NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1
.
Basis of Presentation
Brocade Communications Systems, Inc. (“Brocade” or the “Company”) has prepared the accompanying Condensed Consolidated Financial Statements pursuant to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The Company’s Condensed Consolidated Balance Sheet as of
October 29, 2016
, was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended
October 29, 2016
.
The accompanying Condensed Consolidated Financial Statements are unaudited but, in the opinion of the Company’s management, reflect all adjustments—including normal recurring adjustments—that management considers necessary for a fair presentation of these Condensed Consolidated Financial Statements. The results for the interim periods presented are not necessarily indicative of the results for the full fiscal year or any other future period.
The Company’s fiscal year is a 52- or 53-week period ending on the last Saturday in October or the first Saturday in November, respectively. As is customary for companies that use the 52/53-week convention, every fifth year is a 53-week year. Fiscal year 2017 is a 52-week fiscal year and fiscal year 2016 was a 52-week fiscal year. The Company’s next 53-week fiscal year will be fiscal year 2019 and its next 14-week quarter will be the second quarter of fiscal year 2019.
The Company’s Condensed Consolidated Financial Statements include the accounts of Brocade and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. In May 2016, the Company entered into a joint venture agreement with Guiyang High-Tech Industrial Investment Group Co., Ltd. (“HTII”) to create Guizhou Huiling Technology Co., Ltd (“GHTC”). The Company consolidates its investment in GHTC as this is a variable interest entity, and the Company is the primary beneficiary. The noncontrolling interest attributed to GHTC is presented as a separate component from the Company’s equity in the equity section of the Company’s Condensed Consolidated Balance Sheets. HTII’s share of GHTC’s earnings is presented separately in the Company’s Condensed Consolidated
Statements of Operations
.
Use of Estimates in Preparation of Condensed Consolidated Financial Statements
The preparation of the Company’s Condensed Consolidated Financial Statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and judgments that affect the amounts reported in the Company’s Condensed Consolidated Financial Statements and accompanying notes. Estimates are used for, but not limited to, revenue recognition, sales allowances including discounts, returns, and sales programs, allowance for doubtful accounts, stock-based compensation, acquisition purchase price allocations, warranty obligations, inventory valuation and purchase commitments, impairment of goodwill and other indefinite-lived intangible assets, litigation, gain or loss on held for sale assets and liabilities, and income taxes. Actual results may differ materially from these estimates.
Proposed Acquisition by Broadcom Limited
On November 2, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Broadcom Limited, a limited liability company organized under the laws of the Republic of Singapore (“Broadcom”), Broadcom Corporation, a California corporation and an indirect subsidiary of Broadcom (“Parent”), and Bobcat Merger Sub, Inc., a Delaware corporation and a direct wholly owned subsidiary of Parent (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving as a wholly owned subsidiary of Parent. On December 19, 2016, Parent assigned all of its rights under the Merger Agreement to LSI Corporation, a Delaware corporation and an indirect subsidiary of Broadcom.
At the effective time of the Merger, each share of the Company’s common stock that is outstanding immediately prior to such time will be cancelled and converted into the right to receive
$12.75
per share in cash, without interest, less any required tax withholding.
In general, at the effective time of the Merger: (i) all vested in-the-money Brocade stock options will be cashed out; (ii) Broadcom will assume and convert all vested Brocade stock options that are not in-the-money and all unvested Brocade stock options (whether or not in-the-money), unvested restricted stock units and unvested performance stock units, in each case held by continuing employees and service providers; (iii) all unvested in-the-money Brocade stock options and all unvested Brocade restricted stock units and performance stock units held by members of the Brocade Board of Directors or by senior executives who are parties to change of control agreements providing for the acceleration of vesting and who are not continuing employees or service providers will accelerate vesting and be cashed out; and (iv) all other unvested Brocade restricted stock units and performance stock units and all other Brocade stock options will be cancelled in exchange for no consideration.
Consummation of the Merger is subject to certain customary closing conditions, including, without limitation, the absence of certain legal impediments, the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), antitrust regulatory approval in the People’s Republic of China, the European Union and Japan, review and clearance by the Committee on Foreign Investment in the United States (“CFIUS”), and approval by the Company’s stockholders. The transaction is not subject to a financing condition.
The Company’s stockholders approved the Merger and related matters at a special meeting of stockholders held on January 26, 2017. No further approval by the Company’s stockholders is required with respect to the Merger.
On November 30, 2016, each of the Company and Broadcom submitted a notification and report form with the U.S. Federal Trade Commission (the “FTC”) and the Antitrust Division of the U.S. Department of Justice under the HSR Act. On July 3, 2017, the FTC accepted a proposed consent order for public comment in connection with the Merger. The FTC subsequently approved a final consent order on August 17, 2017.
On May 12, 2017, the European Commission (the “EC”) announced that it had granted conditional antitrust clearance of the Merger. As part of the EC’s clearance decision, Broadcom has agreed to certain commitments as set forth in that decision, which commitments will be monitored by a trustee. Broadcom has also committed to the EC that it will not close the Merger before the appointment of the monitoring trustee.
On May 26, 2017, the Japan Fair Trade Commission granted antitrust clearance of the Merger.
On July 17, 2017, the Company and Broadcom agreed to withdraw and re-file their joint voluntary notice to CFIUS to allow more time for review and discussion with CFIUS in connection with the Merger.
On August 22, 2017, the Ministry of Commerce of the People’s Republic of China issued a written notice that it had granted conditional approval of the Merger pursuant to the Anti-Monopoly Law of the People’s Republic of China.
Assuming timely satisfaction or waiver of all remaining closing conditions (including review and clearance by CFIUS), Brocade expects that the Merger will be completed during the fourth quarter of fiscal year 2017.
The Merger Agreement contains certain customary termination rights for the Company and Parent. For example, the Merger Agreement provides that if it is terminated under specified circumstances, including, but not limited to, if the Company accepts a superior acquisition proposal or the Company’s Board of Directors changes or withdraws its recommendation of the Merger, the Company would be required to pay Parent a termination fee of
$195.0 million
. Effective upon the approval of the Merger and related matters by the Company’s stockholders on January 26, 2017, payment of this termination fee can no longer be triggered.
2
.
Summary of Significant Accounting Policies
There have been no material changes in the Company’s significant accounting policies for the
nine months ended
July 29, 2017
, as compared to those disclosed in Brocade’s Annual Report on Form 10-K for the fiscal year ended
October 29, 2016
.
New Accounting Pronouncements or Updates Recently Adopted
In April 2015, the Financial Accounting Standards Board (“FASB”) issued an update to Accounting Standards Codification (“ASC”) 350,
Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
. This update provides guidance on the accounting for fees paid in a cloud computing arrangement if the arrangement was determined to include a software license. This update will not change U.S. GAAP for a customer’s accounting for service contracts. The Company adopted this update in the first quarter of fiscal year 2017 and has elected to apply this update prospectively. There was no material impact on the Company’s financial position, results of operations, or cash flows.
In December 2016, the FASB issued an update to the Codification,
Technical Corrections and Improvements
. This update includes various amendments to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification. This update is not intended to change U.S. GAAP. The Company adopted this update in the first quarter of fiscal year 2017. There was no material impact on the Company’s financial position, results of operations, or cash flows.
In January 2017, the FASB issued an update to ASC 350,
Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment
, which simplifies the goodwill impairment process by eliminating Step 2 from the quantitative goodwill impairment test. Under this update, goodwill is only impaired for the amount the net assets of the reporting unit exceeds its fair value. The impairment loss should not exceed the carrying amount of goodwill, including any impact from tax-deductible goodwill. The Company early adopted this update in the second quarter of fiscal year 2017. There was no material impact on the Company’s financial position, results of operations, or cash flows.
Recent Accounting Pronouncements or Updates That Are Not Yet Effective
In May 2014, the FASB issued ASC 606,
Revenue from Contracts with Customers
, that will supersede virtually all existing revenue guidance. Under this new revenue guidance, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. As such, an entity will need to use more judgment and make more estimates than under the current guidance. This new revenue guidance should be applied retrospectively either to each prior reporting period presented in the financial statements, or only to the most current reporting period presented in the financial statements with a cumulative effect adjustment recorded in retained earnings. In August 2015, the FASB issued an update to defer the effective date of this new revenue guidance by one year. This new revenue guidance becomes effective and will be adopted by the Company in the first quarter of fiscal year 2019. The Company is currently evaluating the impact of this new revenue guidance on its consolidated financial statements.
In July 2015, the FASB issued an update to ASC 330,
Inventory: Simplifying the Measurement of Inventory
. Under this update, measurement of inventory is based on the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and disposal. This update does not apply to inventory that is measured using last-in, first-out or the retail inventory method. This update should be applied prospectively and will be adopted by the Company in the first quarter of fiscal year 2018. Early adoption is permitted. The Company does not expect the adoption of this update to have a material impact on its consolidated financial statements.
In March 2016, the FASB issued an update to ASC 606,
Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
, which clarifies the implementation guidance for principal versus agent considerations. In April 2016, the FASB issued an update to ASC 606,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing
, which clarifies the guidance related to identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB issued an update to ASC 606,
Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients
, which clarifies the guidance related to collectibility and non-cash consideration, as well as provides practical expedients for the transition to ASC 606. In December 2016, the FASB issued an update to ASC 606,
Revenue from Contracts with Customers: Technical Corrections and Improvements
, which clarifies and corrects any unintended application of the new revenue guidance. The Company must adopt these updates with the adoption of ASC 606,
Revenue from Contracts with Customers
. The Company is currently evaluating the impact of these updates on its consolidated financial statements.
In January 2016, the FASB issued an update to ASC 825,
Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
. This update consists of eight provisions that provide guidance on the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. This update should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption and prospectively for equity investments without readily determinable fair values. This update becomes effective and will be adopted by the Company in the first quarter of fiscal year 2019. Early adoption is permitted for two of the eight provisions. The Company is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASC 842,
Leases
, that will supersede the existing lease guidance, including on-balance sheet recognition of operating leases for lessees. This new lease guidance should be applied using a modified retrospective approach and will be adopted by the Company in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is currently evaluating the impact of this new lease guidance on its consolidated financial statements.
In March 2016, the FASB issued an update to ASC 718,
Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting
. This update simplifies certain aspects of the accounting for share-based payment transactions, including income taxes, forfeiture rates, classification of awards, and classification in the statement of cash flows. This update becomes effective and will be adopted by the Company in the first quarter of fiscal year 2018. Early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements.
In June 2016, the FASB issued ASC 326,
Financial Instrument—Credit Losses
, that will supersede the existing methodology for estimating expected credit losses on certain financial instruments. The new impairment methodology eliminates the probable initial recognition threshold and, instead, estimates the expected credit losses in consideration of past events, current conditions, and forecasted information. This update becomes effective in the first quarter of fiscal year 2021. Early adoption is permitted in the first quarter of fiscal year 2020. The Company is currently evaluating the impact of this update on its consolidated financial statements.
In August 2016, the FASB issued an update to ASC 230,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
. This update consists of eight provisions that provide guidance on the classification of certain cash receipts and cash payments. If practicable, this update should be applied using a retrospective transition method to each period presented. For the provisions that are impracticable to apply retrospectively, those provisions may be applied prospectively as of the earliest date practicable. This update becomes effective and will be adopted by the Company in the first quarter of fiscal year 2019. Early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.
In October 2016, the FASB issued an update to ASC 740,
Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory
. This update requires the recognition of current and deferred income taxes for intra-entity transfers of assets other than inventory. This update should be applied using a modified retrospective approach and becomes effective in the first quarter of fiscal year 2019. Early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements.
In November 2016, the FASB issued an update to ASC 230,
Statement of Cash Flows: Restricted Cash
. This update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This update should be applied using a retrospective transition method and becomes effective in the first quarter of fiscal year 2019. Early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements.
In January 2017, the FASB issued an update to ASC 805,
Business Combinations: Clarifying the Definition of a Business
, which clarifies the definition of a business and adds guidance to assist entities with evaluating whether the transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This update should be applied prospectively and becomes effective in the first quarter of fiscal year 2019. Early adoption is permitted. The Company does not expect the adoption of this update to have a material impact on its consolidated financial statements.
In May 2017, the FASB issued an update to ASC 718,
Compensation—Stock Compensation: Scope of Modification Accounting
, which provides guidance about which changes to the terms or conditions of a share-based payment reward require an entity to apply modification accounting. Under this new guidance, an entity should account for the effects of a modification unless the fair value, vesting conditions, and classification as an equity or liability instrument of the modified award are the same as the original award. This update should be applied prospectively and becomes effective in the first quarter of fiscal year 2019. Early adoption is permitted. The Company does not expect the adoption of this update to have a material impact on its consolidated financial statements.
Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. Cash and cash equivalents are primarily maintained at
five
major financial institutions. Deposits held with banks may be redeemed upon demand and may exceed the amount of insurance provided on such deposits.
A majority of the Company’s accounts receivable balance is derived from U.S. dollar-denominated sales to original equipment manufacturer (“OEM”) partners in the computer storage and server industry. As of
July 29, 2017
,
two
customers accounted for a combined total of
33%
of total accounts receivable (EMC Corporation (“EMC”), which was acquired by Dell, Inc. on September 7, 2016, combined with direct sales to Dell, Inc. (together, “Dell EMC”) with
20%
and Hewlett Packard Enterprise Company (“HPE”) with
13%
). As of
October 29, 2016
,
two
customers accounted for a combined total of
42%
of total accounts receivable (Dell EMC with
29%
and HPE with
13%
). The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable balances. The Company has established reserves for credit losses and sales allowances.
For the three months ended
July 29, 2017
,
three
customers individually accounted for
16%
(Dell EMC),
11%
(HPE), and
10%
(International Business Machines Corporation) of the Company’s total net revenues for a combined total of
37%
of total net revenues. For the three months ended
July 30, 2016
,
two
customers individually accounted for
12%
(EMC and HPE) of the Company’s total net revenues for a combined total of
24%
of total net revenues.
The Company currently relies on single and limited sources for multiple key components used in the manufacture of its products. Additionally, the Company relies on multiple contract manufacturers (“CMs”) for the production of its products, including Hon Hai Precision Industry Co., Ltd., Accton Technology Corporation, Universal Scientific Industrial (Shanghai) Co., Ltd., Flextronics Telecom Systems Ltd., Cape EMS Manufacturing (M) Sdn. Bhd., and American Portwell Technology, Inc., and has a service repair arrangement with Flex Ltd. Although the Company uses standard parts and components for its products where possible, the Company’s CMs currently purchase, on the Company’s behalf, several key components used in the manufacture of products from single- or limited-source suppliers. The Company also entered into license agreements with some of its suppliers, including Qualcomm Inc., for technologies and components that are used in its products.
3
.
Acquisitions, Divestitures, and Assets Held for Sale
Prior Fiscal Year Acquisition
Acquisition of Ruckus Wireless, Inc. (“Ruckus”)
On May 27, 2016 (“Acquisition Date”), the Company completed its acquisition of Ruckus, a public company incorporated in the state of Delaware, to strengthen its Internet Protocol (“IP”) Networking product portfolio by adding Ruckus’ wireless products and services to the Company’s networking solutions.
Immediately prior to the completion of the acquisition, there were
92.2 million
outstanding shares of Ruckus common stock, which included
3.2 million
shares of Ruckus common stock owned by a dissenting former Ruckus stockholder who subsequently filed a petition in Delaware Court of Chancery seeking appraisal of the fair value of those shares under Delaware law. During
the three months ended July 29, 2017
, the Company entered into a settlement agreement with the dissenting former Ruckus stockholder pursuant to which the dissenting former Ruckus stockholder was paid
$51.9 million
, representing
$16.22
per share for each of the
3.2 million
shares. The settlement amount exceeded the amounts of
$41.3 million
and
$2.1 million
previously recorded as purchase consideration and interest expense, respectively, by
$8.5 million
, which was recorded as a litigation settlement expense. See Note
9
, “
Commitments and Contingencies
,” of the Notes to Condensed Consolidated Financial Statements for further discussion.
Based on the
$8.60
per share closing price of the Company’s common stock on the Acquisition Date, the total purchase consideration paid or payable was approximately
$1.3 billion
.
In connection with the acquisition of Ruckus, the Company allocated the total purchase consideration to the net assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the Acquisition Date. The following table summarizes the final allocation of the total purchase consideration to the fair value of the assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
Assets acquired:
|
|
Cash and cash equivalents
|
$
|
95,515
|
|
Short-term investments
|
150,257
|
|
Accounts receivable, net of allowances for doubtful accounts of $2,100
|
41,339
|
|
Inventories
|
64,000
|
|
Prepaid expenses and other current assets
|
5,252
|
|
Property and equipment, net
|
27,060
|
|
Identifiable intangible assets
|
418,000
|
|
Other assets
|
1,697
|
|
Total assets acquired
|
803,120
|
|
Liabilities assumed:
|
|
Accounts payable
|
16,375
|
|
Accrued employee compensation
|
17,514
|
|
Deferred revenue
|
14,520
|
|
Other accrued liabilities
|
33,808
|
|
Non-current deferred revenue
|
9,767
|
|
Non-current deferred tax liabilities
|
64,853
|
|
Other non-current liabilities
|
41,033
|
|
Total liabilities assumed
|
197,870
|
|
Net assets acquired, excluding goodwill (a)
|
605,250
|
|
Total purchase consideration (b)
|
1,275,060
|
|
Goodwill (b) - (a)
|
$
|
669,810
|
|
Goodwill represents the excess of the total purchase consideration over the fair value of the underlying assets acquired and liabilities assumed. Goodwill is attributable to planned growth in new markets and synergies expected to be achieved from the combined operations of the Company and Ruckus. Goodwill of
$350.2 million
was assigned to the IP Networking Products reporting unit, and goodwill of
$319.6 million
was assigned to the Global Services reporting unit. Goodwill recognized in the acquisition is
no
t deductible for tax purposes.
The fair value of identified intangible assets and their respective useful lives are as follows (in thousands, except for estimated useful life):
|
|
|
|
|
|
|
|
Approximate Fair Value
|
|
Estimated Useful Life
(In years)
|
Trade name/trademark
|
$
|
42,000
|
|
|
11
|
Customer relationships
|
118,000
|
|
|
1 - 7
|
Developed technology
|
230,000
|
|
|
6 - 7
|
In-process research and development (“IPR&D”)
(1)
|
28,000
|
|
|
N/A
(1)
|
Total intangible assets
|
$
|
418,000
|
|
|
|
|
|
(1)
|
IPR&D will be accounted for as an indefinite-lived intangible asset until the underlying projects are completed or abandoned.
|
During the second quarter of fiscal year 2017, the Company finalized the purchase price allocation upon obtaining additional information related to the fair value of inventories, property and equipment, identifiable intangible assets, deferred revenue, and deferred tax liabilities. As a result, the Company recorded measurement period adjustments resulting in a net decrease in goodwill of
$3.9 million
. During
the three months ended July 29, 2017
, there were
no
measurement period adjustments, and during
the nine months ended July 29, 2017
, the impact of the measurement period adjustments was not material to the Company’s Condensed Consolidated
Statements of Operations
.
Current Fiscal Year Divestiture and Assets Held for Sale
During the third quarter of fiscal year 2017, as a result of the Company’s evaluation of capital allocation for its products and initiatives, the Company committed to divest certain product lines of its IP Networking business to three unaffiliated buyers. The Company completed the divestiture of its virtual router (“vRouter”) product line for
$31.7 million
in cash, which resulted in a
$6.7 million
loss. The Company signed purchase agreements to divest its virtual application delivery controller (“vADC”) product line for
$16.0 million
and its virtual evolved packet core (“vEPC”) product line for
$1.9 million
. Those divestitures were not completed in the third quarter of fiscal year 2017. Consequently, the assets and liabilities associated with the vADC and vEPC divestitures were classified as held for sale on the Condensed Consolidated Balance Sheet as of
July 29, 2017
(valued at fair value less costs to sell through the date of sale), which resulted in a
$17.6 million
estimated loss related to those two pending divestitures. The pending divestitures were completed during the fourth quarter of fiscal year 2017.
The total
$24.3 million
loss on those three divestitures is presented in the Company’s Condensed Consolidated
Statements of Operations
for
the three and nine months ended July 29, 2017
, as “
Loss on sold and held for sale software product lines
.” The three divestitures are reported in the IP Networking Products reportable segment.
The following table summarizes the net book value adjusted for estimated loss of components of held for sale assets and liabilities (in thousands):
|
|
|
|
|
Assets held for sale:
|
|
Prepaid expenses
|
$
|
180
|
|
Property and equipment, net
|
1,019
|
|
Goodwill
|
12,921
|
|
Finite-lived intangible assets, net
|
12,159
|
|
Total current assets held for sale
|
$
|
26,279
|
|
|
|
Liabilities held for sale:
|
|
Accrued employee compensation
|
$
|
179
|
|
Deferred revenue
|
8,242
|
|
Total current liabilities held for sale
|
$
|
8,421
|
|
Acquisition, Divestiture, and Integration Costs
The following table summarizes the “
Acquisition, divestiture, and integration costs
” included on the Company’s Condensed Consolidated
Statements of Operations
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 29,
2017
|
|
July 30,
2016
|
|
July 29,
2017
|
|
July 30,
2016
|
Direct acquisition costs associated with the Ruckus acquisition
|
$
|
1,184
|
|
|
$
|
10,232
|
|
|
$
|
3,454
|
|
|
$
|
15,218
|
|
Divestiture costs
(1)
|
829
|
|
|
—
|
|
|
1,570
|
|
|
—
|
|
Integration costs associated with the Ruckus acquisition
|
(372
|
)
|
|
4,636
|
|
|
3,338
|
|
|
5,407
|
|
Broadcom pending acquisition-related costs
(2)
|
11,605
|
|
|
—
|
|
|
41,157
|
|
|
—
|
|
Total acquisition, divestiture, and integration costs
|
$
|
13,246
|
|
|
$
|
14,868
|
|
|
$
|
49,519
|
|
|
$
|
20,625
|
|
|
|
(1)
|
These costs relate to the completed divestiture of the Company’s vRouter product line and the pending divestitures of the vADC and vEPC product lines.
|
|
|
(2)
|
These costs are related to retention compensation for certain of the Company’s employees and legal and consulting fees.
|
4
.
Goodwill and Intangible Assets
The following table summarizes goodwill activity by reportable segment during
the nine months ended July 29, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Storage Area Networking (“SAN”)
Products
|
|
IP Networking Products
|
|
Global Services
|
|
Total
|
Balance at October 29, 2016
|
|
|
|
|
|
|
|
Goodwill
|
$
|
176,320
|
|
|
$
|
1,698,641
|
|
|
$
|
549,437
|
|
|
$
|
2,424,398
|
|
Accumulated impairment losses
|
—
|
|
|
(129,214
|
)
|
|
—
|
|
|
(129,214
|
)
|
|
176,320
|
|
|
1,569,427
|
|
|
549,437
|
|
|
2,295,184
|
|
Purchase accounting adjustments
(1)
|
—
|
|
|
70,182
|
|
|
(74,120
|
)
|
|
(3,938
|
)
|
Divestitures and assets held for sale
(2)
|
—
|
|
|
(35,920
|
)
|
|
—
|
|
|
(35,920
|
)
|
Balance at July 29, 2017
|
|
|
|
|
|
|
|
Goodwill
|
176,320
|
|
|
1,732,903
|
|
|
475,317
|
|
|
2,384,540
|
|
Accumulated impairment losses
|
—
|
|
|
(129,214
|
)
|
|
—
|
|
|
(129,214
|
)
|
|
$
|
176,320
|
|
|
$
|
1,603,689
|
|
|
$
|
475,317
|
|
|
$
|
2,255,326
|
|
|
|
(1)
|
For the measurement period adjustments recorded in connection with the acquisition of Ruckus, see Note 3, “
Acquisitions, Divestitures, and Assets Held for Sale
,” of the Notes to Condensed Consolidated Financial Statements.
|
|
|
(2)
|
The reduction in goodwill relates to the completed divestiture of the Company’s vRouter product line and the pending divestitures of the vADC and vEPC product lines in the third quarter of fiscal year 2017. See Note 3, “
Acquisitions, Divestitures, and Assets Held for Sale
,” of the Notes to Condensed Consolidated Financial Statements for additional information.
|
The Company conducts its goodwill impairment test annually, as of the first day of the fourth fiscal quarter, and whenever events occur or facts and circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For the annual goodwill impairment test, the Company uses the income approach, the market approach, or a combination thereof to determine each reporting unit’s fair value. The income approach provides an estimate of fair value based on discounted expected future cash flows (“DCF”). The market approach provides an estimate of fair value by applying various observable market-based multiples to the reporting unit’s operating results and then applying an appropriate control premium. For the fiscal year 2016 annual goodwill impairment test, the Company used a combination of these approaches to estimate each reporting unit’s fair value. At the time that the fiscal year 2016 annual goodwill impairment test was performed, the Company believed that the income approach and the market approach were equally representative of a reporting unit’s fair value.
Determining the fair value of a reporting unit requires judgment and involves the use of significant estimates and assumptions. The Company based its fair value estimates on assumptions it believes to be reasonable but are inherently uncertain. Estimates and assumptions with respect to the determination of the fair value of its reporting units using the income approach include, among other inputs:
|
|
•
|
The Company’s operating forecasts;
|
|
|
•
|
The Company’s forecasted revenue growth rates; and
|
|
|
•
|
Risk-commensurate discount rates and costs of capital.
|
The Company’s estimates of revenues and costs are based on historical data, various internal estimates, and a variety of external sources, and are developed as part of the Company’s regular long-range planning process. The control premium used in the market approach or as part of combined approaches was determined by considering control premiums offered as part of the acquisitions where acquired companies were comparable with the Company’s reporting units.
Based on the results of the annual goodwill impairment analysis performed during the fourth fiscal quarter of 2016, the Company determined that no impairment charge needed to be recorded. As of
July 29, 2017
, no new events had occurred nor had any facts or circumstances changed since the annual goodwill impairment analysis performed during the fourth quarter of fiscal year 2016 that indicated that the fair values of the reporting units may be less than their current carrying amounts.
Intangible assets other than goodwill are primarily amortized on a straight-line basis over the following estimated remaining useful lives, unless the Company has determined these lives to be indefinite. The Company did not incur costs to renew or extend the term of any acquired finite-lived intangible assets during
the nine months ended July 29, 2017
.
The following tables present details of the Company’s intangible assets, excluding goodwill (in thousands, except for weighted-average remaining useful life):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 29, 2017
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
|
Weighted-
Average
Remaining
Useful Life
(In years)
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
Trade names
|
$
|
42,130
|
|
|
$
|
4,586
|
|
|
$
|
37,544
|
|
|
9.82
|
Core/developed technology
|
240,250
|
|
|
46,291
|
|
|
193,959
|
|
|
5.09
|
Patent portfolio license
(1)
|
7,750
|
|
|
2,695
|
|
|
5,055
|
|
|
16.02
|
Customer relationships
|
110,000
|
|
|
18,558
|
|
|
91,442
|
|
|
5.83
|
Total finite-lived intangible assets
(2)
|
$
|
400,130
|
|
|
$
|
72,130
|
|
|
$
|
328,000
|
|
|
5.58
|
Indefinite-lived intangible assets, excluding goodwill:
|
|
|
|
|
|
|
|
IPR&D
(3)
|
25,000
|
|
|
—
|
|
|
25,000
|
|
|
|
Total indefinite-lived intangible assets, excluding goodwill
|
25,000
|
|
|
—
|
|
|
25,000
|
|
|
|
Total intangible assets, excluding goodwill
|
$
|
425,130
|
|
|
$
|
72,130
|
|
|
$
|
353,000
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2016
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
|
Weighted-
Average
Remaining
Useful Life
(In years)
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
Trade names
|
$
|
45,090
|
|
|
$
|
2,359
|
|
|
$
|
42,731
|
|
|
10.51
|
Core/developed technology
|
286,290
|
|
|
37,352
|
|
|
248,938
|
|
|
5.51
|
Patent portfolio license
(1)
|
7,750
|
|
|
1,935
|
|
|
5,815
|
|
|
17.00
|
Customer relationships
|
143,110
|
|
|
15,813
|
|
|
127,297
|
|
|
6.32
|
Non-compete agreements
|
1,050
|
|
|
983
|
|
|
67
|
|
|
0.29
|
Patents with broader applications
|
1,040
|
|
|
110
|
|
|
930
|
|
|
13.38
|
Total finite-lived intangible assets
|
$
|
484,330
|
|
|
$
|
58,552
|
|
|
$
|
425,778
|
|
|
6.08
|
Indefinite-lived intangible assets, excluding goodwill:
|
|
|
|
|
|
|
|
IPR&D
(3)
|
24,000
|
|
|
—
|
|
|
24,000
|
|
|
|
Total indefinite-lived intangible assets, excluding goodwill
|
24,000
|
|
|
—
|
|
|
24,000
|
|
|
|
Total intangible assets, excluding goodwill
|
$
|
508,330
|
|
|
$
|
58,552
|
|
|
$
|
449,778
|
|
|
|
|
|
(1)
|
The patent portfolio license was assigned an estimated useful life that reflects the Company’s consumption of the expected defensive benefits related to this license to certain patents. The method of amortization for the patent portfolio license reflects the Company’s estimate of the pattern in which these expected defensive benefits will be used by the Company and is primarily based on the mix of expiration patterns of the individual patents included in the license.
|
|
|
(2)
|
During
the nine months ended July 29, 2017
,
$9.5 million
of finite-lived intangible assets became fully amortized and, therefore, were removed from the balance sheet.
|
|
|
(3)
|
Acquired IPR&D is an intangible asset accounted for as an indefinite-lived asset until the completion or abandonment of the associated research and development effort. If the research and development effort associated with the IPR&D is successfully completed, then the IPR&D intangible asset will be amortized over its estimated useful life to be determined at the date the effort is completed.
|
The Company conducts its IPR&D impairment test annually, as of the first day of the fourth fiscal quarter, and whenever events occur or facts and circumstances indicate that it is more likely than not that the IPR&D is impaired. For the annual IPR&D impairment test, the Company elects the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the IPR&D asset is less than the carrying amount. If, after assessing the totality of events and circumstances, the Company determines that it is more likely than not that the fair value of the IPR&D asset is less than the carrying amount, then the Company conducts a quantitative analysis to determine the fair value of the IPR&D asset. If the carrying amount of the IPR&D asset exceeds the fair value, then the Company recognizes an impairment loss equal to the difference.
Based on the results of the annual IPR&D impairment analysis performed during the fourth fiscal quarter of 2016, the Company determined that no impairment needed to be recorded. As of
July 29, 2017
, no new events had occurred nor had any facts or circumstances changed since the annual IPR&D impairment analysis performed during the fourth quarter of fiscal year 2016 that indicated that the fair value of the IPR&D asset may be less than the current carrying amount.
The amortization of finite-lived intangible assets is included in the following line items of the Company’s Condensed Consolidated
Statements of Operations
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 29, 2017
|
|
July 30, 2016
|
|
July 29, 2017
|
|
July 30, 2016
|
Cost of revenues
|
$
|
10,612
|
|
|
$
|
8,922
|
|
|
$
|
36,352
|
|
|
$
|
15,269
|
|
General and administrative
(1)
|
248
|
|
|
271
|
|
|
760
|
|
|
821
|
|
Amortization of intangible assets
|
5,822
|
|
|
5,498
|
|
|
20,998
|
|
|
7,302
|
|
Total
|
$
|
16,682
|
|
|
$
|
14,691
|
|
|
$
|
58,110
|
|
|
$
|
23,392
|
|
|
|
(1)
|
The amortization is related to the
$7.8 million
perpetual, nonexclusive license to certain patents purchased in fiscal year 2015.
|
The following table presents the estimated future amortization of finite-lived intangible assets as of
July 29, 2017
(in thousands):
|
|
|
|
|
|
Fiscal Year
|
|
Estimated
Future
Amortization
|
2017 (remaining three months)
|
|
$
|
14,761
|
|
2018
|
|
58,961
|
|
2019
|
|
58,760
|
|
2020
|
|
58,294
|
|
2021
|
|
58,225
|
|
Thereafter
|
|
78,999
|
|
Total
|
|
$
|
328,000
|
|
5
.
Balance Sheet Details
The following tables provide details of selected balance sheet items (in thousands):
|
|
|
|
|
|
|
|
|
|
July 29,
2017
|
|
October 29,
2016
|
Inventories:
|
|
|
|
Raw materials
|
$
|
29,032
|
|
|
$
|
17,793
|
|
Finished goods
|
41,479
|
|
|
51,562
|
|
Inventories
|
$
|
70,511
|
|
|
$
|
69,355
|
|
|
|
|
|
|
|
|
|
|
|
July 29,
2017
|
|
October 29,
2016
|
Property and equipment, net:
|
|
|
|
Gross property and equipment
|
|
|
|
Computer equipment
|
$
|
18,356
|
|
|
$
|
19,710
|
|
Software
|
90,040
|
|
|
89,132
|
|
Engineering and other equipment
|
388,787
|
|
|
445,115
|
|
Furniture and fixtures
|
32,990
|
|
|
33,788
|
|
Leasehold improvements
|
36,801
|
|
|
37,973
|
|
Land and building
|
386,163
|
|
|
386,163
|
|
Total gross property and equipment
|
953,137
|
|
|
1,011,881
|
|
Accumulated depreciation and amortization
(1)
|
(536,956
|
)
|
|
(556,555
|
)
|
Property and equipment, net
|
$
|
416,181
|
|
|
$
|
455,326
|
|
|
|
(1)
|
The following table presents the depreciation of property and equipment included on the Company’s Condensed Consolidated
Statements of Operations
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 29,
2017
|
|
July 30,
2016
|
|
July 29,
2017
|
|
July 30,
2016
|
Depreciation expense
|
$
|
19,040
|
|
|
$
|
20,393
|
|
|
$
|
60,255
|
|
|
$
|
57,531
|
|
6
.
Fair Value Measurements
The Company applies fair value measurements for both financial and non-financial assets and liabilities. The Company does not have any non-financial assets or liabilities that are required to be measured at fair value on a recurring basis as of
July 29, 2017
.
The fair value accounting guidance permits companies to elect fair value measurement for many financial instruments and certain other items that are not required to be accounted for at fair value. The Company did not elect fair value measurement for any eligible financial instruments or other assets.
Fair Value Hierarchy
The Company utilizes a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
During
the nine months ended July 29, 2017
, the Company had no transfers between levels of the fair value hierarchy of its assets and liabilities measured at fair value.
Assets and liabilities measured and recorded at fair value on a recurring basis as of
July 29, 2017
, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Balance as of
July 29, 2017
|
|
Quoted Prices in
Active Markets
for Identical
Instruments
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
(1)
|
$
|
824,925
|
|
|
$
|
824,925
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative assets
|
737
|
|
|
—
|
|
|
737
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
825,662
|
|
|
$
|
824,925
|
|
|
$
|
737
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
141
|
|
|
$
|
—
|
|
|
$
|
141
|
|
|
$
|
—
|
|
Total liabilities measured at fair value
|
$
|
141
|
|
|
$
|
—
|
|
|
$
|
141
|
|
|
$
|
—
|
|
|
|
(1)
|
Money market funds are reported within “Cash and cash equivalents” on the Company’s Condensed Consolidated Balance Sheets.
|
Assets and liabilities measured and recorded at fair value on a recurring basis as of
October 29, 2016
, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Balance as of
October 29, 2016
|
|
Quoted Prices in
Active Markets
for Identical
Instruments
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
(1)
|
$
|
914,724
|
|
|
$
|
914,724
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative assets
|
514
|
|
|
—
|
|
|
514
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
915,238
|
|
|
$
|
914,724
|
|
|
$
|
514
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
354
|
|
|
$
|
—
|
|
|
$
|
354
|
|
|
$
|
—
|
|
Total liabilities measured at fair value
|
$
|
354
|
|
|
$
|
—
|
|
|
$
|
354
|
|
|
$
|
—
|
|
|
|
(1)
|
Money market funds are reported within “Cash and cash equivalents” on the Company’s Condensed Consolidated Balance Sheets.
|
7
.
Restructuring Charges (Benefits)
The following table provides details of “
Restructuring charges (benefits)
” included in the Company’s Condensed Consolidated
Statements of Operations
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 29,
2017
|
|
July 30,
2016
|
|
July 29,
2017
|
|
July 30,
2016
|
Severance and other employee termination costs related to employee voluntary separation plan
|
$
|
17,801
|
|
|
$
|
—
|
|
|
$
|
17,801
|
|
|
$
|
—
|
|
Lease loss reserve and related benefits
|
—
|
|
|
—
|
|
|
—
|
|
|
(566
|
)
|
Total restructuring charges (benefits)
|
$
|
17,801
|
|
|
$
|
—
|
|
|
$
|
17,801
|
|
|
$
|
(566
|
)
|
Fiscal 2017 Third Quarter Employee Voluntary Separation Plan
During the third quarter of fiscal year 2017, the Company implemented a voluntary separation plan for certain eligible employees in the United States and India to reduce the Company’s operating expense structure. The voluntary separation plan was approved by the Company’s management and communicated to the eligible employees in
May 2017
. Approximately
230
employees accepted the terms of the voluntary separation plan. As a result, the Company recorded aggregate charges of
$17.8 million
for severance and other employee termination costs during the third quarter of fiscal year 2017. The voluntary separation plan was substantially completed in the third quarter of fiscal year 2017. As of
July 29, 2017
, the cash payments remaining to be made under the plan total
$3.8 million
, substantially all of which are expected to be made by the end of the first quarter of fiscal year 2018, and are reported within “Accrued employee compensation” on the Company’s Condensed Consolidated Balance Sheets.
8
.
Borrowings
The following table provides details of the Company’s long-term debt (in thousands, except years and percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 29, 2017
|
|
October 29, 2016
|
|
|
Maturity
|
|
Stated Annual Interest Rate
|
|
Amount
|
Effective Interest Rate
|
|
Amount
|
Effective Interest Rate
|
Senior Credit Facility:
|
|
|
|
|
|
|
|
|
|
|
Term Loan Facility
|
|
2021
|
|
variable
|
|
$
|
720,000
|
|
3.54
|
%
|
|
$
|
780,000
|
|
2.53
|
%
|
Convertible Senior Unsecured Notes:
|
|
|
|
|
|
|
|
|
|
|
2020 Convertible Notes
|
|
2020
|
|
1.375%
|
|
575,000
|
|
4.98
|
%
|
|
575,000
|
|
4.98
|
%
|
Senior Unsecured Notes:
|
|
|
|
|
|
|
|
|
|
|
2023 Notes
|
|
2023
|
|
4.625%
|
|
300,000
|
|
4.83
|
%
|
|
300,000
|
|
4.83
|
%
|
Total gross long-term debt
|
|
|
|
|
|
1,595,000
|
|
|
|
1,655,000
|
|
|
Unamortized discount
|
|
|
|
|
|
(58,405
|
)
|
|
|
(73,540
|
)
|
|
Unamortized debt issuance costs
|
|
|
|
|
|
(2,268
|
)
|
|
|
(2,705
|
)
|
|
Current portion of long-term debt
|
|
|
|
|
|
(76,725
|
)
|
|
|
(76,692
|
)
|
|
Long-term debt, net of current portion
|
|
|
|
|
|
$
|
1,457,602
|
|
|
|
$
|
1,502,063
|
|
|
Senior Credit Facility
In connection with the acquisition of Ruckus on May 27, 2016, the Company entered into a Credit Agreement (as amended, the “Credit Agreement”) with Wells Fargo Bank, N.A., as the administrative agent, swingline lender, and issuing lender, and certain other lenders (collectively, the “Lenders”). The Credit Agreement provides for a term loan facility of
$800.0 million
(the “Term Loan Facility”) and a revolving credit facility of
$100.0 million
(the “Revolving Facility,” and together with the Term Loan Facility, the “Senior Credit Facility”). The Revolving Facility includes a
$25.0 million
letter of credit subfacility and a
$10.0 million
swing line loan subfacility. The proceeds of the Term Loan Facility were used to finance a portion of the acquisition of Ruckus and related fees and expenses, the repurchase of shares of the Company’s common stock, and fees and expenses related to the Senior Credit Facility.
Loans made under the Senior Credit Facility bear interest, at the Company’s option, either (i) at a base rate which is based in part on the greatest of (A) the prime rate, (B) the federal funds rate plus 0.50%, or (C) LIBOR for an interest period of one month plus 1.00%, plus an applicable margin that will vary between 0.00% and 0.75% based on the Company’s total leverage ratio, or (ii) at a LIBOR-based rate, plus an applicable margin that will vary between 1.00% and 1.75% based on the Company’s total leverage ratio. For purposes of calculating the applicable rate, the base rate and LIBOR-based rate are subject to a floor of 0.00%. For base rate loans, interest is payable on the last business day of January, April, July, and October of each year. For LIBOR rate loans, interest is payable on the last day of each interest period for the LIBOR-based rate, and if such interest period extends over three months, at the end of each three-month interval during such interest period.
Commitments under the Revolving Facility are subject to an initial commitment fee of
0.30%
, and are later subject to adjustment between
0.20%
and
0.35%
based on the Company’s total leverage ratio. Letters of credit issued under the letter of credit subfacility are subject to an initial commission fee starting at
1.50%
, and are later subject to adjustment between
1.00%
and
1.75%
based on the Company’s total leverage ratio, and an issuance fee of
0.125%
.
The final maturity of the Senior Credit Facility will occur on May 27, 2021, except that if any of the 1.375% convertible senior unsecured notes due 2020 remain outstanding on October 2, 2019, and certain other conditions have not been met, then the final maturity of the Senior Credit Facility will occur on October 2, 2019. Notwithstanding the foregoing, upon the request of the Company made to all applicable Lenders, and provided that no event of default exists or will occur immediately thereafter, individual Lenders may agree to extend the maturity date of its commitments under the Revolving Facility and loans under the Term Loan Facility.
The Company is permitted to make voluntary prepayments of the Senior Credit Facility at any time without payment of a premium or penalty. The Company is required to make mandatory prepayments of loans under the Term Loan Facility (without payment of a premium or penalty) with (i) net cash proceeds from issuances of debt (other than certain permitted debt), (ii) net cash proceeds from certain non-ordinary course asset sales (subject to reinvestment rights and other exceptions), and (iii) casualty proceeds and condemnation awards (subject to reinvestment rights and other exceptions). Commencing October 31, 2016, the loans under the Term Loan Facility will amortize in equal quarterly installments in an aggregate annual amount equal to 10% of the original principal amount thereof, with any remaining balance payable on the final maturity date of the loans under the Term Loan Facility. The loans under the Revolving Facility and all accrued and unpaid interest thereon are due in full on the maturity date.
There were
no
principal amounts outstanding under the revolving credit facility, and the full
$100.0 million
was available for future borrowing under the revolving credit facility as of
July 29, 2017
. Payments totaling
$60.0 million
were made towards the principal of the Term Loan Facility during
the nine months ended July 29, 2017
.
As of
July 29, 2017
, and
October 29, 2016
, the fair value of the Term Loan Facility was approximately
$709.1 million
and
$767.4 million
, respectively, which was estimated based on fair value for similar instruments.
The obligations under the Senior Credit Facility and certain cash management and hedging obligations are fully and unconditionally guaranteed by certain of the Company’s direct and indirect subsidiaries (including Ruckus, but excluding certain immaterial subsidiaries, subsidiaries whose guarantee would result in material adverse tax consequences and subsidiaries whose guarantee is prohibited by applicable law) pursuant to a subsidiary guaranty agreement.
The Company’s obligations under the Senior Credit Facility are unsecured, provided that upon the occurrence of certain events (including if the Company’s corporate family rating from Moody’s falls below Ba1 and from S&P falls below BB+ at any time (referred to as a “Ratings Downgrade”)) or the incurrence of certain indebtedness in excess of $600.0 million (such occurrence or the occurrence of a Ratings Downgrade being a “Collateral Trigger Event”), then such obligations, as well as certain cash management and hedging obligations, will be required to be secured, subject to certain exceptions, by 100% of the equity interests of all present and future restricted subsidiaries directly held by the Company or any guarantor.
As of the date hereof, all of the Company’s subsidiaries are restricted subsidiaries under the Senior Credit Facility. The Company must provide such security within 90 days (or 20 business days with respect to the equity interests of material U.S. subsidiaries) of such Collateral Trigger Event.
The Credit Agreement contains financial maintenance covenants, including (i) a maximum total leverage ratio as of the last date of any fiscal quarter which, prior to the amendment to the Credit Agreement discussed below, was not to exceed 3.50 to 1, subject to certain step-downs to 3.25 to 1 and 3.00 to 1 for fiscal periods ending on or after April 30, 2017, and April 30, 2018, respectively, and (ii) a minimum interest coverage ratio of not less than 3.50 to 1. The Credit Agreement also contains restrictive covenants that limit, among other things, the Company’s and its restricted subsidiaries’ ability to:
|
|
•
|
Incur additional indebtedness or issue certain preferred equity, pay dividends, or make other distributions or other restricted payments (including stock repurchases);
|
|
|
•
|
Sell assets other than on terms specified by the Credit Agreement;
|
|
|
•
|
Amend the terms of certain other indebtedness and organizational documents;
|
|
|
•
|
Create liens on certain assets to secure debt, consolidate, merge, sell, or otherwise dispose of all or substantially all of their assets; and
|
|
|
•
|
Enter into certain transactions with affiliates, or change their lines of business, fiscal years, and accounting practices, in each case, subject to customary exceptions.
|
The Credit Agreement also sets forth customary events of default, including upon the failure to make timely payments under the Senior Credit Facility, the failure to satisfy certain covenants, cross-default and cross-acceleration to other material debt for borrowed money, the occurrence of a change of control, and specified events of bankruptcy and insolvency.
As discussed under Note
1
, “
Basis of Presentation
,” of the Notes to Condensed Consolidated Financial Statements, on November 2, 2016, the Company entered into a merger agreement with Broadcom under which Broadcom agreed to acquire Brocade. The consummation of the proposed acquisition by Broadcom would constitute a “change of control” under the events of default under the Credit Agreement. Due primarily to the pendency of the Merger and Broadcom’s stated intent to divest the Company’s IP Networking business after the closing of the Merger, the Company has experienced lower than expected revenue, earnings, and cash flows and higher than expected acquisition and integration expenses. As a result, on August 11, 2017, the Company amended the Credit Agreement, effective for the Company’s third fiscal quarter of 2017, to modify the consolidated total leverage ratio covenant to (i) postpone the effective date of a previously scheduled third fiscal quarter reduction in the maximum permitted consolidated total leverage ratio from 3.50 to 1 to 3.25 to 1 until the Company’s 2018 fiscal year, thus keeping the maximum permitted ratio at 3.50 to 1 for both the Company’s third and fourth fiscal quarters of 2017, and (ii) temporarily suspend the applicability of an existing 15% limit on the amount of certain expenses, including acquisition, integration and restructuring expenses, that may be added back when calculating consolidated EBITDA for purposes of financial covenant compliance for both the Company’s third and fourth fiscal quarters of 2017.
Convertible Senior Unsecured Notes
On January 14, 2015, the Company issued
$575.0 million
in aggregate principal amount of 1.375% convertible senior unsecured notes due 2020 (the “2020 Convertible Notes”) pursuant to an indenture, dated as of January 14, 2015, between the Company and Wells Fargo Bank, National Association, as the trustee (the “Offering”). Net of an original issue discount, the Company received
$565.7 million
in proceeds from the Offering. Concurrently with the closing of the Offering, the Company called for redemption its outstanding 6.875% senior secured notes due 2020 (the “2020 Notes”) and irrevocably deposited a portion of the net proceeds from the Offering with the trustee to discharge the indenture governing the 2020 Notes.
The 2020 Convertible Notes bear interest payable semiannually on January 1 and July 1 of each year, beginning on July 1, 2015. No payments were made toward the principal of the 2020 Convertible Notes during
the nine months ended July 29, 2017
.
The Company separately accounts for the liability and equity components of the 2020 Convertible Notes. The fair value of the liability component, used in the allocation between the liability and equity components as of the date of issuance, was based on the present value of cash flows using a discount rate of
4.57%
, the Company’s borrowing rate for a similar debt instrument without the conversion feature. The carrying values of the liability and equity components of the 2020 Convertible Notes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
July 29,
2017
|
|
October 29,
2016
|
Principal
|
$
|
575,000
|
|
|
$
|
575,000
|
|
Unamortized discount of the liability component
|
(46,153
|
)
|
|
(59,399
|
)
|
Net carrying amount of liability component
|
$
|
528,847
|
|
|
$
|
515,601
|
|
Carrying amount of equity component
|
$
|
43,320
|
|
|
$
|
55,374
|
|
As of
July 29, 2017
, and
October 29, 2016
, the remaining period of amortization for the discount is
2.42
years and
3.17
years, respectively.
The following table presents the amount of interest cost recognized for amortization of the discount and for the contractual interest coupon for the 2020 Convertible Notes for the following periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 29,
2017
|
|
July 30,
2016
|
|
July 29,
2017
|
|
July 30,
2016
|
Amortization of discount
|
$
|
4,470
|
|
|
$
|
4,254
|
|
|
$
|
13,245
|
|
|
$
|
12,606
|
|
Contractual interest coupon
|
$
|
1,977
|
|
|
$
|
1,977
|
|
|
$
|
5,930
|
|
|
$
|
5,930
|
|
As of
July 29, 2017
, and
October 29, 2016
, the fair value of the 2020 Convertible Notes was approximately
$581.7 million
and
$564.5 million
, respectively, which was estimated based on broker trading prices.
The 2020 Convertible Notes mature on
January 1, 2020
, unless repurchased or converted in accordance with their terms prior to such date. The 2020 Convertible Notes are not callable prior to their maturity. The 2020 Convertible Notes are convertible into common shares of the Company under the circumstances described below. The initial conversion rate is
62.7746
shares of the Company’s common stock per $1,000 principal amount of the notes, which is equal to
36.1 million
shares at an initial conversion price of approximately
$15.93
per share.
The 2020 Convertible Notes contain provisions where the conversion rate is adjusted upon the occurrence of certain events, including if the Company pays a regular, quarterly cash dividend in an amount greater than $0.035 per share. During the third fiscal quarter of 2017, the Board of Directors of the Company declared and paid a cash dividend in the amount of
$0.055
per share. Accordingly, as of
June 8, 2017
, the conversion rate was adjusted to a rate of
63.6060
shares of the Company’s common stock per $1,000 principal amount of the notes, which is equal to
36.6 million
shares at a conversion price of approximately
$15.72
per share. However, because the adjustment resulted in a change to the conversion rate of less than 1%, as is allowed by the terms of the indenture governing the 2020 Convertible Notes, the Company elected to defer the administration and noteholder notification of such adjustment until the occurrence of (i) a subsequent adjustment to the conversion rate that results in a cumulative adjustment of at least 1% of the current conversion rate, (ii) the conversion of any 2020 Convertible Note, or (iii) certain other events requiring the adjustment to be made under the indenture governing the 2020 Convertible Notes.
Holders of the 2020 Convertible Notes may convert all or a portion of their notes prior to the close of business on the business day immediately preceding September 1, 2019, in multiples of $1,000 principal amount, only under the following circumstances:
|
|
•
|
During any fiscal quarter commencing after the fiscal quarter ending on May 2, 2015 (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least
20
trading days (whether or not consecutive) during a period of
30
consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to
130%
of the conversion price of the notes on each applicable trading day;
|
|
|
•
|
During the
five
-business-day period after any
10
consecutive trading-day period in which the trading price per $1,000 principal amount of the notes for each trading day of that 10 consecutive trading-day period was less than
98%
of the product of the last reported sale price of the Company’s common stock and the conversion rate of the notes on each such trading day; or
|
|
|
•
|
Upon the occurrence of certain corporate events as specified in the terms of the indenture governing the 2020 Convertible Notes.
|
On or after September 1, 2019, to the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their notes regardless of the foregoing conditions.
As of
July 29, 2017
, the circumstances for conversion had not been triggered, and the 2020 Convertible Notes were not convertible. The if-converted value of the 2020 Convertible Notes as of
July 29, 2017
, did
not
exceed the principal amount of the 2020 Convertible Notes.
If a “fundamental change,” as specified in the terms of the indenture governing the 2020 Convertible Notes, occurs prior to the maturity date, holders of the notes may require the Company to repurchase the 2020 Convertible Notes at a repurchase price equal to
100%
of the principal amount of the 2020 Convertible Notes repurchased, plus accrued and unpaid interest, if any, up to the repurchase date. As of
July 29, 2017
, a fundamental change had not occurred and the 2020 Convertible Notes were not re-purchasable.
The consummation of the proposed Broadcom acquisition would constitute a “fundamental change” as well as a “make-whole fundamental change” under the terms of the indenture governing the 2020 Convertible Notes. Accordingly, holders of the 2020 Convertible Notes will have the right to require the Company to repurchase their notes upon the consummation of the proposed Broadcom acquisition. In addition, the consummation of the Broadcom acquisition will cause the 2020 Convertible Notes to become convertible for a specified period of time following such consummation, will result in an adjustment to the conversion rate for conversions of the 2020 Convertible Notes during a specified period of time following such consummation, and will require that the Company settle all such conversions in cash.
Convertible Note Hedge and Warrants Related to the Convertible Senior Unsecured Notes
In connection with the issuance of the 2020 Convertible Notes, the Company entered into convertible note hedge transactions with certain financial institutions (the “counterparties”) with respect to its common stock. Upon conversion of the 2020 Convertible Notes, the convertible note hedge transactions give the Company the right to acquire from the counterparties, subject to anti-dilution adjustments substantially similar to those in the 2020 Convertible Notes, initially approximately
36.1 million
shares of the Company’s common stock at an initial strike price of
$15.93
per share. Because a dividend in an amount greater than $0.035 per share was declared and paid effective beginning in the third fiscal quarter of 2015, the strike price under the convertible note hedge transactions has been adjusted to approximately
$15.72
per share as of
June 8, 2017
. The convertible note hedge transactions are expected generally to reduce the potential common stock dilution and/or offset potential cash payments in excess of the principal amount of converted notes upon conversion of the notes in the event that the market price per share of the Company’s common stock, as measured under the terms of the convertible note hedge transactions, is greater than the strike price of the convertible note hedge transactions. The convertible note hedge transactions will be terminated on the maturity date of the 2020 Convertible Notes or earlier under certain circumstances. The
$86.1 million
cost of the convertible note hedge transactions has been accounted for as an equity transaction.
Separately from the convertible note hedge transactions, the Company entered into warrant transactions with the counterparties, pursuant to which the Company sold warrants to the counterparties to acquire, subject to customary anti-dilution adjustments, up to
36.1 million
shares in the aggregate at an initial strike price of
$20.65
per share. The primary reason the Company entered into these warrant transactions was to partially offset the cost of the convertible note hedge transactions. The warrants mature over
60
trading days, commencing on
April 1, 2020
, and are exercisable solely on the maturity dates. The warrants are subject to net share settlement; however, the Company may elect to cash settle the warrants. The Company received gross proceeds of
$51.2 million
from the warrant transactions, which have been accounted for as an equity transaction.
Under the terms of the warrants, the strike price and number of shares to be acquired by the holders of the warrants are adjusted if the Company pays a regular, quarterly cash dividend in an amount greater than $0.035 per share. Accordingly, the terms of the warrants were adjusted to reflect the payment of a cash dividend in the amount of $0.055 per share beginning in the third fiscal quarter of 2016. As of
June 8, 2017
, the holders of the warrants have the right to acquire up to approximately
36.6 million
shares of the Company’s common stock at a strike price of approximately
$20.38
per share.
See Note
15
, “
Net Income (Loss) per Share
,” of the Notes to Condensed Consolidated Financial Statements for further discussion of the dilutive impact of the 2020 Convertible Notes and the convertible note hedge and warrant transactions.
The consummation of the proposed acquisition by Broadcom would result in a termination of the warrant transactions, in which case the Company would be required to settle such transactions in cash. In addition, announcements relating to the proposed transaction may result in adjustments to the terms of the warrant transactions to take into account the economic effect of the proposed transactions, which could result in greater amounts becoming due upon termination or otherwise have a dilutive effect.
Senior Unsecured Notes
In January 2013, the Company issued 4.625% senior unsecured notes in the aggregate principal amount of
$300.0 million
due 2023 (the “2023 Notes”) pursuant to an indenture, dated as of January 22, 2013 (the “2023 Indenture”), between the Company, certain domestic subsidiaries of the Company that have guaranteed the Company’s obligations under the 2023 Notes, and Wells Fargo Bank, National Association, as the trustee. The guarantees of the 2023 Notes were released upon the termination of the Senior Secured Credit Facility and discharge of the 2020 Indenture in the first fiscal quarter of 2015.
The 2023 Notes bear interest payable semiannually on January 15 and July 15 of each year. No payments were made toward the principal of the 2023 Notes during
the nine months ended July 29, 2017
.
As of
July 29, 2017
, and
October 29, 2016
, the fair value of the 2023 Notes was approximately
$307.9 million
and
$297.0 million
, respectively, which was estimated based on broker trading prices.
On or after January 15, 2018, the Company may redeem all or part of the 2023 Notes at the redemption prices set forth in the 2023 Indenture, plus accrued and unpaid interest, if any, up to the redemption date. At any time prior to January 15, 2018, the Company may redeem all or a part of the 2023 Notes at a price equal to
100%
of the principal amount of the 2023 Notes, plus an applicable premium and accrued and unpaid interest, if any, up to the redemption date.
If the Company experiences a specified change of control triggering event, it must offer to repurchase the 2023 Notes at a repurchase price equal to
101%
of the principal amount of the 2023 Notes repurchased, plus accrued and unpaid interest, if any, up to the repurchase date. The consummation of the proposed acquisition by Broadcom could result in a Change of Control Triggering Event if the acquisition is accompanied or followed within a specific period by certain downgrades of the ratings of the 2023 Notes.
The 2023 Indenture contains covenants that, among other things, restrict the ability of the Company and its subsidiaries to:
|
|
•
|
Incur certain liens and enter into certain sale-leaseback transactions;
|
|
|
•
|
Create, assume, incur, or guarantee additional indebtedness of the Company’s subsidiaries without such subsidiaries guaranteeing the 2023 Notes on a pari passu basis; and
|
|
|
•
|
Enter into certain consolidation or merger transactions, or convey, transfer, or lease all or substantially all of the Company’s or its subsidiaries’ assets.
|
These covenants are subject to a number of limitations and exceptions as set forth in the 2023 Indenture. The 2023 Indenture also includes customary events of default, including cross-defaults to other debt of the Company and its subsidiaries.
Debt Maturities
As of
July 29, 2017
, the Company’s aggregate debt maturities based on outstanding principal were as follows (in thousands):
|
|
|
|
|
|
Fiscal Year
|
|
Principal
Balances
|
2017 (remaining three months)
|
|
$
|
20,000
|
|
2018
|
|
80,000
|
|
2019
|
|
80,000
|
|
2020
|
|
655,000
|
|
2021
|
|
460,000
|
|
Thereafter
|
|
300,000
|
|
Total
|
|
$
|
1,595,000
|
|
9
.
Commitments and Contingencies
Product Warranties
The Company’s accrued liability for estimated future warranty costs is included in “Other accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets. The following table summarizes the activity related to the Company’s accrued liability for estimated future warranty costs during the
nine months ended
July 29, 2017
, and
July 30, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
Accrued Warranty
|
|
Nine Months Ended
|
|
July 29,
2017
|
|
July 30,
2016
|
Beginning balance
|
$
|
8,326
|
|
|
$
|
7,599
|
|
Warranty liability assumed from acquisitions
|
—
|
|
|
760
|
|
Liabilities accrued for warranties issued during the period
|
2,136
|
|
|
2,768
|
|
Warranty claims paid and used during the period
|
(2,361
|
)
|
|
(2,736
|
)
|
Changes in liability for pre-existing warranties during the period
|
838
|
|
|
(60
|
)
|
Ending balance
|
$
|
8,939
|
|
|
$
|
8,331
|
|
In addition, the Company has defense and indemnification clauses contained within its various customer contracts. As such, the Company indemnifies the parties to whom it sells its products with respect to the Company’s products, both alone and in certain circumstances when in combination with other products and services, for infringement of any patents, trademarks, copyrights, or trade secrets, as well as against bodily injury or damage to real or tangible personal property caused by a defective Company product, subject to the particular contract’s terms. As of
July 29, 2017
, there have been no known events or circumstances that have resulted in a material customer contract-related indemnification liability to the Company.
Manufacturing and Purchase Commitments
Brocade has manufacturing arrangements with its CMs under which Brocade provides product forecasts and places purchase orders in advance of the scheduled delivery of products to Brocade’s customers. The required lead time for placing orders with the CMs depends on the specific product. Brocade issues purchase orders, and the CMs then generate invoices based on prices and payment terms mutually agreed upon and set forth in those purchase orders. Although the purchase orders Brocade places with its CMs are cancellable, the terms of the agreements require Brocade to purchase all inventory components ordered per Brocade’s forecast, which are not returnable, usable by, or sold to other customers of the CMs. In addition, Brocade has an arrangement with one of its CMs regarding factory capacity that can be used by the Company. Under this arrangement, the Company receives a credit for exceeding the planned utilization of factory capacity and, conversely, is required to pay additional fees for underutilizing the planned capacity.
As of
July 29, 2017
, the Company’s aggregate commitment to its CMs for inventory components used in the manufacture of Brocade products was
$158.9 million
, which the Company expects to utilize during future normal ongoing operations, net of a purchase commitments reserve of
$1.8 million
, which is reported within “Other accrued liabilities” on the Company’s Condensed Consolidated Balance Sheet as of
July 29, 2017
. The Company’s purchase commitments reserve reflects the Company’s estimate of purchase commitments it does not expect to utilize in normal ongoing operations.
Income Taxes
The Company is subject to several ongoing income tax audits and has received notices of proposed adjustments or assessments from certain tax authorities. For additional discussion, see Note
13
, “
Income Taxes
,” of the Notes to Condensed Consolidated Financial Statements. The Company believes it has adequate reserves for all open tax years.
Legal Proceedings
From time to time, the Company is subject to various legal proceedings and claims, including those identified below, which arise in the ordinary course of business, including claims of alleged infringement of patents and/or other intellectual property rights and commercial and employment contract disputes. The Company accrues a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company believes it has recorded adequate provisions for any such matters and, as of
July 29, 2017
, it was not reasonably possible that a material loss had been incurred in excess of the amounts recognized in the Company’s financial statements. However, litigation is inherently uncertain, and the outcome of these matters cannot be predicted with certainty. Accordingly, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these matters.
Ruckus Acquisition-Related Litigation
A putative class action captioned Hussey v. Ruckus Wireless, Inc., et al. is pending in the United States District Court for the Northern District of California (referred to as the “Hussey action”). The original complaint in the Hussey action, filed on June 3, 2016, alleged that Ruckus, members of the Ruckus board of directors, Ruckus’ chief financial officer, Brocade, and a Brocade subsidiary violated Section 14(e) of the Exchange Act based on allegedly false and/or misleading statements and/or alleged omissions in the Solicitation/Recommendation Statement on Schedule 14D-9 filed by Ruckus with the SEC on April 29, 2016, and violated Section 14(d)(7) of the Exchange Act and Rule 14d-10 promulgated thereunder based on the allegedly differential consideration received by members of the Ruckus board of directors and Ruckus’ chief financial officer in connection with the acquisition. An amended complaint, filed on October 24, 2016, named the same defendants as the original complaint and alleged that the defendants violated Sections 14(e), 14(d)(7), and 20(a) of the Exchange Act and Rule 14d-10 promulgated thereunder, that the members of the Ruckus board of directors breached their fiduciary duties to Ruckus stockholders, and that Ruckus’ chief financial officer, Brocade, and the Brocade subsidiary aided and abetted the members of the Ruckus board of directors in breaching their fiduciary duties to Ruckus stockholders. The amended complaint sought an award of damages in an unspecified amount. On December 8, 2016, all defendants filed a motion to dismiss the amended complaint. On February 21, 2017, the court granted the motion and dismissed the amended complaint, with leave to amend as to all claims except the claim for violations of Section 14(d)(7) of the Exchange Act and Rule 14d-10 promulgated thereunder, which claim was dismissed without leave to amend. A second amended complaint was filed on March 27, 2017, adding Ruckus’ financial advisor as an additional defendant and alleging that certain of the defendants violated Sections 14(e) and 20(a) of the Exchange Act, that the members of the Ruckus board of directors and Ruckus’ chief financial officer breached their fiduciary duties to Ruckus stockholders, and that Brocade and the Brocade subsidiary aided and abetted the individual defendants in breaching their fiduciary duties to Ruckus stockholders by purportedly doing one or more of the following: agreeing to terms preferential to the defendants and other Ruckus insiders; accepting overly restrictive deal protection measures in the merger agreement; failing to negotiate for a collar on Brocade’s stock price; providing allegedly false, misleading, and/or incomplete disclosures regarding conflicts of interest and the opinion of Ruckus’ financial advisors; and ultimately agreeing to unfair transaction consideration for the Ruckus shares. The second amended complaint sought an award of damages in an unspecified amount. On April 27, 2017, all defendants filed a motion to dismiss the second amended complaint. On June 29, 2017, the court granted the motion and dismissed the second amended complaint, without leave to amend as to all claims, and entered judgment accordingly. On July 27, 2017, the plaintiffs filed a motion to alter or amend the judgment.
Ruckus Acquisition-Related Appraisal Demand
On May 25, 2016, Ruckus received an appraisal demand letter seeking an appraisal under Section 262 of the Delaware General Corporation Law (“Section 262”) of the fair value of
3.2 million
Ruckus shares purported to be beneficially owned by Verition Multi-Strategy Master Fund Ltd. (the “Dissenter”) that purportedly dissented from the merger of Ruckus with and into a wholly owned subsidiary of the Company. Under Section 262, the Dissenter is entitled to have those shares appraised by the Delaware Court of Chancery and receive payment of the “fair value” of such shares together with statutory interest as determined by the Delaware Court of Chancery, provided that Dissenter complies with the requirements of Section 262. The Dissenter filed a petition for appraisal in the Delaware Court of Chancery on September 22, 2016, captioned Verition Multi-Strategy Master Fund Ltd. v. Ruckus Wireless, Inc. On June 30, 2017, the parties entered into a settlement agreement pursuant to which Ruckus paid the Dissenter
$51.9 million
, representing
$16.22
for each of the
3.2 million
Ruckus shares in exchange for certain releases and a stipulated dismissal of the appraisal proceeding. On July 12, 2017, the court dismissed the appraisal proceeding.
Broadcom Acquisition-Related Litigation
Subsequent to the announcement that Brocade had agreed to be acquired by Broadcom, six purported class action complaints have been filed on behalf of Brocade’s stockholders against Brocade and members of its Board of Directors in the United States District Court for the Northern District of California. Three of the six complaints also name Broadcom Limited, Broadcom Corporation, and/or Bobcat Merger Sub, Inc. as defendants. The six complaints are captioned as follows: Steinberg v. Brocade Communications Systems, Inc., et al. (filed December 12, 2016) (the “Steinberg action”); Gross v. Brocade Communications Systems, Inc., et al. (filed December 15, 2016); Bragan v. Brocade Communications Systems, Inc., et al. (filed December 21, 2016); Jha v. Brocade Communications Systems, Inc., et al. (filed December 21, 2016) (the “Jha action”); Chuakay v. Brocade Communications Systems, Inc., et al. (filed January 5, 2017) (the “Chuakay action”); and Matthew v. Brocade Communications Systems, Inc., et al. (filed January 18, 2017) (collectively, the “Broadcom Acquisition-Related Litigation”). The complaints each allege violations of Sections 14(a) and 20(a) of the Exchange Act and SEC Rule 14a-9 arising out of the Company’s preliminary proxy statement filed with the SEC on December 6, 2016 (the “preliminary proxy statement”) and/or the Company’s definitive proxy statement filed with the SEC on December 20, 2016 (the “definitive proxy statement”) relating to Broadcom’s proposed acquisition of Brocade. Specifically, the plaintiffs allege that the preliminary proxy statement and/or the definitive proxy statement omits material information regarding the background of the transaction, the Company’s financial projections, the Company’s intrinsic value and prospects, the valuation analyses performed by Evercore Group L.L.C. (“Evercore”), the Company’s financial advisor in connection with the transaction, and alleged conflicts of interest faced by Evercore. The plaintiffs in each action seek to enjoin the defendants from consummating the transaction, or, if the transaction is consummated, the plaintiffs alternatively seek rescission and/or damages. The plaintiffs also seek costs and fees.
On January 11, 2017, the plaintiff in the Jha action filed a motion (the “Injunction Motion”) seeking to preliminarily enjoin the special meeting of Brocade stockholders scheduled for January 26, 2017, at which time Brocade stockholders were to vote on the transaction. The plaintiffs in the Steinberg action and the Chuakay action subsequently joined the Injunction Motion. To mitigate the risk of the Broadcom Acquisition-Related Litigation delaying or adversely affecting the transaction, and to minimize the expense of defending the Broadcom Acquisition-Related Litigation, and without admitting any liability or wrongdoing, on January 18, 2017, the Company made certain disclosures that supplemented and revised those contained in the definitive proxy statement. The plaintiffs in the Jha action, the Steinberg action, and the Chuakay action subsequently withdrew the Injunction Motion.
On April 13, 2017, the court consolidated the six actions and named a lead plaintiff.
10
.
Derivative Instruments and Hedging Activities
In the normal course of business, the Company is exposed to fluctuations in interest rates and the exchange rates associated with foreign currencies. The Company’s primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk. The Company currently does not manage its exposure to credit risk by entering into derivative instruments. However, the Company manages its exposure to credit risk through its investment policies. As part of these investment policies, the Company generally enters into transactions with high-credit quality counterparties and, by policy, limits the amount of credit exposure to any one counterparty based on its analysis of that counterparty’s relative credit standing.
The amounts subject to credit risk related to derivative instruments are generally limited to the amounts, if any, by which a counterparty’s obligations exceed the Company’s obligations with that counterparty.
Foreign Currency Exchange Rate Risk
A majority of the Company’s revenue, expense, and capital purchasing activities are transacted in U.S. dollars. However, the Company is exposed to foreign currency exchange rate risk inherent in conducting business globally in numerous currencies. The Company is primarily exposed to foreign currency fluctuations related to operating expenses denominated in currencies other than the U.S. dollar, of which the most significant to its operations for
the nine months ended July 29, 2017
, were
the British pound
,
the euro
,
the Indian rupee
,
the Chinese yuan
,
the Singapore dollar
,
the Japanese yen
,
the Taiwan new dollar
,
the Australian dollar
,
the Canadian dollar
,
the Israeli shekel
,
the Swiss franc
, and
the Hong Kong dollar
. The Company has established a foreign currency risk management program to protect against the volatility of future cash flows caused by changes in foreign currency exchange rates. This program reduces, but does not eliminate, the impact of foreign currency exchange rate movements.
The Company utilizes a rolling hedge strategy for the majority of its foreign currency derivative instruments to hedge exposures to the variability in the U.S. dollar equivalent of anticipated non-U.S.-dollar-denominated cash flows. All of the Company’s foreign currency forward contracts are single delivery, which are settled at maturity involving one cash payment. The Company’s foreign currency risk management program includes foreign currency derivatives with a cash flow hedge accounting designation that utilizes foreign currency forward and option contracts to hedge exposures to the variability in the U.S. dollar equivalent of anticipated non-U.S.-dollar-denominated cash flows. These instruments generally have a maturity of less than
15 months
. For these derivatives, the Company initially reports the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive loss in stockholders’ equity and reclassifies it into earnings in the same period in which the hedged transaction affects earnings. The tax effect allocated to cash flow hedge-related components of other comprehensive income was
not significant
for
the three and nine months ended July 29, 2017, and July 30, 2016
.
Ineffective cash flow hedges are included in the Company’s net income (loss) as part of “
Interest and other income, net
.” The amount recorded on ineffective cash flow hedges was
not significant
for
the three and nine months ended July 29, 2017, and July 30, 2016
.
Net losses relating to the effective portion of foreign currency derivatives, which are offset by net gains on the underlying exposures, are recorded in the Company’s Condensed Consolidated
Statements of Operations
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 29, 2017
|
|
July 30, 2016
|
|
July 29, 2017
|
|
July 30, 2016
|
Cost of revenues
|
$
|
(80
|
)
|
|
$
|
(35
|
)
|
|
$
|
(155
|
)
|
|
$
|
(195
|
)
|
Research and development
|
(24
|
)
|
|
(342
|
)
|
|
(92
|
)
|
|
(968
|
)
|
Sales and marketing
|
(269
|
)
|
|
(120
|
)
|
|
(583
|
)
|
|
(764
|
)
|
General and administrative
|
(32
|
)
|
|
(10
|
)
|
|
(62
|
)
|
|
(54
|
)
|
Total
|
$
|
(405
|
)
|
|
$
|
(507
|
)
|
|
$
|
(892
|
)
|
|
$
|
(1,981
|
)
|
Alternatively, the Company may choose not to hedge the foreign currency risk associated with its foreign currency exposures if the Company believes such exposure acts as a natural foreign currency hedge for other offsetting amounts denominated in the same currency or if the currency is difficult or too expensive to hedge.
As a result of foreign currency fluctuations, the net foreign currency exchange gains and losses recorded as part of “
Interest and other income, net
” were losses of
$0.2 million
and
$1.9 million
for
the three and nine months ended July 29, 2017
, respectively, and losses of
$0.2 million
and
$0.8 million
for
the three and nine months ended July 30, 2016
, respectively.
As of
July 29, 2017
, the Company had gross unrealized loss positions of
$0.1 million
and gross unrealized gain positions of
$0.7 million
included in “Other accrued liabilities” and “Prepaid expenses and other current assets,” respectively.
Volume of Derivative Activity
All derivatives are designated as hedging instruments as of
July 29, 2017
, and
October 29, 2016
. Total gross notional amounts, presented by currency, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated
as Hedging Instruments
|
In U.S. dollars
|
|
July 29, 2017
|
|
October 29, 2016
|
British pound
|
|
$
|
10,537
|
|
|
$
|
42,783
|
|
Indian rupee
|
|
7,588
|
|
|
32,275
|
|
Euro
|
|
7,247
|
|
|
34,070
|
|
Chinese yuan
|
|
4,637
|
|
|
19,805
|
|
Swiss franc
|
|
3,287
|
|
|
14,426
|
|
Singapore dollar
|
|
3,253
|
|
|
15,057
|
|
Japanese yen
|
|
2,078
|
|
|
9,944
|
|
Australian dollar
|
|
1,980
|
|
|
7,876
|
|
Total
|
|
$
|
40,607
|
|
|
$
|
176,236
|
|
11
.
Stock-Based Compensation
Stock-based compensation expense, net of estimated forfeitures, is included in the following line items of the Company’s Condensed Consolidated
Statements of Operations
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 29, 2017
|
|
July 30, 2016
|
|
July 29, 2017
|
|
July 30, 2016
|
Cost of revenues
|
$
|
3,233
|
|
|
$
|
5,965
|
|
|
$
|
12,117
|
|
|
$
|
12,400
|
|
Research and development
|
6,340
|
|
|
9,206
|
|
|
25,045
|
|
|
19,805
|
|
Sales and marketing
|
8,503
|
|
|
17,756
|
|
|
35,097
|
|
|
39,886
|
|
General and administrative
|
5,709
|
|
|
11,716
|
|
|
23,329
|
|
|
21,384
|
|
Total stock-based compensation expense
|
$
|
23,785
|
|
|
$
|
44,643
|
|
|
$
|
95,588
|
|
|
$
|
93,475
|
|
The following table presents stock-based compensation expense, net of estimated forfeitures, by grant type (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 29, 2017
|
|
July 30, 2016
|
|
July 29, 2017
|
|
July 30, 2016
|
Stock options
|
$
|
369
|
|
|
$
|
3,291
|
|
|
$
|
1,665
|
|
|
$
|
4,727
|
|
RSUs, including restricted stock units with market conditions
|
23,416
|
|
|
35,604
|
|
|
76,401
|
|
|
75,986
|
|
Employee stock purchase plan (“ESPP”)
(1)
|
—
|
|
|
5,748
|
|
|
17,522
|
|
|
12,762
|
|
Total stock-based compensation expense
|
$
|
23,785
|
|
|
$
|
44,643
|
|
|
$
|
95,588
|
|
|
$
|
93,475
|
|
|
|
(1)
|
The ESPP stock-based compensation expense recognized in the
nine months ended
July 29, 2017
, includes the acceleration of all of the unamortized expense in the first quarter of fiscal year 2017 due to the suspension of the Company’s ESPP without concurrent replacement as required under the terms of the merger agreement with Broadcom.
|
The following table presents the unrecognized compensation expense, net of estimated forfeitures, by grant type and the related weighted-average periods over which this expense is expected to be recognized as of
July 29, 2017
(in thousands, except for the weighted-average period):
|
|
|
|
|
|
|
|
Unrecognized
Compensation
Expense
|
|
Weighted-
Average Period
(In years)
|
Stock options
|
$
|
410
|
|
|
0.66
|
RSUs, including restricted stock units with market conditions
|
$
|
104,843
|
|
|
1.76
|
The following table presents details on grants made by the Company for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
July 29, 2017
|
|
July 30, 2016
|
|
Granted
(Shares in thousands)
|
|
Weighted-Average
Grant Date Fair Value
|
|
Granted
(Shares in thousands)
|
|
Weighted-Average
Grant Date Fair Value
|
Stock options
|
—
|
|
|
$
|
—
|
|
|
1,390
|
|
|
$
|
1.36
|
|
RSUs, including stock units with market conditions
|
4,102
|
|
|
$
|
9.35
|
|
|
17,879
|
|
|
$
|
7.90
|
|
The total intrinsic value of stock options exercised for the
nine months ended
July 29, 2017
, and
July 30, 2016
, was
$15.6 million
and
$1.2 million
, respectively.
12
.
Stockholders’ Equity
Dividends
During
the nine months ended July 29, 2017
, the Company’s Board of Directors declared the following dividends (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Dividend per Share
|
|
Record Date
|
|
Total Amount Paid
|
|
Payment Date
|
November 20, 2016
|
|
$
|
0.055
|
|
|
December 12, 2016
|
|
$
|
22,346
|
|
|
January 4, 2017
|
February 22, 2017
|
|
$
|
0.055
|
|
|
March 10, 2017
|
|
$
|
22,434
|
|
|
April 4, 2017
|
May 24, 2017
|
|
$
|
0.055
|
|
|
June 12, 2017
|
|
$
|
22,669
|
|
|
July 5, 2017
|
Future dividends are subject to review and approval on a quarterly basis by the Company’s Board of Directors or a committee thereof, and are limited under the terms of the Merger Agreement (as defined in Note
1
, “
Basis of Presentation
,” of the Notes to Condensed Consolidated Financial Statements).
Convertible Note Hedge and Warrants Related to the Convertible Senior Unsecured Notes
In connection with the issuance of the 2020 Convertible Notes, the Company entered into convertible note hedge and warrant transactions with certain financial institutions with respect to its common stock. See Note
8
, “
Borrowings
,” of the Notes to Condensed Consolidated Financial Statements for further discussion.
Accumulated Other Comprehensive Loss
The components of other comprehensive income (loss) and related tax effects for the
three months ended
July 29, 2017
, and
July 30, 2016
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
July 29, 2017
|
|
July 30, 2016
|
|
Before-Tax Amount
|
|
Tax (Expense) Benefit
|
|
Net-of-Tax Amount
|
|
Before-Tax Amount
|
|
Tax (Expense) Benefit
|
|
Net-of-Tax Amount
|
Unrealized gains (losses) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains and losses, foreign exchange contracts
|
$
|
206
|
|
|
$
|
3
|
|
|
$
|
209
|
|
|
$
|
(715
|
)
|
|
$
|
15
|
|
|
$
|
(700
|
)
|
Net gains and losses reclassified into earnings, foreign exchange contracts
(1)
|
405
|
|
|
(42
|
)
|
|
363
|
|
|
507
|
|
|
(25
|
)
|
|
482
|
|
Net unrealized gains (losses) on cash flow hedges
|
611
|
|
|
(39
|
)
|
|
572
|
|
|
(208
|
)
|
|
(10
|
)
|
|
(218
|
)
|
Foreign currency translation adjustments
|
1,972
|
|
|
—
|
|
|
1,972
|
|
|
(1,628
|
)
|
|
—
|
|
|
(1,628
|
)
|
Total other comprehensive income (loss)
|
$
|
2,583
|
|
|
$
|
(39
|
)
|
|
$
|
2,544
|
|
|
$
|
(1,836
|
)
|
|
$
|
(10
|
)
|
|
$
|
(1,846
|
)
|
The components of other comprehensive income (loss) and related tax effects for the
nine months ended
July 29, 2017
, and
July 30, 2016
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
July 29, 2017
|
|
July 30, 2016
|
|
Before-Tax Amount
|
|
Tax
Expense
|
|
Net-of-Tax Amount
|
|
Before-Tax Amount
|
|
Tax (Expense) Benefit
|
|
Net-of-Tax Amount
|
Unrealized gains (losses) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains and losses, foreign exchange contracts
|
$
|
408
|
|
|
$
|
(32
|
)
|
|
$
|
376
|
|
|
$
|
(1,056
|
)
|
|
$
|
21
|
|
|
$
|
(1,035
|
)
|
Net gains and losses reclassified into earnings, foreign exchange contracts
(1)
|
892
|
|
|
(93
|
)
|
|
799
|
|
|
1,981
|
|
|
(150
|
)
|
|
1,831
|
|
Net unrealized gains (losses) on cash flow hedges
|
1,300
|
|
|
(125
|
)
|
|
1,175
|
|
|
925
|
|
|
(129
|
)
|
|
796
|
|
Foreign currency translation adjustments
|
2,635
|
|
|
—
|
|
|
2,635
|
|
|
(1,760
|
)
|
|
—
|
|
|
(1,760
|
)
|
Total other comprehensive income (loss)
|
$
|
3,935
|
|
|
$
|
(125
|
)
|
|
$
|
3,810
|
|
|
$
|
(835
|
)
|
|
$
|
(129
|
)
|
|
$
|
(964
|
)
|
|
|
(1)
|
For classification of amounts reclassified from accumulated other comprehensive loss into earnings as reported on the Company’s Condensed Consolidated
Statements of Operations
, see Note
10
, “
Derivative Instruments and Hedging Activities
,” of the Notes to Condensed Consolidated Financial Statements.
|
The changes in accumulated other comprehensive loss by component, net of tax, for the
nine months ended
July 29, 2017
, and
July 30, 2016
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
July 29, 2017
|
|
July 30, 2016
|
|
Gains (Losses) on Cash Flow Hedges
|
|
Foreign Currency Translation Adjustments
|
|
Total Accumulated Other Comprehensive Loss
|
|
Losses
on Cash Flow Hedges
|
|
Foreign Currency Translation Adjustments
|
|
Total Accumulated Other Comprehensive Loss
|
Beginning balance
|
$
|
(871
|
)
|
|
$
|
(26,542
|
)
|
|
$
|
(27,413
|
)
|
|
$
|
(1,539
|
)
|
|
$
|
(23,463
|
)
|
|
$
|
(25,002
|
)
|
Change in unrealized gains and losses
|
376
|
|
|
2,635
|
|
|
3,011
|
|
|
(1,035
|
)
|
|
(1,760
|
)
|
|
(2,795
|
)
|
Net gains and losses reclassified into earnings
|
799
|
|
|
—
|
|
|
799
|
|
|
1,831
|
|
|
—
|
|
|
1,831
|
|
Net current-period other comprehensive income (loss)
|
1,175
|
|
|
2,635
|
|
|
3,810
|
|
|
796
|
|
|
(1,760
|
)
|
|
(964
|
)
|
Ending balance
|
$
|
304
|
|
|
$
|
(23,907
|
)
|
|
$
|
(23,603
|
)
|
|
$
|
(743
|
)
|
|
$
|
(25,223
|
)
|
|
$
|
(25,966
|
)
|
13
.
Income Taxes
In general, the Company’s provision for income taxes differs from the tax computed at the U.S. federal statutory tax rate due to state taxes, non-U.S. operations being taxed at rates lower than the U.S. federal statutory tax rate, non-deductible stock-based compensation expense, tax credits, and adjustments to unrecognized tax benefits. The non-U.S. operations primarily relate to its European, Asia Pacific, and Japanese subsidiaries.
The Company recorded an income tax benefit for
the three and nine months ended July 29, 2017
, primarily due to an operating loss before tax for
the three months ended July 29, 2017
, and an operating loss before tax and a net discrete benefit from reserve releases as a result of reaching settlement on certain transfer pricing issues with the Geneva Tax Administration (“GTA”) during
the nine months ended July 29, 2017
. The Company recorded an income tax benefit for
the three months ended July 30, 2016
, and an income tax expense for
the nine months ended July 30, 2016
.
The effective tax rate for
the three months ended July 29, 2017
, was higher than the U.S. federal statutory tax rate of
35%
primarily due to the U.S. pre-tax loss being partially offset by pre-tax income from outside of the United States, which is generally taxed at lower than the
35%
, increasing the relative tax benefits compared to the pre-tax consolidated loss.
The effective tax rate for
the nine months ended July 29, 2017
, was higher than the U.S. federal statutory tax rate of
35%
primarily due to the U.S. pre-tax loss being partially offset by pre-tax income from outside of the United States, which is generally taxed at lower than the
35%
, increasing the relative tax benefits compared to the pre-tax consolidated loss, and a net discrete benefit as a result of reaching settlement with the GTA.
The Company’s total gross unrecognized tax benefits, excluding interest and penalties, were
$189.8 million
as of
July 29, 2017
. If the total gross unrecognized tax benefits as of
July 29, 2017
, were recognized in the future, approximately
$144.8 million
would decrease the Company’s tax expense.
The IRS and other tax authorities regularly examine the Company’s income tax returns. In December 2016, the Company reached an agreement with the GTA for fiscal years through 2015, with the exception of fiscal year 2014. The timing of tax examinations, as well as the amounts and timing of related settlements, if any, are highly uncertain. Before the end of fiscal year 2017, it is reasonably possible that either certain audits will conclude or the statutes of limitations relating to certain tax examination periods will expire, or both. After the Company reaches settlement with the tax authorities, the Company expects to record a corresponding adjustment to its unrecognized tax benefits. Taking into consideration the inherent uncertainty as to settlement terms, the timing of payments, and the impact of such settlements on other uncertain tax positions, the Company estimates the range of potential decreases in underlying unrecognized tax benefits is between
$0
and
$2 million
in the next 12 months.
14
.
Segment Information
Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. Financial decisions and the allocation of resources are based on the information from the Company’s internal management reporting system. Currently, the Company’s CODM is its Chief Executive Officer.
Brocade is organized into three operating segments, each of which is an individually reportable segment: SAN Products, IP Networking Products, and Global Services. These reportable segments are organized principally by product category.
At this time, the Company does not track its operating expenses by operating segments because management does not consider this information in its measurement of the performance of the operating segments. The Company also does not track all of its assets by operating segments. The majority of the Company’s assets as of
July 29, 2017
, were attributable to its U.S. operations.
Summarized financial information by reportable segment for
the three and nine months ended July 29, 2017, and July 30, 2016
, based on the internal management reporting system, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SAN Products
|
|
IP Networking Products
|
|
Global Services
|
|
Total
|
Three months ended July 29, 2017
|
|
|
|
|
|
|
|
Net revenues
|
$
|
275,872
|
|
|
$
|
173,677
|
|
|
$
|
99,717
|
|
|
$
|
549,266
|
|
Cost of revenues
|
65,498
|
|
|
89,262
|
|
|
43,361
|
|
|
198,121
|
|
Gross margin
|
$
|
210,374
|
|
|
$
|
84,415
|
|
|
$
|
56,356
|
|
|
$
|
351,145
|
|
Three months ended July 30, 2016
|
|
|
|
|
|
|
|
Net revenues
|
$
|
282,114
|
|
|
$
|
208,881
|
|
|
$
|
99,726
|
|
|
$
|
590,721
|
|
Cost of revenues
|
70,630
|
|
|
117,862
|
|
|
45,330
|
|
|
233,822
|
|
Gross margin
|
$
|
211,484
|
|
|
$
|
91,019
|
|
|
$
|
54,396
|
|
|
$
|
356,899
|
|
Nine months ended July 29, 2017
|
|
|
|
|
|
|
|
Net revenues
|
$
|
864,401
|
|
|
$
|
520,872
|
|
|
$
|
298,209
|
|
|
$
|
1,683,482
|
|
Cost of revenues
|
210,445
|
|
|
275,708
|
|
|
136,301
|
|
|
622,454
|
|
Gross margin
|
$
|
653,956
|
|
|
$
|
245,164
|
|
|
$
|
161,908
|
|
|
$
|
1,061,028
|
|
Nine months ended July 30, 2016
|
|
|
|
|
|
|
|
Net revenues
|
$
|
925,799
|
|
|
$
|
474,556
|
|
|
$
|
287,956
|
|
|
$
|
1,688,311
|
|
Cost of revenues
|
223,806
|
|
|
240,991
|
|
|
127,489
|
|
|
592,286
|
|
Gross margin
|
$
|
701,993
|
|
|
$
|
233,565
|
|
|
$
|
160,467
|
|
|
$
|
1,096,025
|
|
15
.
Net Income (Loss) per Share
The following table presents the calculation of basic and diluted net income (loss) per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 29,
2017
|
|
July 30,
2016
|
|
July 29,
2017
|
|
July 30,
2016
|
Basic net income (loss) per share
|
|
|
|
|
|
|
|
Net income (loss) attributable to Brocade
|
$
|
(19,506
|
)
|
|
$
|
10,495
|
|
|
$
|
(36,154
|
)
|
|
$
|
147,226
|
|
Weighted-average shares used in computing basic net income (loss) per share
|
411,898
|
|
|
426,671
|
|
|
408,494
|
|
|
411,709
|
|
Basic net income (loss) per share—attributable to Brocade stockholders
|
$
|
(0.05
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.09
|
)
|
|
$
|
0.36
|
|
Diluted net income (loss) per share
|
|
|
|
|
|
|
|
Net income (loss) attributable to Brocade
|
$
|
(19,506
|
)
|
|
$
|
10,495
|
|
|
$
|
(36,154
|
)
|
|
$
|
147,226
|
|
Weighted-average shares used in computing basic net income (loss) per share
|
411,898
|
|
|
426,671
|
|
|
408,494
|
|
|
411,709
|
|
Dilutive potential common shares in the form of stock options
|
—
|
|
|
1,227
|
|
|
—
|
|
|
1,329
|
|
Dilutive potential common shares in the form of other share-based awards
|
—
|
|
|
6,518
|
|
|
—
|
|
|
6,378
|
|
Weighted-average shares used in computing diluted net income (loss) per share
|
411,898
|
|
|
434,416
|
|
|
408,494
|
|
|
419,416
|
|
Diluted net income (loss) per share—attributable to Brocade stockholders
|
$
|
(0.05
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.09
|
)
|
|
$
|
0.35
|
|
Antidilutive potential common shares in the form of:
(1)
|
|
|
|
|
|
|
|
Warrants issued in conjunction with the 2020 Convertible Notes
(2)
|
36,573
|
|
|
36,316
|
|
|
36,515
|
|
|
36,251
|
|
Stock options
|
1,334
|
|
|
2,838
|
|
|
1,605
|
|
|
2,029
|
|
Other share-based awards
|
8,183
|
|
|
2,120
|
|
|
8,888
|
|
|
1,140
|
|
|
|
(1)
|
These amounts are excluded from the computation of diluted net income (loss) per share.
|
|
|
(2)
|
In connection with the issuance of the 2020 Convertible Notes, the Company entered into convertible note hedge and warrant transactions as described in Note
8
, “
Borrowings
.” The 2020 Convertible Notes have no impact on diluted earnings per share until the average quarterly price of the Company’s common stock exceeds the adjusted conversion price of
$15.72
per share. If the common stock price exceeds this adjusted conversion price, then immediately, prior to conversion, the Company will calculate the effect of the additional shares that may be issued using the treasury stock method. If the average price of the Company’s common stock exceeds
$20.38
per share for a quarterly period, the Company’s weighted-average shares used in computing diluted net income per share will be impacted by the effect of the additional potential shares that may be issued related to the warrants using the treasury stock method. The convertible note hedge is not considered for purposes of the diluted earnings per share calculation, as its effect would be antidilutive.
|
16
.
Subsequent Event
On
August 11, 2017
, the Board of Directors of the Company approved a workforce reduction plan intended to facilitate the exit of personnel resources deemed non-essential to the business of the Company due primarily to (i) the divestiture of certain software product lines in the third and fourth quarters of fiscal year 2017 and (ii) an internal realignment of sales resources. The workforce reduction plan impacts approximately
230
notified employees in the United States who are expected to exit the Company during the Company’s fourth quarter of fiscal year 2017. The Company expects to incur aggregate charges of approximately
$23 million
to
$26 million
in its fourth quarter of fiscal year 2017 for severance and other employee termination costs associated with the workforce reduction plan. All of these charges are expected to result in cash expenditures. The Company’s headcount as of
August 11, 2017
, excluding the notified employees and employees associated with the fiscal fourth quarter software divestitures, was approximately
4,600
.