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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 30, 2014
Commission File No. 0-23298
QLogic Corporation
(Exact name of registrant as specified in its charter)
| Delaware | 33-0537669 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) | |
| 26650 Aliso Viejo Parkway | ||
| Aliso Viejo, California | 92656 | |
| (Address of principal executive offices) | (Zip Code) | |
(949) 389-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class |
Name of Each Exchange on Which Registered | |
| Common Stock, $0.001 Par Value | The NASDAQ Stock Market LLC | |
| (NASDAQ Global Select Market) |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer þ |
Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ | |||
| (Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The aggregate market value of the voting stock held by non-affiliates of the Registrant on September 27, 2013 was $955,102,000 (based on the closing price for shares of the Registrant’s common stock as reported by the NASDAQ Global Select Market on such date).
As of May 14, 2014, 87,201,000 shares of the Registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement relating to the Registrant’s 2014 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K where indicated.
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QLOGIC CORPORATION
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| Item 1. | Business |
Introduction
QLogic Corporation was organized as a Delaware corporation in 1992. Our principal executive offices are located at 26650 Aliso Viejo Parkway, Aliso Viejo, California 92656, and our telephone number at that location is (949) 389-6000. Our website address is www.qlogic.com. The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendment to these reports, that we file with or furnish to the Securities and Exchange Commission (SEC) are available free of charge on our website as soon as reasonably practicable after those reports are filed with the SEC.
On February 29, 2012, we completed the sale of our InfiniBand business. As a result of this divestiture, our results of operations for this divested business are presented as discontinued operations for all periods included in this report.
On January 17, 2014, we completed the acquisition from Brocade Communications Systems, Inc. of its Fibre Channel and converged network adapter business. On March 13, 2014, we completed the acquisition from Broadcom Corporation of its 10/40/100Gb Ethernet controller-related assets.
Unless the context indicates otherwise, “we,” “our,” “us,” “QLogic” and the “Company” each refer to QLogic Corporation and its subsidiaries.
All references to years refer to our fiscal years ended March 30, 2014, March 31, 2013 and April 1, 2012, as applicable, unless calendar years are specified.
Our Networking Products
We design and supply high performance server and storage networking connectivity products that provide, enhance and manage computer data communication. These products facilitate the rapid transfer of data and enable efficient resource sharing between servers, networks and storage. Our products are used in enterprise data centers, cloud computing, Web 2.0 and other environments dependent on high performance, reliable data networking.
Our products are based primarily on Fibre Channel and Ethernet technologies and are used in connection with storage networks, local area networks, and converged networks. Storage networks are used to provide data across enterprise environments. Fibre Channel is currently the dominant technology for enterprise storage networking. Local area networks (LANs) are used to provide workstation-to-server, server-to-server, and server-to-storage connectivity using Ethernet. Converged networks are designed to address the evolving data center by consolidating and unifying various classes of connectivity and networks, such as storage area networks and LANs, using Ethernet speeds of 10Gb per second and greater. Fibre Channel over Ethernet (FCoE) is a converged networking technology that uses an Ethernet LAN for both storage and local area data transmission, thus combining the benefits of Fibre Channel technology with the pervasiveness of Ethernet-based networks. Similarly, Internet Small Computer System Interface (iSCSI) is an alternative to FCoE and provides storage over Ethernet capabilities. Our converged network products can operate individually as 10Gb Ethernet network products, FCoE products, iSCSI products, or in combination as multi-protocol products.
Our products are sold worldwide, primarily to original equipment manufacturers (OEMs) and distributors. Our customers rely on our various server and storage connectivity products to deliver solutions to information technology professionals in virtually every business sector. Our products are found primarily in server and storage subsystem solutions that are used by enterprises with critical business data requirements. The data center and business applications that drive requirements for our networking connectivity products include:
| • | General business information technology requirements; |
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| • | Cloud computing, Web 2.0, data warehousing, data mining and online transaction processing; |
| • | Media-rich environments such as film and video, broadcast, medical imaging, computer-aided design and computer-aided manufacturing; and |
| • | Server clustering, server and storage virtualization, disaster recovery, high-speed backup, data replication and data migration. |
Our products consist primarily of connectivity products such as adapters and application-specific integrated circuits (ASICs). Adapters reside in a server and provide for high performance connectivity of host computer servers to data and storage networks. The ASICs that we sell are used in servers, storage systems and switches. ASICs used in servers in certain embedded applications are typically referred to as converged LAN on Motherboard (cLOMs).
We provide Fibre Channel, iSCSI, FCoE and 10Gb Ethernet standard adapters and ASICs for rack and tower servers, as well as custom mezzanine adapters and ASICs for bladed servers. Our adapters and ASICs are also used in a variety of storage systems. All of these adapters and ASICs provide single or multi-protocol network connectivity. We also sell switches that manage the transmission and routing of data between servers and storage, as well as servers to servers. However, in connection with our June 2013 restructuring plan, we announced that we were ceasing development of future switch ASICs.
We classify our products into two categories – Advanced Connectivity Platforms and Legacy Connectivity Products. Advanced Connectivity Platforms are comprised primarily of adapters and ASICs for server and storage connectivity applications. Legacy Connectivity Products are comprised primarily of Fibre Channel switch products and 1Gb iSCSI products.
Advanced Connectivity Platforms accounted for 84%, 82% and 84% of our net revenues for fiscal 2014, 2013 and 2012, respectively. Legacy Connectivity Products accounted for 16%, 18% and 16% of our net revenues for fiscal 2014, 2013 and 2012, respectively. For a summary of our net revenues by product category, see Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in Part II, Item 7 of this report.
Customers
Our products are incorporated in solutions from a number of server and storage system OEM customers, including Cisco Systems, Inc., Dell Inc., EMC Corporation, Fujitsu Ltd., Hewlett-Packard Company, Huawei Technologies Co., Ltd., Inspur Worldwide Services Ltd., International Business Machines Corporation, Lenovo Group Ltd., NetApp, Inc., and Oracle Corporation. A small number of these customers account for a substantial portion of our net revenues, and we expect that a small number of customers will continue to represent a substantial portion of our net revenues for the foreseeable future. Our top ten customers accounted for 83%, 84% and 86% of net revenues during fiscal 2014, 2013 and 2012, respectively.
A summary of our customers, including their manufacturing subcontractors, that represent 10% or more of our net revenues is as follows:
| 2014 | 2013 | 2012 | ||||||||||
| Hewlett-Packard |
24 | % | 24 | % | 27 | % | ||||||
| IBM |
17 | % | 20 | % | 18 | % | ||||||
| Dell |
15 | % | 12 | % | 11 | % | ||||||
We believe that our relationships with our customers are good. However, we believe our major customers continually evaluate whether or not to purchase products from alternative or additional sources. Accordingly, there can be no assurance that a major customer will not reduce, delay or eliminate its purchases from us. Any
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such reduction, delay or loss of purchases could have a material adverse effect on our business, financial condition or results of operations.
Some of our OEM customers experience seasonality and uneven sales patterns in their businesses. As a result, we experience similar seasonality and uneven sales patterns. The seasonality is primarily due to the closing of a disproportionate percentage of sales transactions in the last month, weeks and days of each quarter and spikes in sales during the fourth quarter of each calendar year. Although we do not consider our business to be highly seasonal, we believe that seasonality has impacted and may impact our business. To the extent that we experience seasonality in our business, it would most likely have a negative impact on the sequential growth rate of our net revenues during the fourth quarter of our fiscal year.
International revenues accounted for 58%, 57% and 57% of our net revenues for fiscal 2014, 2013 and 2012, respectively. For additional information on our international sales and operations, see Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in Part II, Item 7 of this report. For a discussion of risks related to our foreign operations, see Risk Factors, included in Part I, Item 1A of this report.
Sales and Marketing
Our products are marketed and sold primarily to OEMs by our internal sales team supported by field sales and systems engineering personnel. In addition, we sell our products through a network of domestic and international distributors. We also sell our products to original design manufacturers (ODMs) both as an extension of our OEM design organizations and as direct sales transactions.
In domestic and in certain international markets, we maintain both a sales force to serve our OEM customers and distributors that are focused on medium-sized and emerging accounts. We maintain a focused business development and outbound marketing organization to assist, train and equip the sales organizations of our OEM customers and their respective reseller organizations and partners. We maintain sales offices in the United States and various international locations. For information regarding revenue by geographic area, see Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in Part II, Item 7 of this report.
We work with our server and storage system OEM customers during their design cycles. We provide these customers with pre-sales system design support and services, as well as training classes and seminars conducted both in the field and from our worldwide offices.
Our sales and marketing efforts are focused on establishing and developing long-term relationships with our OEM customers and distribution partners, as well as brand preference activities. The sales cycle for OEMs typically begins with the identification of a requirement that could be potentially fulfilled with an existing QLogic product or a product based on a new technology. The cycle continues with technical and sales collaboration with the OEM and, if successful, leads to one of our product designs being selected as a component in a customer’s server or storage system. We then work closely with the customer to integrate our products with the customer’s current and future generations of products or platforms. This cycle, from opportunity identification to initial production shipment, typically ranges from six to twenty-four months. Following initial production shipment, our sales efforts are focused on educating the OEM’s sales and marketing teams on the applications and benefits of our products to drive brand preference. The brand preference phase of the sales activities can last for the duration of the OEM program.
In addition to sales and marketing efforts, we actively participate with industry organizations relating to the development and acceptance of industry standards. We collaborate with peer companies through open standards bodies, cooperative testing and certifications. To ensure and promote multi-vendor heterogeneous operation, we maintain interoperability certification programs and testing laboratories.
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Engineering and Development
Our industry is subject to rapid, regular and sometimes unpredictable technological change. Our ability to compete depends upon our ability to continually design, develop and introduce new products that take advantage of market opportunities and address emerging standards. Our strategy is to leverage our substantial base of architectural, systems and engineering expertise to address a broad range of server and storage networking solutions.
We are engaged in the design and development of ASICs and adapters based on one or more of Fibre Channel, iSCSI, FCoE and Ethernet technologies.
We continue to invest in engineering and development to expand our capabilities to address the emerging technologies in the rapid evolution of storage, local area and converged networks. During fiscal 2014, 2013 and 2012, we incurred engineering and development expenses of $147.0 million, $156.1 million and $138.8 million, respectively.
Backlog
A substantial portion of our sales to OEM customers are transacted through hub arrangements whereby our products are purchased on a just-in-time basis and fulfilled from warehouse facilities, or hubs, in proximity to the facilities of our customers or their contract manufacturers. Our sales are made primarily pursuant to purchase orders, including blanket purchase orders for hub arrangements. Because the hub arrangements with our customers and industry practice allow customers to cancel or change orders with limited advance notice, we believe that backlog at any particular date is not a reliable indicator of our future revenue levels and is not material to understanding our business.
Competition
The markets for networking connectivity products are highly competitive and characterized by short product life cycles, price erosion, rapidly changing technology, frequent product performance improvements and evolving industry standards. We believe the principal competitive factors in our industry include:
| • | time-to-market; |
| • | features and functionality; |
| • | product quality, reliability and performance; |
| • | price; |
| • | product innovation; |
| • | customer relationships; |
| • | design capabilities; |
| • | customer service and technical support; and |
| • | interoperability of components in storage, local area and converged networks. |
Due to the diversity of products required in storage, local area and converged networking, we compete with many companies. In the traditional enterprise storage Fibre Channel adapter and ASIC markets, our primary competitor is Emulex Corporation. In the 10Gb Ethernet adapter and ASIC markets, which include converged networking products such as FCoE and iSCSI, we primarily compete with Emulex Corporation, Mellanox Technologies, Ltd., Chelsio Communications, Inc. and Intel Corporation. We may also compete with some of our server and storage systems customers, some of which have the capability to develop products comparable to those we offer.
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Manufacturing
We use ASIC industry suppliers to access foundries for the manufacture of ASICs, which we sell as standalone products or integrate into our adapter and switch products. This approach allows us to avoid the high costs of owning, operating, maintaining and upgrading wafer fabrication and assembly facilities. As a result, we focus our resources on product design and development, quality assurance, sales and marketing, and supply chain management. Prior to the sale of our adapter and switch products, final tests are performed to ensure quality. Product test, customer-specific configuration and product localization are completed by third-party service providers or by us. We also provide fabrication process reliability tests, as required, and conduct failure analysis to confirm the integrity of our quality assurance procedures.
Our semiconductors are currently manufactured by a number of foundries. Most of the ASICs used in our products are manufactured using 90, 65, 40 or 28 nanometer process technology. In addition, we continually evaluate smaller geometries. In the past, we have experienced some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, which resulted in reduced manufacturing yields, delays in product deliveries and increased expenses. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes.
We depend on our ASIC suppliers to work with their wafer foundries to allocate a portion of their capacity sufficient to meet our needs and to produce products of acceptable quality and with satisfactory manufacturing yields in a timely manner. These foundries fabricate products for other companies and, in certain cases, manufacture products of their own design. We do not have long-term supply agreements directly with any of these foundries; we purchase both wafers and finished chips from our ASIC suppliers on a discrete purchase order basis. Therefore, the foundries, through our ASIC suppliers, generally are not obligated to supply products to us for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order. We work with our existing ASIC suppliers, and may qualify new ASIC suppliers, as needed, to obtain additional manufacturing capacity. However, there can be no assurance that we will be able to maintain our current relationships or obtain additional capacity.
We currently purchase our semiconductor products through our ASIC suppliers either in finished or wafer form. We use subcontractors to assemble our semiconductor products purchased in wafer form. In the assembly process for our semiconductor products, the silicon wafers are separated into individual die, which are then assembled into packaged ASICs and tested by our ASIC suppliers, third party ASIC test partners or by us.
For our adapter, switch and other products, we use third-party contract manufacturers for material procurement, assembly, test and inspection in a turnkey model, prior to shipment to our customers. These contract manufacturers are primarily located outside the United States. To the extent that we rely on these contract manufacturers, we are not able to directly control product delivery schedules and quality assurance. The loss of one of our major contract manufacturers could significantly impact our ability to produce products for an indefinite period of time. Qualifying a new contract manufacturer and commencing volume production is a lengthy and expensive process. While we believe that our relationships with our contract manufacturers are good, if we are required to change a contract manufacturer or if a contract manufacturer experiences delays, disruptions, capacity constraints, component part shortages or quality control problems in its manufacturing operations, shipment of our products to our customers could be delayed, resulting in loss or postponement of revenue and potential harm to our competitive position and relationships with customers.
Certain key components used in the manufacture of our products are purchased from single or limited sources. ASICs are purchased from single sources. For example, in connection with our acquisition of 10/40/100Gb Ethernet controller-related assets, we entered into a development and supply agreement which requires us to purchase the ASICs used in the related products exclusively from Broadcom. Other key components such as microprocessors, logic chips, power supplies and programmable logic devices are purchased from limited sources. If one of these suppliers experiences an interruption in its ability to supply our needs, or chooses to sever its relationship with us, we may be unable to produce certain of our products until alternative suppliers are identified and qualified.
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Many of the component parts used in our adapter, switch and other products are standard off-the-shelf items, which are, or can be, obtained from more than one source. We select suppliers on the basis of technology, manufacturing capacity, financial viability, quality and cost. Our reliance on third-party manufacturers involves risks, including possible limitations on availability of products due to market abnormalities, geopolitical instability, natural disasters, labor shortages and labor strikes, unavailability of or delays in obtaining access to certain product technologies, and the absence of complete control over delivery schedules, manufacturing yields and total production costs. The inability of our suppliers to deliver products of acceptable quality and in a timely manner or our inability to procure adequate supplies of our products could have a material adverse effect on our business, financial condition or results of operations.
Intellectual Property
While we have a number of patents issued and additional patent applications pending in the United States, Canada, Europe and Asia, we rely primarily on our trade secrets, trademarks, copyrights and contractual provisions to protect our intellectual property. We attempt to protect our proprietary information through confidentiality agreements and contractual provisions with our customers, suppliers, employees and consultants, and through other security measures. However, the laws of certain countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products and intellectual property rights to the same extent as the laws of the United States, or at all.
Our ability to compete may be affected by our ability to protect our intellectual property. We protect our rights vigorously; however there can be no assurance that these measures will be successful. We may be required to assert claims of infringement of intellectual property rights against others. In the event of such a dispute, we may be required to expend significant resources and there can be no assurance that we would be successful. If the dispute led to litigation, it could result in significant expense to us, and divert the efforts of our technical and management personnel, whether or not such litigation is determined in our favor.
We have in the past received notices of claimed infringement of intellectual property rights and been involved in intellectual property litigation. There can be no assurance that third parties will not assert additional claims of infringement of intellectual property rights against us, or against customers or others whom we are contractually obligated to indemnify, with respect to existing and future products. In the event of a patent or other intellectual property dispute, we may be required to expend significant resources to defend such claims, develop non-infringing technology or to obtain licenses to the technology that is the subject of the claim. There can be no assurance that we would be successful in such development or that any such license would be available on commercially reasonable terms, if at all. In the event of litigation to determine the validity of any third party’s claims, such litigation could result in significant expense to us, and divert the efforts of our technical and management personnel, whether or not such litigation is determined in our favor.
Some of our products are designed to include software or other intellectual property licensed from third parties. None of these licenses relate to core QLogic-developed technology, are material to our business, or require payment of amounts that are material.
Environment
Our operations are subject to regulation under various federal, state, local and foreign laws concerning the environment, including laws addressing the discharge of pollutants into the environment, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, and third-party damage or personal injury claims, if we violate or become liable under environmental laws.
Most of our products are also subject to various laws governing chemical substances in products, including those regulating the manufacture and distribution of chemical substances and those restricting the presence of
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certain substances in electronic products. We could incur substantial costs, or our products could be restricted from entering certain countries, if our products become non-compliant with environmental laws. We also face increasing complexity in our product design and procurement operations as we adjust to new and future requirements relating to the materials composition of our products. For example, the European Union adopted the Waste Electrical and Electronic Equipment (WEEE) Directive, pursuant to which European Union countries have enacted legislation making producers of electrical goods financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. These and similar laws adopted in other countries could impose a significant cost of doing business in those countries.
Environmental costs are presently not material to our results of operations or financial position, and we do not currently anticipate material capital expenditures for environmental control facilities.
Working Capital
Our working capital was $314.3 million as of March 30, 2014, which includes $278.0 million of cash, cash equivalents and marketable securities. For additional information, see Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources, included in Part II, Item 7 of this report.
Employees
We had 1,044 employees as of May 14, 2014. We believe our future prospects will depend, in part, on our ability to continue to attract, train, motivate, retain and manage skilled engineering, sales, marketing and executive personnel. Our employees are not represented by a labor union. We believe that our relations with our employees are good.
| Item 1A. | Risk Factors |
Set forth below and elsewhere in this report and in other documents we file with the Securities and Exchange Commission are risks and uncertainties that could cause our actual results of operations to differ materially from the results contemplated by the forward-looking statements contained in this report or otherwise publicly disclosed by the Company.
Our operating results may fluctuate in future periods, which could cause our stock price to decline.
We have experienced, are currently experiencing, and expect to experience in future periods, fluctuations in sales and operating results from quarter to quarter. For example, the market for our Fibre Channel products is mature and has declined during recent periods. This market decline may be the result of a shift in the information technology (IT) data center deployment model, as more enterprise data centers are using private or public clouds to provide a portion of their requirements. This shift has adversely impacted the enterprise server market. To the extent the Fibre Channel market continues to decline, our quarterly operating results would be negatively impacted.
A significant portion of our net revenues in each fiscal quarter results from orders booked in that quarter. Orders placed by major customers are typically based on their forecasted sales and inventory levels for our products. Accordingly, it is extremely difficult for us to forecast future sales levels and historical information may not be indicative of future trends. In addition, there can be no assurance that we will maintain our current gross margins or profitability in the future.
Fluctuations in our quarterly operating results may also be the result of:
| • | the timing, size and mix of orders from customers; |
| • | gain or loss of significant customers; |
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| • | industry consolidation among our competitors, our customers or our suppliers; |
| • | customer policies pertaining to desired inventory levels of our products; |
| • | sales discounts and customer incentives; |
| • | the availability and sale of new products; |
| • | changes in our average selling prices; |
| • | the timing of server refresh cycles; |
| • | variations in manufacturing capacities, efficiencies and costs; |
| • | the availability and cost of components, including silicon chips; |
| • | variations in product development costs, especially related to advanced technologies; |
| • | variations in operating expenses; |
| • | changes in effective income tax rates, including those resulting from changes in tax laws; |
| • | our ability to timely produce products that comply with new environmental restrictions or related requirements of our original equipment manufacturer (OEM) customers; |
| • | actual events, circumstances, outcomes and amounts differing from judgments, assumptions and estimates used in determining the value of certain assets (including the amounts of related valuation allowances), liabilities and other items reflected in our consolidated financial statements; |
| • | the timing of revenue recognition and revenue deferrals; |
| • | gains or losses related to our marketable securities; or |
| • | changes in accounting rules or our accounting policies. |
In addition, our quarterly results of operations are influenced by competitive factors, including the pricing and availability of our products and our competitors’ products. Furthermore, communications regarding new products and technologies could cause our customers to defer or cancel purchases of our products. Order deferrals by our customers, delays in our introduction of new products, and longer than anticipated design-in cycles for our products have in the past adversely affected our quarterly results of operations. Due to these factors, as well as other unanticipated factors, it is likely that in some future quarter or quarters our operating results will be below the expectations of public market analysts or investors, and as a result, the price of our common stock could significantly decrease.
We expect gross margin to vary over time and our recent level of gross margin may not be sustainable.
Our recent level of gross margin may not be sustainable and may be adversely affected by numerous factors, including:
| • | as a result of our acquisition of the 10/40/100Gb Ethernet controller-related assets from Broadcom in the fourth quarter of fiscal 2014, we expect that our Ethernet products will represent a higher percentage of our future revenues and these products have a lower gross margin percentage than our historical corporate average; |
| • | other changes in product mix; |
| • | transitions to products based on emerging technologies, which may have lower gross margins; |
| • | changes in manufacturing volumes over which fixed costs are absorbed; |
| • | increased price competition; |
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| • | introduction of new products by us or our competitors, including products with advantages in price, performance or features; |
| • | our inability to reduce manufacturing-related or component costs; |
| • | entry into new markets; |
| • | amortization and impairments of purchased intangible assets; |
| • | sales discounts and customer incentives; |
| • | increases in material, labor or overhead costs; |
| • | excess inventory and inventory holding charges; |
| • | changes in distribution channels; |
| • | increased warranty costs; and |
| • | acquisitions and dispositions of businesses, technologies or product lines. |
A decrease in our gross margin could adversely affect the market price of our common stock.
Our operating results have been, are being, and may in the future be, adversely affected by unfavorable economic conditions.
The United States and other countries around the world have experienced, and are continuing to experience, economic weakness and uncertainty. Political instability in certain regions of the world is significantly contributing to this economic uncertainty. Economic uncertainty is adversely affecting, and in the future may continue to adversely affect, IT spending rates. For example, certain of our large OEM customers are reporting significant weakness in particular markets and geographies. Reductions in IT spending rates have resulted in reduced sales volumes, and could result in lower prices for our products, longer sales cycles, increased inventory provisions and increased production costs, all of which could negatively impact our results of operations.
As a result of worldwide economic weakness and uncertainty, it is extremely difficult for us and our customers to forecast future revenue levels based on historical information and trends. In addition, U.S. federal government spending cuts might reduce demand for our products from organizations that receive funding from the U.S. government and could negatively affect macroeconomic conditions in the United States, which could further reduce demand for our products. To the extent that we do not achieve our anticipated level of revenue, our operating results could be adversely affected.
Our stock price may be volatile.
The market price of our common stock has fluctuated substantially, and there can be no assurance that such volatility will not continue. Several factors could impact our stock price including, but not limited to:
| • | differences between our actual revenues and operating results and the published expectations of public market analysts; |
| • | quarterly fluctuations in our revenues and operating results; |
| • | introduction of new products or changes in product pricing policies by our competitors or us; |
| • | conditions in the markets in which we operate; |
| • | changes in market projections by industry forecasters; |
| • | changes in estimates of our earnings or rating upgrades or downgrades of our stock by public market analysts; |
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| • | operating results or forecasts of our major customers or competitors; |
| • | rumors or dissemination of false information; and |
| • | general economic and geopolitical conditions. |
In addition, stock markets have experienced extreme price and volume volatility in recent years and stock prices of technology companies have been especially volatile. This volatility has had a substantial effect on the market prices of securities of many public companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations could adversely affect the market price of our common stock, which could have a material adverse impact on investor confidence and employee retention.
Our business is dependent, in large part, on the continued growth of the networking markets that we serve and if these markets do not continue to develop, our business will suffer.
Our products are used in storage, local area and converged networks, and therefore our business is dependent on these markets. Our success in generating revenue in these markets will depend on, among other things, our ability to:
| • | educate potential OEM customers, distributors, resellers, system integrators, storage system providers and end-user organizations about the benefits of our products; |
| • | maintain and enhance our relationships with OEM customers, distributors, resellers, system integrators and storage system providers; |
| • | predict and base our products on standards that ultimately become industry standards; and |
| • | achieve and maintain interoperability between our products and other equipment and components from diverse vendors. |
If we are not successful in any or all of these items, our business and results of operations could be materially and adversely affected.
Our financial condition will be materially harmed if we do not maintain and gain market acceptance of our products.
The markets in which we compete involve rapidly changing technologies, evolving industry standards and continuing improvements in products and services. Examples of these changing technologies include system-on-chip products and both software-defined-networking and software-defined-storage products. Our future success depends, in part, on our ability to:
| • | enhance our current products and develop and introduce, in a timely manner, new products that keep pace with technological developments and industry standards; |
| • | compete effectively on the basis of price and performance; and |
| • | adequately address OEM and end-user customer requirements and achieve market acceptance. |
We believe that to remain competitive, we will need to continue to develop new products and enter new markets, which will require significant investment. Some new markets may require engagement with customers with whom we have limited or no prior experience. Our competitors may be developing alternative technologies, or entering into exclusive strategic alliances with our major customers, either of which may adversely affect the market acceptance of our products, our ability to enter new markets, or our ability to secure customer design wins. Although we continue to explore and develop products based on new technologies, a substantial portion of our revenues is generated today from Fibre Channel technology. If alternative technologies are adopted by the industry, we may not be able to develop products for these technologies in a timely manner. Further, even if
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alternative technologies do augment Fibre Channel revenues, our products may not be fully developed in time to be accepted by our customers. Even if our new products are developed in time, we may not be able to manufacture them at competitive prices or in sufficient volumes.
Some of our products are based on Fibre Channel over Ethernet (FCoE) or 10Gb Ethernet technologies. FCoE is a converged networking technology that provides a unified storage and data network over Enhanced Ethernet, while preserving the investment by end users in their existing Fibre Channel infrastructure and storage. As with many emerging technologies, it is expected that the market for FCoE will take a number of years to fully develop and mature. We expect products based on FCoE to supplement, and perhaps replace, certain products based on Fibre Channel technology. 10Gb Ethernet is a technology for use in enterprise data centers. The market for 10Gb Ethernet products includes well-established participants who have significantly more engineering, sales and marketing resources to dedicate to developing and penetrating the market than we do. An inability to maintain, or build on, our market share in the Fibre Channel, converged or 10Gb Ethernet markets, or the failure of these markets to expand, could have a material adverse effect on our business or results of operations.
We depend on a small number of customers and any decrease in revenues from any one of our major customers could adversely affect our results of operations and cause our stock price to decline.
A small number of customers account for a substantial portion of our net revenues, and we expect that a small number of customers will continue to represent a substantial portion of our net revenues in the foreseeable future. Our top ten customers accounted for 83%, 84% and 86% of net revenues during fiscal 2014, 2013 and 2012, respectively. Total revenue from our two largest customers, Hewlett-Packard Company and International Business Machines Corporation, together accounted for 40% or more of net revenues during fiscal 2014, 2013 and 2012. We are also subject to credit risk associated with the concentration of our accounts receivable.
A significant portion of the products we sell are incorporated into servers manufactured by our major customers. Certain of our large OEM customers are reporting weakness in this market. If server sales by our major customers continue to be adversely affected by the IT spending environment or server market factors, demand for our products could decrease further, which could have a material adverse effect on our business, financial condition or results of operations.
Our customers generally order products through written purchase orders instead of long-term supply contracts and, therefore, are generally not obligated to purchase products from us for any extended period. Customers typically incorporate our products into complex devices and systems, which creates supply chain cross-dependencies. Accordingly, supply chain disruptions affecting components of our customers’ devices and/or systems could negatively impact the demand for our products, even if the supply of our products is not directly affected. Major customers also have significant leverage over us and may attempt to change the sales terms, including pricing, customer incentives and payment terms, or insist that we undertake or fund significant aspects of the design, qualification and testing that our customers have typically been responsible for, either of which could have a material adverse effect on our business, financial condition or results of operations. As our OEM customers are pressured to reduce prices as a result of competitive factors, we may be required to contractually commit to price reductions for our products before we know how, or if, cost reductions can be achieved. If we are unable to achieve these cost reductions, our gross margins could decline and such a decline could have a material adverse effect on our business, financial condition or results of operations.
The ongoing consolidation in the technology industry could adversely impact our business. There is the potential for some of our customers to merge with or acquire one or more of our other customers. For example, International Business Machines Corporation recently announced an agreement to sell its x86 server business to Lenovo Group Ltd. There is also a potential that one of our large customers could acquire one of our current competitors. As a result of such transactions, demand for our products could decrease, which could have a material adverse effect on our business, financial condition or results of operations.
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Competition within the markets for products such as ours is intense and includes various established competitors.
The markets for networking connectivity products are highly competitive and are characterized by short product life cycles, price erosion, rapidly changing technology, frequent product performance improvements and evolving industry standards. Due to the diversity of products required in storage, local area and converged networking, we compete with many companies. In the traditional enterprise storage Fibre Channel adapter and application-specific integrated circuit (ASIC) markets, our primary competitor is Emulex Corporation. In the 10Gb Ethernet adapter and ASIC markets, which include converged networking products such as FCoE and Internet Small Computer Systems Interface (iSCSI) we compete primarily with Emulex Corporation, Mellanox Technologies, Ltd., Chelsio Communications, Inc. and Intel Corporation. We may also compete with some of our server and storage systems customers, some of which have the capability to develop products comparable to those we offer.
We need to continue to develop products appropriate to our markets to remain competitive as our competitors continue to introduce products with improved features. While we continue to devote significant resources to engineering and development, these efforts may not be successful or competitive products may not be developed and introduced in a timely manner. In addition, while relatively few competitors offer a full range of storage, local area and converged networking connectivity products, additional domestic and foreign manufacturers may increase their presence in these markets either through the development of new products or through industry consolidation. We may not be able to compete successfully against these or other competitors. If we are unable to design, develop or introduce competitive new products on a timely basis, or if our competitors introduce new products that are more successful than ours in the marketplace, our future operating results may be materially and adversely affected.
We may engage in mergers, acquisitions, divestitures and strategic investments and these activities could adversely affect our results of operations and stock price.
Our future growth may depend in part on our ability to identify and acquire businesses, technologies or product lines. For example, we completed two acquisitions in fiscal 2014, including the acquisition of 10/40/100Gb Ethernet controller-related assets from Broadcom Corporation. Mergers and acquisitions involve numerous risks, including:
| • | the failure of markets for the products of acquired businesses, technologies or product lines to develop as expected; |
| • | uncertainties in identifying and pursuing acquisition targets; |
| • | the challenges in achieving strategic objectives, cost savings and other benefits expected from acquisitions; |
| • | the risk that the financial returns on acquisitions will not support the expenditures incurred to acquire such businesses or the capital expenditures needed to develop such businesses; |
| • | difficulties in assimilating the acquired businesses, technologies or product lines; |
| • | the failure to successfully manage additional business locations, including the additional infrastructure and resources necessary to support and integrate such locations; |
| • | the existence of unknown product defects related to acquired businesses, technologies or product lines that may not be identified due to the inherent limitations involved in the due diligence process of an acquisition; |
| • | the diversion of management’s attention from other business concerns; |
| • | risks associated with entering markets or conducting operations with which we have no or limited direct prior experience; |
| • | risks associated with assuming the legal obligations of acquired businesses, technologies or product lines; |
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| • | risks related to the effect that internal control processes of acquired businesses might have on our financial reporting and management’s report on our internal control over financial reporting; |
| • | the potential loss of, or impairment of our relationships with, current customers or failure to retain the customers of acquired businesses; |
| • | the inability to qualify the acquired products with OEM partners on a timely basis, or at all; |
| • | the potential loss of key employees related to acquired businesses, technologies or product lines; and |
| • | the incurrence of significant exit charges if products or technologies acquired in business combinations are unsuccessful. |
Further, we may never realize the perceived benefits of a business combination or divestiture. Acquisitions by us could negatively impact gross margins or dilute stockholders’ investment and cause us to incur debt, contingent liabilities and amortization/impairment charges related to intangible assets, all of which could materially and adversely affect our financial condition or results of operations. Divestitures involve risks, such as difficulty splitting up businesses, distracting employees, potential loss of revenue and negatively impacting margins, and potentially disrupting customer relationships. In addition, our effective tax rate for future periods could be negatively impacted by acquisitions or divestitures.
We have made, and could make in the future, investments in technology companies, including privately-held companies in a development stage. Many of these private equity investments are inherently risky because the companies’ businesses may never develop, and we may incur losses related to these investments. In addition, we may be required to write down the carrying value of these investments to reflect other-than-temporary declines in their value, which could have a material adverse effect on our financial condition and results of operations.
If we are unable to attract and retain key personnel, we may not be able to sustain or grow our business.
Our future success largely depends on our key engineering, sales, marketing and executive personnel, including highly skilled semiconductor design personnel and software developers. In December 2013, we announced the appointment of Prasad Rampalli to the position of President and Chief Executive Officer with an effective date of February 3, 2014. During our leadership transition, it is especially important that we retain key personnel. If we lose the services of key personnel, or do not hire or retain other personnel for key positions, our business could be adversely affected.
We believe that the market for key personnel in the industries in which we compete is highly competitive. In particular, we have periodically experienced difficulty in attracting and retaining qualified engineers and other technical personnel and anticipate that competition for such personnel will increase in the future. For example, the market for qualified technical personnel within India has become extremely competitive, resulting in significant wage inflation. As a result, we may not be able to attract and retain key personnel with the skills and expertise necessary to develop new products in the future or to manage our business, both in the United States and abroad.
We have historically used equity awards and our employee stock purchase program as key components of our total employee compensation program in order to align employees’ interests with the interests of our stockholders, encourage retention of key personnel, and provide competitive compensation packages. However, the guidelines of proxy advisory firms relating to stockholder approval of shares available under equity compensation plans and share usage could make it more difficult for us to obtain such approval and therefore grant stock-based awards to employees in the future, which may result in changes in our stock-based compensation strategy. These and other developments relating to the provision of stock-based compensation to employees could make it more difficult to attract, retain and motivate key personnel.
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Our products are complex and may contain undetected software or hardware errors that could lead to an increase in our costs, reduce our net revenues or damage our reputation.
Our products are complex and may contain undetected software or hardware errors when first introduced or as newer versions are released. We are also exposed to risks associated with latent defects in existing products and to risks that components purchased from third-party subcontractors and incorporated into our products may not meet our specifications or may otherwise fail prematurely. From time to time, we have found errors in existing, new or enhanced products. In addition, our products are frequently combined with other products, including software, from other vendors, and these products often need to interface with existing networks, each of which have different specifications and utilize multiple protocol standards. As a result, when problems occur, it may be difficult to identify the source of the problem. The occurrence of hardware or software errors could adversely affect the sales of our products, cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems, any of which could materially and adversely affect our operating results.
We expect the pricing of our products to continue to decline, which could reduce our revenues, gross margins and profitability.
We expect the average unit prices of our products (on a like-for-like product comparison basis) to decline in the future as a result of competitive pricing pressures, increased sales discounts and customer incentives, new product introductions by us or our competitors, or other factors. If we are unable to offset these factors by increasing sales volumes or reducing product manufacturing costs, our total revenues and gross margins may decline. Moreover, most of our expenses are fixed in the short-term or incurred in advance of receipt of corresponding revenues. As a result, we may not be able to decrease our spending to offset any unexpected shortfall in revenues. If this occurs, our revenues, gross margins and profitability could decline.
We are dependent on sole source and limited source suppliers for certain key components.
Certain key components used in the manufacture of our products are purchased from single or limited sources. ASICs are purchased from single sources. For example, in connection with our acquisition of 10/40/100Gb Ethernet controller-related assets, we entered into a development and supply agreement which requires us to purchase the ASICs used in the related products exclusively from Broadcom. Other key components such as microprocessors, logic chips, power supplies and programmable logic devices are purchased from limited sources. If one of these suppliers experiences an interruption in its ability to supply our needs, or chooses to sever or significantly change its relationship with us, we may be unable to produce certain of our products, which could result in the loss of customers and have a material adverse effect on our results of operations.
We are dependent on worldwide third-party subcontractors and contract manufacturers.
Third-party subcontractors located outside the United States assemble and test certain products for us. To the extent that we rely on third-party subcontractors to perform these functions, we will not be able to directly control product delivery schedules and quality assurance. This lack of control may result in product shortages or quality assurance problems that could delay shipments of products or increase manufacturing, assembly, testing or other costs. If a subcontractor experiences capacity constraints or financial difficulties, suffers damage to its facilities, experiences power outages, natural disasters, labor shortages or labor strikes, or any other disruption of assembly or testing capacity, we may not be able to obtain alternative assembly and testing services in a timely manner.
In addition, the loss of any of our major third-party contract manufacturers could significantly impact our ability to produce products for an indefinite period of time. Qualifying a new contract manufacturer and commencing volume production is a lengthy and expensive process. Some customers will not purchase any products, other than a limited number of evaluation units, until they qualify the manufacturing line for the
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product. If we are required to change a contract manufacturer or if a contract manufacturer experiences delays, disruptions, capacity constraints, component part shortages or quality control problems in its manufacturing operations, shipment of our products to our customers could be delayed, resulting in loss or postponement of revenues and potential harm to our competitive position and relationships with customers.
The migration of our customers toward new products could adversely affect our results of operations.
As new or enhanced products are introduced, we must successfully manage the transition from older products in order to minimize the effects of product inventories that may become excess and obsolete, as well as ensure that sufficient supplies of new products can be delivered to meet customer demand. Our failure to manage the transition to newer products in the future or to develop and successfully introduce new products and product enhancements could adversely affect our business or results of operations. In addition, our customers are demanding a higher level of customization for new products, which prevents us from fully leveraging our product design work and adds to our new product development costs. When we introduce new products and product enhancements, we face additional risks relating to product transitions, including risks relating to forecasting demand and longer lead times associated with smaller product geometries and more complex production operations. Any such adverse event or increased costs could have a material adverse effect on our business, financial condition or results of operations.
Historically, the technology industry has developed higher performance ASICs, which create chip-level solutions that replace selected board-level or box-level solutions at a significantly lower average selling price. We have previously offered ASICs to customers for certain applications that have effectively resulted in a lower-priced solution when compared to an adapter solution. This transition to ASICs may also occur with respect to other current and future products. The result of this transition may have an adverse effect on our business, financial condition or results of operations. In the future, a similar adverse effect to our business could occur if there were rapid shifts in customer purchases from our midrange networking connectivity products to lower-cost products.
Our business is subject to seasonal fluctuations and uneven sales patterns.
A large percentage of our products are sold to customers who experience seasonality and uneven sales patterns in their businesses. As a result, we experience similar seasonality and uneven sales patterns. We believe this uneven sales pattern is a result of many factors including:
| • | the tendency of our customers to close a disproportionate percentage of their sales transactions in the last month, weeks and days of each quarter; |
| • | spikes in sales during the fourth quarter of each calendar year that some of our customers experience; and |
| • | differences between our quarterly fiscal periods and the fiscal periods of our customers. |
In addition, because our customers require us to maintain products at hub locations near their facilities or near the facilities of their contract manufacturers, it is difficult for us to predict sales trends. Our uneven sales pattern also makes it extremely difficult to predict the demand of our customers and adjust manufacturing capacity accordingly. If we predict demand that is substantially greater than actual customer orders, we will have excess inventory. Alternatively, if customer orders substantially exceed predicted demand, the ability to assemble, test and ship orders received in the last weeks and days of each quarter may be limited, or at an increased cost, which could have a material adverse effect on our quarterly revenues and earnings.
Unanticipated changes in our tax provisions or adverse outcomes resulting from examination of our income tax returns could adversely affect our results of operations.
We are subject to income taxes in the United States and various foreign jurisdictions. Our effective tax rate has been and could in the future be adversely affected by changes in tax laws or interpretations of those tax laws,
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by changes in the mix of earnings in countries with differing statutory tax rates, or by changes in the valuation of our deferred tax assets and liabilities. Our effective tax rate is also affected by intercompany transactions for licenses, services, funding and other items. Given the global scope of our operations, and the complexity of global tax and transfer pricing rules and regulations, it is difficult to estimate earnings within each tax jurisdiction. If actual earnings within a tax jurisdiction differ materially from our estimates, we may not achieve our expected effective tax rate.
Additionally, our effective tax rate may be impacted by the tax effects of acquisitions, dispositions, changes to tax laws or regulations, examinations by tax authorities, stock-based compensation, uncertain tax positions, and changes in our ability to realize deferred tax assets. Significant judgment and estimates are required in determining the impact on our effective tax rate related to these items, including whether it is more likely than not that some or all of our deferred tax assets will be realized. Such estimates are subject to uncertainty due to various factors, including the economic environment, industry and market conditions, and the length of time of the projections included in the analyses. If our actual results are less favorable than current estimates, or we revise our estimates downward in future analyses, a valuation allowance may be required related to our deferred tax assets with a corresponding adjustment to earnings in the period in which such determination is made, which could have a material effect on our results of operations. In addition, the Organisation for Economic Co-operation and Development (OECD), an international association of 34 countries including the United States, is contemplating changes to numerous long-standing tax principles. These contemplated changes, if finalized and adopted by countries, will increase tax uncertainty and may adversely affect our provision for income taxes.
Finally, we are subject to examination of our income tax returns by the United States Internal Revenue Service (IRS) and other tax authorities, which may result in the assessment of additional income taxes. For example, our federal consolidated income tax returns for fiscal years 2010, 2011 and 2012 are currently under examination by the IRS. We regularly assess the likelihood of adverse outcomes resulting from examinations to determine the adequacy of our provisions for income taxes. However, unanticipated outcomes from examinations could have a material adverse effect on our financial condition or results of operations.
Because we have operations in foreign countries and depend on foreign customers and suppliers, we are subject to international economic, currency, regulatory, political and other risks that could harm our business, financial condition and results of operations.
International revenues accounted for 58%, 57% and 57% of our net revenues for fiscal 2014, 2013 and 2012, respectively. We expect that international revenues will continue to account for a significant percentage of our net revenues for the foreseeable future. In addition, we maintain operations in foreign countries and a significant portion of our inventory purchases are from suppliers that are located outside the United States. As a result, we are subject to several risks, which include:
| • | a greater difficulty of administering and managing our business globally; |
| • | compliance with multiple, and potentially conflicting, regulatory requirements, such as import or export requirements, tariffs and other barriers; |
| • | less effective intellectual property protections outside of the United States; |
| • | currency fluctuations; |
| • | overlapping or differing tax structures; |
| • | political and economic instability, including terrorism and war; and |
| • | general trade restrictions. |
As of March 30, 2014, our international subsidiaries held $232.8 million of our total cash, cash equivalents and marketable securities. These holdings by our international subsidiaries consist primarily of debt securities
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due from U.S. issuers, including the U.S. government and related agencies, and U.S. dollar denominated cash and money market funds. Certain foreign regulations could impact our ability to transfer funds to the United States. Additionally, should we decide to repatriate cash held outside of the United States, we may incur a significant tax obligation.
Our international sales are invoiced in U.S. dollars and, accordingly, if the relative value of the U.S. dollar in comparison to the currency of our foreign customers should increase, the resulting effective price increase of our products to such foreign customers could result in decreased sales. In addition, a significant portion of our inventory is purchased from international suppliers, who invoice us in U.S. dollars. If the relative value of the U.S. dollar in comparison to the currency of our foreign suppliers should decrease, our suppliers may increase prices, which could result in a decline of our gross margin. Any of the foregoing factors could have a material adverse effect on our business, financial condition or results of operations.
Our facilities and the facilities of our suppliers and customers are located in regions that are subject to natural disasters.
Our California facilities, including our principal executive offices, our principal design facilities and our critical business operations, are located near major earthquake faults. We are not specifically insured for earthquakes or other natural disasters. Any personal injury at, or damages to, the facilities as a result of such occurrences could have a material adverse effect on our business, results of operations or financial condition. Additionally, we have operations, suppliers and customers in regions that have historically experienced natural disasters. Any earthquake or other natural disaster, including a hurricane, flood, volcanic eruption, tsunami or fire, affecting any of these regions could adversely affect our business, results of operations and financial condition.
In addition, as a result of a natural disaster, our major customers may face shortages of components that could negatively impact their ability to build the servers and data center devices into which our products are integrated, thereby negatively impacting the demand for our products even if the supply of our products is not directly affected by the natural disaster. For example, the earthquake, tsunami and related events that occurred in Japan in March 2011, and the extensive flooding that occurred in Thailand beginning in October 2011, caused widespread destruction in regions that include suppliers of components for many technology companies.
Our proprietary rights may be inadequately protected and difficult to enforce.
In some jurisdictions, we have patent protection on certain aspects of our technology. However, we rely primarily on trade secrets, trademarks, copyrights and contractual provisions to protect our proprietary rights. There can be no assurance that these protections will be adequate to protect our proprietary rights, that others will not independently develop or otherwise acquire equivalent or superior technology, or that we can maintain such technology as trade secrets. There also can be no assurance that any patents we possess will not be invalidated, circumvented or challenged. We have taken steps in several jurisdictions to enforce our trademarks against third parties. No assurances can be given that we will ultimately be successful in protecting our trademarks. The laws of certain countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products and intellectual property rights to the same extent as the laws of the United States, or at all. If we fail to protect our intellectual property rights, our business could be negatively impacted.
Disputes relating to claimed infringement of intellectual property rights may adversely affect our business.
We have in the past received notices of claimed infringement of intellectual property rights and been involved in intellectual property litigation. There can be no assurance that third parties will not assert future claims of infringement of intellectual property rights against us, or against customers who we are contractually
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obligated to indemnify, with respect to existing and future products. In addition, our supply of silicon chips and other components can also be interrupted by intellectual property infringement claims against our suppliers.
Individuals and groups are purchasing intellectual property assets for the sole purpose of making claims of infringement and attempting to extract settlements from companies such as ours. Although patent and intellectual property disputes may be settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and the necessary licenses or similar arrangements may not be available to us on satisfactory terms, or at all. As a result, we could be prevented from manufacturing and selling some of our products. In addition, if we litigate these kinds of claims, the litigation could be expensive, time consuming and could divert management’s attention from other matters and there is no guarantee we would prevail. Our business could suffer regardless of the outcome of the litigation.
Our distributors may not effectively sell our products and their reseller customers may purchase products from our competitors, which could negatively affect our results of operations.
Our distributors, which currently account for less than 15% of our net revenues, generally offer a diverse array of products from several different manufacturers and suppliers. Accordingly, we are at risk that these distributors may give higher priority to selling products from other suppliers, thus reducing their efforts to sell our products. A reduction in sales efforts by our current distributors could materially and adversely impact our business or results of operations. In addition, if we decrease our distributor-incentive programs (i.e., competitive pricing and rebates), our distributors may decrease the amount of product purchased from us. This could result in a change of business behavior, and distributors may decide to decrease their inventory levels, which could impact availability of our products to their customers.
As a result of these factors regarding our distributors or other unrelated factors, the reseller customers of our distributors could decide to purchase products developed and manufactured by our competitors. Any loss of demand for our products by value-added resellers and system integrators could have a material adverse effect on our business or results of operations.
Our portfolio of marketable securities could experience a decline in market value, which could materially and adversely affect our financial results.
As of March 30, 2014, we held short-term marketable securities totaling $186.8 million. We invest in debt securities, the majority of which are high investment grade, and we limit the exposure to credit risk through diversification and investment in highly-rated securities. However, investing in highly-rated securities does not entirely mitigate the risk of potential declines in market value. For example, in the past we have recorded impairment charges related to investment securities, including securities issued by companies in the financial services sector, that had previously been rated AA or higher. A deterioration in the economy, including tightening of credit markets or significant volatility in interest rates, could cause declines in value of our marketable securities or could impact the liquidity of the portfolio. If market conditions deteriorate significantly, our results of operations or financial condition could be materially and adversely affected.
Changes in and compliance with regulations could materially and adversely affect us.
Our business, results of operations or financial condition could be materially and adversely affected if new laws, regulations or standards relating to us or our products are implemented or existing ones are changed. In addition, our compliance with existing regulations may have a material adverse impact on us. For example, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that require the U.S. Securities and Exchange Commission to adopt additional rules and regulations in these areas. The U.S. Securities and Exchange Commission has also finalized new disclosure requirements relating to the sourcing of so-called conflict minerals from the Democratic Republic of Congo and certain other
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adjoining countries. Our disclosure will be predicated upon the timely receipt of accurate information from suppliers, who may be unwilling or unable to provide us with the relevant information. As a result, these new requirements could adversely affect our costs, the availability of minerals used in our products and our relationships with customers and suppliers.
We and our customers are subject to various import and export regulations of the United States government and other countries. Certain government export regulations apply to the encryption or other features contained in some of our products. Changes in or violations of any such import or export regulations could materially and adversely affect our business, financial condition or results of operations.
In many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by regulations applicable to us, such as the Foreign Corrupt Practices Act and other anti-bribery laws. Although we have policies and procedures designed to ensure compliance with these laws, our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation of our policies. Any such violation, even if prohibited by our policies, could have a material adverse effect on our business, financial condition or results of operations.
We face increasing complexity in our product design and procurement operations as we adjust to new and future requirements relating to the chemical and material composition of our products, their safe use, the energy consumption associated with those products and product take-back legislation (i.e., legislation that makes producers of electrical goods financially responsible for specified collection, recycling, treatment and disposal of past and future covered products). We could incur substantial costs, our products could be restricted from entering certain jurisdictions, and we could face other sanctions, if we were to violate or become liable under environmental laws or if our products become non-compliant with environmental laws.
We continually seek ways to increase the energy efficiency of our products. Recent analyses have estimated the amount of global carbon emissions that are due to information technology products. As a result, governmental and non-governmental organizations have turned their attention to development of regulations and standards to drive technological improvements and reduce the amount of carbon emissions. There is a risk that these regulations or standards, once developed, will not fully address the complexity of the technology developed by the IT industry or will favor certain technological approaches that we do not currently utilize. Depending on the regulations or standards that are ultimately adopted, compliance could adversely affect our business, results of operations or financial condition.
We may experience difficulties in transitioning to smaller geometry process technologies.
We expect to continue to transition our semiconductor products to increasingly smaller line width geometries. This transition requires us to modify the manufacturing processes for our products and to redesign some products, as well as standard cells and other integrated circuit designs that we may use in multiple products. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies. In the past, we have experienced some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, which resulted in reduced manufacturing yields, delays in product deliveries and increased expenses. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes.
If we fail to carefully manage the use of “open source” software in our products, we may be required to license key portions of our products on a royalty-free basis or expose key parts of our source code.
Certain of our software may be derived from “open source” software that is generally made available to the public by its authors and/or other third parties. Such open source software is often made available to us under licenses, such as the GNU General Public License, that impose certain obligations on us in the event we were to distribute derivative works of the open source software. These obligations may require us to make source code
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for the derivative works available to the public and license such derivative works under a particular type of license, rather than the forms of licenses customarily used to protect our intellectual property. In the event the copyright holder of any open source software were to successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public or stop distributing that work.
System security risks, data protection breaches and cyber-attacks could disrupt our internal operations, and any such disruption could reduce our expected revenues, increase our expenses, damage our reputation and adversely affect our stock price.
Experienced computer programmers and hackers may be able to penetrate our network and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant and, if our efforts to address these problems are not successful, this could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions.
We manage and store various proprietary information and sensitive or confidential data relating to our business. We have also outsourced a number of our business functions to third party contractors. Breaches of our or our third party contractors’ security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us or our customers, including the potential loss or disclosure of such information or data as a result of fraud, trickery or other forms of deception, could expose us or our customers to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. In addition, the cost and operational consequences of implementing further data protection measures could be significant.
Our ability to borrow and maintain outstanding borrowings under our credit agreement is subject to certain covenants.
We have a credit agreement that provides us with a $125.0 million unsecured revolving credit facility that matures in March 2018. Borrowings under the credit agreement may be used for general corporate purposes, including permitted share repurchases and acquisitions. Under the credit agreement, we may increase the revolving commitments or obtain incremental term loans in an aggregate amount up to an additional $100.0 million, subject to certain conditions. Our ability to borrow under the credit agreement is subject to continued compliance with certain financial and non-financial covenants. In addition, a breach of any of the covenants or other provisions in the credit agreement could result in an event of default, which if not cured or waived, could result in outstanding borrowings becoming immediately due and payable. We may be unable to maintain compliance with these covenants and, if we fail to do so, we may be unable to obtain waivers or amend the covenants. In the event that some or all of our outstanding borrowings are accelerated and become immediately due and payable, we may not have the funds to repay, or the ability to refinance, our borrowings. There were no borrowings outstanding under the credit agreement as of March 30, 2014.
| Item 1B. | Unresolved Staff Comments |
None.
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| Item 2. | Properties |
Our principal product development, operations, sales and corporate offices are located in four buildings comprising approximately 195,000 square feet in Aliso Viejo, California. We own each of these buildings. We also lease one building comprising approximately 100,000 square feet in Shakopee, Minnesota, that houses product development and operations teams for many of our Legacy Connectivity Products. We lease an operations, sales and fulfillment facility located in Dublin, Ireland. In addition, we lease facilities in Mountain View and Roseville, California; Pune and Bangalore, India; Ramat Gan, Israel; and Taipei City, Taiwan. We also maintain sales offices at various locations in the United States, Europe and Asia. We believe that our existing properties, including both owned and leased sites, are in good condition and suitable for the conduct of our business.
| Item 3. | Legal Proceedings |
Various lawsuits, claims and proceedings have been or may be instituted against us. The outcome of litigation cannot be predicted with certainty and some lawsuits, claims and proceedings may be disposed of unfavorably to us. Many intellectual property disputes have a risk of injunctive relief and there can be no assurance that a license will be granted. Injunctive relief could have a material adverse effect on our financial condition or results of operations. Based on an evaluation of matters that are pending or asserted, we believe the disposition of such matters will not have a material adverse effect on our financial condition or results of operations.
| Item 4. | Mine Safety Disclosures |
Not applicable.
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| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Principal Market and Prices
Shares of our common stock are traded and quoted on the NASDAQ Global Select Market under the symbol QLGC. The following table sets forth the range of high and low sales prices per share of our common stock for each quarterly period of the two most recent fiscal years as reported on the NASDAQ Global Select Market.
| 2014 | 2013 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| Fourth Quarter |
$ | 12.90 | $ | 10.82 | $ | 12.90 | $ | 9.50 | ||||||||
| Third Quarter |
12.67 | 10.32 | 11.61 | 8.63 | ||||||||||||
| Second Quarter |
11.73 | 9.57 | 14.07 | 9.56 | ||||||||||||
| First Quarter |
11.67 | 9.29 | 17.85 | 13.14 | ||||||||||||
Number of Common Stockholders
The number of record holders of our common stock was 413 as of May 14, 2014.
Dividends
We have never paid cash dividends on our common stock. We currently anticipate that we will retain all of our future earnings for use in the development and expansion of our business and for general corporate purposes, including repurchases of our common stock. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our operating results, financial condition and other factors as the board of directors deems relevant.
Recent Sales of Unregistered Securities
We did not issue any unregistered securities during fiscal 2014.
Issuer Purchases of Equity Securities
Our most recent stock repurchase program expired during fiscal 2014. We did not make any stock repurchases during the fourth quarter of fiscal 2014.
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Stockholder Return Performance
The performance graph below shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that we specifically incorporate this information by reference, and will not otherwise be deemed filed under the Acts.
The following graph compares, for the five-year period ended March 30, 2014, the cumulative total stockholder return for our common stock, the Standard & Poor’s Midcap 400 Index (S&P Midcap 400 Index) and the NASDAQ Computer Index. Measurement points are the last trading day of each of our fiscal years ended March 29, 2009, March 28, 2010, April 3, 2011, April 1, 2012, March 31, 2013 and March 30, 2014. The graph assumes that $100 was invested on March 29, 2009 in our common stock, the S&P Midcap 400 Index and the NASDAQ Computer Index and assumes reinvestment of dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among QLogic Corporation,
the S&P Midcap 400 Index,
and the NASDAQ Computer Index
| Cumulative Total Return | ||||||||||||||||||||||||
| 3/29/09 | 3/28/10 | 4/3/11 | 4/1/12 | 3/31/13 | 3/30/14 | |||||||||||||||||||
| QLogic Corporation |
$ | 100.00 | $ | 172.01 | $ | 154.95 | $ | 151.54 | $ | 98.98 | $ | 106.57 | ||||||||||||
| S&P Midcap 400 Index |
100.00 | 164.07 | 208.29 | 212.42 | 250.30 | 303.47 | ||||||||||||||||||
| NASDAQ Computer Index |
100.00 | 166.95 | 201.35 | 249.06 | 234.04 | 314.41 | ||||||||||||||||||
* $100 invested on 3/29/09 in stock or 3/31/09 in index, including reinvestment of dividends. Indexes calculated on month-end basis.
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| Item 6. | Selected Financial Data |
The following selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto appearing elsewhere in this report.
| Year Ended (1) | ||||||||||||||||||||
| March 30, 2014 (2) (3) |
March 31, 2013 (4) |
April 1, 2012 |
April 3, 2011 |
March 28, 2010 |
||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||
| Statement of Operations Data |
||||||||||||||||||||
| Net revenues |
$ | 460,907 | $ | 484,538 | $ | 558,608 | $ | 558,375 | $ | 518,471 | ||||||||||
| Cost of revenues |
150,800 | 159,180 | 177,704 | 176,959 | 167,107 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Gross profit |
310,107 | 325,358 | 380,904 | 381,416 | 351,364 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Operating expenses: |
||||||||||||||||||||
| Engineering and development |
147,010 | 156,097 | 138,768 | 125,219 | 116,789 | |||||||||||||||
| Sales and marketing |
68,367 | 78,512 | 77,370 | 73,965 | 68,881 | |||||||||||||||
| General and administrative |
32,097 | 32,899 | 35,299 | 34,148 | 34,242 | |||||||||||||||
| Special charges |
74,853 | — | — | 373 | 5,163 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total operating expenses |
322,327 | 267,508 | 251,437 | 233,705 | 225,075 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Operating income (loss) |
(12,220 | ) | 57,850 | 129,467 | 147,711 | 126,289 | ||||||||||||||
| Interest and other income, net |
3,260 | 4,007 | 3,959 | 5,187 | 10,601 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Income (loss) from continuing operations before income taxes |
(8,960 | ) | 61,857 | 133,426 | 152,898 | 136,890 | ||||||||||||||
| Income tax expense (benefit) |
9,306 | (11,704 | ) | 13,983 | 11,552 | 69,345 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Income (loss) from continuing operations |
(18,266 | ) | 73,561 | 119,443 | 141,346 | 67,545 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Discontinued operations: |
||||||||||||||||||||
| Income (loss) from operations, net of income taxes |
— | (425 | ) | 910 | (2,256 | ) | (12,597 | ) | ||||||||||||
| Gain on sale, net of income taxes |
— | — | 109,083 | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Income (loss) from discontinued operations |
— | (425 | ) | 109,993 | (2,256 | ) | (12,597 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net income (loss) |
$ | (18,266 | ) | $ | 73,136 | $ | 229,436 | $ | 139,090 | $ | 54,948 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Income (loss) from continuing operations per share: |
||||||||||||||||||||
| Basic |
$ | (0.21 | ) | $ | 0.79 | $ | 1.17 | $ | 1.31 | $ | 0.58 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Diluted |
$ | (0.21 | ) | $ | 0.78 | $ | 1.16 | $ | 1.29 | $ | 0.58 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Income (loss) from discontinued operations per share: |
||||||||||||||||||||
| Basic |
$ | — | $ | (0.01 | ) | $ | 1.08 | $ | (0.02 | ) | $ | (0.11 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Diluted |
$ | — | $ | — | $ | 1.07 | $ | (0.02 | ) | $ | (0.11 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net income (loss) per share: |
||||||||||||||||||||
| Basic |
$ | (0.21 | ) | $ | 0.78 | $ | 2.25 | $ | 1.29 | $ | 0.47 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Diluted |
$ | (0.21 | ) | $ | 0.78 | $ | 2.23 | $ | 1.27 | $ | 0.47 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance Sheet Data |
||||||||||||||||||||
| Cash and cash equivalents and investment securities |
$ | 278,041 | $ | 455,506 | $ | 537,955 | $ | 384,076 | $ | 375,673 | ||||||||||
| Total assets |
798,263 | 825,163 | 913,418 | 757,207 | 750,737 | |||||||||||||||
| Total stockholders’ equity |
693,426 | 734,277 | 759,843 | 601,164 | 583,339 | |||||||||||||||
| (1) | The statement of operations data for all periods reflects the operating results of the InfiniBand business as discontinued operations. |
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| (2) | During the fourth quarter of fiscal 2014, we completed the acquisition of (i) Broadcom’s 10/40/100Gb Ethernet controller-related assets, and (ii) Brocade’s Fibre Channel and converged network adapter business. |
| (3) | In fiscal 2014, we recorded special charges of $74.9 million consisting of $41.0 million for the portion of a license payment we attributed to the use of the related technology in periods prior to the date of the license agreement, $26.5 million of exit costs and $7.3 million of asset impairment charges primarily related to property and equipment. During fiscal 2014, we also recorded incremental income tax charges of $16.5 million for valuation allowances against deferred tax assets related to certain state tax credits and net operating loss carryforwards. |
| (4) | In fiscal 2013, we recorded $14.3 million of income tax benefits associated with adjustments to certain tax positions subject to an IRS examination. |
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our audited consolidated financial statements and related notes. In this discussion and elsewhere in this report, we make forward-looking statements. These forward-looking statements are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, descriptions of our expectations regarding future trends affecting our business and other statements regarding future events or our objectives, goals, strategies, beliefs and underlying assumptions that are other than statements of historical fact. When used in this report, the words “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” “will” and similar expressions, or the negative of such expressions, are intended to identify these forward-looking statements. Statements concerning current conditions may also be forward-looking if they imply a continuation of current conditions. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of several factors, including, but not limited to those factors set forth and discussed in Part I, Item 1A “Risk Factors” and elsewhere in this report. In light of the significant uncertainties inherent in the forward-looking information included in this report, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. You are cautioned, therefore, not to place undue reliance on these forward-looking statements, which are made only as of the date of this report. We undertake no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
We design and supply high performance server and storage networking connectivity products that provide, enhance and manage computer data communication. These products facilitate the rapid transfer of data and enable efficient resource sharing between servers, networks and storage. Our products are used in enterprise data centers, cloud computing, Web 2.0 and other environments dependent on high performance, reliable data networking.
Our products are based primarily on Fibre Channel and Ethernet technologies and are used in connection with storage networks, local area networks, and converged networks. Storage networks are used to provide data across enterprise environments. Fibre Channel is currently the dominant technology for enterprise storage networking. Local area networks (LANs) are used to provide workstation-to-server, server-to-server, and server-to-storage connectivity using Ethernet. Converged networks are designed to address the evolving data center by consolidating and unifying various classes of connectivity and networks, such as storage area networks and LANs, using Ethernet speeds of 10Gb per second and greater. Fibre Channel over Ethernet (FCoE) is a converged networking technology that uses an Ethernet LAN for both storage and local area data transmission, thus combining the benefits of Fibre Channel technology with the pervasiveness of Ethernet-based networks. Similarly, Internet Small Computer System Interface (iSCSI) is an alternative to FCoE and provides storage over Ethernet capabilities. Our converged network products can operate individually as 10Gb Ethernet products, FCoE products, iSCSI products, or in combination as multi-protocol products.
We classify our products into two categories – Advanced Connectivity Platforms and Legacy Connectivity Products. Advanced Connectivity Platforms are comprised primarily of adapters and application-specific integrated circuits (ASICs) for server and storage connectivity applications. Legacy Connectivity Products are comprised primarily of Fibre Channel switch products and 1Gb iSCSI products.
Our products are sold worldwide, primarily to original equipment manufacturers (OEMs) and distributors. Our customers rely on our various server and storage connectivity products to deliver solutions to information technology professionals in virtually every business sector. Our products are found primarily in server and storage subsystem solutions that are used by enterprises with critical business data requirements. These products are incorporated in solutions from a number of server and storage system OEM customers, including Cisco Systems, Inc., Dell Inc., EMC Corporation, Fujitsu Ltd., Hewlett-Packard Company, Huawei
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Technologies Co. Ltd., Inspur Worldwide Services Ltd., International Business Machines Corporation, Lenovo Group Ltd., NetApp, Inc. and Oracle Corporation.
We use a fifty-two/fifty-three week fiscal year ending on the Sunday nearest March 31. Fiscal years 2014, 2013 and 2012 each comprised fifty-two weeks and ended on March 30, 2014, March 31, 2013 and April 1, 2012, respectively.
Business Acquisitions
On March 13, 2014, we acquired certain 10/40/100Gb Ethernet controller-related assets from Broadcom Corporation (Broadcom) primarily relating to Broadcom’s NetXtreme® II Ethernet controller family and licensed certain related intellectual property under non-exclusive licenses for total cash consideration of $147.8 million and the assumption of certain liabilities. This business acquisition expands our product portfolio and is expected to accelerate our time to market for next generation products in the server Ethernet connectivity market.
On January 17, 2014, we acquired the assets of the Fibre Channel and converged network adapter business from Brocade Communications Systems, Inc. (Brocade) for cash consideration of $9.6 million and the assumption of certain liabilities. We completed this acquisition to expand our product portfolio and market position in the Fibre Channel and converged network adapter market.
License Agreement
On March 13, 2014, we entered into a non-exclusive patent license agreement with Broadcom and paid a one-time fee of $62.0 million as specified in the agreement. The license covers all of our Fibre Channel products. We attributed $41.0 million to the use of the related technology in periods prior to the date of the license agreement and recorded such amount in special charges in fiscal 2014. The portion of the fee attributed to the future use of the related technology is $21.0 million and was recorded as a prepaid license that will be amortized over the ten-year term of the license agreement.
Restructuring Plans
In March 2014, we implemented a restructuring plan primarily designed to consolidate our Ethernet product roadmap following the acquisition of the Ethernet controller-related assets from Broadcom. This restructuring plan primarily includes a workforce reduction and the consolidation and elimination of certain engineering activities. During the fourth quarter of fiscal 2014, we recorded special charges of $14.0 million in connection with this plan, which consisted of $9.1 million of exit costs and $4.9 million of asset impairment charges primarily related to property and equipment. We expect to incur approximately $1 million of additional exit costs, primarily related to severance costs for workforce reductions. We expect to substantially complete these restructuring activities during the first quarter of fiscal 2015.
In June 2013, we commenced a restructuring plan designed to enhance product focus and streamline business operations. This restructuring plan includes a workforce reduction and the consolidation and elimination of certain engineering activities. In connection with this plan, we ceased development of future ASICs for switch products. We recorded special charges of $19.8 million related to this restructuring plan during fiscal 2014, which consisted of $17.4 million of exit costs and $2.4 million of asset impairment charges primarily related to property and equipment. We expect to incur between $1 million and $2 million of additional severance costs in connection with employees required to provide services for varying periods in excess of statutory notice periods. The additional severance costs will be recognized over the requisite service period.
Disposition of Business
In February 2012, we completed the sale of the product lines and certain assets associated with our InfiniBand business (the IB Business). As a result of this divestiture, our consolidated statements of operations
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for all periods present the operations of this business as discontinued operations. The following discussion and analysis is based on our continuing operations and excludes any results or discussion of our discontinued operations.
Fiscal Year and Fourth Quarter Financial Highlights and Other Information
Net revenues for fiscal 2014 were $460.9 million compared to $484.5 million in fiscal 2013. Loss from continuing operations for fiscal 2014 was $18.3 million, or $0.21 per diluted share, compared to income from continuing operations of $73.6 million, or $0.78 per diluted share, in fiscal 2013. During fiscal 2014, we generated $56.8 million of cash from operations and used $47.8 million of cash to purchase common stock under our stock repurchase program.
A summary of our financial performance during the fourth quarter of fiscal 2014 is as follows:
| • | Net revenues for the fourth quarter of fiscal 2014 were $115.7 million compared to $116.9 million in the fourth quarter of fiscal 2013. Revenue from Advanced Connectivity Platforms increased to $101.1 million in the fourth quarter of fiscal 2014 from $97.0 million in the same quarter of fiscal 2013. Revenue from Legacy Connectivity Products was $14.6 million in the fourth quarter of fiscal 2014 compared to $19.9 million in the same quarter of fiscal 2013. |
| • | Gross profit as a percentage of net revenues for the fourth quarter of fiscal 2014 was 65.9% compared to 67.7% in the fourth quarter of fiscal 2013. Gross profit for the fourth quarter of fiscal 2014 included $2.0 million of incremental costs related to our acquisitions in the fourth quarter of fiscal 2014. |
| • | Operating loss was $42.6 million in the fourth quarter of fiscal 2014 compared to operating income of $10.4 million in the fourth quarter of fiscal 2013. We recorded special charges of $56.5 million during the fourth quarter of fiscal 2014, comprised of $41.0 million related to the non-exclusive patent license agreement with Broadcom and $15.5 million related to our restructuring plans. |
| • | Loss from continuing operations was $46.8 million, or $0.54 per diluted share, in the fourth quarter of fiscal 2014 compared to income from continuing operations of $29.6 million, or $0.33 per diluted share, in the fourth quarter of fiscal 2013. Loss from continuing operations in the fourth quarter of fiscal 2014 included special charges of $56.5 million and incremental tax charges of $14.7 million for valuation allowances related to deferred tax assets for certain state tax credits and net operating loss carryforwards. |
| • | Cash, cash equivalents and marketable securities were $278.0 million as of March 30, 2014 compared to $455.5 million as of March 31, 2013. |
| • | Accounts receivable was $65.2 million as of March 30, 2014 compared to $66.1 million as of March 31, 2013. Days sales outstanding in receivables was 51 days as of March 30, 2014. |
| • | Inventories decreased to $18.0 million as of March 30, 2014 from $20.2 million as of March 31, 2013. Our annualized inventory turns were 8.7 turns in the fourth quarter of fiscal 2014. |
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Results of Operations
Net Revenues
A summary of our net revenues by product category is as follows:
| 2014 | 2013 | 2012 | ||||||||||
| (Dollars in millions) | ||||||||||||
| Net revenues: |
||||||||||||
| Advanced Connectivity Platforms |
$ | 386.7 | $ | 399.4 | $ | 466.8 | ||||||
| Legacy Connectivity Products |
74.2 | 85.1 | 91.8 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | 460.9 | $ | 484.5 | $ | 558.6 | |||||||
|
|
|
|
|
|
|
|||||||
| Percentage of net revenues: |
||||||||||||
| Advanced Connectivity Platforms |
84 | % | 82 | % | 84 | % | ||||||
| Legacy Connectivity Products |
16 | 18 | 16 | |||||||||
|
|
|
|
|
|
|
|||||||
| 100 | % | 100 | % | 100 | % | |||||||
|
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|
|||||||
Historically, the global marketplace for server and storage connectivity solutions has expanded in response to the information requirements of enterprise data centers, cloud computing, Web 2.0 and other environments dependent on high performance, reliable data networking. The markets we serve have been characterized by rapid advances in technology and related product performance, which has generally resulted in declining average selling prices over time.
The market for our Fibre Channel products is mature and has declined during recent periods. This market decline may be the result of a shift in the information technology (IT) data center deployment model, as more enterprise data centers are using private or public clouds to provide a portion of their requirements. This shift has adversely impacted the enterprise server market. To the extent the Fibre Channel market continues to decline, our quarterly operating results would be negatively impacted. In addition, the United States and other countries around the world have experienced, and are continuing to experience, economic weakness and uncertainty. Political instability in certain regions of the world is significantly contributing to this economic uncertainty. Economic uncertainty is adversely affecting, and in the future may continue to adversely affect, IT spending rates, which may have a negative impact on our revenue and operating results. As a result of these factors, it is extremely difficult for us to forecast future sales levels and historical information may not be indicative of future trends.
Net revenues of $460.9 million for fiscal 2014 decreased from $484.5 million in fiscal 2013. The decrease in net revenues was primarily the result of a $12.7 million, or 3%, decrease in revenue from Advanced Connectivity Platforms and a $10.9 million, or 13%, decrease in revenue from Legacy Connectivity Products. The decrease in revenue from Advanced Connectivity Platforms was primarily due to a decrease in average selling prices, predominately due to a change in product mix. We expect our revenue from Advanced Connectivity Platforms to grow during fiscal 2015, primarily driven by increased shipments of our Ethernet products associated with our recent acquisition from Broadcom. The decrease in revenue from Legacy Connectivity Products was primarily due to a decrease in the quantity of switches sold. We expect net revenue from our Legacy Connectivity Products to continue to decline over time. As part of the restructuring plan we implemented in June 2013, we ceased development of future ASICs for switch products; however, we will continue to sell and support products based on the current generation switch ASICs. In addition, we expect our 1Gb iSCSI products will continue to be replaced with solutions based on current technology.
Net revenues of $484.5 million for fiscal 2013 decreased from $558.6 million in fiscal 2012. The decrease in net revenues was the result of a $67.4 million, or 14%, decrease in revenue from Advanced Connectivity
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Platforms and a $6.7 million, or 7%, decrease in revenue from Legacy Connectivity Products. The decrease in revenue from Advanced Connectivity Platforms and Legacy Connectivity Products were each primarily due to a decrease in units sold.
A small number of our customers account for a substantial portion of our net revenues, and we expect that a small number of customers will continue to represent a substantial portion of our net revenues for the foreseeable future. Our top ten customers accounted for 83%, 84% and 86% of net revenues during fiscal 2014, 2013 and 2012, respectively.
A summary of our customers, including their manufacturing subcontractors, that represent 10% or more of our net revenues is as follows:
| 2014 | 2013 | 2012 | ||||||||||
| Hewlett-Packard |
24 | % | 24 | % | 27 | % | ||||||
| IBM |
17 | % | 20 | % | 18 | % | ||||||
| Dell |
15 | % | 12 | % | 11 | % | ||||||
We believe our major customers continually evaluate whether or not to purchase products from alternative or additional sources. Accordingly, there can be no assurance that a major customer will not reduce, delay or eliminate its purchases from us. Any such reduction, delay or loss of purchases could have a material adverse effect on our business, financial condition or results of operations.
Net revenues by geographic area are as follows:
| 2014 | 2013 | 2012 | ||||||||||
| (In millions) | ||||||||||||
| United States |
$ | 191.5 | $ | 209.6 | $ | 239.2 | ||||||
| Asia-Pacific and Japan |
166.5 | 158.0 | 178.7 | |||||||||
| Europe, Middle East and Africa |
85.6 | 92.7 | 113.9 | |||||||||
| Rest of world |
17.3 | 24.2 | 26.8 | |||||||||
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|
|||||||
| $ | 460.9 | $ | 484.5 | $ | 558.6 | |||||||
|
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|
|||||||
Revenues by geographic area are presented based upon the ship-to location of the customer, which is not necessarily indicative of the location of the ultimate end-user of our products. The United States and China are the only countries that represented 10% or more of net revenues for the years presented. Net revenues from customers in China were $56.0 million, $65.0 million and $72.6 million for fiscal 2014, 2013 and 2012, respectively.
Gross Profit
Gross profit represents net revenues less cost of revenues. Cost of revenues consists primarily of the cost of purchased products, assembly and test services; costs associated with product procurement, inventory management, logistics and product quality; and the amortization of purchased intangible assets and other assets. A summary of our gross profit and related percentage of net revenues is as follows:
| 2014 | 2013 | 2012 | ||||||||||
| (Dollars in millions) | ||||||||||||
| Gross profit |
$ | 310.1 | $ | 325.4 | $ | 380.9 | ||||||
| Percentage of net revenues |
67.3 | % | 67.1 | % | 68.2 | % | ||||||
Gross profit for fiscal 2014 decreased $15.3 million, or 4.7%, from gross profit for fiscal 2013, primarily due to the decrease in revenue and incremental acquisition-related costs of $1.2 million for intangible asset amortization and $0.8 million for acquired inventory valuation step-up amortization. The gross profit percentage
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for fiscal 2014 was 67.3% compared to 67.1% for fiscal 2013. The gross profit percentage increased primarily due to favorable product mix, partially offset by the incremental acquisition-related charges.
Gross profit for fiscal 2013 decreased $55.5 million, or 15% from gross profit for fiscal 2012. The gross profit percentage for fiscal 2013 was 67.1% compared to 68.2% for fiscal 2012. The decrease in gross profit percentage was primarily due to an unfavorable product mix.
Our ability to maintain our current gross profit percentage may be significantly affected by factors such as the mix of products shipped, manufacturing volumes over which fixed costs are absorbed, sales discounts and customer incentives, component costs, the transition to new products, competitive price pressures, the timeliness of volume shipments of new products, our ability to achieve manufacturing cost reductions, and amortization and impairments of purchased intangible assets and other assets. We anticipate that it will continue to be difficult to reduce manufacturing costs. In addition, our anticipated future growth in revenue is expected to be driven primarily by increased shipments of Ethernet products that have a lower gross profit percentage than our historical corporate average. As a result of these and other factors, our gross profit percentage is expected to decline in future periods.
Operating Expenses
Our operating expenses are summarized in the following table:
| 2014 | 2013 | 2012 | ||||||||||
| (Dollars in millions) | ||||||||||||
| Operating expenses: |
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| Engineering and development |
$ | 147.0 | $ | 156.1 | $ | 138.8 | ||||||
| Sales and marketing |
68.4 | 78.5 | 77.3 | |||||||||
| General and administrative |
32.1 | 32.9 | 35.3 | |||||||||
| Special charges |
74.8 | — | — | |||||||||
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| $ | 322.3 | $ | 267.5 | $ | 251.4 | |||||||
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| Percentage of net revenues: |
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| Engineering and development |
31.9 | % | 32.2 | % | 24.8 | % | ||||||
| Sales and marketing |
14.8 | 16.2 | 13.9 | |||||||||
| General and administrative |
7.0 | 6.8 | 6.3 | |||||||||
| Special charges |
16.2 | — | — | |||||||||
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| 69.9 | % | 55.2 | % | 45.0 | % | |||||||
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Engineering and Development. Engineering and development expenses consist primarily of compensation and related employee benefit costs, outside service and material costs, occupancy and equipment costs and related computer support costs. During fiscal 2014, engineering and development expenses decreased to $147.0 million from $156.1 million in fiscal 2013. The decrease was primarily due to a $6.7 million decrease in outside service and material costs related to new product development, a $2.7 million decrease in stock-based compensation and a $2.1 million decrease in cash compensation and related employee benefit costs, principally due to cost savings achieved as a result of our restructuring plans. These decreases were partially offset by a $2.3 million increase in equipment depreciation and maintenance costs.
Engineering and development expenses increased to $156.1 million for fiscal 2013 from $138.8 million in fiscal 2012. The increase was primarily due to a $10.0 million increase in cash compensation and related employee benefit costs, principally due to an increase in headcount, a $4.4 million increase in outside service and material costs related to new product development, and a $2.2 million increase in equipment depreciation and maintenance costs.
We believe continued investments in engineering and development activities are critical to achieving future design wins, expansion of our customer base and revenue growth opportunities.
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Sales and Marketing. Sales and marketing expenses consist primarily of compensation and related employee benefit costs, sales commissions, promotional activities and travel for sales and marketing personnel. Sales and marketing expenses decreased to $68.4 million for fiscal 2014 from $78.5 million for fiscal 2013. The decrease was primarily due to a $4.8 million decrease in cash compensation and related employee benefit costs and a $1.5 million decrease in stock-based compensation, principally due to a reduction in headcount resulting from our restructuring plans. The decrease in sales and marketing expenses also included a $2.9 million decrease in promotional expenses.
Sales and marketing expenses increased to $78.5 million for fiscal 2013 from $77.3 million for fiscal 2012. The increase was primarily due to an increase in cash compensation and related employee benefit costs, principally due to an increase in headcount.
General and Administrative. General and administrative expenses consist primarily of compensation and related employee benefit costs for executive, finance, accounting, human resources, legal and information technology personnel. Non-compensation components of general and administrative expenses include accounting, legal and other professional fees, facilities expenses and other corporate expenses. General and administrative expenses decreased to $32.1 million for fiscal 2014 from $32.9 million for fiscal 2013 primarily due to a $2.5 million decrease in stock-based compensation, partially offset by a $1.7 million increase in outside services and other corporate expenses.
General and administrative expenses decreased to $32.9 million for fiscal 2013 from $35.3 million for fiscal 2012 primarily due to a $1.2 million decrease in cash compensation and related employee benefit costs and a $0.8 million decrease in stock-based compensation.
Special Charges. During fiscal 2014, we recorded special charges of $74.8 million, consisting of $41.0 million for the portion of a license payment attributed to the use of the related technology in periods prior to the date of our license agreement with Broadcom, $26.5 million of exit costs and $7.3 million of asset impairment charges primarily related to property and equipment. The exit costs include severance and related costs associated with involuntarily terminated employees. Certain employees that were notified of their termination are required to provide services for varying periods in excess of statutory notice periods. Severance costs related to these services are recognized ratably over the estimated requisite service period. Exit costs also include the costs associated with the cancellation of certain contracts and the estimated costs associated with the portion of a facility under a non-cancelable lease that we ceased using. We expect to incur between $2 million and $3 million of additional exit costs associated with both of our current restructuring activities, primarily related to severance costs for terminated employees that are required to provide services beyond the statutory notice period.
The total unpaid exit costs of $15.6 million as of March 30, 2014 are expected to be paid over the terms of the related agreements through fiscal 2018, including $10.0 million during the next twelve months.
Income Taxes
Our income tax expense (benefit) from continuing operations was $9.3 million, $(11.7) million and $14.0 million for fiscal 2014, 2013 and 2012, respectively.
Income tax expense for fiscal 2014 included $16.5 million of valuation allowances we recorded against deferred tax assets related to certain state tax credits and net operating loss carryforwards. Based upon our current projections of future taxable income in the respective states, we are no longer able to assert that it is more likely than not that we would realize the full benefit of these deferred tax assets. The current projections reflect changes in our forecasted taxable income, including the impact of acquisitions and restructuring activities which occurred during the fourth quarter of fiscal 2014. Income tax expense for fiscal 2014 was also impacted by the effect of a discrete tax-related item associated with the difference between stock-based compensation expense and the deduction related to stock-based awards on income tax returns.
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Our income tax benefit for fiscal 2013 was primarily the result of adjustments to certain tax positions subject to an Internal Revenue Service (IRS) examination. These adjustments primarily consist of the settlement of a significant matter in the IRS examination of our income tax returns for fiscal years 2008 and 2009 for an amount less than we had previously accrued related to this tax position. During fiscal 2014, we settled all remaining matters relating to this IRS examination without material adjustment and are no longer subject to federal income tax examinations for years prior to fiscal 2010.
Our federal consolidated income tax returns for fiscal years 2010, 2011 and 2012 are currently under examination by the IRS. We do not believe that the results of these examinations will have a material impact on our financial condition or results of operations.
Given the global scope of our operations and the complexity of global tax and transfer pricing rules and regulations, it is difficult to estimate earnings within each tax jurisdiction. If actual earnings within each tax jurisdiction differ materially from our estimates, we may not achieve our expected effective tax rate. Additionally, our effective tax rate may be impacted by other items, including the tax effects of acquisitions and dispositions, changes to tax laws or regulations, examinations by tax authorities, stock-based compensation, uncertain tax positions and changes in our ability to realize deferred tax assets.
Liquidity and Capital Resources
Our combined balances of cash, cash equivalents and marketable securities was $278.0 million as of March 30, 2014 compared to $455.5 million as of March 31, 2013. As of March 30, 2014 and March 31, 2013, our international subsidiaries held $232.8 million and $317.1 million, respectively, of our total cash, cash equivalents and marketable securities. These holdings by our international subsidiaries consisted primarily of debt securities due from U.S. issuers, including the U.S. government and related agencies, and U.S. dollar denominated cash and money market funds. Certain foreign regulations could impact our ability to transfer funds to the United States. We currently intend to invest the funds held outside of the United States in our international operations and, as a result, do not intend to repatriate these funds. Should we decide to repatriate funds held outside of the United States, we may incur a significant tax obligation.
We believe that existing cash, cash equivalents, marketable securities and expected cash flow from operations will provide sufficient funds to finance our operations for at least the next twelve months. However, it is possible that we may need to supplement our existing sources of liquidity to finance our activities beyond the next twelve months or for the future acquisition of businesses, products or technologies and there can be no assurance that sources of liquidity will be available to us at that time.
Revolving Credit Facility
We have a credit agreement that provides us with a $125.0 million unsecured revolving credit facility that matures in March 2018. Borrowings under the credit agreement may be used for general corporate purposes, including permitted share repurchases and acquisitions. Under the credit agreement, we may increase the revolving commitments or obtain incremental term loans in an aggregate amount up to an additional $100.0 million, subject to certain conditions. There were no borrowings outstanding under the credit agreement as of March 30, 2014.
Operating, Investing and Financing Activities
Cash provided by operating activities was $56.8 million for fiscal 2014 compared to $97.2 million for fiscal 2013. Operating cash flow for fiscal 2014 included the payment of $62.0 related to the non-exclusive patent license agreement with Broadcom, of which $41.0 million was attributed to the use of the related technology in periods prior to the date of the license agreement and charged to operations in fiscal 2014 and $21.0 million was attributed to the future use of the related technology over the term of the agreement and recorded as a prepaid license. Cash provided by operating activities for fiscal 2014 consisted of our net loss of $18.3 million, including the $41.0 million related to the license agreement, net non-cash expenses of $62.3 million and net cash provided
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as a result of changes in operating assets and liabilities of $12.8 million. Net non-cash expenses include $32.5 million of depreciation and amortization, $22.6 million of stock-based compensation, and $8.0 million of asset impairments which were primarily related to our restructuring plans. The changes in operating assets and liabilities included an $11.5 million increase in other liabilities, a $9.9 million increase in accrued taxes, net, and a $6.7 million decrease in inventories (excluding the impact of our acquisitions in fiscal 2014), partially offset by a $19.0 million increase in other assets. The increase in other liabilities was primarily due to accrued exit costs associated with our restructuring plans. The increase in accrued taxes, net, was primarily due to lower tax payments remitted during fiscal 2014. The decrease in inventories was primarily due to sales of products that included ASICs that were purchased in the prior year due to long lead times. The increase in other assets is primarily related to the $21.0 million of the amount paid under the patent license agreement with Broadcom that we attributed to future periods.
Cash provided by operating activities was $97.2 million for fiscal 2013 compared to $166.2 million for fiscal 2012. Operating cash flow for fiscal 2013 consisted of our net income of $73.1 million and net non-cash expenses of $62.9 million, partially offset by net cash used as a result of changes in operating assets and liabilities of $38.8 million. The changes in operating assets and liabilities included a $37.3 million decrease in accrued taxes, net, and a $10.6 million decrease in accounts receivable. The decrease in accrued taxes, net, was primarily due to tax payments associated with the settlement of a significant matter in the IRS examination. The decrease in accounts receivable was primarily due to the timing of cash collections and a decrease in net revenues.
Operating cash flow for fiscal 2012 consisted of our net income of $229.4 million, including a $103.5 million gain on sale of the IB Business, and net non-cash expenses of $65.4 million, partially offset by net cash used as a result of changes in operating assets and liabilities of $25.1 million. The changes in operating assets and liabilities included a $16.3 million use of cash for accrued taxes, primarily due to estimated tax payments remitted during the fiscal year.
Cash used in investing activities was $17.0 million for fiscal 2014 and consisted of $157.4 million for the acquisition of businesses and $27.5 million of purchases of property and equipment, partially offset by $167.9 million of net proceeds from sales and maturities of available-for-sale securities. Cash used in investing activities was $36.4 million for fiscal 2013 and consisted of $46.8 million of purchases of property and equipment, partially offset by $10.4 million of net proceeds from sales and maturities of available-for-sale securities. Cash used in investing activities was $47.8 million for fiscal 2012 and consisted of $140.0 million of net purchases of available-for-sale securities and $32.8 million of purchases of property and equipment, partially offset by $125.0 million of proceeds from the sale of the IB Business.
We expect capital expenditures to remain significant in the future as we continue to invest in more costly engineering and production tools for new technologies, machinery and equipment, and enhancements to our corporate information technology infrastructure.
Cash used in financing activities was $44.1 million for fiscal 2014 and consisted primarily of our purchase of $47.8 million of common stock under our stock repurchase program, $4.7 million for minimum tax withholdings paid on behalf of employees for restricted stock units that vested during the year, partially offset by $8.7 million of proceeds from the issuance of common stock under stock-based awards. Cash used in financing activities was $129.7 million for fiscal 2013 and consisted primarily of our purchase of $131.4 million of common stock under our stock repurchase program, $5.6 million for minimum tax withholdings paid on behalf of employees for restricted stock units that vested during the year, partially offset by $8.3 million of proceeds from the issuance of common stock under stock-based awards. Cash used in financing activities was $101.7 million for fiscal 2012 and consisted primarily of our purchase of $126.9 million of common stock under our stock repurchase programs and $5.5 million for minimum tax withholdings paid on behalf of employees for restricted stock units that vested during the year, partially offset by $30.0 million of proceeds from the issuance of common stock under stock-based awards.
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Since fiscal 2003, we have had various stock repurchase programs that authorized the purchase of up to $1.95 billion of our outstanding common stock. As of March 30, 2014, we had repurchased a total of 126.6 million shares of common stock under our stock repurchase programs for an aggregate purchase price of $1.94 billion. Our most recent stock repurchase program expired during fiscal 2014.
Contractual Obligations and Commitments
We have certain contractual obligations and commitments to make future payments in the form of non-cancelable purchase orders to our suppliers and commitments under operating lease arrangements. A summary of our contractual obligations as of March 30, 2014, and their impact on our cash flows in future fiscal years, is as follows:
| 2015 | 2016 | 2017 | 2018 | 2019 | Total | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Operating leases |
$ | 8.2 | $ | 4.4 | $ | 2.5 | $ | 1.9 | $ | 0.2 | $ | 17.2 | ||||||||||||
| Non-cancelable purchase obligations |
39.5 | — | — | — | — | 39.5 | ||||||||||||||||||
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| $ | 47.7 | $ | 4.4 | $ | 2.5 | $ | 1.9 | $ | 0.2 | $ | 56.7 | |||||||||||||
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The amount of unrecognized tax benefits, including related accrued interest and penalties, was $17.1 million as of March 30, 2014. We are not able to provide a reasonable estimate of the timing of future tax payments related to these obligations.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenues and expenses during the reporting period. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, including the current economic environment, in making judgments about the carrying values of assets and liabilities. We believe the accounting policies described below to be our most critical accounting policies. These accounting policies are affected significantly by judgments, assumptions and estimates used in the preparation of the financial statements and actual results could differ materially from the amounts reported based on these policies.
Revenue Recognition
We recognize revenue from product sales when all of the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured.
For all sales, we use a binding purchase order or a signed agreement as evidence of an arrangement. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the terms specified in the arrangement with the customer. The customer’s obligation to pay and the payment terms are set at the time of delivery and are not dependent on the subsequent resale of the product. However, certain of our sales are made to distributors under agreements that contain a limited right to return unsold product and price protection provisions. These return rights and price protection provisions limit our ability to reasonably estimate product returns and the final price of the inventory sold to distributors. As a result, the price to the customer is not fixed or determinable at the time products are delivered to distributors. Accordingly, we recognize revenue from these distributors based on the sell-through method using inventory information provided by the distributor. At times, we provide standard incentive programs to our customers. We account for our competitive pricing incentives and rebates as a reduction of revenue in the period the related revenue is recorded based on the specific program criteria and historical experience. In addition, we record provisions against revenue and cost of revenue for estimated product returns in the same period that revenue is recognized. These provisions are based
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on historical experience as well as specifically identified product returns. Service and other revenue is recognized when earned and receipt is reasonably assured.
For those sales that include multiple deliverables, we allocate revenue based on the relative selling price of the individual components. When more than one element, such as hardware and services, are contained in a single arrangement, we allocate revenue between the elements based on each element’s relative selling price, provided that each element meets the criteria for treatment as a separate unit of accounting. When applying the relative selling price method, we determine the selling price for each deliverable using vendor-specific objective evidence (VSOE) of the selling price, if it exists. In order to establish VSOE of the selling price, we must regularly sell the product and/or service on a standalone basis with a substantial majority of the sales priced within a relatively narrow range. If VSOE of the selling price cannot be determined, we then consider third party evidence (TPE) of the selling price. Generally, we are not able to determine TPE due to the lack of similar products and services sold by other companies within the industry. If neither VSOE nor TPE exists, we determine the estimated selling price based on multiple factors including, but not limited to, cost, gross margin, market conditions and pricing practices. Revenue allocated to each element is then recognized when the basic revenue recognition criteria is met for each deliverable.
We sell certain software products and related post-contract customer support. We recognize revenue from software products when all of the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is probable. Revenue is allocated to undelivered elements based upon VSOE of the fair value of the element. VSOE of the fair value is based upon the price charged when the element is sold separately. Revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for each element. If we are unable to determine VSOE of fair value for an undelivered element, the entire amount of revenue from the arrangement is deferred and recognized over the service period or when all elements have been delivered.
Stock-Based Compensation
We recognize compensation expense for all stock-based awards made to employees and non-employee directors, including stock options, restricted stock units and stock purchases under our Employee Stock Purchase Plan (the ESPP), based on estimated fair values on the measurement date, which is generally the date of grant. Stock-based compensation is recognized for the portion of the award that is ultimately expected to vest. Forfeitures are estimated at the time of grant based on historical trends and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We recognize stock-based compensation expense for awards that are subject to only a service condition on a straight-line basis over the requisite service period for the entire award, which is the vesting period for stock options and restricted stock units, and the offering period for the ESPP. For all other stock-based awards, stock-based compensation is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. The determination of fair value of stock-based awards on the date of grant using an option-pricing model is affected by our stock price, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. In estimating expected stock price volatility, we use a combination of (i) historical volatility, calculated based on the daily closing prices of our common stock over a period equal to the expected term of the option, and (ii) implied volatility, utilizing market data of actively traded options on our common stock. We believe that the historical volatility of the price of our common stock over the expected term of the option is a strong indicator of the expected future volatility. We also believe that implied volatility takes into consideration market expectations of how future volatility will differ from historical volatility. Accordingly, we believe a combination of both historical and implied volatility provides the best estimate of the future volatility of the market price of our common stock. Changes in the subjective assumptions can materially affect the estimated fair value of stock-based awards.
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Income Taxes
We utilize the asset and liability method of accounting for income taxes. Income tax positions taken or expected to be taken in a tax return are recognized in the first reporting period that it is more likely than not the tax position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. Previously recognized income tax positions that fail to meet the recognition threshold in a subsequent period are derecognized in that period. Differences between actual results and our assumptions, or changes in our assumptions in future periods, are recorded in the period they become known. We record potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.
Deferred income taxes are recognized for the future tax consequences of temporary differences using enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Temporary differences include the difference between the financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carryforwards. The effect on deferred taxes of a change in tax rates is recognized in earnings in the period that includes the enactment date.
A valuation allowance is recorded when it is more likely than not that some or all of a deferred tax asset will not be realized. Significant judgment and estimates are required in determining whether a valuation allowance is recorded. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. Our estimates and projections require significant judgment and are subject to uncertainty due to various factors, including the economic environment, industry and market conditions, and the length of time of the projections included in the analyses. If our actual results are less favorable than current estimates, or we revise our estimates downward in future analyses, a valuation allowance may be required with a corresponding adjustment to earnings in the period in which such determination is made.
As a multinational corporation, we are subject to complex tax laws and regulations in various jurisdictions. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional liabilities or potentially to reverse previously recorded tax liabilities. Differences between actual results and our assumptions, or changes in our assumptions in future periods, are recorded in the period they become known.
Marketable Securities
Marketable securities consist of available-for-sale securities and are classified in the consolidated balance sheets based on the nature of the security and the availability for use in current operations. Available-for-sale securities are recorded at fair value based on quoted market prices or other observable inputs. Unrealized gains and losses, net of related income taxes, on available-for-sale securities are excluded from earnings and reported as a separate component of accumulated other comprehensive income until realized.
We recognize an impairment charge on available-for-sale securities when the decline in the fair value of an investment below its cost basis is judged to be other-than-temporary. If we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, we would recognize the entire impairment in earnings. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is separated into (a) the amount representing the credit loss and (b) the amount related to all other factors. The amount of the other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of
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applicable taxes. Significant judgment is required in determining the fair value of investment securities in inactive markets as well as determining when declines in fair value constitute an other-than-temporary impairment and the portion of any impairment that is due to a credit loss. We consider various factors in determining whether to recognize an impairment charge, including the current financial and credit market environment, the financial condition and near-term prospects of the issuer of the security, the magnitude of the unrealized loss compared to the cost of the investment, the length of time the investment has been in a loss position and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery of market value.
Realized gains or losses are determined on a specific identification basis and reported in interest and other income, net, as incurred.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market. We write down the carrying value of our inventory to estimated net realizable value for estimated excess and obsolete inventory based upon assumptions about future demand and market conditions. These assumptions are based on economic conditions and trends (both current and projected), anticipated customer demand and acceptance of our current products, expected future products and other assumptions. If actual market conditions are less favorable than those projected by management, additional write-downs may be required. Once we write down the carrying value of inventory, a new cost basis is established. Subsequent changes in facts and circumstances do not result in an increase in the newly established cost basis.
Inventories acquired through business combinations are recorded at their acquisition date fair value, which is generally estimated selling price less the costs of disposal and a normal profit allowance.
Goodwill and Other Intangible Assets
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. The amounts and useful lives assigned to intangible assets acquired, other than goodwill, impact the amount and timing of future amortization. The amount assigned to in-process research and development is capitalized and accounted for as an indefinite-lived intangible asset until the underlying projects are completed or abandoned.
Goodwill is not amortized but instead is tested at least annually for impairment, or more frequently when events or changes in circumstances indicate a potential impairment, by comparing the carrying value to the fair value of the reporting unit to which the goodwill is assigned. A two-step test is used to identify the potential impairment and to measure the amount of impairment, if any. The first step is to compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit is less than its carrying amount, goodwill is considered impaired and the loss is measured by performing step two. Under step two, the impairment loss is measured by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. We perform the annual test for impairment as of the first day of our fourth fiscal quarter. During the annual goodwill impairment test in fiscal 2014, we completed step one and determined that there was no impairment of goodwill since the fair value (based on quoted market price) of the reporting unit exceeded its carrying value. Based on this impairment test, we believe that we have no at-risk goodwill.
The initial recording and subsequent evaluation for impairment of goodwill and purchased intangible assets requires the use of significant management judgment regarding the forecasts of future operating results. It is possible that our business plans may change and our estimates used may prove to be inaccurate. If our actual results or estimates used in future impairment analyses are lower than current estimates, we could incur impairment charges.
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Long-Lived Assets
Long-lived assets, including property and equipment and purchased intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Significant judgment is required in determining whether a potential indicator of impairment of our long-lived assets exists. Recoverability of assets to be held and used is measured by the comparison of the carrying amount of an asset or asset group to future undiscounted net cash flows expected to be generated by the asset or asset group. If such an asset or asset group is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group. Assets to be disposed of are reported at the lower of their carrying amount or fair value less costs to sell. Estimating future net cash flows and determining proper asset groupings for the purpose of this impairment test requires the use of significant management judgment. If our actual results, or estimates used in future impairment analyses, are lower than our current estimates, we could incur impairment charges.
Recently Issued Accounting Standards Not Yet Effective
In July 2013, the Financial Accounting Standards Board issued an accounting standard update that requires certain unrecognized tax benefits to be presented as a reduction to deferred tax assets rather than as liabilities when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This standard may be applied prospectively or retrospectively. We will adopt this standard in the first quarter of fiscal 2015 and its adoption is not expected to have a material effect on our consolidated financial statements.
Off-Balance Sheet Arrangements
During the periods presented, we did not have any off-balance sheet arrangements other than operating leases. Information related to our off-balance sheet arrangements is included in Note 17 of the Notes to Consolidated Financial Statements in this Form 10-K. Such information is hereby incorporated by reference.
| Item 7a. | Quantitative and Qualitative Disclosures About Market Risk |
Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of March 30, 2014, the carrying value of our cash and cash equivalents approximates fair value.
We maintain a portfolio of marketable securities consisting primarily of U.S. government and agency securities, corporate debt obligations, mortgage-backed securities and municipal bonds, the majority of which have remaining terms of three years or less. We are exposed to fluctuations in interest rates as movements in interest rates can result in changes in the market value of our investments in debt securities. However, due to the short-term expected duration of our portfolio of marketable securities, we do not believe that we are subject to material interest rate risk.
In accordance with our investment guidelines, we only invest in instruments with high credit quality ratings and we limit our exposure to any one issuer or type of investment. Our portfolio of marketable securities as of March 30, 2014 consists of $186.8 million of securities that are classified as available-for-sale. As of March 30, 2014, we had gross unrealized losses associated with our available-for-sale securities of $0.3 million that were determined by management to be temporary in nature.
We do not use derivative financial instruments.
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| Item 8. | Financial Statements and Supplementary Data |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
QLogic Corporation:
We have audited the accompanying consolidated balance sheets of QLogic Corporation and subsidiaries as of March 30, 2014 and March 31, 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the years in the three-year period ended March 30, 2014. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule of valuation and qualifying accounts as listed in the index under Item 15(a) (2). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of QLogic Corporation and subsidiaries as of March 30, 2014 and March 31, 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended March 30, 2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), QLogic Corporation’s internal control over financial reporting as of March 30, 2014, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 22, 2014, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Irvine, California
May 22, 2014
40
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
QLogic Corporation:
We have audited QLogic Corporation’s internal control over financial reporting as of March 30, 2014, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). QLogic Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, QLogic Corporation maintained, in all material respects, effective internal control over financial reporting as of March 30, 2014, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of QLogic Corporation and subsidiaries as of March 30, 2014 and March 31, 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the years in the three-year period ended March 30, 2014, and our report dated May 22, 2014, expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Irvine, California
May 22, 2014
41
Table of Contents
QLOGIC CORPORATION
March 30, 2014 and March 31, 2013
| 2014 | 2013 | |||||||
| (In thousands, except share and per share amounts) |
||||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 91,258 | $ | 95,532 | ||||
| Marketable securities |
186,783 | 359,974 | ||||||
| Accounts receivable, less allowance for doubtful accounts of $1,186 and $1,196 as of March 30, 2014 and March 31, 2013, respectively |
65,213 | 66,135 | ||||||
| Inventories |
18,036 | 20,160 | ||||||
| Deferred tax assets |
15,080 | 13,036 | ||||||
| Other current assets |
16,590 | 24,381 | ||||||
|
|
|
|
|
|||||
| Total current assets |
392,960 | 579,218 | ||||||
| Property and equipment, net |
84,912 | 96,336 | ||||||
| Goodwill |
194,107 | 110,976 | ||||||
| Purchased intangible assets, net |
69,903 | 4,054 | ||||||
| Deferred tax assets |
32,827 | 31,992 | ||||||
| Other assets |
23,554 | 2,587 | ||||||
|
|
|
|
|
|||||
| $ | 798,263 | $ | 825,163 | |||||
|
|
|
|
|
|||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 30,657 | $ | 29,668 | ||||
| Accrued compensation |
26,956 | 27,453 | ||||||
| Accrued taxes |
981 | 4,559 | ||||||
| Deferred revenue |
3,954 | 4,676 | ||||||
| Other current liabilities |
16,123 | 7,651 | ||||||
|
|
|
|
|
|||||
| Total current liabilities |
78,671 | 74,007 | ||||||
| Accrued taxes |
17,095 | 10,772 | ||||||
| Other liabilities |
9,071 | 6,107 | ||||||
|
|
|
|
|
|||||
| Total liabilities |
104,837 | 90,886 | ||||||
|
|
|
|
|
|||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Preferred stock, $0.001 par value; 1,000,000 shares authorized; no shares issued and outstanding |
— | — | ||||||
| Common stock, $0.001 par value; 500,000,000 shares authorized; 213,786,000 and 212,145,000 shares issued as of March 30, 2014 and March 31, 2013, respectively |
214 | 212 | ||||||
| Additional paid-in capital |
958,008 | 932,557 | ||||||
| Retained earnings |
1,672,071 | 1,690,337 | ||||||
| Accumulated other comprehensive income |
435 | 1,887 | ||||||
| Treasury stock, at cost: 126,616,000 and 122,185,000 shares as of March 30, 2014 and March 31, 2013, respectively |
(1,937,302 | ) | (1,890,716 | ) | ||||
|
|
|
|
|
|||||
| Total stockholders’ equity |
693,426 | 734,277 | ||||||
|
|
|
|
|
|||||
| $ | 798,263 | $ | 825,163 | |||||
|
|
|
|
|
|||||
See accompanying notes to consolidated financial statements.
42
Table of Contents
QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 30, 2014, March 31, 2013 and April 1, 2012
| 2014 | 2013 | 2012 | ||||||||||
| (In thousands, except per share amounts) |
||||||||||||
| Net revenues |
$ | 460,907 | $ | 484,538 | $ | 558,608 | ||||||
| Cost of revenues |
150,800 | 159,180 | 177,704 | |||||||||
|
|
|
|
|
|
|
|||||||
| Gross profit |
310,107 | 325,358 | 380,904 | |||||||||
|
|
|
|
|
|
|
|||||||
| Operating expenses: |
||||||||||||
| Engineering and development |
147,010 | 156,097 | 138,768 | |||||||||
| Sales and marketing |
68,367 | 78,512 | 77,370 | |||||||||
| General and administrative |
32,097 | 32,899 | 35,299 | |||||||||
| Special charges |
74,853 | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total operating expenses |
322,327 | 267,508 | 251,437 | |||||||||
|
|
|
|
|
|
|
|||||||
| Operating income (loss) |
(12,220 | ) | 57,850 | 129,467 | ||||||||
| Interest and other income, net |
3,260 | 4,007 | 3,959 | |||||||||
|
|
|
|
|
|
|
|||||||
| Income (loss) from continuing operations before income taxes |
(8,960 | ) | 61,857 | 133,426 | ||||||||
| Income tax expense (benefit) |
9,306 | (11,704 | ) | 13,983 | ||||||||
|
|
|
|
|
|
|
|||||||
| Income (loss) from continuing operations |
(18,266 | ) | 73,561 | 119,443 | ||||||||
|
|
|
|
|
|
|
|||||||
| Discontinued operations: |
||||||||||||
| Income (loss) from operations, net of income taxes |
— | (425 | ) | 910 | ||||||||
| Gain on sale, net of income taxes |
— | — | 109,083 | |||||||||
|
|
|
|
|
|
|
|||||||
| Income (loss) from discontinued operations |
— | (425 | ) | 109,993 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net income (loss) |
$ | (18,266 | ) | $ | 73,136 | $ | 229,436 | |||||
|
|
|
|
|
|
|
|||||||
| Income (loss) from continuing operations per share: |
||||||||||||
| Basic |
$ | (0.21 | ) | $ | 0.79 | $ | 1.17 | |||||
|
|
|
|
|
|
|
|||||||
| Diluted |
$ | (0.21 | ) | $ | 0.78 | $ | 1.16 | |||||
|
|
|
|
|
|
|
|||||||
| Income (loss) from discontinued operations per share: |
||||||||||||
| Basic |
$ | — | $ | (0.01 | ) | $ | 1.08 | |||||
|
|
|
|
|
|
|
|||||||
| Diluted |
$ | — | $ | — | $ | 1.07 | ||||||
|
|
|
|
|
|
|
|||||||
| Net income (loss) per share: |
||||||||||||
| Basic |
$ | (0.21 | ) | $ | 0.78 | $ | 2.25 | |||||
|
|
|
|
|
|
|
|||||||
| Diluted |
$ | (0.21 | ) | $ | 0.78 | $ | 2.23 | |||||
|
|
|
|
|
|
|
|||||||
| Number of shares used in per share calculations: |
||||||||||||
| Basic |
87,612 | 93,560 | 101,766 | |||||||||
|
|
|
|
|
|
|
|||||||
| Diluted |
87,612 | 93,998 | 102,711 | |||||||||
|
|
|
|
|
|
|
|||||||
See accompanying notes to consolidated financial statements.
43
Table of Contents
QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended March 30, 2014, March 31, 2013 and April 1, 2012
| 2014 | 2013 | 2012 | ||||||||||
| (In thousands) | ||||||||||||
| Net income (loss) |
$ | (18,266 | ) | $ | 73,136 | $ | 229,436 | |||||
| Other comprehensive income, net of income taxes: |
||||||||||||
| Changes in fair value of marketable securities: |
||||||||||||
| Changes in unrealized gains |
(1,112 | ) | 1,600 | 691 | ||||||||
| Net realized gains reclassified into earnings |
(587 | ) | (626 | ) | (204 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| (1,699 | ) | 974 | 487 | |||||||||
| Foreign currency translation adjustments |
247 | (120 | ) | (68 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Total other comprehensive income (loss) |
(1,452 | ) | 854 | 419 | ||||||||
|
|
|
|
|
|
|
|||||||
| Comprehensive income (loss) |
$ | (19,718 | ) | $ | 73,990 | $ | 229,855 | |||||
|
|
|
|
|
|
|
|||||||
See accompanying notes to consolidated financial statements.
44
Table of Contents
QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended March 30, 2014, March 31, 2013 and April 1, 2012
| Accumulated Other Comprehensive Income |
Treasury Stock |
Total Stockholders’ Equity |
||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital |
Retained Earnings |
||||||||||||||||||||||||||
| Outstanding | ||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
| Balance at April 3, 2011 |
104,717 | $ | 208 | $ | 844,546 | $ | 1,387,765 | $ | 614 | $ | (1,631,969 | ) | $ | 601,164 | ||||||||||||||
| Net income |
— | — | — | 229,436 | — | — | 229,436 | |||||||||||||||||||||
| Issuance of common stock under stock-based awards |
2,646 | 3 | 24,485 | — | — | — | 24,488 | |||||||||||||||||||||
| Increase in excess tax benefits from stock-based awards |
— | — | 111 | — | — | — | 111 | |||||||||||||||||||||
| Stock-based compensation |
— | — | 32,592 | — | — | — | 32,592 | |||||||||||||||||||||
| Other comprehensive income |
— | — | — | — | 419 | — | 419 | |||||||||||||||||||||
| Purchases of treasury stock |
(8,586 | ) | — | — | — | — | (128,367 | ) | (128,367 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance at April 1, 2012 |
98,777 | 211 | 901,734 | 1,617,201 | 1,033 | (1,760,336 | ) | 759,843 | ||||||||||||||||||||
| Net income |
— | — | — | 73,136 | — | — | 73,136 | |||||||||||||||||||||
| Issuance of common stock under stock-based awards |
1,457 | 1 | 2,614 | — | — | — | 2,615 | |||||||||||||||||||||
| Decrease in excess tax benefits from stock-based awards |
— | — | (2,154 | ) | — | — | — | (2,154 | ) | |||||||||||||||||||
| Stock-based compensation |
— | — | 30,363 | — | — | — | 30,363 | |||||||||||||||||||||
| Other comprehensive income |
— | — | — | — | 854 | — | 854 | |||||||||||||||||||||
| Purchases of treasury stock |
(10,274 | ) | — | — | — | — | (130,380 | ) | (130,380 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance at March 31, 2013 |
89,960 | 212 | 932,557 | 1,690,337 | 1,887 | (1,890,716 | ) | 734,277 | ||||||||||||||||||||
| Net loss |
— | — | — | (18,266 | ) | — | — | (18,266 | ) | |||||||||||||||||||
| Issuance of common stock under stock-based awards |
1,641 | 2 | 3,970 | — | — | — | 3,972 | |||||||||||||||||||||
| Decrease in excess tax benefits from stock-based awards |
— | — | (1,157 | ) | — | — | — | (1,157 | ) | |||||||||||||||||||
| Stock-based compensation |
— | — | 22,638 | — | — | — | 22,638 | |||||||||||||||||||||
| Other comprehensive loss |
— | — | — | — | (1,452 | ) | — | (1,452 | ) | |||||||||||||||||||
| Purchases of treasury stock |
(4,431 | ) | — | — | — | — | (46,586 | ) | (46,586 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance at March 30, 2014 |
87,170 | $ | 214 | $ | 958,008 | $ | 1,672,071 | $ | 435 | $ | (1,937,302 | ) | $ | 693,426 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
See accompanying notes to consolidated financial statements.
45
Table of Contents
QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 30, 2014, March 31, 2013 and April 1, 2012
| 2014 | 2013 | 2012 | ||||||||||
| (In thousands) | ||||||||||||
| Cash flows from operating activities: |
||||||||||||
| Net income (loss) |
$ | (18,266 | ) | $ | 73,136 | $ | 229,436 | |||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||||||
| Depreciation and amortization |
32,523 | 28,630 | 31,641 | |||||||||
| Stock-based compensation |
22,638 | 30,363 | 32,592 | |||||||||
| Deferred income taxes |
(3,637 | ) | (110 | ) | (4,813 | ) | ||||||
| Gain on sale of business |
— | — | (103,509 | ) | ||||||||
| Asset impairments |
8,022 | — | — | |||||||||
| Other non-cash items |
2,729 | 3,954 | 5,946 | |||||||||
| Changes in operating assets and liabilities, net of acquisitions and disposition: |
||||||||||||
| Accounts receivable |
899 | 10,635 | (6,533 | ) | ||||||||
| Inventories |
6,660 | (436 | ) | (843 | ) | |||||||
| Other assets |
(19,013 | ) | (3,346 | ) | 361 | |||||||
| Accounts payable |
4,376 | (3,555 | ) | (4,908 | ) | |||||||
| Accrued compensation |
(1,511 | ) | (873 | ) | 2,468 | |||||||
| Accrued taxes, net |
9,855 | (37,314 | ) | (16,265 | ) | |||||||
| Other liabilities |
11,516 | (3,919 | ) | 590 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by operating activities |
56,791 | 97,165 | 166,163 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash flows from investing activities: |
||||||||||||
| Purchases of available-for-sale securities |
(342,921 | ) | (298,621 | ) | (573,635 | ) | ||||||
| Proceeds from sales and maturities of available-for-sale securities |
510,816 | 308,947 | 433,644 | |||||||||
| Purchases of property and equipment |
(27,550 | ) | (46,765 | ) | (32,731 | ) | ||||||
| Acquisition of businesses |
(157,352 | ) | — | — | ||||||||
| Proceeds from sale of business |
— | — | 124,969 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash used in investing activities |
(17,007 | ) | (36,439 | ) | (47,753 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Cash flows from financing activities: |
||||||||||||
| Proceeds from issuance of common stock under stock-based awards |
8,711 | 8,250 | 29,961 | |||||||||
| Minimum tax withholding paid on behalf of employees for restricted stock units |
(4,739 | ) | (5,635 | ) | (5,473 | ) | ||||||
| Purchases of treasury stock |
(47,785 | ) | (131,426 | ) | (126,870 | ) | ||||||
| Other financing activities |
(245 | ) | (899 | ) | 708 | |||||||
|
|
|
|
|
|
|
|||||||
| Net cash used in financing activities |
(44,058 | ) | (129,710 | ) | (101,674 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net increase (decrease) in cash and cash equivalents |
(4,274 | ) | (68,984 | ) | 16,736 | |||||||
| Cash and cash equivalents at beginning of year |
95,532 | 164,516 | 147,780 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash and cash equivalents at end of year |
$ | 91,258 | $ | 95,532 | $ | 164,516 | ||||||
|
|
|
|
|
|
|
|||||||
| Supplemental disclosure of cash flow information: |
||||||||||||
| Cash paid during the year for income taxes, net of refunds received |
$ | 2,508 | $ | 23,434 | $ | 25,311 | ||||||
|
|
|
|
|
|
|
|||||||
See accompanying notes to consolidated financial statements.
46
Table of Contents
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business and Summary of Significant Accounting Policies
General Business Information
QLogic Corporation (QLogic or the Company) designs and supplies high performance server and storage networking connectivity products that provide, enhance and manage computer data communication. The Company’s products are used in enterprise data centers, cloud computing, Web 2.0 and other environments dependent on high performance, reliable data networking. The Company’s products are based primarily on Fibre Channel and Ethernet technologies and are used in connection with storage networks, local area networks, and converged networks. The Company’s products consist primarily of connectivity products such as adapters and application-specific integrated circuits (ASICs) and are sold worldwide, primarily to original equipment manufacturers (OEMs) and distributors.
The Company classifies its products into two categories – Advanced Connectivity Platforms and Legacy Connectivity Products. Advanced Connectivity Platforms are comprised primarily of adapters and ASICs for server and storage connectivity applications. Legacy Connectivity Products are comprised primarily of Fibre Channel switch products and 1Gb Internet Small Computer System Interface (iSCSI) products.
Principles of Consolidation
The consolidated financial statements include the financial statements of QLogic Corporation and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
Financial Reporting Period
The Company uses a fifty-two/fifty-three week fiscal year ending on the Sunday nearest March 31. Fiscal years 2014, 2013 and 2012 each comprised fifty-two weeks and ended on March 30, 2014, March 31, 2013 and April 1, 2012, respectively.
Basis of Presentation
In February 2012, the Company completed the sale of the product lines and certain assets associated with its InfiniBand business (the IB Business). The IB Business meets the criteria to be presented as discontinued operations. As a result of this divestiture, the Company’s consolidated financial statements for all periods present the operations of the IB Business as discontinued operations.
Certain immaterial reclassifications have been made to prior year amounts to conform to the current year presentation.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and judgments that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. Among the significant estimates affecting the consolidated financial statements are those related to revenue recognition, stock-based compensation, income taxes, marketable securities, inventories, goodwill and long-lived assets.
The Company evaluates its estimates on an ongoing basis using historical experience and other factors, including the current economic environment. Significant judgment is required in determining (i) the fair value of assets acquired and liabilities assumed in a business combination, including the fair value of identifiable intangible assets, (ii) the fair value of a patent license and the portion of the fair value attributable to past and
47
Table of Contents
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
future periods, (iii) the Company’s tax filing positions and the related assessment of recognition and measurement of uncertain tax positions, (iv) whether a valuation allowance related to a deferred tax asset should be recorded, (v) whether a potential indicator of impairment of the Company’s long-lived assets exists and in estimating future cash flows for the purpose of any necessary impairment tests, and (vi) whether a group of assets disposed or to be disposed of meets the criteria for presentation as discontinued operations and in identifying the appropriate amounts to present as discontinued operations. If management’s estimates differ materially from actual results, the Company’s future results of operations will be affected.
Revenue Recognition
The Company recognizes revenue from product sales when all of the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured.
For all sales, the Company uses a binding purchase order or a signed agreement as evidence of an arrangement. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the terms specified in the arrangement with the customer. The customer’s obligation to pay and the payment terms are set at the time of delivery and are not dependent on the subsequent resale of the product. However, certain of the Company’s sales are made to distributors under agreements that contain a limited right to return unsold product and price protection provisions. These return rights and price protection provisions limit the Company’s ability to reasonably estimate product returns and the final price of the inventory sold to distributors. As a result, the price to the customer is not fixed or determinable at the time products are delivered to distributors. Accordingly, the Company recognizes revenue from these distributors based on the sell-through method using inventory information provided by the distributor. At times, the Company provides standard incentive programs to its customers. The Company accounts for its competitive pricing incentives and rebates as a reduction of revenue in the period the related revenue is recorded based on the specific program criteria and historical experience. In addition, the Company records provisions against revenue and cost of revenue for estimated product returns in the same period that revenue is recognized. These provisions are based on historical experience as well as specifically identified product returns. Service and other revenue is recognized when earned and receipt is reasonably assured.
For those sales that include multiple deliverables, the Company allocates revenue based on the relative selling price of the individual components. When more than one element, such as hardware and services, are contained in a single arrangement, the Company allocates revenue between the elements based on each element’s relative selling price, provided that each element meets the criteria for treatment as a separate unit of accounting. When applying the relative selling price method, the Company determines the selling price for each deliverable using vendor-specific objective evidence (VSOE) of the selling price, if it exists. In order to establish VSOE of the selling price, the Company must regularly sell the product and/or service on a standalone basis with a substantial majority of the sales priced within a relatively narrow range. If VSOE of the selling price cannot be determined, the Company then considers third party evidence (TPE) of the selling price. Generally, the Company is not able to determine TPE due to the lack of similar products and services sold by other companies within the industry. If neither VSOE nor TPE exists, the Company determines the estimated selling price based on multiple factors including, but not limited to, cost, gross margin, market conditions and pricing practices. Revenue allocated to each element is then recognized when the basic revenue recognition criteria is met for each deliverable.
The Company sells certain software products and related post-contract customer support. The Company recognizes revenue from software products when all of the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is probable. Revenue is allocated to
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undelivered elements based upon VSOE of the fair value of the element. VSOE of the fair value is based upon the price charged when the element is sold separately. Revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for each element. If the Company is unable to determine VSOE of fair value for an undelivered element, the entire amount of revenue from the arrangement is deferred and recognized over the service period or when all elements have been delivered.
Stock-Based Compensation
The Company recognizes compensation expense for all stock-based awards made to employees and non-employee directors, including stock options, restricted stock units and stock purchases under its Employee Stock Purchase Plan (the ESPP), based on estimated fair values on the measurement date, which is generally the date of grant. Stock-based compensation is recognized for the portion of the award that is ultimately expected to vest. Forfeitures are estimated at the time of grant based on historical trends and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company recognizes stock-based compensation expense for awards that are subject to only a service condition on a straight-line basis over the requisite service period for the entire award, which is the vesting period for stock options and restricted stock units, and the offering period for the ESPP. For all other stock-based awards, stock-based compensation is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. The determination of fair value of stock-based awards on the date of grant using an option-pricing model is affected by the Company’s stock price, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. In estimating expected stock price volatility, the Company uses a combination of (i) historical volatility, calculated based on the daily closing prices of its common stock over a period equal to the expected term of the option, and (ii) implied volatility, utilizing market data of actively traded options on its common stock.
Research and Development
Research and development costs, including costs related to the development of new products and process technology, are expensed as incurred.
Advertising Costs
The Company expenses all advertising costs as incurred and such costs were not material to the consolidated statements of operations for all periods presented.
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Income tax positions taken or expected to be taken in a tax return are recognized in the first reporting period that it is more likely than not the tax position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. Previously recognized income tax positions that fail to meet the recognition threshold in a subsequent period are derecognized in that period. Differences between actual results and the Company’s assumptions, or changes in its assumptions in future periods, are recorded in the period they become known. The Company records potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.
Deferred income taxes are recognized for the future tax consequences of temporary differences using enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences
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are expected to be recovered or settled. Temporary differences include the difference between the financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carryforwards. The effect on deferred taxes of a change in tax rates is recognized in earnings in the period that includes the enactment date.
A valuation allowance is recorded when it is more likely than not that some or all of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, the Company considers all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. The Company’s estimates and projections require significant judgment and are subject to uncertainty due to various factors, including the economic environment, industry and market conditions, and the length of time of the projections included in the analyses.
Income from Continuing Operations per Share
The Company computes basic income (loss) from continuing operations per share based on the weighted-average number of common shares outstanding during the periods presented. Diluted income (loss) from continuing operations per share is computed based on the weighted-average number of common and any dilutive potential common shares outstanding using the treasury stock method. The Company has granted stock options, restricted stock units and other stock-based awards, which have been treated as dilutive potential common shares in computing diluted income from continuing operations per share.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents, marketable securities and trade accounts receivable. Cash and cash equivalents are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits.
The Company invests primarily in debt securities, the majority of which are high investment grade. In accordance with the Company’s investment policy, exposure to credit risk is limited by the diversification and investment in highly-rated securities.
The Company sells its products to OEMs and distributors throughout the world. As of March 30, 2014, and March 31, 2013 the Company had four customers that each individually accounted for 10% or more of the Company’s accounts receivable. These customers, all of which were OEMs or manufacturing subcontractors of servers and workstations, accounted for an aggregate of 71% and 74% of the Company’s accounts receivable as of March 30, 2014 and March 31, 2013, respectively. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. Sales to customers are denominated in U.S. dollars. As a result, the Company believes its foreign currency risk related to trade accounts receivable is minimal.
Fair Value Measurements
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs that may be used to measure fair value. The first two levels of inputs are considered observable and the last unobservable. A description of the three levels of inputs is as follows:
| • | Level 1 — Quoted prices in active markets for identical assets or liabilities. |
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| • | Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| • | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less on their acquisition date to be cash equivalents. The carrying amounts of cash and cash equivalents approximate their fair values.
Marketable Securities
Marketable securities consist of available-for-sale securities and are classified in the consolidated balance sheets based on the nature of the security and the availability for use in current operations. Available-for-sale securities are recorded at fair value based on quoted market prices or other observable inputs. Unrealized gains and losses, net of related income taxes, on available-for-sale securities are excluded from earnings and reported as a separate component of accumulated other comprehensive income until realized.
The Company recognizes an impairment charge on available-for-sale securities when the decline in the fair value of an investment below its cost basis is judged to be other-than-temporary. If the Company intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the Company would recognize the entire impairment in earnings. If the Company does not intend to sell the security and it is not more likely than not that it will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is separated into (a) the amount representing the credit loss and (b) the amount related to all other factors. The amount of the other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes. The Company considers various factors in determining whether to recognize an impairment charge, including the current financial and credit market environment, the financial condition and near-term prospects of the issuer of the security, the magnitude of the unrealized loss compared to the cost of the investment, the length of time the investment has been in a loss position and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery of market value.
Realized gains or losses are determined on a specific identification basis and reported in interest and other income, net, as incurred.
Allowance for Doubtful Accounts
An allowance for doubtful accounts is maintained for estimated losses resulting from the inability of the Company’s customers to make required payments. This reserve is determined by analyzing specific customer accounts, applying estimated loss rates to the aging of remaining accounts receivable balances, and considering the impact of the current economic environment where appropriate.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market. The Company writes down the carrying value of inventory to estimated net realizable value for estimated excess and obsolete inventory based
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upon assumptions about future demand and market conditions. These assumptions are based on economic conditions and trends (both current and projected), anticipated customer demand and acceptance of the Company’s current products, expected future products and other assumptions. Once the Company writes down the carrying value of inventory, a new cost basis is established. Subsequent changes in facts and circumstances do not result in an increase in the newly-established cost basis.
Inventories acquired through business combinations are recorded at their acquisition date fair value, which is generally estimated selling price less the costs of disposal and a normal profit allowance.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over estimated useful lives of 39.5 years for buildings, five to fifteen years for building and land improvements, and two to five years for other property and equipment. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the related asset.
Goodwill and Other Intangible Assets
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. The amounts and useful lives assigned to intangible assets acquired, other than goodwill, impact the amount and timing of future amortization. The amount assigned to in-process research and development is capitalized and accounted for as an indefinite-lived intangible asset until the underlying projects are completed or abandoned.
Goodwill is not amortized but instead is tested at least annually for impairment, or more frequently when events or changes in circumstances indicate a potential impairment, by comparing the carrying value to the fair value of the reporting unit to which the goodwill is assigned. A two-step test is used to identify the potential impairment and to measure the amount of impairment, if any. The first step is to compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit is less than its carrying amount, goodwill is considered impaired and the loss is measured by performing step two. Under step two, the impairment loss is measured by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Management determined that the Company has a single reporting unit for the purpose of testing goodwill for impairment. The Company performs the annual test for impairment as of the first day of its fourth fiscal quarter.
During the annual goodwill impairment test, the Company completed step one and determined that there was no impairment of goodwill since the fair value (based on quoted market price) of the reporting unit exceeded its carrying value.
Long-Lived Assets
Long-lived assets, including property and equipment and purchased intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by the comparison of the carrying amount of an asset or asset group to future undiscounted net cash flows expected to be generated by the asset or asset group. If such an asset or asset group is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group. Assets to be disposed of are reported at the lower of their carrying amount or fair value less costs to sell.
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Purchased intangible assets consist primarily of technology acquired in business acquisitions. Purchased intangible assets that have definite lives are amortized using a method that reflects the pattern in which the economic benefits of the intangible assets are realized or, if that pattern cannot be reliably determined, using a straight-line method over the estimated useful lives of the related assets, generally ranging from three to seven years.
Debt Issuance Costs
Costs incurred in connection with the issuance of revolving credit facilities are capitalized and amortized to interest expense on a straight-line basis over the term of the related agreement.
Warranty
The Company’s products typically carry a warranty for periods of up to five years. The Company records a liability for product warranty obligations in the period the related revenue is recorded based on historical warranty experience. Warranty expense and the corresponding liability were not material to the consolidated financial statements for all periods presented.
Comprehensive Income
Comprehensive income (loss) includes all changes in equity other than transactions with stockholders. The Company’s accumulated other comprehensive income consists of unrealized gains and losses on available-for-sale securities, net of income taxes, and foreign currency translation adjustments.
Foreign Currency Translation
Certain of the Company’s foreign subsidiaries utilize a functional currency other than U.S. dollars. Assets and liabilities of these subsidiaries are translated to U.S. dollars at exchange rates in effect at the balance sheet date, and income and expenses are translated at average exchange rates during the period. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income. Gains and losses resulting from transactions denominated in currencies other than the functional currency are included in interest and other income, net, and were not material to the consolidated statements of operations for all periods presented.
Note 2. Business Acquisitions and License Agreement
Broadcom Corporation
On March 13, 2014, the Company acquired certain 10/40/100Gb Ethernet controller-related assets from Broadcom Corporation (Broadcom) primarily relating to the NetXtreme® II Ethernet controller family and licensed certain related intellectual property under non-exclusive licenses for total cash consideration of $147.8 million and the assumption of certain liabilities. The transfer of certain property and equipment in a foreign jurisdiction is subject to local compliance requirements and is expected to be completed in fiscal 2015. This business acquisition expands the Company’s product portfolio and is expected to accelerate its time to market for next generation products in the server Ethernet connectivity market. In connection with this acquisition, the Company entered into a development and supply agreement under which the Company will purchase services and ASICs from Broadcom related to this business.
The Company preliminarily estimated the fair value of the assets acquired and liabilities assumed and allocated a portion of the total purchase consideration to tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values at the acquisition date. The excess of the total
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purchase consideration over the aggregate estimated fair values was recorded as goodwill. The goodwill associated with this acquisition is expected to be tax deductible. The following table summarizes the preliminary allocation of the purchase price to the fair value of the assets acquired and liabilities assumed:
| (In thousands) | ||||
| Inventories |
$ | 2,880 | ||
| Other current assets |
307 | |||
| Property and equipment |
2,455 | |||
| Goodwill |
83,131 | |||
| Purchased intangible asset |
60,100 | |||
| Accrued compensation |
(987 | ) | ||
| Other current liabilities |
(129 | ) | ||
|
|
|
|||
| $ | 147,757 | |||
|
|
|
|||
Included in the preliminary purchase price allocation is a provisional amount related to a purchased intangible asset consisting of developed technology, which has an estimated useful life of five years. The preliminary fair value of this purchased intangible asset was based on estimates and assumptions made by management at the time of the acquisition. The Company is in the process of completing the identification and valuation of the intangible assets and certain property and equipment acquired, which may result in adjustments to goodwill and the provisional amounts recorded for the purchased intangible asset and property and equipment, as well as recording the fair value of additional identifiable intangible assets. These adjustments may also result in changes to related amortization expense. The Company expects to finalize the purchase price allocation during fiscal 2015.
Supplemental Pro Forma Data (Unaudited)
The unaudited supplemental pro forma financial data presented below gives effect to this acquisition as if it had occurred at the beginning of fiscal 2013. The supplemental data includes amortization expense related to the acquired intangible assets of $12.0 million in each of the periods presented. In addition, the supplemental data reflects adjustments related to stock-based compensation, the amortization of acquired inventory valuation step-up and transaction costs, such as legal fees, directly associated with the acquisition. These additional adjustments are not material to the periods presented.
This unaudited supplemental pro forma financial data is presented for informational purposes only and does not purport to be indicative of the results of future operations or the results that would have occurred had the Company completed the acquisition at the beginning of fiscal 2013.
| 2014 | 2013 | |||||||
| (Unaudited, in thousands, except per share amounts) |
||||||||
| Pro forma net revenues: |
||||||||
| Advanced Connectivity Platforms |
$ | 423,446 | $ | 433,357 | ||||
| Legacy Connectivity Products |
85,888 | 124,424 | ||||||
|
|
|
|
|
|||||
| $ | 509,334 | $ | 557,781 | |||||
| Pro forma income (loss) from continuing operations |
$ | (38,676 | ) | $ | 59,198 | |||
| Pro forma income (loss) from continuing operations per share (basic) |
$ | (0.44 | ) | $ | 0.63 | |||
| Pro forma income (loss) from continuing operations per share (diluted) |
$ | (0.44 | ) | $ | 0.63 | |||
The results of operations for this acquisition have been included in the consolidated financial statements from the date of acquisition and are immaterial to the consolidated financial results of the Company.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Patent License Agreement
On March 13, 2014, the Company entered into a non-exclusive patent license agreement with Broadcom and paid a one-time fee of $62.0 million as specified in the agreement. The license covers all of the Company’s Fibre Channel products. The Company determined that the $62.0 million fee represented the estimated fair value of the license utilizing a market approach, as well as a relief-from-royalty income approach based on the applicable historical revenues and projected future revenues over the ten-year term of the license. Based on the relief-from-royalty income approach, the Company attributed $41.0 million of the license fee to the use of the related technology in periods prior to the date of the license agreement and recorded this amount in special charges in fiscal 2014. The portion of the fee attributed to the future use of the technology was $21.0 million and was recorded as a prepaid license in other assets. The prepaid license is being amortized using a method that reflects the pattern in which the economic benefits of the prepaid license are consumed or otherwise used over the ten-year license term. During fiscal 2014, the Company recognized $0.1 million of amortization expense related to the prepaid license.
Multiple Element Arrangement
The Company accounted for the acquisition of the Ethernet controller-related assets (which included a development and supply agreement and a transition services agreement) and the patent license agreement as a multiple element arrangement, since these agreements were entered into between the parties within a short period of time. In a multiple element arrangement, the fair value of the individual components is determined and the total consideration is allocated to the components on a relative fair value basis. The Company determined that the fair value of each of the acquisition and the patent license were consistent with the consideration specified in the respective agreements.
Brocade Communications Systems, Inc.
On January 17, 2014, the Company acquired the assets of the Fibre Channel and converged network adapter business from Brocade Communications Systems, Inc. (Brocade) for cash consideration of $9.6 million and the assumption of certain liabilities. The Company completed this acquisition to expand its product portfolio and market position in the Fibre Channel and converged network adapter market. The Company estimated the fair value of the assets acquired and liabilities assumed and allocated the total purchase consideration to tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values at the acquisition date. The primary components of the purchase price allocation are an intangible asset of $8.0 million, consisting of developed technology, and inventory of $1.7 million. The intangible asset is being amortized over an estimated useful life of three years using a method that reflects the pattern in which the economic benefits of the intangible asset are utilized.
The results of operations for this acquisition have been included in the consolidated financial statements from the date of acquisition and are immaterial to the consolidated financial results of the Company. Pro forma results of operations have not been presented for this acquisition as the results of operations of the acquired business are not material to the consolidated financial statements of the Company.
Note 3. Discontinued Operations
On February 29, 2012, the Company completed the sale of the product lines and certain assets associated with its InfiniBand business to Intel Corporation and received $125.0 million in cash. In addition, Intel agreed to assume certain liabilities related to the IB Business. The assets sold consisted primarily of intellectual property, inventories and property and equipment. The Company allocated $8.8 million of the carrying value of its goodwill to the IB Business and wrote off this amount as part of the sale. The allocated amount was determined on a pro rata basis based on the consideration received from the sale of the IB Business and the fair value of the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
reporting unit as of the date the IB Business was sold. In connection with this divestiture, the Company recognized a gain on the sale of the IB Business of $103.5 million.
Income from discontinued operations consists of direct revenues and direct expenses of the IB Business, including cost of revenues, as well as other fixed and allocated costs to the extent that such costs were eliminated as a result of the transaction. General corporate overhead costs have not been allocated to discontinued operations. A summary of the operating results of the IB Business included in discontinued operations in the consolidated statements of operations is as follows:
| 2013 | 2012 | |||||||
| (In thousands) | ||||||||
| Net revenues |
$ | 421 | $ | 36,199 | ||||
| Loss from operations before income taxes |
$ | (690 | ) | $ | (2,913 | ) | ||
Note 4. Marketable Securities
The Company’s portfolio of available-for-sale marketable securities consists of the following:
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
| (In thousands) | ||||||||||||||||
| March 30, 2014 |
||||||||||||||||
| U.S. government and agency securities |
$ | 49,237 | $ | 16 | $ | (55 | ) | $ | 49,198 | |||||||
| Corporate debt obligations |
74,386 | 200 | (72 | ) | 74,514 | |||||||||||
| Mortgage-backed securities |
32,778 | 191 | (187 | ) | 32,782 | |||||||||||
| Municipal bonds |
24,989 | 133 | (9 | ) | 25,113 | |||||||||||
| Other debt securities |
5,178 | 3 | (5 | ) | 5,176 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 186,568 | $ | 543 | $ | (328 | ) | $ | 186,783 | ||||||||
|
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|
|
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| March 31, 2013 |
||||||||||||||||
| U.S. government and agency securities |
$ | 113,033 | $ | 327 | $ | (1 | ) | $ | 113,359 | |||||||
| Corporate debt obligations |
153,460 | 1,429 | (30 | ) | 154,859 | |||||||||||
| Mortgage-backed securities |
50,852 | 473 | (44 | ) | 51,281 | |||||||||||
| Municipal bonds |
39,661 | 211 | — | 39,872 | ||||||||||||
| Other debt securities |
602 | 1 | — | 603 | ||||||||||||
|
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|
|
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| $ | 357,608 | $ | 2,441 | $ | (75 | ) | $ | 359,974 | ||||||||
|
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The amortized cost and estimated fair value of debt securities as of March 30, 2014, by contractual maturity, are presented below. Expected maturities will differ from contractual maturities because the issuers of securities may have the right to repay obligations without prepayment penalties. Certain debt instruments, although possessing a contractual maturity greater than one year, are classified as short-term marketable securities based on their ability to be traded on active markets and availability for current operations.
| Amortized Cost |
Estimated Fair Value |
|||||||
| (In thousands) | ||||||||
| Due in one year or less |
$ | 25,933 | $ | 25,953 | ||||
| Due after one year through three years |
118,551 | 118,756 | ||||||
| Due after three years through five years |
18,255 | 18,205 | ||||||
| Due after five years |
23,829 | 23,869 | ||||||
|
|
|
|
|
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| $ | 186,568 | $ | 186,783 | |||||
|
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|
|
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the Company’s marketable securities with unrealized losses by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 30, 2014 and March 31, 2013.
| Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
| Description of Securities |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| March 30, 2014 |
||||||||||||||||||||||||
| U.S. government and agency securities |
$ | 26,879 | $ | (55 | ) | $ | — | $ | — | $ | 26,879 | $ | (55 | ) | ||||||||||
| Corporate debt obligations |
19,906 | (72 | ) | — | — | 19,906 | (72 | ) | ||||||||||||||||
| Mortgage-backed securities |
11,261 | (145 | ) | 2,838 | (42 | ) | 14,099 | (187 | ) | |||||||||||||||
| Municipal bonds |
3,322 | (9 | ) | — | — | 3,322 | (9 | ) | ||||||||||||||||
| Other debt securities |
2,955 | (5 | ) | — | — | 2,955 | (5 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
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| $ | 64,323 | $ | (286 | ) | $ | 2,838 | $ | (42 | ) | $ | 67,161 | $ | (328 | ) | ||||||||||
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| March 31, 2013 |
||||||||||||||||||||||||
| U.S. government and agency securities |
$ | 4,502 | $ | (1 | ) | $ | — | $ | — | $ | 4,502 | $ | (1 | ) | ||||||||||
| Corporate debt obligations |
24,203 | (30 | ) | — | — | 24,203 | (30 | ) | ||||||||||||||||
| Mortgage-backed securities |
10,048 | (44 | ) | — | — | 10,048 | (44 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
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|
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| $ | 38,753 | $ | (75 | ) | $ | — | $ | — | $ | 38,753 | $ | (75 | ) | |||||||||||
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|
|||||||||||||
As of March 30, 2014 and March 31, 2013, the fair value of certain of the Company’s available-for-sale securities was less than their cost basis. Management reviewed various factors in determining whether to recognize an impairment charge related to these unrealized losses, including the current financial and credit market environment, the financial condition and near-term prospects of the issuer of the security, the magnitude of the unrealized loss compared to the cost of the investment, the length of time the investment had been in a loss position and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery of market value. As of March 30, 2014 and March 31, 2013, the Company determined that the unrealized losses were temporary in nature and recorded them as a component of accumulated other comprehensive income.
Realized gains and losses reclassified from accumulated other comprehensive income are included in interest and other income, net, in the consolidated statements of operations.
Note 5. Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash and cash equivalents, marketable securities, accounts receivable and accounts payable. The carrying value of accounts receivable and accounts payable approximates fair value.
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the assets measured at fair value on a recurring basis as of March 30, 2014 and March 31, 2013 is as follows:
| Fair Value Measurements Using | ||||||||||||
| Level 1 | Level 2 | Total | ||||||||||
| (In thousands) | ||||||||||||
| March 30, 2014 |
||||||||||||
| Cash and cash equivalents |
$ | 91,258 | $ | — | $ | 91,258 | ||||||
| Marketable securities: |
||||||||||||
| U.S. government and agency securities |
49,198 | — | 49,198 | |||||||||
| Corporate debt obligations |
— | 74,514 | 74,514 | |||||||||
| Mortgage-backed securities |
— | 32,782 | 32,782 | |||||||||
| Municipal bonds |
— | 25,113 | 25,113 | |||||||||
| Other debt securities |
— | 5,176 | 5,176 | |||||||||
|
|
|
|
|
|
|
|||||||
| 49,198 | 137,585 | 186,783 | ||||||||||
|
|
|
|
|
|
|
|||||||
| $ | 140,456 | $ | 137,585 | $ | 278,041 | |||||||
|
|
|
|
|
|
|
|||||||
| March 31, 2013 |
||||||||||||
| Cash and cash equivalents |
$ | 95,098 | $ | 434 | $ | 95,532 | ||||||
| Marketable securities: |
||||||||||||
| U.S. government and agency securities |
113,359 | — | 113,359 | |||||||||
| Corporate debt obligations |
— | 154,859 | 154,859 | |||||||||
| Mortgage-backed securities |
— | 51,281 | 51,281 | |||||||||
| Municipal bonds |
— | 39,872 | 39,872 | |||||||||
| Other debt securities |
— | 603 | 603 | |||||||||
|
|
|
|
|
|
|
|||||||
| 113,359 | 246,615 | 359,974 | ||||||||||
|
|
|
|
|
|
|
|||||||
| $ | 208,457 | $ | 247,049 | $ | 455,506 | |||||||
|
|
|
|
|
|
|
|||||||
The Company’s investments classified within Level 2 were primarily valued based on valuations obtained from a third-party pricing service. To estimate fair value, the pricing service utilizes industry-standard valuation models, including both income and market-based approaches for which all significant inputs are observable either directly or indirectly. The Company obtained documentation from the pricing service as to the methodology and summary of inputs used for the various types of securities. The pricing service maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs. These observable inputs include reported trades and broker/dealer quotes of the same or similar securities, issuer credit spreads, benchmark securities and other observable inputs. The Company compares valuation information from the pricing service with other pricing sources to validate the reasonableness of the valuations.
Note 6. Inventories
Components of inventories are as follows:
| 2014 | 2013 | |||||||
| (In thousands) | ||||||||
| Raw materials |
$ | 2,041 | $ | 2,039 | ||||
| Finished goods |
15,995 | 18,121 | ||||||
|
|
|
|
|
|||||
| $ | 18,036 | $ | 20,160 | |||||
|
|
|
|
|
|||||
58
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 7. Property and Equipment
Components of property and equipment are as follows:
| 2014 | 2013 | |||||||
| (In thousands) | ||||||||
| Land |
$ | 14,656 | $ | 14,656 | ||||
| Buildings and improvements |
47,629 | 46,462 | ||||||
| Production and test equipment |
219,416 | 220,130 | ||||||
| Furniture and fixtures |
8,338 | 7,986 | ||||||
|
|
|
|
|
|||||
| 290,039 | 289,234 | |||||||
| Less accumulated depreciation and amortization |
205,127 | 192,898 | ||||||
|
|
|
|
|
|||||
| $ | 84,912 | $ | 96,336 | |||||
|
|
|
|
|
|||||
Note 8. Purchased Intangible Assets
Purchased intangible assets consist of the following:
| March 30, 2014 | March 31, 2013 | |||||||||||||||||||||||
| Gross Carrying Value |
Accumulated Amortization |
Net Carrying Value |
Gross Carrying Value |
Accumulated Amortization |
Net Carrying Value |
|||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Acquisition-related intangibles: |
||||||||||||||||||||||||
| Developed technology |
$ | 73,461 | $ | 4,957 | $ | 68,504 | $ | 5,400 | $ | 3,021 | $ | 2,379 | ||||||||||||
| Other |
1,010 | 993 | 17 | 1,010 | 791 | 219 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 74,471 | 5,950 | 68,521 | 6,410 | 3,812 | 2,598 | |||||||||||||||||||
| Other purchased intangibles: |
||||||||||||||||||||||||
| Technology-related |
2,819 | 1,437 | 1,382 | 2,713 | 1,257 | 1,456 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | 77,290 | $ | 7,387 | $ | 69,903 | $ | 9,123 | $ | 5,069 | $ | 4,054 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
A summary of the amortization expense, by classification, included in the consolidated statements of operations is as follows:
| 2014 | 2013 | 2012 | ||||||||||
| (In thousands) | ||||||||||||
| Continuing operations — cost of revenues |
$ | 2,387 | $ | 1,223 | $ | 1,023 | ||||||
| Discontinued operations |
— | — | 3,160 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | 2,387 | $ | 1,223 | $ | 4,183 | |||||||
|
|
|
|
|
|
|
|||||||
59
Table of Contents
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the estimated future amortization expense of purchased intangible assets as of March 30, 2014:
| Fiscal |
||||
| (In thousands) | ||||
| 2015 |
$ | 16,452 | ||
| 2016 |
15,600 | |||
| 2017 |
13,793 | |||
| 2018 |
12,279 | |||
| 2019 |
11,779 | |||
|
|
|
|||
| $ | 69,903 | |||
|
|
|
|||
Note 9. Revolving Credit Facility
In March 2013, the Company entered into a credit agreement (the Credit Agreement) which provides the Company with a $125.0 million unsecured revolving credit facility that matures in March 2018. Borrowings under the Credit Agreement may be used for general corporate purposes, including permitted share repurchases and acquisitions. Under the Credit Agreement, the Company may increase the revolving commitments or obtain incremental term loans in an aggregate amount up to $100.0 million, subject to certain conditions.
Borrowings under the credit facility bear interest, at the Company’s option, at either a rate equal to (i) a base rate described in the Credit Agreement plus an applicable margin based on the Company’s leverage ratio (varying from 0.25% to 1.00%) or (ii) an adjusted LIBO rate described in the Credit Agreement plus an applicable margin based on the Company’s leverage ratio (varying from 1.25% to 2.00%). The credit facility also carries a commitment fee equal to the available but unused borrowing multiplied by an applicable margin based on the Company’s leverage ratio and the average daily used amount of the commitments (varying from 0.20% to 0.35%).
The Credit Agreement includes financial covenants requiring a maximum leverage ratio, a minimum fixed charge coverage ratio and a minimum liquidity. The Credit Agreement also contains other customary affirmative and negative covenants and events of default.
There were no borrowings outstanding under the Credit Agreement as of March 30, 2014.
Note 10. Stockholders’ Equity
Capital Stock
The Company’s authorized capital consists of 1 million shares of preferred stock, par value $0.001 per share, and 500 million shares of common stock, par value $0.001 per share. As of March 30, 2014 and March 31, 2013, the Company had 213.8 million and 212.1 million shares of common stock issued, respectively. As of March 30, 2014, 27.8 million shares of common stock were reserved for the exercise of issued and unissued stock-based awards and 2.5 million shares were reserved for issuance in connection with the Company’s Employee Stock Purchase Plan.
Treasury Stock
Since fiscal 2003, the Company has had various stock repurchase programs that authorized the purchase of the Company’s outstanding common stock. During fiscal 2014, the Company purchased 4.4 million shares of its
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
common stock for an aggregate purchase price of $46.6 million. During fiscal 2013, the Company purchased 10.3 million shares of its common stock for an aggregate purchase price of $130.4 million. As of March 30, 2014, the Company had purchased a total of 126.6 million shares of common stock under these repurchase programs for an aggregate purchase price of $1.94 billion. The Company’s most recent stock repurchase program expired during fiscal 2014.
Repurchased shares have been recorded as treasury shares and will be held unless and until the Company’s Board of Directors designates that these shares be retired or used for other purposes.
Note 11. Stock-Based Compensation
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (the ESPP) that operates in accordance with Section 423 of the Internal Revenue Code. The ESPP is administered by the Compensation Committee of the Board of Directors. Under the ESPP, employees of the Company who elect to participate are granted options to purchase common stock at a 15% discount from the lower of the market value of the common stock at the beginning or end of each offering period. The ESPP permits an enrolled employee to make contributions to purchase shares of common stock, in an amount between 1% and 10% of compensation, subject to limits specified in the Internal Revenue Code. The total number of shares issued under the ESPP was 836,000, 740,000 and 556,000 during fiscal 2014, 2013 and 2012, respectively.
Stock Incentive Compensation Plans
The Company may grant stock-based awards to employees and directors under the QLogic 2005 Performance Incentive Plan (the 2005 Plan). Shares available for future grant were 12.6 million under the 2005 Plan as of March 30, 2014. Prior to the adoption of the 2005 Plan in August 2005, the Company granted options to purchase shares of the Company’s common stock to employees and directors under certain predecessor stock plans. No further awards can be granted under these predecessor plans.
The 2005 Plan provides for the issuance of incentive and non-qualified stock options, restricted stock units and other stock-based incentive awards for employees. The 2005 Plan permits the Compensation Committee of the Board of Directors to select eligible employees to receive awards and to determine the terms and conditions of awards. In general, stock options granted to employees have ten-year terms and vest over four years from the date of grant. Restricted stock units represent a right to receive a share of stock at a future vesting date with no cash payment from the holder. In general, restricted stock units granted to employees subject to only a service condition vest over four years from the date of grant. Restricted stock units granted to certain senior executives subject to a service and either a performance or market condition vest over three or four years.
Under the terms of the 2005 Plan, as amended, non-employee directors receive grants of stock-based awards upon initial election or appointment to the Board of Directors and upon annual reelection to the Board. The target fair value of such grants is determined by reference to the equity compensation for non-employee directors of the Company’s peer group of companies. The target value is then allocated 50% to a restricted stock unit award and 50% to a non-qualified stock option grant in the case of the initial grant and allocated 70% to a restricted stock unit award and 30% to a non-qualified stock option grant in the case of the annual grant. All stock-based awards granted to non-employee directors have ten-year terms and vest from one to three years from the date of grant.
61
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of stock option activity is as follows:
| Number of Shares |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Term (Years) |
Aggregate Intrinsic Value |
|||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
| Outstanding at April 3, 2011 |
21,856 | $ | 18.51 | |||||||||||||
| Granted |
1,630 | 15.73 | ||||||||||||||
| Exercised |
(1,544 | ) | 14.83 | |||||||||||||
| Forfeited (cancelled pre-vesting) |
(686 | ) | 15.86 | |||||||||||||
| Expired (cancelled post-vesting) |
(2,245 | ) | 24.93 | |||||||||||||
|
|
|
|||||||||||||||
| Outstanding at April 1, 2012 |
19,011 | 17.91 | ||||||||||||||
| Granted |
1,387 | 13.67 | ||||||||||||||
| Exercised |
(79 | ) | 14.31 | |||||||||||||
| Forfeited (cancelled pre-vesting) |
(177 | ) | 15.82 | |||||||||||||
| Expired (cancelled post-vesting) |
(3,313 | ) | 20.23 | |||||||||||||
|
|
|
|||||||||||||||
| Outstanding at March 31, 2013 |
16,829 | 17.14 | ||||||||||||||
| Granted |
75 | 10.90 | ||||||||||||||
| Exercised |
(88 | ) | 12.00 | |||||||||||||
| Forfeited (cancelled pre-vesting) |
(732 | ) | 15.02 | |||||||||||||
| Expired (cancelled post-vesting) |
(4,881 | ) | 20.45 | |||||||||||||
|
|
|
|||||||||||||||
| Outstanding at March 30, 2014 |
11,203 | $ | 15.84 | 4.5 | $ | 327 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Vested and expected to vest at March 30, 2014 |
11,123 | $ | 15.85 | 4.5 | $ | 325 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Exercisable at March 30, 2014 |
10,216 | $ | 15.95 | 4.2 | $ | 168 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
A summary of activity of restricted stock units subject to only a service condition is as follows:
| Number of Shares |
Weighted- Average Grant Date Fair Value |
|||||||
| (In thousands) | ||||||||
| Outstanding and unvested at April 3, 2011 |
2,271 | $ | 15.80 | |||||
| Granted |
1,656 | 15.63 | ||||||
| Vested |
(879 | ) | 15.58 | |||||
| Forfeited |
(362 | ) | 15.82 | |||||
|
|
|
|||||||
| Outstanding and unvested at April 1, 2012 |
2,686 | 15.77 | ||||||
| Granted |
1,753 | 13.52 | ||||||
| Vested |
(1,002 | ) | 15.43 | |||||
| Forfeited |
(186 | ) | 14.94 | |||||
|
|
|
|||||||
| Outstanding and unvested at March 31, 2013 |
3,251 | 14.71 | ||||||
| Granted |
2,207 | 11.11 | ||||||
| Vested |
(1,150 | ) | 14.90 | |||||
| Forfeited |
(697 | ) | 13.80 | |||||
|
|
|
|||||||
| Outstanding and unvested at March 30, 2014 |
3,611 | $ | 12.62 | |||||
|
|
|
|
|
|||||
62
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table above includes 477,000 restricted stock units granted to employees that joined the Company in connection with acquisitions in fiscal 2014.
A summary of activity of restricted stock units subject to a service condition and either a performance or market condition is as follows:
| Number of Shares |
Weighted- Average Grant Date Fair Value |
|||||||
| (In thousands) | ||||||||
| Outstanding and unvested at April 3, 2011 |
— | $ | — | |||||
| Granted |
163 | 13.85 | ||||||
| Vested |
— | — | ||||||
| Forfeited |
(8 | ) | 13.85 | |||||
|
|
|
|||||||
| Outstanding and unvested at April 1, 2012 |
155 | 13.85 | ||||||
| Granted |
179 | 14.10 | ||||||
| Vested |
(36 | ) | 13.85 | |||||
| Forfeited |
(9 | ) | 13.85 | |||||
|
|
|
|||||||
| Outstanding and unvested at March 31, 2013 |
289 | 14.01 | ||||||
| Granted |
374 | 11.67 | ||||||
| Vested |
(60 | ) | 13.97 | |||||
| Forfeited |
(180 | ) | 13.86 | |||||
|
|
|
|||||||
| Outstanding and unvested at March 30, 2014 |
423 | $ | 12.02 | |||||
|
|
|
|
|
|||||
During fiscal 2014, 2013 and 2012, the Company issued 717,000, 638,000 and 546,000 shares of common stock, respectively, in connection with the vesting of restricted stock units. The difference between the number of restricted stock units vested and the shares of common stock issued is the result of restricted stock units withheld in satisfaction of minimum tax withholding obligations associated with the vesting.
Stock-Based Compensation Expense
A summary of stock-based compensation expense, by functional line item in the consolidated statements of operations, is as follows:
| 2014 | 2013 | 2012 | ||||||||||
| (In thousands) | ||||||||||||
| Cost of revenues |
$ | 1,349 | $ | 2,372 | $ | 2,506 | ||||||
| Engineering and development |
10,918 | 13,584 | 14,199 | |||||||||
| Sales and marketing |
5,337 | 6,853 | 6,667 | |||||||||
| General and administrative |
5,034 | 7,554 | 8,316 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total continuing operations |
22,638 | 30,363 | 31,688 | |||||||||
| Discontinued operations |
— | — | 904 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | 22,638 | $ | 30,363 | $ | 32,592 | |||||||
|
|
|
|
|
|
|
|||||||
63
Table of Contents
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair value of stock options granted and shares to be purchased under the ESPP have been estimated at the date of grant using a Black-Scholes option-pricing model. The weighted-average fair values and underlying assumptions are as follows:
| 2014 | 2013 | 2012 | ||||||||||||||||||||||
| Stock Options |
Employee Stock Purchase Plan |
Stock Options |
Employee Stock Purchase Plan |
Stock Options |
Employee Stock Purchase Plan |
|||||||||||||||||||
| Fair value |
$ | 4.12 | $ | 2.41 | $ | 4.97 | $ | 2.66 | $ | 5.73 | $ | 3.49 | ||||||||||||
| Expected volatility |
36 | % | 32 | % | 38 | % | 36 | % | 36 | % | 36 | % | ||||||||||||
| Risk-free interest rate |
1.6 | % | 0.1 | % | 0.9 | % | 0.1 | % | 1.8 | % | 0.1 | % | ||||||||||||
| Expected life (years) |
6.2 | 0.3 | 5.5 | 0.25 | 5.5 | 0.25 | ||||||||||||||||||
| Dividend yield |
— | — | — | — | — | — | ||||||||||||||||||
Restricted stock units granted subject to either (i) a service condition only, or (ii) service and performance conditions, are valued based on the closing market price on the date of grant. Restricted stock units granted with service and market conditions are valued based on a Monte Carlo simulation model on the date of grant.
The Company recognized tax benefits related to stock-based compensation expense for fiscal 2014, 2013 and 2012 of $6.2 million, $7.9 million and $7.7 million, respectively. Stock-based compensation costs capitalized as part of the cost of assets were not material for all periods presented.
As of March 30, 2014, there was $45.3 million of total unrecognized compensation costs related to outstanding stock-based awards. These costs are expected to be recognized over a weighted-average period of 2.5 years.
During fiscal 2014, 2013 and 2012, the grant date fair value of options vested totaled $7.7 million, $12.1 million and $16.5 million, respectively. The intrinsic value of options exercised during fiscal 2014, 2013 and 2012 totaled $0.1 million, $0.2 million and $3.8 million, respectively. Intrinsic value of options exercised is calculated as the difference between the market price on the date of exercise and the exercise price multiplied by the number of options exercised.
The fair value of restricted stock units vested during fiscal 2014, 2013 and 2012 totaled $11.7 million, $14.6 million and $14.4 million, respectively.
The Company currently issues new shares to deliver common stock under its stock-based award plans.
Note 12. Employee Retirement Savings Plan
The Company has established a pretax savings plan under Section 401(k) of the Internal Revenue Code for substantially all U.S. employees. Under the plan, eligible employees are able to contribute up to 50% of their compensation, subject to limits specified in the Internal Revenue Code. In fiscal 2013, the Company began matching contributions up to 2% of a participant’s compensation. Additionally, the Company periodically authorizes discretionary contributions to the plan. The Company’s matching and discretionary contributions on behalf of its employees totaled $1.8 million, $1.2 million and $1.1 million in fiscal 2014, 2013 and 2012, respectively.
The Company also maintains retirement plans in certain non-U.S. locations. The total expense and total obligation of the Company for these plans were not material to the consolidated financial statements for all periods presented.
64
Table of Contents
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 13. Special Charges
A summary of the special charges recorded during fiscal 2014 is as follows:
| (In thousands) | ||||
| Patent license (Note 2) |
$ | 41,040 | ||
| Exit costs |
26,491 | |||
| Asset impairments |
7,322 | |||
|
|
|
|||
| $ | 74,853 | |||
|
|
|
|||
March 2014 Initiative
In March 2014, the Company implemented a restructuring plan (March 2014 Initiative) primarily designed to consolidate its Ethernet product roadmap following the acquisition of the Ethernet controller-related assets from Broadcom (Note 2). This restructuring plan primarily includes a workforce reduction and the consolidation and elimination of certain engineering activities. The Company expects to incur approximately $1 million of additional exit costs, primarily related to severance costs for workforce reductions. The Company expects to substantially complete these restructuring activities during the first quarter of fiscal 2015.
During the fourth quarter of fiscal 2014, the Company recorded special charges of $14.0 million in connection with the March 2014 Initiative, consisting of $9.1 million of exit costs and $4.9 million of asset impairment charges primarily related to abandoned property and equipment. The exit costs include severance and related costs associated with involuntarily terminated employees and the costs associated with the cancellation of certain contracts.
Activity and liability balances for exit costs related to the March 2014 Initiative are as follows:
| Workforce Reduction |
Contract Cancellation and Other |
Total | ||||||||||
| (In thousands) | ||||||||||||
| Charged to costs and expenses |
$ | 4,789 | $ | 4,325 | $ | 9,114 | ||||||
| Payments |
(1,612 | ) | (14 | ) | (1,626 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Balance as of March 30, 2014 |
$ | 3,177 | $ | 4,311 | $ | 7,488 | ||||||
|
|
|
|
|
|
|
|||||||
June 2013 Initiative
In June 2013, the Company commenced a restructuring plan (June 2013 Initiative) designed to enhance product focus and streamline business operations. The restructuring plan includes a workforce reduction and the consolidation and elimination of certain engineering activities. In connection with this plan, the Company ceased development of future ASICs for switch products.
During fiscal 2014, the Company recorded special charges of $19.8 million in connection with the June 2013 Initiative, consisting of $17.4 million of exit costs and $2.4 million of asset impairment charges primarily related to abandoned property and equipment. The exit costs include severance and related costs associated with involuntarily terminated employees. Certain employees that were notified of their termination are required to provide services for varying periods in excess of statutory notice periods. Severance costs related to these services are recognized ratably over the estimated requisite service period. The Company expects to incur between $1 million and $2 million of additional severance costs in connection with these employees over the
65
Table of Contents
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
requisite service period. Exit costs also include the estimated costs associated with the portion of a facility under a non-cancelable lease that the Company ceased using.
Activity and liability balances for exit costs related to the June 2013 Initiative, including a liability associated with exit costs related to a portion of the facility the Company ceased using prior to fiscal 2013, are as follows:
| Workforce Reduction |
Facilities and Other |
Total | ||||||||||
| (In thousands) | ||||||||||||
| Balance as of March 31, 2013 |
$ | — | $ | 1,771 | $ | 1,771 | ||||||
| Charged to costs and expenses |
13,831 | 3,546 | 17,377 | |||||||||
| Payments |
(10,303 | ) | (696 | ) | (10,999 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Balance as of March 30, 2014 |
$ | 3,528 | $ | 4,621 | $ | 8,149 | ||||||
|
|
|
|
|
|
|
|||||||
The total unpaid exit costs related to both initiatives are expected to be paid over the terms of the related agreements through fiscal 2018. As of March 30, 2014, unpaid exit costs totaling $10.0 million and $5.6 million are included in other current liabilities and other liabilities, respectively.
Note 14. Interest and Other Income, net
Components of interest and other income, net, are as follows:
| 2014 | 2013 | 2012 | ||||||||||
| (In thousands) | ||||||||||||
| Interest income |
$ | 3,378 | $ | 3,825 | $ | 3,405 | ||||||
| Gain on sales of available-for-sale securities |
2,184 | 1,151 | 1,839 | |||||||||
| Loss on sales of available-for-sale securities |
(938 | ) | (716 | ) | (809 | ) | ||||||
| Other |
(1,364 | ) | (253 | ) | (476 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| $ | 3,260 | $ | 4,007 | $ | 3,959 | |||||||
|
|
|
|
|
|
|
|||||||
Note 15. Income Taxes
Income (loss) from continuing operations before income taxes consists of the following components:
| 2014 | 2013 | 2012 | ||||||||||
| (In thousands) | ||||||||||||
| United States |
$ | (19,056 | ) | $ | 13,084 | $ | 35,733 | |||||
| International |
10,096 | 48,773 | 97,693 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | (8,960 | ) | $ | 61,857 | $ | 133,426 | ||||||
|
|
|
|
|
|
|
|||||||
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of income tax expense (benefit) from continuing operations are as follows:
| 2014 | 2013 | 2012 | ||||||||||
| (In thousands) | ||||||||||||
| Current: |
||||||||||||
| Federal |
$ | 9,206 | $ | (13,374 | ) | $ | 11,054 | |||||
| State |
1,532 | 260 | 1,279 | |||||||||
| Foreign |
2,205 | 1,520 | 1,904 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total current |
12,943 | (11,594 | ) | 14,237 | ||||||||
|
|
|
|
|
|
|
|||||||
| Deferred: |
||||||||||||
| Federal |
(18,883 | ) | 3,445 | 3,360 | ||||||||
| State |
15,006 | (3,684 | ) | (4,781 | ) | |||||||
| Foreign |
240 | 129 | 1,167 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total deferred |
(3,637 | ) | (110 | ) | (254 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| $ | 9,306 | $ | (11,704 | ) | $ | 13,983 | ||||||
|
|
|
|
|
|
|
|||||||
Income tax expense from continuing operations for fiscal 2014 includes the impact of valuation allowances recorded against deferred tax assets related to certain state tax credits and net operating loss carryforwards. Income tax benefit from continuing operations for fiscal 2013 was primarily the result of adjustments to certain tax positions subject to an Internal Revenue Service (IRS) examination. These adjustments primarily consist of the settlement of a significant matter in the IRS examination of the Company’s income tax returns for fiscal years 2008 and 2009.
The income tax benefit related to discontinued operations for fiscal 2013 and 2012 was $0.3 million and $9.4 million, respectively. The income tax benefit for fiscal 2012 includes a $5.6 million net benefit associated with the sale of the IB Business, including the tax effect of the related liquidation of two domestic subsidiaries which were engaged in the IB Business. In connection with this liquidation, the Company recognized losses for tax purposes related to its investment in these subsidiaries. The tax benefit of these losses was substantially offset by the tax related to the gain on sale of the IB Business. The $5.6 million net tax benefit is included in the gain on sale from discontinued operations, net of income taxes, in the consolidated statement of operations for fiscal 2012.
The effect of deferred taxes associated with the change in unrealized gains and losses on the Company’s available-for-sale securities was immaterial for all periods presented and was recorded in accumulated other comprehensive income.
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A reconciliation of the income tax expense (benefit) with the amount computed by applying the federal statutory tax rate to income (loss) from continuing operations before income taxes is as follows:
| 2014 | 2013 | 2012 | ||||||||||
| (In thousands) | ||||||||||||
| Expected income tax expense (benefit) at the statutory rate |
$ | (3,136 | ) | $ | 21,650 | $ | 46,699 | |||||
| State income taxes, net of federal tax benefit |
(330 | ) | 1,581 | 1,198 | ||||||||
| Tax rate differential on foreign earnings and other international related tax items |
(324 | ) | (14,025 | ) | (30,277 | ) | ||||||
| Benefit from research and other credits |
(6,764 | ) | (9,210 | ) | (5,090 | ) | ||||||
| Stock-based compensation |
4,759 | 2,414 | 2,602 | |||||||||
| Resolution of prior period tax matters |
(1,480 | ) | (14,701 | ) | (2,530 | ) | ||||||
| Valuation allowance |
16,433 | (301 | ) | (161 | ) | |||||||
| Other, net |
148 | 888 | 1,542 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | 9,306 | $ | (11,704 | ) | $ | 13,983 | ||||||
|
|
|
|
|
|
|
|||||||
The components of the deferred tax assets and liabilities are as follows:
| 2014 | 2013 | |||||||
| (In thousands) | ||||||||
| Deferred tax assets: |
||||||||
| Research credits |
$ | 24,296 | $ | 17,103 | ||||
| Reserves and accruals not currently deductible |
20,454 | 16,968 | ||||||
| Stock-based compensation |
15,583 | 18,036 | ||||||
| Net operating loss carryforwards |
11,048 | 12,408 | ||||||
| Patent license |
7,430 | — | ||||||
| Investment securities |
1,046 | 1,267 | ||||||
| Other |
419 | 657 | ||||||
|
|
|
|
|
|||||
| Total gross deferred tax assets |
80,276 | 66,439 | ||||||
| Valuation allowance |
(17,672 | ) | (1,239 | ) | ||||
|
|
|
|
|
|||||
| Total deferred tax assets, net of valuation allowance |
62,604 | 65,200 | ||||||
|
|
|
|
|
|||||
| Deferred tax liabilities: |
||||||||
| State income taxes |
10,026 | 9,315 | ||||||
| Research and development expenditures |
2,220 | 4,198 | ||||||
| Property and equipment |
1,911 | 6,149 | ||||||
| Purchased intangible assets |
540 | 510 | ||||||
|
|
|
|
|
|||||
| Total deferred tax liabilities |
14,697 | 20,172 | ||||||
|
|
|
|
|
|||||
| Net deferred tax assets |
$ | 47,907 | $ | 45,028 | ||||
|
|
|
|
|
|||||
The Company’s deferred tax assets related to research credits consist primarily of state research tax credit carryforwards. These state tax credits have no expiration date and may be carried forward indefinitely. However, these credits may be utilized only to the extent that the Company realizes taxable income in the related state. Based upon the Company’s current projections of future taxable income in the respective states, the Company is no longer able to assert that it is more likely than not that it would realize the full benefit of these deferred tax assets. The current projections reflect changes in the Company’s forecasted taxable income, including the impact of acquisitions and restructuring activities which occurred during the fourth quarter of fiscal 2014. Accordingly, the Company recorded a valuation allowance against these deferred tax assets of $14.8 million during fiscal 2014.
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s deferred tax assets related to net operating loss carryforwards include both federal and state net operating loss carryforwards. The state net operating loss carryforwards are specific to the states in which the net operating losses were generated and certain of these carryforwards relate to previous acquisitions, which are subject to limitations on the timing of utilization. Based upon the Company’s current projections of future taxable income in the respective states, the Company is no longer able to assert that it is more likely than not that it would realize the full benefit of these deferred tax assets. The current projections reflect changes in the Company’s forecasted taxable income, including the impact of acquisitions and restructuring activities which occurred during the fourth quarter of fiscal 2014. Accordingly, the Company recorded a valuation allowance against these deferred tax assets of $1.7 million during fiscal 2014.
The Company’s deferred tax assets related to investment securities and capital loss carryovers consist primarily of temporary differences related to other-than-temporary impairments on the Company’s investment securities and realized losses on dispositions of investment securities that are subject to limitations on deductibility. As a result of limitations on the deductibility of capital losses and other factors, management is currently unable to assert that it is more likely than not that the Company will realize the full benefit of these deferred tax assets. Accordingly, the Company had previously recorded a valuation allowance against these deferred tax assets. The balance of this valuation allowance was $1.2 million as of March 30, 2014 and March 31, 2013.
Based upon the Company’s current and historical pre-tax earnings, management believes it is more likely than not that the Company will realize the full benefit of the existing deferred tax assets as of March 30, 2014, except for the deferred tax assets discussed above. Management believes the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income or that there would be sufficient tax carrybacks available; however, there can be no assurance that the Company will generate any earnings or any specific level of continuing earnings in future years.
As of March 30, 2014, the Company has federal net operating loss carryforwards of $14.0 million, which will expire between fiscal 2027 and 2029, if not utilized, and state net operating loss carryforwards of $71.2 million, which will expire between fiscal 2017 and 2032, if not utilized. The net operating loss carryforwards relating to acquired companies are subject to limitations on the timing of utilization. The Company also has state capital loss carryovers of $54.4 million, which will expire between fiscal 2017 and 2029, if not utilized, and state research tax credit carryforwards of $23.3 million, which have no expiration date.
The Company has made no provision for U.S. income taxes or foreign withholding taxes on the earnings of its foreign subsidiaries, as these amounts are intended to be indefinitely reinvested in operations outside the United States. As of March 30, 2014, the cumulative amount of undistributed earnings of the Company’s foreign subsidiaries was $355.2 million. Because of the availability of U.S. foreign tax credits, it is not practicable to determine the U.S. federal income tax liability that would be payable if such earnings were not reinvested indefinitely.
During fiscal 2013, the Company effectively settled a matter with the IRS related to the examination of the Company’s income tax returns for fiscal years 2008 and 2009. This settlement was for an amount less than the Company had previously accrued for this tax position. As a result, the Company recorded an income tax benefit of $9.5 million. In connection with this settlement, the Company paid federal and state income tax payments totaling $32.8 million in fiscal 2013.
Also during fiscal 2013, the Company obtained additional information related to other matters under examination by the IRS. Based on this new information, the Company reassessed the largest amount of tax
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
benefit that is greater than 50% likely of being realized related to these tax positions. As a result, the Company reduced the related liability for unrecognized tax benefits and recorded a corresponding income tax benefit of $4.8 million.
During fiscal 2014, the Company settled all open matters relating to the IRS examination of the Company’s income tax returns for fiscal years 2008 and 2009 without material adjustment and is no longer subject to federal income tax examinations for years prior to fiscal 2010. The Company’s federal consolidated income tax returns for fiscal years 2010, 2011 and 2012 are currently under examination by the IRS. With limited exceptions, the Company is no longer subject to state and foreign income tax examinations by taxing authorities for years prior to fiscal 2008. Management does not believe that the results of these examinations will have a material impact on the Company’s financial condition or results of operations.
A rollforward of the activity in the gross unrecognized tax benefits is as follows:
| 2014 | 2013 | |||||||
| (In thousands) | ||||||||
| Balance at beginning of year |
$ | 9,584 | $ | 58,384 | ||||
| Additions based on tax positions related to the current year |
1,140 | 1,470 | ||||||
| Additions for tax positions of prior years |
4,494 | 183 | ||||||
| Reductions for tax positions of prior years |
(1,641 | ) | (20,547 | ) | ||||
| Decreases relating to settlements with taxing authorities |
— | (29,906 | ) | |||||
|
|
|
|
|
|||||
| Balance at end of year |
$ | 13,577 | $ | 9,584 | ||||
|
|
|
|
|
|||||
If the unrecognized tax benefits as of March 30, 2014 were recognized, $10.8 million, net of $2.8 million of tax benefits from state income taxes, would favorably affect the Company’s effective income tax rate.
In addition to the unrecognized tax benefits noted above, the Company had accrued $3.5 million and $1.2 million of interest expense and penalties as of March 30, 2014 and March 31, 2013, respectively. The Company recognized interest expense, net of the related tax effect, and penalties aggregating $2.1 million, $1.0 million and $1.0 million during fiscal 2014, 2013 and 2012, respectively.
It is reasonably possible that the Company’s liability for uncertain tax positions may be reduced by as much as $1.4 million as a result of either the settlement of tax positions with various tax authorities or by virtue of the statute of limitations expiring through the end of fiscal 2015.
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 16. Income per Share
The following table sets forth the computation of basic and diluted income (loss) from continuing operations per share:
| 2014 | 2013 | 2012 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
| Income (loss) from continuing operations |
$ | (18,266 | ) | $ | 73,561 | $ | 119,443 | |||||
|
|
|
|
|
|
|
|||||||
| Shares: |
||||||||||||
| Weighted-average shares outstanding — basic |
87,612 | 93,560 | 101,766 | |||||||||
| Dilutive potential common shares, using treasury stock method |
— | 438 | 945 | |||||||||
|
|
|
|
|
|
|
|||||||
| Weighted-average shares outstanding — diluted |
87,612 | 93,998 | 102,711 | |||||||||
|
|
|
|
|
|
|
|||||||
| Income (loss) from continuing operations per share: |
||||||||||||
| Basic |
$ | (0.21 | ) | $ | 0.79 | $ | 1.17 | |||||
|
|
|
|
|
|
|
|||||||
| Diluted |
$ | (0.21 | ) | $ | 0.78 | $ | 1.16 | |||||
|
|
|
|
|
|
|
|||||||
Stock-based awards, including stock options and restricted stock units, representing 15.2 million, 18.4 million and 16.6 million shares of common stock have been excluded from the diluted per share calculations for fiscal 2014, 2013 and 2012, respectively. These stock-based awards have been excluded from the diluted per share calculations because their effect would have been antidilutive.
Note 17. Commitments and Contingencies
Leases
The Company leases certain facilities, software and equipment under operating lease agreements. A summary of the future minimum lease commitments under non-cancelable operating leases as of March 30, 2014 is as follows:
| Fiscal Year |
(In thousands) | |||
| 2015 |
$ | 8,190 | ||
| 2016 |
4,370 | |||
| 2017 |
2,564 | |||
| 2018 |
1,928 | |||
| 2019 |
163 | |||
|
|
|
|||
| Total future minimum lease payments |
$ | 17,215 | ||
|
|
|
|||
Rent expense for fiscal 2014, 2013 and 2012 was $10.4 million, $10.6 million and $10.9 million, respectively.
Contingencies
Various lawsuits, claims and proceedings have been or may be instituted against the Company. The outcome of litigation cannot be predicted with certainty and some lawsuits, claims and proceedings may be disposed of unfavorably to the Company.
The Company indemnifies certain of its customers and others against claims that the Company’s products infringe upon a patent, copyright, trademark or trade secret of a third party. In the event of such a claim, the Company agrees to pay all litigation costs, including attorney fees, and any settlement payments or damages awarded directly related to the infringement.
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Table of Contents
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Management believes that any monetary liability or financial impact to the Company from these matters, individually and in the aggregate, would not be material to the Company’s financial condition or results of operations. However, there can be no assurance with respect to such result, and the monetary liability or financial impact to the Company from these matters could differ materially from those projected.
Note 18. Revenue Components, Geographic Revenues and Significant Customers
Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company operates in one operating segment.
Revenue Components
A summary of net revenues by product category is as follows:
| 2014 | 2013 | 2012 | ||||||||||
| (In thousands) | ||||||||||||
| Advanced Connectivity Platforms |
$ | 386,738 | $ | 399,416 | $ | 466,846 | ||||||
| Legacy Connectivity Products |
74,169 | 85,122 | 91,762 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | 460,907 | $ | 484,538 | $ | 558,608 | |||||||
|
|
|
|
|
|
|
|||||||
Geographic Revenues
Revenues by geographic area are presented based upon the ship-to location of the customer. Net revenues by geographic area are as follows:
| 2014 | 2013 | 2012 | ||||||||||
| (In thousands) | ||||||||||||
| United States |
$ | 191,481 | $ | 209,590 | $ | 239,198 | ||||||
| Asia-Pacific and Japan |
166,568 | 158,075 | 178,715 | |||||||||
| Europe, Middle East and Africa |
85,572 | 92,695 | 113,873 | |||||||||
| Rest of world |
17,286 | 24,178 | 26,822 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | 460,907 | $ | 484,538 | $ | 558,608 | |||||||
|
|
|
|
|
|
|
|||||||
The United States and China are the only countries that represented 10% or more of net revenues for the years presented. Net revenues from customers in China were $56.0 million, $65.0 million and $72.6 million for fiscal 2014, 2013 and 2012, respectively.
Significant Customers
A summary of the Company’s customers, including their manufacturing subcontractors, that represent 10% or more of the Company’s net revenues is as follows:
| 2014 | 2013 | 2012 | ||||||||||
| Hewlett-Packard |
24 | % | 24 | % | 27 | % | ||||||
| IBM |
17 | % | 20 | % | 18 | % | ||||||
| Dell |
15 | % | 12 | % | 11 | % | ||||||
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Table of Contents
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 19. Condensed Quarterly Results (Unaudited)
The following table summarizes certain unaudited quarterly financial information for fiscal 2014 and 2013:
| Three Months Ended (1) | ||||||||||||||||
| June (2) | September | December | March (3) (4) | |||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
| Fiscal 2014: |
||||||||||||||||
| Net revenues |
$ | 113,116 | $ | 112,622 | $ | 119,449 | $ | 115,720 | ||||||||
| Gross profit |
76,497 | 76,309 | 81,003 | 76,298 | ||||||||||||
| Operating income (loss) |
(3,075 | ) | 13,186 | 20,302 | (42,633 | ) | ||||||||||
| Income (loss) from continuing operations |
(3,050 | ) | 10,977 | 20,586 | (46,779 | ) | ||||||||||
| Net income (loss) |
(3,050 | ) | 10,977 | 20,586 | (46,779 | ) | ||||||||||
| Income (loss) from continuing operations per share: |
||||||||||||||||
| Basic |
$ | (0.03 | ) | $ | 0.13 | $ | 0.24 | $ | (0.54 | ) | ||||||
| Diluted |
$ | (0.03 | ) | $ | 0.13 | $ | 0.24 | $ | (0.54 | ) | ||||||
| Net income (loss) per share: |
||||||||||||||||
| Basic |
$ | (0.03 | ) | $ | 0.13 | $ | 0.24 | $ | (0.54 | ) | ||||||
| Diluted |
$ | (0.03 | ) | $ | 0.13 | $ | 0.24 | $ | (0.54 | ) | ||||||
| Fiscal 2013: |
||||||||||||||||
| Net revenues |
$ | 130,371 | $ | 117,867 | $ | 119,386 | $ | 116,914 | ||||||||
| Gross profit |
87,058 | 78,887 | 80,297 | 79,116 | ||||||||||||
| Operating income |
20,041 | 12,985 | 14,424 | 10,400 | ||||||||||||
| Income from continuing operations |
18,441 | 11,780 | 13,705 | 29,635 | ||||||||||||
| Net income |
18,386 | 11,874 | 13,241 | 29,635 | ||||||||||||
| Income from continuing operations per share: |
||||||||||||||||
| Basic |
$ | 0.19 | $ | 0.13 | $ | 0.15 | $ | 0.33 | ||||||||
| Diluted |
$ | 0.19 | $ | 0.13 | $ | 0.15 | $ | 0.33 | ||||||||
| Net income per share: |
||||||||||||||||
| Basic |
$ | 0.19 | $ | 0.13 | $ | 0.14 | $ | 0.33 | ||||||||
| Diluted |
$ | 0.19 | $ | 0.13 | $ | 0.14 | $ | 0.33 | ||||||||
| (1) | The statement of operations data for all periods presented reflects the operating results of the IB Business as discontinued operations. |
| (2) | During the three months ended June 30, 2013, the Company recorded special charges of $12.0 million, consisting of $9.6 million of exit costs and $2.4 million of asset impairment charges primarily related to property and equipment. |
| (3) | During the three months ended March 30, 2014, the Company recorded special charges of $56.5 million, consisting of $41.0 million for the portion of a license payment attributed by the Company to the use of the related technology in periods prior to the date of the related license agreement, $10.6 million of exit costs and $4.9 million of asset impairment charges primarily related to property and equipment. The Company also recorded incremental tax charges of $14.7 million consisting of valuation allowances related to deferred tax assets for certain state tax credits and net operating loss carryforwards. |
| (4) | During the three months ended March 31, 2013, the Company recorded $14.3 million of income tax benefits associated with adjustments to certain tax positions subject to an IRS examination and $5.0 million related to the retroactive reinstatement of the federal research tax credit. |
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Table of Contents
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 30, 2014.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management evaluated the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (1992). Based on this evaluation, our principal executive officer and principal financial officer concluded that the Company’s internal control over financial reporting was effective at a reasonable assurance level as of March 30, 2014.
The independent registered public accounting firm that audited the consolidated financial statements included in this annual report has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. See page 41 herein.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act that occurred during the fourth quarter of fiscal 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| Item 9B. | Other Information |
None.
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Table of Contents
| Item 10. | Directors, Executive Officers and Corporate Governance |
Reference is made to the Company’s Definitive Proxy Statement for its 2014 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of fiscal 2014, for information required under this Item 10. Such information is incorporated herein by reference.
The Company has adopted and implemented a Business Ethics Policy (the Code of Ethics) that applies to the Company’s officers, employees and directors. The Code of Ethics is available on our website at www.qlogic.com.
| Item 11. | Executive Compensation |
Reference is made to the Company’s Definitive Proxy Statement for its 2014 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of fiscal 2014, for information required under this Item 11. Such information is incorporated herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Reference is made to the Company’s Definitive Proxy Statement for its 2014 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of fiscal 2014, for information required under this Item 12. Such information is incorporated herein by reference.
There are no arrangements, known to the Company, which might at a subsequent date result in a change in control of the Company.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Reference is made to the Company’s Definitive Proxy Statement for its 2014 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of fiscal 2014, for information required under this Item 13. Such information is incorporated herein by reference.
| Item 14. | Principal Accounting Fees and Services |
Reference is made to the Company’s Definitive Proxy Statement for its 2014 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of fiscal 2014, for information required under this Item 14. Such information is incorporated herein by reference.
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Table of Contents
| Item 15. | Exhibits and Financial Statement Schedules |
(a) (1) Consolidated Financial Statements
The following consolidated financial statements of the Company for the years ended March 30, 2014, March 31, 2013 and April 1, 2012 are filed as part of this report:
| Page Number |
||||
| 40 | ||||
| Consolidated Balance Sheets as of March 30, 2014 and March 31, 2013 |
42 | |||
| 43 | ||||
| 44 | ||||
| 45 | ||||
| 46 | ||||
| 47 | ||||
(a) (2) Financial Statement Schedule
The following consolidated financial statement schedule of the Company for the years ended March 30, 2014, March 31, 2013 and April 1, 2012 is filed as part of this report and is incorporated herein by reference:
Schedule II — Valuation and Qualifying Accounts
All other schedules have been omitted because the required information is presented in the financial statements or notes thereto, the amounts involved are not significant or the schedules are not applicable.
(a) (3) Exhibits
An exhibit index has been filed as part of this report and is incorporated herein by reference.
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Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| QLOGIC CORPORATION | ||
| By: | /s/ PRASAD L. RAMPALLI | |
| Prasad L. Rampalli | ||
| President and Chief Executive Officer | ||
Date: May 22, 2014
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes Prasad L. Rampalli and/or Jean Hu, as attorney-in-fact, to sign on his or her behalf and in each capacity stated below, and to file all amendments and/or supplements to this Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature |
Title |
Date | ||
| Principal Executive Officer: |
||||
| /s/ PRASAD L. RAMPALLI Prasad L. Rampalli |
President, Chief Executive Officer |
May 22, 2014 | ||
| Principal Financial and Accounting Officer: |
||||
| /s/ JEAN HU Jean Hu |
Senior Vice President and Chief Financial Officer |
May 22, 2014 | ||
| /s/ H.K. DESAI H.K. Desai |
Executive Chairman and |
May 22, 2014 | ||
| /s/ BALAKRISHNAN S. IYER Balakrishnan S. Iyer |
Director |
May 22, 2014 | ||
| /s/ CHRISTINE KING Christine King |
Director |
May 22, 2014 | ||
| /s/ KATHRYN B. LEWIS Kathryn B. Lewis |
Director |
May 22, 2014 | ||
| /s/ D. SCOTT MERCER D. Scott Mercer |
Director |
May 22, 2014 | ||
| /s/ GEORGE D. WELLS George D. Wells |
Director |
May 22, 2014 | ||
| /s/ WILLIAM M. ZEITLER William M. Zeitler |
Director |
May 22, 2014 | ||
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SCHEDULE II
QLOGIC CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
| Balance at Beginning of Year |
Additions: Charged to Costs and Expenses or Revenues |
Deductions: Amounts Written Off, Net of Recoveries |
Balance at End of Year |
|||||||||||||
| (In thousands) | ||||||||||||||||
| Year ended March 30, 2014: |
||||||||||||||||
| Allowance for doubtful accounts |
$ | 1,196 | $ | 23 | $ | 33 | $ | 1,186 | ||||||||
| Sales returns and allowances |
$ | 4,747 | $ | 17,225 | $ | 18,099 | $ | 3,873 | ||||||||
| Year ended March 31, 2013: |
||||||||||||||||
| Allowance for doubtful accounts |
$ | 1,446 | $ | (182 | ) | $ | 68 | $ | 1,196 | |||||||
| Sales returns and allowances |
$ | 4,861 | $ | 31,653 | $ | 31,767 | $ | 4,747 | ||||||||
| Year ended April 1, 2012: |
||||||||||||||||
| Allowance for doubtful accounts |
$ | 1,536 | $ | 79 | $ | 169 | $ | 1,446 | ||||||||
| Sales returns and allowances |
$ | 7,856 | $ | 35,170 | $ | 38,165 | $ | 4,861 | ||||||||
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| Exhibit No. |
Description | |
| 2.1 | Asset Purchase Agreement, by and between QLogic Corporation and Intel Corporation, dated as of January 20, 2012 (incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on January 25, 2012). | |
| 2.2 | Asset Purchase Agreement, by and between QLogic Corporation and Broadcom Corporation, dated as of February 18, 2014 (incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on March 13, 2014). | |
| 3.1 | Certificate of Incorporation of QLogic Corporation, as amended to date (incorporated by reference to Exhibit 3.1 of the Registrant’s Annual Report on Form 10-K for the year ended April 1, 2012). | |
| 3.2 | Amended and Restated By-Laws of QLogic Corporation, as adopted on February 9, 2012 (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on February 13, 2012). | |
| 10.1 | QLogic Corporation Non-Employee Director Stock Option Plan, as amended (incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement on Form S-8 filed on February 6, 2004 (File No. 333-112572)).* | |
| 10.2 | QLogic Corporation Stock Awards Plan, as amended (incorporated by reference to Exhibit 4.2 of the Registrant’s Registration Statement on Form S-8 filed on February 6, 2004 (File No. 333-112572)).* | |
| 10.3 | Form of Indemnification Agreement between QLogic Corporation and Directors and Executive Officers (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on April 7, 2006).* | |
| 10.4 | QLogic Corporation 1998 Employee Stock Purchase Plan, Amended and Restated Effective May 23, 2013 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on August 23, 2013).* | |
| 10.5 | QLogic Corporation 2005 Performance Incentive Plan, Amended and Restated Effective July 16, 2009 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on August 21, 2009).* | |
| 10.6 | Terms and Conditions of Nonqualified Stock Option under the QLogic Corporation 2005 Performance Incentive Plan, as amended (incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 29, 2013).* | |
| 10.7 | Terms and Conditions of Incentive Stock Option under the QLogic Corporation 2005 Performance Incentive Plan, as amended (incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 29, 2013).* | |
| 10.8 | Terms and Conditions of Stock Unit Award under the QLogic Corporation 2005 Performance Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 29, 2013).* | |
| 10.9 | Change in Control Severance Agreement, dated December 19, 2008, between QLogic Corporation and H.K. Desai (incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 28, 2008).* | |
| 10.10 | Change in Control Severance Agreement, dated December 19, 2008, between QLogic Corporation and Simon Biddiscombe (incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 28, 2008).* | |
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| Exhibit No. |
Description | |
| 10.11 | Non-Employee Director Equity Award Program under the QLogic Corporation 2005 Performance Incentive Plan Amended and Restated Effective June 4, 2012 (incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2012).* | |
| 10.12 | Amendment to Change in Control Severance Agreement, effective November 15, 2010, by and between QLogic Corporation and Simon Biddiscombe (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on October 21, 2010).* | |
| 10.13 | Employment Agreement, effective December 4, 2013, by and between QLogic Corporation and H.K. Desai (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on December 9, 2013).* | |
| 10.14 | Amendment to Change in Control Severance Agreement, effective November 15, 2010, by and between QLogic Corporation and H.K. Desai (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed on October 21, 2010).* | |
| 10.15 | Form of Change in Control Severance Agreement between QLogic Corporation and Executive Officers (incorporated by reference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 30, 2012).* | |
| 10.16 | Terms and Conditions of FY2012 Performance Share Award under the QLogic Corporation 2005 Performance Incentive Plan (incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 3, 2011).* | |
| 10.17 | Terms and Conditions of Performance Share Award under the QLogic Corporation 2005 Performance Incentive Plan (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2012).* | |
| 10.18 | Amendment No. 2 to Change in Control Severance Agreement, dated December 20, 2012, by and between QLogic Corporation and Simon Biddiscombe (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 30, 2012).* | |
| 10.19 | Amendment No. 2 to Change in Control Severance Agreement, dated December 20, 2012, by and between QLogic Corporation and H.K. Desai (incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 30, 2012).* | |
| 10.20 | Credit Agreement, dated as of March 20, 2013, by and among QLogic Corporation, the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.21 of the Registrant’s Annual Report on Form 10-K filed on May 23, 2013). | |
| 10.21 | General Release Agreement, dated May 17, 2013, by and between the Company and Simon Biddiscombe (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on May 20, 2013).* | |
| 10.22 | Form of Terms and Conditions of Performance Share Award under the QLogic Corporation 2005 Performance Incentive Plan, as amended (incorporated by reference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 29, 2013).* | |
| 10.23 | Offer Letter, dated December 3, 2013, by and between QLogic Corporation and Prasad Rampalli (incorporated by reference to Exhibit 10.5 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 29, 2013).* | |
| 21.1 | Subsidiaries of the Registrant. | |
| 23.1 | Consent of Independent Registered Public Accounting Firm. | |
| 24 | Power of Attorney (included on signature page). | |
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| Exhibit No. |
Description | |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
| * | Compensation plan, contract or arrangement required to be filed as an exhibit pursuant to applicable rules of the Securities and Exchange Commission. |
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