NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1Company
Red Hat, Inc., incorporated in Delaware, together with its subsidiaries (Red Hat or the
Company) is a leading global provider of open source software solutions, using a community-powered approach to develop and offer reliable and high-performing operating system, virtualization, management, middleware, cloud, mobile and
storage technologies.
Open source software is an alternative to proprietary software and represents a different model for the
development and licensing of commercial software code than that typically used for proprietary software. Because open source software code is often freely shared, there are customarily no licensing fees for the use of open source software.
Therefore, the Company does not recognize revenue from the licensing of the code itself. The Company provides value to its customers through the development, aggregation, integration, testing, certification, delivery, maintenance, enhancement and
support of its Red Hat technologies, and by providing a level of performance, scalability, flexibility, reliability and security for the technologies the Company packages and distributes. Moreover, because communities of developers not employed by
the Company assist with the creation of the Companys open source offerings, opportunities for further innovation of the Companys offerings are supplemented by these communities.
The Company derives its revenue and generates cash from customers primarily from two sources: (i) subscription revenue and
(ii) training and services revenue. These arrangements typically involve subscriptions to Red Hat technologies. The arrangements with the Companys customers that produce this revenue and cash are explained in further detail in NOTE
2Summary of Significant Accounting Policies.
NOTE 2Summary of Significant Accounting Policies
Basis of presentation
The accompanying Consolidated Financial Statements include the accounts of the Company and all of its wholly owned subsidiaries. All
significant inter-company accounts and transactions are eliminated in consolidation. There are no significant foreign exchange restrictions on the Companys foreign subsidiaries.
The Consolidated Statements of Cash Flows as of February 29, 2016 and February 28, 2015 include the effect of retrospective
application of Accounting Standards Update 2016-09,
CompensationStock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(ASU 2016-09). Under ASU 2016-09, all windfall tax benefits related to
share-based payments are reported as cash flows from operating activities along with all other income tax cash flows. Previously, windfall tax benefits from share-based payment arrangements were reported as cash flows from financing activities.
With the Companys permitted election to retrospectively apply this classification amendment, $20.2 million and $5.6
million, respectively, of windfall tax benefits previously reported as cash inflows from financing activities on the Companys Consolidated Statements of Cash Flows for the fiscal years ended February 29, 2016 and February 28, 2015
have been reclassified as cash inflows from operating activities.
For additional discussion related to recent accounting
pronouncements the Company has either recently adopted or is currently evaluating the impact from future adoption, see Recent accounting pronouncements in this note.
In addition to the reclassifications resulting from application of ASU 2016-09, certain other amounts for the fiscal years ended
February 29, 2016 and February 28, 2015 have been reclassified to conform to the current year presentation.
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Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (U.S. GAAP) requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from such
estimates.
Revenue recognition
The Company establishes persuasive evidence of a sales arrangement for each type of revenue transaction based on either a signed contract with the end customer, a click-through contract on the
Companys website whereby the customer agrees to the Companys standard subscription terms, signed or click-through distribution contracts with original equipment manufacturers (OEMs) and other resellers, or, in the case of
individual training seats, through receipt of payment which indicates acceptance of the Companys training agreement terms.
Subscription revenue
Subscription revenue is comprised of direct and
indirect sales of subscriptions relating to Red Hat technologies. Accounts receivable and deferred revenue are recorded at the time a customer enters into a binding subscription agreement for the purchase of a subscription, subscription services are
made available to the customer and the customer is billed. The deferred revenue amount is recognized as revenue ratably over the subscription period. Red Hat technologies are generally offered with either one or three-year base subscription periods;
the majority of the Companys subscriptions have one-year terms. Under these subscription agreements, renewal rates are generally specified for one or three-year renewal terms. Subscriptions generally entitle the end user to the technology
itself and post-contract customer support, generally consisting of varying levels of support services as well as access to security updates, fixes, functionality enhancements, upgrades to the technologies, each on an if and when available basis, and
compatibility with an ecosystem of certified hardware and software, during the term of the subscription. The Company sells its offerings through two principal channels: (1) direct, which includes sales by the Companys sales force as well
as web store sales, and (2) indirect, which includes certified cloud and service providers (CCSPs), distributors, OEMs, systems integrators and value added resellers. The Company recognizes revenue from the sale of Red Hat
technologies ratably over the period of the subscription beginning on the commencement date of the subscription agreement.
Subscription arrangements with large enterprise customers often have contracts with multiple elements (e.g., software technology,
support, training, consulting and other services). The Company allocates revenue to each element of the arrangement based on vendor-specific objective evidence (VSOE) of each elements fair value when the Company can demonstrate
sufficient evidence of the fair value of at least those elements that are undelivered. The fair value of each element in multiple element arrangements is created by either (i) providing the customer with the ability during the term of the
arrangement to renew that element at the same rate paid for the element included in the initial term of the agreement or (ii) selling the element on a stand-alone basis.
The Company derives a portion of its revenue from CCSPs that provide public clouds with, and allow users to consume, computing resources as a service. The Company earns revenue based on subscription units
consumed by the CCSP or its end users.
For periods prior to March 1, 2015, the Company recognized cloud-usage revenue
upon receipt of usage reports from the CCSPs, which typically report fees owed to the Company one month or more after the fees have been earned. Effective March 1, 2015, the Company believed that it had sufficient historical data and experience
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
to estimate this cloud-usage revenue and has begun estimating the amount of and recognizing such revenue in the period earned. The estimates are based on the historical cloud-usage data
available.
Training and services revenue
Training and services revenue is comprised of revenue for consulting, engineering and customer training and education services. Consulting services consist of time-based arrangements, and revenue is
recognized as these services are performed. Engineering services represent revenue earned under fixed fee arrangements with the Companys OEM partners and other customers to provide for significant modification and customization of Red Hat
technologies. The Company recognizes revenue for these fixed fee engineering services using the percentage of completion basis of accounting, provided the Company has the ability to make reliable estimates of progress towards completion, the
fee for such services is fixed or determinable and collection of the resulting receivable is probable. Under the percentage of completion method, earnings under the contract are recognized based on the progress toward completion as estimated using
the ratio of labor hours incurred to total expected project hours. Changes in estimates are recognized in the period in which they are known. Revenue for customer training and education services is recognized on the dates the services are complete.
Deferred selling costs
Deferred commissions are the incremental costs that are directly associated with non-cancellable subscription contracts with customers and consist of sales commissions paid to the Companys sales
force. The commissions are deferred and amortized over a period that approximates the subscription period. The commission payments are paid in full subsequent to the month in which the customers service commences. The deferred commission
amounts are recoverable through the future revenue streams under the non-cancellable customer contracts. In addition, the Company has the ability and intent under the commission plans with its sales force to recover commissions previously paid to
its sales force in the event that customers breach the terms of their subscription agreements and do not fully pay for their subscription agreements. Deferred commissions are included in Prepaid expenses and Other assets, net on the accompanying
Consolidated Balance Sheets. Amortization of deferred commissions is included in sales and marketing expense in the accompanying Consolidated Statements of Operations.
Goodwill and other long-lived assets
Goodwill
The Company evaluates goodwill for impairment during the fourth quarter of its fiscal year or more frequently if events or changes in
circumstances indicate that an impairment to goodwill may have occurred. For fiscal years ended February 28, 2017 and February 28, 2015, the Company applied its test for goodwill impairment as permitted by Accounting Standards Update
2011-08,
IntangiblesGoodwill and Other (Topic 350): Testing Goodwill for Impairment
(ASU 2011-08), which allows the Company to first assess qualitative factors to determine whether it is more likely than
not that the fair value of a reporting unit is less than its carrying value. The outcome of these qualitative tests determines whether it is necessary for a company to perform the two-step goodwill impairment test as required in years prior to
the adoption of ASU 2011-08.
After considering such qualitative factors as macroeconomic conditions, actual or anticipated
changes to cost factors (for example, selling and delivery), overall financial performance and other Company-specific factors, such as potential changes in strategy, the Company determined that it was not more likely than not that any impairment to
goodwill had occurred during the fiscal years ended February 28, 2017 and February 28, 2015. Consequently, the Company was not required to perform the remaining two-step quantitative goodwill impairment test.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the fiscal year ended February 29, 2016, the Company elected to perform a
quantitative assessment of goodwill for all of its reporting units. In doing so, the Company compared the estimated fair value of each of the reporting units to its respective book value, including allocated goodwill. The Company concluded that
there were no impairments of goodwill.
Other long-lived assets
The Company evaluates the recoverability of its property and equipment and other long-lived assets whenever events or changes in
circumstances indicate that an impairment may have occurred. An impairment loss is recognized when the net book value of such assets exceeds the estimated future undiscounted cash flows attributable to the assets or the business to which the assets
relate. Impairment losses, if any, are measured as the amount by which the carrying value exceeds the fair value of the assets.
Cash and
cash equivalents
The Company considers highly liquid investments purchased with a maturity period of three months or less
at the date of purchase to be cash equivalents.
Accounts receivable and allowance for doubtful accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the
Companys estimate of the amount of probable credit losses in the Companys existing accounts receivable. The Company determines the allowance based on historical write-off experience. The Company reviews its allowance for doubtful
accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. All other balances are reviewed on a pooled basis by type of receivable. Account balances are charged off against the
allowance when the Company determines it is probable the receivable will not be recovered. The Company does not have off-balance sheet credit exposure related to its customers. See NOTE 4Accounts Receivable for further discussion on accounts
receivable balances.
Fair value measurements
Fair value is defined as the exchange price that would be received for the purchase of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for such asset
or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs. To measure fair
value, the Company uses the following fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable:
Level 1Quoted prices in active markets for identical assets or liabilities.
Level 2Inputs 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 3Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets
or liabilities.
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RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Companys investments are comprised primarily of debt securities that are
classified as available for sale and recorded at their fair market values. Liquid investments with effective maturities of three months or less at the date of purchase are classified as cash equivalents. Investments with remaining effective
maturities of twelve months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than twelve months from the balance sheet date are classified as long-term investments.
The Companys Level 1 financial instruments are valued using quoted prices in active markets for identical instruments. The Companys Level 2 financial instruments, including derivative instruments, are valued using quoted prices for
identical instruments in less active markets or using other observable market inputs for comparable instruments.
Unrealized
gains and temporary losses on investments classified as available for sale are included within accumulated other comprehensive income, net of any related tax effect. Realized gains and losses are recorded using the specific identification method and
upon realization, such amounts are reclassified from accumulated other comprehensive income to Other income (expense), net. Realized gains and losses and other than temporary impairments, if any, are reflected in the Companys Consolidated
Statements of Operations as Other income (expense), net. The Company does not recognize changes in the fair value of its investments in income unless a decline in value is considered other than temporary. The vast majority of the Companys
investments are priced by pricing vendors. These pricing vendors use the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs. In the event
observable inputs are not available, the Company assesses other factors to determine the securitys market value, including broker quotes or model valuations. Independent price verifications of all holdings are performed by pricing vendors
which are then reviewed by the Company. In the event a price fails a pre-established tolerance check, it is researched so that the Company can assess the cause of the variance to determine what the Company believes is the appropriate fair market
value. See NOTE 17Assets and Liabilities Measured at Fair Value on a Recurring Basis for further discussion on fair value measurements.
The Company minimizes its credit risk associated with investments by investing primarily in investment grade, liquid securities. The Companys policy is designed to limit exposures to any one issuer
depending on credit quality. Periodic evaluations of the relative credit standing of those issuers are considered in the Companys investment strategy.
Internal use software
The Company capitalizes costs related to the
development of internal use software for its website, enterprise resource planning system and systems management applications. The Company amortizes the costs of computer software developed for internal use on a straight-line basis over an estimated
useful life of five years. The carrying value of internal use software is included in property and equipment on the Companys Consolidated Balance Sheets.
Capitalized software costs
Capitalization of software development costs
for products to be sold to third parties begins upon the establishment of technological feasibility and ceases when the product is available for general release. As a result of the Companys practice of frequently releasing source code that it
has developed on an on-going basis for unrestricted download on the Internet, there is generally no passage of time between achievement of technological feasibility and the availability of the Companys product for general release. Therefore,
at February 28, 2017 and February 29, 2016, the Company had no internally developed capitalized software costs for products to be sold to third parties.
83
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Property and equipment
Property and equipment is primarily comprised of furniture, computer and other equipment, computer software and leasehold improvements, which are recorded at cost and depreciated or amortized using the
straight-line method. Expenditures for maintenance and repairs are charged to operations as incurred; major expenditures for renewals and betterments are capitalized and depreciated. Property and equipment acquired under capital leases are
depreciated over the lesser of the estimated remaining useful life of the asset or the remaining term of the lease.
Share-based
compensation
The Company measures share-based compensation cost as of the grant date, based on the estimated fair value of
the award and recognizes the cost over the employee requisite service period typically on a straight-line basis. The Company estimates the fair value of stock options using the Black-Scholes-Merton valuation model. The fair value of nonvested share
awards, nonvested share units and performance share units (PSUs) are measured at their underlying closing share price on the date of grant. The Companys share-based compensation is described further in NOTE 13Share-based
Awards.
Sales and marketing expenses
Sales and marketing expenses consist of costs, including salaries, sales commissions and related expenses, such as travel, of all personnel involved in the sales and marketing process. Sales and marketing
expenses also include costs of advertising, sales lead generation programs, cooperative marketing arrangements and trade shows. Payments made to resellers or other customers are recognized as a reduction of revenue unless the Company
(i) receives an identifiable benefit (goods or services) in exchange for such payments that is sufficiently separable from the purchase of the Companys products and (ii) the Company can reasonably estimate the fair value of the
benefit identified. Advertising costs are expensed as incurred.
Advertising expense totaled $95.7 million, $88.9 million and
$62.6 million for the fiscal years ended February 28, 2017, February 29, 2016 and February 28, 2015, respectively.
Research
and development expenses
Research and development expenses include all direct costs, primarily salaries for Company
personnel and outside consultants, related to the development of new software products, significant enhancements to existing software products, and the portion of costs of development of internal use software required to be expensed. Research and
development costs are charged to operations as incurred.
Income taxes
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The Company continues to assess the realizability of its deferred tax assets, which primarily consist of share-based compensation expense deductions, tax credit carryforwards and deferred revenue. In
assessing the realizability of these deferred tax assets, management considers whether it is more likely than not that some
84
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
portion or all of the deferred tax assets will be realized. The Company continues to maintain a valuation allowance against its deferred tax assets with respect to certain foreign net operating
loss (NOL) carryforwards.
With respect to foreign earnings, it is the Companys policy to invest the
earnings of foreign subsidiaries indefinitely outside the U.S. From time to time, however, the Company may remit a portion of these earnings to the extent it incurs no additional U.S. tax and it is otherwise feasible.
Because tax laws are complex and subject to different interpretations, significant judgment is required. As a result, the Company makes
certain estimates and assumptions in (i) calculating its income tax expense, deferred tax assets and deferred tax liabilities, (ii) determining any valuation allowance recorded against deferred tax assets and (iii) evaluating the
amount of unrecognized tax benefits, as well as the interest and penalties related to such uncertain tax positions. The Companys estimates and assumptions may differ significantly from tax benefits ultimately realized. The Companys
income tax expense and deferred taxes are described further in NOTE 11Income Taxes.
Foreign currency translation
The Euro has been determined to be the primary functional currency for the Companys European operations, and local currencies have
been determined to be the functional currencies for the Companys Asia Pacific and Latin American operations. Foreign exchange gains and losses, which result from the process of remeasuring foreign currency transactions into the appropriate
functional currency, are included in Other income (expense), net in the Companys Consolidated Statements of Operations.
The impact of changes in foreign currency exchange rates resulting from the translation of foreign currency financial statements into
U.S. dollars for financial reporting purposes is included in other comprehensive income, which is a separate component of stockholders equity. Assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance
sheet date. Income and expense items are translated at average rates for the period.
Customers and credit risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, cash
equivalents, investments and trade receivables. The Company primarily places its cash, cash equivalents and investments with high-credit quality financial institutions which invest predominantly in U.S. government instruments, investment grade
corporate bonds and certificates of deposit guaranteed by banks that are members of the Federal Deposit Insurance Corporation. Cash deposits are primarily in financial institutions in the U.S. and the United Kingdom. However, cash for monthly
operating costs of international operations are deposited in banks outside the U.S.
The Company performs credit evaluations
to reduce credit risk and generally requires no collateral from its customers. Management estimates the allowance for uncollectible accounts based on its historical experience and credit evaluation. The Companys standard credit terms are net
30 days in North America, net 30 to net 45 days in EMEA (Europe, Middle East and Africa) and Latin America, and range from net 30 to net 60 days in Asia Pacific (principally Australia, China, India, Japan, Singapore and South Korea).
Net income per common share
The Company computes basic net income per common share by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted net income per common
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RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
share is computed by dividing net income by the weighted average number of common shares and dilutive potential common share equivalents then outstanding. Potential common share equivalents
consist of shares issuable upon the exercise of stock options or vesting of share-based awards.
With respect to the
Companys 0.25% convertible senior notes due 2019 (the convertible notes), the Company has the option to pay cash or deliver, as the case may be, either cash, shares of its common stock or a combination of cash and shares of its
common stock for the aggregate amount due upon conversion of the convertible notes. The Companys intent is to settle the principal amount of the convertible notes in cash upon conversion. As a result, upon conversion of the convertible notes,
only the amounts payable in excess of the principal amounts of the notes are considered in diluted earnings per share under the treasury stock method. See NOTE 21Convertible Notes for detailed information on the convertible notes.
Segment reporting
The
Company is organized primarily on the basis of three geographic business units: the Americas (U.S., Latin America and Canada), EMEA and Asia Pacific. These business units are aggregated into one reportable segment due to the similarity in
nature of products and services provided, financial performance economic characteristics (e.g., revenue growth and gross margin), methods of production and distribution and customer classes (e.g., cloud service providers, distributors, resellers and
enterprise).
The Company has offices in more than 90 locations around the world. The Company manages its international
business on an Americas-wide, EMEA-wide and Asia Pacific-wide basis. See NOTE 19Segment Reporting for further discussion.
Recent
accounting pronouncements
Accounting pronouncements adopted
In March 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-09 to simplify several aspects of the
accounting for share-based compensation, including the income tax consequences. This guidance is effective for the Company as of the first quarter of the fiscal year ending February 28, 2018. However, the Company elected to early adopt ASU
2016-09 effective March 1, 2016.
Impact to Consolidated Statements of Operations.
One of the more significant
impacts of adopting ASU 2016-09 is the required change in how the Company recognizes the excess tax benefits (windfalls) or deficiencies (shortfalls) related to share-based compensation. For example, prior to adopting
ASU 2016-09, such windfalls and shortfalls were credited or charged, respectively, to additional paid-in capital in the Companys Consolidated Balance Sheets. Under ASU 2016-09, these windfalls and shortfalls are recognized as a discrete tax
benefit or discrete tax expense, respectively, in the Companys Consolidated Statements of Operations. For the fiscal year ended February 28, 2017, the Company recognized a discrete tax benefit of $15.8 million related to net windfall
tax benefits from share-based compensation.
ASU 2016-09 requires companies to adopt the amendment related to accounting for
windfalls and shortfalls on a prospective basis only. As a result, no change has been made to the Consolidated Statements of Operations for the fiscal years ended February 29, 2016 and February 28, 2015 related to the $19.8 million and
$6.4 million, respectively, of net windfall tax benefits the Company recognized as additional paid-in capital during the fiscal years ended February 29, 2016 and February 28, 2015. Net windfall tax benefits of $19.8 million recognized as
additional paid-in capital during the fiscal year ended February 29, 2016 includes gross windfall tax benefits of $20.2 million net of $0.5 million shortfall tax expense. Net windfall tax benefits of $5.4 million recognized
86
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
within additional paid-in capital during the fiscal year ended February 28, 2015 includes gross windfall tax benefits of $5.6 million net of $0.3 million shortfall tax expense.
Impact to Consolidated Statements of Cash Flows.
In addition to the income tax consequences described above, under ASU 2016-09 all
windfall tax benefits related to share-based payments are reported as cash flows from operating activities along with all other income tax cash flows. Previously, windfall tax benefits from share-based payment arrangements were reported as cash
flows from financing activities.
With respect to the classification of windfall tax benefits on the statement of cash flows,
ASU 2016-09 allows companies to elect either a prospective or retrospective application. The Company has elected to apply this classification amendment retrospectively. As a result, $20.2 million and $5.6 million, respectively, of windfall tax
benefits previously reported as cash flows from financing activities on the Companys Consolidated Statements of Cash Flows for the fiscal years ended February 29, 2016 and February 28, 2015 have been reclassified as cash flows from
operating activities.
Impact to Consolidated Balance Sheets.
ASU 2016-09 requires that certain other amendments
relevant to the Company be applied using a modified-retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the period in which the guidance is adopted. As a result of adopting ASU
2016-09 during the fiscal year ended February 28, 2017, the Company adjusted retained earnings for amendments related to (i) the timing of when unrealized net windfall tax benefits are recognized and (ii) an entity-wide accounting
policy election to recognize share-based award forfeitures only as they occur rather than estimate by applying a forfeiture rate. The following table summarizes the impact to the Companys Consolidated Balance Sheet, including the net amount
charged to retained earnings as of March 1, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
As of March 1, 2016
|
|
|
|
Balance Sheet Classification
|
|
Amount
|
|
Increase to additional paid-in capital resulting from the Companys election to recognize forfeitures as they occur rather
than applying an estimated forfeiture rate
|
|
Additional paid-in capital
|
|
$
|
2,369
|
|
Recognition of deferred tax assets related to cumulative-effect adjustment from the Companys election to recognize
forfeitures as they occur
|
|
Deferred tax assets, net
|
|
$
|
603
|
|
Recognition of deferred tax assets related to certain unrealized net windfall tax benefits from share-based
compensation
|
|
Deferred tax assets, net
|
|
$
|
1,316
|
|
Net charge to retained earnings for cumulative-effect adjustment from adoption of ASU 2016-09
|
|
Retained earnings
|
|
$
|
450
|
|
In August 2014, the FASB issued Accounting Standards Update 2014-15,
Presentation of Financial
StatementsGoing Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern
(ASU 2014-15). This standard sets forth managements responsibility to evaluate, each
reporting period, whether there is substantial doubt about the Companys ability to continue as a going concern, and if so, to provide related footnote disclosures. This guidance is effective for the Company as of February 28, 2017. The
Company early adopted ASU 2014-15 and performed its evaluation during the fourth quarter of its fiscal year ended February 28, 2017. As a result of this evaluation, the Company does not have substantial doubt about its ability to continue as a
going concern.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Accounting pronouncements being evaluated
In January 2017, the FASB issued Accounting Standards Update 2017-04,
IntangiblesGoodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment
(ASU 2017-04)
.
The FASB issued ASU 2017-04 to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this updated standard, an entity should
recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value, but the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity also should
consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if any. The FASB also eliminated the requirement for reporting units with a zero or negative
carrying amount to first perform a qualitative assessment. This guidance is effective for the Company as of the first quarter of its fiscal year ending February 29, 2020. The Company is currently evaluating the impact that this updated
standard, but does not believe this update will have a significant impact on its consolidated financial statements.
In August
2016, the FASB issued Accounting Standards Update 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
(ASU 2016-15). The FASB issued ASU 2016-15 to decrease the diversity in
practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this update provide guidance on eight specific cash flow issues. This guidance is effective for the Company as of
the first quarter of its fiscal year ending February 28, 2019 and should be applied using the retrospective transition method to each period presented. Early adoption is permitted but all amendments must be adopted in the same period. The
Company is currently evaluating the impact that this updated standard will have on its consolidated financial statements.
In
February 2016, the FASB issued Accounting Standards Update 2016-02,
Leases (Topic 842)
(ASU 2016-02). The FASB issued ASU 2016-02 to increase transparency and comparability among organizations with respect to accounting for
leases. Under ASU 2016-02, lessees will recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of
lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. This
guidance is effective for the Company as of the first quarter of its fiscal year ending February 28, 2019. The Company is currently evaluating the impact that this updated standard will have on its consolidated financial statements.
In January 2016, the FASB issued Accounting Standards Update 2016-01,
Financial InstrumentsOverall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities
(ASU 2016-01). The FASB issued ASU 2016-01 to require equity investments with readily determinable fair values to be measured at fair value with changes in
fair value recognized in net income. Equity investments that do not have readily determinable fair values are allowed to be remeasured upon the occurrence of an observable price change or upon identification of an impairment. This guidance is
effective for the Company as of the first quarter of the fiscal year ending February 28, 2019. The Company is currently evaluating the impact that this updated standard will have on its consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update 2014-09,
Revenue from Contracts with Customers
, now referred to as
Accounting Standards Codification Topic 606 (ASC 606). The FASB issued ASC 606 to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The
standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance. This guidance is effective for the Company beginning the
first quarter of its fiscal
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RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
year ending February 28, 2019. The standard must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective
approach.
The Company has substantially completed its preliminary assessment of the potential impact that the implementation
of this updated standard will have on its consolidated financial statements. With respect to the Companys software subscription offerings, which accounted for 89%, 88%, and 87% of the Companys total revenue for the fiscal years ended
February 28, 2017, February 29, 2016 and February 28, 2015, respectively, the Company provides value to its customers through continuous aggregation, integration, testing, certification, maintenance, enhancement and support of the
open source technologies that it distributes. The Company currently recognizes subscription revenue ratably over the subscription period. Under the updated standard, these subscription attributes represent a series of performance obligations that
are delivered over time, primarily on a stand-ready basis (for example, attributes such as updates, upgrades, and support are not forced upon subscribers but rather made available to subscribers). As a result, the Company believes that its
subscription revenue meets the criteria for revenue recognition over time and will continue to be recognized ratably under the updated standard.
The Company also offers professional consulting and training services that are designed to help customers derive additional value from Red Hat technologies. Under the updated guidance, revenue from
professional consulting and training services that were previously sold on a standalone basis will continue to be recognized over time as the Company satisfies its performance obligations by delivering and transferring such services to the customer.
With respect to customer contracts with multiple elements (such as software subscriptions and professional consulting and
training services), under the current standard the Company allocates total contract revenue to each elements relative fair value when the Company can demonstrate sufficient VSOE of the fair value of at least those elements that are
undelivered. For multiple-element contracts in which one or more of the undelivered elements lacks VSOE, the Company defers recognition of any revenue until the elements lacking VSOE have been delivered. However, under the updated standard, the
Company will be required to allocate total contract revenue to each element (referred to as a distinct performance obligation under the updated standard) based on either an established or estimated standalone selling price. The Company would then
recognize the allocated revenue as each element (performance obligation) is delivered. Because the Company has historically established VSOE for most of its offerings and as a result has not been required to defer a significant amount of revenue due
to insufficient VSOE, the Company does not anticipate the updated standards requirement to establish or estimate a standalone selling price, rather than defer revenues in the absence of VSOE, to have a significant impact on the Companys
financial statements.
The Company continues to assess the impact of the updated guidance, including for example, any
potential changes to and investments in the Companys policies, processes, systems and internal controls over financial reporting that may be required to comply with new guidance related to variable consideration, contract modifications,
allocation of discounts and expanded disclosures. The Company has not yet finalized its decision with respect to transition method.
NOTE
3Business Combinations
Acquisition of 3scale, Inc.
On June 24, 2016, the Company completed its acquisition of all of the shares of 3scale, Inc. (3scale), a provider of
application programming interface (API) management technology. By adding 3scale to its existing portfolio, including Red Hat JBoss Middleware, Red Hat OpenShift and Red Hat Mobile Application Platform, the Company strengthens its
enablement of the API economy with simplified cloud integration and microservices-based architectures.
89
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The consideration paid was $29.1 million in cash. Management has completed its
assessment of the acquisition-date fair value of the assets acquired and liabilities assumed. The total consideration transferred of $29.1 million was allocated to the Companys assets and liabilities as follows: $16.9 million to goodwill,
$13.1 million to identifiable intangible assets and $0.9 million to working capital as a net current liability.
The Company
incurred approximately $1.8 million in transaction costs, including legal and accounting fees, relating to the acquisition. These transaction costs have been expensed as incurred and included in general and administrative expense on the
Companys Consolidated Statements of Operations for the fiscal year ended February 28, 2017.
Acquisition of
Ansible, Inc.
On October 16, 2015, the Company completed its acquisition of all of the shares of Ansible, Inc.
(Ansible). Ansible is a provider of IT automation solutions that allows its users to manage applications across hybrid cloud environments. The acquisition augments the Companys management portfolio and help customers to deploy and
manage applications across private and public clouds, speed service delivery through development and operations initiatives, streamline OpenStack installations and upgrades and accelerate container adoption by simplifying orchestration and
configuration.
The consideration paid was $126.0 million and includes $125.2 million of cash. Management has completed its
assessment of the acquisition-date fair value of the assets acquired and liabilities assumed. The total consideration transferred of $126.0 million has been allocated to the Companys assets and liabilities as follows: $102.3 million to
goodwill, $25.1 million to identifiable intangible assets and $1.4 million to working capital as a net current liability.
The
Company incurred approximately $3.9 million in transaction costs, including legal and accounting fees, relating to the acquisition. These transaction costs have been expensed as incurred and included in general and administrative expense on the
Companys Consolidated Statements of Operations for the fiscal year ended February 29, 2016.
Acquisition of
FeedHenry Ltd.
On October 8, 2014, the Company completed its acquisition of all of the shares of FeedHenry Ltd.
(FeedHenry). FeedHenry is a provider of cloud-based enterprise mobile application platforms. The acquisition expands the Companys portfolio of application development, integration and platform-as-a-service solutions, enabling the
Company to support mobile application development in public and private environments.
The consideration paid as of the
closing date was $80.2 million and has been allocated to the Companys assets and liabilities as follows: $68.5 million to goodwill, $9.0 million to identifiable intangible assets and the remaining $2.7 million to net working capital.
The Company incurred approximately $1.1 million in transaction costs, including legal and accounting fees, relating to the
acquisition. These transaction costs have been expensed as incurred and included in general and administrative expense on the Companys Consolidated Statements of Operations for the fiscal year ended February 28, 2015.
90
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Acquisition of eNovance, SAS
On June 24, 2014, the Company completed its acquisition of all of the shares of eNovance, SAS (eNovance), a provider of
open source cloud computing services. The acquisition assists in advancing the Companys market position in OpenStack, and the addition of eNovances systems integration capabilities and engineering talent is expected to help meet growing
demand for enterprise OpenStack consulting, design and deployment.
The consideration paid was $67.6 million and has been
allocated to the Companys assets and liabilities as follows: $60.8 million to goodwill, $5.3 million to identifiable intangible assets and the remaining $1.5 million to net working capital.
In addition to the cash consideration transferred, the Company issued a total of 529,057 restricted common shares to certain
employee-shareholders. The vesting of these restricted shares is conditioned on continued employment with the Company. As a result of the employment condition, the transfer of these shares has been accounted for apart from the business combination.
The Company incurred approximately $0.9 million in transaction costs, including legal and accounting fees, relating to the
acquisition. These transaction costs have been expensed as incurred and included in general and administrative expense on the Companys Consolidated Statements of Operations for the fiscal year ended February 28, 2015.
Acquisition of Inktank Storage, Inc.
On April 30, 2014, the Company completed its acquisition of all of the shares of Inktank Storage, Inc. (Inktank), a provider of scale-out, open source storage systems, whose flagship
technology, Inktank Ceph Enterprise, delivers object and block storage software to enterprises deploying public or private clouds. The acquisition complements the Companys existing GlusterFS-based storage offering.
The consideration paid was $152.5 million and has been allocated to the Companys assets and liabilities as follows: $131.4 million
to goodwill, $10.8 million to identifiable intangible assets and the remaining $10.3 million to net working capital.
The
Company incurred approximately $2.0 million in transaction costs, including legal and accounting fees, relating to the acquisition. These transaction costs have been expensed as incurred and included in general and administrative expense on the
Companys Consolidated Statements of Operations for the fiscal year ended February 28, 2015.
Pro forma
consolidated financial information (unaudited)
The following unaudited pro forma consolidated financial information
reflects the results of operations of the Company (in thousands, except per share amounts) as if the acquisition of 3scale, Ansible, FeedHenry, eNovance and Inktank had closed on March 1, 2014, after giving effect to certain purchase accounting
adjustments. These pro forma results are not necessarily indicative of what the Companys operating results would have been had the acquisitions actually taken place at the beginning of the period. Pro forma consolidated financial information
for the fiscal year ended February 28, 2017 has not been provided because the acquisition
91
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
of 3scale would not have had a significant impact on consolidated operating results if the acquisition had closed on March 1, 2016.
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
Revenue
|
|
$
|
2,057,565
|
|
|
$
|
1,797,959
|
|
Net income
|
|
|
188,825
|
|
|
|
158,467
|
|
Basic net income per common share
|
|
$
|
1.03
|
|
|
$
|
0.85
|
|
Diluted net income per common share
|
|
$
|
1.01
|
|
|
$
|
0.84
|
|
Goodwill and other business combinations
The Company completed its annual goodwill impairment tests for the fiscal years ended February 28, 2017, February 29, 2016
and February 28, 2015. No goodwill impairment was deemed to have occurred for any of the fiscal years. The following is a summary of goodwill (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
Balance at beginning of year
|
|
$
|
1,027,277
|
|
|
$
|
927,060
|
|
|
$
|
687,430
|
|
Acquisitions
|
|
|
16,923
|
|
|
|
102,260
|
|
|
|
260,786
|
|
Impact of foreign currency fluctuations
|
|
|
(3,636
|
)
|
|
|
(3,493
|
)
|
|
|
(21,156
|
)
|
Other adjustments
|
|
|
145
|
|
|
|
1,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
1,040,709
|
|
|
$
|
1,027,277
|
|
|
$
|
927,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The excess of purchase price paid for acquisitions over the fair value of the net assets acquired was
recognized as goodwill. Goodwill comprises the majority of the purchase price paid for each of the acquired businesses because these businesses were focused on emerging technologies such as development and operations automation, mobile technologies,
cloud-enabling technologies and software-defined storage technologies, which consequentlyat the time of acquisitiongenerated relatively little revenue. However, these acquired businesses, with their assembled, highly-specialized
workforces and community of contributors, are expected to both expand the Companys existing technology portfolio and advance the Companys market position overall in open source solutions.
NOTE 4Accounts Receivable
Accounts receivable are presented net of an allowance for doubtful accounts. Activity in the Companys allowance for doubtful accounts is presented in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended
|
|
Balance at
beginning
of period
|
|
|
Charged to
(recovery
of)
expense
|
|
|
Adjustments (1)
|
|
|
Balance at
end of
period
|
|
February 28, 2015
|
|
$
|
1,986
|
|
|
|
469
|
|
|
|
(208
|
)
|
|
$
|
2,247
|
|
February 29, 2016
|
|
$
|
2,247
|
|
|
|
1,323
|
|
|
|
(772
|
)
|
|
$
|
2,798
|
|
February 28, 2017
|
|
$
|
2,798
|
|
|
|
(140
|
)
|
|
|
133
|
|
|
$
|
2,791
|
|
(1)
|
Represents foreign currency translation adjustments and amounts written-off as uncollectible accounts receivable.
|
92
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of February 28, 2017 and February 29, 2016, no individual customer
accounted for 10% or more of the Companys accounts receivable.
NOTE 5Prepaid Expenses
Prepaid expenses include sales commissions, which are the incremental costs that are directly associated with non-cancellable subscription
contracts with customers and consist of sales commissions paid to the Companys sales force. The commissions are deferred and amortized over a period to approximate the period of the subscription term. For further discussion on deferred
commissions see NOTE 2Summary of Significant Accounting Policies. Prepaid expenses, including sales commissions, were comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
Deferred commissions
|
|
$
|
147,695
|
|
|
$
|
102,254
|
|
Professional services
|
|
|
24,135
|
|
|
|
21,160
|
|
Taxes
|
|
|
10,734
|
|
|
|
15,819
|
|
Insurance
|
|
|
2,166
|
|
|
|
2,160
|
|
Other
|
|
|
15,879
|
|
|
|
9,484
|
|
|
|
|
|
|
|
|
|
|
Total prepaid expenses
|
|
$
|
200,609
|
|
|
$
|
150,877
|
|
|
|
|
|
|
|
|
|
|
NOTE 6Property and Equipment
The Companys property and equipment is recorded at cost and consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
(Years)
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
Computer and other equipment
|
|
|
3-5
|
|
|
$
|
155,615
|
|
|
$
|
135,342
|
|
Software, including software developed for internal use
|
|
|
5
|
|
|
|
93,727
|
|
|
|
85,517
|
|
Furniture and fixtures
|
|
|
7
|
|
|
|
32,260
|
|
|
|
28,800
|
|
Leasehold improvements
|
|
|
up to 15
|
|
|
|
124,060
|
|
|
|
104,045
|
|
Property and equipmentin progress
|
|
|
|
|
|
|
15,500
|
|
|
|
8,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
|
|
|
|
421,162
|
|
|
|
361,705
|
|
Less: accumulated depreciation
|
|
|
|
|
|
|
(231,533
|
)
|
|
|
(194,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
$
|
189,629
|
|
|
$
|
166,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment is depreciated or amortized using the straight-line method over the respective
assets estimated useful life. Leasehold improvements are depreciated up to 15 years, over the lesser of the estimated remaining useful life of the asset or the remaining term of the lease. Depreciation expense recognized in the Companys
Consolidated Financial Statements is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
Total depreciation expense
|
|
$
|
54,077
|
|
|
$
|
48,909
|
|
|
$
|
48,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 7Identifiable Intangible Assets
Identifiable intangible assets consist primarily of trademarks, copyrights and patents, purchased technologies, customer and reseller
relationships, and covenants not to compete, all of which are amortized over the estimated useful life, generally on a straight-line basis, with the exception of customer and reseller relationships, which are generally amortized over the greater of
straight-line or the related assets pattern of economic benefit. Useful lives range from two to 10 years. As of February 28, 2017 and February 29, 2016, trademarks with an indefinite estimated useful life totaled $10.9 million and
$11.1 million, respectively. The following is a summary of identifiable intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2017
|
|
|
February 29, 2016
|
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Amount
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Amount
|
|
Trademarks, copyrights and patents
|
|
$
|
148,850
|
|
|
$
|
(59,440
|
)
|
|
$
|
89,410
|
|
|
$
|
138,106
|
|
|
$
|
(49,876
|
)
|
|
$
|
88,230
|
|
Purchased technologies
|
|
|
107,078
|
|
|
|
(80,536
|
)
|
|
|
26,542
|
|
|
|
96,105
|
|
|
|
(70,940
|
)
|
|
|
25,165
|
|
Customer and reseller relationships
|
|
|
104,438
|
|
|
|
(88,046
|
)
|
|
|
16,392
|
|
|
|
104,593
|
|
|
|
(80,329
|
)
|
|
|
24,264
|
|
Covenants not to compete
|
|
|
14,081
|
|
|
|
(12,329
|
)
|
|
|
1,752
|
|
|
|
13,240
|
|
|
|
(9,875
|
)
|
|
|
3,365
|
|
Other intangible assets
|
|
|
8,833
|
|
|
|
(5,162
|
)
|
|
|
3,671
|
|
|
|
8,833
|
|
|
|
(3,786
|
)
|
|
|
5,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable intangible assets
|
|
$
|
383,280
|
|
|
$
|
(245,513
|
)
|
|
$
|
137,767
|
|
|
$
|
360,877
|
|
|
$
|
(214,806
|
)
|
|
$
|
146,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the change in identifiable intangible assets (in thousands):
|
|
|
|
|
Balance at February 29, 2016
|
|
$
|
146,071
|
|
Purchase of identifiable intangible assets from 3scale, primarily developed technologies
|
|
|
13,130
|
|
Purchase of developed software and other intangible assets
|
|
|
11,038
|
|
Amortization expense
|
|
|
(31,232
|
)
|
Impact of foreign currency fluctuations and other adjustments
|
|
|
(1,240
|
)
|
|
|
|
|
|
Balance at February 28, 2017
|
|
$
|
137,767
|
|
|
|
|
|
|
Amortization expense associated with identifiable intangible assets recognized in the Companys
Consolidated Financial Statements is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
Cost of revenue
|
|
$
|
16,938
|
|
|
$
|
13,102
|
|
|
$
|
12,049
|
|
Sales and marketing
|
|
|
7,078
|
|
|
|
8,075
|
|
|
|
7,838
|
|
Research and development
|
|
|
138
|
|
|
|
842
|
|
|
|
2,417
|
|
General and administrative
|
|
|
7,078
|
|
|
|
5,160
|
|
|
|
5,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense
|
|
$
|
31,232
|
|
|
$
|
27,179
|
|
|
$
|
28,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of February 28, 2017, future amortization expense on existing intangibles is as
follows (in thousands):
|
|
|
|
|
Fiscal Year
|
|
Amortization
Expense of
Intangible Assets
|
|
2018
|
|
$
|
27,392
|
|
2019
|
|
|
22,170
|
|
2020
|
|
|
18,371
|
|
2021
|
|
|
11,867
|
|
2022
|
|
|
7,241
|
|
Thereafter
|
|
|
39,840
|
|
|
|
|
|
|
Total amortization expense
|
|
$
|
126,881
|
|
|
|
|
|
|
NOTE 8Other Assets, Net
Other assets, net were comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
Deferred commissions, non-current
|
|
$
|
38,842
|
|
|
$
|
8,722
|
|
Cost-basis investments
|
|
|
14,778
|
|
|
|
16,079
|
|
Prepaid expenses, non-current
|
|
|
12,209
|
|
|
|
12,553
|
|
Security deposits and other
|
|
|
8,276
|
|
|
|
7,152
|
|
|
|
|
|
|
|
|
|
|
Other assets, net
|
|
$
|
74,105
|
|
|
$
|
44,506
|
|
|
|
|
|
|
|
|
|
|
The Company reviews its non-marketable cost-basis investments in equity securities for other than
temporary declines in fair value based on prices recently paid for shares in that company, as well as changes in market conditions. The carrying values are not necessarily representative of the amounts that the Company could realize in a current
transaction. The Company recognized losses of $2.0 million, $2.8 million and $4.6 million on certain investments during the fiscal years ended February 28, 2017, February 29, 2016 and February 28, 2015, respectively.
NOTE 9Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses were comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
Accounts payable
|
|
$
|
76,197
|
|
|
$
|
63,268
|
|
Accrued wages and other compensation-related expenses
|
|
|
212,184
|
|
|
|
137,738
|
|
Accrued other trade payables
|
|
|
43,781
|
|
|
|
45,785
|
|
Accrued income and other taxes payable
|
|
|
44,032
|
|
|
|
37,069
|
|
Accrued other
|
|
|
763
|
|
|
|
942
|
|
|
|
|
|
|
|
|
|
|
Total accounts payable and accrued expenses
|
|
$
|
376,957
|
|
|
$
|
284,802
|
|
|
|
|
|
|
|
|
|
|
95
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 10Derivative Instruments
The Company transacts business in various foreign countries and is, therefore, subject to risk of foreign currency exchange rate
fluctuations. The Company from time to time enters into forward contracts to economically hedge transactional exposure associated with commitments arising from trade accounts receivable, trade accounts payable and fixed purchase obligations
denominated in a currency other than the functional currency of the respective operating entity. All derivative instruments are recorded on the Consolidated Balance Sheets at their respective fair market values. The Company has elected not to
prepare and maintain the documentation required to qualify for hedge accounting treatment and, therefore, changes in fair value are recorded in the Consolidated Statements of Operations. See NOTE 17Assets and Liabilities Measured at Fair Value
on a Recurring Basis for information regarding the fair value hierarchy of derivative instruments.
The effects of derivative
instruments on the Companys Consolidated Financial Statements are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended February 28,
2017
|
|
|
|
As of February 28, 2017
|
|
|
Classification of Gain
(Loss) Recognized
in Income on
Derivatives
|
|
Amount of
Gain
(Loss) Recognized
in Income
on
Derivatives
|
|
|
|
Balance
Sheet Classification
|
|
Fair
Value
|
|
|
Notional
Value
|
|
|
|
Assetsforeign currency forward contracts not designated as
hedges
|
|
Other current assets
|
|
$
|
135
|
|
|
$
|
15,151
|
|
|
Other income (expense), net
|
|
$
|
3,663
|
|
|
|
|
|
|
|
Liabilitiesforeign currency
forward contracts not designated
as hedges
|
|
Accounts payable and accrued expenses
|
|
|
(160
|
)
|
|
|
33,670
|
|
|
Other income (expense), net
|
|
|
(2,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(25
|
)
|
|
$
|
48,821
|
|
|
|
|
$
|
693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended February 29,
2016
|
|
|
|
As of February 29, 2016
|
|
|
Classification of Gain
(Loss) Recognized
in Income on
Derivatives
|
|
Amount of
Gain
(Loss) Recognized
in Income
on
Derivatives
|
|
|
|
Balance
Sheet Classification
|
|
Fair
Value
|
|
|
Notional
Value
|
|
|
|
Assetsforeign currency forward contracts not designated as hedges
|
|
Other current assets
|
|
$
|
566
|
|
|
$
|
31,390
|
|
|
Other income (expense), net
|
|
$
|
1,226
|
|
|
|
|
|
|
|
Liabilitiesforeign currency forward contracts not designated as hedges
|
|
Accounts payable and accrued expenses
|
|
|
(452
|
)
|
|
|
41,214
|
|
|
Other income (expense), net
|
|
|
(1,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
114
|
|
|
$
|
72,604
|
|
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 11Income Taxes
Components of income tax expense
The U.S. and foreign components of the Companys income before provision for income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
U.S.
|
|
$
|
187,316
|
|
|
$
|
155,550
|
|
|
$
|
167,388
|
|
Foreign
|
|
|
132,864
|
|
|
|
119,315
|
|
|
|
88,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
$
|
320,180
|
|
|
$
|
274,865
|
|
|
$
|
255,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the Companys provision for income taxes consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
$
|
35,791
|
|
|
$
|
39,168
|
|
|
$
|
26,325
|
|
Federal
|
|
|
16,857
|
|
|
|
44,872
|
|
|
|
15,252
|
|
State
|
|
|
1,502
|
|
|
|
5,133
|
|
|
|
4,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense
|
|
$
|
54,150
|
|
|
$
|
89,173
|
|
|
$
|
45,667
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(4,854
|
)
|
|
|
(5,170
|
)
|
|
|
(8,188
|
)
|
Federal
|
|
|
17,712
|
|
|
|
(6,142
|
)
|
|
|
36,197
|
|
State
|
|
|
(531
|
)
|
|
|
(2,361
|
)
|
|
|
1,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax expense (benefit)
|
|
$
|
12,327
|
|
|
$
|
(13,673
|
)
|
|
$
|
29,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net provision for income taxes
|
|
$
|
66,477
|
|
|
$
|
75,500
|
|
|
$
|
75,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Statutory Rate Reconciliation
Taxes computed at the statutory federal income tax rates are reconciled to the provision for income taxes as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
February 28, 2017
|
|
|
February 29, 2016
|
|
|
February 28, 2015
|
|
Provision at federal statutory rate
|
|
$
|
112,063
|
|
|
|
35.0
|
%
|
|
$
|
96,203
|
|
|
|
35.0
|
%
|
|
$
|
89,424
|
|
|
|
35.0
|
%
|
State tax, net of federal tax benefit
|
|
|
520
|
|
|
|
0.2
|
%
|
|
|
601
|
|
|
|
0.2
|
%
|
|
|
4,042
|
|
|
|
1.6
|
%
|
Foreign rate differential (1)
|
|
|
(11,795
|
)
|
|
|
(3.7
|
)%
|
|
|
(8,232
|
)
|
|
|
(3.0
|
)%
|
|
|
(13,983
|
)
|
|
|
(5.5
|
)%
|
Foreign dividend
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
|
|
8,720
|
|
|
|
3.4
|
%
|
Nondeductible items
|
|
|
3,077
|
|
|
|
1.0
|
%
|
|
|
3,426
|
|
|
|
1.2
|
%
|
|
|
3,339
|
|
|
|
1.3
|
%
|
Share-based compensation (2)
|
|
|
(12,749
|
)
|
|
|
(4.0
|
)%
|
|
|
149
|
|
|
|
0.1
|
%
|
|
|
105
|
|
|
|
|
%
|
Research tax credit
|
|
|
(9,532
|
)
|
|
|
(3.0
|
)%
|
|
|
(5,105
|
)
|
|
|
(1.9
|
)%
|
|
|
(5,329
|
)
|
|
|
(2.1
|
)%
|
Foreign tax credit
|
|
|
(8,930
|
)
|
|
|
(2.8
|
)%
|
|
|
(10,267
|
)
|
|
|
(3.7
|
)%
|
|
|
(11,755
|
)
|
|
|
(4.6
|
)%
|
Domestic production activities deduction
|
|
|
(4,601
|
)
|
|
|
(1.4
|
)%
|
|
|
(5,033
|
)
|
|
|
(1.8
|
)%
|
|
|
(4,433
|
)
|
|
|
(1.7
|
)%
|
Other
|
|
|
(1,576
|
)
|
|
|
(0.5
|
)%
|
|
|
3,758
|
|
|
|
1.4
|
%
|
|
|
5,167
|
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
66,477
|
|
|
|
20.8
|
%
|
|
$
|
75,500
|
|
|
|
27.5
|
%
|
|
$
|
75,297
|
|
|
|
29.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Foreign rate differential includes a reduction of $1.5 million related to a tax holiday in Israel. The tax holiday provides for a reduced tax rate on income
attributable to research and development activities and is scheduled to terminate as of the fiscal year ending February 29, 2020. The financial impact from the tax holiday for the fiscal year ended February 28, 2017 resulted in an increase
to the Companys diluted earnings per share of approximately $0.01.
|
(2)
|
Share-based compensation in the fiscal year ended February 28, 2017 includes $15.8 million net windfall tax benefits from share-based payments resulting from the
Companys early adoption of ASU 2016-09. See NOTE 2Summary of Significant Accounting Policies for additional discussion regarding the adoption of ASU 2016-09. This windfall is offset by certain stock-based compensation for which the
Company receives no tax benefit.
|
Deferred taxes
Significant components of the Companys deferred tax assets and liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
Deferred tax assets:
|
|
|
|
|
Foreign net operating loss carryforwards
|
|
$
|
4,218
|
|
|
$
|
6,679
|
|
Domestic net operating loss carryforwards
|
|
|
5,696
|
|
|
|
13,202
|
|
Domestic credit carryforwards
|
|
|
9,864
|
|
|
|
7,849
|
|
Share-based compensation
|
|
|
51,016
|
|
|
|
44,276
|
|
Deferred revenue
|
|
|
97,258
|
|
|
|
83,901
|
|
Foreign deferred royalty expenses
|
|
|
2,505
|
|
|
|
9,896
|
|
Convertible notes
|
|
|
11,377
|
|
|
|
15,182
|
|
Other
|
|
|
17,077
|
|
|
|
12,313
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
199,011
|
|
|
|
193,298
|
|
Valuation allowance for deferred tax assets
|
|
|
(5,621
|
)
|
|
|
(3,291
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net of valuation allowance
|
|
|
193,390
|
|
|
|
190,007
|
|
|
|
|
|
|
|
|
|
|
98
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
Deferred tax liabilities:
|
|
|
|
|
Goodwill
|
|
|
10,757
|
|
|
|
9,450
|
|
Property and equipment
|
|
|
25,163
|
|
|
|
22,669
|
|
Identifiable intangible assets
|
|
|
21,101
|
|
|
|
21,416
|
|
Compensation accruals
|
|
|
30,128
|
|
|
|
21,415
|
|
Other
|
|
|
4,347
|
|
|
|
3,770
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
91,496
|
|
|
|
78,720
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (1)
|
|
$
|
101,894
|
|
|
$
|
111,287
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net deferred tax asset is reported on the Companys Consolidated Balance Sheets as Deferred tax assets, net and included in Other long-term obligations.
|
The Company maintains a valuation allowance against its deferred tax assets with respect to certain foreign and
state NOL and credit carryforwards that the Company does not believe will ultimately be realized. For the fiscal year ended February 28, 2017, the valuation allowance increased $2.3 million primarily as a result of foreign NOL and credit
carryforwards acquired through recent acquisitions.
As of February 28, 2017, the Company had U.S. federal NOL
carryforwards of $9.2 million, foreign NOL carryforwards of $22.9 million and U.S. state NOL carryforwards of $72.3 million. The NOL carryforwards expire in varying amounts beginning in the fiscal year ending February 28, 2018. As of
February 28, 2017, the Company had U.S. federal research tax credit carryforwards of $0.8 million, state research tax credit carryforwards of $18.1 million and foreign research tax credit carryforwards of $1.2 million, which expire in varying
amounts beginning in the fiscal year ending February 28, 2018.
As of February 28, 2017, cumulative undistributed
earnings of non-U.S. subsidiaries totaled $677.4 million. Determination of the deferred tax liability on these earnings reinvested indefinitely outside the U.S. is not practicable because of available foreign tax credits, continually changing
variables and other factors. It is the Companys policy to invest the earnings of foreign subsidiaries indefinitely outside the U.S. From time to time, however, the Company may remit a portion of these earnings to the extent it is economically
prudent. The Company has provided U.S. income taxes on the earnings of certain foreign subsidiaries that are not considered as permanently reinvested outside the U.S. The U.S. income tax on such earnings has been offset by U.S. foreign tax credits.
The Company has also provided U.S. income taxes on the earnings of certain foreign subsidiaries that are permanently reinvested outside the U.S. but are deemed distributed for U.S. federal income tax purposes. The U.S. income tax on such earnings is
reduced or offset by available U.S. foreign tax credits.
Unrecognized tax benefits
The following table reconciles unrecognized tax benefits (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
Balance at beginning of year
|
|
$
|
74,886
|
|
|
$
|
60,343
|
|
|
$
|
57,054
|
|
Additions based on tax positions related to prior years
|
|
|
2,142
|
|
|
|
13,486
|
|
|
|
514
|
|
Additions based on tax positions related to the current year
|
|
|
4,893
|
|
|
|
3,494
|
|
|
|
3,374
|
|
(Reductions) additions related to changes in facts and circumstances
|
|
|
(2,271
|
)
|
|
|
256
|
|
|
|
(229
|
)
|
Reductions related to lapse of the statute of limitations
|
|
|
(2,748
|
)
|
|
|
(1,581
|
)
|
|
|
(370
|
)
|
Reductions related to settlements with tax authorities
|
|
|
|
|
|
|
(1,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
76,902
|
|
|
$
|
74,886
|
|
|
$
|
60,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Companys unrecognized tax benefits as of February 28, 2017 and
February 29, 2016, which, if recognized, would affect the Companys effective tax rate were $69.1 million and $59.1 million, respectively.
It is the Companys policy to recognize interest and penalties related to uncertain tax positions as income tax expense. Uncertain tax position interest and penalties recognized in the Consolidated
Statements of Operations totaled $2.5 million, $1.5 million and $2.7 million for the fiscal years ended February 28, 2017, February 29, 2016 and February 28, 2015, respectively. Uncertain tax position accrued interest and accrued
penalties recognized in the Consolidated Balance Sheets totaled $13.2 million and $10.7 million as of February 28, 2017 and February 29, 2016, respectively.
As of February 28, 2017, it is reasonably possible that total unrecognized tax benefits may be reduced by up to $7.6 million within the next 12 months as a result of statutes of limitations
expirations in various tax jurisdictions, all of which would affect the Companys effective tax rate.
The Company is
subject to taxation in the U.S. and various other state and foreign jurisdictions. The material jurisdictions in which the Company is subject to potential examination include India, Ireland and the U.S., where the Company is no longer subject to
examination prior to fiscal years ended February 28, 2006, February 29, 2012 and February 29, 2000, respectively. The Company is currently under examination in France, India and the United Kingdom. The Company believes it has
adequately provided for any reasonably foreseeable outcomes related to tax audits.
NOTE 12Stockholders Equity
Common stock
The Company has authorized 300,000,000 shares of common stock with a par value of $0.0001 per share. Holders of these shares have one vote per share. Upon the dissolution, liquidation or winding up of the
Company, holders of common stock will be entitled to receive the assets of the Company after satisfaction of the preferential rights of any outstanding preferred stock or any other outstanding stock ranking on liquidation senior to or on parity with
the common stock.
The Company repurchased 6,192,382 shares, 3,476,229 shares and 8,355,757 shares of its common stock during
the fiscal years ended February 28, 2017, February 29, 2016 and February 28, 2015, respectively, at an aggregate cost of $458.7 million, $262.6 million and $535.1 million, respectively, in accordance with the share repurchase
programs described below. These amounts are recorded in Treasury stock on the Companys Consolidated Balance Sheets.
Preferred stock
At February 28, 2017, the Company has authorized 5,000,000 shares of preferred stock with a par value of $0.0001 per share. No shares of preferred stock were outstanding as of February 28, 2017
or February 29, 2016.
Share repurchase programs
On March 25, 2015, the Company announced that its Board of Directors had authorized the repurchase of up to $500.0 million of Red
Hats common stock from time to time on the open market or in privately negotiated transactions. The program was discontinued by the Board effective June 30, 2016. From March 1, 2016 through its discontinuance on June 30, 2016,
the Company repurchased 1,291,733 shares of its common stock for $94.4 million under this repurchase program.
On
June 22, 2016, the Company announced that its Board of Directors authorized the repurchase of up to $1.0 billion of Red Hats common stock from time to time on the open market or in privately negotiated
100
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
transactions. The new program commenced on July 1, 2016, and will expire on the earlier of (i) June 30, 2018 or (ii) a determination by the Board, Chief Executive Officer or
Chief Financial Officer to discontinue the program. The new program replaced the previous $500.0 million repurchase program, which was discontinued by the Board effective June 30, 2016.
From its commencement on July 1, 2016 through February 28, 2017, the Company has repurchased 4,900,649 shares of its common
stock for $364.3 million under this program. As of February 28, 2017, the amount available under the program for the repurchase of the Companys common stock was $635.7 million.
Accelerated share repurchase
During the fiscal year ended February 28, 2015, the Company entered into an accelerated share repurchase program (the ASR Agreement). On October 7, 2014, under the ASR Agreement, the
Company paid $375.0 million to the ASR Agreement counterparty and received 5,312,555 shares of its common stock from the ASR Agreement counterparty, which represented 80 percent of the shares deliverable to the Company under the ASR Agreement
assuming an average share price of $56.47 (the Companys closing share price at October 1, 2014). The ASR Agreement was completed on February 27, 2015. On March 4, 2015, the ASR Agreement counterparty delivered 720,101 additional
shares of the Companys common stock to the Company in settlement of the ASR Agreement.
The Company initially accounted
for the ASR Agreement as two separate transactions: (i) the 5,312,555 shares of common stock initially delivered to the Company were accounted for as a treasury stock transaction with $300.0 million, or 80 percent, of the $375.0 million upfront
payment being recorded in Treasury stock in the Companys Consolidated Balance Sheet at February 28, 2015 and (ii) the unsettled portion of the ASR Agreement of $75.0 million was recorded in Additional paid-in capital on the
Companys Consolidated Balance Sheet as of February 28, 2015. The $75.0 million representing the unsettled portion of the ASR originally recorded in Additional paid-in capital was reclassified upon settlement to Treasury stock during the
fiscal year ended February 29, 2016.
The total number of shares of common stock the Company repurchased under the ASR
Agreement was 6,032,656 shares with a weighted average share price of $62.16.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss was comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
Accumulated loss from foreign currency translation adjustment
|
|
$
|
(87,784
|
)
|
|
$
|
(73,776
|
)
|
Accumulated unrealized loss, net of tax, on available-for-sale securities
|
|
|
(568
|
)
|
|
|
(673
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(88,352
|
)
|
|
$
|
(74,449
|
)
|
|
|
|
|
|
|
|
|
|
NOTE 13Share-based Awards
Overview
The Companys 2004 Long-Term Incentive Plan, as amended and
restated (the LTIP), provides for the granting of service- and performance-based share awards, among other awards. As of February 28, 2017, there were 10.0 million shares of common stock reserved for issuance under the LTIP for
future share-based awards to
101
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
be granted to any employee, officer, director or consultant of the Company at terms and prices to be determined by the Board of Directors.
The following table summarizes granted share-based awards by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards Granted in Fiscal Years Ended
|
|
|
|
February 28, 2017
|
|
|
February 29, 2016
|
|
|
February 28, 2015
|
|
|
|
Shares and
Shares
Underlying
Awards
|
|
|
Weighted
Average
Per Share
Award
Fair Value
|
|
|
Shares and
Shares
Underlying
Awards
|
|
|
Weighted
Average
Per Share
Award
Fair Value
|
|
|
Shares and
Shares
Underlying
Awards
|
|
|
Weighted
Average
Per Share
Award
Fair Value
|
|
Service-based shares and share units (1)
|
|
|
2,212,006
|
|
|
$
|
75.62
|
|
|
|
2,108,639
|
|
|
$
|
76.45
|
|
|
|
2,994,553
|
|
|
$
|
53.23
|
|
Performance-based share unitsMaximum
|
|
|
725,004
|
|
|
$
|
76.68
|
|
|
|
628,596
|
|
|
$
|
77.87
|
|
|
|
1,148,084
|
|
|
$
|
52.17
|
|
Stock options assumed as part of a business combination
|
|
|
|
|
|
$
|
|
|
|
|
119,515
|
|
|
$
|
58.22
|
|
|
|
219,169
|
|
|
$
|
48.45
|
|
Restricted shares issued as part of a business combination with continued-employment service conditions
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
529,057
|
|
|
$
|
54.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based awards
|
|
|
2,937,010
|
|
|
$
|
75.88
|
|
|
|
2,856,750
|
|
|
$
|
76.00
|
|
|
|
4,890,863
|
|
|
$
|
52.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Service-based shares granted during the fiscal year ended February 28, 2017 include 140,182 restricted shares awarded to certain executives that were subject to
both a four-year service condition and the achievement of a specified dollar amount of revenue for the fiscal year ended February 28, 2017 (the RSA performance goal). The RSA performance goal for the fiscal year ended
February 28, 2017 was met. Therefore, as of February 28, 2017 only the service condition remained with 25% vesting on July 17, 2017, and the remainder vesting ratably on a quarterly basis over the course of the subsequent three-year
period.
|
The following summarizes share-based compensation expense recognized in the Companys Consolidated
Financial Statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
February 28,
2017 (1)
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
Cost of revenue
|
|
$
|
16,553
|
|
|
$
|
15,898
|
|
|
$
|
14,027
|
|
Sales and marketing
|
|
|
93,378
|
|
|
|
69,089
|
|
|
|
55,203
|
|
Research and development
|
|
|
52,424
|
|
|
|
48,466
|
|
|
|
38,517
|
|
General and administrative
|
|
|
30,175
|
|
|
|
32,781
|
|
|
|
27,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
192,530
|
|
|
$
|
166,234
|
|
|
$
|
135,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Total share-based compensation expense of $192.5 million includes $5.0 million of expense related to the Companys employee stock purchase plan
(ESPP). See NOTE 16Employee Benefit Plans for information regarding the ESPP.
|
Share-based compensation expense qualifying for capitalization was insignificant for each of the Companys fiscal years ended
February 28, 2017, February 29, 2016 and February 28, 2015. Accordingly, no share-based compensation expense was capitalized during these years.
As discussed in NOTE 2Summary of Significant Accounting Policies, as a result of adopting
ASU 2016-09
during the fiscal year ended February 28,
2017, the Company recognizes share-based award
102
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
forfeitures only as they occur rather than estimating by applying a forfeiture rate. During the fiscal years ended February 29, 2016 and February 28, 2015, an estimated forfeiture rate
of 10% per annum, which approximated the Companys historical rate, was applied to options and service-based share awards. Awards were adjusted to actual forfeiture rates at vesting.
Stock options
The total share-based compensation expense related to stock options recognized in the Consolidated Financial Statements was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
Share-based compensation expensestock options
|
|
$
|
4,813
|
|
|
$
|
4,918
|
|
|
$
|
5,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 28, 2017, the Company had 208,505 stock options outstanding with a weighted average
remaining contractual life of 4.5 years and a weighted average exercise price of $34.70. The number of stock options exercisable as of February 28, 2017 was 129,576 with a weighted average share price of $38.49.
The intrinsic value of stock options exercised was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
Total intrinsic value of stock options exercised
|
|
$
|
7,928
|
|
|
$
|
9,103
|
|
|
$
|
6,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 28, 2017, compensation cost related to unvested stock options not yet recognized in
the Companys Consolidated Financial Statements totaled $3.2 million. The weighted average period over which these unvested stock options are expected to be recognized is approximately 1.6 years.
Service-based share awards
Service-based share awards include nonvested shares, nonvested share units and deferred share units granted under the LTIP. Nonvested shares vest, subject to continued service to the Company, 25% on the
first trading day on or about July 16 of the year subsequent to the year in which the grant occurs and 6.25% on the last day of each subsequent three-month period. Nonvested share units generally vest, subject to continued service to the
Company, 25% each year over a four-year period beginning on the date of grant. Nonvested shares and nonvested share units are generally amortized to expense on a straight-line basis over four years. Deferred share units are awarded to directors and
generally vest within one year when issued in lieu of annual share awards or immediately when issued in lieu of cash.
The
total share-based compensation expense related to service-based share awards recognized in the Companys Consolidated Financial Statements was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
Share-based compensation expenseservice-based awards
|
|
$
|
147,843
|
|
|
$
|
124,904
|
|
|
$
|
107,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table summarizes the activity for the Companys service-based share
awards:
|
|
|
|
|
|
|
|
|
|
|
Nonvested
Shares and
Share Units
|
|
|
Weighted Average
Per Share
Grant Date
Fair Value
|
|
Service-based share awards at February 28, 2014
|
|
|
5,373,308
|
|
|
$
|
48.34
|
|
Granted
|
|
|
2,994,553
|
|
|
|
53.23
|
|
Vested
|
|
|
(1,948,247
|
)
|
|
|
47.24
|
|
Forfeited
|
|
|
(569,952
|
)
|
|
|
48.50
|
|
Restricted shares issued as part of a business combination with continued-employment service conditions (1)
|
|
|
529,057
|
|
|
|
54.75
|
|
|
|
|
|
|
|
|
|
|
Service-based share awards at February 28, 2015
|
|
|
6,378,719
|
|
|
$
|
51.49
|
|
Granted
|
|
|
2,108,639
|
|
|
|
76.45
|
|
Vested
|
|
|
(2,047,169
|
)
|
|
|
50.78
|
|
Forfeited
|
|
|
(265,315
|
)
|
|
|
56.21
|
|
|
|
|
|
|
|
|
|
|
Service-based share awards at February 29, 2016
|
|
|
6,174,874
|
|
|
$
|
60.05
|
|
Granted
|
|
|
2,212,006
|
|
|
|
75.62
|
|
Vested
|
|
|
(2,409,518
|
)
|
|
|
57.42
|
|
Forfeited
|
|
|
(313,162
|
)
|
|
|
64.36
|
|
|
|
|
|
|
|
|
|
|
Service-based share awards at February 28, 2017
|
|
|
5,664,200
|
|
|
$
|
67.01
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As part of the Companys acquisition of eNovance, a total of 529,057 restricted common shares were issued to certain shareholders of eNovance. These restricted
shares are conditioned on continued employment with the Company.
|
The following summarizes the intrinsic value
as of February 28, 2017 of the Companys service-based awards outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares and
Share Units
|
|
|
Weighted Average
Remaining
Vesting Period
|
|
|
Intrinsic Value at
February 28, 2017
(in thousands)
|
|
Outstanding
|
|
|
5,664,200
|
|
|
|
2.6
|
|
|
$
|
469,052
|
|
The intrinsic value of service-based awards vesting was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
Total intrinsic value of service-based awards vesting
|
|
$
|
181,691
|
|
|
$
|
157,864
|
|
|
$
|
108,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 28, 2017, compensation cost related to service-based share awards not yet recognized
in the Companys Consolidated Financial Statements totaled $279.9 million. The weighted average period over which these nonvested awards are expected to be recognized is approximately 2.6 years.
Performance-based share awards
Under the LTIP, certain executive officers and senior management were awarded a target number of PSUs. The PSU payouts are either based on (i) the Companys financial performance
(performance condition) or
104
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(ii) the performance of the Companys total stockholder return (market condition). Set forth below are general descriptions of the two types of performance-based awards
granted to certain executive officers and members of senior management.
PSUs with performance conditions
Depending on the Companys financial performance measured against the financial performance of specified peer companies during a
three-year performance period, PSU grantees may earn up to 200% of the target number of PSUs (the Maximum PSUs). Payouts are earned over a performance period with two separate performance segments. Up to 50% of the Maximum PSUs may be
earned in respect of the first performance segment; and up to 100% of the Maximum PSUs may be earned in respect of the second performance segment, less the amount earned in the first performance segment.
PSUs with market conditions
Depending on the performance of the Companys total stockholder return measured against the performance of the total shareholder return of specified peer companies over a performance period of
approximately three years, PSU grantees may earn up to 200% of the target number of PSUs. Each grantee will receive a number of shares of common stock equal to the number of PSUs earned in a single payout following the end of the performance period.
In addition to the PSUs with the market condition described above, certain executives were awarded a total of 242,352 PSUs
that pay out only if the Companys total shareholder return increases by at least 50% within a three-year performance period beginning on August 6, 2014 (TSR Hurdle PSUs). If the performance goal is achieved during the
performance period and the grantees business relationship with the Company has not ceased, 50% of the TSR Hurdle PSUs vest upon achievement of the performance goal and the remaining 50% of the TSR Hurdle PSUs vest on the last day of the
four-year service period beginning on August 6, 2014. The TSR Hurdle PSUs performance goal was met during the fourth quarter of the fiscal year ended February 29, 2016.
The total share-based compensation expense related to performance-based share awards recognized in the Companys Consolidated
Financial Statements was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
Share-based compensation expenseperformance-based awards
|
|
$
|
34,865
|
|
|
$
|
36,412
|
|
|
$
|
22,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table summarizes the activity for the Companys PSUs:
|
|
|
|
|
|
|
|
|
|
|
Maximum (1)
|
|
Activity
|
|
Shares
Underlying
Performance
Share Units
|
|
|
Weighted Average
Per Share
Grant Date
Fair Value
|
|
Outstanding at February 28, 2014
|
|
|
1,675,225
|
|
|
$
|
47.34
|
|
Granted
|
|
|
1,148,084
|
|
|
|
52.17
|
|
Vested
|
|
|
(374,921
|
)
|
|
|
45.42
|
|
Forfeited
|
|
|
(299,053
|
)
|
|
|
41.90
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 28, 2015
|
|
|
2,149,335
|
|
|
$
|
51.01
|
|
Granted
|
|
|
628,596
|
|
|
|
77.87
|
|
Vested
|
|
|
(497,656
|
)
|
|
|
52.41
|
|
Forfeited
|
|
|
(230,764
|
)
|
|
|
52.29
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 29, 2016
|
|
|
2,049,511
|
|
|
$
|
58.76
|
|
Granted
|
|
|
725,004
|
|
|
|
76.68
|
|
Vested
|
|
|
(492,518
|
)
|
|
|
48.94
|
|
Forfeited
|
|
|
(346,102
|
)
|
|
|
62.68
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 28, 2017
|
|
|
1,935,895
|
|
|
$
|
67.27
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Vested and forfeited amounts represent the actual number of shares vesting and forfeited during the year. Outstanding amounts represent the remaining maximum potential
shares available to vest as of the period ended.
|
The total intrinsic value of performance-based share awards
vesting was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
Total intrinsic value of performance-based awards vesting
|
|
$
|
36,768
|
|
|
$
|
36,555
|
|
|
$
|
18,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 28, 2017, the number of shares subject to PSU awards expected to vest was
1.3 million shares. Compensation expense related to PSUs expected to vest but not yet recognized in the Consolidated Financial Statements totaled $31.1 million as of February 28, 2017. The weighted average period over which these awards
are expected to be recognized is approximately 1.1 years.
106
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 14Commitments and Contingencies
Operating leases
As of February 28, 2017, the Company leased office space and certain equipment under various non-cancellable operating leases. Future minimum lease payments required under the operating leases at
February 28, 2017 are as follows (in thousands):
|
|
|
|
|
Fiscal Year
|
|
Operating
Leases
|
|
2018
|
|
$
|
56,068
|
|
2019
|
|
|
49,856
|
|
2020
|
|
|
42,851
|
|
2021
|
|
|
36,514
|
|
2022
|
|
|
31,640
|
|
Thereafter
|
|
|
72,873
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
289,802
|
|
|
|
|
|
|
Rent expense under operating leases is provided in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
Total operating lease expense
|
|
$
|
44,228
|
|
|
$
|
38,152
|
|
|
$
|
36,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product indemnification
The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party from losses arising in connection with the Companys services or products, or from
losses arising in connection with certain events defined within a particular contract, which may include litigation or claims relating to intellectual property infringement, certain losses arising from damage to property or injury to persons or
other matters. In each of these circumstances, payment by the Company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the
other partys claims. Further, the Companys obligations under these agreements may in certain cases be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third-parties for certain payments
made by the Company.
It is not possible to predict the maximum potential amount of future payments under these or similar
agreements due to the conditional nature of the Companys obligations and the facts and circumstances involved in each particular agreement. The Company does not record a liability for claims related to indemnification unless the Company
concludes that the likelihood of a material claim is probable and estimable. Payments pursuant to these indemnification claims during the fiscal years ended February 28, 2017, February 29, 2016 and February 28, 2015 were in the
aggregate immaterial.
NOTE 15Legal Proceedings
The Company experiences routine litigation in the normal course of its business, including patent litigation. The Company presently believes that the outcome of this routine litigation will not have a
material adverse effect on its financial position, results of operations or cash flows.
107
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 16Employee Benefit Plans
Retirement plans
The Company provides retirement plans whereby participants may elect to contribute a portion of their annual compensation to the plans, after complying with certain limitations. The Company has the option
to make contributions to the plans and contributed to the plans as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
Total contributions to employee benefit plans
|
|
$
|
32,839
|
|
|
$
|
25,731
|
|
|
$
|
21,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase plan
During the third quarter of the fiscal year ended February 28, 2017, the Company began offering an ESPP whereby eligible employees
may elect to purchase common stock of the Company at the end of a six-month plan period (Plan Period). During each Plan Period, eligible employees who so elect may authorize payroll deductions in an amount no less
than 1% nor greater than 15% of his or her eligible compensation during the Plan Period. At the end of each Plan Period, the accumulated deductions are used to purchase shares of common stock. Shares are purchased at a price
equal to 85% of the closing price of the Companys common stock, on either the first business day of the Plan Period or the last business day of the Plan Period, whichever is lower. No participant may purchase more than $25,000 worth
of common stock per calendar year.
As of February 28, 2017, the Company has 5,000,000 common shares reserved for
issuance under the ESPP. Share-based compensation expense recognized in the Companys Consolidated Statements of Operations for the fiscal year ended February 28, 2017 related to the ESPP totaled $5.0 million.
NOTE 17Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes the composition and fair value hierarchy of the Companys financial assets and liabilities at
February 28, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
February 28,
2017
|
|
|
Quoted Prices
In
Active Markets
for
Identical
Assets (Level 1)
|
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money markets (1)
|
|
$
|
258,188
|
|
|
$
|
258,188
|
|
|
$
|
|
|
|
$
|
|
|
Available-for-sale securities (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency securities
|
|
|
327,430
|
|
|
|
|
|
|
|
327,430
|
|
|
|
|
|
Corporate securities
|
|
|
714,993
|
|
|
|
|
|
|
|
714,993
|
|
|
|
|
|
Foreign currency derivatives (2)
|
|
|
135
|
|
|
|
|
|
|
|
135
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives (3)
|
|
|
(160
|
)
|
|
|
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,300,586
|
|
|
$
|
258,188
|
|
|
$
|
1,042,398
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included in Cash and cash equivalents, Investments in debt securities, short-term or Investments in debt securities, long-term in the Companys Consolidated
Balance Sheet at February 28, 2017 in addition to $832.6 million of cash.
|
108
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(2)
|
Included in Other current assets in the Companys Consolidated Balance Sheet at February 28, 2017.
|
(3)
|
Included in Accounts payable and accrued expenses in the Companys Consolidated Balance Sheet at February 28, 2017.
|
The following table summarizes the composition and fair value hierarchy of the Companys financial assets and liabilities at
February 29, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
February 29,
2016
|
|
|
Quoted Prices
In
Active Markets
for
Identical
Assets (Level 1)
|
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money markets (1)
|
|
$
|
221,970
|
|
|
$
|
221,970
|
|
|
$
|
|
|
|
$
|
|
|
Available-for-sale securities (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency securities
|
|
|
331,117
|
|
|
|
|
|
|
|
331,117
|
|
|
|
|
|
Corporate securities
|
|
|
736,495
|
|
|
|
|
|
|
|
736,495
|
|
|
|
|
|
Foreign currency derivatives (2)
|
|
|
566
|
|
|
|
|
|
|
|
566
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives (3)
|
|
|
(452
|
)
|
|
|
|
|
|
|
(452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,289,696
|
|
|
$
|
221,970
|
|
|
$
|
1,067,726
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included in Cash and cash equivalents, Investments in debt securities, short-term or Investments in debt securities, long-term in the Companys Consolidated
Balance Sheet at February 29, 2016, in addition to $705.8 million of cash.
|
(2)
|
Included in Other current assets in the Companys Consolidated Balance Sheet at February 29, 2016.
|
(3)
|
Included in Accounts payable and accrued expenses in the Companys Consolidated Balance Sheet at February 29, 2016.
|
The following table represents the Companys investments measured at fair value as of February 28, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
|
|
Amortized
Cost
|
|
|
Gross Unrealized
|
|
|
Aggregate
Fair
Value
|
|
|
Cash
Equivalent
Marketable
Securities
|
|
|
Investments
in debt
securities,
short-term
|
|
|
Investments
in debt
securities,
long-term
|
|
|
|
|
Gains
|
|
|
Losses(1)
|
|
|
|
|
|
Money markets
|
|
$
|
258,188
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
258,188
|
|
|
$
|
258,188
|
|
|
$
|
|
|
|
$
|
|
|
U.S. agency securities
|
|
|
329,617
|
|
|
|
37
|
|
|
|
(2,224
|
)
|
|
|
327,430
|
|
|
|
|
|
|
|
27,593
|
|
|
|
299,837
|
|
Corporate securities
|
|
|
714,226
|
|
|
|
1,416
|
|
|
|
(649
|
)
|
|
|
714,993
|
|
|
|
|
|
|
|
342,390
|
|
|
|
372,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,302,031
|
|
|
$
|
1,453
|
|
|
$
|
(2,873
|
)
|
|
$
|
1,300,611
|
|
|
$
|
258,188
|
|
|
$
|
369,983
|
|
|
$
|
672,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As of February 28, 2017, there were $0.6 million of accumulated unrealized losses related to investments that have been in a continuous unrealized loss position
for 12 months or longer. The aggregate related fair value of investments with unrealized losses was $605.9 million.
|
109
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table summarizes the stated maturities of the Companys investment in
available-for-sale securities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
February 28,
2017
|
|
|
Less than
1 Year
|
|
|
1-5 Years
|
|
|
More than
5 Years
|
|
Maturity of current and long-term available-for-sale securities
|
|
$
|
1,042,423
|
|
|
$
|
369,984
|
|
|
$
|
672,439
|
|
|
$
|
|
|
The following table represents the Companys investments measured at fair value as of
February 29, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
|
|
Amortized
Cost
|
|
|
Gross Unrealized
|
|
|
Aggregate
Fair
Value
|
|
|
Cash
Equivalent
Marketable
Securities
|
|
|
Investments
in debt
securities,
short-term
|
|
|
Investments
in debt
securities,
long-term
|
|
|
|
|
Gains
|
|
|
Losses(1)
|
|
|
|
|
|
Money markets
|
|
$
|
221,970
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
221,970
|
|
|
$
|
221,970
|
|
|
$
|
|
|
|
$
|
|
|
U.S. agency securities
|
|
|
331,302
|
|
|
|
160
|
|
|
|
(345
|
)
|
|
|
331,117
|
|
|
|
|
|
|
|
50,453
|
|
|
|
280,664
|
|
Corporate securities
|
|
|
737,723
|
|
|
|
994
|
|
|
|
(2,222
|
)
|
|
|
736,495
|
|
|
|
|
|
|
|
230,689
|
|
|
|
505,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,290,995
|
|
|
$
|
1,154
|
|
|
$
|
(2,567
|
)
|
|
$
|
1,289,582
|
|
|
$
|
221,970
|
|
|
$
|
281,142
|
|
|
$
|
786,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As of February 29, 2016, there were $0.9 million of accumulated unrealized losses related to investments that have been in a continuous unrealized loss position
for 12 months or longer. The aggregate related fair value of investments with unrealized losses was $608.8 million.
|
NOTE
18Earnings Per Share
The Company computes basic net income per common share by dividing net income available to
common stockholders by the weighted average number of common shares outstanding. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares and dilutive potential common share equivalents
then outstanding. Potential common share equivalents consist of shares issuable upon the exercise of stock options or vesting of share-based awards.
The following table reconciles the numerators and denominators of the earnings per share (EPS) calculation (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
Net income, basic and diluted
|
|
$
|
253,703
|
|
|
$
|
199,365
|
|
|
$
|
180,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
179,642
|
|
|
|
182,817
|
|
|
|
186,529
|
|
Incremental shares attributable to assumed vesting or exercise of outstanding equity award shares
|
|
|
3,027
|
|
|
|
3,020
|
|
|
|
2,717
|
|
Dilutive effect of convertible notes
|
|
|
292
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares
|
|
|
182,961
|
|
|
|
186,119
|
|
|
|
189,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share - diluted
|
|
$
|
1.39
|
|
|
$
|
1.07
|
|
|
$
|
0.95
|
|
With respect to the Companys convertible notes, the Company has the option to pay cash or deliver,
as the case may be, either cash, shares of its common stock or a combination of cash and shares of its common stock for the aggregate amount due upon conversion of the convertible notes. The Companys intent is to settle the
110
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
principal amount of the convertible notes in cash upon conversion. As a result, upon conversion of the convertible notes, only the amounts payable in excess of the principal amounts of the
convertible notes are considered in diluted EPS under the treasury stock method. See NOTE 21Convertible Notes for detailed information on the convertible notes.
Warrants to purchase 10,965,630 shares of the Companys common stock at $101.65 per share were outstanding during the fiscal years ended February 28, 2017, February 29, 2016 and
February 28, 2015 but were not included in the computation of diluted EPS because the warrants exercise price was greater than the average market price of the Companys common stock during the related period.
The following share awards are not included in the computation of diluted EPS because the aggregate value of proceeds considered received
upon either exercise or vesting was greater than the average market price of the Companys common stock during the related periods and the effect of including such share awards in the computation would be anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
Number of shares considered anti-dilutive for calculating diluted EPS
|
|
|
77
|
|
|
|
21
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 19Segment Reporting
The following summarizes revenue from unaffiliated customers; income (loss) from operations; total cash, cash equivalents and available-for-sale investment securities and total assets by geographic
segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
EMEA
|
|
|
Asia Pacific
|
|
|
Corporate(1)
|
|
|
Consolidated
|
|
|
|
Fiscal Year Ended February 28, 2017
|
|
Revenue from unaffiliated customers
|
|
$
|
1,555,290
|
|
|
$
|
515,642
|
|
|
$
|
340,871
|
|
|
$
|
|
|
|
$
|
2,411,803
|
|
Income (loss) from operations
|
|
$
|
318,244
|
|
|
$
|
106,769
|
|
|
$
|
99,762
|
|
|
$
|
(192,530
|
)
|
|
$
|
332,245
|
|
Total cash, cash equivalents and available-for-sale investment securities
|
|
$
|
1,100,827
|
|
|
$
|
706,028
|
|
|
$
|
326,376
|
|
|
$
|
|
|
|
$
|
2,133,231
|
|
Total assets
|
|
$
|
2,974,734
|
|
|
$
|
1,075,422
|
|
|
$
|
485,029
|
|
|
$
|
|
|
|
$
|
4,535,185
|
|
|
|
|
|
Fiscal Year Ended February 29, 2016
|
|
Revenue from unaffiliated customers
|
|
$
|
1,354,345
|
|
|
$
|
436,304
|
|
|
$
|
261,581
|
|
|
$
|
|
|
|
$
|
2,052,230
|
|
Income (loss) from operations
|
|
$
|
297,462
|
|
|
$
|
93,373
|
|
|
$
|
63,447
|
|
|
$
|
(166,234
|
)
|
|
$
|
288,048
|
|
Total cash, cash equivalents and available-for-sale investment securities
|
|
$
|
1,222,470
|
|
|
$
|
540,584
|
|
|
$
|
232,336
|
|
|
$
|
|
|
|
$
|
1,995,390
|
|
Total assets
|
|
$
|
2,909,238
|
|
|
$
|
871,475
|
|
|
$
|
374,386
|
|
|
$
|
|
|
|
$
|
4,155,099
|
|
|
|
|
|
Fiscal Year Ended February 28, 2015
|
|
Revenue from unaffiliated customers
|
|
$
|
1,144,237
|
|
|
$
|
410,299
|
|
|
$
|
234,953
|
|
|
$
|
|
|
|
$
|
1,789,489
|
|
Income (loss) from operations
|
|
$
|
242,173
|
|
|
$
|
89,364
|
|
|
$
|
53,689
|
|
|
$
|
(135,232
|
)
|
|
$
|
249,994
|
|
Total cash, cash equivalents and available-for-sale investment securities
|
|
$
|
1,267,824
|
|
|
$
|
405,114
|
|
|
$
|
135,805
|
|
|
$
|
|
|
|
$
|
1,808,743
|
|
Total assets
|
|
$
|
2,755,923
|
|
|
$
|
726,101
|
|
|
$
|
302,545
|
|
|
$
|
|
|
|
$
|
3,784,569
|
|
(1)
|
Amounts represent share-based compensation expense that was not allocated to geographic segments.
|
111
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Supplemental information about geographic areas
The Company approximates its geographic sources of revenue based on the country of origin of its non-cancellable subscription and service
agreements initiated during the year (commonly referred to as bookings). The following table lists revenue from unaffiliated customers in the United States, the Companys country of domicile, and revenue from foreign countries (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
United States, the Companys country of domicile
|
|
$
|
1,400,228
|
|
|
$
|
1,213,493
|
|
|
$
|
1,022,803
|
|
Foreign
|
|
|
1,011,575
|
|
|
|
838,737
|
|
|
|
766,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from unaffiliated customers
|
|
$
|
2,411,803
|
|
|
$
|
2,052,230
|
|
|
$
|
1,789,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no individual foreign countries in which the Company earned 10% or more of its revenue from
unaffiliated customers.
Total tangible long-lived assets located in the United States, the Companys country of
domicile, and similar tangible long-lived assets held outside the U.S. are summarized in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
United States, the Companys country of domicile
|
|
$
|
133,492
|
|
|
$
|
126,937
|
|
|
$
|
131,792
|
|
Foreign
|
|
|
56,137
|
|
|
|
39,949
|
|
|
|
40,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tangible long-lived assets
|
|
$
|
189,629
|
|
|
$
|
166,886
|
|
|
$
|
172,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information about major customers
For the fiscal years ended February 28, 2017 and February 29, 2016, the U.S. government and its agencies represented in the
aggregate approximately 10% of the Companys total revenue. For the fiscal year ended February 28, 2015, there were no individual customers from which the Company generated 10% or greater revenue.
Supplemental information about products and services
The following table provides further detail, by type, of our subscription and services revenues. Infrastructure-related offerings subscription revenue includes subscription revenue generated from Red Hat
Enterprise Linux and related technologies such as Red Hat Satellite and Red Hat Enterprise Virtualization. Subscription revenue generated from our Application Development-related and other emerging technology
112
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
offerings includes Red Hat JBoss Middleware, Red Hat Storage, Red Hat Mobile Application Platform and Red Hat cloud offerings such as Red Hat OpenStack Platform and Red Hat OpenShift (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
Subscription revenue:
|
|
|
|
|
Infrastructure-related offerings
|
|
$
|
1,696,443
|
|
|
$
|
1,480,463
|
|
|
$
|
1,324,693
|
|
Application Development-related and other emerging technology offerings
|
|
|
439,337
|
|
|
|
322,986
|
|
|
|
236,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subscription revenue
|
|
|
2,135,780
|
|
|
|
1,803,449
|
|
|
|
1,561,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Training and services revenue:
|
|
|
|
|
Consulting services
|
|
|
207,959
|
|
|
|
190,870
|
|
|
|
171,436
|
|
Training
|
|
|
68,064
|
|
|
|
57,911
|
|
|
|
56,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total training and services revenue
|
|
|
276,023
|
|
|
|
248,781
|
|
|
|
228,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
2,411,803
|
|
|
$
|
2,052,230
|
|
|
$
|
1,789,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 20Other Long-Term Obligations
Other long-term obligations were comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
Accrued income taxes
|
|
$
|
76,718
|
|
|
$
|
73,403
|
|
Deferred rent credits
|
|
|
11,670
|
|
|
|
13,197
|
|
Net deferred tax liability, non-current
|
|
|
2,939
|
|
|
|
169
|
|
Other
|
|
|
2,638
|
|
|
|
1,143
|
|
|
|
|
|
|
|
|
|
|
Total other long-term obligations
|
|
$
|
93,965
|
|
|
$
|
87,912
|
|
|
|
|
|
|
|
|
|
|
NOTE 21Convertible Notes
Convertible note offering
On October 7, 2014, the Company completed
its offering of $805.0 million aggregate principal amount of its 0.25% Convertible Senior Notes due 2019 (the convertible notes). The convertible notes were sold in a private placement under a purchase agreement, dated as of
October 1, 2014, entered into by and among the Company and the Initial Purchasers, for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.
The Company used $148.0 million of the net proceeds from the offering of the convertible notes to pay the cost of the
privately-negotiated convertible note hedge transactions described below. The Company received proceeds of $79.8 million from the sale of warrants pursuant to the warrant transactions described below.
In addition, the Company used $375.0 million of the net proceeds from the offering of the convertible notes to repurchase shares of its
common stock under an accelerated share repurchase program pursuant to an agreement that the Company entered into on October 1, 2014, as described in NOTE 12
Stockholders Equity.
113
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company has and intends to continue to use the remaining net proceeds from the
offering for working capital and other general corporate purposes, which may include capital expenditures, potential acquisitions or strategic transactions.
Indenture
On October 7, 2014, the Company entered into an indenture
(the Indenture) with respect to the convertible notes with U.S. Bank National Association, as trustee (the Trustee). Under the Indenture, the convertible notes will be senior unsecured obligations of the Company and bear
interest at a rate of 0.25% per year, payable semiannually in arrears on April 1 and October 1 of each year, beginning on April 1, 2015. The convertible notes will mature on October 1, 2019, unless previously purchased or
converted.
The convertible notes are convertible into shares of the Companys common stock at an initial conversion rate
of 13.6219 shares per $1,000 principal amount of convertible notes (which is equivalent to an initial conversion price of approximately $73.41 per share), subject to adjustment upon the occurrence of certain events. The initial conversion price
represents a premium of approximately 30% to the $56.47 per share closing price of the Companys common stock on October 1, 2014. Upon conversion of the convertible notes, holders will receive cash or shares of the Companys common
stock or a combination thereof, at the Companys election.
Prior to April 1, 2019, the convertible notes will be
convertible only upon the occurrence of certain circumstances, and will be convertible thereafter at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the convertible notes.
The conversion rate is subject to customary anti-dilution adjustments. If certain corporate events described in the Indenture
occur prior to the maturity date, the conversion rate will be increased for a holder who elects to convert its convertible notes in connection with such corporate event in certain circumstances.
The convertible notes are not redeemable prior to maturity, and no sinking fund is provided for the notes. If the Company undergoes a
fundamental change, as defined in the Indenture, subject to certain conditions, holders may require the Company to purchase for cash all or any portion of their convertible notes. The fundamental change purchase price will be 100% of the
principal amount of the convertible notes to be purchased plus any accrued and unpaid special interest up to but excluding the fundamental change purchase date.
The Indenture contains customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of at least 25% in principal amount of the
outstanding convertible notes may declare 100% of the principal of, and accrued and unpaid interest, if any, on, all the convertible notes to be due and payable.
In accounting for the issuance of the convertible notes, the Company separated the convertible notes into liability and equity components. The carrying amount of the liability component was calculated by
measuring the estimated fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the
liability component from the face value of the convertible notes as a whole. The excess of the face value of the convertible notes as a whole over the carrying amount of the liability component (the debt discount) is amortized to
interest expense over the term of the convertible notes using the effective interest method with an effective interest rate of 2.86% per annum. The equity component is not remeasured as long as it continues to meet the conditions for equity
classification.
114
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The convertible notes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
Liability component:
|
|
|
|
|
Principal
|
|
$
|
805,000
|
|
|
$
|
805,000
|
|
Less: debt issuance costs
|
|
|
(7,442
|
)
|
|
|
(10,029
|
)
|
Less: debt discount
|
|
|
(51,925
|
)
|
|
|
(71,029
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
745,633
|
|
|
$
|
723,942
|
|
|
|
|
|
|
|
|
|
|
Equity component (1)
|
|
$
|
96,890
|
|
|
$
|
96,890
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Recorded in the Consolidated Balance Sheets in Additional paid-in capital.
|
In accounting for the transaction costs related to the convertible note issuance, the Company allocated the total amount incurred of $15.2 million to the liability and equity components based on their
relative fair values. Issuance costs attributable to the liability component totaled $13.4 million and are being amortized to interest expense over the term of the convertible notes using the effective interest method. The remaining $1.8 million of
issuance costs have been allocated to the equity component and are included in Additional paid-in capital on the Companys Consolidated Balance Sheet as of February 28, 2017. Additionally, the Company recorded a deferred tax asset of $0.7
million related to the $1.8 million equity component of transactional costs, which are deductible for tax purposes.
The
following table includes total interest expense recognized related to the convertible notes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
Coupon rate 0.25% per year, payable semiannually
|
|
$
|
2,012
|
|
|
$
|
2,012
|
|
|
$
|
805
|
|
Amortization of convertible note issuance costsliability component
|
|
|
2,587
|
|
|
|
2,433
|
|
|
|
935
|
|
Accretion of debt discount
|
|
|
19,104
|
|
|
|
18,570
|
|
|
|
7,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense related to convertible notes
|
|
$
|
23,703
|
|
|
$
|
23,015
|
|
|
$
|
9,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the convertible notes, which was determined based on inputs that are observable in the
market (Level 2), and the carrying value of convertible notes (the carrying value excludes the equity component of the convertible notes classified in equity) is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 28, 2017
|
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
Convertible notes
|
|
$
|
745,865
|
|
|
$
|
745,633
|
|
|
|
|
|
|
|
|
|
|
Convertible note hedge transactions and warrant transactions
On October 1, 2014, the Company entered into convertible note hedge transactions and warrant transactions with certain of the Initial
Purchasers of the convertible notes or their respective affiliates (the Option Counterparties).
115
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The convertible note hedge transactions are expected to offset the potential dilution
with respect to shares of the Companys common stock upon any conversion of the convertible notes and/or offset any cash payments the Company is required to make in excess of the principal amount of the converted notes, as the case may be. To
partially offset the $148.0 million cost of the convertible note hedge transactions, the Company issued warrants and received proceeds of $79.8 million. The number of shares of the Companys common stock underlying the warrants total
10,965,630, the same number of shares underlying the convertible notes and the convertible note hedge transactions. The combination of the convertible note hedge transactions and the warrant transactions effectively increases the initial conversion
price of the convertible notes from $73.41 per share to $101.65 per share. As a result, the warrant transactions will have a dilutive effect with respect to the Companys common stock to the extent that the market price per share of the
Companys common stock, as measured under the terms of the warrant transactions, exceeds the $101.65 strike price of the warrants. However, subject to certain conditions, the Company may elect to settle all of the warrants in cash. The $101.65
strike price of the warrants represents a premium of approximately 80% over the $56.47 per share closing price of the Companys common stock on October 1, 2014.
The purchase of convertible note hedges and proceeds from issuance of warrants were recorded in stockholders equity and will continue to be classified as stockholders equity.
NOTE 22Unaudited Quarterly Results
Below are unaudited condensed quarterly results (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended February 28, 2017
|
|
|
|
(Unaudited)
|
|
|
|
4th
Quarter
|
|
|
3rd
Quarter
|
|
|
2nd
Quarter
|
|
|
1st
Quarter
|
|
Revenue:
|
|
|
|
|
Subscriptions
|
|
$
|
559,588
|
|
|
$
|
543,318
|
|
|
$
|
531,209
|
|
|
$
|
501,665
|
|
Training and services
|
|
|
69,252
|
|
|
|
71,942
|
|
|
|
68,595
|
|
|
|
66,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subscription and training and services revenue
|
|
$
|
628,840
|
|
|
$
|
615,260
|
|
|
$
|
599,804
|
|
|
$
|
567,899
|
|
Gross profit
|
|
$
|
536,633
|
|
|
$
|
524,807
|
|
|
$
|
512,134
|
|
|
$
|
483,851
|
|
Income from operations
|
|
$
|
94,225
|
|
|
$
|
80,773
|
|
|
$
|
81,884
|
|
|
$
|
75,363
|
|
Interest income
|
|
$
|
3,754
|
|
|
$
|
3,346
|
|
|
$
|
3,391
|
|
|
$
|
3,430
|
|
Interest expense
|
|
$
|
6,002
|
|
|
$
|
6,009
|
|
|
$
|
5,924
|
|
|
$
|
5,887
|
|
Other income (expense), net
|
|
$
|
(304
|
)
|
|
$
|
(1,392
|
)
|
|
$
|
85
|
|
|
$
|
(553
|
)
|
Net income, basic and diluted
|
|
$
|
65,803
|
|
|
$
|
67,943
|
|
|
$
|
58,773
|
|
|
$
|
61,184
|
|
Net income per common share (1):
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
|
$
|
0.38
|
|
|
$
|
0.33
|
|
|
$
|
0.34
|
|
Diluted
|
|
$
|
0.36
|
|
|
$
|
0.37
|
|
|
$
|
0.32
|
|
|
$
|
0.33
|
|
Weighted average shares outstanding:
|
|
|
|
|
Basic
|
|
|
177,802
|
|
|
|
179,233
|
|
|
|
180,322
|
|
|
|
181,168
|
|
Diluted
|
|
|
181,197
|
|
|
|
182,682
|
|
|
|
183,346
|
|
|
|
184,187
|
|
(1)
|
Earnings per common share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly per common share information may not equal
the reported annual earnings per common share.
|
116
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended February 29, 2016
|
|
|
|
(Unaudited)
|
|
|
|
4th
Quarter
|
|
|
3rd
Quarter
|
|
|
2nd
Quarter
|
|
|
1st
Quarter
|
|
|
|
(in thousands, except per share data)
|
|
Revenue:
|
|
|
|
|
Subscriptions
|
|
$
|
479,642
|
|
|
$
|
457,488
|
|
|
$
|
441,526
|
|
|
$
|
424,793
|
|
Training and services
|
|
|
63,859
|
|
|
|
66,092
|
|
|
|
62,622
|
|
|
|
56,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subscription and training and services revenue
|
|
$
|
543,501
|
|
|
$
|
523,580
|
|
|
$
|
504,148
|
|
|
$
|
481,001
|
|
Gross profit
|
|
$
|
462,281
|
|
|
$
|
442,532
|
|
|
$
|
428,184
|
|
|
$
|
409,604
|
|
Income from operations
|
|
$
|
71,771
|
|
|
$
|
68,877
|
|
|
$
|
76,470
|
|
|
$
|
70,930
|
|
Interest income
|
|
$
|
3,189
|
|
|
$
|
2,874
|
|
|
$
|
2,895
|
|
|
$
|
2,715
|
|
Interest expense
|
|
$
|
5,856
|
|
|
$
|
5,817
|
|
|
$
|
5,733
|
|
|
$
|
5,715
|
|
Other income (expense), net
|
|
$
|
(336
|
)
|
|
$
|
49
|
|
|
$
|
(1,245
|
)
|
|
$
|
(203
|
)
|
Net income, basic and diluted
|
|
$
|
53,036
|
|
|
$
|
46,848
|
|
|
$
|
51,395
|
|
|
$
|
48,086
|
|
Net income per common share (1):
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
|
$
|
0.26
|
|
|
$
|
0.28
|
|
|
$
|
0.26
|
|
Diluted
|
|
$
|
0.29
|
|
|
$
|
0.25
|
|
|
$
|
0.28
|
|
|
$
|
0.26
|
|
Weighted average shares outstanding:
|
|
|
|
|
Basic
|
|
|
182,099
|
|
|
|
182,850
|
|
|
|
183,179
|
|
|
|
183,130
|
|
Diluted
|
|
|
184,888
|
|
|
|
186,094
|
|
|
|
186,750
|
|
|
|
186,175
|
|
(1)
|
Earnings per common share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly per common share information may not equal
the reported annual earnings per common share.
|
117