UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT
OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE
SECURITIES EXCHANGE ACT OF 1934
October 15, 2007
|
|
Commission File
Number:0001284823
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XYRATEX
LTD
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(Translation of
registrants name into English)
|
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Langstone
Road,
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Havant
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PO9 1SA
|
United
Kingdom
|
(Address of principal
executive offices)
|
Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or 40-F.
Form 20-F
x
Form
40-F
o
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1)
o
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7)
o
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information
to the Commission pursuant to rule 12g3-2(b) under the Securities Exchange Act
of 1934. Yes
o
No
x
If Yes is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82:
NEWS
RELEASE
Havant,
UK October 15, 2007 -
Xyratex Ltd (Nasdaq: XRTX)
today released the following financial information for the third quarter of its
2007 fiscal year, ending August 31, 2007:
Managements Discussion and Analysis of Financial Condition and Results
of Operations
Unaudited condensed consolidated financial statements
1
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section
contains forward-looking statements. These statements relate to future events
or our future financial performance and involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to differ materially from any future
results, levels of activity, performance or achievements expressed or implied
by these forward-looking statements. These risks and other factors include
those listed under Risk Factors and elsewhere in our Annual Report on Form
20-F as filed with the Securities and Exchange Commission. In some cases, you
can identify forward-looking statements by terminology such as may, will, should,
expects, intends, plans, anticipates, believes, estimates, predicts,
potential, continue, or the negative of these terms or other comparable
terminology. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements.
Overview
We are a leading
provider of modular enterprise-class data storage subsystems and storage
process technology. We design, develop and manufacture enabling technology that
provides our customers with data storage products to support high-performance
storage and data communication networks. We operate in two business segments:
Networked Storage Solutions and Storage Infrastructure.
Our Networked Storage
Solutions products are primarily storage subsystems, which we provide to
OEMs and our Storage Infrastructure products consist of disk drive
manufacturing process equipment, which we sell directly to manufacturers of
disk drives and disk drive components. We form long-term strategic
relationships with our customers and we support them through our operations in
the United States, Asia and Europe. In our 2006 fiscal year, sales to our top
two customers, Network Appliance and Seagate Technology accounted for 46% and
28% of our revenues respectively. In the nine months ended August 31, 2007,
sales to these customers accounted for 71% of our revenues. We had 49 customers
which individually contributed more than $0.5 million to revenues in our 2006
fiscal year and at August 31, 2007 we had over 150 active customers. We enter
into joint development projects with our key customers and suppliers in order
to research and introduce new technologies and products.
On September 4,
2006, we completed the acquisition of Jastam Trading Co. Ltd. of Tokyo, a full
service broker for equipment suppliers to high technology customers. The
consideration for the acquisition of $1.7 million was paid in full in cash on
completion and approximately represents the fair value of the tangible net
assets acquired. The purchase of Jastam will enable us to better support
current and potential future customers in Japan and is not expected to have a
significant effect on future earnings in the short term.
We have recently
completed a number of transactions to enhance the intellectual property base
within our Networked Storage Solutions segment and generate income from our
existing patent portfolio. These included the acquisition of a specific
portfolio of patents from IBM in July 2006, a general patent cross license
arrangement with IBM in December 2006 and the acquisition of certain key assets
and intellectual property from Ario Data Networks Inc, also in December 2006.
This represents a significant injection of intellectual property and will
enable us to build more value add features and functions to the technology
acquired as part of the acquisition of nStor Technologies, Inc. in
September 2005. We also concluded two intellectual property licenses
relating to the Xyratex portfolio of patents and filings. In March 2006 we
licensed our network analysis patent portfolio and transferred the related
product line to Napatech, a programmable network adapter company based in
Denmark and in August 2006 we licensed our cross bar switching patent portfolio
to Virtensys, a U.K. technology start up. In total these transactions resulted
in us recording purchases of intangible and other assets totaling approximately
$9.0 million, of which $5.0 million was recorded during the nine months ended
August 31, 2007. We recorded other income of $4.1 million related to our
license to Napatech, of which a $0.9 million final payment was recorded during
the nine months ended August 31, 2007 and the remainder was recorded in our
2006 fiscal year.
Revenues
We derive revenues
primarily from the sale of our Networked Storage Solutions products and our
Storage Infrastructure products.
Our Networked Storage
Solutions products consist primarily of storage subsystems which address three
market segments through our OEM customers; Network Attached Storage or NAS,
Storage Area Networks or SAN and Capacity Optimized storage. We have continued
to see strong growth in each of these market segments over recent fiscal years,
particularly through Network Appliance, our main customer addressing these
marketplaces. Our customers typically operate across multiple market segments.
Capacity Optimized storage is a relatively new segment within the external
storage systems market. It is primarily driven by magnetic tape technology
being replaced by storage systems containing low cost disk drive technology in
the back up and recovery processes within enterprises. The deployment of low
cost disk drives is also taking place within the SAN and NAS market segments as
IT departments begin to classify their data as part of an information life
cycle or corporate data management strategy. Our customers
2
in each market segment
currently use the Fibre Channel protocol to access the storage subsystem which
can incorporate either high performance Fibre Channel or lower cost ATA/SATA
disk drives.
Our Storage
Infrastructure revenues are derived from the sale of disk drive manufacturing
process equipment directly to manufacturers of disk drives and disk drive
components. We have seen growth in these revenues over recent fiscal years,
primarily through sales to Seagate Technology. We supply three main product
lines in this segment: production test systems, servo track writers and media
process technology (comprising media cleaning and media handling automation
technology). Revenues from these products are subject to significant
fluctuations, particularly from quarter to quarter, as they are dependent on
the capital investment decisions and installation schedules of our customers.
We typically enter into
arrangements with our largest customers and provide them with products based on
purchase orders executed under these arrangements. These arrangements often
include estimates as to future product demand but do not typically specify
minimum volume purchase requirements. Due to the complexity of our products, we
provide almost all of our products on a build-to-order basis. The prices of our
products are generally agreed to in advance and are based on a pre-negotiated
pricing model. The pricing model may specify certain product components and
component costs as well as anticipated profit margins.
As described above, the
unit prices we obtain from our major customers will typically vary with
volumes. As products become more mature, prices will generally decline, partly
reflecting reduced component costs. We also regularly introduce new products
which are likely to incorporate additional features or new technology and these
products will generally command a higher unit price. Average unit prices will
also vary with the mix of customers and products. Our unit prices have reduced
in the last two full fiscal years as volumes with our major customers have
increased and prices are adjusted in line with the agreed price/volume matrix.
Because this is related to volume growth, this has not resulted in a reduction
in our revenues in those fiscal years and has also enabled reductions in
component costs. With this exception, we have not seen an overall trend in our
unit prices.
Sales of the major
portion of our Storage Infrastructure products include an installation element.
Revenue for these products is recognized upon installation except that, where
there is objective and reliable evidence to support the fair value of
installation, or where there is a separate arrangement for the installation,
product revenue is recognized upon delivery. In addition, some of our sales
contracts provide that a certain percentage of payments are to be made in
advance of product delivery, in which case we record these payments as deferred
revenue until the product is actually delivered.
We believe that both of
our business segments present the opportunity for growth over the next several
years. Over the last five fiscal years we have seen growth in demand from our
major customers, which we believe relates to factors including increases in the
amount of digitally stored information, increased information technology
spending, growth in the specific markets which our customers address, the trend
towards outsourcing and an increased market share of our customers. Growth in
our Storage Infrastructure revenues can also be specifically affected by the
growth in shipped volume and increases in the individual storage capacity of
disk drives.
The acquisition of
Maxtor by Seagate Technology in May 2006 represented a significant
consolidation among disk drive suppliers and caused significant changes in
market share. We believe these market share changes resulted in an exceptional
level of purchases of our equipment in our 2006 fiscal year as our customers
invested in new capacity to capture increased market share. In addition we
believe Seagate are reutilizing certain Maxtor owned equipment, which was
previously planned to be replaced by Xyratex equipment. This surplus capacity
and planned reutilization of Maxtor owned equipment has resulted in a significant
decline in our revenues during the nine months ended August 31, 2007 relative
to the previous fiscal year and whilst the opportunity for growth in the longer
term remains, we anticipate that revenues from our Storage Infrastructure
products will continue be impacted by these factors during our 2008 fiscal
year.
Foreign
Exchange Rate Fluctuations
The functional currency
for all our operations is U.S. dollars and the majority of our revenues and
cost of revenues are denominated in U.S. dollars. A significant proportion
(approximately $75 million in our 2006 fiscal year) of our non-U.S. dollar
operating expenses relate to payroll and other expenses of our U.K. operations.
To a lesser extent we are also exposed to movements in the Malaysian Ringgit
relative to the U.S. dollar. We manage our exchange rate exposures through the
use of forward foreign currency exchange contracts and option agreements. By
using these derivative instruments, increases or decreases in our U.K. pound
operating expenses resulting from changes in the U.S. dollar to U.K. pound
exchange rate are partially offset by realized gains and losses on the
derivative instruments.
Over our last four
fiscal years there has been significant volatility in the exchange rate between
the U.K. pound and the U.S. dollar. Overall in this period the U.S. dollar has
fallen by approximately 18% relative to the U.K. pound. The effect of this
volatility and movement is reduced because we have hedged the majority of our
exposure to this exchange rate movement for approximately one year ahead. Our
2007 operating expenses will increase by approximately $3.0 million from our
2006 fiscal year as a result this movement, the effect primarily being in the
second half of the year. Excluding the effect of future movements in the
exchange rate, we anticipate a further increase in our operating expenses of
$5.0 million in our 2008 fiscal year.
3
Costs
of Revenues and Gross Profit
Our costs of revenues
consist primarily of the costs of the materials and components used in the
assembly and manufacture of our products, including disk drives, electronic
cards, enclosures and power supplies. Other items included in costs of revenues
include salaries, bonuses and other labor costs for employees engaged in the
component procurement, assembly and testing of our products, warranty expenses,
shipping costs, depreciation of manufacturing equipment and certain overhead
costs. Our gross margins change primarily as a result of fluctuations in our
product mix. Our gross margins also change as a result of changes to product
pricing, manufacturing volumes and costs of components. The gross margins for
our Networked Storage Solutions products tend to be lower than the margins of
our Storage Infrastructure products and therefore our gross profit as a
percentage of revenues will continue to vary with the proportions of revenues
in each segment.
Research
and Development
Our research and
development expenses include expenses related to product development,
engineering, materials costs and salaries, bonuses and other labor costs for
our employees engaged in research and development. Research and development
expenses include the costs incurred in designing products for our OEM
customers, which often occurs prior to their commitment to purchase these
products. We expense research and development costs as they are incurred.
Due to the level of
competition in the markets in which we operate and the rapid changes in technology,
our future revenues are heavily dependent on the improvements we make to our
products and the introduction of new products. During our 2006 fiscal year our
research and development expenses related to approximately 46 separate projects
covering improving existing products, meeting customer specific requirements
and entering new markets, such as development of the Storage Bridge Bay (SBB)
compliant Application Storage System.
As of November, 2006 26%
of our employees were engaged in our research and development activities. Over
recent fiscal years research and development expenses have risen approximately
at the level of increase in revenue. Over the longer term we expect this trend
to continue. In our 2007 fiscal year, although revenues have declined, we have
continued to increase our research and development expenditure. This reflects
our continuing commitment to developing products based on advanced technologies
and designs to support growth in Networked Storage Solutions revenues and the longer
term opportunities for growth of our Storage Infrastructure revenues.
Selling,
General and Administrative
Selling, general, and
administrative expenses include expenses related to salaries, bonuses and other
labor costs for senior management and sales, marketing, and administrative
employees, market research and consulting fees, commissions to sales
representatives, information technology costs, other marketing and sales
activities and exchange gains and losses arising on the retranslation of U.K.
pound denominated assets and liabilities. Our selling, general and
administrative expenses have increased over recent fiscal years as we have
grown our business. To the extent our business continues to grow we would
expect these expenses to continue to increase approximately in line with our
revenues.
Equity
Compensation Expense
We record equity
compensation expense using the fair value method required by Financial
Accounting Standard (FAS) 123RShare Based Payment. Equity compensation
expense calculated under FAS 123R for the nine month periods ended August 31,
2007 and August 31, 2006 was $5.8 million and $5.4 million respectively. We
anticipate recording $10.6 million in equity compensation expense over our next
four fiscal years for share and option awards outstanding as of August 31,
2007. We also anticipate that this will increase as a result of the granting of
additional share based awards in future periods and change as a result of
changes in the assumptions on which the calculation of the equity compensation
expense is based.
Provision
for Income Taxes
We are subject to
taxation primarily in the United Kingdom, the United States and Malaysia. Over
90% of our income before income taxes in the last two fiscal years has arisen
in the United Kingdom or Malaysia. Since 1998, our Malaysian operations
benefited from high-tech pioneer status which provided us with a zero tax
rate on substantially all of our income arising in Malaysia. In 2006 we were
granted a tax exempt status for our operations in Malaysia until 2012, provided
that we meet certain requirements. As of November 30, 2006, we recorded a
deferred tax asset of $9.9 million related to loss-carry forwards and
other timing differences in the United Kingdom. As a result of loss
carry-forwards we have not been required to make any significant U.K. tax
payments in recent fiscal years. Of the remaining deferred tax balance of $8.1
million, $4.5 million related to equity compensation expense as described in
the next paragraph and $3.3 million related to net operating loss carryforwards
recorded in connection with our acquisition of nStor Technologies Inc. in 2005.
Following the
introduction of FAS 123R in our 2006 fiscal year, we have recorded equity
compensation expense using the fair value method. This has resulted in the
recording of a tax benefit of $1.8 million which is included in the deferred
tax asset at
4
November 30, 2006. We
also recorded a deferred tax asset of $4.4 million related to equity compensation
expense calculated under the intrinsic method prior to our 2006 fiscal year.
The realization of these elements of our deferred tax asset is dependent on
future share price movements over the next four fiscal years. We anticipate
recording any variation to the value of this asset as an adjustment to
Additional Paid in Capital.
Tax payments in our 2006
fiscal year amounted to $1.0 million and, due to the beneficial Malaysian
tax status and U.K. tax losses, these tax payments related primarily to our U.S.
operations. We do not anticipate a significant change in the level of our tax
payments in our 2007 fiscal year. The tax expense we recorded in our 2006
fiscal year, primarily related to a reduction in the deferred tax asset arising
from the usage of U.K. operating loss carryforwards.
Results from Operations
The following table sets forth, for the periods indicated, selected
operating data as a percentage of revenues.
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|
Three Months
Ended August 31,
|
|
Nine Months Ended
August 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenues
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Cost of revenues
|
|
82.1
|
|
78.9
|
|
82.0
|
|
79.1
|
|
Gross profit
|
|
17.9
|
|
21.1
|
|
18.0
|
|
20.9
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
8.6
|
|
6.9
|
|
8.5
|
|
7.3
|
|
Selling, general and administrative
|
|
6.9
|
|
6.0
|
|
6.6
|
|
6.0
|
|
Amortization of intangible assets
|
|
0.6
|
|
0.5
|
|
0.7
|
|
0.5
|
|
Operating income
|
|
1.8
|
|
7.8
|
|
2.2
|
|
7.1
|
|
Net income
|
|
1.8
|
|
6.8
|
|
2.4
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross profit as a percentage of
segment revenues:
|
|
|
|
|
|
|
|
|
|
Networked Storage Solutions
|
|
14.9
|
|
14.1
|
|
14.3
|
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14.1
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|
Storage Infrastructure
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|
27.2
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|
30.5
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|
29.2
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30.5
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|
Three Months Ended August
31, 2007 Compared to Three Months Ended August 31, 2006
The following is a tabular
presentation of our results of operations for the three months ended August 31,
2007 compared to the three months ended August 31, 2006. Following the table is
a discussion and analysis of our business and results of operations for such
periods.
|
|
Three Months Ended
|
|
|
|
|
|
|
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August 31,
|
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August 31,
|
|
Increase / (Decrease)
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
%
|
|
|
|
US dollars in thousands
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Networked Storage Solutions
|
|
$
|
174,004
|
|
$
|
148,566
|
|
$
|
25,438
|
|
17.1
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%
|
Storage Infrastructure
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60,210
|
|
114,572
|
|
(54,362
|
)
|
(47.4
|
)
|
Total revenues
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|
234,214
|
|
263,138
|
|
(28,924
|
)
|
(10.8
|
)
|
Cost of revenues
|
|
192,274
|
|
207,488
|
|
(15,214
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)
|
(7.3
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)
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
Networked Storage Solutions
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|
25,847
|
|
20,933
|
|
4,914
|
|
23.5
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|
Storage Infrastructure
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|
16,403
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34,999
|
|
(18,596
|
)
|
(53.1
|
)
|
Equity compensation
|
|
(310
|
)
|
(282
|
)
|
(28
|
)
|
|
|
Total gross profit
|
|
41,940
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|
55,650
|
|
(13,710
|
)
|
(24.6
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
20,187
|
|
18,061
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|
2,126
|
|
11.8
|
|
Selling, general and administrative
|
|
16,061
|
|
15,764
|
|
297
|
|
1.9
|
|
Amortization of intangible assets
|
|
1,517
|
|
1,318
|
|
199
|
|
|
|
Operating income
|
|
4,175
|
|
20,507
|
|
(16,332
|
)
|
(79.6
|
)
|
Interest income, net
|
|
824
|
|
429
|
|
395
|
|
|
|
Provision for income taxes
|
|
733
|
|
3,125
|
|
(2,392
|
)
|
|
|
Net income
|
|
$
|
4,266
|
|
$
|
17,811
|
|
$
|
(13,545
|
)
|
(76.0
|
%)
|
5
Revenues
The
10.8% decrease in our revenues in the three months ended August 31, 2007
compared to the three months ended August 31, 2006 was attributable to decreased
sales of our Storage Infrastructure products being partially offset by an increase
in sales of our Networked Storage Solutions products.
Of
the $25.4 million, or 17.1%, increase in revenues from sales of our Networked
Storage Solutions management estimates that $16.0 million was contributed
by a 36% increase in revenues from products incorporating low-cost disk drives.
The remaining increase related primarily to growth of approximately 14% in
sales of our storage subsystem products incorporating Fibre Channel disk drives.
Both of these increases reflected continued growth in our sales to Network
Appliance together with increased volumes from other customers, the
introduction of new products and the contribution of new customers. We believe
this reflects the increasing requirements for storage of digital information,
particularly networked storage.
The
$54.4 million or 47.4% decrease in revenues from sales of Storage
Infrastructure products primarily related to a decrease in demand due to the
investment by Seagate Technology in an exceptional level of production capacity
in 2006 in connection with its acquisition of Maxtor as described in the
overview. As also described in the overview, our revenues from our Storage
Infrastructure products are subject to significant fluctuations, particularly
between quarters, resulting from our major customers capital expenditure
decisions and installation schedules.
Cost
of Revenues and Gross Profit
The decrease in cost of revenues and gross profit in the three months
ended August 31, 2007 compared to the three months ended August 31, 2006 was primarily
due to lower Storage Infrastructure revenues. As a percentage of revenues our
gross profit was 17.9% for the three months ended August 31, 2007 compared to 21.1%
for the three months ended August 31, 2006. This change was primarily attributable
to the increased proportion of revenues from the sales of lower margin
Networked
Storage Solutions
products.
The gross margin for our Networked Storage Solutions products increased
to 14.9% in the three months ended August 31, 2007 from 14.1% in the three
months ended August 31, 2006, as a result of a number of changes in product and
customer mix, none of which were individually significant. These include the
effect of improved margins on a number of newer products which now benefit from
lower component costs.
The
gross margin for Storage Infrastructure products was 27.2% in the three months
ended August 31, 2007, compared to 30.5% in the three months ended August 31,
2006. This was primarily a result of fixed costs relative to lower volumes.
In
measuring the performance of our business segments from period to period we
focus on gross profit by product group, which excludes a non-cash equity
compensation charge of $0.3 million for the three months ended August 31,
2007 and $0.3 million for the three months ended August 31, 2006. See Note 11
to our condensed consolidated financial statements for a description of our
segments and how we measure segment performance.
Research
and Development
The
$2.1 million increase in research and development expense in the three months
ended August 31, 2007 compared to the three months ended August 31, 2006 primarily
relates to increased investment in a number of our Storage Infrastructure
product lines, particularly media automation. The increase also included
approximately $0.5 million resulting from a change in exchange rates and an
increase in the number of employees supporting development of Networked Storage
Solutions products. These effects were partially offset by a decrease in
employee performance bonuses of $0.9 million.
Selling,
General and Administrative
The
$0.3 million increase in our selling, general and administrative expense in the
three months ended August 31, 2007 compared to the three months ended August 31,
2006 primarily related to an increase of $0.8 million resulting from a change
in exchange rates, partially offset by a decrease in employee performance
bonuses of $0.7 million.
Amortization
of Intangible Assets
The
$0.2 million increase in amortization of intangible assets in the three months
ended August 31, 2007 relates primarily to the effects of our acquisitions of
patents and other specific intellectual property from IBM and Ario Data
Networks Inc as described above.
6
Interest
Income, Net
We
recorded net interest income of $0.8 million in the three months ended August
31, 2007 compared to $0.4 million in the three months ended August 31, 2006.
This primarily resulted from an increase in average cash balances.
Provision
for Income Taxes
During
the three months ended August 31, 2007 we recorded a provision for income taxes
of $0.7 million compared with a $3.1 million provision for income taxes in the
three months ended August 31, 2006. This was primarily as a result of the decrease
in income before income taxes.
Net
Income
The
decrease in net income for the three months ended August 31, 2007 compared to
the three months ended August 31, 2006 resulted primarily from a decrease in Storage
Infrastructure revenues.
Nine months ended
August 31, 2007 Compared to Nine months ended August 31, 2006
The
following is a tabular presentation of our results of operations for the nine
months ended August 31, 2007 compared to the nine months ended August 31, 2006.
Following the table is a discussion and analysis of our business and results of
operations for such periods.
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
August 31,
|
|
August 31,
|
|
Increase / (Decrease)
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
%
|
|
|
|
US dollars in thousands
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Networked Storage Solutions
|
|
$
|
506,774
|
|
$
|
431,134
|
|
$
|
75,640
|
|
17.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Storage Infrastructure
|
|
176,871
|
|
311,403
|
|
(134,532
|
)
|
(43.2
|
)
|
Total revenues
|
|
683,645
|
|
742,537
|
|
(58,892
|
)
|
(7.9
|
)
|
Cost of revenues
|
|
560,449
|
|
587,289
|
|
(26,840
|
)
|
(4.6
|
)
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
Networked Storage Solutions
|
|
72,408
|
|
60,948
|
|
11,460
|
|
18.8
|
|
Storage Infrastructure
|
|
51,670
|
|
94,943
|
|
(43,273
|
)
|
(45.6
|
)
|
Equity compensation
|
|
(882
|
)
|
(643
|
)
|
(239
|
)
|
|
|
Total gross profit
|
|
123,196
|
|
155,248
|
|
(32,052
|
)
|
(20.6
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
58,189
|
|
53,925
|
|
4,264
|
|
7.9
|
|
Selling, general and administrative
|
|
45,445
|
|
44,582
|
|
863
|
|
1.9
|
|
Amortization of intangible assets
|
|
4,819
|
|
3,693
|
|
1,126
|
|
|
|
Operating income
|
|
14,743
|
|
53,048
|
|
(38,305
|
)
|
(72.2
|
)
|
Other income
|
|
890
|
|
1,965
|
|
(1,075
|
)
|
|
|
Interest income, net
|
|
2,253
|
|
867
|
|
1,386
|
|
|
|
Provision for income taxes
|
|
1,504
|
|
7,056
|
|
(5,552
|
)
|
(78.7
|
)
|
Net income
|
|
$
|
16,382
|
|
$
|
48,824
|
|
$
|
(32,442
|
)
|
(66.4
|
)%
|
Revenues
The
7.9% decrease in our revenues in the nine months ended August 31, 2007 compared
to the nine months ended August 31, 2006 was attributable to
decreased
sales of our Storage Infrastructure products being partially offset by an increase
in sales of our Networked Storage Solutions products.
Of
the $75.6 million increase in revenues from sales of our Networked Storage
Solutions products, management estimates that $40.0 million was
contributed by a 34% increase in revenues from products incorporating low-cost
disk drives. The remaining increase related primarily to growth of
approximately 16% in sales of our storage subsystem products incorporating Fibre
Channel disk drives.
Both of these increases were driven largely by a
continued growth in our sales to Network Appliance and also resulted from
increased volumes from other customers, the introduction of new products and
the contribution of new customers. We believe this reflects the increasing
requirements for storage of digital information, particularly networked
storage.
7
The $134.5 million decrease in revenues from sales of Storage
Infrastructure products primarily related to a decrease in demand due to the investment
by Seagate Technology in an exceptional level of production capacity in 2006 in
connection with its acquisition of Maxtor as described in the overview. As also
described in the overview, our revenues from our Storage Infrastructure
products are subject to significant fluctuations, particularly between
quarters, resulting from our major customers capital expenditure decisions and
installation schedules. Additionally, revenues for the nine months ended August
31, 2006 included a $10.5 million charge to Maxtor for the cancellation of an
order for production test systems, being compensation for product development
costs and supply chain liabilities.
Cost of Revenues and Gross Profit
The decrease in cost of revenues and gross profit in the nine months
ended August 31, 2007 compared to the nine months ended August 31, 2006 was primarily
due to lower Storage Infrastructure revenues. As a percentage of revenues gross
profit was 18.0% in the nine months ended August 31, 2007 compared to 20.9% for
the nine months ended August 31, 2006. This change was primarily attributable
to the increased proportion of revenues from the sales of lower margin Networked
Storage Solutions products.
The
gross margin for our Networked Storage Solutions products increased to 14.3% in
the nine months ended August 31, 2007 from 14.1% in the nine months ended
August 31, 2006. The gross margin in each quarter varies primarily with changes
in product mix. There were no individually significant factors resulting in
changes to gross margin in these periods.
The
gross margin for Storage Infrastructure products was 29.2% in the nine months
ended August 31, 2007, compared to 30.5% in the nine months ended August 31,
2006. This was primarily due to a decrease in margin as a result of fixed costs
relative to lower volumes. This was partially offset by favorable changes in
product and customer mix during the period.
In measuring the performance of our business segments from period to
period we focus on gross profit by product group, which excludes a non-cash
equity compensation charge of $0.9 million for the nine months ended
August 31, 2007 and $0.6 million for the nine months ended August 31, 2006. See
Note 11 to our condensed consolidated financial statements for a description of
our segments and how we measure segment performance.
Research and Development
The $4.3 million increase in research and development expense in the nine
months ended August 31, 2007 compared to the nine months ended August 31, 2006
primarily related to increased investment in a number of our Storage
Infrastructure product lines, particularly media automation. The increase also
included approximately $0.5 million resulting from a change in exchange rates
and an increase in the number of employees supporting development of Networked
Storage Solutions products. These effects were partially offset by a decrease
in employee performance bonuses of $1.6 million.
Selling, General and Administrative
Our
selling, general and administrative expense increased by $0.9 million in the nine
months ended August 31, 2007 compared to the nine months ended August 31, 2006.
This primarily reflected an increase in the number of employees engaged in
support activities to the Networked Storage Solutions business and also
included an increase of $0.8 million resulting from a change in exchange rates.
These increases were partially offset by a decrease in employee performance
bonuses of $2.1 million, and the inclusion of an accounts receivable provision
of $0.8 million in the nine months ended August 31, 2006.
Amortization
of Intangible Assets
The
$1.1 million increase in amortization of intangible assets in the nine months
ended August 31, 2007 relates primarily to the effects of our acquisitions of
patents and other specific intellectual property from IBM and Ario Data
Networks Inc as described above.
Other Income
We
recorded income of $0.9 million in the nine months ended August 31, 2007
compared to $2.0 million in the nine months ended August 31, 2006 relating to
the disposal of a product line to Napatech as described in the overview above.
8
Interest Income, Net
We
recorded net interest income of $2.3 million in the nine months ended August 31,
2007 compared to $0.9 million in the nine months ended August 31, 2006. This
primarily resulted from an increase in average cash balances.
Provision for Income Taxes
During
the nine months ended August 31, 2007 we recorded a provision for income taxes
of $1.5 million compared with $7.1 million in the nine months ended August 31,
2006.
This was primarily as a result of the decrease in income before
income taxes.
Net Income
The
decrease in net income for the nine months ended August 31, 2007 compared to
the nine months ended August 31, 2006 resulted primarily from a decrease in
revenues from our Storage Infrastructure products.
Liquidity
and Capital Resources
Cash
flows
Net
cash provided by operating activities was $29.8 million for the nine months
ended August 31, 2007 compared to $33.2 million for the nine months ended
August 31, 2006.
Cash
provided by operating activities of $29.8 million for the nine months ended
August 31, 2007 resulted primarily from the positive contribution of net income
of $16.4 million after excluding net non-cash charges totaling $20.8 million
together with a decrease in inventory of $4.0 million and an increase in accounts
payable of $23.7 million. The decrease in inventory primarily related to the
lower revenues in the period. The increase in accounts payable primarily
related to the timing of Storage Infrastructure revenues in our third quarter
being concentrated at the end of the quarter. These positive effects on cashflow
were partially offset by increases in accounts receivable and other current
assets of $19.8 million and $3.6 million, and decreases in employee
compensation and benefits payable and deferred revenue of $4.9 million and $5.8
million respectively. The increase in accounts receivable resulted from the
timing of Storage Infrastructure revenues as explained above. The increase in
other currents assets related primarily to the timing of payments of U.K. sales
taxes. The decrease in employee compensation and benefits payable related to
the payment of 2006 fiscal year bonuses. The decrease in deferred revenue
relates to a reduction in orders on hand in our Storage Infrastructure segment.
Deferred revenue represents advance payments from customers for Storage
Infrastructure products and varies with the level of orders on hand for these
products.
Cash
provided by operating activities of $33.2 million for the nine months ended
August 31, 2006 resulted primarily from the positive contribution of net income
of $48.8 million after excluding net non-cash charges totaling $16.4 million
together with increases in accounts payable and deferred revenue of $40.1
million and $3.6 million respectively. The increase in accounts payable
resulted primarily from the increase in revenues. A decrease in deferred income
taxes of $7.1 million and an increase in other accrued liabilities of $3.8
million also contributed to operating cash flow. The decrease in deferred
income taxes related primarily to the usage of U.K. net operating loss
carry-forwards. The increase in other accrued liabilities resulted primarily
from an increase in liabilities to suppliers for an order cancellation. These
positive effects on cash flows were partially offset by increases in accounts
receivable and inventories of $32.1 million and $56.2 million,
respectively. The increase in inventories resulted from an increase in the
levels of revenue and changes to installation schedules by our disk drive
manufacturer customers. The increase in accounts receivable resulted from an
increase in revenues.
Net
cash used in investing activities for the nine months ended August 31, 2007
included $4.9 million related to the purchase of intellectual property from IBM
and Ario Data Networks Inc as described in the overview above, $1.7 million
deferred consideration related to our acquisition of ZT Automation in 2004 and
$11.3 million related to capital expenditure.
Net
cash used in investing activities for the nine months ended August 31, 2006
included $8.0 million deferred consideration related to our acquisition of ZT
Automation in 2004, $15.6 million related to capital expenditure and $4.0 million
related to the acquisition of a portfolio of patents from IBM on June 30, 2006.
Our
capital expenditures relate primarily to purchases of equipment such as
tooling, production lines and test equipment. In addition, in July 2005 we
commenced a new project to replace our Enterprise and Resource Planning (ERP)
system. This will result in additional capital expenditure of approximately
$9.0 million in our 2005, 2006 and 2007 fiscal years, of which $6.8
million was included in capital expenditure in our 2005 and 2006 fiscal years.
With this exception, we do not anticipate any significant changes in the nature
or level of our capital expenditures and we would expect these to generally
change in line with our revenues. We currently have no material commitments for
capital expenditures.
Net
cash used in our financing activities was $4.7 million in the nine months ended
August 31, 2007 and $2.9 million in the nine months ended August 31, 2006.
9
Net
cash used in financing activities for the nine months ended August 31, 2007
comprises repayments of the $7.0 million remaining under our HSBC term loan
partially offset by $2.3 million proceeds from the exercise of employee share
options.
Net cash used in financing activities for the nine months ended August
31, 2006 comprises quarterly repayments totaling $3.0 million under our
HSBC term loan and payments of $3.0 million deferred consideration for the
acquisition of Oliver Design offset by $3.1 million proceeds from the exercise
of employee share options.
Liquidity
As
of August 31, 2007, our principal sources of liquidity consisted of cash and
cash equivalents of $64.2 million and our multi-currency credit facilities
with HSBC. The HSBC credit facilities include a revolving line of credit which
expires in December 2008, and a short-term overdraft facility. The
revolving line of credit is for an aggregate principal amount of up to
$30.0 million and bears interest at a rate of between 0.6% and 1.25% above
LIBOR, depending on the level of debt relative to operating income. The
overdraft facility is for an aggregate principal amount of $15.0 million
and bears interest at a rate equal to 0.75% above LIBOR. As of August 31,
2007 we had no debt outstanding under our revolving line of credit or our
overdraft facility. The HSBC credit facilities provide for a security interest
on substantially all of our assets.
Our
future financing requirements will depend on many factors, but are particularly
affected by our operating results, our level of revenues and associated working
capital requirements, changes in the payment terms with our major customers and
suppliers of disk drives, and quarterly fluctuations in our revenues.
Additionally, our cash flow could be significantly affected by any acquisitions
we have made or might choose to make or alliances we have entered or might
enter into. We believe that our cash and cash equivalents together with our
credit facilities with HSBC will be sufficient to meet our cash requirements at
least through the next 12 months. We cannot assure you that additional
equity or debt financing will be available to us on acceptable terms or at all.
Accounting
Policies
Critical
Accounting Policies
Our critical accounting policies are set out in our Annual Report on
form 20-F as filed with the Securities and Exchange Commission on February 20,
2007. By critical accounting policies we mean policies that are both
important to the portrayal of our financial condition and financial results and
require critical management judgments and estimates about matters that are
inherently uncertain. Although we believe that our judgments and estimates are
appropriate, actual future results may differ from our estimates.
Recent Accounting
Pronouncements
In
May 2005, the FASB issued FAS No. 154, Accounting Changes and Error
Corrections (FAS 154), which replaced APB No. 20, Accounting
Changes and FAS No. 3, Reporting Accounting Changes in Interim Financial
Statements. FAS 154 changes the requirements for the accounting for and
reporting of a change in accounting
principle by requiring voluntary changes in accounting principles to be
reported using retrospective application, unless impractical to do so. FAS 154
is effective for accounting changes and corrections of errors made in our 2007
fiscal year.
In
June 2005, the FASB issued Staff Position FAS 143-1, Accounting for
Electronic Equipment Waste Obligations (FSP 143-1), which provides guidance
on the accounting for certain obligations associated with the Waste Electrical
and Electronic Equipment Directive (the Directive), adopted by the European
Union (EU). Under the Directive, the waste management obligation for
historical equipment remains with the commercial user until the customer
replaces the equipment. FSP 143-1 is required to be applied in our 2007 fiscal
year. Adoption of this standard did not have a material impact on our financial
position or results of operations.
In
July 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting
for Uncertainty in Income Taxesan interpretation of FAS No. 109.
FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an entitys financial statements in accordance with FAS No. 109 and
prescribes a recognition threshold and measurement attribute for financial
statement disclosure of tax positions taken or expected to be taken on a tax
return. Additionally, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006, with early adoption permitted. We will adopt
FIN 48 in our 2008 fiscal year and are currently evaluating the effect
FIN 48 will have on our consolidated financial position or results of
operations.
In September 2006, the FASB issued FAS No. 157 (FAS 157), Fair
Value Measurements. FAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. FAS
157 is effective for our 2008 fiscal year. We are in the process of assessing
the effect FAS 157 may have on our consolidated financial statements.
In February 2007, the FASB issued FAS No. 159 (FAS 159), The Fair
Value Option for Financial Assets and
10
Financial
Liabilities including an amendment of FAS No. 115 . FAS 159
allows measurement at fair value of eligible financial assets and liabilities
that are not otherwise measured at fair value. If the fair value option for an
eligible item is elected, unrealized gains and losses for that item shall be
reported in current earnings at each subsequent reporting date. FAS 159 also
establishes presentation and disclosure requirements designed to draw comparison
between the different measurement attributes the company elects for similar
types of assets and liabilities. This statement is effective for fiscal years
beginning after November 15, 2007. We are in the process of evaluating the
effect FAS 159 may have on our consolidated financial statements.
11
XYRATEX LTD
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
August 31,
|
|
November 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(US dollars and amounts in
thousands)
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
64,213
|
|
$
|
56,921
|
|
Accounts receivable, net
|
|
125,160
|
|
105,324
|
|
Inventories
|
|
89,067
|
|
93,111
|
|
Prepaid expenses
|
|
3,738
|
|
2,390
|
|
Deferred income taxes
|
|
3,000
|
|
2,513
|
|
Other current assets
|
|
7,731
|
|
7,247
|
|
Total current assets
|
|
292,909
|
|
267,506
|
|
Property, plant and equipment, net
|
|
35,657
|
|
34,471
|
|
Intangible assets, net
|
|
57,422
|
|
58,109
|
|
Deferred income taxes
|
|
16,070
|
|
15,594
|
|
Total assets
|
|
$
|
402,058
|
|
$
|
375,680
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
108,552
|
|
$
|
84,896
|
|
Short-term borrowings
|
|
|
|
4,000
|
|
Employee compensation and benefits payable
|
|
11,747
|
|
16,645
|
|
Deferred revenue
|
|
10,476
|
|
16,303
|
|
Income taxes payable
|
|
1,591
|
|
1,641
|
|
Other accrued liabilities
|
|
11,941
|
|
14,701
|
|
Total current liabilities
|
|
144,307
|
|
138,186
|
|
Long-term debt
|
|
|
|
3,000
|
|
Total liabilities
|
|
144,307
|
|
141,186
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
Common shares of Xyratex Ltd (in
thousands), par value $0.01 per share 70,000 authorized, 29,092 and 28,793
issued and outstanding
|
|
291
|
|
288
|
|
Additional paid-in capital
|
|
352,822
|
|
344,686
|
|
Accumulated other comprehensive income
|
|
1,510
|
|
2,774
|
|
Accumulated deficit
|
|
(96,872
|
)
|
(113,254
|
)
|
Total shareholders equity
|
|
257,751
|
|
234,494
|
|
Total liabilities and shareholders equity
|
|
$
|
402,058
|
|
$
|
375,680
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
12
XYRATEX LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
August 31,
|
|
August 31,
|
|
August 31,
|
|
August 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(US dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
234,214
|
|
263,138
|
|
683,645
|
|
742,537
|
|
Cost of revenues
|
|
192,274
|
|
207,488
|
|
560,449
|
|
587,289
|
|
Gross profit:
|
|
41,940
|
|
55,650
|
|
123,196
|
|
155,248
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
20,187
|
|
18,061
|
|
58,189
|
|
53,925
|
|
Selling, general and administrative
|
|
16,061
|
|
15,764
|
|
45,445
|
|
44,582
|
|
Amortization of intangible assets
|
|
1,517
|
|
1,318
|
|
4,819
|
|
3,693
|
|
Total operating expenses
|
|
37,765
|
|
35,143
|
|
108,453
|
|
102,200
|
|
Operating income
|
|
4,175
|
|
20,507
|
|
14,743
|
|
53,048
|
|
Other income
|
|
|
|
|
|
890
|
|
1,965
|
|
Interest income, net
|
|
824
|
|
429
|
|
2,253
|
|
867
|
|
Income before income taxes
|
|
4,999
|
|
20,936
|
|
17,886
|
|
55,880
|
|
Provision for income taxes
|
|
733
|
|
3,125
|
|
1,504
|
|
7,056
|
|
Net income
|
|
$
|
4,266
|
|
$
|
17,811
|
|
$
|
16,382
|
|
$
|
48,824
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.15
|
|
$
|
0.62
|
|
$
|
0.57
|
|
$
|
1.71
|
|
Diluted
|
|
$
|
0.14
|
|
$
|
0.60
|
|
$
|
0.55
|
|
$
|
1.66
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares (in
thousands), used in computing net earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
29,048
|
|
28,727
|
|
28,873
|
|
28,635
|
|
Diluted
|
|
29,941
|
|
29,516
|
|
29,840
|
|
29,499
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
13
XYRATEX LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY AND COMPREHENSIVE INCOME (LOSS)
(US dollars and amounts, in thousands)
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Number of
|
|
|
|
Additional
|
|
|
|
other
|
|
|
|
|
|
Common
|
|
|
|
paid in
|
|
Accumulated
|
|
comprehensive
|
|
|
|
|
|
Shares
|
|
Par value
|
|
capital
|
|
deficit
|
|
income (loss)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of November 30, 2005
|
|
28,437
|
|
$
|
284
|
|
$
|
333,886
|
|
$
|
(171,432
|
)
|
$
|
(1,356
|
)
|
$
|
161,382
|
|
Issuance of common shares
|
|
302
|
|
3
|
|
3,080
|
|
|
|
|
|
$
|
3,083
|
|
Non-cash equity compensation
|
|
|
|
|
|
5,376
|
|
|
|
|
|
$
|
5,376
|
|
Components of comprehensive income, net of
tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
48,824
|
|
|
|
|
|
Unrealized loss on forward foreign currency
contracts net of reclassification adjustment:
|
|
|
|
|
|
|
|
|
|
3,435
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,259
|
|
Balances as of August 31, 2006
|
|
28,739
|
|
$
|
287
|
|
$
|
342,342
|
|
$
|
(122,608
|
)
|
$
|
2,079
|
|
$
|
222,100
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Number of
|
|
|
|
Additional
|
|
|
|
other
|
|
|
|
|
|
Common
|
|
|
|
paid in
|
|
Accumulated
|
|
comprehensive
|
|
|
|
|
|
Shares
|
|
Par value
|
|
capital
|
|
deficit
|
|
income (loss)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of November 30, 2006
|
|
28,793
|
|
$
|
288
|
|
$
|
344,686
|
|
$
|
(113,254
|
)
|
$
|
2,774
|
|
$
|
234,494
|
|
Issuance of common shares
|
|
299
|
|
3
|
|
2,316
|
|
|
|
|
|
$
|
2,319
|
|
Non-cash equity compensation
|
|
|
|
|
|
5,820
|
|
|
|
|
|
$
|
5,820
|
|
Components of comprehensive income, net of
tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
16,382
|
|
|
|
|
|
Unrealized gain on forward foreign currency
contracts net of reclassification adjustment:
|
|
|
|
|
|
|
|
|
|
(1,264
|
)
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,118
|
|
Balances as of August 31, 2007
|
|
29,092
|
|
$
|
291
|
|
$
|
352,822
|
|
$
|
(96,872
|
)
|
$
|
1,510
|
|
$
|
257,751
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
14
XYRATEX LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Nine Months Ended
|
|
|
|
August 31,
|
|
August 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(US dollars in thousands)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
|
$
|
16,382
|
|
$
|
48,824
|
|
Adjustments to reconcile net income to
net cash
provided
by operating activities:
|
|
|
|
|
|
Depreciation
|
|
10,115
|
|
7,066
|
|
Amortization of intangible assets
|
|
4,819
|
|
3,693
|
|
Non-cash equity compensation
|
|
5,820
|
|
5,376
|
|
Loss on sale of assets
|
|
|
|
265
|
|
Changes in assets and liabilities, net of
impact of acquisitions and divestitures
|
|
|
|
|
|
Accounts receivable
|
|
(19,836
|
)
|
(32,072
|
)
|
Inventories
|
|
4,044
|
|
(56,233
|
)
|
Prepaid expenses and other current assets
|
|
(3,638
|
)
|
91
|
|
Accounts payable
|
|
23,656
|
|
40,142
|
|
Employee compensation and benefits payable
|
|
(4,898
|
)
|
2,292
|
|
Deferred revenue
|
|
(5,827
|
)
|
3,622
|
|
Income taxes payable
|
|
(50
|
)
|
(760
|
)
|
Deferred income taxes
|
|
839
|
|
7,137
|
|
Other accrued liabilities
|
|
(1,636
|
)
|
3,775
|
|
Net cash provided by operating activities
|
|
29,790
|
|
33,218
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Investments in property, plant and
equipment
|
|
(11,301
|
)
|
(15,591
|
)
|
Acquisition of intangible assets
|
|
(4,855
|
)
|
(4,000
|
)
|
Acquisition of business, net of cash
received
|
|
(1,661
|
)
|
(7,955
|
)
|
Net cash used in investing activities
|
|
(17,817
|
)
|
(27,546
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Payments of long-term borrowings
|
|
(7,000
|
)
|
(3,000
|
)
|
Payment of acquisition note payable
|
|
|
|
(3,000
|
)
|
Proceeds from issuance of shares
|
|
2,319
|
|
3,083
|
|
Net cash provided by (used in) financing
activities
|
|
(4,681
|
)
|
(2,917
|
)
|
Change in cash and cash equivalents
|
|
7,292
|
|
2,755
|
|
Cash and cash equivalents at beginning of
period
|
|
56,921
|
|
41,240
|
|
Cash and cash equivalents at end of period
|
|
$
|
64,213
|
|
$
|
43,995
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
15
XYRATEX LTD
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(US
dollars and amounts in thousands, except per share data, unless otherwise
stated)
1.
The Company and its
Operations
Xyratex Ltd together with its subsidiaries (the
Company) is a leading provider of modular enterprise-class data storage
subsystems and storage process technology with principal operations in the
United Kingdom (U.K.), the United States of America (U.S.) and Malaysia
.
We design, develop and manufacture enabling
technology in support of high-performance storage and data communication
networks.
2.
Basis of Presentation
The accompanying interim condensed consolidated
financial statements have been prepared in accordance with accounting
principles generally accepted in the United States.
These condensed consolidated financial statements
are unaudited but include all adjustments (consisting of normal recurring
adjustments) which the Companys management considers necessary for a fair
presentation of the financial position as of such dates and the operating
results and cash flows for those periods presented. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted. In addition, the results of operations for the
interim periods may not necessarily be indicative of the operating results
that may be incurred for the entire year.
The November 30, 2006 balance sheet was derived
from audited consolidated financial statements but does not include all
disclosures required by accounting principles generally accepted in the United
States. However, the Company believes that the disclosures are adequate to make
the information presented not misleading. These unaudited condensed
consolidated financial statements should be read in conjunction with the
Companys audited consolidated financial statements included in the Companys Form 20-F
as filed with the Securities and Exchange Commission on February 20, 2007.
3.
Equity compensation plans
With effect from December 1, 2005, the Company
adopted Statement of Financial Accounting Standards No.123 (revised 2004), Share-Based
Payment (FAS 123R), which established accounting for share-based awards
exchanged for employee services. Accordingly, equity compensation cost is
measured at grant date, based on the fair value of the award, over the
requisite service period.
The following table summarizes equity compensation
expense related to share-based awards under FAS 123R for the three and nine
month periods ended August 31, 2007 and 2006.
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
August 31,
2007
|
|
August 31,
2006
|
|
August 31,
2007
|
|
August 31,
2006
|
|
Equity
compensation:
|
|
|
|
|
|
|
|
|
|
Cost of
revenues
|
|
$
|
310
|
|
$
|
282
|
|
$
|
882
|
|
$
|
643
|
|
Research and
development
|
|
620
|
|
586
|
|
1,766
|
|
1,405
|
|
Selling,
general and administrative
|
|
1,060
|
|
1,184
|
|
3,172
|
|
3,328
|
|
Total equity
compensation
|
|
1,990
|
|
2,052
|
|
5,820
|
|
5,376
|
|
Related
income tax benefit
|
|
$
|
597
|
|
$
|
513
|
|
$
|
1,640
|
|
$
|
1,344
|
|
16
The Companys share-based awards include restricted
stock units, share options, an Employee Stock Purchase Plan and restricted
shares. Based on an agreement with the Companys managing underwriter for the
Initial Public Offering in 2004, there are 3,101 shares authorized for
future grants under the plans. Option exercises are satisfied through the issue
of new shares or where previously agreed with the trustee, through the transfer
of shares from an employee benefit trust.
Restricted
Stock Units
In
March 2006, the Company began issuing restricted stock units (RSUs) to
certain employees. These units require that shares be awarded over four years
from the date of grant, subject to continued service. The vesting of certain of
these units is also subject to the achievement of certain performance
conditions in the year of grant. The specific performance goals related to
grants in 2006 were reviewed by management and as a result 85 RSUs were
forfeited on February 1, 2007. Equity compensation expense relating to
RSUs totaling $4,260 has been recorded in the nine months ended August 31,
2007. Restricted stock units granted, exercised, canceled and expired are
summarized as follows:
|
|
RSU
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic
Value
|
|
Non-vested
restricted stock units at November 30, 2006
|
|
511
|
|
$
|
25.18
|
|
|
|
|
|
Granted
|
|
481
|
|
22.91
|
|
|
|
|
|
Vested
|
|
(93
|
)
|
25.41
|
|
|
|
|
|
Cancelled/forfeited
|
|
(95
|
)
|
26.30
|
|
|
|
|
|
Non-vested
restricted stock units at August 31, 2007
|
|
804
|
|
$
|
23.66
|
|
3.0
|
|
$
|
16,737
|
|
Non-vested
restricted stock units expected to vest at August 31, 2007
|
|
733
|
|
|
|
3.0
|
|
$
|
15,265
|
|
Share Option
Activity
The Company has five plans under which employees
have been granted options to purchase Xyratex Ltd shares. Options granted,
exercised, canceled and expired under all of the Companys share option plans,
excluding the Sharesave Plan, are summarized as follows:
|
|
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at November 30, 2006
|
|
2,337
|
|
$
|
10.26
|
|
6.3
|
|
$
|
27,601
|
|
Exercised
|
|
(302
|
)
|
8.42
|
|
|
|
|
|
Forfeited
|
|
(206
|
)
|
13.38
|
|
|
|
|
|
Outstanding
at August 31, 2007
|
|
1,829
|
|
10.25
|
|
6.0
|
|
$
|
19,353
|
|
Exercisable
at August 31, 2007
|
|
1,419
|
|
8.73
|
|
5.6
|
|
$
|
17,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
prices of option activity and options outstanding denominated in U.K. pounds have
been converted to the U.S. dollar equivalent in the above table using the U.K.
pound/U.S. dollar exchange rate as of each transaction date or period end date
as appropriate.
The
aggregate intrinsic value of options outstanding at August 31, 2007 is calculated
as the difference between the market price of the underlying common share and
the exercise price of the options. All outstanding options had exercise prices
that were lower than the $20.82 closing market price of the Companys common
shares at August 31, 2007. The total intrinsic value of options exercised
during the nine month period ended August 31, 2007 was $3,403 determined
as of the date of exercise. The total fair value of options forfeited during
the nine month period ended August 31, 2007 was $1,643.
There
were no movements in options outstanding under the Sharesave Plan during the
three months ended August 31, 2007.
Employee Stock Purchase Plan and
Restricted Shares
23 shares were granted under the Employee Stock
Purchase Plan in the nine months ended August 31, 2007. In addition a
total of 65 unvested shares were outstanding at both August 31, 2007 and November 30,
2006.
17
4.
Net
earnings per share
Basic net earnings per share for the three and nine
month periods ended August 31, 2007
is computed by dividing net income by the weighted-average number of
Xyratex Ltd common shares. Diluted net earnings per share gives effect to all
potentially dilutive ordinary share equivalents outstanding during the period.
|
|
Common shares
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
August 31
2007
|
|
August 31,
2006
|
|
August 31
2007
|
|
August 31,
2006
|
|
Total
weighted average common shares basic
|
|
29,048
|
|
28,727
|
|
28,873
|
|
28,635
|
|
Dilutive
effect of share options
|
|
709
|
|
603
|
|
767
|
|
705
|
|
Dilutive
effect of restricted stock units
|
|
184
|
|
186
|
|
200
|
|
159
|
|
Total
weighted average common shares diluted
|
|
29,941
|
|
29,516
|
|
29,840
|
|
29,499
|
|
5.
Other income
On March 6, 2006, the Company concluded the
disposal of a product line through a license agreement of intellectual property
of certain network analysis technology and the transfer of the related customer
base to Napatech, a programmable network adapter company based in Denmark. The
Company is continuing to manufacture the related product lines for Napatech
under a separate Supply Agreement. Under the license agreement a total of
$4,093 became payable, of which $890 has been recorded in the statement of
operations as other income in the nine months ended August 31, 2007.
6.
Derivative
financial instruments
The Company manages its exposure to foreign currency
exchange rate risk between the U.K. pound to the U.S. dollar and the Malaysian
ringgit to the U.S. dollar through entering into forward exchange contracts and
options. The Company designated all of its forward foreign currency contracts
as qualifying for hedge accounting. Changes in the fair value of these
instruments are deferred and recorded as a component of accumulated other
comprehensive income (AOCI) until the hedged transactions affect earnings, at
which time the deferred gains and losses on the forward foreign currency
contracts are recognized in the income statement.
The Company reclassified a gain of $2,385 and
$1,204, net of tax of $1,022 and $516, from AOCI to earnings during the nine
months ended August 31, 2007 and August 31, 2006, respectively due to
the realization of the underlying transactions. The Company recorded the
increase in fair market value of derivatives related to its cash flow hedges of
$1,121 and $2,231, net of tax of $480 and $956, to AOCI for the nine months
ended August 31, 2007 and August 31, 2006, respectively. Any
remaining unrealized amounts are expected to be reclassified to earnings during
the next fifteen months. The fair value of these foreign currency contracts
represents the amount the Company would receive or pay to terminate the
contracts, considering first, quoted market prices of comparable agreements, or
in the absence of quoted market prices, such factors as interest rates,
currency exchange rates and remaining maturity.
The following table shows derivatives existing as of
August 31, 2007 and November 30, 2006:
|
|
August 31,
|
|
November 30,
|
|
Derivatives between U.K. pound and U.S. dollar
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Forward
exchange contracts and options
|
|
$
|
58,249
|
|
$
|
43,294
|
|
Fair value
of contracts
|
|
$
|
2,101
|
|
$
|
3,762
|
|
Carrying
value of contracts
|
|
$
|
2,101
|
|
$
|
3,762
|
|
Average rate
of contract
|
|
$
|
1.94
|
|
$
|
1.80
|
|
Period end
rate
|
|
$
|
2.02
|
|
$
|
1.95
|
|
Maximum
period of contracts (months)
|
|
15
|
|
12
|
|
|
|
August 31,
|
|
November 30,
|
|
Derivatives between Malaysian ringgit and U.S. dollar
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Forward
exchange contracts and options
|
|
$
|
5,500
|
|
$
|
6,500
|
|
Fair value
of contracts
|
|
$
|
25
|
|
$
|
46
|
|
Carrying value
of contracts
|
|
$
|
25
|
|
$
|
46
|
|
Average rate
of contract
|
|
$
|
0.29
|
|
$
|
0.28
|
|
Period end
rate
|
|
$
|
0.29
|
|
$
|
0.28
|
|
Maximum
period of contracts (months)
|
|
9
|
|
12
|
|
18
7.
Concentration
of credit risk
Financial instruments which potentially subject the
Company to concentrations of credit risk include cash and cash equivalents,
short-term investments and accounts receivable. The Company places its cash and
cash equivalents and short-term investments with high-credit quality financial
institutions. Cash deposits are generally placed with either one or two
institutions and such deposits, at times, exceed governmentally insured limits.
Concentrations of credit risk, with respect to accounts receivable, exist to
the extent of amounts presented in the financial statements. Two customers,
each with balances greater than 10% of total accounts receivable, represented
70% of the total accounts receivable balance at August 31, 2007 and two
customers represented 66% of the total accounts receivable balance at November 30,
2006. Generally, the Company does not require collateral or other security to
support customer receivables. The Company performs periodic credit evaluations
of its customers and maintains an allowance for potential credit losses based
on historical experience and other information available to management. Losses
to date have been within managements expectations.
During the nine months ended August 31, 2007
and August 31, 2006, revenues from two customers, represented 71% and 79%
of total revenues, respectively. No other customer accounted for more than 10%
of revenues.
8.
Acquisitions and intangible
assets
During
the nine months ended August 31, 2007, the Company enhanced the
intellectual property base within its Networked Storage Solutions segment
through the purchase of intellectual property from Ario Data Networks Inc. of
Colorado, and the entry into a patent cross license agreement with IBM. The
Ario transaction also involved the recruitment of certain Ario employees and
the purchase of certain non-material tangible assets. The amounts paid for
these intangible assets was cash totaling $4,790.
In
September 2006, the Company completed an acquisition that was not
significant to the operating results and financial position. The cash purchase
price for the acquisition was $1,704. The Company estimated the fair values of
the acquired assets and liabilities and the allocation of the purchase price to
intangible assets. Pro forma operating results have not been presented for the
acquisition because the effect of the acquisition was not material. No goodwill
has been recognized on the above transaction. $329 has been allocated to
intangible assets as existing customer relationships to be amortized over two
years.
In
June 2006, the Company also acquired a portfolio of US patents and related
filings in other countries for consideration of $4,000. This has been allocated
to intangible assets as patents and core technology to be amortized over five
years.
Each
of these intangible assets are expected to be deductible for tax purposes.
Identified intangible assets
Identified intangible asset balances are summarized
as follows:
|
|
August 31, 2007
|
|
November 30, 2006
|
|
Existing
technology
|
|
$
|
11,698
|
|
$
|
11,300
|
|
Patents and
core technology
|
|
11,887
|
|
8,887
|
|
Non-competition
agreements
|
|
1,000
|
|
1,000
|
|
Order
backlog
|
|
2,100
|
|
2,100
|
|
Supplier
contracts
|
|
39
|
|
39
|
|
Assembled
workforce
|
|
1,516
|
|
124
|
|
Customer
relationships
|
|
4,629
|
|
4,629
|
|
|
|
32,869
|
|
28,079
|
|
Accumulated amortization
|
|
(14,313
|
)
|
(9,494
|
)
|
|
|
$
|
18,556
|
|
$
|
18,585
|
|
Goodwill
The
changes in the carrying amount of goodwill for the nine month period ended August 31,
2007 are as follows:
|
|
Networked Storage
Solutions
|
|
Storage
Infrastructure
|
|
Total
|
|
Balance at November 30,
2006
|
|
$
|
17,330
|
|
$
|
22,194
|
|
$
|
39,524
|
|
Tax benefit
of goodwill
|
|
|
|
(1,260
|
)
|
(1,260
|
)
|
Contingent
consideration
|
|
|
|
602
|
|
602
|
|
Balance at August 31,
2007
|
|
$
|
17,330
|
|
$
|
21,536
|
|
$
|
38,866
|
|
19
9.
Inventories
|
|
August 31,
|
|
November 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
19,485
|
|
$
|
7,528
|
|
Work in
progress
|
|
22,940
|
|
26,275
|
|
Raw
materials
|
|
46,642
|
|
59,308
|
|
|
|
$
|
89,067
|
|
$
|
93,111
|
|
10.
Income Taxes
The provision for income taxes for the three and
nine month periods ended August 31, 2007 and for the three and nine month
periods ended August 31, 2006 is based on an effective tax rate of 9% and
15% respectively, the rates being based on a forecast of income before income
taxes in the years ended November 30, 2007 and November 30, 2006.
The difference between the provision for income
taxes recorded in the financial statements and income tax based upon the UK
statutory rate of 30% is primarily related to income tax exemptions for the Companys
Malaysian operations and research and development tax credits. In addition, the
nine months ended August 31, 2007 included a benefit of $856 relating to
the agreement of a previous years computation and a provision of $703, being a
reduction in the deferred tax asset resulting from a change in the income tax
rate in the United Kingdom to 28%, effective from April 2008. The nine
months ended August 31, 2006 included a benefit of $1,469 relating to
further tax exemptions for the Companys Malaysian operations and an agreement
of a previous years computation.
11.
Segment Information
Description of segments.
The Company designs, develops and
manufactures enabling technology in support of high-performance storage and
data communication networks. The Company organizes its business operations into
two product groupsNetworked Storage Solutions and Storage Infrastructure, each
of which comprises a reportable segment.
Description of the Companys segments:
Networked
Storage Solutions.
Provision of high performance, high
density, network storage subsystem technology to OEMs supplying the network
storage and data networking market places.
Storage Infrastructure
. Provision of high-performance, high density
disk drive, process & test technology to the major disk drive
companies and their component suppliers for the development and production of
highly reliable disk drives.
Segment revenue and profit.
The following tables reflect the results of
the Companys reportable segments under the Companys management reporting
system. These results are not necessarily a depiction that is in conformity
with accounting principles generally accepted in the United States and in
particular does not include the equity compensation expense. The performance of
each segment is generally measured based on gross profit.
20
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
August 31,
|
|
August 31,
|
|
August 31,
|
|
August 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Networked
Storage Solutions
|
|
$
|
174,004
|
|
$
|
148,566
|
|
$
|
506,774
|
|
$
|
431,134
|
|
Storage
Infrastructure
|
|
$
|
60,210
|
|
$
|
114,572
|
|
$
|
176,871
|
|
$
|
311,403
|
|
Total
Segments
|
|
$
|
234,214
|
|
$
|
263,138
|
|
$
|
683,645
|
|
$
|
742,537
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
Networked
Storage Solutions
|
|
$
|
25,847
|
|
$
|
20,933
|
|
$
|
72,408
|
|
$
|
60,948
|
|
Storage
Infrastructure
|
|
$
|
16,403
|
|
$
|
34,999
|
|
$
|
51,670
|
|
$
|
94,943
|
|
Total
Segments
|
|
$
|
42,250
|
|
$
|
55,932
|
|
$
|
124,078
|
|
$
|
155,891
|
|
Equity
Compensation (note 3)
|
|
$
|
(310
|
)
|
$
|
(282
|
)
|
$
|
(882
|
)
|
$
|
(643
|
)
|
Total
|
|
$
|
41,940
|
|
$
|
55,650
|
|
$
|
123,196
|
|
$
|
155,248
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
Networked
Storage Solutions
|
|
$
|
2,955
|
|
$
|
2,028
|
|
$
|
8,405
|
|
$
|
5,523
|
|
Storage
Infrastructure
|
|
$
|
1,803
|
|
$
|
1,647
|
|
$
|
5,305
|
|
$
|
4,566
|
|
Total Segments
|
|
$
|
4,758
|
|
$
|
3,675
|
|
$
|
13,710
|
|
$
|
10,089
|
|
Corporate
|
|
$
|
442
|
|
$
|
291
|
|
$
|
1,224
|
|
$
|
671
|
|
Total
|
|
$
|
5,200
|
|
$
|
3,966
|
|
$
|
14,934
|
|
$
|
10,760
|
|
Total segments revenues represent revenues as
reported by the Company for all periods presented. Gross profit above
represents gross profit as reported by the Company for all periods presented.
The chief operating decision maker does not review asset information by segment
and therefore no asset information is presented.
21
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
|
|
|
XYRATEX LTD
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
Date: October 15, 2007
|
|
By:
|
/s/ Richard Pearce
|
|
|
|
|
Name: Richard Pearce
|
|
|
|
Title: Chief Financial Officer
|
XORTX Therapeutics (NASDAQ:XRTX)
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