NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1
.
Basis of Presentation
Brocade Communications Systems, Inc. (“Brocade” or the “Company”) has prepared the accompanying Condensed Consolidated Financial Statements pursuant to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The Company’s Condensed Consolidated Balance Sheet as of
October 31, 2015
, was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended
October 31, 2015
.
The accompanying Condensed Consolidated Financial Statements are unaudited but, in the opinion of the Company’s management, reflect all adjustments—including normal recurring adjustments—that management considers necessary for a fair presentation of these Condensed Consolidated Financial Statements. The results for the interim periods presented are not necessarily indicative of the results for the full fiscal year or any other future period.
The Company’s fiscal year is a 52- or 53-week period ending on the last Saturday in October or the first Saturday in November, respectively. As is customary for companies that use the 52/53-week convention, every fifth year is a 53-week year. Fiscal year 2016 is a 52-week fiscal year and fiscal year 2015 was a 52-week fiscal year. The Company’s next 53-week fiscal year will be fiscal year 2019 and its next 14-week quarter will be the second quarter of fiscal year 2019.
The Company’s Condensed Consolidated Financial Statements include the accounts of Brocade and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. In May 2016, the Company entered into a joint venture agreement with Guiyang High-Tech Industrial Investment Group Co., Ltd. (“HTII”) to create Guizhou Huiling Technology Co., Ltd (“GHTC”). The Company consolidates its investment in GHTC as this is a variable interest entity, and the Company is the primary beneficiary. The noncontrolling interest attributed to GHTC is presented as a separate component from the Company’s equity in the equity section of the Company’s Condensed Consolidated Balance Sheets. HTII’s share of GHTC’s earnings are not presented separately in the Company’s Condensed Consolidated
Statements of Income
as these amounts are not material for any of the fiscal periods presented.
Use of Estimates in Preparation of Condensed Consolidated Financial Statements
The preparation of the Company’s Condensed Consolidated Financial Statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and judgments that affect the amounts reported in the Company’s Condensed Consolidated Financial Statements and accompanying notes. Estimates are used for, but not limited to, revenue recognition, sales allowances and programs, allowance for doubtful accounts, stock-based compensation, acquisition purchase price allocations, warranty obligations, inventory valuation and purchase commitments, restructuring costs, incentive compensation, facilities lease losses, impairment of goodwill and other indefinite-lived intangible assets, litigation, and income taxes. Actual results may differ materially from these estimates.
2
.
Summary of Significant Accounting Policies
There have been no material changes in the Company’s significant accounting policies for the
nine months ended
July 30, 2016
, as compared to those disclosed in Brocade’s Annual Report on Form 10-K for the fiscal year ended
October 31, 2015
.
Consolidation of Variable Interest Entities
The Company uses a qualitative approach in assessing the consolidation requirement for variable interest entities. The approach focuses on identifying which enterprise has the power to direct the activities that most significantly impact the variable interest entity’s economic performance and which enterprise has the obligation to absorb losses or the right to receive benefits from the variable interest entity. In the event that the Company is the primary beneficiary of a variable interest entity, the assets, liabilities, and results of operations of the variable interest entity will be included in the Company’s consolidated financial statements.
New Accounting Pronouncements or Updates Recently Adopted
In April 2014, the Financial Accounting Standards Board (“FASB”) issued an update to Accounting Standards Codification (“ASC”) 205,
Presentation of Financial Statements
, and ASC 360,
Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
. Under this update, a discontinued operation may include a component of an entity or a group of components of an entity, a business, or nonprofit activity. Only those disposals of components of an entity that represent a strategic shift that has, or will have, a major effect on an entity’s operations and financial results will be reported as discontinued operations in the financial statements. This update should be applied prospectively. The Company adopted this update in the first quarter of fiscal year 2016. There was no material impact on the Company’s financial position, results of operations, or cash flows.
In April 2015, the FASB issued an update to ASC 835,
Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs
. Under this update, debt issuance costs are required to be presented as a direct deduction from the carrying amount of the related debt liability, consistent with the presentation of debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this update. This update should be applied retrospectively to all prior periods presented in the financial statements. The Company adopted this update in the first quarter of fiscal year 2016. There was no material impact on the Company’s financial position, results of operations, or cash flows.
In September 2015, the FASB issued an update to ASC 805,
Business Combinations: Simplifying the Accounting Measurement-Period Adjustments
. This update simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. Under this update, the adjustments are recognized in the reporting period in which the adjustment amounts are determined. This update should be applied prospectively. The Company adopted this update in the first quarter of fiscal year 2016. There was no material impact on the Company’s financial position, results of operations, or cash flows.
In November 2015, the FASB issued an update to ASC 740,
Income Taxes: Balance Sheet Classification of Deferred Taxes
. This update simplifies the presentation of current and non-current deferred tax liabilities and assets. Under this update, the deferred tax liabilities and assets are classified as non-current on the balance sheet. The update does not impact the current requirement that deferred tax liabilities and assets be offset and presented as a single amount. This update may be applied either prospectively or retrospectively. The Company adopted this update in the first quarter of fiscal year 2016 and has elected to apply this update prospectively. There was no material impact on the Company’s financial position, results of operations, or cash flows.
Recent Accounting Pronouncements or Updates That Are Not Yet Effective
In May 2014, the FASB issued ASC 606,
Revenue from Contracts with Customers
, that will supersede virtually all existing revenue guidance. Under this new revenue guidance, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. As such, an entity will need to use more judgment and make more estimates than under the current guidance. This new revenue guidance should be applied retrospectively either to each prior reporting period presented in the financial statements, or only to the most current reporting period presented in the financial statements with a cumulative effect adjustment recorded in retained earnings. In August 2015, the FASB issued an update to defer the effective date of this new revenue guidance by one year. This new revenue guidance becomes effective and will be adopted by the Company in the first quarter of fiscal year 2019. Early adoption is not permitted for reporting periods before the first quarter of fiscal year 2018. The Company is currently evaluating the impact of this new revenue guidance on its consolidated financial statements.
In March 2016, the FASB issued an update to ASC 606,
Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
, which clarifies the implementation guidance for principal versus agent considerations. In April 2016, the FASB issued an update to ASC 606,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing
, which clarifies the guidance related to identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB issued an update to ASC 606,
Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients
, which clarifies the guidance related to collectibility and non-cash consideration, as well as provides practical expedients for the transition to ASC 606. The Company must adopt these updates with the adoption of ASC 606,
Revenue from Contracts with Customers
. The Company is currently evaluating the impact of these updates on its consolidated financial statements.
In April 2015, the FASB issued an update to ASC 350,
Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
. This update provides guidance on the accounting for fees paid in a cloud computing arrangement if the arrangement was determined to include a software license. This update will not change U.S. GAAP for a customer’s accounting for service contracts. This update may be applied either prospectively or retrospectively and will be adopted by the Company in the first quarter of fiscal year 2017. Early adoption is permitted. The Company does not expect the adoption of this update to have a material impact on its consolidated financial statements.
In July 2015, the FASB issued an update to ASC 330,
Inventory: Simplifying the Measurement of Inventory
. Under this update, measurement of inventory is based on the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and disposal. This update does not apply to inventory that is measured using last-in, first-out or the retail inventory method. This update should be applied prospectively and will be adopted by the Company in the first quarter of fiscal year 2018. Early adoption is permitted. The Company does not expect the adoption of this update to have a material impact on its consolidated financial statements.
In January 2016, the FASB issued an update to ASC 825,
Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
. This update consists of eight provisions that provide guidance on the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. This update should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption and prospectively for equity investments without readily determinable fair values. This update becomes effective and will be adopted by the Company in the first quarter of fiscal year 2019. Early adoption is permitted for two of the eight provisions. The Company is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASC 842,
Leases
, that will supersede the existing lease guidance, including on-balance sheet recognition of operating leases for lessees. This new lease guidance should be applied using a modified retrospective approach and will be adopted by the Company in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is currently evaluating the impact of this new lease guidance on its consolidated financial statements.
In March 2016, the FASB issued an update to ASC 718,
Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting
. This update simplifies certain aspects of the accounting for share-based payment transactions, including income taxes, forfeiture rates, classification of awards, and classification in the statement of cash flows. This update becomes effective in the first quarter of fiscal year 2018. Early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements.
In June 2016, the FASB issued ASC 326,
Financial Instrument—Credit Losses
, that will supersede the existing methodology for estimating expected credit losses on certain financial instruments. The new impairment methodology eliminates the probable initial recognition threshold and, instead, estimates the expected credit losses in consideration of past events, current conditions, and forecasted information. This update becomes effective in the first quarter of fiscal year 2021. Early adoption is permitted in the first quarter of fiscal year 2020. The Company is currently evaluating the impact of this update on its consolidated financial statements.
In August 2016, the FASB issued an update to ASC 230,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
. This update consists of eight provisions that provide guidance on the classification of certain cash receipts and cash payments. If practicable, this update should be applied using a retrospective transition method to each period presented. For the provisions that are impracticable to apply retrospectively, those provisions may be applied prospectively as of the earliest date practicable. This update becomes effective and will be adopted by the Company in the first quarter of fiscal year 2019. Early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.
Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. Cash and cash equivalents are primarily maintained at
six
major financial institutions. Deposits held with banks may be redeemed upon demand and may exceed the amount of insurance provided on such deposits.
A majority of the Company’s accounts receivable balance is derived from sales to original equipment manufacturer (“OEM”) partners in the computer storage and server industry. As of
July 30, 2016
,
two
customers individually accounted for
18%
and
10%
of total accounts receivable, for a combined total of
28%
of total accounts receivable. As of
October 31, 2015
,
one
customer individually accounted for
17%
of total accounts receivable and no other customers individually accounted for more than 10% of total accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable balances. The Company has established reserves for credit losses and sales allowances.
For the three months ended
July 30, 2016
,
two
customers individually accounted for
12%
and
12%
of the Company’s total net revenues for a combined total of
24%
of total net revenues. For the three months ended
August 1, 2015
,
three
customers individually accounted for
16%
,
15%
, and
12%
of the Company’s total net revenues for a combined total of
43%
of total net revenues.
The Company currently relies on single and limited sources for multiple key components used in the manufacture of its products. Additionally, the Company relies on multiple contract manufacturers (“CMs”) for the production of its products, including Hon Hai Precision Industry Co., Ltd. and Accton Technology Corporation. Although the Company uses standard parts and components for its products where possible, the Company’s CMs currently purchase, on the Company’s behalf, several key components used in the manufacture of products from single- or limited-source suppliers. The Company also entered into license agreements with some of its suppliers, including Qualcomm Inc., for technologies and components that are used in its products.
3
.
Acquisitions
Current Fiscal Year Acquisitions
Acquisition of Ruckus Wireless, Inc. (“Ruckus”)
On May 27, 2016 (“Acquisition Date”), the Company completed its acquisition of Ruckus, a public company incorporated in the state of Delaware, to strengthen its Internet Protocol (“IP”) Networking product portfolio by adding Ruckus’ wireless products and services to the Company’s networking solutions.
Pursuant to the terms of the Agreement and Plan of Merger entered into between the Company, Ruckus, and a Company subsidiary, Ruckus stockholders were entitled to receive
$6.45
in cash and
0.75
shares of the Company’s common stock in exchange for each outstanding share of Ruckus common stock. The results of operations for the acquired business are included in the Company’s Condensed Consolidated
Statements of Income
from the Acquisition Date. Immediately prior to the completion of the acquisition, there were
92.2 million
outstanding shares of Ruckus common stock, which included
3.2 million
shares of Ruckus common stock owned by a dissenting former Ruckus stockholder who has submitted and not withdrawn a demand for appraisal of the fair value of those shares under Delaware law. As a result, no cash payment had been made and no shares had been issued to the dissenting stockholder as of July 30, 2016.
Based on the
$8.60
per share closing price of the Company’s common stock on May 27, 2016, the total preliminary purchase consideration paid or payable was
$1.3 billion
, consisting of
$574.0 million
in cash for outstanding Ruckus shares less dissenting shares,
$78.3 million
in cash for outstanding vested Ruckus stock options allocated to preliminary purchase consideration,
$574.0 million
of equity interests in the Company,
$7.4 million
of the fair value of replacement awards allocated to the preliminary purchase consideration, and
$41.7 million
relating to the appraisal demand submitted by the dissenting former Ruckus stockholder, which was accrued as of
July 30, 2016
, and reported within “Other accrued liabilities” on the Company’s Condensed Consolidated Balance Sheets.
The Company recorded direct acquisition costs of
$10.2 million
and
$15.2 million
for
the three and nine months ended July 30, 2016
, respectively, and integration costs of
$4.6 million
and
$5.4 million
for
the three and nine months ended July 30, 2016
, respectively. These costs were expensed as incurred and are presented in the Company’s Condensed Consolidated
Statements of Income
for
the three and nine months ended July 30, 2016
, as “Acquisition and integration costs.”
In connection with this acquisition, the Company allocated the total preliminary purchase consideration to the net assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the Acquisition Date. The following table summarizes the preliminary allocation of the total preliminary purchase consideration to the fair value of the assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
Assets acquired:
|
|
Cash and cash equivalents
|
$
|
95,515
|
|
Short-term investments
|
149,615
|
|
Accounts receivable, net of allowances for doubtful accounts of $2,100
|
41,339
|
|
Inventories
|
66,000
|
|
Prepaid expenses and other current assets
|
5,953
|
|
Property and equipment, net
|
21,777
|
|
Identifiable intangible assets
|
380,000
|
|
Other assets
|
1,697
|
|
Total assets acquired
|
761,896
|
|
Liabilities assumed:
|
|
Accounts payable
|
16,375
|
|
Accrued employee compensation
|
17,514
|
|
Deferred revenue
|
13,923
|
|
Other accrued liabilities
|
33,810
|
|
Non-current deferred revenue
|
9,364
|
|
Non-current deferred tax liabilities
|
57,677
|
|
Other non-current liabilities
|
40,561
|
|
Total liabilities assumed
|
189,224
|
|
Net assets acquired, excluding goodwill (a)
|
572,672
|
|
Total preliminary purchase consideration (b)
|
1,275,448
|
|
Estimated goodwill (b) - (a)
|
$
|
702,776
|
|
Goodwill represents the excess of the total preliminary purchase consideration over the fair value of the underlying assets acquired and liabilities assumed. Goodwill is attributable to planned growth in new markets and synergies expected to be achieved from the combined operations of the Company and Ruckus. Goodwill of
$303.8 million
was assigned to the IP Networking Products reporting unit, and goodwill of
$398.9 million
was assigned to the Global Services reporting unit. Goodwill recognized in the acquisition is
no
t deductible for tax purposes.
A preliminary assessment of the fair value of identified intangible assets and their respective useful lives are as follows (in thousands, except for estimated useful life):
|
|
|
|
|
|
|
|
Approximate Fair Value
|
|
Estimated Useful Life
(In years)
|
Trade name/trademark
|
$
|
44,000
|
|
|
15.00
|
Customer relationships
|
118,000
|
|
|
1 - 7
|
Developed technology
|
195,000
|
|
|
6 - 7
|
In-process research and development (“IPR&D”)
(1)
|
23,000
|
|
|
N/A
(1)
|
Total intangible assets
|
$
|
380,000
|
|
|
|
|
|
(1)
|
IPR&D will be accounted for as an indefinite-lived intangible asset until the underlying projects are completed or abandoned.
|
The total preliminary purchase consideration and allocation reflects the Company’s preliminary estimates and is subject to revision as additional information in relation to the preliminary purchase consideration and the fair value of the underlying assets acquired and liabilities assumed becomes available.
Additional information that existed as of the Acquisition Date may become known to the Company during the remainder of the measurement period.
This period is not to exceed 12 months from the acquisition date.
Pursuant to the terms of the Agreement and Plan of Merger, all unvested Ruckus awards, then comprised of restricted stock units (“RSUs”), performance-based RSUs, and stock options, were canceled and replaced with Company RSUs and stock options (“replacement awards”). Per ASC 805, Business Combinations, the replacement of stock options or other share-based payment awards in conjunction with a business combination represents a modification of share-based payment awards that must be accounted for in accordance with ASC 718, Compensation—Stock Compensation. As a result of the Company’s obligation to issue replacement awards, a portion of the fair-value-based measure of replacement awards is included in measuring the purchase consideration transferred in the business combination. To determine the portion of the replacement awards that is part of the purchase consideration, the Company measured the fair value of both the replacement awards and the historical Ruckus awards as of the Acquisition Date, in accordance with ASC 718. The fair value of the replacement awards, whether vested or unvested, was included in the preliminary purchase consideration to the extent that pre-acquisition services had been rendered. The preliminary purchase consideration also included the fair value of accelerated vesting for awards that vested at the Acquisition Date due to change-in-control provisions.
In addition, the Company accelerated 20% to 50% of the vesting of unvested replacement awards granted to
eight
Ruckus executives and modified the vesting schedules of unvested replacement awards granted to those
eight
plus an additional
four
Ruckus executives. As a result, the Company recorded
$4.7 million
as an expense in
the three and nine months ended July 30, 2016
.
As of
July 30, 2016
, the fair value of the remaining unvested replacement awards of
$28.6 million
will be recorded as stock-based compensation expense over the applicable future vesting periods.
For
the three and nine months ended July 30, 2016
, the Company’s Condensed Consolidated
Statements of Income
included revenue and loss from operations of
$77.8 million
and
$37.6 million
, respectively, attributable to the operations of the Ruckus business since the Acquisition Date.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information presents the consolidated results of the Company and Ruckus for
the three and nine months ended July 30, 2016, and August 1, 2015
, giving effect to the acquisition and the related debt financing as if they had occurred on November 2, 2014, and combines the historical financial results of the Company and Ruckus. The unaudited pro forma financial information includes adjustments to give effect to pro forma events that are directly attributable to the acquisition and the related debt financing. The pro forma financial information includes adjustments to amortization and depreciation for intangible assets and property, plant, and equipment acquired, adjustments to stock-based compensation expense, the effect of acquisition on inventory acquired and deferred revenue, interest expense for the additional indebtedness, and acquisition and integration costs. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations of future periods. The unaudited pro forma financial information does not give effect to the potential impact of current financial conditions, regulatory matters, or any anticipated synergies, operating efficiencies, or cost savings that may be associated with the acquisition. Consequently, actual results will differ from the unaudited pro forma financial information presented below (in thousands, except for per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 30,
2016
|
|
August 1,
2015
|
|
July 30,
2016
|
|
August 1,
2015
|
Unaudited pro forma consolidated results:
|
|
|
|
|
|
|
|
Pro forma revenues
|
$
|
600,530
|
|
|
$
|
655,663
|
|
|
$
|
1,900,664
|
|
|
$
|
1,953,490
|
|
Pro forma net income (loss)
|
$
|
(21,936
|
)
|
|
$
|
85,843
|
|
|
$
|
100,982
|
|
|
$
|
168,212
|
|
Pro forma net income (loss) per share—basic
|
$
|
(0.05
|
)
|
|
$
|
0.21
|
|
|
$
|
0.25
|
|
|
$
|
0.40
|
|
Pro forma net income (loss) per share—diluted
|
$
|
(0.05
|
)
|
|
$
|
0.20
|
|
|
$
|
0.24
|
|
|
$
|
0.38
|
|
Unaudited pro forma net income for
the nine months ended August 1, 2015
, includes nonrecurring pro forma adjustments directly attributable to the acquisition to the effect of inventory acquired and acquisition and integration costs of
$39.8 million
and
$20.6 million
, respectively. No such adjustments are included in any other periods.
Other Fiscal Year 2016 Acquisition
In March 2016, the Company completed its acquisition of a privately held developer of software for data center automation to strengthen its IP Networking product portfolio. The Company does not consider this acquisition to be material to its results of operations or financial position. Therefore, the Company is not presenting pro forma financial information of combined operations.
Prior Fiscal Year Acquisitions
In March 2015, the Company completed its acquisition of two businesses to strengthen its software networking portfolio. The total aggregate purchase price of the acquisitions was
$96.1 million
. The total net aggregate purchase price of the acquisitions, net of
$0.1 million
of cash acquired as part of the acquisitions, was
$95.5 million
in cash consideration and
$0.5 million
in non-cash consideration.
The Company recorded direct acquisition costs of
$1.5 million
for
the nine months ended August 1, 2015
, and integration costs of
$0.8 million
and
$1.7 million
for
the three and nine months ended August 1, 2015
, respectively. These costs were expensed as incurred and are presented in the Company’s Condensed Consolidated
Statements of Income
for
the three and nine months ended August 1, 2015
, as “Acquisition and integration costs.”
The results of operations for both acquisitions are included in the Company’s Condensed Consolidated
Statements of Income
from the respective dates of acquisition. The Company does not consider these acquisitions to be significant, individually or in the aggregate, to its results of operations or financial position. Therefore, the Company is not presenting pro forma financial information of combined operations.
In connection with these acquisitions, the Company allocated the total purchase consideration to the net assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the acquisition dates. The Company also granted RSU awards and cash awards to transferring or continuing employees of the acquired businesses. These awards require the employees to continue providing services to the Company for the duration of the vesting or payout periods.
The RSUs are accounted for as stock-based compensation expense
and reported, as applicable, within “Cost of revenues,” “Research and development,” “Sales and marketing,” and “General and administrative” on the Company’s Condensed Consolidated
Statements of Income
. For
the three and nine months ended July 30, 2016
, the Company recognized
$0.5 million
and
$1.4 million
, respectively, of stock-based compensation expense related to these RSU awards. For
the three and nine months ended August 1, 2015
, the Company recognized
$0.9 million
and
$1.1 million
, respectively, of stock-based compensation expense related to these RSU awards.
The cash awards are accounted for as employee compensation expense
and reported within “Research and development” on the Company’s Condensed Consolidated
Statements of Income
. For
the three and nine months ended July 30, 2016
, the Company recognized
$0.9 million
and
$3.4 million
, respectively, of compensation expense related to these cash awards. For
the three and nine months ended August 1, 2015
, the Company recognized
$1.6 million
and
$2.0 million
, respectively, of compensation expense related to these cash awards.
4
.
Goodwill and Intangible Assets
The following table summarizes goodwill activity by reportable segment during
the nine months ended July 30, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Storage Area Networking (“SAN”)
Products
|
|
IP Networking Products
|
|
Global Services
|
|
Total
|
Balance at October 31, 2015
|
|
|
|
|
|
|
|
Goodwill
|
$
|
176,325
|
|
|
$
|
1,414,634
|
|
|
$
|
155,416
|
|
|
$
|
1,746,375
|
|
Accumulated impairment losses
|
—
|
|
|
(129,214
|
)
|
|
—
|
|
|
(129,214
|
)
|
|
176,325
|
|
|
1,285,420
|
|
|
155,416
|
|
|
1,617,161
|
|
Acquisitions
(1)
|
—
|
|
|
308,456
|
|
|
398,936
|
|
|
707,392
|
|
Tax adjustments
(2)
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
Translation adjustments
|
—
|
|
|
(233
|
)
|
|
—
|
|
|
(233
|
)
|
Balance at July 30, 2016
|
|
|
|
|
|
|
|
Goodwill
|
176,320
|
|
|
1,722,857
|
|
|
554,352
|
|
|
2,453,529
|
|
Accumulated impairment losses
|
—
|
|
|
(129,214
|
)
|
|
—
|
|
|
(129,214
|
)
|
|
$
|
176,320
|
|
|
$
|
1,593,643
|
|
|
$
|
554,352
|
|
|
$
|
2,324,315
|
|
|
|
(1)
|
The goodwill acquired relates to the acquisitions completed in March 2016 and May 2016. See Note
3
, “
Acquisitions
,” of the Notes to Condensed Consolidated Financial Statements.
|
|
|
(2)
|
The goodwill adjustments were primarily a result of tax benefits from the exercise of stock awards of acquired companies.
|
The Company conducts its goodwill impairment test annually and whenever events occur or facts and circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Effective on the first day of the fourth fiscal quarter, the Company changed the date of its annual impairment test for goodwill from the first day of the second fiscal quarter to the first day of the fourth fiscal quarter. This change in the annual impairment test date was made to better coincide with the timing of when the Company prepares its annual budget and financial plans as part of its regular long-range planning process. For the annual goodwill impairment test, the Company uses the income approach, the market approach, or a combination thereof to determine each reporting unit’s fair value. The income approach provides an estimate of fair value based on discounted expected future cash flows (“DCF”). The market approach provides an estimate of fair value by applying various observable market-based multiples to the reporting unit’s operating results and then applying an appropriate control premium. For the initial fiscal year 2016 annual goodwill impairment test, the Company used a combination of these approaches to estimate each reporting unit’s fair value. At the time that the initial fiscal year 2016 annual goodwill impairment test was performed, the Company believed that the income approach and the market approach were equally representative of a reporting unit’s fair value.
Determining the fair value of a reporting unit requires judgment and involves the use of significant estimates and assumptions. The Company based its fair value estimates on assumptions it believes to be reasonable but are inherently uncertain. Estimates and assumptions with respect to the determination of the fair value of its reporting units using the income approach include, among other inputs:
|
|
•
|
The Company’s operating forecasts;
|
|
|
•
|
The Company’s forecasted revenue growth rates; and
|
|
|
•
|
Risk-commensurate discount rates and costs of capital.
|
The Company’s estimates of revenues and costs are based on historical data, various internal estimates, and a variety of external sources, and are developed as part of the Company’s regular long-range planning process. The control premium used in market or combined approaches was determined by considering control premiums offered as part of the acquisitions where acquired companies were comparable with the Company’s reporting units.
Based on the results of the initial annual goodwill impairment analysis performed during the second fiscal quarter of 2016, the Company determined that no impairment needed to be recorded. As of
July 30, 2016
, no new events had occurred nor had any facts or circumstances changed since the annual goodwill impairment analysis performed during the second quarter of fiscal year 2016 that indicated that the fair values of the reporting units may be less than their current carrying amounts.
Intangible assets other than goodwill are amortized on a straight-line basis over the following estimated remaining useful lives, unless the Company has determined these lives to be indefinite. The Company did not incur costs to renew or extend the term of any acquired finite-lived intangible assets during
the nine months ended July 30, 2016
.
The following tables present details of the Company’s intangible assets, excluding goodwill (in thousands, except for weighted-average remaining useful life):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2016
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
|
Weighted-
Average
Remaining
Useful Life
(In years)
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
Trade names
|
$
|
45,090
|
|
|
$
|
1,105
|
|
|
$
|
43,985
|
|
|
14.71
|
Core/developed technology
(1) (2)
|
254,290
|
|
|
23,834
|
|
|
230,456
|
|
|
5.67
|
Patent portfolio license
(3)
|
7,750
|
|
|
1,669
|
|
|
6,081
|
|
|
17.00
|
Customer relationships
|
141,110
|
|
|
8,805
|
|
|
132,305
|
|
|
6.52
|
Non-compete agreements
|
1,050
|
|
|
904
|
|
|
146
|
|
|
0.46
|
Patents with broader applications
|
1,040
|
|
|
92
|
|
|
948
|
|
|
13.63
|
Total finite-lived intangible assets
|
450,330
|
|
|
36,409
|
|
|
413,921
|
|
|
6.72
|
Indefinite-lived intangible assets, excluding goodwill:
|
|
|
|
|
|
|
|
IPR&D
(1)
|
21,000
|
|
|
—
|
|
|
21,000
|
|
|
|
Total indefinite-lived intangible assets, excluding goodwill
|
21,000
|
|
|
—
|
|
|
21,000
|
|
|
|
Total intangible assets, excluding goodwill
|
$
|
471,330
|
|
|
$
|
36,409
|
|
|
$
|
434,921
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2015
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
|
Weighted-
Average
Remaining
Useful Life
(In years)
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
Trade names
|
$
|
1,090
|
|
|
$
|
415
|
|
|
$
|
675
|
|
|
4.36
|
Core/developed technology
|
40,530
|
|
|
9,605
|
|
|
30,925
|
|
|
3.49
|
Patent portfolio license
(3)
|
7,750
|
|
|
849
|
|
|
6,901
|
|
|
17.74
|
Customer relationships
|
23,110
|
|
|
2,484
|
|
|
20,626
|
|
|
7.18
|
Non-compete agreements
|
1,050
|
|
|
664
|
|
|
386
|
|
|
1.17
|
Patents with broader applications
|
1,040
|
|
|
40
|
|
|
1,000
|
|
|
14.38
|
Total finite-lived intangible assets
|
74,570
|
|
|
14,057
|
|
|
60,513
|
|
|
6.55
|
Indefinite-lived intangible assets, excluding goodwill:
|
|
|
|
|
|
|
|
IPR&D
(1)
|
15,110
|
|
|
—
|
|
|
15,110
|
|
|
|
Total indefinite-lived intangible assets, excluding goodwill
|
15,110
|
|
|
—
|
|
|
15,110
|
|
|
|
Total intangible assets, excluding goodwill
|
$
|
89,680
|
|
|
$
|
14,057
|
|
|
$
|
75,623
|
|
|
|
|
|
(1)
|
Acquired IPR&D are intangible assets accounted for as indefinite-lived assets until the completion or abandonment of the associated research and development efforts. If the research and development efforts associated with the IPR&D are successfully completed, then the IPR&D intangible assets will be amortized over the estimated useful lives to be determined as of the date the efforts are completed. During the three months ended
July 30, 2016
, the Company acquired
$23.0 million
in IPR&D intangible assets in connection with the acquisition of Ruckus. The research and development efforts associated with these IPR&D intangible assets are expected to be completed in fiscal years 2016 and 2017. During the
nine months ended
July 30, 2016
, research and development efforts were completed on
$17.1 million
of the IPR&D intangible assets, and the completed IPR&D intangible assets are being amortized as core/developed technology over the estimated useful lives of
five
to
seven
years.
|
|
|
(2)
|
During the
nine months ended
July 30, 2016
,
$1.0 million
of finite-lived intangible assets became fully amortized and, therefore, were removed from the balance sheet.
|
|
|
(3)
|
The patent portfolio license was assigned an estimated useful life that reflects the Company’s consumption of the expected defensive benefits related to this license to certain patents. The method of amortization for the patent portfolio license reflects the Company’s estimate of the pattern in which these expected defensive benefits will be used by the Company and is primarily based on the mix of expiration patterns of the individual patents included in the license.
|
The Company conducts the IPR&D impairment test annually and whenever events occur or facts and circumstances indicate that it is more likely than not that the IPR&D is impaired. Effective on the first day of the fourth fiscal quarter, the Company changed the date of its annual impairment test for IPR&D from the first day of the second fiscal quarter to the first day of the fourth fiscal quarter. This change in the annual impairment test date was made to better coincide with the timing of when the Company prepares its annual budget and financial plans as part of its regular long-range planning process. For the annual IPR&D impairment test, the Company elects the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the IPR&D assets is less than the carrying amount. If, after assessing the totality of events and circumstances, the Company determines that it is more likely than not that the fair value of the IPR&D assets is less than the carrying amount, then the Company conducts a quantitative analysis to determine the fair value of the IPR&D assets. If the carrying amount of the IPR&D assets exceeds the fair value, then the Company recognizes an impairment loss equal to the difference.
The Company has not identified any changes in circumstances requiring an interim IPR&D impairment test for the
nine months ended
July 30, 2016
, and therefore, the Company determined that no impairment needed to be recorded.
The amortization of finite-lived intangible assets is included in the following line items of the Company’s Condensed Consolidated
Statements of Income
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 30, 2016
|
|
August 1, 2015
|
|
July 30, 2016
|
|
August 1, 2015
|
Cost of revenues
|
$
|
8,922
|
|
|
$
|
2,549
|
|
|
$
|
15,269
|
|
|
$
|
5,043
|
|
General and administrative
(1)
|
271
|
|
|
889
|
|
|
821
|
|
|
1,654
|
|
Amortization of intangible assets
|
5,498
|
|
|
280
|
|
|
7,302
|
|
|
570
|
|
Total
|
$
|
14,691
|
|
|
$
|
3,718
|
|
|
$
|
23,392
|
|
|
$
|
7,267
|
|
|
|
(1)
|
The amortization is related to the
$7.8 million
of perpetual, non-exclusive license to certain patents purchased during the fiscal year ended October 31, 2015.
|
The following table presents the estimated future amortization of finite-lived intangible assets as of
July 30, 2016
(in thousands):
|
|
|
|
|
|
Fiscal Year
|
|
Estimated
Future
Amortization
|
2016 (remaining three months)
|
|
$
|
18,998
|
|
2017
|
|
72,063
|
|
2018
|
|
63,562
|
|
2019
|
|
60,039
|
|
2020
|
|
59,082
|
|
Thereafter
|
|
140,177
|
|
Total
|
|
$
|
413,921
|
|
5
.
Balance Sheet Details
The following tables provide details of selected balance sheet items (in thousands):
|
|
|
|
|
|
|
|
|
|
July 30,
2016
|
|
October 31,
2015
|
Inventories:
|
|
|
|
Raw materials
|
$
|
17,613
|
|
|
$
|
18,788
|
|
Finished goods
|
63,569
|
|
|
21,736
|
|
Inventories
|
$
|
81,182
|
|
|
$
|
40,524
|
|
|
|
|
|
|
|
|
|
|
|
July 30,
2016
|
|
October 31,
2015
|
Property and equipment, net:
|
|
|
|
Gross property and equipment
|
|
|
|
Computer equipment
|
$
|
18,886
|
|
|
$
|
14,820
|
|
Software
|
84,337
|
|
|
67,625
|
|
Engineering and other equipment
(1)
|
443,808
|
|
|
407,342
|
|
Furniture and fixtures
(1)
|
33,468
|
|
|
31,028
|
|
Leasehold improvements
|
37,315
|
|
|
33,986
|
|
Land and building
|
386,163
|
|
|
385,415
|
|
Total gross property and equipment
|
1,003,977
|
|
|
940,216
|
|
Accumulated depreciation and amortization
(1) (2)
|
(544,165
|
)
|
|
(500,992
|
)
|
Property and equipment, net
|
$
|
459,812
|
|
|
$
|
439,224
|
|
|
|
(1)
|
Engineering and other equipment, furniture and fixtures, and accumulated depreciation and amortization include the following amounts under capital leases as of
July 30, 2016
, and
October 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 30,
2016
|
|
October 31,
2015
|
Cost of capitalized leases
|
$
|
270
|
|
|
$
|
1,312
|
|
Accumulated depreciation
|
(255
|
)
|
|
(857
|
)
|
Property and equipment, net, under capital leases
|
$
|
15
|
|
|
$
|
455
|
|
|
|
(2)
|
The following table presents the depreciation of property and equipment included in the Company’s Condensed Consolidated
Statements of Income
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 30,
2016
|
|
August 1,
2015
|
|
July 30,
2016
|
|
August 1,
2015
|
Depreciation expense
|
$
|
20,393
|
|
|
$
|
18,605
|
|
|
$
|
57,531
|
|
|
$
|
55,302
|
|
6
.
Fair Value Measurements
The Company applies fair value measurements for both financial and non-financial assets and liabilities. The Company does not have any non-financial assets or liabilities that are required to be measured at fair value on a recurring basis as of
July 30, 2016
.
The fair value accounting guidance permits companies to elect fair value measurement for many financial instruments and certain other items that are not required to be accounted for at fair value. The Company did not elect fair value measurement for any eligible financial instruments or other assets.
Fair Value Hierarchy
The Company utilizes a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
During
the nine months ended July 30, 2016
, the Company had no transfers between levels of the fair value hierarchy of its assets and liabilities measured at fair value.
Assets and liabilities measured and recorded at fair value on a recurring basis as of
July 30, 2016
, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Balance as of
July 30, 2016
|
|
Quoted Prices in
Active Markets
for Identical
Instruments
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
(1)
|
$
|
885,152
|
|
|
$
|
885,152
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative assets
|
477
|
|
|
—
|
|
|
477
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
885,629
|
|
|
$
|
885,152
|
|
|
$
|
477
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
759
|
|
|
$
|
—
|
|
|
$
|
759
|
|
|
$
|
—
|
|
|
|
(1)
|
Money market funds are reported within “Cash and cash equivalents” on the Company’s Condensed Consolidated Balance Sheets.
|
Assets and liabilities measured and recorded at fair value on a recurring basis as of
October 31, 2015
, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Balance as of
October 31, 2015
|
|
Quoted Prices in
Active Markets
for Identical
Instruments
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
(1)
|
$
|
1,184,410
|
|
|
$
|
1,184,410
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative assets
|
709
|
|
|
—
|
|
|
709
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
1,185,119
|
|
|
$
|
1,184,410
|
|
|
$
|
709
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
1,125
|
|
|
$
|
—
|
|
|
$
|
1,125
|
|
|
$
|
—
|
|
|
|
(1)
|
Money market funds are reported within “Cash and cash equivalents” on the Company’s Condensed Consolidated Balance Sheets.
|
7
.
Restructuring and Other Related Benefits
The following table provides details of “
Restructuring and other related benefits
” included in the Company’s Condensed Consolidated
Statements of Income
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 30,
2016
|
|
August 1,
2015
|
|
July 30,
2016
|
|
August 1,
2015
|
Lease loss reserve and related benefits
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(566
|
)
|
|
$
|
(637
|
)
|
The following table provides a reconciliation of the Company’s beginning and ending restructuring liability balances (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2013 Fourth Quarter Restructuring Plan
|
|
Other Restructuring Plans
|
|
|
|
Severance and Benefits
|
|
Lease Loss Reserve and Related Costs
|
|
Lease Loss
Reserve and Related Costs
|
|
Total
|
Restructuring liabilities at October 31, 2015
|
$
|
110
|
|
|
$
|
1,811
|
|
|
$
|
408
|
|
|
$
|
2,329
|
|
Restructuring and other related benefits
|
—
|
|
|
(566
|
)
|
|
—
|
|
|
(566
|
)
|
Cash payments
|
—
|
|
|
(380
|
)
|
|
(260
|
)
|
|
(640
|
)
|
Translation adjustment
|
—
|
|
|
(17
|
)
|
|
—
|
|
|
(17
|
)
|
Restructuring liabilities at July 30, 2016
|
$
|
110
|
|
|
$
|
848
|
|
|
$
|
148
|
|
|
$
|
1,106
|
|
|
|
|
|
|
|
|
|
Current restructuring liabilities at July 30, 2016
|
$
|
110
|
|
|
$
|
350
|
|
|
$
|
148
|
|
|
$
|
608
|
|
Non-current restructuring liabilities at July 30, 2016
|
$
|
—
|
|
|
$
|
498
|
|
|
$
|
—
|
|
|
$
|
498
|
|
Fiscal 2013 Fourth Quarter Restructuring Plan
During the fiscal year ended October 26, 2013, and the first quarter of fiscal year 2014, the Company restructured certain business operations and reduced the Company’s operating expense structure. The restructuring plan included a workforce reduction, as well as the cancellation of certain non-recurring engineering agreements and exits from certain leased facilities. The restructuring plan was substantially completed in the first quarter of fiscal year 2014.
Other Restructuring Plans
The Company also recorded charges related to estimated facilities lease losses, net of expected sublease income, due to consolidation of real estate space as a result of acquisitions.
Cash payments for facilities that are part of the Company’s lease loss reserve are expected to be paid over the respective lease terms through fiscal year 2021.
General
The Company reevaluates its estimates and assumptions on a quarterly basis and makes adjustments to the restructuring liabilities balance if necessary. During
the nine months ended July 30, 2016
, the Company reversed
$0.6 million
of charges related to estimated facilities lease losses due to a change in lease terms for a certain facility.
8
.
Borrowings
The following table provides details of the Company’s long-term debt (in thousands, except years and percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2016
|
|
October 31, 2015
|
|
|
Maturity
|
|
Stated Annual Interest Rate
|
|
Amount
|
Effective Interest Rate
|
|
Amount
|
Effective Interest Rate
|
Senior Credit Facility:
|
|
|
|
|
|
|
|
|
|
|
Term Loan Facility
|
|
2021
|
|
variable
|
|
$
|
800,000
|
|
2.50
|
%
|
|
$
|
—
|
|
—
|
%
|
Convertible Senior Unsecured Notes:
|
|
|
|
|
|
|
|
|
|
|
2020 Convertible Notes
|
|
2020
|
|
1.375%
|
|
575,000
|
|
4.98
|
%
|
|
575,000
|
|
4.98
|
%
|
Senior Unsecured Notes:
|
|
|
|
|
|
|
|
|
|
|
2023 Notes
|
|
2023
|
|
4.625%
|
|
300,000
|
|
4.83
|
%
|
|
300,000
|
|
4.83
|
%
|
Capital lease obligations
|
|
2016
|
|
4.625%
|
|
16
|
|
4.63
|
%
|
|
298
|
|
4.63
|
%
|
Total gross long-term debt
|
|
|
|
|
|
1,675,016
|
|
|
|
875,298
|
|
|
Unamortized discount
|
|
|
|
|
|
(78,755
|
)
|
|
|
(79,196
|
)
|
|
Unamortized debt issuance costs
|
|
|
|
|
|
(2,873
|
)
|
|
|
(2,025
|
)
|
|
Current portion of long-term debt
|
|
|
|
|
|
(76,627
|
)
|
|
|
(298
|
)
|
|
Long-term debt, net of current portion
|
|
|
|
|
|
$
|
1,516,761
|
|
|
|
$
|
793,779
|
|
|
Senior Credit Facility
In connection with the acquisition of Ruckus on May 27, 2016, the Company entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, N.A., as the administrative agent, swingline lender, and issuing lender, and certain other lenders (collectively, the “Lenders”). The Credit Agreement provides for a term loan facility of
$800 million
(the “Term Loan Facility”) and a revolving credit facility of
$100 million
(the “Revolving Facility,” and together with the Term Loan Facility, the “Senior Credit Facility”). The Revolving Facility includes a
$25 million
letter of credit subfacility and a
$10 million
swing line loan subfacility. The proceeds of the Term Loan Facility were used to finance a portion of the acquisition of Ruckus and related fees and expenses, the repurchase of shares of the Company’s common stock, and fees and expenses related to the Senior Credit Facility.
Loans made under the Senior Credit Facility bear interest, at the Company’s option, either (i) at a base rate which is based in part on the greatest of (A) the prime rate, (B) the federal funds rate plus 0.50%, or (C) LIBOR for an interest period of one month plus 1.00%, plus an applicable margin that will vary between 0.00% and 0.75% based on the Company’s total leverage ratio or (ii) at a LIBOR-based rate, plus an applicable margin that will vary between 1.00% and 1.75% based on the Company’s total leverage ratio. For purposes of calculating the applicable rate, the base rate and LIBOR-based rate are subject to a floor of 0.00%. For base rate loans, interest is payable on the last business day of January, April, July and October of each year. For LIBOR rate loans, interest is payable on the last day of each interest period for the LIBOR-based rate, and if such interest period extends over three months, at the end of each three-month interval during such interest period.
Commitments under the Revolving Facility are subject to an undrawn commitment fee starting at
0.30%
, and are later subject to adjustment between
0.20%
and
0.35%
based on the Company’s total leverage ratio. Letters of credit issued under the letter of credit subfacility are subject to a commission fee starting at
1.50%
, and are later subject to adjustment between
1.00%
and
1.75%
based on the Company’s total leverage ratio, and an issuance fee of
0.125%
.
The final maturity of the Senior Credit Facility will occur on May 27, 2021, except that if any of the 1.375% convertible senior unsecured notes due 2020 remain outstanding on October 2, 2019, and certain other conditions have not been met, then the final maturity of the Senior Credit Facility will occur on October 2, 2019. Notwithstanding the foregoing, upon the request of the Company made to all applicable Lenders, and provided that no event of default exists or will occur immediately thereafter, individual Lenders may agree to extend the maturity date of its commitments under the Revolving Facility and loans under the Term Loan Facility.
The Company is permitted to make voluntary prepayments of the Senior Credit Facility at any time without payment of a premium or penalty. The Company is required to make mandatory prepayments of loans under the Term Loan Facility (without payment of a premium or penalty) with (i) net cash proceeds from issuances of debt (other than certain permitted debt), (ii) net cash proceeds from certain non-ordinary course asset sales (subject to reinvestment rights and other exceptions), and (iii) casualty proceeds and condemnation awards (subject to reinvestment rights and other exceptions). Commencing October 31, 2016, the loans under the Term Loan Facility will amortize in equal quarterly installments in an aggregate annual amount equal to 10% of the original principal amount thereof, with any remaining balance payable on the final maturity date of the loans under the Term Loan Facility. The loans under the Revolving Facility and all accrued and unpaid interest thereon are due in full on the maturity date.
There were
no
principal amounts outstanding under the revolving credit facility, and the full
$100 million
was available for future borrowing under the revolving credit facility as of
July 30, 2016
. No payments were made toward the principal of the Term Loan Facility during
the nine months ended July 30, 2016
.
As of
July 30, 2016
, the fair value of the Term Loan Facility was approximately
$786.5 million
, which was estimated based on fair value for similar instruments.
The obligations under the Senior Credit Facility and certain cash management and hedging obligations are fully and unconditionally guaranteed by certain of the Company’s direct and indirect subsidiaries (including Ruckus, but excluding certain immaterial subsidiaries, subsidiaries whose guarantee would result in material adverse tax consequences and subsidiaries whose guarantee is prohibited by applicable law) pursuant to a subsidiary guaranty agreement.
The Company’s obligations under the Senior Credit Facility are unsecured, provided that upon the occurrence of certain events (including if the Company’s corporate family rating from Moody’s falls below Ba1 and from S&P falls below BB+ at any time (referred to as a “Ratings Downgrade”)) or the incurrence of certain indebtedness in excess of $600 million (such occurrence or the occurrence of a Ratings Downgrade being a “Collateral Trigger Event”), then such obligations, as well as certain cash management and hedging obligations, will be required to be secured, subject to certain exceptions, by 100% of the equity interests of all present and future restricted subsidiaries directly held by the Company or any guarantor.
The Company must provide such security within 90 days (or 20 business days with respect to the equity interests of material U.S. subsidiaries) of such Collateral Trigger Event.
The Credit Agreement contains financial maintenance covenants, including a (i) maximum total leverage ratio as of the last date of any fiscal quarter not to exceed 3.50:1.00; subject to certain step-downs to 3.25:1.00 and 3.00:1.00 for fiscal periods ending on or after April 30, 2017, and April 30, 2018, respectively, and (ii) a minimum interest coverage ratio of not less than 3.50:1.00. The Credit Agreement also contains restrictive covenants that limit, among other things, the Company’s and its restricted subsidiaries’ ability to:
|
|
•
|
Incur additional indebtedness or issue certain preferred equity, pay dividends or make other distributions or other restricted payments (including stock repurchases);
|
|
|
•
|
Sell assets other than on terms specified by the Credit Agreement;
|
|
|
•
|
Amend the terms of certain other indebtedness and organizational documents;
|
|
|
•
|
Create liens on certain assets to secure debt, consolidate, merge, sell, or otherwise dispose of all or substantially all of their assets; and
|
|
|
•
|
Enter into certain transactions with affiliates, or change their lines of business, fiscal years, and accounting practices, in each case, subject to customary exceptions.
|
The Credit Agreement also sets forth customary events of default, including upon the failure to make timely payments under the Senior Credit Facility, the failure to satisfy certain covenants, cross-default and cross-acceleration to other material debt for borrowed money, the occurrence of a change of control, and specified events of bankruptcy and insolvency.
Convertible Senior Unsecured Notes
On January 14, 2015, the Company issued
$575.0 million
in aggregate principal amount of 1.375% convertible senior unsecured notes due 2020 (the “2020 Convertible Notes”) pursuant to an indenture, dated as of January 14, 2015, between the Company and Wells Fargo Bank, National Association, as the trustee (the “Offering”). Net of an original issue discount, the Company received
$565.7 million
in proceeds from the Offering. Concurrently with the closing of the Offering, the Company called for the redemption of its outstanding 6.875% senior secured notes due 2020 (the “2020 Notes”) and irrevocably deposited a portion of the net proceeds from the Offering with the trustee to discharge the 2020 Indenture as described below under “
Senior Secured Notes.
”
The 2020 Convertible Notes bear interest payable semiannually on January 1 and July 1 of each year, beginning on July 1, 2015. No payments were made toward the principal of the 2020 Convertible Notes during
the nine months ended July 30, 2016
.
The Company separately accounts for the liability and equity components of the 2020 Convertible Notes. The fair value of the liability component, used in the allocation between the liability and equity components as of the date of issuance, was based on the present value of cash flows using a discount rate of
4.57%
, the Company’s borrowing rate for a similar debt instrument without the conversion feature. The carrying values of the liability and equity components of the 2020 Convertible Notes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
July 30,
2016
|
|
October 31,
2015
|
Principal
|
$
|
575,000
|
|
|
$
|
575,000
|
|
Unamortized discount of the liability component
|
(63,706
|
)
|
|
(76,311
|
)
|
Net carrying amount of liability component
|
$
|
511,294
|
|
|
$
|
498,689
|
|
Carrying amount of equity component
|
$
|
59,293
|
|
|
$
|
70,765
|
|
As of
July 30, 2016
, the remaining period of amortization for the discount is
3.42
years.
The following table presents the amount of interest cost recognized for amortization of the discount and for the contractual interest coupon for the 2020 Convertible Notes for the following periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 30,
2016
|
|
August 1,
2015
|
|
July 30,
2016
|
|
August 1,
2015
|
Amortization of discount
|
$
|
4,254
|
|
|
$
|
4,048
|
|
|
$
|
12,606
|
|
|
$
|
8,792
|
|
Contractual interest coupon
|
$
|
1,977
|
|
|
$
|
1,977
|
|
|
$
|
5,930
|
|
|
$
|
4,323
|
|
As of
July 30, 2016
, and
October 31, 2015
, the fair value of the 2020 Convertible Notes was approximately
$560.4 million
and
$568.0 million
, respectively, which was estimated based on broker trading prices.
The 2020 Convertible Notes mature on
January 1, 2020
, unless repurchased or converted in accordance with their terms prior to such date. The 2020 Convertible Notes are not callable prior to their maturity. The 2020 Convertible Notes are convertible into shares of common stock of the Company under the circumstances described below. The initial conversion rate is
62.7746
shares of the Company’s common stock per $1,000 principal amount of the notes, which is equal to
36.1 million
shares at an initial conversion price of approximately
$15.93
per share.
The 2020 Convertible Notes contain provisions where the conversion rate is adjusted upon the occurrence of certain events, including if the Company pays a regular, quarterly cash dividend in an amount greater than $0.035 per share. During the third fiscal quarter of 2016, the Board of Directors of the Company declared and paid a cash dividend in the amount of
$0.055
per share. Accordingly, as of
June 8, 2016
, the conversion rate was adjusted to a rate of
63.1587
shares of the Company’s common stock per $1,000 principal amount of the notes, which is equal to
36.3 million
shares at a conversion price of approximately
$15.83
per share. The adjustment resulted in a change to the conversion rate of less than 1%, and by the terms of the indenture governing the 2020 Convertible Notes, the Company is allowed and elected to defer the noteholder notification of such adjustment until the occurrence of (i) a subsequent adjustment to the conversion rate that results in a cumulative adjustment of at least 1% of the current conversion rate, (ii) the conversion of any 2020 Convertible Note, or (iii) certain other events requiring the adjustment to be made under the indenture governing the 2020 Convertible Notes.
Holders of the 2020 Convertible Notes may convert all or a portion of their notes prior to the close of business on the business day immediately preceding September 1, 2019, in multiples of $1,000 principal amount, only under the following circumstances:
|
|
•
|
During any fiscal quarter commencing after the fiscal quarter ending on May 2, 2015 (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least
20
trading days (whether or not consecutive) during a period of
30
consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to
130%
of the conversion price of the notes on each applicable trading day;
|
|
|
•
|
During the
five
-business-day period after any
10
consecutive trading day period in which the trading price per $1,000 principal amount of the notes for each trading day of that
10
consecutive trading day period was less than
98%
of the product of the last reported sale price of the Company’s common stock and the conversion rate of the notes on each such trading day; or
|
|
|
•
|
Upon the occurrence of certain corporate events as specified in the terms of the indenture governing the 2020 Convertible Notes.
|
On or after September 1, 2019, through the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their notes regardless of the foregoing conditions.
As of
July 30, 2016
, the circumstances for conversion had not been triggered, and the 2020 Convertible Notes were not convertible. The if-converted value of the 2020 Convertible Notes as of
July 30, 2016
, did
not
exceed the principal amount of the 2020 Convertible Notes.
If a fundamental change, as specified in the terms of the indenture governing the 2020 Convertible Notes, occurs prior to the maturity date, holders of the notes may require the Company to repurchase the 2020 Convertible Notes at a repurchase price equal to
100%
of the principal amount of the 2020 Convertible Notes repurchased, plus accrued and unpaid interest, if any, up to the repurchase date. As of
July 30, 2016
, a fundamental change had not occurred and the 2020 Convertible Notes were not re-purchasable.
Convertible Note Hedge and Warrants Related to the Convertible Senior Unsecured Notes
In connection with the issuance of the 2020 Convertible Notes, the Company entered into convertible note hedge transactions with certain financial institutions (the “counterparties”) with respect to its common stock. Upon conversion of the 2020 Convertible Notes, the convertible note hedge transactions give the Company the right to acquire from the counterparties, subject to anti-dilution adjustments substantially similar to those in the 2020 Convertible Notes, initially approximately
36.1 million
shares of the Company’s common stock at an initial strike price of
$15.93
per share. Because a dividend in an amount greater than $0.035 per share was declared and paid effective beginning in the third fiscal quarter of 2015, the strike price under the convertible note hedge transactions has been adjusted to approximately
$15.83
per share as of
June 8, 2016
. The convertible note hedge transactions are expected generally to reduce the potential common stock dilution and/or offset potential cash payments in excess of the principal amount of converted notes upon conversion of the notes in the event that the market price per share of the Company’s common stock, as measured under the terms of the convertible note hedge transactions, is greater than the strike price of the convertible note hedge transactions. The convertible note hedge transactions will be terminated on the maturity date of the 2020 Convertible Notes or earlier under certain circumstances. The
$86.1 million
cost of the convertible note hedge transactions has been accounted for as an equity transaction.
Separately from the convertible note hedge transactions, the Company entered into warrant transactions with the counterparties, pursuant to which the Company sold warrants to the counterparties to acquire, subject to customary anti-dilution adjustments, up to
36.1 million
shares in the aggregate at an initial strike price of
$20.65
per share. The primary reason the Company entered into these warrant transactions was to partially offset the cost of the convertible note hedge transactions. The warrants mature over
60
trading days, commencing on
April 1, 2020
, and are exercisable solely on the maturity dates. The warrants are subject to net share settlement; however, the Company may elect to cash settle the warrants. The Company received gross proceeds of
$51.2 million
from the warrant transactions, which have been accounted for as an equity transaction.
Under the terms of the warrants, the strike price and number of shares to be acquired by the holders of the warrants are adjusted if the Company pays a regular, quarterly cash dividend in an amount greater than $0.035 per share. Accordingly, the terms of the warrants were adjusted to reflect the payment of a cash dividend in the amount of $0.045 per share beginning in the third fiscal quarter of 2015, and, as of
June 8, 2016
, the holders of the warrants have the right to acquire up to approximately
36.3 million
shares of the Company’s common stock at a strike price of approximately
$20.52
per share.
See Note
15
, “
Net Income per Share
,” of the Notes to Condensed Consolidated Financial Statements for further discussion of the dilutive impact of the 2020 Convertible Notes and the convertible note hedge and warrant transactions.
Senior Unsecured Notes
In January 2013, the Company issued 4.625% senior unsecured notes in the aggregate principal amount of
$300.0 million
due 2023 (the “2023 Notes”) pursuant to an indenture, dated as of January 22, 2013 (the “2023 Indenture”), between the Company, certain domestic subsidiaries of the Company that have guaranteed the Company’s obligations under the 2023 Notes, and Wells Fargo Bank, National Association, as the trustee. The guarantees of the 2023 Notes were released upon the termination of the Senior Secured Credit Facility and discharge of the 2020 Indenture in the first fiscal quarter of 2015.
The 2023 Notes bear interest payable semiannually on January 15 and July 15 of each year. No payments were made toward the principal of the 2023 Notes during
the nine months ended July 30, 2016
.
As of
July 30, 2016
, and
October 31, 2015
, the fair value of the 2023 Notes was approximately
$296.2 million
and
$293.9 million
, respectively, which was estimated based on broker trading prices.
On or after January 15, 2018, the Company may redeem all or part of the 2023 Notes at the redemption prices set forth in the 2023 Indenture, plus accrued and unpaid interest, if any, up to the redemption date. At any time prior to January 15, 2018, the Company may redeem all or a part of the 2023 Notes at a price equal to
100%
of the principal amount of the 2023 Notes, plus an applicable premium and accrued and unpaid interest, if any, up to the redemption date.
If the Company experiences a specified change of control triggering event, it must offer to repurchase the 2023 Notes at a repurchase price equal to
101%
of the principal amount of the 2023 Notes repurchased, plus accrued and unpaid interest, if any, up to the repurchase date.
The 2023 Indenture contains covenants that, among other things, restrict the ability of the Company and its subsidiaries to:
|
|
•
|
Incur certain liens and enter into certain sale-leaseback transactions;
|
|
|
•
|
Create, assume, incur, or guarantee additional indebtedness of the Company’s subsidiaries without such subsidiaries guaranteeing the 2023 Notes on a pari passu basis; and
|
|
|
•
|
Enter into certain consolidation or merger transactions, or convey, transfer, or lease all or substantially all of the Company’s or its subsidiaries’ assets.
|
These covenants are subject to a number of limitations and exceptions as set forth in the 2023 Indenture. The 2023 Indenture also includes customary events of default, including cross-defaults to other debt of the Company and its subsidiaries.
Senior Secured Notes
In January 2010, the Company issued
$300.0 million
in aggregate principal amount of the 2020 Notes pursuant to an indenture, dated as of January 20, 2010, between the Company, certain domestic subsidiaries of the Company, and Wells Fargo Bank, National Association, as the trustee (the “2020 Indenture”). Interest on the 2020 Notes was payable semiannually on January 15 and July 15 of each year. The Company’s obligations under the 2020 Notes were previously guaranteed by certain of the Company’s domestic subsidiaries and secured by a lien on substantially all of the Company’s and the subsidiary guarantors’ assets.
On January 14, 2015, the Company called the 2020 Notes for redemption at a redemption price equal to
103.438%
of the principal amount of the 2020 Notes, and irrevocably deposited
$322.2 million
with the trustee for the 2020 Notes to discharge the 2020 Indenture. Due to the deposit and discharge, the guarantees provided by certain of the Company’s domestic subsidiaries, and the liens granted by the Company and the subsidiary guarantors to secure their obligations with respect to the 2020 Notes, were released as of the date of the deposit.
The amount deposited with the trustee included
$300.0 million
to repay the principal amount of the 2020 Notes,
$10.3 million
representing the difference between the redemption price and the principal amount of the 2020 Notes (“Call Premium”),
$10.3 million
for accrued interest through January 15, 2015, and
$1.6 million
of interest payable up to the redemption date of February 13, 2015. The trustee redeemed the 2020 Notes on February 13, 2015, using the deposited amount, extinguishing the Company’s
$300.0 million
liability for the principal amount of the 2020 Notes.
In accordance with the applicable accounting guidance for debt modification and extinguishment, and for interest costs accounting, the Company expensed the Call Premium, remaining debt issuance costs, and remaining original issue discount relating to the 2020 Notes in the first quarter of fiscal year 2015, which totaled
$20.4 million
. The Company reported this expense within “Interest expense” on the Company’s Condensed Consolidated
Statements of Income
for the
nine months ended
August 1, 2015
.
Debt Maturities
As of
July 30, 2016
, the Company’s aggregate debt maturities based on outstanding principal were as follows (in thousands):
|
|
|
|
|
|
Fiscal Year
|
|
Principal
Balances
|
2016 (remaining three months)
|
|
$
|
20,016
|
|
2017
|
|
80,000
|
|
2018
|
|
80,000
|
|
2019
|
|
80,000
|
|
2020
|
|
655,000
|
|
Thereafter
|
|
760,000
|
|
Total
|
|
$
|
1,675,016
|
|
9
.
Commitments and Contingencies
Product Warranties
The Company’s accrued liability for estimated future warranty costs is included in “Other accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets. The following table summarizes the activity related to the Company’s accrued liability for estimated future warranty costs during the
nine months ended
July 30, 2016
, and
August 1, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Accrued Warranty
|
|
Nine Months Ended
|
|
July 30,
2016
|
|
August 1,
2015
|
Beginning balance
|
$
|
7,599
|
|
|
$
|
7,486
|
|
Warranty liability assumed from acquisitions
|
760
|
|
|
—
|
|
Liabilities accrued for warranties issued during the period
|
2,768
|
|
|
3,059
|
|
Warranty claims paid and used during the period
|
(2,736
|
)
|
|
(3,221
|
)
|
Changes in liability for pre-existing warranties during the period
|
(60
|
)
|
|
(125
|
)
|
Ending balance
|
$
|
8,331
|
|
|
$
|
7,199
|
|
In addition, the Company has defense and indemnification clauses contained within its various customer contracts. As such, the Company indemnifies the parties to whom it sells its products with respect to the Company’s products, both alone and in certain circumstances when in combination with other products and services, for infringement of any patents, trademarks, copyrights, or trade secrets, as well as against bodily injury or damage to real or tangible personal property caused by a defective Company product. As of
July 30, 2016
, there have been no known events or circumstances that have resulted in a material customer contract-related indemnification liability to the Company.
Manufacturing and Purchase Commitments
Brocade has manufacturing arrangements with its CMs under which Brocade provides product forecasts and places purchase orders in advance of the scheduled delivery of products to Brocade’s customers. The required lead time for placing orders with the CMs depends on the specific product. Brocade issues purchase orders, and the CMs then generate invoices based on prices and payment terms mutually agreed upon and set forth in those purchase orders. Although the purchase orders Brocade places with its CMs are cancellable, the terms of the agreements require Brocade to purchase all inventory components that are not returnable, usable by, or sold to other customers of the CMs. In addition, Brocade has an arrangement with one of its CMs regarding factory capacity that can be used by the Company. Under this arrangement, the Company receives a credit for exceeding the planned utilization of factory capacity and, conversely, is required to pay additional fees for underutilizing the planned capacity.
As of
July 30, 2016
, the Company’s aggregate commitment to its CMs for inventory components used in the manufacture of Brocade products was
$220.0 million
, which the Company expects to utilize during future normal ongoing operations, net of a purchase commitments reserve of
$3.6 million
, which is reported within “Other accrued liabilities” on the Company’s Condensed Consolidated Balance Sheet as of
July 30, 2016
. The Company’s purchase commitments reserve reflects the Company’s estimate of purchase commitments it does not expect to utilize in normal ongoing operations.
Income Taxes
The Company is subject to several ongoing income tax audits and has received notices of proposed adjustments or assessments from certain tax authorities. For additional discussion, see Note
13
, “
Income Taxes
,” of the Notes to Condensed Consolidated Financial Statements. The Company believes it has adequate reserves for all open tax years.
Legal Proceedings
From time to time, the Company is subject to various legal proceedings and claims, including those identified below, which arise in the ordinary course of business, including claims of alleged infringement of patents and/or other intellectual property rights and commercial and employment contract disputes. The Company accrues a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company believes it has recorded adequate provisions for any such matters and, as of
July 30, 2016
, it was not reasonably possible that a material loss had been incurred in excess of the amounts recognized in the Company’s financial statements. However, litigation is inherently uncertain, and the outcome of these matters cannot be predicted with certainty. Accordingly, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these matters.
Ruckus Acquisition-Related Litigation
Subsequent to the announcement that Brocade had entered into an agreement to acquire Ruckus on April 3, 2016, three putative stockholder class action complaints relating to the acquisition were filed on behalf of purported Ruckus stockholders in the Superior Court of California, County of Santa Clara, a fourth putative stockholder class action complaint was filed in the United States District Court for the District of Delaware, and a fifth putative class action complaint was filed in the United States District Court for the Northern District of California. The complaints in the three California state court actions are captioned: Maguire v. Ruckus Wireless, Inc., et al. (filed April 12, 2016 and amended on May 10, 2016; referred to as the “Maguire action”); Jaljouli v. Ruckus Wireless, Inc., et al., (filed April 19, 2016; referred to as the “Jaljouli action”); and Small v. Ruckus Wireless, Inc., et al. (filed May 12, 2016; referred to as the “Small action”). The complaint in the Delaware federal court action is captioned Borrego v. Ruckus Wireless, Inc., et al. (filed May 11, 2016; referred to as the “Borrego action”). The complaint in the California federal court action is captioned Hussey v. Ruckus Wireless, Inc., et al. (filed June 3, 2016; referred to as the “Hussey action”).
The complaints in the Maguire, Jaljouli and Small actions contain similar allegations and name Ruckus and members of the Ruckus board of directors as defendants; the Maguire and Jaljouli actions also name Brocade and a Brocade subsidiary as defendants. In general, the complaints allege that the members of the Ruckus board of directors breached their fiduciary duties to Ruckus stockholders by purportedly doing one or more of the following: agreeing to unfair and inadequate transaction consideration for the Ruckus shares; accepting unreasonable deal protection measures in the merger agreement that would dissuade other potential bidders from making competing offers; failing to properly value Ruckus and take steps to maximize the sale value of Ruckus; engaging in self-dealing; and providing allegedly false, misleading, and/or incomplete disclosures regarding the transaction, the negotiations leading up to it, and the opinion of Ruckus’ financial advisor. The complaints in the Maguire and Jaljouli actions also allege that one or more of Ruckus, Brocade, and the Brocade subsidiary aided and abetted the members of the Ruckus board of directors in breaching their fiduciary duties to Ruckus stockholders.
The complaint in the Borrego action alleges that Ruckus and members of the Ruckus board of directors violated Sections 14(e), 14(d)(4) and 20(a) of the Exchange Act based on allegedly false and/or misleading statements and/or alleged omissions in the Solicitation/Recommendation Statement on Schedule 14D-9 filed by Ruckus with the SEC on April 29, 2016. The complaint in the Hussey action, which names Ruckus, members of the Ruckus board of directors, Ruckus’ chief financial officer, Brocade, and a Brocade subsidiary as defendants, contains a similar Section 14(e) claim and also alleges that the defendants violated Section14(d)(7) of the Exchange Act and Rule 14d-10 promulgated thereunder based on the allegedly differential consideration received by members of the Ruckus board of directors and Ruckus’ chief financial officer in connection with the acquisition.
The plaintiffs in one or more of these five actions have requested relief including, among other things, certification as a class, rescission and invalidation of the merger agreement or related agreements, injunctive relief, imposition of a constructive trust, an award of damages and an accounting, an award of the costs and disbursements of the action (including reasonable attorneys’ and experts’ fees), and other equitable relief that the court may deem just and proper.
The Small action was voluntarily dismissed by the plaintiff on August 29, 2016.
Ruckus Acquisition-Related Appraisal Demand
On May 25, 2016, Ruckus received an appraisal demand letter seeking an appraisal under Section 262 of the Delaware General Corporation Law (“Section 262”) of the fair value of
3.2 million
Ruckus shares purported to be beneficially owned by a shareholder (the “Dissenter”) that purportedly dissented from the merger of Ruckus with and into a wholly-owned subsidiary of the Company. Under Section 262, the Dissenter is entitled to have those shares appraised by the Delaware Court of Chancery and receive payment of the “fair value” of such shares together with statutory interest as determined by the Delaware Court of Chancery, provided that Dissenter complies with the requirements of Section 262. The Company is not aware of any action being commenced in the Delaware Court of Chancery relating to the Dissenter’s appraisal demand. If the Dissenter does not timely and properly commence and prosecute to judgment such an appraisal action, the Dissenter may be entitled to receive
$6.45
in cash and
0.75
shares of Brocade common stock with respect to each of the
3.2 million
shares subject to its appraisal demand, with an aggregate value of
$41.3 million
as of
July 30, 2016
. Otherwise, the dollar amount that the Company may be required to pay to the Dissenter will be determined by the Delaware Court of Chancery and may be more than, less than, or equal to that amount.
10
.
Derivative Instruments and Hedging Activities
In the normal course of business, the Company is exposed to fluctuations in interest rates and the exchange rates associated with foreign currencies. The Company’s primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk. The Company currently does not manage its exposure to credit risk by entering into derivative instruments. However, the Company manages its exposure to credit risk through its investment policies. As part of these investment policies, the Company generally enters into transactions with high-credit quality counterparties and, by policy, limits the amount of credit exposure to any one counterparty based on its analysis of that counterparty’s relative credit standing.
The amounts subject to credit risk related to derivative instruments are generally limited to the amounts, if any, by which a counterparty’s obligations exceed the Company’s obligations with that counterparty.
Foreign Currency Exchange Rate Risk
A majority of the Company’s revenue, expense, and capital purchasing activities are transacted in U.S. dollars. However, the Company is exposed to foreign currency exchange rate risk inherent in conducting business globally in numerous currencies. The Company is primarily exposed to foreign currency fluctuations related to operating expenses denominated in currencies other than the U.S. dollar, of which the most significant to its operations for
the three and nine months ended July 30, 2016
, were
the euro
,
the British pound
,
the Indian rupee
,
the Chinese yuan
,
the Singapore dollar
,
the Japanese yen
, and
the Swiss franc
. The Company has established a foreign currency risk management program to protect against the volatility of future cash flows caused by changes in foreign currency exchange rates. This program reduces, but does not eliminate, the impact of foreign currency exchange rate movements.
The Company utilizes a rolling hedge strategy for the majority of its foreign currency derivative instruments to hedge exposures to the variability in the U.S. dollar equivalent of anticipated non-U.S.-dollar-denominated cash flows. All of the Company’s foreign currency forward contracts are single delivery, which are settled at maturity involving one cash payment. The Company’s foreign currency risk management program includes foreign currency derivatives with a cash flow hedge accounting designation that utilizes foreign currency forward and option contracts to hedge exposures to the variability in the U.S. dollar equivalent of anticipated non-U.S.-dollar-denominated cash flows. These instruments generally have a maturity of less than
15 months
. For these derivatives, the Company initially reports the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive loss in stockholders’ equity and reclassifies it into earnings in the same period in which the hedged transaction affects earnings. The tax effect allocated to cash flow hedge-related components of other comprehensive loss was
not material
for
the three and nine months ended July 30, 2016, and August 1, 2015
.
Ineffective cash flow hedges are included in the Company’s net income as part of “
Interest and other income, net
.” The amount recorded on ineffective cash flow hedges was
not material
for
the three and nine months ended July 30, 2016, and August 1, 2015
.
Net losses relating to the effective portion of foreign currency derivatives, which are offset by net gains on the underlying exposures, are recorded in the Company’s Condensed Consolidated
Statements of Income
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 30, 2016
|
|
August 1, 2015
|
|
July 30, 2016
|
|
August 1, 2015
|
Cost of revenues
|
$
|
(35
|
)
|
|
$
|
(141
|
)
|
|
$
|
(195
|
)
|
|
$
|
(605
|
)
|
Research and development
|
(342
|
)
|
|
(206
|
)
|
|
(968
|
)
|
|
(273
|
)
|
Sales and marketing
|
(120
|
)
|
|
(542
|
)
|
|
(764
|
)
|
|
(1,866
|
)
|
General and administrative
|
(10
|
)
|
|
(52
|
)
|
|
(54
|
)
|
|
(135
|
)
|
Total
|
$
|
(507
|
)
|
|
$
|
(941
|
)
|
|
$
|
(1,981
|
)
|
|
$
|
(2,879
|
)
|
Alternatively, the Company may choose not to hedge the foreign currency risk associated with its foreign currency exposures if the Company believes such exposure acts as a natural foreign currency hedge for other offsetting amounts denominated in the same currency or if the currency is difficult or too expensive to hedge.
As a result of foreign currency fluctuations, the net foreign currency exchange gains and losses recorded as part of “
Interest and other income, net
” were losses of
$0.2 million
and
$0.8 million
for
the three and nine months ended July 30, 2016
, respectively, and gains of
$0.3 million
and losses of
$0.6 million
for
the three and nine months ended August 1, 2015
, respectively.
As of
July 30, 2016
, the Company had gross unrealized loss positions of
$0.8 million
and gross unrealized gain positions of
$0.5 million
included in “Other accrued liabilities” and “Prepaid expenses and other current assets,” respectively.
Volume of Derivative Activity
All derivatives are designated as hedging instruments as of
July 30, 2016
, and
October 31, 2015
. Total gross notional amounts, presented by currency, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Derivatives Designated
as Hedging Instruments
|
In U.S. dollars
|
July 30, 2016
|
|
October 31, 2015
|
Euro
|
$
|
10,410
|
|
|
$
|
40,961
|
|
British pound
|
9,940
|
|
|
46,330
|
|
Indian rupee
|
8,836
|
|
|
35,647
|
|
Chinese yuan
|
3,629
|
|
|
15,129
|
|
Singapore dollar
|
3,484
|
|
|
13,745
|
|
Japanese yen
|
2,606
|
|
|
8,809
|
|
Swiss franc
|
2,365
|
|
|
9,265
|
|
Total
|
$
|
41,270
|
|
|
$
|
169,886
|
|
11
.
Stock-Based Compensation
Stock-based compensation expense, net of estimated forfeitures, is included in the following line items of the Company’s Condensed Consolidated
Statements of Income
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 30, 2016
|
|
August 1, 2015
|
|
July 30, 2016
|
|
August 1, 2015
|
Cost of revenues
|
$
|
5,965
|
|
|
$
|
3,955
|
|
|
$
|
12,400
|
|
|
$
|
9,757
|
|
Research and development
|
9,206
|
|
|
5,226
|
|
|
19,805
|
|
|
13,239
|
|
Sales and marketing
|
17,756
|
|
|
10,601
|
|
|
39,886
|
|
|
27,651
|
|
General and administrative
|
11,716
|
|
|
4,655
|
|
|
21,384
|
|
|
13,947
|
|
Total stock-based compensation expense
|
$
|
44,643
|
|
|
$
|
24,437
|
|
|
$
|
93,475
|
|
|
$
|
64,594
|
|
The following table presents stock-based compensation expense, net of estimated forfeitures, by grant type (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 30, 2016
|
|
August 1, 2015
|
|
July 30, 2016
|
|
August 1, 2015
|
Stock options
|
$
|
3,291
|
|
|
$
|
973
|
|
|
$
|
4,727
|
|
|
$
|
2,865
|
|
RSUs, including restricted stock units with market conditions
|
35,604
|
|
|
18,941
|
|
|
75,986
|
|
|
48,192
|
|
Employee stock purchase plan (“ESPP”)
|
5,748
|
|
|
4,523
|
|
|
12,762
|
|
|
13,537
|
|
Total stock-based compensation expense
|
$
|
44,643
|
|
|
$
|
24,437
|
|
|
$
|
93,475
|
|
|
$
|
64,594
|
|
The following table presents the unrecognized compensation expense, net of estimated forfeitures, by grant type and the related weighted-average periods over which this expense is expected to be recognized as of
July 30, 2016
(in thousands, except for the weighted-average period):
|
|
|
|
|
|
|
|
Unrecognized
Compensation
Expense
|
|
Weighted-
Average Period
(In years)
|
Stock options
|
$
|
2,161
|
|
|
1.10
|
RSUs, including restricted stock units with market conditions
|
$
|
166,357
|
|
|
2.69
|
ESPP
|
$
|
24,497
|
|
|
1.21
|
The following table presents details on grants made by the Company for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
July 30, 2016
|
|
August 1, 2015
|
|
Granted
(Shares in thousands)
|
|
Weighted-Average
Grant Date Fair Value
|
|
Granted
(Shares in thousands)
|
|
Weighted-Average
Grant Date Fair Value
|
Stock options
|
1,390
|
|
|
$
|
1.36
|
|
|
1,117
|
|
|
$
|
3.09
|
|
RSUs, including stock units with market conditions
|
17,879
|
|
|
$
|
7.90
|
|
|
10,251
|
|
|
$
|
11.53
|
|
The total intrinsic value of stock options exercised for the
nine
months ended
July 30, 2016
, and
August 1, 2015
, was
$1.2 million
and
$2.9 million
, respectively.
12
.
Stockholders’ Equity
Dividends
During
the nine months ended July 30, 2016
, the Company’s Board of Directors declared the following dividends (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Dividend per Share
|
|
Record Date
|
|
Total Amount Paid
|
|
Payment Date
|
November 22, 2015
|
|
$
|
0.045
|
|
|
December 10, 2015
|
|
$
|
18,429
|
|
|
January 4, 2016
|
February 16, 2016
|
|
$
|
0.045
|
|
|
March 10, 2016
|
|
$
|
18,016
|
|
|
April 4, 2016
|
May 18, 2016
|
|
$
|
0.055
|
|
|
June 10, 2016
|
|
$
|
25,261
|
|
|
July 5, 2016
|
Future dividends are subject to review and approval on a quarterly basis by the Company’s Board of Directors or a committee thereof.
Convertible Note Hedge and Warrants Related to the Convertible Senior Unsecured Notes
In connection with the issuance of the 2020 Convertible Notes, the Company entered into convertible note hedge and warrant transactions with certain financial institutions with respect to its common stock. See Note
8
, “
Borrowings
,” of the Notes to Condensed Consolidated Financial Statements for further discussion.
Accumulated Other Comprehensive Loss
The components of other comprehensive loss and related tax effects for the
three months ended
July 30, 2016
, and
August 1, 2015
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
July 30, 2016
|
|
August 1, 2015
|
|
Before-Tax Amount
|
|
Tax Expense
|
|
Net-of-Tax Amount
|
|
Before-Tax Amount
|
|
Tax Expense
|
|
Net-of-Tax Amount
|
Unrealized gains (losses) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains and losses, foreign exchange contracts
|
$
|
(715
|
)
|
|
$
|
15
|
|
|
$
|
(700
|
)
|
|
$
|
(361
|
)
|
|
$
|
(53
|
)
|
|
$
|
(414
|
)
|
Net gains and losses reclassified into earnings, foreign exchange contracts
(1)
|
507
|
|
|
(25
|
)
|
|
482
|
|
|
941
|
|
|
(110
|
)
|
|
831
|
|
Net unrealized gains (losses) on cash flow hedges
|
(208
|
)
|
|
(10
|
)
|
|
(218
|
)
|
|
580
|
|
|
(163
|
)
|
|
417
|
|
Foreign currency translation adjustments
|
(1,628
|
)
|
|
—
|
|
|
(1,628
|
)
|
|
(492
|
)
|
|
—
|
|
|
(492
|
)
|
Total other comprehensive income (loss)
|
$
|
(1,836
|
)
|
|
$
|
(10
|
)
|
|
$
|
(1,846
|
)
|
|
$
|
88
|
|
|
$
|
(163
|
)
|
|
$
|
(75
|
)
|
The components of other comprehensive loss and related tax effects for the
nine months ended
July 30, 2016
, and
August 1, 2015
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
July 30, 2016
|
|
August 1, 2015
|
|
Before-Tax Amount
|
|
Tax (Expense) Benefit
|
|
Net-of-Tax Amount
|
|
Before-Tax Amount
|
|
Tax (Expense) Benefit
|
|
Net-of-Tax Amount
|
Unrealized gains (losses) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains and losses, foreign exchange contracts
|
$
|
(1,056
|
)
|
|
$
|
21
|
|
|
$
|
(1,035
|
)
|
|
$
|
(2,558
|
)
|
|
$
|
226
|
|
|
$
|
(2,332
|
)
|
Net gains and losses reclassified into earnings, foreign exchange contracts
(1)
|
1,981
|
|
|
(150
|
)
|
|
1,831
|
|
|
2,879
|
|
|
(335
|
)
|
|
2,544
|
|
Net unrealized gains (losses) on cash flow hedges
|
925
|
|
|
(129
|
)
|
|
796
|
|
|
321
|
|
|
(109
|
)
|
|
212
|
|
Foreign currency translation adjustments
|
(1,760
|
)
|
|
—
|
|
|
(1,760
|
)
|
|
(5,781
|
)
|
|
—
|
|
|
(5,781
|
)
|
Total other comprehensive loss
|
$
|
(835
|
)
|
|
$
|
(129
|
)
|
|
$
|
(964
|
)
|
|
$
|
(5,460
|
)
|
|
$
|
(109
|
)
|
|
$
|
(5,569
|
)
|
|
|
(1)
|
For classification of amounts reclassified from accumulated other comprehensive loss into earnings as reported on the Company’s Condensed Consolidated
Statements of Income
, see Note
10
, “
Derivative Instruments and Hedging Activities
,” of the Notes to Condensed Consolidated Financial Statements.
|
The changes in accumulated other comprehensive loss by component, net of tax, for the
nine months ended
July 30, 2016
, and
August 1, 2015
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
July 30, 2016
|
|
August 1, 2015
|
|
Losses on Cash Flow Hedges
|
|
Foreign Currency Translation Adjustments
|
|
Total Accumulated Other Comprehensive Loss
|
|
Losses on Cash Flow Hedges
|
|
Foreign Currency Translation Adjustments
|
|
Total Accumulated Other Comprehensive Loss
|
Beginning balance
|
$
|
(1,539
|
)
|
|
$
|
(23,463
|
)
|
|
$
|
(25,002
|
)
|
|
$
|
(1,907
|
)
|
|
$
|
(16,907
|
)
|
|
$
|
(18,814
|
)
|
Change in unrealized gains and losses
|
(1,035
|
)
|
|
(1,760
|
)
|
|
(2,795
|
)
|
|
(2,332
|
)
|
|
(5,781
|
)
|
|
(8,113
|
)
|
Net gains and losses reclassified into earnings
|
1,831
|
|
|
—
|
|
|
1,831
|
|
|
2,544
|
|
|
—
|
|
|
2,544
|
|
Net current-period other comprehensive income (loss)
|
796
|
|
|
(1,760
|
)
|
|
(964
|
)
|
|
212
|
|
|
(5,781
|
)
|
|
(5,569
|
)
|
Ending balance
|
$
|
(743
|
)
|
|
$
|
(25,223
|
)
|
|
$
|
(25,966
|
)
|
|
$
|
(1,695
|
)
|
|
$
|
(22,688
|
)
|
|
$
|
(24,383
|
)
|
13
.
Income Taxes
In general, the Company’s provision for income taxes differs from the tax computed at the U.S. federal statutory tax rate due to state taxes, the effect of non-U.S. operations being taxed at rates lower than the U.S. federal statutory tax rate, non-deductible stock-based compensation expense, tax credits, and adjustments to unrecognized tax benefits. Earnings of the Company’s subsidiaries outside of the United States primarily relate to its European, Asia Pacific, and Japan businesses.
The Company recorded an income tax benefit for
the three months ended July 30, 2016
, primarily due to a discrete benefit from reserve releases as a result of reaching a settlement on certain transfer pricing issues with the Internal Revenue Service (“IRS”) and certain expired statute of limitations.
The effective tax rate for
the three and nine months ended July 30, 2016
, was lower than the U.S. federal statutory tax rate of
35%
primarily due to a discrete benefit from reserve releases as a result of reaching a settlement on certain transfer pricing issues with the IRS and benefits from the federal research and development tax credit, which was permanently reinstated retroactive to January 1, 2015, by the passage of the Protecting Americans from Tax Hikes Act of 2015.
The effective tax rate for
the nine months ended July 30, 2016
, was higher compared with the effective tax rate for
the nine months ended August 1, 2015
, primarily due to an increase in unrecognized tax benefits related to certain intercompany transactions during
the nine months ended July 30, 2016
.
The Company’s total gross unrecognized tax benefits, excluding interest and penalties, were
$189.1 million
as of
July 30, 2016
. If the total gross unrecognized tax benefits as of
July 30, 2016
, were recognized in the future, approximately
$144.0 million
would decrease the Company’s effective tax rate.
The IRS and other tax authorities regularly examine the Company’s income tax returns. In June 2016, the Company reached agreement with the IRS on certain transfer pricing issues in the Company’s federal income tax returns for fiscal years 2009 and 2010. In October 2014, the Geneva Tax Administration issued its final assessments for fiscal years 2003 to 2012, disputing certain of the Company’s transfer pricing arrangements. In November 2014, the Company filed a protest to challenge the final assessments. The Company believes that reserves for unrecognized tax benefits are adequate for all open tax years. The timing of tax examinations, as well as the amounts and timing of related settlements, if any, are highly uncertain. Before the end of fiscal year 2016, it is reasonably possible that either certain audits will conclude or the statutes of limitations relating to certain tax examination periods will expire, or both. After the Company reaches settlement with the tax authorities, the Company expects to record a corresponding adjustment to its unrecognized tax benefits. Taking into consideration the inherent uncertainty as to settlement terms, the timing of payments, and the impact of such settlements on the uncertainty in income taxes, the Company estimates the range of potential decreases in underlying uncertainty in income tax is between
$0
and
$5 million
in the next 12 months.
14
.
Segment Information
Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. Financial decisions and the allocation of resources are based on the information from the Company’s internal management reporting system. Currently, the Company’s CODM is its Chief Executive Officer.
Brocade is organized into three operating segments, each of which is an individually reportable segment: SAN Products, IP Networking Products, and Global Services. These reportable segments are organized principally by product category. The results of the Ruckus business are included in the IP Networking Products and Global Services reportable segments from the date of acquisition.
At this time, the Company does not track its operating expenses by operating segments because management does not consider this information in its measurement of the performance of the operating segments. The Company also does not track all of its assets by operating segments. The majority of the Company’s assets as of
July 30, 2016
, were attributable to its U.S. operations.
Summarized financial information by reportable segment for
the three and nine months ended July 30, 2016, and August 1, 2015
, based on the internal management reporting system, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SAN Products
|
|
IP Networking Products
|
|
Global Services
|
|
Total
|
Three months ended July 30, 2016
|
|
|
|
|
|
|
|
Net revenues
|
$
|
282,114
|
|
|
$
|
208,881
|
|
|
$
|
99,726
|
|
|
$
|
590,721
|
|
Cost of revenues
|
70,630
|
|
|
117,862
|
|
|
45,330
|
|
|
233,822
|
|
Gross margin
|
$
|
211,484
|
|
|
$
|
91,019
|
|
|
$
|
54,396
|
|
|
$
|
356,899
|
|
Three months ended August 1, 2015
|
|
|
|
|
|
|
|
Net revenues
|
$
|
309,451
|
|
|
$
|
153,749
|
|
|
$
|
88,619
|
|
|
$
|
551,819
|
|
Cost of revenues
|
73,657
|
|
|
70,586
|
|
|
35,672
|
|
|
179,915
|
|
Gross margin
|
$
|
235,794
|
|
|
$
|
83,163
|
|
|
$
|
52,947
|
|
|
$
|
371,904
|
|
Nine months ended July 30, 2016
|
|
|
|
|
|
|
|
Net revenues
|
$
|
925,799
|
|
|
$
|
474,556
|
|
|
$
|
287,956
|
|
|
$
|
1,688,311
|
|
Cost of revenues
|
223,806
|
|
|
240,991
|
|
|
127,489
|
|
|
592,286
|
|
Gross margin
|
$
|
701,993
|
|
|
$
|
233,565
|
|
|
$
|
160,467
|
|
|
$
|
1,096,025
|
|
Nine months ended August 1, 2015
|
|
|
|
|
|
|
|
Net revenues
|
$
|
976,362
|
|
|
$
|
431,319
|
|
|
$
|
266,952
|
|
|
$
|
1,674,633
|
|
Cost of revenues
|
233,150
|
|
|
198,631
|
|
|
109,056
|
|
|
540,837
|
|
Gross margin
|
$
|
743,212
|
|
|
$
|
232,688
|
|
|
$
|
157,896
|
|
|
$
|
1,133,796
|
|
15
.
Net Income per Share
The following table presents the calculation of basic and diluted net income per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 30,
2016
|
|
August 1,
2015
|
|
July 30,
2016
|
|
August 1,
2015
|
Basic net income per share
|
|
|
|
|
|
|
|
Net income
|
$
|
10,495
|
|
|
$
|
91,667
|
|
|
$
|
147,226
|
|
|
$
|
255,974
|
|
Weighted-average shares used in computing basic net income per share
|
426,671
|
|
|
417,299
|
|
|
411,709
|
|
|
422,184
|
|
Basic net income per share
|
$
|
0.02
|
|
|
$
|
0.22
|
|
|
$
|
0.36
|
|
|
$
|
0.61
|
|
Diluted net income per share
|
|
|
|
|
|
|
|
Net income
|
$
|
10,495
|
|
|
$
|
91,667
|
|
|
$
|
147,226
|
|
|
$
|
255,974
|
|
Weighted-average shares used in computing basic net income per share
|
426,671
|
|
|
417,299
|
|
|
411,709
|
|
|
422,184
|
|
Dilutive potential common shares in the form of stock options
|
1,227
|
|
|
1,772
|
|
|
1,329
|
|
|
1,777
|
|
Dilutive potential common shares in the form of other share-based awards
|
6,518
|
|
|
8,447
|
|
|
6,378
|
|
|
9,342
|
|
Weighted-average shares used in computing diluted net income per share
|
434,416
|
|
|
427,518
|
|
|
419,416
|
|
|
433,303
|
|
Diluted net income per share
|
$
|
0.02
|
|
|
$
|
0.21
|
|
|
$
|
0.35
|
|
|
$
|
0.59
|
|
Antidilutive potential common shares in the form of:
(1)
|
|
|
|
|
|
|
|
Warrants issued in conjunction with the 2020 Convertible Notes
(2)
|
36,316
|
|
|
36,125
|
|
|
36,251
|
|
|
26,453
|
|
Stock options
|
2,838
|
|
|
1,109
|
|
|
2,029
|
|
|
934
|
|
Other share-based awards
|
2,120
|
|
|
100
|
|
|
1,140
|
|
|
33
|
|
|
|
(1)
|
These amounts are excluded from the computation of diluted net income per share.
|
|
|
(2)
|
In connection with the issuance of the 2020 Convertible Notes, the Company entered into convertible note hedge and warrant transactions as described in Note
8
, “
Borrowings
.” The 2020 Convertible Notes have no impact on diluted earnings per share until the average quarterly price of the Company’s common stock exceeds the adjusted conversion price of
$15.83
per share. If the common stock price exceeds this adjusted conversion price, then, prior to conversion, the Company will calculate the effect of the additional shares that may be issued using the treasury stock method. If the average price of the Company’s common stock exceeds
$20.52
per share for a quarterly period, the Company’s weighted-average shares used in computing diluted net income per share will be impacted by the effect of the additional potential shares that may be issued related to the warrants using the treasury stock method. The convertible note hedge is not considered for purposes of the diluted earnings per share calculation, as its effect would be antidilutive.
|