NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
.
Basis of Presentation
Brocade Communications Systems, Inc. (“Brocade” or the “Company”) is a leading supplier of networking hardware, software, and services, including Storage Area Networking (“SAN”) solutions and Internet Protocol (“IP”) Networking solutions for businesses and organizations of various types and sizes. Brocade’s end customers include global enterprises and other organizations and service providers, such as telecommunication firms, cable operators, and mobile carriers. Brocade’s products, services, and solutions simplify information technology (“IT”) infrastructure, increase resource utilization, ensure availability of mission-critical applications, and support key IT services including Internet connectivity, enterprise mobility, virtualization, and cloud computing. Brocade’s advanced Wi-Fi solutions are used by service providers and enterprises to solve a range of network capacity, coverage, and reliability challenges associated with increasing wireless traffic demands created by the growth in the number of users equipped with more powerful, smart wireless devices using increasingly data rich applications and services.
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, fiscal year
2015
was a 52-week fiscal year, and fiscal year
2014
was a 53-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 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 Consolidated Balance Sheets. HTII’s share of GHTC’s earnings are presented separately in the Company’s Consolidated
Statements of Income
.
Use of Estimates in Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, revenue recognition, sales allowances including discounts, returns, and programs, allowance for doubtful accounts, stock-based compensation, acquisition purchase price allocations, warranty obligations, inventory valuation and purchase commitments, impairment of goodwill and other indefinite-lived intangible assets, litigation, income taxes, and investments. Actual results may differ materially from these estimates.
2
.
Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents.
Investments and Equity Securities
From time to time, the Company makes equity investments in non-publicly traded companies. These investments are included in “Other assets” on the accompanying Consolidated Balance Sheets and are generally accounted for under the cost method as the Company does not have the ability to exercise significant influence over the respective issuers’ operating and financial policies, nor does it have a liquidation preference that is substantive. The Company monitors its investments in non-publicly traded companies for impairment on a quarterly basis and makes appropriate reductions in carrying values when such impairments are determined to be other-than-temporary. Impairment charges are included in “
Other income (loss), net
” on the Company’s Consolidated Statements of Income. Factors considered in determining an impairment include, but are not limited to, the current business environment including competition and uncertainty of financial condition, going concern considerations such as the rate at which the issuer company utilizes cash and the issuer company’s ability to obtain additional financing to fulfill its stated business plan, the need for changes to the issuer company’s existing business model due to changing business environments and its ability to successfully implement necessary changes, and comparable valuations. The carrying value of the Company’s equity investments in non-publicly traded companies at
October 29, 2016
, and
October 31, 2015
, was
$4.9 million
and
$2.5 million
, respectively.
Fair Value of Financial Instruments
The fair value of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable, and accrued liabilities, approximate cost because of their short maturities.
Derivative Financial Instruments
In the normal course of business, the Company is exposed to fluctuations in interest rates and the exchange rates associated with foreign currencies. The derivatives entered into by the Company qualify for and are designated as foreign currency cash flow hedges.
The derivatives are recognized on the Company’s Consolidated Balance Sheets at their respective fair values. Changes in fair values of outstanding cash flow hedges that are highly effective are recorded in “Accumulated other comprehensive loss” until earnings are affected by cash flows from the underlying hedged transaction. In most cases, amounts recorded in “Accumulated other comprehensive loss” will be recorded in earnings at maturity of the related derivative. The recognition of effective hedge results offsets the gains or losses on the underlying exposure. Cash flows from derivative transactions are classified according to the nature of the risk being hedged by presenting the gain or loss on the matured derivatives and related impact from the underlying hedged transactions in the same line items on the Company’s Consolidated Statements of Income.
The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking hedge transactions. This documentation includes linking all derivatives either to specific assets and liabilities on the consolidated balance sheets or specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods.
The Company discontinues hedge accounting prospectively when (i) the derivative is no longer highly effective in offsetting changes in the cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (ii) the derivative expires or is sold, terminated or exercised; (iii) it is no longer probable that the forecasted transaction will occur; or (iv) management determines that designating the derivative as a hedging instrument is no longer appropriate.
When the Company discontinues hedge accounting, but it continues to be probable that the forecasted transaction will occur in the originally expected period, the gain or loss on the derivative remains in accumulated other comprehensive loss and is reclassified into earnings when the forecasted transaction affects earnings. However, if it is no longer probable that a forecasted transaction will occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gain or loss that was in accumulated other comprehensive loss will be recognized immediately in earnings. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its fair value on the Company’s Consolidated Balance Sheet until maturity and will recognize future changes in the fair value in current period earnings. Any hedge ineffectiveness is recorded in current period earnings within “Other income (loss), net.” Effectiveness is assessed based upon statistical regression analysis of changes in cash flows, as well as other relevant information.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market. Inventory costs include material, labor, and overhead. The Company records inventory write-downs based on excess and obsolete inventory determined primarily by its forecast of future demand. A majority of the Company’s inventory is located off-site at customers’ hubs, third-party managed service depots and at contract manufacturers’ locations. Cash flows related to the sale of inventories are classified as cash flows from operating activities.
Deferred Costs
When the Company’s products have been delivered, but the product revenue associated with the arrangement has been deferred as a result of not meeting the revenue recognition criteria (see section entitled “
Revenue Recognition
” below), the related product costs are also deferred if the inventory is deemed recoverable. The deferred costs are recognized in cost of revenues when the related deferred revenue is recognized or when the inventory is deemed unrecoverable.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. An estimated useful life of
three years
is used for computer equipment and
four
to
seven years
is used for software based on the nature of the software purchased. Estimated useful lives of up to
four years
are used for engineering and other equipment,
seven years
is used for furniture and an estimated useful life of
39 years
is used for buildings with a range of
ten
to
30 years
for some components of the buildings. Leasehold improvements are amortized using the straight-line method over the shorter of
ten years
or the remaining term of the lease.
Brocade evaluates long-lived assets, such as property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable in accordance with Accounting Standards Codification (“ASC”) 360-10 Property, Plant and Equipment. Brocade assesses the fair value of the assets based on the undiscounted future cash flow the assets are expected to generate and recognizes an impairment loss when the estimated undiscounted future cash flow expected to result from the use of the asset plus net proceeds expected to result from the disposition of the asset, if any, are less than the carrying value of the asset. When Brocade identifies an impairment, Brocade reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values.
Acquisition
The Company allocates the fair value of the purchase consideration of its acquisitions to the tangible assets, liabilities, and intangible assets acquired, including in-process research and development (“IPR&D”), based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When an IPR&D project is completed, the IPR&D is reclassified as an amortizable purchased intangible asset and amortized over the asset’s estimated useful life. Acquisition-related expenses and related restructuring costs are recognized separately from the business combination and are expensed as incurred.
Goodwill, Other Indefinite-lived Intangible Assets and Long-lived Intangible Assets
Goodwill and other indefinite-lived intangible assets are generated as a result of business combinations. Our indefinite-lived assets are comprised of acquired IPR&D and goodwill. IPR&D is an intangible asset accounted as an indefinite-lived asset until the completion or abandonment of the associated research and development effort.
During the development period, the Company conducts an IPR&D impairment test annually and whenever events or changes in facts and circumstances indicate that it is more likely than not that the IPR&D is impaired. Events which might indicate impairment include, but are not limited to, adverse cost factors, deteriorating financial performance, strategic decisions made in response to economic, market, and competitive conditions, the impact of the economic environment on us and our customer base, and/or other relevant events such as changes in management, key personnel, litigations, or customers.
The Company evaluates goodwill for impairment on an annual basis or 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. An impairment loss is recognized to the extent that the carrying amount of goodwill exceeds the asset’s implied fair value. Events which might indicate impairment include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on the Company’s customer base, material negative changes in relationships with significant customers, and/or a significant decline in the Company’s stock price for a sustained period.
Effective on the first day of the fourth fiscal quarter of 2016, the Company changed the date of its annual impairment test for IPR&D and 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. These financial plans are a key component in estimating the fair value of its reporting units, which is the basis for performing its annual impairment test. The Company believes that the change in its annual impairment test date is preferable as it allows the Company to utilize its most current projections in the annual impairment test.
Long-lived intangible assets are carried at cost less accumulated amortization. Amortization is recognized on a straight-line basis over the estimated useful life of the respective asset. The Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Examples of such events or circumstances include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of acquired assets or the strategy for the Company’s business, significant negative industry or economic trends, and/or a significant decline in the Company’s stock price for a sustained period. Impairment is recognized based on the difference between the fair value of the asset and its carrying value. For additional discussion, see Note
4
, “
Goodwill and Intangible Assets
,” of the Notes to Consolidated Financial Statements.
Litigation Costs
The Company is subject to the possibility of legal actions arising in the ordinary course of business. The Company regularly monitors the status of pending legal actions to evaluate both the magnitude and likelihood of any potential losses. An accrual for these potential losses is made when they are probable and the amount of loss, or possible range of loss, can be reasonably estimated. Legal costs related to such potential losses are expensed as incurred. In addition, recoveries are shown as a reduction in litigation costs in the period in which they are realized.
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
seven
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
October 29, 2016
,
two
customers accounted for a combined total of
42%
(
EMC Corporation
(“
EMC
”), which was acquired by Dell, Inc. on September 7, 2016, combined with direct sales to Dell, Inc. (together “
Dell EMC
”) with
29%
and
Hewlett Packard Enterprise Company
(“
HPE
”) with
13%
) of total accounts receivable. As of
October 31, 2015
,
one
customer (
HPE
) individually accounted for
17%
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 each of the fiscal years ended
October 29, 2016
,
October 31, 2015
, and
November 1, 2014
,
three
customers accounted for a combined total of
39%
(
Dell EMC
with
19%
,
HPE
with
10%
, and
International Business Machines Corporation
(“
IBM
”) with
10%
),
41%
(
EMC
with
17%
,
HPE
with
12%
, and
IBM
with
12%
), and
46%
(
EMC
with
18%
,
HPE
with
12%
, and
IBM
with
16%
) of total net revenues, respectively.
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., Accton Technology Corporation, Universal Scientific Industrial (Shanghai) Co., Ltd., Flextronics Telecom Systems Ltd., and Cape EMS Manufacturing (M) Sdn. Bhd., and has a service repair arrangement with Flex Ltd. 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.
Revenue Recognition
Product revenue.
Substantially all of the Company’s products are integrated with software that is essential to the functionality of the equipment. Additionally, the Company provides unspecified software upgrades and enhancements related to the equipment through its maintenance contracts for most of its products. Product revenue is generally recognized when all of the following criteria have been met:
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Persuasive evidence of an arrangement exists;
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•
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The fee is fixed or determinable; and
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•
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Collectibility is reasonably assured.
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OEM and direct customers are not granted specific rights of return; however, the Company may permit returns of product from customers if such product is returned in a timely manner and in good condition. In addition, certain of the Company’s contracts with OEM and direct customers include Sales Programs which entitle the customers to discounted pricing on future purchases if agreed upon volume targets are met.
The Company reduces OEM and direct customer revenue for estimated sales returns at the time of shipment and for sales programs at the later of revenue recognition or communication of the commitment for sales incentives. Sales return allowances are estimated based on historical sales returns. Sales programs are estimated based on approved sales programs versus claims under such sales programs, current trends and the Company’s expectations regarding future activity.
For newly introduced products, many of the Company’s large OEM customers require a product qualification period during which the Company’s products are tested and approved by the OEM customers for sale to their customers. Revenue recognition and related cost are deferred for shipments to new OEM customers and for shipments of newly introduced products to existing OEM customers until satisfactory evidence of completion of the product qualification has been received from the OEM customer.
Distributors are granted rights of stock rotation which are limited to a contractually specified percentage of the distributor’s aggregate purchase volume. These stock rotation rights are subject to expiration 180 days from the time of product shipment by the Company to the distributor. Distributor sales are also subject to Sales Program incentives and to deal-specific rebates that are payable to distributors upon sale of the related product by the distributor to an ultimate customer. Prior to the fourth quarter of the fiscal year ended
October 29, 2016
, the Company had not yet developed a historical dataset sufficient to allow for reliable estimation of distributor rebates contemporaneously with the shipment of product to the distributor. For this reason, the ultimate price of distributor sales was not deemed determinable until the period in which the distributor’s sale to the ultimate customer took place. Accordingly, revenue from sales to the Company’s distributor customers was recognized in the same period in which the product was actually sold by the distributor (sell-through).
The Company initiated a project to enhance the capture of distributor point of sale (“POS”) data in fiscal year 2014. This project resulted in the Company being able to associate specific rebates reflected in the distributor POS data to specific sales quotes maintained in the Company’s quoting system. Therefore, beginning in the fourth quarter of the fiscal year ended October 29, 2016, the historical distributor rebates and matching sales reflected in the Company’s historical dataset grew to reach approximately two years. Since the distributors must claim rebates within 180 days from their receipt of the related product, two years was deemed sufficient for purposes of making reliable estimates of ultimate rebate claims. Accordingly, beginning in the fourth quarter of the fiscal year ended October 29, 2016, revenue from sales to distributor customers is recognized upon shipment to the distributor (sell-in) and is reduced by allowances for rebates, sales program incentives, and stock rotations, which are all estimated by a process using both historical experience and expectations of future outcomes based on facts and circumstances available contemporaneously at the date of estimation.
As a result of this change from a sell-through method to a sell-in method for distributor sales, revenues totaling
$14.4 million
that would have otherwise been deferred at
October 29, 2016
, were recognized during the fourth quarter of the year then ended. In addition, the related cost of goods sold totaling
$4.0 million
that would have been similarly deferred were also recognized in the fourth quarter of the year ended
October 29, 2016
.
The Company maintains an allowance for doubtful accounts, which is also accounted for as a reduction in revenue. The Company establishes the allowance for doubtful accounts to ensure accounts receivable are not overstated due to uncollectibility. The Company maintains an allowance for doubtful accounts based upon the analysis of accounts receivable, historical collection patterns, customer concentrations, customer creditworthiness, current economic trends, changes in customer payment terms and practices, and customer communication. The Company records a specific reserve for individual accounts when it becomes aware of a customer’s likely inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to customers change, the Company would further adjust estimates of the recoverability of receivables.
Multiple-element arrangements.
The Company’s multiple-element product offerings include networking hardware with embedded software products and support, which are considered separate units of accounting. For certain of the Company’s products, software and non-software components function together to deliver the tangible products’ essential functionality.
The Company allocates revenue to each element in a multiple-element arrangement based upon their relative selling price. When applying the relative selling price method, the Company determines the selling price for each deliverable using vendor-specific objective evidence (“VSOE”) of selling price, if it exists, or third-party evidence (“TPE”) of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, the Company uses its best estimate of selling price for that deliverable. Revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for each element.
The Company determines VSOE based on its normal pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range. For post-contract customer support (“PCS”), the Company considers stated renewal rates in determining VSOE.
In most instances, the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements. This may be due to the Company infrequently selling each element separately, not pricing products within a narrow range, or only having a limited sales history. When VSOE cannot be established, the Company attempts to establish the selling price for each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, the Company’s go-to-market strategy differs from that of its peers and its offerings contain a significant level of customization and differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis. Therefore, the Company is typically unable to determine TPE.
When the Company is unable to establish selling price using VSOE or TPE, the Company uses best estimated selling price (“BESP”) in its allocation of the arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings.
The Company determines BESP for a product by considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives and pricing practices. The determination of BESP is made through consultation with and formal approval by the Company’s management, taking into consideration the go-to-market strategy.
The Company regularly reviews VSOE, TPE and BESP, as well as the establishment and updates of these estimates. There was no material impact on revenues during the fiscal year ended
October 29, 2016
, nor does the Company expect a material impact in the near term from changes in VSOE, TPE or BESP.
Services revenue.
Services revenue consists of professional services and maintenance arrangements, including PCS, software as a service (“SaaS”), and other professional services. PCS services are offered under renewable, annual fee-based contracts or as part of multiple-element arrangements, and typically include telephone support, upgrades and enhancements to the Company’s operating system software, software updates on an “if and when available” basis, advance replacement for various defective devices and components including power supplies, fans, switches, access points and controllers, telephone and internet access to technical support personnel, and other hardware support. Revenue related to PCS elements is deferred and recognized ratably over the contractual period. PCS contracts are typically one to five years in length.
Professional services are offered under hourly or fixed fee-based contracts. Professional services revenue is typically recognized as services are performed.
Warranty Expense
The Company provides standard warranties on its products ranging from one year to limited lifetime warranties. Estimated future warranty costs are accrued at the time of shipment and charged to cost of revenues based upon historical experience, current trends in warranty claims, and the Company’s expectations regarding future experience.
Foreign Currency
Assets and liabilities of the Company’s international subsidiaries in which the local currency is the functional currency are translated into U.S. dollars at period-end exchange rates. Income and expenses are translated into U.S. dollars at the average exchange rates during the period. The resulting translation adjustments are included in the Company’s Consolidated Balance Sheets in the stockholders’ equity section as a component of accumulated other comprehensive loss. Foreign exchange gains and losses for assets and liabilities of the Company’s international subsidiaries in which the functional currency is the U.S. dollar are recorded in the Company’s Consolidated Statement of Income.
Capitalized Software Development Costs
Eligible development costs for software to be sold are capitalized upon the establishment of technological feasibility, which is defined as being equivalent to completion of a beta-phase working prototype. Total eligible software development costs have not been material to date.
Eligible costs related to internal development or purchase of software for internal use are capitalized and included in “Property and equipment, net.” These costs are amortized over the estimated useful lives of
four
to
seven years
based on the nature of the software purchased or developed. Ongoing software development costs on the Company’s Oracle R12 customization project and the Long-Term Evolution (“LTE”) Small Cell Cloud Controller are recorded in construction-in-progress accounts until completed. These costs are eligible for capitalization in accordance with ASC 350-40,
Intangibles—Goodwill
and
Other—Internal-Use Software
, and will be amortized using the straight-line method over the estimated useful life.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising costs were
$11.3 million
,
$13.6 million
, and
$17.6 million
for the fiscal years ended
October 29, 2016
,
October 31, 2015
, and
November 1, 2014
, respectively.
During the fiscal year ended October 27, 2012, the Company entered into a multi-year arrangement which includes exchanging certain of the Company’s products and services, with an estimated overall fair value of
$16.6 million
, for advertising.
The Company is accounting for this transaction based on fair values of products and services surrendered
and accordingly recognized
$1.1 million
,
$1.1 million
, and
$2.4 million
of related gross operating revenue for the fiscal years ended
October 29, 2016
,
October 31, 2015
, and
November 1, 2014
, respectively. In addition,
$4.0 million
of the advertising costs for the fiscal year ended
October 29, 2016
, were incurred in connection with this multi-year arrangement, and a related advertising expense prepayment is currently recorded within “Prepaid expenses and other current assets” and “Other assets.”
Income Taxes
The Company recognizes income tax expense for the amount of taxes payable or refundable for the current year. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts, along with net operating loss carryforwards and credit carryforwards. A valuation allowance is recognized to the extent that it is more likely than not that the tax benefits will not be realized.
The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that the Company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes. For additional discussion, see Note
14
,
“
Income Taxes
,” of the Notes to Consolidated Financial Statements.
Computation of Net Income per Share
Basic net income per share is computed using the weighted-average number of common shares outstanding during the period, less shares subject to repurchase. Diluted net income per share is computed using the weighted-average number of common shares outstanding and potentially dilutive common shares outstanding during the period that have a dilutive effect on earnings per share. Potentially dilutive common shares result from the assumed exercise of outstanding stock options, assumed vesting of outstanding restricted stock units (“RSUs”), assumed issuance of stock under the employee stock purchase plan, and assumed conversion of outstanding convertible senior unsecured notes and exercise of related warrant transactions, all using the treasury stock method.
Stock-Based Compensation
The Company accounts for employee equity awards under the fair value method. Accordingly, the Company measures stock-based compensation at the grant date based on the fair value of the award. The fair values of stock options and the Employee Stock Purchase Plan (“ESPP”) are estimated using the Black-Scholes option pricing model. Estimated compensation cost relating to time-based RSUs granted prior to the initial declaration of a quarterly cash dividend on May 22, 2014, is based on the fair value of the Company’s common stock on the date of grant because Brocade did not historically pay cash dividends on its common stock. For time-based RSUs granted on or subsequent to May 22, 2014, the fair value of RSUs is measured based on the grant-date share price, less the present value of expected dividends during the vesting period, discounted at a risk-free interest rate. The fair value of restricted stock units with market conditions (“MSUs”) is estimated using a lattice model that incorporates a Monte Carlo simulation. The Company records stock-based compensation expense over the 24-month offering period in connection with shares issued under its ESPP. The compensation expense for stock-based awards is reduced by an estimate for forfeitures and is recognized over the vesting period of the award under a graded vesting method, except for RSUs granted by the Company, which is recognized over the expected term of the award under a straight-line vesting method. For additional discussion, see Note
12
, “
Stock-Based Compensation
,” of the Notes to Consolidated Financial Statements.
The Company accounts for the tax effects of share-based payment awards using the alternative transition method, which includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC Pool”) related to the tax effects of employee stock-based compensation and to determine the subsequent impact on the APIC Pool and consolidated statement of cash flows of the tax effects of employee stock-based compensation awards.
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. If the Company is the primary beneficiary of a variable interest entity, the assets, liabilities, and results of operations of the variable interest entity are 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 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 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 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 becomes effective 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, subsequent 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 becomes effective 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 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 becomes effective 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 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.
In October 2016, the FASB issued an update to ASC 740,
Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory
. This update requires the recognition of current and deferred income taxes for intra-entity transfers of assets other than inventory. This update should be applied using a modified retrospective approach and becomes effective 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.
In November 2016, the FASB issued an update to ASC 230,
Statement of Cash Flows: Restricted Cash
. This update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This update should be applied using a retrospective transition method and becomes effective 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.
3
.
Acquisitions and Divestitures
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 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 filed a petition in Delaware Court of Chancery seeking 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
October 29, 2016
.
Based on the
$8.60
per share closing price of the Company’s common stock on the Acquisition Date, the total purchase consideration paid or payable was
$1.3 billion
, consisting of approximately
$574.0 million
in cash for total outstanding Ruckus shares less dissenting shares,
$574.0 million
of equity interests in the Company,
$78.3 million
in cash for outstanding vested Ruckus stock options allocated to purchase consideration,
$7.4 million
of the fair value of replacement awards allocated to the purchase consideration, and
$41.3 million
relating to the appraisal petition filed by the dissenting former Ruckus stockholder, which was accrued as of
October 29, 2016
, and reported within “Other accrued liabilities” on the Company’s Consolidated Balance Sheets.
For the
fiscal year ended October 29, 2016
, the Company recorded direct acquisition costs of
$15.7 million
and integration costs of
$12.3 million
. These costs were expensed as incurred and are presented in the Company’s Consolidated
Statements of Income
for the
fiscal year ended October 29, 2016
, as “Acquisition and integration costs.”
In connection with the acquisition of Ruckus, 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 Date. The following table summarizes the preliminary allocation of the total 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
|
150,257
|
|
Accounts receivable, net of allowances for doubtful accounts of $2,100
|
41,339
|
|
Inventories
|
63,035
|
|
Prepaid expenses and other current assets
|
5,201
|
|
Property and equipment, net
|
21,777
|
|
Identifiable intangible assets
|
417,000
|
|
Other assets
|
1,697
|
|
Total assets acquired
|
795,821
|
|
Liabilities assumed:
|
|
Accounts payable
|
16,375
|
|
Accrued employee compensation
|
17,514
|
|
Deferred revenue
|
13,923
|
|
Other accrued liabilities
|
33,809
|
|
Non-current deferred revenue
|
9,364
|
|
Non-current deferred tax liabilities
|
62,963
|
|
Other non-current liabilities
|
40,561
|
|
Total liabilities assumed
|
194,509
|
|
Net assets acquired, excluding goodwill (a)
|
601,312
|
|
Total purchase consideration (b)
|
1,275,060
|
|
Estimated goodwill (b) - (a)
|
$
|
673,748
|
|
Goodwill represents the excess of the total 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
$279.7 million
was assigned to the IP Networking Products reporting unit, and goodwill of
$394.0 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
|
|
|
11.00
|
Customer relationships
|
120,000
|
|
|
1 - 7
|
Developed technology
|
226,000
|
|
|
6 - 7
|
IPR&D
(1)
|
27,000
|
|
|
N/A
|
Total intangible assets
|
$
|
417,000
|
|
|
|
|
|
(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 allocation reflects the Company’s preliminary estimates and is subject to revision as additional information in relation to the fair value of the inventories, identifiable intangible assets, and deferred revenue assumed becomes available.
During the fourth quarter of fiscal year 2016, the Company obtained additional information related to the fair value of inventories, identifiable intangible assets, and deferred tax liabilities. As a result, the Company recorded a measurement period adjustment resulting in a net decrease in goodwill of
$29.0 million
. The impact on the line items “Cost of revenues” and “Acquisition and integration costs” on the Company’s Consolidated Statements of Income was immaterial for the fiscal year 2016. The Company is continuing to assess the values assigned to the remaining assets acquired and liabilities assumed.
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 cancelled 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 purchase consideration to the extent that pre-acquisition services had been rendered. The 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
nine
Ruckus executives and modified the vesting schedules of unvested replacement awards granted to those
nine
plus an additional
four
Ruckus executives. As a result, the Company recorded
$6.1 million
as an expense in the
fiscal year ended October 29, 2016
.
As of
October 29, 2016
, the fair value of the remaining unvested replacement awards of
$21.8 million
will be recorded as stock-based compensation expense over the applicable future vesting periods.
For the
fiscal year ended October 29, 2016
, the Company’s Consolidated
Statements of Income
included revenue of
$181.5 million
related to Ruckus. However, the Company cannot determine earnings specifically related to Ruckus since the date of acquisition, as we began integrating these operations into our business upon closing of the acquisition.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information presents the consolidated results of the Company and Ruckus for the
fiscal year ended October 29, 2016
, 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):
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
October 29,
2016
|
|
October 31,
2015
|
Unaudited pro forma consolidated results:
|
|
|
|
|
Pro forma revenues
|
|
$
|
2,556,240
|
|
|
$
|
2,633,746
|
|
Pro forma net income
|
|
$
|
187,167
|
|
|
$
|
227,566
|
|
Pro forma net income per share—basic
|
|
$
|
0.46
|
|
|
$
|
0.54
|
|
Pro forma net income per share—diluted
|
|
$
|
0.45
|
|
|
$
|
0.53
|
|
Unaudited pro forma net income for the
fiscal year ended October 31, 2015
, includes nonrecurring pro forma adjustments directly attributable to the acquisition to the effect of inventory acquired of
$35.9 million
and acquisition and integration costs of
$28.0 million
. 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.
For the
fiscal year ended October 29, 2016
, the Company recorded no direct acquisition costs and integration costs related to the prior fiscal year acquisitions. For the
fiscal year ended October 31, 2015
, the Company recorded direct acquisition costs and integration costs of
$1.4 million
and
$2.5 million
, respectively. These costs were expensed as incurred and are presented in the Company’s Consolidated Statements of Income for the fiscal year ended
October 29, 2016
, and
October 31, 2015
, as “
Acquisition and integration costs.
”
For each acquisition, 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 were accounted for as stock-based compensation expense
and are reported, as applicable, within
“Cost of revenues,” “Research and development,” “Sales and marketing,” and “General and administrative”
on the Company’s Consolidated Statements of Income. For the fiscal year ended
October 29, 2016
, and
October 31, 2015
, the Company recognized
$2.5 million
and
$1.6 million
, respectively, of stock-based compensation expense related to these RSU awards.
The cash awards were accounted for as employee compensation expense
and are reported within
“Research and development”
on the Company’s Consolidated
Statements of Income
. For the fiscal year ended
October 29, 2016
, and
October 31, 2015
, the Company recognized
$4.2 million
and
$4.8 million
, respectively, of cash compensation expense related to these awards.
On
September 11, 2014
, the Company completed its acquisition of the assets of Vistapointe, Inc. (“Vistapointe”), a privately held developer of network visibility and analytics solutions with facilities located in San Ramon, California and Bangalore, India, and certain assets of its related entities. This acquisition has enhanced Brocade’s leadership role in developing software-based, carrier-grade network visibility and analytics (“NVA”) solutions for mobile network operators. This acquisition has also enhanced Brocade’s network functions virtualization (“NFV”) technology and gives Brocade new products to address with visibility and analytics solutions for mobile operators.
The total purchase price was
$16.9 million
, consisting entirely of cash consideration. In addition, the Company paid direct acquisition costs of
$0.4 million
.
Divestitures
On January 17, 2014, the Company completed the sale of its network adapter business to QLogic Corporation (subsequently acquired by Cavium, Inc.) as part of the Company’s business strategy to focus on its portfolio of high-performance networking hardware and software-based products and services.
The net carrying amount of the network adapter business’ assets and liabilities at the time of the divestiture was
$5.1 million
, comprised primarily of associated goodwill of
$4.1 million
. The sale resulted in a gain of
$4.9 million
, which is presented in the Company’s Consolidated Statements of Income for
fiscal year ended November 1, 2014
, as “
Gain on sale of network adapter business
.”
4
.
Goodwill and Intangible Assets
The following table summarizes goodwill activity by reportable segment during the fiscal years ended
October 29, 2016
, and
October 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SAN
Products
|
|
IP Networking
Products
|
|
Global
Services
|
|
Total
|
Balance at November 1, 2014
|
|
|
|
|
|
|
|
Goodwill
|
$
|
176,346
|
|
|
$
|
1,365,175
|
|
|
$
|
155,416
|
|
|
$
|
1,696,937
|
|
Accumulated impairment losses
|
—
|
|
|
(129,214
|
)
|
|
—
|
|
|
(129,214
|
)
|
|
176,346
|
|
|
1,235,961
|
|
|
155,416
|
|
|
1,567,723
|
|
Acquisitions
(1)
|
—
|
|
|
49,458
|
|
|
—
|
|
|
49,458
|
|
Purchase accounting adjustments
|
—
|
|
|
(15
|
)
|
|
—
|
|
|
(15
|
)
|
Tax and other adjustments
(2)
|
(21
|
)
|
|
—
|
|
|
—
|
|
|
(21
|
)
|
Translation adjustments
|
—
|
|
|
16
|
|
|
—
|
|
|
16
|
|
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
(3)
|
—
|
|
|
284,336
|
|
|
394,021
|
|
|
678,357
|
|
Purchase accounting adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Tax adjustments
(2)
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
Translation adjustments
|
—
|
|
|
(329
|
)
|
|
—
|
|
|
(329
|
)
|
Balance at October 29, 2016
|
|
|
|
|
|
|
|
Goodwill
|
176,320
|
|
|
1,698,641
|
|
|
549,437
|
|
|
2,424,398
|
|
Accumulated impairment losses
|
—
|
|
|
(129,214
|
)
|
|
—
|
|
|
(129,214
|
)
|
|
$
|
176,320
|
|
|
$
|
1,569,427
|
|
|
$
|
549,437
|
|
|
$
|
2,295,184
|
|
|
|
(1)
|
The goodwill acquired relates to the acquisitions completed in fiscal year 2015, which is gross of the adjustments recorded during the purchase price allocation period. See Note
3
, “
Acquisitions and Divestitures
,” of the Notes to Consolidated Financial Statements.
|
|
|
(2)
|
The goodwill adjustments were primarily a result of tax benefits from the exercise of stock awards of acquired companies.
|
|
|
(3)
|
The goodwill acquired relates to the acquisitions completed in fiscal year 2016. See Note
3
, “
Acquisitions and Divestitures
,” of the Notes to Consolidated Financial Statements.
|
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 of 2016, 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.
Upon the change in the annual impairment test date during the fourth fiscal quarter of 2016, the Company again performed an impairment test in addition to the one performed during the second fiscal quarter of 2016. There was no change in the valuation methodology between the annual impairment tests performed during the second and fourth fiscal quarters of 2016.
For the annual goodwill impairment tests, 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 annual goodwill impairment tests performed in fiscal year
2016
, the Company used a combination of these approaches to estimate each reporting unit’s fair value. At the time the annual goodwill impairment tests were 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 or an intangible asset 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 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 as part of 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 goodwill impairment analyses, performed during both the second and fourth fiscal quarter of
2016
, the Company determined that no impairment charge needed to be recorded.
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 fiscal year ended
October 29, 2016
.
The following tables present details of the Company’s intangible assets, excluding goodwill (in thousands, except for weighted-average remaining useful life):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2016
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
|
Weighted-
Average
Remaining
Useful Life
(in years)
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
Trade names
|
$
|
45,090
|
|
|
$
|
2,359
|
|
|
$
|
42,731
|
|
|
10.51
|
Core/developed technology
(1) (2)
|
286,290
|
|
|
37,352
|
|
|
248,938
|
|
|
5.51
|
Patent portfolio license
(3)
|
7,750
|
|
|
1,935
|
|
|
5,815
|
|
|
17.00
|
Customer relationships
|
143,110
|
|
|
15,813
|
|
|
127,297
|
|
|
6.32
|
Non-compete agreements
|
1,050
|
|
|
983
|
|
|
67
|
|
|
0.29
|
Patents with broader applications
|
1,040
|
|
|
110
|
|
|
930
|
|
|
13.38
|
Total finite-lived intangible assets
|
$
|
484,330
|
|
|
$
|
58,552
|
|
|
$
|
425,778
|
|
|
6.08
|
Indefinite-lived intangible assets, excluding goodwill:
|
|
|
|
|
|
|
|
IPR&D
(1)
|
24,000
|
|
|
—
|
|
|
24,000
|
|
|
|
Total indefinite-lived intangible assets, excluding goodwill
|
24,000
|
|
|
—
|
|
|
24,000
|
|
|
|
Total intangible assets, excluding goodwill
|
$
|
508,330
|
|
|
$
|
58,552
|
|
|
$
|
449,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 is an intangible asset accounted for as an indefinite-lived asset until the completion or abandonment of the associated research and development effort. If the research and development effort associated with the IPR&D is successfully completed, then the IPR&D intangible asset will be amortized over its estimated useful life to be determined at the date the effort is completed. During the year ended
October 29, 2016
, the Company acquired $
27.0 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 year 2017. During the year ended
October 29, 2016
, research and development efforts were completed on $
18.1 million
of the IPR&D intangible assets, and the completed IPR&D intangible assets are being amortized as core/developed technology over their estimated useful lives of
five
to
seven
years.
|
|
|
(2)
|
During the fiscal year ended
October 29, 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.
Based on the results of the annual IPR&D impairment analysis performed during the fourth fiscal quarter of 2016, the Company determined that no impairment needed to be recorded.
The following table presents the amortization of finite-lived intangible assets included on the Company’s Consolidated Statements of Income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2016
|
|
October 31,
2015
|
|
November 1,
2014
|
Cost of revenues
|
$
|
28,787
|
|
|
$
|
7,640
|
|
|
$
|
8,010
|
|
General and administrative
(1)
|
1,087
|
|
|
849
|
|
|
—
|
|
Other operating expense
|
15,661
|
|
|
2,556
|
|
|
10,280
|
|
Total
|
$
|
45,535
|
|
|
$
|
11,045
|
|
|
$
|
18,290
|
|
|
|
(1)
|
The amortization is related to the
$7.8 million
of perpetual, nonexclusive 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
October 29, 2016
(in thousands):
|
|
|
|
|
Fiscal Year
|
Estimated
Future
Amortization
|
2017
|
$
|
78,985
|
|
2018
|
69,915
|
|
2019
|
66,386
|
|
2020
|
65,454
|
|
2021
|
61,700
|
|
Thereafter
|
83,338
|
|
Total
|
$
|
425,778
|
|
5
.
Restructuring and Other Related Costs
The following table provides details of the Company’s restructuring and other related costs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2016
|
|
October 31, 2015
|
|
November 1, 2014
|
Goodwill impairment
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
83,382
|
|
Severance and benefits
|
—
|
|
|
—
|
|
|
(1,788
|
)
|
Lease loss reserve and related costs (benefits)
|
(603
|
)
|
|
(678
|
)
|
|
7,686
|
|
Restructuring, goodwill impairment, and other related costs (benefits)
|
$
|
(603
|
)
|
|
$
|
(678
|
)
|
|
$
|
89,280
|
|
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
|
|
Contract Terminations
and Other
|
|
Lease Loss
Reserve and Related Costs
|
|
Lease Loss
Reserve and Related Costs
|
|
Total
|
Restructuring liabilities at November 1, 2014
|
$
|
171
|
|
|
$
|
42
|
|
|
$
|
3,949
|
|
|
$
|
994
|
|
|
$
|
5,156
|
|
Restructuring and other charges
|
—
|
|
|
—
|
|
|
(519
|
)
|
|
(159
|
)
|
|
(678
|
)
|
Cash payments
|
—
|
|
|
(42
|
)
|
|
(1,411
|
)
|
|
(427
|
)
|
|
(1,880
|
)
|
Translation adjustment
|
(34
|
)
|
|
—
|
|
|
(208
|
)
|
|
—
|
|
|
(242
|
)
|
Other adjustments, net
|
(27
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(27
|
)
|
Restructuring liabilities at October 31, 2015
|
110
|
|
|
—
|
|
|
1,811
|
|
|
408
|
|
|
2,329
|
|
Restructuring and other charges
|
—
|
|
|
—
|
|
|
(603
|
)
|
|
—
|
|
|
(603
|
)
|
Cash payments
|
—
|
|
|
—
|
|
|
(474
|
)
|
|
(336
|
)
|
|
(810
|
)
|
Translation adjustment
|
(1
|
)
|
|
—
|
|
|
(20
|
)
|
|
—
|
|
|
(21
|
)
|
Restructuring liabilities at October 29, 2016
|
$
|
109
|
|
|
$
|
—
|
|
|
$
|
714
|
|
|
$
|
72
|
|
|
$
|
895
|
|
|
|
|
|
|
|
|
|
|
|
Current restructuring liabilities at October 29, 2016
|
$
|
109
|
|
|
$
|
—
|
|
|
$
|
293
|
|
|
$
|
72
|
|
|
$
|
474
|
|
Non-current restructuring liabilities at October 29, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
421
|
|
|
$
|
—
|
|
|
$
|
421
|
|
Fiscal 2013 Fourth Quarter Restructuring Plan
During the fourth quarter of fiscal year 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 nonrecurring 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 primarily 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 re-evaluates its estimates and assumptions on a quarterly basis and makes adjustments to the restructuring liabilities balance if necessary. During the fiscal year ended
October 29, 2016
, the Company reversed approximately
$0.6 million
of charges related to estimated facilities lease losses due to a change in lease terms for a certain facility.
The restructuring and other related charges are included in “
Restructuring, goodwill impairment, and other related costs (benefits)
” on the Company’s Consolidated Statements of Income.
6
.
Balance Sheet Details
The following tables provide details of selected balance sheet items (in thousands):
|
|
|
|
|
|
|
|
|
|
October 29,
2016
|
|
October 31,
2015
|
Accounts receivable:
|
|
|
|
Accounts receivable
|
$
|
296,710
|
|
|
$
|
247,376
|
|
Allowance for doubtful accounts
|
(1,736
|
)
|
|
(1,838
|
)
|
Sales allowances
|
(10,630
|
)
|
|
(9,655
|
)
|
Accounts receivable, net
|
$
|
284,344
|
|
|
$
|
235,883
|
|
|
|
|
|
|
|
|
|
|
|
October 29,
2016
|
|
October 31,
2015
|
Inventories:
|
|
|
|
Raw materials
|
$
|
17,793
|
|
|
$
|
18,788
|
|
Finished goods
|
51,562
|
|
|
21,736
|
|
Inventories
|
$
|
69,355
|
|
|
$
|
40,524
|
|
|
|
|
|
|
|
|
|
|
|
October 29,
2016
|
|
October 31,
2015
|
Property and equipment, net:
|
|
|
|
Gross property and equipment
|
|
|
|
Computer equipment
|
$
|
19,710
|
|
|
$
|
14,820
|
|
Software
|
89,132
|
|
|
67,625
|
|
Engineering and other equipment
(1)
|
445,115
|
|
|
407,342
|
|
Furniture and fixtures
(1)
|
33,788
|
|
|
31,028
|
|
Leasehold improvements
|
37,973
|
|
|
33,986
|
|
Land and building
|
386,163
|
|
|
385,415
|
|
Total gross property and equipment
|
1,011,881
|
|
|
940,216
|
|
Accumulated depreciation and amortization
(1), (2)
|
(556,555
|
)
|
|
(500,992
|
)
|
Property and equipment, net
|
$
|
455,326
|
|
|
$
|
439,224
|
|
|
|
(1)
|
Engineering and other equipment, furniture and fixtures, and accumulated depreciation and amortization include the following amounts under capital leases as of
October 29, 2016
, and
October 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 29,
2016
|
|
October 31,
2015
|
Cost
|
$
|
270
|
|
|
$
|
1,312
|
|
Accumulated depreciation
|
(270
|
)
|
|
(857
|
)
|
Property and equipment, net, under capital leases
|
$
|
—
|
|
|
$
|
455
|
|
|
|
(2)
|
The following table presents the depreciation of property and equipment included on the Company’s Consolidated Statements of Income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2016
|
|
October 31,
2015
|
|
November 1,
2014
|
Depreciation expense
|
$
|
78,781
|
|
|
$
|
73,623
|
|
|
$
|
82,357
|
|
|
|
|
|
|
|
|
|
|
|
October 29,
2016
|
|
October 31,
2015
|
Other accrued liabilities:
|
|
|
|
Income taxes payable
|
$
|
9,168
|
|
|
$
|
7,142
|
|
Accrued warranty
|
8,326
|
|
|
7,599
|
|
Inventory purchase commitments
|
1,084
|
|
|
1,237
|
|
Accrued sales programs
|
27,552
|
|
|
33,637
|
|
Accrual for the appraisal demand submitted by the dissenting shareholder and related interest payable
|
42,244
|
|
|
—
|
|
Accrued interest
|
7,268
|
|
|
6,523
|
|
Others
|
17,528
|
|
|
21,088
|
|
Other accrued liabilities
|
$
|
113,170
|
|
|
$
|
77,226
|
|
7
.
Fair Value Measurements
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between unrelated market participants at the measurement date. In determining fair value for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and also considers assumptions that market participants would use when pricing the asset or liability. 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
October 29, 2016
.
The fair value of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, restricted cash, accounts payable, and accrued liabilities, approximate cost because of their short maturities.
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 of these 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. There are three levels of inputs that may be used to measure fair value:
Level 1
Observable inputs that reflect quoted prices in active markets for identical assets or liabilities. Brocade’s assets utilizing Level 1 inputs include money market funds.
Level 2
Inputs that reflect quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in less-active markets, or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. Brocade’s assets and liabilities utilizing Level 2 inputs include derivative instruments. The Company uses observable market prices for comparable instruments to value its derivative instruments.
Level 3
Unobservable inputs that reflect the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available. Brocade has no assets or liabilities utilizing Level 3 inputs.
During the fiscal year ended
October 29, 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
October 29, 2016
, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Balance as of October 29, 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)
|
$
|
914,724
|
|
|
$
|
914,724
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative assets
|
514
|
|
|
—
|
|
|
514
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
915,238
|
|
|
$
|
914,724
|
|
|
$
|
514
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
354
|
|
|
$
|
—
|
|
|
$
|
354
|
|
|
$
|
—
|
|
Total liabilities measured at fair value
|
$
|
354
|
|
|
$
|
—
|
|
|
$
|
354
|
|
|
$
|
—
|
|
|
|
(1)
|
Money market funds are reported within “Cash and cash equivalents” on the Company’s 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
|
|
|
$
|
—
|
|
Total liabilities measured at fair value
|
$
|
1,125
|
|
|
$
|
—
|
|
|
$
|
1,125
|
|
|
$
|
—
|
|
|
|
(1)
|
Money market funds are reported within “Cash and cash equivalents” on the Company’s Consolidated Balance Sheets.
|
8
.
Borrowings
The following table provides details of the Company’s long-term debt (in thousands, except years and percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 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
|
|
$
|
780,000
|
|
|
2.53
|
%
|
|
$
|
—
|
|
|
—
|
%
|
Convertible Senior Unsecured Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 Convertible Notes
|
|
2020
|
|
1.38%
|
|
575,000
|
|
|
4.98
|
%
|
|
575,000
|
|
|
4.98
|
%
|
Senior Unsecured Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
2023 Notes
|
|
2023
|
|
4.63%
|
|
300,000
|
|
|
4.83
|
%
|
|
300,000
|
|
|
4.83
|
%
|
Capital lease obligations
|
|
2016
|
|
4.63%
|
|
—
|
|
|
|
|
298
|
|
|
4.63
|
%
|
Total gross long-term debt
|
|
|
|
|
|
1,655,000
|
|
|
|
|
875,298
|
|
|
|
Unamortized discount
|
|
|
|
|
|
(73,540
|
)
|
|
|
|
(79,196
|
)
|
|
|
Unamortized debt issuance costs
|
|
|
|
|
|
(2,705
|
)
|
|
|
|
(2,025
|
)
|
|
|
Current portion of long-term debt
|
|
|
|
|
|
(76,692
|
)
|
|
|
|
(298
|
)
|
|
|
Long-term debt, net of current portion
|
|
|
|
|
|
$
|
1,502,063
|
|
|
|
|
$
|
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
$800.0 million
(the “Term Loan Facility”) and a revolving credit facility of
$100.0 million
(the “Revolving Facility,” and together with the Term Loan Facility, the “Senior Credit Facility”). The Revolving Facility includes a
$25.0 million
letter of credit subfacility and a
$10.0 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 initial commitment fee of
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 an initial 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
$100.0 million
was available for future borrowing under the revolving credit facility as of
October 29, 2016
. Payments totaling
$20.0 million
were made towards the principal of the Term Loan Facility during fiscal year ended
October 29, 2016
.
As of
October 29, 2016
, the fair value of the Term Loan Facility was approximately
$767.4 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. As of the date hereof, all of the Company’s subsidiaries are restricted subsidiaries under the Senior Credit Facility.
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.
As discussed under Note
17
, “
Subsequent Events
,” of the Notes to Consolidated Financial Statements, on November 2, 2016, the Company entered into a merger agreement with Broadcom Limited (“Broadcom”) under which Broadcom agreed to acquire Brocade. The consummation of the proposed acquisition by Broadcom would constitute a “change of control” under the events of default under the Credit Agreement.
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 redemption 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 fiscal year ended
October 29, 2016
, and
October 31, 2015
.
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):
|
|
|
|
|
|
|
|
|
|
October 29,
2016
|
|
October 31,
2015
|
Principal
|
$
|
575,000
|
|
|
$
|
575,000
|
|
Unamortized discount of the liability component
|
(59,398
|
)
|
|
(76,311
|
)
|
Net carrying amount of liability component
|
$
|
515,602
|
|
|
$
|
498,689
|
|
Carrying amount of equity component
|
$
|
55,374
|
|
|
$
|
70,765
|
|
As of
October 29, 2016
, and
October 31, 2015
, the remaining period of amortization for the discount is
3.17
years and
4.17
years, respectively.
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):
|
|
|
|
|
|
|
|
|
|
October 29,
2016
|
|
October 31,
2015
|
Amortization of discount
|
$
|
16,912
|
|
|
$
|
12,891
|
|
Contractual interest coupon
|
$
|
7,906
|
|
|
$
|
6,299
|
|
As of
October 29, 2016
, and
October 31, 2015
, the fair value of the 2020 Convertible Notes was approximately
$564.5 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 common shares 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 fourth 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
September 7, 2016
, the conversion rate was adjusted to a rate of
63.2998
shares of the Company’s common stock per $1,000 principal amount of the notes, which is equal to
36.4 million
shares at a conversion price of approximately
$15.80
per share. However, because the adjustment resulted in a change to the conversion rate of less than 1%, as is allowed by the terms of the indenture governing the 2020 Convertible Notes, the Company elected to defer the administration and 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, to 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
October 29, 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
October 29, 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
October 29, 2016
, a fundamental change had not occurred and the 2020 Convertible Notes were not re-purchasable.
The consummation of the proposed Broadcom acquisition would constitute a “fundamental change” as well as a “make-whole fundamental change” under the terms of the indenture governing the 2020 Convertible Notes. Accordingly, holders of the 2020 Convertible Notes will have the right to require the Company to repurchase their notes upon the consummation of the proposed Broadcom acquisition. In addition, the consummation of the Broadcom acquisition will cause the 2020 Convertible Notes to become convertible for a specified period of time following such consummation, will result in an adjustment to the conversion rate for conversions of the 2020 Convertible Notes during a specified period of time following such consummation, and will require that the Company settle all such conversions in cash.
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
15.80
per share as of
September 7, 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 $0.055 per share beginning in the third fiscal quarter of 2016, and, as of
September 7, 2016
, the holders of the warrants have the right to acquire up to approximately
36.4 million
shares of the Company’s common stock at a strike price of approximately
$20.48
per share.
See Note
16
, “
Net Income per Share
,” of the Notes to Consolidated Financial Statements for further discussion of the dilutive impact of the 2020 Convertible Notes and the convertible note hedge and warrant transactions.
The consummation of the proposed acquisition by Broadcom would result in a termination of the warrant transactions, in which case the Company would be required to settle such transactions in cash. In addition, announcements relating to the proposed transaction may result in adjustments to the terms of the warrant transactions to take into account the economic effect of the proposed transactions, which could result in greater amounts becoming due upon termination or otherwise have a dilutive effect.
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 fiscal year ended
October 29, 2016
.
As of
October 29, 2016
, and
October 31, 2015
, the fair value of the 2023 Notes was approximately
$297.0 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 consummation of the proposed acquisition by Broadcom could result in a Change of Control Triggering Event if the acquisition is accompanied or followed within a specified period by certain downgrades of the ratings of the 2023 Notes.
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 subsidiary 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 that have guaranteed the Company’s obligations under the 2020 Notes, 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. As a result, the Company ceased presenting consolidated financial statements for the parent company, the former subsidiary guarantors, and non-guarantor subsidiaries effective in the first fiscal quarter of 2015.
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 Consolidated
Statements of Income
for the fiscal year ended
October 31, 2015
.
As of
November 1, 2014
, the fair value of the 2020 Notes was approximately
$312.5 million
, which was estimated based on broker trading prices.
Debt Maturities
As of
October 29, 2016
, the Company’s aggregate debt maturities based on outstanding principal were as follows (in thousands):
|
|
|
|
|
|
Fiscal Year
|
|
Principal
Balances
|
2017
|
|
$
|
80,000
|
|
2018
|
|
80,000
|
|
2019
|
|
80,000
|
|
2020
|
|
655,000
|
|
2021
|
|
460,000
|
|
Thereafter
|
|
300,000
|
|
Total
|
|
$
|
1,655,000
|
|
9
.
Commitments and Contingencies
Operating Leases
The Company leases certain facilities and certain equipment under various operating agreements expiring through
October 2025
. In connection with its facilities lease agreements, the Company has signed unconditional, irrevocable letters of credit totaling
$0.1 million
as security for the leases.
The following table presents the composition of net rent expense included on the Company’s Consolidated Statements of Income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2016
|
|
October 31,
2015
|
|
November 1,
2014
|
Rent expense
|
$
|
26,423
|
|
|
$
|
22,929
|
|
|
$
|
21,928
|
|
Sublease income
|
(7,538
|
)
|
|
(7,673
|
)
|
|
(7,264
|
)
|
Net rent expense
|
$
|
18,885
|
|
|
$
|
15,256
|
|
|
$
|
14,664
|
|
Future minimum lease payments under all non-cancellable operating leases as of
October 29, 2016
, excluding contractual sublease income of
$1.9 million
, are as follows (in thousands):
|
|
|
|
|
|
Fiscal Year
|
|
Operating
Leases
|
2017
|
|
$
|
20,996
|
|
2018
|
|
14,782
|
|
2019
|
|
11,286
|
|
2020
|
|
10,392
|
|
2021
|
|
9,634
|
|
Thereafter
|
|
21,549
|
|
Total minimum lease payments
|
|
$
|
88,639
|
|
Product Warranties
The Company’s accrued liability for estimated future warranty costs is included in “Other accrued liabilities” in the accompanying Consolidated Balance Sheets. The following table summarizes the activity related to the Company’s accrued liability for estimated future warranty costs during the fiscal years ended
October 29, 2016
, and
October 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Accrued Warranty
|
|
Fiscal Year Ended
|
|
October 29,
2016
|
|
October 31,
2015
|
Beginning balance
|
$
|
7,599
|
|
|
$
|
7,486
|
|
Warranty liability assumed from acquisitions
|
760
|
|
|
—
|
|
Liabilities accrued for warranties issued during the period
|
3,584
|
|
|
4,076
|
|
Warranty claims paid and used during the period
|
(3,598
|
)
|
|
(4,164
|
)
|
Changes in liability for pre-existing warranties during the period
|
(19
|
)
|
|
201
|
|
Ending balance
|
$
|
8,326
|
|
|
$
|
7,599
|
|
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
October 29, 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 ordered per Brocade’s forecast which 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
October 29, 2016
, the Company’s aggregate commitment to its CMs for inventory components used in the manufacture of Brocade products was
$206.3 million
, which the Company expects to utilize during future normal ongoing operations, net of a purchase commitments reserve of
$1.1 million
, which is reported within “Other accrued liabilities” on the Company’s Consolidated Balance Sheet as of
October 29, 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
14
,
“
Income Taxes
,” of the Notes to 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, either asserted or unasserted, 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
October 29, 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 contained similar allegations and named Ruckus and members of the Ruckus board of directors as defendants; the Maguire and Jaljouli actions also named Brocade and a Brocade subsidiary as defendants. In general, the complaints alleged that the members of the Ruckus board of directors breached their fiduciary duties to Ruckus stockholders in agreeing to the transaction and making related disclosures. The complaints in the Maguire and Jaljouli actions also alleged 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 Maguire and Jaljouli actions were each voluntarily dismissed by the plaintiffs on September 19, 2016, and the Small action was voluntarily dismissed by the plaintiff on August 29, 2016.
The complaint in the Borrego action alleged 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 Borrego action was voluntarily dismissed by the plaintiff on September 15, 2016.
The original complaint in the Hussey action, which named Ruckus, members of the Ruckus board of directors, Ruckus’ chief financial officer, Brocade, and a Brocade subsidiary as defendants, contained a Section 14(e) claim similar to that alleged in the Borrego action and also alleged 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. An amended complaint filed on October 24, 2016, names the same defendants as the original complaint, and alleges that the defendants violated Sections 14(e), 14(d)(7) and 20(a) of the Exchange Act and Rule 14d-10 promulgated thereunder, that the members of the Ruckus board of directors breached their fiduciary duties to Ruckus stockholders, and that Ruckus’ chief financial officer, Brocade and the Brocade subsidiary aided and abetted the members of the Ruckus board of directors in breaching their fiduciary duties to Ruckus stockholders by purportedly doing one or more of the following: agreeing to terms preferential to the defendants and other Ruckus insiders, accepting overly restrictive deal protection measures in the merger agreement, failing to negotiate for a collar on Brocade’s stock price, engaging a financial advisor with conflicts of interest, providing allegedly false, misleading and/or incomplete disclosures regarding conflicts of interest and the opinion of Ruckus’s financial advisors, and ultimately agreeing to unfair transaction consideration for the Ruckus shares. The amended complaint seeks an award of damages in an unspecified amount. The defendants filed a motion to dismiss the amended complaint on December 8, 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 Dissenter filed a petition for appraisal in the Delaware Court of Chancery on September 22, 2016. If the Dissenter does not timely and properly prosecute to judgment its 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. 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 fiscal year ended
October 29, 2016
, were
the British pound
,
the euro
,
the Indian rupee
,
the Chinese yuan
,
the Singapore dollar
,
the Swiss franc
,
the Japanese yen
, and
the Australian dollar
. 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 significant for the fiscal years ended
October 29, 2016
,
October 31, 2015
, and
November 1, 2014
.
Ineffective cash flow hedges are included in the Company’s net income as part of “Other income (loss), net.” The amount recorded on ineffective cash flow hedges was not significant for the fiscal years ended
October 29, 2016
,
October 31, 2015
, and
November 1, 2014
.
Net gains (losses) relating to the effective portion of foreign currency derivatives recorded in the Company’s Consolidated Statements of Income are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29, 2016
|
|
October 31, 2015
|
|
November 1, 2014
|
Cost of revenues
|
$
|
(238
|
)
|
|
$
|
(898
|
)
|
|
$
|
126
|
|
Research and development
|
(1,546
|
)
|
|
(381
|
)
|
|
(451
|
)
|
Sales and marketing
|
(940
|
)
|
|
(2,772
|
)
|
|
528
|
|
General and administrative
|
(67
|
)
|
|
(199
|
)
|
|
59
|
|
Total
|
$
|
(2,791
|
)
|
|
$
|
(4,250
|
)
|
|
$
|
262
|
|
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.
The net foreign currency exchange gains and losses recorded as part of “Other income (loss), net” were losses of
$0.8 million
,
$0.4 million
and
$0.3 million
for the fiscal years ended
October 29, 2016
,
October 31, 2015
, and
November 1, 2014
, respectively.
As of
October 29, 2016
, the Company had gross unrealized loss positions of
$0.4 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
Total gross notional amounts, presented by currency, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Derivatives Designated
as Hedging Instruments
|
In U.S. dollars
|
October 29, 2016
|
|
October 31, 2015
|
British pound
|
$
|
42,783
|
|
|
$
|
46,330
|
|
Euro
|
34,070
|
|
|
40,961
|
|
Indian rupee
|
32,275
|
|
|
35,647
|
|
Chinese yuan
|
19,805
|
|
|
15,129
|
|
Singapore dollar
|
15,057
|
|
|
13,745
|
|
Swiss franc
|
14,426
|
|
|
9,265
|
|
Japanese yen
|
9,944
|
|
|
8,809
|
|
Australian dollar
|
7,876
|
|
|
—
|
|
Total
|
$
|
176,236
|
|
|
$
|
169,886
|
|
11
.
Employee Compensation Plans
In April 2009, the stockholders of Brocade approved the Company’s 2009 Stock Plan, 2009 Director Plan, and 2009 Employee Stock Purchase Plan (“2009 ESPP”), and such plans are now part of the Company’s equity compensation plans. The Company’s 1999 Stock Plan, 1999 Director Option Plan, and 1999 Employee Stock Purchase Plan (“1999 ESPP”) each expired in March 2009.
In April 2012, the stockholders of Brocade approved an amendment and restatement of the Company’s 2009 Stock Plan and 2009 ESPP to increase the plans’ share reserves by
35.0 million
and
30.0 million
shares, respectively.
In January 2013, the Compensation Committee (the “Committee”) of the Board of Directors of Brocade adopted the 2013 Inducement Award Plan. The objective of the plan is to provide incentives to attract, retain, and motivate eligible persons whose potential contributions are important to promote the success of the Company. The 2013 Inducement Award Plan was amended and restated in May 2016 as discussed below.
In April 2015, the stockholders of Brocade approved an amendment and restatement of the Company’s 2009 Stock Plan and 2009 Director Plan to increase the plans’ share reserves by
29.5 million
and
1.0 million
shares, respectively, as well as change the fungible ratio at which RSUs are deducted from and returned to the plans. The 2009 Director Plan was also amended and restated to eliminate the fixed share initial restricted stock unit award granted in connection with an election or appointment to our Board of Directors, change the formula for calculating the pro-rata annual grant for a new director who first becomes a director other than at an annual meeting, and revise the method of computing the annual restricted stock unit award to a formula based on a set dollar value.
In April 2016, the stockholders of Brocade approved an amendment and restatement of the Company’s 2009 ESPP to increase the plan’s share reserves by
20.0 million
shares.
In May 2016, the Board of Directors amended and restated the 2013 Inducement Award Plan, renaming it the “Amended and Restated Inducement Award Plan” (the “Inducement Plan”). As amended and restated, the Inducement Plan permits (i) the issuance of equity awards in connection with acquisition or merger activity that convert, replace, or adjust outstanding equity awards to reflect the acquisition or merger as permitted by Nasdaq Listing Rule 5635(c)(3), (ii) the issuance of “inducement grant” equity awards to new employees of the Company as permitted by Nasdaq Listing Rule 5635(c)(4), and (iii) the issuance of shares available under pre-existing plans acquired by the Company in acquisitions and mergers (“Assumed Shares”) as permitted by Nasdaq Listing Rule 5635(c). In May 2016,
2.4 million
Assumed Shares were added to the Inducement Plan, which were assumed by Brocade from the Ruckus Wireless, Inc. Amended & Restated 2012 Equity Incentive Plan.
Inducement Plan
The Inducement Plan provides for the grant of stock options, restricted stock, RSUs, stock appreciation rights, performance units, performance shares, and other stock or cash awards to recipients as the Committee may determine. Per the terms of the plan, as amended,
14.6 million
shares of the Company’s common stock are reserved for issuance under the plan, subject to adjustment for stock dividends, stock splits, or other changes in the Company’s common stock or the Company’s capital structure. In addition, the exercise price of stock options and stock appreciation rights granted under the plan must be at least equal to the fair market value of the Company’s common stock on the date of grant. The term, vesting schedule, and other conditions applicable to grants made under this plan are established by the Committee at the time of grant.
2009 Stock Plan
The 2009 Stock Plan provides for the grant of stock options, restricted stock, RSUs, including restricted stock units with market conditions, stock appreciation rights, performance units, performance shares, and other stock or cash awards to employees, directors, and consultants. Per the terms of the 2009 Stock Plan, as amended,
132.5 million
shares of the Company’s common stock are reserved for issuance under the plan, plus any shares subject to stock options or similar awards granted under the Company’s 1999 Stock Plan, 1999 Nonstatutory Stock Option Plan (“1999 NSO Plan”), and 2001 McDATA Equity Incentive Plan that expire or otherwise terminate without having been exercised in full, and shares issued pursuant to awards granted under the Company’s 1999 Stock Plan, 1999 NSO Plan, and 2001 McDATA Equity Incentive Plan that are forfeited to or repurchased by the Company, with the maximum number of shares to be added to the 2009 Stock Plan pursuant to this clause equal to
40.3 million
shares.
2009 Director Plan
The 2009 Director Plan provides for the grant of stock options and RSUs to non-employee directors of the Company. Per the terms of the 2009 Director Plan, as amended,
3.0 million
shares of the Company’s common stock are reserved for issuance under the plan, plus any shares subject to stock options or similar awards granted under the Company’s 1999 Director Option Plan that expire or otherwise terminate without having been exercised in full, and shares issued pursuant to awards granted under the Company’s 1999 Director Option Plan that are forfeited to or repurchased by the Company, with the maximum number of shares to be added to the 2009 Director Plan pursuant to this clause equal to
0.9 million
shares.
2009 Employee Stock Purchase Plan
The 2009 ESPP permits eligible employees to purchase shares of the Company’s common stock through payroll deductions for up to
15%
of qualified compensation during the offering period. In addition, eligible employees may purchase at a discount of up to
15%
of the lesser of the fair market value of the Company’s common stock on (i) the first trading day of the offering period, or (ii) the last day of each purchase period; provided, however, that the purchase price for subsequent offering periods may be determined by the administrator, subject to compliance with the terms of the 2009 ESPP. A total of
85.0 million
shares of the Company’s common stock are reserved for issuance under the 2009 ESPP, as amended. The 2009 ESPP is implemented through consecutive, overlapping offering periods. The offering periods generally start with the first trading day on or after June 1 and December 1 each year and end approximately
24
months later, unless the fair market value of the Company’s common stock on the last day of a purchase period is lower than the fair market value of the Company’s common stock on the first trading day of the offering period, in which case the offering period will end early, immediately after the purchase period, and a new offering period will commence on or about such date. Each offering period is divided into
four
purchase periods of approximately
six months
in length. Eligible employees may purchase no more than
3,750
shares of the Company’s common stock during each purchase period. As of
October 29, 2016
,
24.5 million
shares were available for issuance under the 2009 ESPP. Employee participation in the 2009 ESPP was suspended effective December 1, 2016, and the 2009 ESPP will terminate upon the completion of the proposed acquisition of the Company by Broadcom. See Note
17
, “
Subsequent Events
,” of the Notes to Consolidated Financial Statements.
Summary of Equity Compensation Plans
The Company may grant stock options, restricted stock awards, and RSUs, including restricted stock units with market conditions, for shares of the Company’s common stock and other types of equity compensation awards to its employees and directors under the various equity compensation plans described above. Effective in April 2015, in accordance with the terms of the 2009 Stock Plan and the 2009 Director Plan, as amended, each award granted other than stock options or stock appreciation rights will count against the applicable plan’s share reserve as
2.03
shares for every one share subject to such award. In addition, the exercise price of stock options and stock appreciation rights granted under the 2009 Stock Plan must be at least equal to the fair market value of the Company’s common stock on the date of grant and the exercise price of incentive stock options granted to any participant who owns more than
10%
of the total voting power of all classes of the Company’s outstanding stock must be at least
110%
of the fair market value of the Company’s common stock on the date of grant.
The term of a stock option and a stock appreciation right may not exceed
seven years
, except that, with respect to any participant who owns
10%
of the voting power of all classes of the Company’s outstanding capital stock, the term of an incentive stock option may not exceed
five years
. The majority of the stock options, restricted stock awards, and RSUs granted under the Company’s equity compensation plans vest over a period of
three
to
four years
. Certain options and awards granted under the 2009 Stock Plan and the 2009 Director Plan vest over shorter or longer periods.
As of
October 29, 2016
, and
October 31, 2015
, approximately
72.4 million
and
63.4 million
shares, respectively, were authorized for future issuance under the Company’s equity compensation plans, which include stock options, shares to be issued pursuant to the 2009 ESPP, RSUs, and other awards. A total of
39.8 million
and
36.8 million
shares of common stock were available for grant under the Company’s equity compensation plans as of
October 29, 2016
, and
October 31, 2015
, respectively. Awards that expire, or are cancelled without delivery of shares, generally become available for issuance under the Company’s equity compensation plans.
Employee 401(k) Plan
The Company sponsors the Brocade Communications Systems, Inc. 401(k) Plan (“401(k) Plan”), which qualifies under Section 401(k) of the Internal Revenue Code and is designed to provide retirement benefits for its eligible employees through tax-deferred salary deductions.
Employees may elect to contribute up to
60%
of their eligible compensation to the 401(k) Plan. Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Service (“IRS”). The Company matches employee contributions dollar for dollar up to a maximum of
$3,000
per calendar year per person. All matching contributions vest immediately. The Company’s matching contributions to the 401(k) Plan totaled
$9.5 million
,
$8.7 million
, and
$8.2 million
for the fiscal years ended
October 29, 2016
,
October 31, 2015
, and
November 1, 2014
, respectively.
12
.
Stock-Based Compensation
Stock-based compensation expense, net of estimated forfeitures, was included in the following line items of the Company’s Consolidated Statements of Income as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2016
|
|
October 31,
2015
|
|
November 1,
2014
|
Cost of revenues
|
$
|
16,882
|
|
|
$
|
12,946
|
|
|
$
|
14,963
|
|
Research and development
|
29,298
|
|
|
18,714
|
|
|
18,635
|
|
Sales and marketing
|
53,357
|
|
|
38,340
|
|
|
31,650
|
|
General and administrative
|
31,469
|
|
|
18,528
|
|
|
19,666
|
|
Total stock-based compensation expense
|
$
|
131,006
|
|
|
$
|
88,528
|
|
|
$
|
84,914
|
|
The following table presents stock-based compensation expense, net of estimated forfeitures, by grant type (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2016
|
|
October 31,
2015
|
|
November 1,
2014
|
Stock options
|
$
|
5,612
|
|
|
$
|
3,675
|
|
|
$
|
4,581
|
|
RSUs, including restricted stock units with market conditions
|
105,657
|
|
|
67,735
|
|
|
62,906
|
|
Employee stock purchase plan (“ESPP”)
|
19,737
|
|
|
17,118
|
|
|
17,427
|
|
Total stock-based compensation expense
|
$
|
131,006
|
|
|
$
|
88,528
|
|
|
$
|
84,914
|
|
The following table presents the unrecognized compensation expense, net of estimated forfeitures, of the Company’s equity compensation plans as of
October 29, 2016
, which is expected to be recognized over the following weighted-average periods (in thousands, except for the weighted-average period):
|
|
|
|
|
|
|
|
Unrecognized
Compensation
Expense
|
|
Weighted-
Average Period
(In years)
|
Stock options
|
$
|
1,364
|
|
|
0.89
|
RSUs, including restricted stock units with market conditions
|
$
|
143,209
|
|
|
2.06
|
ESPP
|
$
|
17,522
|
|
|
1.10
|
In accordance with the applicable accounting guidance for stock-based compensation, the compensation expense for stock-based awards is reduced by an estimate for forfeitures and is recognized over the requisite service period of the respective awards.
To the extent that the actual forfeitures differ from the estimated forfeitures, the Company records the difference in the period that the awards vest. The Company estimates the forward-looking forfeiture rate, using the Company’s historical forfeiture rates, annually during the second fiscal quarter, and whenever events occur or facts and circumstances indicate that the current forfeiture rate estimate is significantly different from historical forfeitures. Changes in the estimated forfeiture rates and differences between the estimated forfeiture rates and actual forfeiture rates may result in significant increases or decreases in stock-based compensation expense from period to period
.
Based on the results of the annual forfeiture rate analysis performed during the second fiscal quarter of
2016
, there was
no
significant impact related to the change in the estimated forfeiture rates in fiscal year
2016
. However, in the second fiscal quarter of
2015
, the Company increased its expected forfeiture rate and recorded a cumulative reduction to stock-based compensation expense of
$5.6 million
in fiscal year
2015
.
Stock Options
The fair value of each option granted during the respective period is estimated on the date of grant using the Black-Scholes valuation model and the assumptions noted in the following table. The dividend yield reflects the cash dividends paid by Brocade starting in the third quarter of fiscal year 2014. The risk-free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option. For stock options granted prior to November 1, 2015, the expected volatility is based on an equal weighted-average of implied volatilities from traded options of the Company’s common stock and historical volatility of the Company’s common stock. For stock options granted on or subsequent to November 1, 2015, the expected volatility is based on historical volatility of the Company’s common stock. The expected term is based on historical exercise behavior.
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2016
|
|
October 31,
2015
|
|
November 1,
2014
|
Expected dividend yield
|
2.3
|
%
|
|
1.3
|
%
|
|
0.0% - 1.5%
|
Risk-free interest rate
|
0.0 - 1.3%
|
|
|
1.1 - 1.8%
|
|
|
0.7 - 2.3%
|
Expected volatility
|
32.1 - 39.0%
|
|
|
36.5
|
%
|
|
36.8 - 39.4%
|
Expected term (in years)
|
1.1 - 4.5
|
|
|
4.5
|
|
|
5.0
|
Compensation expense computed under the fair value method for stock options issued is being amortized under a graded vesting method over the options’ vesting period. A summary of stock option activity under the equity compensation plans for the fiscal years ended
October 29, 2016
,
October 31, 2015
, and
November 1, 2014
, is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(In thousands)
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Grant Date Fair Value
|
|
Weighted-Average
Remaining
Contractual Term
(In years)
|
|
Aggregate
Intrinsic
Value
(In thousands)
|
Outstanding as of October 26, 2013
|
12,561
|
|
|
$
|
6.19
|
|
|
|
|
2.37
|
|
$
|
24,784
|
|
Granted
|
1,770
|
|
|
$
|
9.03
|
|
|
$
|
3.16
|
|
|
|
|
|
Exercised
|
(6,971
|
)
|
|
$
|
5.93
|
|
|
|
|
|
|
$
|
24,240
|
|
Forfeited or expired
|
(1,161
|
)
|
|
$
|
8.93
|
|
|
|
|
|
|
|
Outstanding as of November 1, 2014
|
6,199
|
|
|
$
|
6.79
|
|
|
|
|
4.74
|
|
$
|
24,452
|
|
Granted
|
1,117
|
|
|
$
|
10.89
|
|
|
$
|
3.09
|
|
|
|
|
|
Exercised
|
(564
|
)
|
|
$
|
6.68
|
|
|
|
|
|
|
$
|
2,980
|
|
Forfeited or expired
|
(61
|
)
|
|
$
|
8.20
|
|
|
|
|
|
|
|
Outstanding as of October 31, 2015
|
6,691
|
|
|
$
|
7.47
|
|
|
|
|
4.37
|
|
$
|
20,252
|
|
Granted
|
1,395
|
|
|
$
|
9.30
|
|
|
$
|
0.88
|
|
|
|
|
|
Exercised
|
(371
|
)
|
|
$
|
6.05
|
|
|
|
|
|
|
$
|
1,258
|
|
Forfeited or expired
|
(47
|
)
|
|
$
|
8.88
|
|
|
|
|
|
|
|
Outstanding as of October 29, 2016
|
7,668
|
|
|
$
|
7.86
|
|
|
|
|
4.30
|
|
$
|
10,372
|
|
Vested and expected to vest as of October 29, 2016
|
7,486
|
|
|
$
|
7.82
|
|
|
|
|
4.26
|
|
$
|
10,353
|
|
Exercisable and vested as of October 29, 2016
|
5,377
|
|
|
$
|
7.25
|
|
|
|
|
3.62
|
|
$
|
9,643
|
|
Restricted Stock Units, Including Restricted Stock Units with Market Conditions
Prior to the initial declaration of a quarterly cash dividend on May 22, 2014, the fair value of time-based RSUs was measured based on the grant-date share price because Brocade did not historically pay cash dividends on its common stock. For awards granted on or subsequent to May 22, 2014, the fair value of time-based RSUs is measured based on the grant-date share price, less the present value of expected dividends during the vesting period, discounted at a risk-free interest rate. The fair value of MSUs is estimated using a lattice model that incorporates a Monte Carlo simulation. A summary of the changes in nonvested RSUs, including MSUs, under Brocade’s equity compensation plans during the fiscal years ended
October 29, 2016
,
October 31, 2015
, and
November 1, 2014
, respectively, is presented as follows:
|
|
|
|
|
|
|
|
|
Shares
(In thousands)
|
|
Weighted-Average
Grant Date Fair Value
|
Nonvested as of October 26, 2013
|
22,761
|
|
|
$
|
3.85
|
|
Granted
|
11,582
|
|
|
$
|
9.69
|
|
Vested
|
(11,750
|
)
|
|
$
|
5.59
|
|
Forfeited
|
(3,594
|
)
|
|
$
|
6.01
|
|
Nonvested as of November 1, 2014
|
18,999
|
|
|
$
|
5.93
|
|
Granted
|
10,777
|
|
|
$
|
11.46
|
|
Vested
|
(8,317
|
)
|
|
$
|
7.81
|
|
Forfeited
|
(2,260
|
)
|
|
$
|
8.69
|
|
Nonvested as of October 31, 2015
|
19,199
|
|
|
$
|
9.82
|
|
Granted
|
19,143
|
|
|
$
|
7.92
|
|
Vested
|
(9,570
|
)
|
|
$
|
8.96
|
|
Forfeited
|
(3,755
|
)
|
|
$
|
9.84
|
|
Nonvested as of October 29, 2016
|
25,017
|
|
|
$
|
9.07
|
|
Vested and expected to vest as of October 29, 2016
|
21,093
|
|
|
$
|
9.10
|
|
A summary of the changes in nonvested MSUs included in the above summary of changes in nonvested RSUs under Brocade’s equity compensation plans during the fiscal year ended
October 29, 2016
, is presented as follows:
|
|
|
|
|
|
|
|
|
Shares
(In thousands)
|
|
Weighted-Average
Grant Date Fair Value
|
Nonvested as of October 31, 2015
|
1,936
|
|
|
$
|
9.65
|
|
Granted
|
1,090
|
|
|
$
|
6.18
|
|
Vested
|
(560
|
)
|
|
$
|
8.93
|
|
Forfeited
|
(1,487
|
)
|
|
$
|
10.55
|
|
Nonvested as of October 29, 2016
|
979
|
|
|
$
|
8.94
|
|
Vested and expected to vest as of October 29, 2016
|
784
|
|
|
$
|
9.05
|
|
Typically, vesting of RSUs occurs over
one
to
four years
and is subject to the employee’s continuing service to Brocade.
The aggregate intrinsic value of nonvested RSUs at
October 29, 2016
,
October 31, 2015
, and
November 1, 2014
, was
$217.4 million
,
$200.1 million
, and
$203.9 million
, respectively.
Employee Stock Purchase Plan
Under the 2009 ESPP, eligible employees can participate and purchase shares semiannually at a discount of up to
15%
of the lesser of the fair market value of the Company’s common stock on (i) the first trading day of the offering period, or (ii) the last day of each six-month purchase period. The 2009 ESPP permits eligible employees to purchase common stock through payroll deductions for up to
15%
of qualified compensation. The Company accounts for the 2009 ESPP as a compensatory plan and compensation expense is being amortized under a graded vesting method over the
24
-month offering period. In addition, the Company accounts for changes in percentage contribution elected by employees, as well as decreases in the Company’s common stock price on the last day of each
six
-month purchase period as compared to the common stock price on the first trading day of the offering period, by applying modification accounting which results in an increase in compensation expense during the period of modification.
The fair value of the option component of the 2009 ESPP shares was estimated using the Black-Scholes option pricing model and the weighted-average assumptions noted in the following table:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2016
|
|
October 31,
2015
|
|
November 1,
2014
|
Expected dividend yield
|
2.3
|
%
|
|
1.4
|
%
|
|
1.4
|
%
|
Risk-free interest rate
|
0.7
|
%
|
|
0.3
|
%
|
|
0.2
|
%
|
Expected volatility
|
35.7
|
%
|
|
27.3
|
%
|
|
30.1
|
%
|
Expected term (in years)
|
1.4
|
|
|
1.2
|
|
|
1.3
|
|
13
.
Stockholders’ Equity
Dividends
During the fiscal year ended
October 29, 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
|
August 24, 2016
|
|
$
|
0.055
|
|
|
September 9, 2016
|
|
$
|
22,054
|
|
|
October 3, 2016
|
Future dividends are subject to review and approval on a quarterly basis by the Company’s Board of Directors or a committee thereof, and are limited under the terms of the Merger Agreement (as defined in Note
17
, “
Subsequent Events
,” of the Notes to Consolidated Financial Statements).
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 Consolidated Financial Statements for further discussion.
Accumulated Other Comprehensive Loss
The components of other comprehensive loss and related tax effects for the fiscal years ended
October 29, 2016
, and
October 31, 2015
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29, 2016
|
|
October 31, 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
|
$
|
(2,046
|
)
|
|
$
|
93
|
|
|
$
|
(1,953
|
)
|
|
$
|
(3,570
|
)
|
|
$
|
183
|
|
|
$
|
(3,387
|
)
|
Net gains and losses reclassified into earnings, foreign exchange contracts
(1)
|
2,791
|
|
|
(170
|
)
|
|
2,621
|
|
|
4,250
|
|
|
(495
|
)
|
|
3,755
|
|
Net unrealized gains (losses) on cash flow hedges
|
745
|
|
|
(77
|
)
|
|
668
|
|
|
680
|
|
|
(312
|
)
|
|
368
|
|
Foreign currency translation adjustments
|
(3,079
|
)
|
|
—
|
|
|
(3,079
|
)
|
|
(6,556
|
)
|
|
—
|
|
|
(6,556
|
)
|
Total other comprehensive loss
|
$
|
(2,334
|
)
|
|
$
|
(77
|
)
|
|
$
|
(2,411
|
)
|
|
$
|
(5,876
|
)
|
|
$
|
(312
|
)
|
|
$
|
(6,188
|
)
|
|
|
(1)
|
For Consolidated Statements of Income classification of amounts reclassified from accumulated other comprehensive loss, see Note
10
, “
Derivative Instruments and Hedging Activities
,” of the Notes to Consolidated Financial Statements.
|
The changes in accumulated other comprehensive loss by component, net of tax, for the fiscal years ended
October 29, 2016
, and
October 31, 2015
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29, 2016
|
|
October 31, 2015
|
|
Gains (Losses) on Cash Flow Hedges
|
|
Foreign Currency Translation Adjustments
|
|
Total Accumulated Other Comprehensive Loss
|
|
Gains (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
|
(1,953
|
)
|
|
(3,079
|
)
|
|
(5,032
|
)
|
|
(3,387
|
)
|
|
(6,556
|
)
|
|
(9,943
|
)
|
Net gains and losses reclassified into earnings
|
2,621
|
|
|
—
|
|
|
2,621
|
|
|
3,755
|
|
|
—
|
|
|
3,755
|
|
Net current-period other comprehensive income (loss)
|
668
|
|
|
(3,079
|
)
|
|
(2,411
|
)
|
|
368
|
|
|
(6,556
|
)
|
|
(6,188
|
)
|
Ending balance
|
$
|
(871
|
)
|
|
$
|
(26,542
|
)
|
|
$
|
(27,413
|
)
|
|
$
|
(1,539
|
)
|
|
$
|
(23,463
|
)
|
|
$
|
(25,002
|
)
|
14
.
Income Taxes
The domestic and international components of income before income tax and noncontrolling interest for the fiscal years ended
October 29, 2016
,
October 31, 2015
, and
November 1, 2014
, are presented as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2016
|
|
October 31,
2015
|
|
November 1,
2014
|
United States
|
$
|
51,383
|
|
|
$
|
250,788
|
|
|
$
|
192,730
|
|
International
|
210,655
|
|
|
188,263
|
|
|
160,891
|
|
Total
|
$
|
262,038
|
|
|
$
|
439,051
|
|
|
$
|
353,621
|
|
The income tax expense (benefit) for the fiscal years ended
October 29, 2016
,
October 31, 2015
, and
November 1, 2014
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2016
|
|
October 31,
2015
|
|
November 1,
2014
|
U.S. federal taxes:
|
|
|
|
|
|
Current
|
$
|
50,317
|
|
|
$
|
64,042
|
|
|
$
|
61,666
|
|
Deferred
|
(18,976
|
)
|
|
14,775
|
|
|
33,065
|
|
Total U.S. federal taxes
|
31,341
|
|
|
78,817
|
|
|
94,731
|
|
State taxes:
|
|
|
|
|
|
Current
|
10,501
|
|
|
9,790
|
|
|
16,597
|
|
Deferred
|
(1,743
|
)
|
|
761
|
|
|
(2,599
|
)
|
Total state taxes
|
8,758
|
|
|
10,551
|
|
|
13,998
|
|
Non-U.S. taxes:
|
|
|
|
|
|
Current
|
8,207
|
|
|
9,713
|
|
|
6,655
|
|
Deferred
|
(195
|
)
|
|
(392
|
)
|
|
266
|
|
Total non-U.S. taxes
|
8,012
|
|
|
9,321
|
|
|
6,921
|
|
Total
|
$
|
48,111
|
|
|
$
|
98,689
|
|
|
$
|
115,650
|
|
The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate for fiscal years ended
October 29, 2016
,
October 31, 2015
, and
November 1, 2014
, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2016
|
|
October 31,
2015
|
|
November 1,
2014
|
U.S. federal statutory tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State taxes, net of federal tax benefit
|
(2.3
|
)
|
|
0.2
|
|
|
3.1
|
|
Foreign income taxed at other than U.S. rates
|
(24.9
|
)
|
|
(14.5
|
)
|
|
(16.9
|
)
|
Stock-based compensation expense
|
5.2
|
|
|
1.9
|
|
|
2.3
|
|
Research and development credit
|
(1.8
|
)
|
|
(0.9
|
)
|
|
(3.1
|
)
|
Permanent items
|
0.3
|
|
|
0.3
|
|
|
0.3
|
|
Change in liabilities for uncertain tax positions
|
3.2
|
|
|
0.5
|
|
|
0.5
|
|
Goodwill impairment charge
|
—
|
|
|
—
|
|
|
8.3
|
|
Audit settlement and reinstated tax credit
|
—
|
|
|
—
|
|
|
0.1
|
|
Change in valuation allowance
|
2.5
|
|
|
1.3
|
|
|
1.6
|
|
Other
|
1.2
|
|
|
(1.3
|
)
|
|
1.5
|
|
Effective tax rate
|
18.4
|
%
|
|
22.5
|
%
|
|
32.7
|
%
|
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, non-U.S. operations being taxed at rates lower than the U.S. federal statutory rate, non-deductible stock-based compensation expense, tax credits, and adjustments to unrecognized tax benefits. The non-U.S. operations primarily relate to Brocade’s European, Asia Pacific, and Japanese subsidiaries.
The effective tax rate in fiscal year 2016 was lower than the U.S. federal statutory tax rate of
35%
primarily due to the effects of earnings in foreign jurisdictions being taxed at rates lower than the U.S. federal statutory tax rate, a benefit from the qualified domestic manufacturing deduction, a benefit from the tax reserves released related to an audit settlement with the Internal Revenue Service, and a benefit from the federal research and development tax credit that was reinstated on December 18, 2015, and made retroactive for calendar year 2015.
The effective tax rate in fiscal year 2015 was lower than the U.S. federal statutory tax rate of
35%
primarily due to the effects of earnings in foreign jurisdictions being taxed at rates lower than the U.S. federal statutory tax rate, a benefit from the qualified domestic manufacturing deduction, and a benefit from the federal research and development tax credit that was reinstated on December 19, 2014, and made retroactive for calendar year 2014.
The effective tax rate for fiscal year 2016 is lower compared with fiscal years 2015 and 2014 primarily due to the effects of the relatively greater fiscal year 2016 earnings in foreign jurisdictions being taxed at rates lower than the U.S. federal statutory tax rate, a benefit from the tax reserves released related to an audit settlement with the Internal Revenue Service, and a benefit from the federal research and development tax credit that was reinstated on December 18, 2015, permanently, and made retroactive for calendar year 2015.
The Company’s effective tax rate for fiscal year 2015 is lower compared with fiscal year 2014 primarily due to the goodwill impairment charge recorded in fiscal year 2014, which is nondeductible for tax purposes.
As of
October 29, 2016
, U.S. federal income taxes and foreign withholding taxes were not provided for on an estimated cumulative total of
$1,048.9 million
of undistributed earnings of the Company’s foreign subsidiaries. The Company intends to reinvest current and accumulated earnings of its foreign subsidiaries for expansion of its business operations outside the United States for an indefinite period of time. The Company’s existing cash and cash equivalents totaled
$1,257.1 million
as of
October 29, 2016
. Of this amount, approximately
85%
was held by its foreign subsidiaries. If these earnings were distributed to the United States in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, the Company could be subject to additional U.S. income taxes, net of foreign tax credits, and foreign withholding taxes. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.
The components of deferred tax assets and deferred tax liabilities for the fiscal years ended
October 29, 2016
, and
October 31, 2015
, are presented as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
October 29,
2016
|
|
October 31,
2015
|
Net operating loss carryforwards
|
$
|
9,018
|
|
|
$
|
7,871
|
|
Stock-based compensation expense
|
27,822
|
|
|
19,868
|
|
Tax credit carryforwards
|
104,382
|
|
|
87,830
|
|
Reserves and accruals
|
98,561
|
|
|
110,796
|
|
Other
|
47
|
|
|
140
|
|
Gross deferred tax assets
|
239,830
|
|
|
226,505
|
|
Valuation allowance
|
(106,217
|
)
|
|
(88,581
|
)
|
Total deferred tax assets
|
133,613
|
|
|
137,924
|
|
Acquired intangibles and goodwill
|
(90,374
|
)
|
|
(18,155
|
)
|
Fixed assets
|
(26,479
|
)
|
|
(28,370
|
)
|
Other
|
(4,024
|
)
|
|
(35,935
|
)
|
Total deferred tax liabilities
|
(120,877
|
)
|
|
(82,460
|
)
|
Total net deferred tax assets
|
$
|
12,736
|
|
|
$
|
55,464
|
|
As of
October 29, 2016
, the Company believes that sufficient positive evidence exists from historical operations and projections of taxable income in future years to conclude that it is more likely than not that the Company will realize its deferred tax assets except for California deferred tax assets and capital loss carryforwards. Accordingly, the Company applies a valuation allowance to the California deferred tax assets due to the change in California law that occurred in November 2012, and to capital loss carryforwards due to the limited carryforward periods of these tax assets.
As of
October 29, 2016
, the Company had federal net operating loss carryforwards of
$89.5 million
, California state net operating loss carryforwards of
$77.5 million
and other significant state net operating loss carryforwards of approximately
$132.4 million
. Additionally, the Company had federal tax credit carryforwards of
$143.3 million
and state tax credit carryforwards of
$218.0 million
. The federal net operating loss and tax credit carryforwards expire on
various dates between fiscal year 2018 through 2036
. The state net operating loss and credit carryforwards expire on
various dates between fiscal year 2017 through 2035
. The federal net operating loss carryforwards and federal tax credit carryforwards include excess tax deductions related to stock-based compensation. Under the current tax law, net operating loss and credit carryforwards available to offset future income in any given year may be limited by statute or upon the occurrence of certain events, including significant changes in ownership interests. As a result of the McDATA, Foundry, Ruckus, and other acquisitions, all of the tax attributes from these companies are subject to an annual limitation. The Company expects some of these tax attributes to expire due to the annual limitation.
The Company applies a recognition threshold and measurement attribute for the financial statement recognition and measurement of an income tax position taken or expected to be taken on a tax return. Recognition of a tax position is determined when it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation process. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than
50%
likely of being realized upon ultimate settlement with a taxing authority.
A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits, excluding accrued net interest and penalties, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
October 29,
2016
|
|
October 31,
2015
|
Unrecognized tax benefits, beginning balance
|
$
|
117,569
|
|
|
$
|
119,615
|
|
Gross increases for tax positions taken in prior periods
|
15,874
|
|
|
705
|
|
Gross decreases for tax positions taken in prior periods
|
(7,734
|
)
|
|
(6,843
|
)
|
Increase from business combinations
|
52,665
|
|
|
—
|
|
Gross increases for tax positions taken in current period
|
35,350
|
|
|
8,418
|
|
Changes due to settlements with taxing authorities
|
(10,294
|
)
|
|
—
|
|
Reductions resulting from lapses of statutes of limitations
|
(3,474
|
)
|
|
(4,326
|
)
|
Unrecognized tax benefits, ending balance
|
$
|
199,956
|
|
|
$
|
117,569
|
|
As of
October 29, 2016
, the Company had net unrecognized tax benefits of
$151.8 million
, which if recognized, would result in a reduction of the Company’s effective tax rate.
The Internal Revenue Service (“IRS”) and other tax authorities regularly examine the Company’s income tax returns. In August 2016, the Company reached a settlement agreement with the IRS related to its examination of its federal income tax returns for fiscal years 2009 and 2010. In addition, 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 income tax examinations, as well as the amounts and timing of related settlements, if any, are highly uncertain. Before the end of fiscal year 2017, it is reasonably possible that either certain audits will conclude, or the statutes of limitations relating to certain income tax examination periods will expire, or both. After the Company reaches a 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 unrecognized tax benefits, the Company estimates the range of potential decreases in underlying uncertainty in income tax is between
$0
and
$9.0 million
in the next 12 months.
The Company classifies interest and penalties related to unrecognized tax benefits as a component of income tax expense. During the fiscal year ended
October 29, 2016
, the Company recognized
$0.4 million
of interest and penalties related to unrecognized tax benefits. There were no material interest or penalties during the fiscal year ended
October 31, 2015
. The total net accrued interest and penalties included in the Company’s liability related to unrecognized tax benefits as of
October 29, 2016
, and
October 31, 2015
, was
$2.9 million
and
$2.5 million
, respectively.
Of the total tax benefits (detriments) resulting from the exercise of employee stock options and employee participation in the Company’s equity compensation plans, the amounts recorded to stockholders’ equity were approximately
$4.2 million
in fiscal year
2016
,
$48.0 million
in fiscal year
2015
, and
$59.9 million
in fiscal year
2014
.
15
.
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.
The types of products and services from which each reportable segment derives its revenues are as follows:
|
|
•
|
SAN Products include infrastructure products and solutions that help customers develop and deploy storage and server consolidation, disaster recovery, and data security, as well as meet compliance requirements regarding data management. These products are used to build storage area networks and are generally used in conjunction with servers and storage subsystems, SAN interconnection components, and server and storage management software applications and tools. Brocade’s family of Fibre Channel (“FC”) SAN backbones, directors, and fabric/embedded switches provide interconnection, bandwidth, and high-speed switching between servers and storage devices. Switches and directors support key applications such as data backup, remote mirroring, and high-availability clustering, as well as high-volume transaction processing applications such as enterprise resource planning and data warehousing. Additionally, Brocade offers a variety of FC fabric extension, analytics, switching, and routing solutions;
|
|
|
•
|
IP Networking Products include Layer 2 and Layer 3 Ethernet switches and routers that are designed to connect users over private and public networks, including local area, metro, and within and across global data centers. Brocade also offers converged network products, and a portfolio of related software and hardware-based data networking offerings. Additionally, the Company offers Layer 4-7 products that are designed for application traffic management and server load balancing. With the acquisition of Ruckus, Brocade also offers a comprehensive range of wireless products for the network edge; and
|
|
|
•
|
Global Services include break/fix maintenance, installation, consulting, network management and software maintenance, and post-contract customer support revenue.
|
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
October 29, 2016
, and
October 31, 2015
, were attributable to its U.S. operations.
Summarized financial information by reportable segment for the fiscal years ended
October 29, 2016
,
October 31, 2015
, and
November 1, 2014
, based on the internal management reporting system, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SAN Products
|
|
IP Networking
Products
|
|
Global Services
|
|
Total
|
Fiscal year ended October 29, 2016
|
|
|
|
|
|
|
|
Net revenues
|
$
|
1,229,184
|
|
|
$
|
730,412
|
|
|
$
|
386,014
|
|
|
$
|
2,345,610
|
|
Cost of revenues
|
295,100
|
|
|
362,061
|
|
|
172,110
|
|
|
829,271
|
|
Gross margin
|
$
|
934,084
|
|
|
$
|
368,351
|
|
|
$
|
213,904
|
|
|
$
|
1,516,339
|
|
Fiscal year ended October 31, 2015
|
|
|
|
|
|
|
|
Net revenues
|
$
|
1,301,231
|
|
|
$
|
601,170
|
|
|
$
|
361,059
|
|
|
$
|
2,263,460
|
|
Cost of revenues
|
311,881
|
|
|
275,634
|
|
|
147,872
|
|
|
735,387
|
|
Gross margin
|
$
|
989,350
|
|
|
$
|
325,536
|
|
|
$
|
213,187
|
|
|
$
|
1,528,073
|
|
Fiscal year ended November 1, 2014
|
|
|
|
|
|
|
|
Net revenues
|
$
|
1,326,950
|
|
|
$
|
525,237
|
|
|
$
|
359,080
|
|
|
$
|
2,211,267
|
|
Cost of revenues
|
344,466
|
|
|
247,975
|
|
|
153,033
|
|
|
745,474
|
|
Gross margin
|
$
|
982,484
|
|
|
$
|
277,262
|
|
|
$
|
206,047
|
|
|
$
|
1,465,793
|
|
Revenues are attributed to geographic areas based on where the Company’s products are shipped. Geographic revenue and property and equipment information for the fiscal years ended
October 29, 2016
,
October 31, 2015
, and
November 1, 2014
is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2016
|
|
October 31,
2015
|
|
November 1,
2014
|
Net revenues:
|
|
|
|
|
|
United States
|
$
|
1,202,792
|
|
|
$
|
1,275,056
|
|
|
$
|
1,286,650
|
|
International
|
|
|
|
|
|
Europe, the Middle East and Africa
(1)
|
676,685
|
|
|
610,133
|
|
|
598,196
|
|
Asia Pacific
|
318,758
|
|
|
229,903
|
|
|
183,035
|
|
Japan
|
100,034
|
|
|
93,470
|
|
|
91,062
|
|
Canada, Central and South America
|
47,341
|
|
|
54,898
|
|
|
52,324
|
|
Total international net revenues
|
1,142,818
|
|
|
988,404
|
|
|
924,617
|
|
Total net revenues
|
$
|
2,345,610
|
|
|
$
|
2,263,460
|
|
|
$
|
2,211,267
|
|
|
|
(1)
|
Includes net revenues of
$336.1 million
,
$400.0 million
, and
$385.2 million
for the fiscal years ended
October 29, 2016
,
October 31, 2015
, and
November 1, 2014
, respectively, relating to the Netherlands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29,
2016
|
|
October 31,
2015
|
|
November 1,
2014
|
Property and equipment, net:
|
|
|
|
|
|
United States
|
$
|
418,804
|
|
|
$
|
409,404
|
|
|
$
|
426,941
|
|
International
|
36,522
|
|
|
29,820
|
|
|
18,492
|
|
Property and equipment, net
|
$
|
455,326
|
|
|
$
|
439,224
|
|
|
$
|
445,433
|
|
16
.
Net Income per Share
The following table presents the calculation of basic and diluted net income per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2016
|
|
October 31,
2015
|
|
November 1,
2014
|
Basic net income per share
|
|
|
|
|
|
Net income attributable to Brocade
|
$
|
213,815
|
|
|
$
|
340,362
|
|
|
$
|
237,971
|
|
Weighted-average shares used in computing basic net income per share
|
409,058
|
|
|
420,331
|
|
|
435,258
|
|
Basic net income per share
|
$
|
0.52
|
|
|
$
|
0.81
|
|
|
$
|
0.55
|
|
Diluted net income per share
|
|
|
|
|
|
Net income attributable to Brocade
|
$
|
213,815
|
|
|
$
|
340,362
|
|
|
$
|
237,971
|
|
Weighted-average shares used in computing basic net income per share
|
409,058
|
|
|
420,331
|
|
|
435,258
|
|
Dilutive potential common shares in the form of stock options
|
1,329
|
|
|
1,722
|
|
|
1,995
|
|
Dilutive potential common shares in the form of other share-based awards
|
6,706
|
|
|
8,503
|
|
|
9,606
|
|
Weighted-average shares used in computing diluted net income per share
|
417,093
|
|
|
430,556
|
|
|
446,859
|
|
Diluted net income per share
|
$
|
0.51
|
|
|
$
|
0.79
|
|
|
$
|
0.53
|
|
Antidilutive potential common shares in the form of:
(1)
|
|
|
|
|
|
Warrants issued in conjunction with the 2020 Convertible Notes
(2)
|
36,288
|
|
|
28,880
|
|
|
—
|
|
Stock options
|
2,149
|
|
|
977
|
|
|
1,725
|
|
Other share-based awards
|
1,600
|
|
|
142
|
|
|
893
|
|
|
|
(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
$15.80
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
$20.48
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.
|
17
.
Subsequent Events
On November 2, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Broadcom Limited, a limited liability company organized under the laws of the Republic of Singapore (“Ultimate Parent”), Broadcom Corporation, a California corporation and an indirect subsidiary of Ultimate Parent (“Parent”), and Bobcat Merger Sub, Inc., a Delaware corporation and a direct wholly owned subsidiary of Parent (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving as a wholly owned subsidiary of Parent.
At the effective time of the Merger, each share of the Company’s common stock that is outstanding immediately prior to such time will be cancelled and converted into the right to receive
$12.75
per share in cash, without interest, less any required tax withholding.
In general, at the effective time of the Merger: (i) Ultimate Parent will assume and convert all vested Brocade stock options that are not in-the-money and all unvested Brocade stock options, restricted stock units and performance stock units, in each case held by continuing employees and service providers; (ii) all vested in-the-money Brocade stock options, after giving effect to any acceleration, will be cashed out; (iii) all other Brocade restricted stock units and performance stock units will accelerate vesting and be cashed out; and (iv) all other Brocade stock options not assumed or cashed out will be cancelled in exchange for no consideration.
Consummation of the Merger is subject to certain customary closing conditions, including, without limitation, the absence of certain legal impediments, the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), antitrust regulatory approval in the People’s Republic of China, the European Union and Japan, review and clearance by the Committee on Foreign Investment in the United States, and approval by the Company’s stockholders. The transaction is not subject to a financing condition. On November 30, 2016, the Company submitted its notification and report form with the U.S. Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice under the HSR Act. Assuming timely satisfaction of these closing conditions, Brocade expects that the Merger will be completed in the second half of its fiscal year 2017.
The Merger Agreement contains certain customary termination rights for the Company and Parent. Upon termination of the Merger Agreement under specified circumstances, including, but not limited to, if the Company accepts a superior acquisition proposal or the Company’s Board of Directors changes or withdraws its recommendation of the Merger, the Company will be required to pay Parent a termination fee of
$195 million
.
Broadcom Acquisition-Related Litigation
On December 12, 2016, a purported stockholder of the Company commenced a putative class-action lawsuit captioned Steinberg v. Brocade Communications Systems, Inc., et al., against the Company, its directors, Ultimate Parent, Parent and Merger Sub in the United States District Court for the Northern District of California. The complaint alleges violations of Sections 14(a) and 20(a) of the Exchange Act and SEC Rule 14a-9 arising out of the Company’s preliminary proxy statement filed with the SEC on December 6, 2016 (the “preliminary proxy statement”) relating to the Merger. Specifically, the complaint asserts that the preliminary proxy statement omitted material information regarding the Company’s financial projections and an analysis performed by Evercore Group L.L.C. (“Evercore”), the Company’s financial advisor in connection with the Merger. The plaintiff seeks to enjoin defendants from consummating the Merger, or, if the Merger is consummated, the plaintiff alternatively seeks rescission and damages. The plaintiff also seeks costs and fees.
On December 15, 2016, another purported stockholder of the Company commenced a putative class action lawsuit captioned Gross v. Brocade Communications Systems, Inc., et al., against the Company and its directors in the United States District Court for the Northern District of California. The complaint alleges violations of Sections 14(a) and 20(a) of the Exchange Act and various SEC rules including Rule 14a-9 arising out of the preliminary proxy statement. Specifically, the complaint asserts that the preliminary proxy statement omitted material information regarding the background of the Merger, the Company’s financial projections, the valuation analyses performed by Evercore, and alleged conflicts of interest faced by Evercore. The plaintiff seeks to enjoin defendants from consummating the Merger and to enjoin the stockholder vote concerning the Merger, or, if the Merger is consummated, the plaintiff alternatively seeks damages. The plaintiff also seeks costs and fees.
BROCADE COMMUNICATIONS SYSTEMS, INC.
Selected Quarterly Financial Data
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
October 29, 2016
|
|
July 30, 2016
|
|
April 30, 2016
|
|
January 30, 2016
|
|
October 31, 2015
|
|
August 1, 2015
|
|
May 2, 2015
|
|
January 31, 2015
|
|
(In thousands, except per share and stock price amounts)
|
Quarterly Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
657,299
|
|
|
$
|
590,721
|
|
|
$
|
523,306
|
|
|
$
|
574,284
|
|
|
$
|
588,827
|
|
|
$
|
551,819
|
|
|
$
|
546,575
|
|
|
$
|
576,239
|
|
Gross margin
|
$
|
420,314
|
|
|
$
|
356,899
|
|
|
$
|
350,311
|
|
|
$
|
388,815
|
|
|
$
|
394,277
|
|
|
$
|
371,904
|
|
|
$
|
372,209
|
|
|
$
|
389,683
|
|
Income from operations
(1)
|
$
|
82,868
|
|
|
$
|
20,594
|
|
|
$
|
82,665
|
|
|
$
|
120,966
|
|
|
$
|
119,221
|
|
|
$
|
119,849
|
|
|
$
|
114,205
|
|
|
$
|
139,405
|
|
Net income
|
$
|
66,701
|
|
|
$
|
10,495
|
|
|
$
|
43,085
|
|
|
$
|
93,646
|
|
|
$
|
84,388
|
|
|
$
|
91,667
|
|
|
$
|
77,040
|
|
|
$
|
87,267
|
|
Per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.17
|
|
|
$
|
0.02
|
|
|
$
|
0.11
|
|
|
$
|
0.23
|
|
|
$
|
0.20
|
|
|
$
|
0.22
|
|
|
$
|
0.18
|
|
|
$
|
0.20
|
|
Diluted
|
$
|
0.16
|
|
|
$
|
0.02
|
|
|
$
|
0.11
|
|
|
$
|
0.23
|
|
|
$
|
0.20
|
|
|
$
|
0.21
|
|
|
$
|
0.18
|
|
|
$
|
0.20
|
|
Shares used in computing
per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
401,103
|
|
|
426,671
|
|
|
400,554
|
|
|
407,902
|
|
|
414,769
|
|
|
417,299
|
|
|
420,718
|
|
|
428,536
|
|
Diluted
|
410,123
|
|
|
434,416
|
|
|
408,748
|
|
|
415,085
|
|
|
422,315
|
|
|
427,518
|
|
|
433,234
|
|
|
439,156
|
|
Common stock sale prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
$
|
10.49
|
|
|
$
|
9.84
|
|
|
$
|
10.70
|
|
|
$
|
10.92
|
|
|
$
|
11.28
|
|
|
$
|
12.88
|
|
|
$
|
12.96
|
|
|
$
|
12.43
|
|
Low
|
$
|
8.64
|
|
|
$
|
7.60
|
|
|
$
|
7.58
|
|
|
$
|
7.40
|
|
|
$
|
9.72
|
|
|
$
|
9.67
|
|
|
$
|
10.85
|
|
|
$
|
10.66
|
|
|
|
(1)
|
Beginning in the fourth quarter of the fiscal year ended October 29, 2016, revenue from sales to distributor customers is recognized upon shipment to the distributor (sell-in) and is reduced by allowances for rebates, sales program incentives, and stock rotations, which are all estimated by a process using both historical experience and expectations of future outcomes based on facts and circumstances available contemporaneously at the date of estimation. See Note
2
, “
Summary of Significant Accounting Policies
,” of the Notes to Consolidated Financial Statements.
|