support costs. Cost of SEM revenues represented 3% of SEM revenues for both the three and nine months ended January 27, 2012 and 2% of SEM revenues for both the three and nine months ended January 28, 2011.

Cost of Service Revenues (in millions, except percentages):

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
     January 28,
2011
     % Change     January 27,
2012
     January 28,
2011
     % Change  

Cost of service revenues

   $  133.0       $  111.0         20   $  379.3       $  320.0         19

Cost of service revenues increased by $22.0 million, or 20%, and $59.3 million, or 19%, during the three and nine months ended January 27, 2012, respectively, from the comparable periods in the prior year primarily due to the costs associated with servicing a larger installed base and an increase in logistics and materials costs. Costs represented 44% and 42% of service revenues for the three months ended January 27, 2012 and January 28, 2011, respectively, and represented 43% and 42% of service revenues for the nine months ended January 27, 2012 and January 28, 2011, respectively.

Operating Expenses

Sales and Marketing, Research and Development, and General and Administrative Expenses

Compensation costs comprise the largest component of operating expenses. Included in compensation costs are salaries, benefits, other compensation-related costs, stock-based compensation costs and employee incentive compensation plan costs. Compensation costs included in operating expenses increased approximately $59.8 million, or 17%, and $205.4 million, or 21%, for the three and nine months ended January 27, 2012, respectively, from the comparable periods in the prior year, primarily due to:

(i) an increase in salaries, benefits and other compensation-related costs of $63.8 million and $210.1 million for the three and nine months ended January 27, 2012, respectively, due to an increase in average headcount, which included the impact of the Engenio acquisition;

(ii) an increase in stock-based compensation of $29.0 million and $66.1 million for the three and nine months ended January 27, 2012, respectively, which includes the impact of the Engenio acquisition and $10.9 million of expense related to the reset of the employee stock purchase plan (ESPP) offerings triggered by the decline in our stock price below the grant date prices of the offerings;

(iii) partially offset by a decrease in incentive compensation expense of $33.0 million and $70.8 million for the three and nine months ended January 27, 2012, respectively, due to lower achievement of performance against plan operating targets during the three and nine months ended January 27, 2012.

Sales and Marketing (in millions, except percentages):

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
     January 28,
2011
     % Change     January 27,
2012
     January 28,
2011
     % Change  

Sales and marketing expenses

   $ 477.0       $ 397.4         20   $ 1,385.9       $ 1,134.4         22

 

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Sales and marketing expense consists primarily of compensation costs, commissions, outside services, allocated facilities and IT costs, advertising and marketing promotional expense, and travel and entertainment expense. Sales and marketing expenses increased due to the following:

 

     Three Months Ended
Fiscal 2012 to Fiscal 2011

Percentage Change
Points
    Nine Months Ended
Fiscal  2012 to Fiscal 2011
Percentage Change
Points
 

Salaries

             8                9   

Stock-based compensation

     4        3   

Incentive plan compensation

     (4     (3

Other compensation and benefit costs

     2        2   
  

 

 

   

 

 

 

Total compensation costs

     10        11   

Outside services

     1        2   

Amortization expense

     2        2   

Commissions

     3        2   

Facilities and IT support costs

     2        2   

Advertising and marketing promotional expense

     2        2   

Other

     —          1   
  

 

 

   

 

 

 

Total change

     20        22   
  

 

 

   

 

 

 

The increase in total compensation costs for the three and nine months ended January 27, 2012 reflects an increase in average sales and marketing headcount of 21% and 22%, respectively, as compared to the same periods in the prior year. These increases were partially offset by a decrease in incentive compensation expense. The increase in commissions expense for the three and nine months ended January 27, 2012 was due to higher sales levels compared to the same periods in the prior year. Amortization expense increased due to the addition of intangible assets as a result of the acquisition of Engenio.

Research and Development (in millions, except percentages):

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
     January 28,
2011
     % Change     January 27,
2012
     January 28,
2011
     % Change  

Research and development expenses

   $ 208.3       $ 166.0         25   $ 606.6       $ 472.1         28

Research and development expense consists primarily of compensation costs, allocated facilities and IT costs, depreciation and amortization, equipment and software related costs, prototypes, non-recurring engineering (NRE) charges and other outside services costs. Research and development expenses increased due to the following:

 

     Three Months Ended
Fiscal 2012 to Fiscal 2011

Percentage Change
Points
    Nine Months Ended
Fiscal 2012 to Fiscal 2011

Percentage Change
Points
 

Salaries

             12                13   

Stock-based compensation

     7        5   

Incentive plan compensation

     (8     (5

Other compensation and benefit costs

     3        4   
  

 

 

   

 

 

 

Total compensation costs

     14        17   

Facilities and IT support costs

     4        5   

Depreciation expense

     3        3   

Outside services

     2        2   

Other

     2        1   
  

 

 

   

 

 

 

Total change

     25        28   
  

 

 

   

 

 

 

The increase in total compensation costs reflects a 38% and 39% increase in average engineering headcount during the three and nine months ended January 27, 2012, respectively, compared to the same periods in the prior year. These increases were partially offset by a decrease in incentive compensation expense. The increase in facilities and IT support costs in each period reflects the acquisition of Engenio. Depreciation expense increased due to purchases of production and engineering equipment.

We believe that our future performance will depend in large part on our ability to maintain and enhance our current product line, develop new products that achieve market acceptance, maintain technological competitiveness and meet an expanding range of customer requirements. We expect to continue to spend on current and future product development efforts, broaden our existing product offerings and introduce new products that expand our solutions portfolio.

 

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Table of Contents

General and Administrative (in millions, except percentages):

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
     January 28,
2011
     % Change     January 27,
2012
     January 28,
2011
     % Change  

General and administrative expenses

   $ 63.2       $ 61.9         2   $ 193.4       $ 182.3         6

General and administrative expense consists primarily of compensation costs, professional and corporate legal fees, outside services and allocated facilities and IT costs. General and administrative expenses increased due to the following:

 

     Three Months Ended
Fiscal 2012 to Fiscal 2011

Percentage Change
Points
    Nine Months Ended
Fiscal 2012 to Fiscal 2011

Percentage Change
Points
 

Salaries

             3                5   

Stock-based compensation

     2        2   

Incentive plan compensation

     (10     (8
  

 

 

   

 

 

 

Total compensation costs

     (5     (1

Outside services

     1        4   

Professional and corporate legal fees

     8        3   

Other

     (2     —     
  

 

 

   

 

 

 

Total change

     2        6   
  

 

 

   

 

 

 

The decrease in total compensation costs was driven by a decrease in incentive compensation expense for the three and nine months ended January 27, 2012. These decreases were partially offset by the impact of a 13% and 16% increase in average general and administrative headcount during the three and nine months ended January 27, 2012, respectively, compared to the same periods in the prior year. Professional and corporate legal fees are higher than the comparable prior year periods as a result of a legal fee settlement in the three months ended January 28, 2011 associated with the resolution of the Sun Microsystems litigation. The increase in outside services for the nine months ended January 27, 2012 reflects additional spending on contractors and costs associated with the Engenio integration activities and various on-going operational projects.

Acquisition-Related Expense (in millions, except percentages):

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
     January 28,
2011
     % Change     January 27,
2012
     January 28,
2011
     % Change  

Acquisition-related expense

   $ 3.5       $ 0.6         483   $ 7.4       $ 0.9         722

During the three and nine months ended January 27, 2012, we incurred $3.5 million and $7.4 million, respectively, of due diligence, legal and other integration charges associated with our acquisition of Engenio. During the nine months ended January 28, 2011, we incurred $0.9 million of costs associated with our acquisitions of Bycast Inc. and Akorri Networks, Inc.

Other Expense, Net

Interest Income (in millions, except percentages):

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
     January 28,
2011
     % Change     January 27,
2012
     January 28,
2011
     % Change  

Interest income

   $ 8.7       $ 10.3         (16 )%    $ 27.6       $ 29.6         (7 )% 

The decrease in interest income during the three and nine months ended January 27, 2012, from the comparable periods in the prior year, was primarily due to lower yields on new investments.

Interest Expense (in millions, except percentages):

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
    January 28,
2011
    % Change     January 27,
2012
    January 28,
2011
    % Change  

Interest expense

   $ (18.9   $ (19.0     (1 )%    $ (54.7   $ (56.2     (3 )% 

 

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Interest expense decreased 1% and 3% during the three and nine months ended January 27, 2012, respectively, from the comparable periods in the prior year. During the three and nine months ended January 27, 2012, we recognized incremental non-cash interest expense from the amortization of debt discount and issuance costs relating to our Notes of approximately $13.5 million and $38.7 million, respectively, net of capitalized interest. During the three and nine months ended January 28, 2011, we recognized incremental non-cash interest expense from the amortization of debt discount and issuance costs relating to our Notes of approximately $13.3 million and $39.2 million, respectively. The coupon interest expense related to the Notes was $5.2 million and $15.2 million during the three and nine months ended January 27, 2012, respectively, net of capitalized interest and $5.5 million and $16.5 million during the three and nine months ended January 28, 2011, respectively. During the three and nine months ended January 27, 2012, we capitalized interest of $0.9 million and $4.3 million, respectively, on facility assets under construction and on significant software development projects.

Provision for Income Taxes (in millions, except percentages):

 

     Three Months Ended     Nine Months Ended  
     January 27,
2012
     January 28,
2011
     % Change     January 27,
2012
     January 28,
2011
     % Change  

Provision for income taxes

   $ 27.3       $ 26.3         4   $ 73.2       $ 73.5        

Our effective tax rates for the three months ended January 27, 2012 and January 28, 2011 were 18.6% and 12.4%, respectively, and 14.7% and 12.5% for the nine months ended January 27, 2012 and January 28, 2011, respectively. Our effective tax rates for the three and nine months ended January 27, 2012 and January 28, 2011 differ from the U.S. statutory rate of 35% because our foreign earnings are taxed at rates lower than the U.S. statutory rate. In January 2012, we reached agreement with the U.S. Internal Revenue Service (IRS) with regards to a tax position taken during prior periods. Our provision for income taxes increased for the three months ended January 27, 2012 compared to the three months ended January 28, 2011 primarily as a result of a discrete tax expense of $11.7 million, net of federal tax benefit, related to this settlement and the resulting remeasurement of our tax positions. Our provision for income taxes decreased for the nine months ended January 27, 2012 compared to the nine months ended January 28, 2011 primarily as a result of a decrease in U.S. pre-tax profits, partially offset by the tax effect of the remeasurement of a prior year tax position and lower tax benefits from disqualified dispositions of our ESPP.

As of January 27, 2012, we had $155.5 million of unrecognized tax benefits, of which $104.3 million has been recorded in other long-term liabilities and $96.6 million, including penalties and interest, would affect our provision for income taxes if recognized. During the nine months ended January 27, 2012, there was a gross increase in our unrecognized tax benefits of $8.0 million for tax positions related to the current year, and a gross increase of $20.3 million and a gross decrease of $6.0 million for tax positions related to prior years.

Liquidity and Capital Resources

The following sections discuss our principal liquidity requirements, as well as our sources and uses of cash flows on our liquidity and capital resources. The principal objectives of our investment policy are the preservation of principal and maintenance of liquidity. We attempt to mitigate default risk by investing in high-quality investment grade securities, limiting the time to maturity and monitoring the counter-parties and underlying obligors closely. We believe our cash equivalents and short-term investments are liquid and accessible. We are not aware of any significant deterioration in the fair value of our cash equivalents or investments from the values reported as of January 27, 2012.

Liquidity Sources and Cash Requirements

Our principal sources of liquidity as of January 27, 2012 consisted of approximately $4.9 billion in cash, cash equivalents and short-term investments, as well as cash we expect to generate from operations.

Cash, cash equivalents and short-term investments consist of the following (in millions):

 

     January 27, 2012      April 29, 2011  

Cash and cash equivalents

   $ 2,420.9       $ 2,757.3   

Short-term investments

     2,445.2         2,417.4   
  

 

 

    

 

 

 

Total cash, cash equivalents and short-term investments

   $ 4,866.1       $ 5,174.7   
  

 

 

    

 

 

 

 

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Table of Contents

As of January 27, 2012, $2.4 billion of cash, cash equivalents and short-term investments were held in the U.S., while $2.5 billion were held in foreign countries. Most of the amounts held outside the U.S. can be repatriated to the U.S. but, under current law, would be subject to U.S. federal and state income taxes. If we were to repatriate foreign earnings for cash requirements in the U.S., we would incur U.S. federal and state income taxes reduced by the current amount of our U.S. federal and state net operating loss and tax credit carry forwards. However, our intent is to keep these funds permanently reinvested outside of the U.S., and our current plans do not contemplate a need to repatriate them to fund our U.S. operations. Our principal liquidity requirements are primarily to meet our working capital needs, support ongoing business activities, fund research and development, meet capital expenditure needs, invest in critical or complementary technologies, and service our debt and synthetic leases. Our contractual obligations as of January 27, 2012 are summarized below in the Contractual Obligations table.

Key factors that could affect our cash flows include changes in our revenue mix and profitability, our ability to effectively manage our working capital, in particular, accounts receivable and inventories, our ability to effectively integrate acquired products, businesses and technologies, including Engenio, and conversions of our Notes by holders. Based on our current business outlook, we believe that our sources of cash will satisfy our working capital needs, capital expenditures, investment requirements, stock repurchases, contractual obligations, commitments, interest payments on our Notes and other liquidity requirements associated with operations and meet our cash requirements for at least the next 12 months. However, in the event our liquidity is insufficient, we may be required to curtail spending and implement additional cost saving measures and restructuring actions. We cannot be certain that we will continue to generate cash flows at or above current levels or that we will be able to obtain additional financing, if necessary, on satisfactory terms, if at all.

Our investment portfolio, including auction rate securities, has been and will continue to be exposed to market risk due to trends in the credit and capital markets. We continue to closely monitor current economic and market events to minimize our market risk on our investment portfolio. Based on our ability to access our cash and short-term investments, our expected operating cash flows, and our other potential sources of cash, we do not anticipate that the lack of liquidity of these investments will impact our ability to fund working capital needs, capital expenditures, acquisitions or other cash requirements. We intend to and believe that we have the ability to hold these investments until the market recovers. If current market conditions deteriorate, we may be required to record additional charges to earnings in future periods.

Capital Expenditure Requirements

We expect to fund our capital expenditures, including our commitments related to facilities, equipment, operating leases and internal-use software development projects over the next few years through existing cash, cash equivalents, investments and cash generated from operations. The timing and amount of our capital requirements cannot be precisely determined and will depend on a number of factors, including future demand for products, changes in the network storage industry, hiring plans and our decisions related to the financing of our facilities and equipment requirements. We expect that our existing facilities and those being developed in Sunnyvale, California; Research Triangle Park, North Carolina and other locations worldwide are adequate for our requirements over at least the next two years and that additional space will be available as needed. We anticipate capital expenditures to be between $45.0 million and $65.0 million over the next three months.

Acquisition-Related Requirements

On May 6, 2011, we completed the acquisition of certain assets related to the Engenio business of LSI. We paid LSI $480.0 million in cash and also assumed certain assets and liabilities related to Engenio. As part of our efforts to integrate Engenio into our business, we expect to incur additional integration charges. See Note 5 of the accompanying condensed consolidated financial statements for more information.

Cash Flows

As of January 27, 2012, our cash, cash equivalents and short-term and long-term investments decreased by $323.1 million from April 29, 2011, to $4.9 billion. The decrease was primarily a result of $600.0 million in cash paid for the repurchase of common stock, $480.0 million net cash paid in connection with the acquisition of Engenio, $282.9 million in capital expenditures and $21.2 million of net purchases of investments, partially offset by $880.0 million of cash provided by operating activities and $101.0 million from issuances of common stock related to employee stock option exercises and purchases under the ESPP. We derive our liquidity and capital resources primarily from our operating cash flows and from working capital. Accounts receivable days sales outstanding as of January 27, 2012 decreased to 40 days, compared to 47 days as of April 29, 2011, primarily due to improvements in shipment linearity. Working capital increased by $1.0 billion to $4.0 billion as of January 27, 2012, compared to $3.0 billion as of April 29, 2011, primarily due to the reclassification of our $1.2 billion Notes to long-term liabilities as the underlying contingent conversion threshold was not met at January 27, 2012 and a decrease in accrued compensation and related benefits of $168.0 million, partially offset by a decrease in cash, cash equivalents and short-term investments of $308.6 million and accounts receivable of $57.2 million.

 

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Table of Contents

Cash Flows from Operating Activities

During the nine months ended January 27, 2012, we generated cash from operating activities of $880.0 million. The primary sources of cash from operating activities consisted of net income of $424.7 million, adjusted by depreciation and amortization of $210.5 million, stock-based compensation of $197.8 million and deferred income taxes of $64.0 million. Significant changes in assets and liabilities impacting operating cash flows included an increase in deferred revenue of $234.5 million and a decrease in accounts receivable of $55.8 million, partially offset by a decrease in accrued compensation and other current liabilities of $160.5 million, which was primarily attributable to cash payouts to employees related to the fiscal year 2011 commissions and incentive compensation plans.

We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, shipment linearity, accounts receivable collections performance, inventory and supply chain management, tax benefits from stock-based compensation, and the timing and amount of compensation and other payments.

Cash Flows from Investing Activities

During the nine months ended January 27, 2012, we completed our acquisition of Engenio for a total net cash payment of $480.0 million, purchased $282.9 million of capital expenditures and purchased $21.2 million in net purchases of our investments.

Cash Flows from Financing Activities

We used $415.2 million in financing activities for the nine months ended January 27, 2012, which primarily consisted of $600.0 million for the repurchase of common stock, partially offset by $80.7 million of excess tax benefit from stock-based compensation and $101.0 million of proceeds from employee equity award plans, net of shares withheld for taxes.

Net proceeds from the issuance of common stock related to employee participation in employee equity award programs have historically been a significant component of our liquidity. The extent to which our employees exercise stock options generally increases or decreases based upon changes in the market price of our common stock. As a result, our cash flow resulting from the issuance of common stock in connection with these programs and related tax benefits will vary.

Stock Repurchase Program

During the nine months ended January 27, 2012, 14.6 million shares of our common stock were repurchased as described below. Since the May 13, 2003 inception of our stock repurchase program through January 27, 2012, we have repurchased a total of 119.0 million shares of our common stock at an average price of $29.65 per share, for an aggregate purchase price of $3.5 billion. As of January 27, 2012, our Board of Directors had authorized the repurchase of up to $4.0 billion of our common stock under this stock repurchase program. As of January 27, 2012, the remaining authorized amount for stock repurchases under this program was $0.5 billion with no termination date. The stock repurchase program may be suspended or discontinued at any time.

Accelerated Share Repurchase Agreements

On July 8, 2011, we entered into a collared accelerated share repurchase agreement (ASR) with Bank of America, N.A, under which we prepaid $200.0 million to purchase shares of our common stock. The aggregate number of shares ultimately purchased was determined based on the volume weighted-average share price of our common stock over a specified period of time. The contract was settled in August 2011. The total number of shares repurchased and retired under this ASR was 4.1 million shares at a price of $48.30.

On August 19, 2011, we entered into an ASR with Wells Fargo Bank, National Association, under which we prepaid $400.0 million to purchase shares of our common stock. The aggregate number of shares ultimately purchased was determined based on the volume weighted-average share price of our common stock over a specified period of time. The contract was settled in November 2011. The total number of shares repurchased and retired under this ASR was 10.5 million shares at a price of $38.08.

 

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Table of Contents

Convertible Notes

As of January 27, 2012, we had $1.265 billion principal amount of 1.75% Convertible Senior Notes due 2013 (See Note 9 of the accompanying condensed consolidated financial statements). The Notes will mature on June 1, 2013, unless earlier repurchased or converted. Our common stock price did not exceed the conversion threshold price of $41.41 per share set forth for these Notes for at least 20 trading days during the 30 consecutive trading days ended December 31, 2011. Accordingly, as of January 27, 2012, the Notes were not convertible at the option of the holder and, therefore, the carrying value of the Notes was classified as long-term debt and the difference between the principal amount and the carrying value of the Notes was reflected as equity on our condensed consolidated balance sheet as of January 27, 2012.

The determination of whether or not the Notes are convertible must continue to be performed quarterly. Consequently, the Notes may be convertible in future quarters, and therefore may be classified as short-term debt if the contingent conversion thresholds are met in such quarters. Additionally, since the Notes would be convertible at the option of the holder and the principal amount would be required to be paid in cash, the difference between the principal amount and the carrying value of the Notes would be reflected as convertible debt in mezzanine on our condensed consolidated balance sheets. As of January 27, 2012, shares issued related to conversion of the Notes were minimal. As of January 27, 2012, we received a minimal number of shares related to the Note hedge transactions and no cash or shares were delivered related to the warrant transactions.

Contractual Obligations

The following table summarizes our contractual obligations as of January 27, 2012 and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in millions):

 

     Remainder
of

2012
    2013     2014     2015     2016     Thereafter      Total  

Off-balance sheet commitments:

               

Office operating lease payments

   $ 9.4      $ 37.1      $ 36.2      $ 36.3      $ 31.2      $ 74.9       $ 225.1   

Real estate lease payments(1)

     0.8        129.2        —          —          —          —           130.0   

Less: sublease income

     (0.5     (1.2     (0.8     (0.8     (0.5     —           (3.8

Equipment operating lease payments

     7.4        20.5        13.4        4.4        1.3        0.6         47.6   

Purchase commitments with contract manufacturers(2)

     215.4        3.6        1.2        0.2        —          —           220.4   

Capital expenditures

     19.6        17.2        11.7        —          —          —           48.5   

Other purchase obligations(3)

     89.9        92.6        17.6        10.6        10.0        10.0         230.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total off balance-sheet commitments

     342.0        299.0        79.3        50.7        42.0        85.5         898.5   

1.75% Convertible notes(4)

     —          22.1        1,276.0        —          —          —           1,298.1   

Long-term financing arrangements

     3.8        10.9        3.4        2.2        1.7        0.8         22.8   

Uncertain tax positions(5)

                  105.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 345.8      $ 332.0      $ 1,358.7      $ 52.9      $ 43.7      $ 86.3       $ 2,325.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other Commercial Commitments:

               

Letters of credit

   $ 6.0      $ 1.4      $ —        $ 0.2      $ 0.4      $ 1.2       $ 9.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) Included in real estate lease payments pursuant to four financing arrangements with BNP Paribas LLC (BNPPLC) are: (i) lease commitments of $0.8 million for the remainder of fiscal 2012 and $2.1 million in fiscal 2013, which are based on either the LIBOR rate as of January 27, 2012 plus a spread or a fixed rate for terms of five years and (ii) at the expiration or termination of the leasing arrangements, a supplemental payment obligation equal to our minimum guarantee of $127.1 million in the event that we elect not to purchase or arrange for sale of the buildings.
(2) Contract manufacturer commitments consist of obligations for on-hand inventories and non-cancelable purchase orders with our contract manufacturers. As of January 27, 2012, we recorded accruals of $3.2 million for firm, non-cancelable purchase commitments with contract manufacturers for quantities in excess of our future demand forecasts, which is consistent with the valuation of our excess and obsolete inventory.
(3) Purchase obligations represent an estimate of all open purchase orders and contractual obligations in the ordinary course of business, other than commitments with contract manufacturers and suppliers, for which we have not received the goods or services. Purchase obligations do not include contracts that may be cancelled without penalty. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.

 

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(4) Included in these amounts are obligations related to the $1.265 billion principal amount of 1.75% Notes due 2013 (see Note 9 of the accompanying condensed consolidated financial statements). Estimated interest payments for the Notes are $33.2 million for the remainder of fiscal 2012 through fiscal 2014.
(5) As of January 27, 2012, our liability for uncertain tax positions was $105.9 million, including interest and penalties, which due to the uncertainty of the timing of future payments, are presented in the total column on a separate line in this table.

Some of the amounts in the table above are based on management’s estimates and assumptions, including their duration, the possibility of renewal or termination, anticipated actions by management and third parties and other factors. Because these estimates and assumptions are subjective, our actual future obligations may vary from those reflected in the table. We expect to fund our contractual obligations and other commitments in the table above through existing cash, cash equivalents, investments, and cash generated from operations or obtain additional financing, if necessary.

As of January 27, 2012, we have four leasing arrangements (Leasing Arrangements 1, 2, 3 and 4) with BNPPLC, some of which require us to lease certain of our land to BNPPLC for a period of 99 years and to lease approximately 0.6 million square feet of office space from BNPPLC for our headquarters in Sunnyvale, California, which had an original cost of $149.6 million. Under these leasing arrangements, we pay BNPPLC minimum lease payments, which vary based on LIBOR plus a spread or a fixed rate on the costs of the facilities on the respective lease commencement dates. We make payments for each of the leases for a term of five years. We have the option to renew each of the leases for two consecutive five-year periods upon approval by BNPPLC. Upon expiration (or upon any earlier termination) of the lease terms, we must elect one of the following options: (i) purchase the buildings from BNPPLC at cost; (ii) if certain conditions are met, arrange for the sale of the buildings by BNPPLC to a third-party, and be liable for any deficiency between the net proceeds received from the third-party and BNPPLC’s cost, up to 85% of cost (residual guarantee); or (iii) pay BNPPLC supplemental payments for an amount equal to the difference between BNPPLC’s cost and fair value, up to the residual guarantee, in which event we may r