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
April 15, 2008
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|
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
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United Kingdom
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(Address
of principal executive offices)
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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 April 15, 2008 -
Xyratex Ltd
(Nasdaq: XRTX) today released the following financial information for the first
quarter of its 2008 fiscal year, ending February 29, 2008:
·
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 2007 fiscal year, sales to our top
three customers, Network Appliance, Seagate Technology and Western Digital,
accounted for 56%, 12% and 12% of our revenues, respectively. In the three
months ended February 29, 2008, sales to Network Appliance accounted for
62% of our revenues. No other customer accounted for more than 10% of our
revenues in the quarter. We had 47 customers which individually contributed
more than $0.5 million to revenues in our 2007 fiscal year and at February 29,
2008 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.
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 that 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 the past two fiscal
years, particularly through Network Appliance, our main customer addressing
these marketplaces. Our customers typically operate across multiple market
segments. Capacity Optimized storage is primarily driven by magnetic tape
technology being replaced by storage systems containing low cost disk drive
technology in the backup 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 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 primarily derived from the sale of disk drive manufacturing
process equipment directly to manufacturers of disk drives and disk drive
components. 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.
2
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 for Networked Storage
Solutions products have reduced in the last two 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.
We believe that both of our
business segments present the opportunity for growth over the next several
years. We are seeing growth in demand from many of our 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 that our customers address, the trend towards outsourcing and
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 Seagate is
reutilizing certain Maxtor-owned equipment, which was previously planned to be
replaced by Xyratex equipment. This surplus capacity and reutilization of
Maxtor owned equipment resulted in a significant decline in our revenues during
2007 fiscal year compared to our 2006 fiscal year and whilst the opportunity
for growth in the longer term remains, revenues from our Storage Infrastructure
products are continuing to be impacted by these factors during the first half
of 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 $71.0 million in our 2007 fiscal year) of our non-U.S.
dollar operating expenses relates 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 three 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 5% 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. Excluding the effect
of future movements in the exchange rate, we anticipate this movement will
increase our operating expenses by approximately $5.0 million in our 2008
fiscal year, in comparison to our 2007 fiscal year.
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 2007
fiscal year our research and development expenses related to over approximately
45 separate projects
3
covering improving existing products, meeting
customer specific requirements and entering new markets, such as development of
the Storage Bridge Bay (SBB) compliant OneStor platform and the application of
our media process automation technology to solar cell manufacturing.
As of November 2007,
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
declined, we 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 three month periods ended February 29,
2008 and February 28, 2007 was $2.2 million and $1.7 million respectively.
Equity Share Capital
On January 14, 2008 we
commenced a share buy-back program. We have announced that we will purchase our
common shares up to a value of $30 million and it is anticipated that the
repurchase will take place over a period of up to one year. During the three
months ended February 29, 2008 we purchased 169,000 shares at a total
value of $2.6 million.
Provision for Income Taxes
We are subject to taxation
primarily in the United Kingdom, the United States and Malaysia. Our Malaysian
operations benefit from a beneficial tax 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 substantially all of our operations in Malaysia
until 2012, provided that we meet certain requirements. In the United Kingdom
and the United States we benefit from research and development tax credits. As
of November 30, 2007 we recorded a deferred tax asset of
$15.4 million related to loss carryforwards and other timing differences
in the United Kingdom. The majority of this asset is denominated in U.K. pounds
and income tax expense will therefore include exchange adjustments to this
asset. As a result of loss carryforwards we have not been required to make any
significant U.K. tax payments in recent fiscal years. Of the remaining deferred
tax balance of $7.3 million, $5.3 million relates to equity
compensation expense as described in the next paragraph and $2.9 million
relates to net operating loss carryforwards recorded in connection with our
acquisition of nStor.
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 $3.5 million which is included in the deferred tax asset at
November 30, 2007. We also recorded a deferred tax asset of
$1.8 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 2007
fiscal year amounted to $0.5 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 2008 fiscal year. Over the last three fiscal years our tax
benefit or expense has primarily consisted of U.S. current taxes and movements
in the U.K. deferred tax asset.
As described in the unaudited condensed
consolidated financial statements, with effect from December 1, 2007, the
Company adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxesan interpretation of FAS No. 109 (FIN 48).
FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in
4
an entitys financial statements in
accordance with FAS 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. As a result of the adoption of FIN 48,
the Company recorded no additional unrecognized tax benefits. As of December 1,
2007, the Company had $7.7 million of unrecognized tax benefits. If this asset
were recognized approximately $3.4 million would reduce our income tax expense
and the remainder would result in a balance sheet reclassification only.
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
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February 29,
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February 28,
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2008
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2007
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Revenues
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100.0
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%
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100.0
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%
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Cost of revenues
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84.9
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81.0
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Gross profit
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15.1
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19.0
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Operating expenses:
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|
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Research and development
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8.9
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7.9
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Selling, general and administrative
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6.9
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6.3
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Amortization of intangible assets
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0.6
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0.7
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Operating income (loss)
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(1.3
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)
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4.1
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Net income (loss)
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(1.0
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)
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4.3
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|
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|
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Segment gross profit as a percentage of segment revenues:
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Networked Storage Solutions
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14.7
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13.6
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Storage Infrastructure
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18.9
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31.6
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Three Months Ended February 29, 2008
Compared to Three Months Ended February 28, 2007
The following is a
tabular presentation of our results of operations for the three months ended February 29,
2008 compared to the three months ended February 28, 2007. Following the
table is a discussion and analysis of our business and results of operations
for such periods.
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Three Months Ended
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February 29,
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February 28,
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Increase / (Decrease)
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2008
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2007
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Amount
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%
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US dollars in thousands
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Revenues:
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|
|
|
|
|
|
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Networked Storage Solutions
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$
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187,776
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$
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163,616
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$
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24,160
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14.8
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%
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Storage Infrastructure
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29,278
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72,791
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(43,513
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)
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(59.8
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)
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Total revenues
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217,054
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236,407
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(19,353
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)
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(8.2
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)
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Cost of revenues
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184,283
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191,372
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(7,089
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)
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(3.7
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)
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Gross profit:
|
|
|
|
|
|
|
|
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Networked Storage Solutions
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27,599
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22,286
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5,313
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23.8
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Storage Infrastructure
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5,526
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22,294
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(17,468
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)
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(76.0
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)
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Equity compensation
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(354
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)
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(245
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)
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109
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|
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Total gross profit
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32,771
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45,035
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(12,264
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)
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(27.2
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)
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Operating expenses:
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|
|
|
|
|
|
|
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Research and development
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19,279
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18,794
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485
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2.6
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Selling, general and administrative
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14,979
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14,800
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179
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1.2
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Amortization of intangible assets
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1,379
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1,651
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(272
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)
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|
|
Operating income (loss)
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|
(2,866
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)
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9,790
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(12,656
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)
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Other income
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|
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890
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(890
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)
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Interest income, net
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899
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655
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244
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|
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Provision for income taxes
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252
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|
1,221
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(969
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)
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Net income (loss)
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$
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(2,219
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)
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$
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10,114
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$
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(12,333
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)
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%
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5
Revenues
The 8.2% decrease in our
revenues in the three months ended February 29, 2008 compared to the three
months ended February 28, 2007 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 $24.2 million, or
14.8%, increase in revenues from sales of our Networked Storage Solutions
management estimates that $12.7 million was contributed by a 25% increase
in revenues from products incorporating low-cost disk drives. The remaining
increase related primarily to growth of approximately 10% 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 $43.5 million or
59.8% 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 February 29, 2008 compared to the three
months ended February 28, 2007 was primarily due to lower Storage
Infrastructure revenues. As a percentage of revenues our gross profit was 15.1%
for the three months ended February 29, 2008 compared to 19.0% for the
three months ended February 28, 2007. This change was also primarily
attributable to lower Storage
Infrastructure revenues.
The
gross margin for our Networked Storage Solutions products increased to 14.7% in
the three months ended February 29, 2008 from 13.6% in the three months
ended February 28, 2007, primarily as a result of increased margins and
volumes of RAID products which were introduced in 2007.
The gross margin for
Storage Infrastructure products was 18.9% in the three months ended February 29,
2008, compared to 31.6% in the three months ended February 28, 2007. 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 $0.4 million for the three months ended February 29, 2008 and $0.3
million for the three months ended February 28, 2007. See Note 13 to our
unaudited condensed consolidated financial statements for a description of our
segments and how we measure segment performance.
Research
and Development
The $0.5 million
increase in research and development expense in the three months ended February 29,
2008 compared to the three months ended February 28, 2007 primarily
relates to increased investment in a number of our Storage Infrastructure
product lines, particularly production test racks, partially offset by a
decrease in employee performance bonuses of $0.6 million.
Selling,
General and Administrative
Selling, general and
administrative expenses in the three months ended February 29, 2008 were
essentially unchanged when compared to the three months ended February 28,
2007.
Amortization
of Intangible Assets
The $0.3 million
decrease in amortization of intangible assets in the three months ended February 29,
2008 compared to the three months ended February 28, 2007 primarily
resulted from intangible assets acquired as a result of the acquisition of ZT
Automation in our 2004 fiscal year becoming fully amortized.
Other
Income
We recorded income of
$0.9 million in the three months ended February 28, 2007 relating to
the final payment in respect of the disposal of a product line to Napatech in
2006.
Interest
Income, Net
We recorded net interest
income of $0.9 million in the three months ended February 29, 2008
compared to $0.7 million in the three months ended February 28, 2007. This
primarily resulted from an increase in average cash balances.
6
Provision
for Income Taxes
During the three months
ended February 29, 2008 we recorded a provision for income taxes of $0.3
million compared with a $1.2 million provision for income taxes in the three months
ended February 28, 2007. This was primarily as a result of recording a net
loss before taxes for the three months ended February 29, 2008 compared to
net income before taxes for the three months ended February 28, 2007. This
was offset by the inclusion in the three months ended February 29, 2008 of
an expense of $0.5 million resulting from a foreign exchange adjustment to the
deferred tax asset and the inclusion of a $0.9 million tax refund in the three
months ended February 28, 2007.
Net
Income (Loss)
The recording of a net
loss for the three months ended February 29, 2008 compared to net income
for the three months ended February 28, 2007 resulted primarily from a
decrease in Storage Infrastructure revenues.
Liquidity and Capital
Resources
Cash flows
Net cash used by
operating activities was $6.8 million for the three months ended February 29,
2008 compared to net cash provided by operating activities of $8.3 million for
the three months ended February 28, 2007.
Cash used by operating
activities of $6.8 million for the three months ended February 29, 2008
resulted primarily from an increase in inventory of $21.5 million, offset by a
reduction in working capital requirements of our Storage Infrastructure
business. The increase in inventory primarily related to a build up of
inventory to mitigate the risks associated with the migration to our new ERP
system and lower than expected shipments at the end of the quarter. The
reduction in working capital requirements for our Storage Infrastructure business
primarily resulted from the reduction in revenues in that division and was the
primary cause of a decrease in accounts receivable of $20.8 million and a
decrease in accounts payable of $3.3 million. In addition a decrease in
deferred revenue of $7.0 million also contributed to the net cash used. This 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. These negative effects on cashflow
were partially offset by a $4.9 million positive effect of the operating
results being the net loss adjusted for non-cash charges.
Cash provided by
operating activities of $8.3 million for three months ended February 28,
2007 resulted primarily from the positive contribution of net income of $10.1
million after excluding net non-cash charges totaling $6.3 million
together with a decrease in inventory of $6.4 million, and increases in accounts
payable of $3.5 million. The decrease in
inventory was primarily related to the expectation of lower revenues in our
second fiscal quarter. The increase in accounts payable resulted primarily from
the timing of purchases in the quarter. These positive effects on cashflow were
partially offset by increases in accounts receivable and other current assets
of $7.0 million and $3.0 million respectively and decreases in employee
compensation and benefits and deferred revenue of $5.3 million and $3.5 million
respectively. The increase in accounts receivable resulted from changes in the
timing of shipments in the quarter. The increase in other currents assets
related to a reduction in value of forward foreign currency exchange contracts.
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.
Net cash used in
investing activities was $4.0 million for the three months ended February 29,
2008 compared to $10.1 million for the three months ended February 28,
2007.
Net cash used in
investing activities for the three months ended February 29, 2008 related
to capital expenditure. Net cash used in investing activities for the three
months ended February 28, 2007 comprised $4.8 million related to the
purchase of intellectual property from IBM and Ario Data Networks Inc., $1.7
million deferred consideration related to our acquisition of ZT Automation in
2004 and $3.6 million related to capital expenditure.
Our capital expenditures
relate primarily to purchases of equipment such as tooling, production lines
and test equipment. 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 $2.0 million in the three months ended February 29,
2008 and $0.5 million in the three months ended February 28, 2007.
Net
cash used in financing activities for the
three
months ended February 29, 2008 comprised the repurchase of shares under
our share buy-back program as described in the overview of the value $2.6
million partially offset by $0.6 million proceeds from the exercise of employee
share options.
7
Net
cash used in financing activities for the
three
months ended February 28, 2007 comprised a quarterly repayment of $1.0
million under our HSBC term loan partially offset by $0.5 million proceeds from
the exerci
se of employee share options.
Liquidity
As of February 29,
2008, our principal sources of liquidity consisted of cash and cash equivalents
of $57.9 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 February 29, 2008 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.
In
addition to the share buy-back described above in the overview, our future
financing requirements will depend on many factors, but are particularly
affected by the rate at which our revenues and associated working capital
requirements grow, 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 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, 2008. 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
On
December 1, 2007, the Company adopted 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. The
adoption of FAS 157 did not give rise to any adjustments to the consolidated
financial statements.
On
December 1, 2007, the Company adopted FAS No. 159 (FAS 159), The
Fair Value Option for Financial Assets and Financial Liabilitiesincluding 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. The adoption of FAS 159 did not give rise to any adjustments to
the consolidated financial statements.
In
December 2007, the FASB issued FAS No. 141 (Revised 2007), Business
Combinations. FAS 141R retains the fundamental requirements of the
original pronouncement requiring that the purchase method be used for all
business combinations. FAS 141R defines the acquirer as the entity that
obtains control of one or more businesses in the business combination,
establishes the acquisition date as the date that the acquirer achieves control
and requires the acquirer to recognize the assets acquired, liabilities assumed
and any noncontrolling interest at their fair values as of the acquisition
date. In addition, FAS 141R requires expensing of acquisition-related and
restructure-related costs, remeasurement of earn out provisions at fair value,
measurement of equity securities issued for purchase at the date of close of
the transaction and non-expensing of in-process research and development
related intangibles. FAS 141R is effective for our business combinations
for which the acquisition date is on or after December 1, 2009.
8
XYRATEX
LTD
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
February 29,
|
|
November 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(US dollars and amounts in
thousands)
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
57,866
|
|
$
|
70,678
|
|
Accounts receivable, net
|
|
101,544
|
|
122,327
|
|
Inventories
|
|
113,131
|
|
91,662
|
|
Prepaid expenses
|
|
3,934
|
|
2,994
|
|
Deferred income taxes
|
|
2,926
|
|
3,000
|
|
Other current assets
|
|
6,281
|
|
8,275
|
|
Total current assets
|
|
285,682
|
|
298,936
|
|
Property, plant and equipment, net
|
|
37,952
|
|
37,421
|
|
Intangible assets, net
|
|
54,282
|
|
54,175
|
|
Deferred income taxes
|
|
18,953
|
|
19,743
|
|
Total assets
|
|
$
|
396,869
|
|
$
|
410,275
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
92,747
|
|
$
|
96,046
|
|
Employee compensation and benefits payable
|
|
11,385
|
|
13,280
|
|
Deferred revenue
|
|
8,194
|
|
15,212
|
|
Income taxes payable
|
|
1,537
|
|
1,165
|
|
Other accrued liabilities
|
|
12,907
|
|
11,311
|
|
Total current liabilities
|
|
126,770
|
|
137,014
|
|
Long-term debt
|
|
|
|
|
|
Total liabilities
|
|
126,770
|
|
137,014
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
Common shares of Xyratex Ltd (in thousands), par value $0.01 per
share 70,000 authorized, 29,214 and 29,117 issued and outstanding
|
|
292
|
|
291
|
|
Additional paid-in capital
|
|
359,099
|
|
356,268
|
|
Accumulated other comprehensive income
|
|
688
|
|
1,847
|
|
Accumulated deficit
|
|
(89,980
|
)
|
(85,145
|
)
|
Total shareholders equity
|
|
270,099
|
|
273,261
|
|
Total liabilities and shareholders equity
|
|
$
|
396,869
|
|
$
|
410,275
|
|
9
XYRATEX
LTD
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Three Months Ended,
|
|
|
|
February 29,
|
|
February 28,
|
|
|
|
2008
|
|
2007
|
|
|
|
(US dollars in thousands, except per
share amounts)
|
|
|
|
|
|
|
|
Revenues:
|
|
217,054
|
|
236,407
|
|
Cost of revenues
|
|
184,283
|
|
191,372
|
|
Gross profit:
|
|
32,771
|
|
45,035
|
|
Operating expenses:
|
|
|
|
|
|
Research and development
|
|
19,279
|
|
18,794
|
|
Selling, general and administrative
|
|
14,979
|
|
14,800
|
|
Amortization of intangible assets
|
|
1,379
|
|
1,651
|
|
Total operating expenses
|
|
35,637
|
|
35,245
|
|
Operating income (loss)
|
|
(2,866
|
)
|
9,790
|
|
Other income
|
|
|
|
890
|
|
Interest income, net
|
|
899
|
|
655
|
|
Income (loss) before income taxes
|
|
(1,967
|
)
|
11,335
|
|
Provision (benefit) for income taxes
|
|
252
|
|
1,221
|
|
Net income (loss)
|
|
$
|
(2,219
|
)
|
$
|
10,114
|
|
|
|
|
|
|
|
Net earnings (loss) per share:
|
|
|
|
|
|
Basic
|
|
$
|
(0.08
|
)
|
$
|
0.35
|
|
Diluted
|
|
$
|
(0.08
|
)
|
$
|
0.34
|
|
|
|
|
|
|
|
Weighted average common shares (in thousands), used in computing net
earnings (loss) per share:
|
|
|
|
|
|
Basic
|
|
29,125
|
|
28,847
|
|
Diluted
|
|
29,125
|
|
29,699
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
10
XYRATEX LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
(US dollars and amounts, in thousands)
|
|
Number of
Common
Shares
|
|
Par value
|
|
Additional
paid in
capital
|
|
Accumulated
deficit
|
|
Accumulated
other
comprehensive
income (loss)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of November 30, 2006
|
|
28,793
|
|
$
|
288
|
|
$
|
344,686
|
|
$
|
(113,254
|
)
|
$
|
2,774
|
|
$
|
234,494
|
|
Issuance of common shares
|
|
135
|
|
1
|
|
501
|
|
|
|
|
|
$
|
502
|
|
Non-cash equity compensation
|
|
|
|
|
|
1,660
|
|
|
|
|
|
$
|
1,660
|
|
Components of comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
10,114
|
|
|
|
|
|
Unrealized loss on forward foreign currency contracts net of
reclassification adjustment:
|
|
|
|
|
|
|
|
|
|
(831
|
)
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,283
|
|
Balances as of February 28, 2007
|
|
28,928
|
|
$
|
289
|
|
$
|
346,847
|
|
$
|
(103,140
|
)
|
$
|
1,943
|
|
$
|
245,939
|
|
|
|
Number of
Common
Shares
|
|
Par value
|
|
Additional
paid in
capital
|
|
Accumulated
deficit
|
|
Accumulated
other
comprehensive
income (loss)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of November 30, 2007
|
|
29,117
|
|
$
|
291
|
|
$
|
356,268
|
|
$
|
(85,145
|
)
|
$
|
1,847
|
|
$
|
273,261
|
|
Issuance of common shares
|
|
266
|
|
3
|
|
631
|
|
|
|
|
|
$
|
634
|
|
Non-cash equity compensation
|
|
|
|
|
|
2,200
|
|
|
|
|
|
$
|
2,200
|
|
Repurchases of common shares
|
|
(169
|
)
|
(2
|
)
|
|
|
(2,616
|
)
|
|
|
$
|
(2,618
|
)
|
Components of comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
(2,219
|
)
|
|
|
|
|
Unrealized gain on forward foreign currency contracts net of
reclassification adjustment:
|
|
|
|
|
|
|
|
|
|
(1,159
|
)
|
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,378
|
)
|
Balances as of February 29, 2008
|
|
29,214
|
|
$
|
292
|
|
$
|
359,099
|
|
$
|
(89,980
|
)
|
$
|
688
|
|
$
|
270,099
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
11
XYRATEX
LTD
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Three Months Ended
|
|
|
|
February 29,
|
|
February 28,
|
|
|
|
2008
|
|
2007
|
|
|
|
(US dollars in thousands)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,219
|
)
|
$
|
10,114
|
|
Adjustments to reconcile net income (loss) to net cash
provided by
operating activities:
|
|
|
|
|
|
Depreciation
|
|
3,485
|
|
3,037
|
|
Amortization of intangible assets
|
|
1,379
|
|
1,651
|
|
Non-cash equity compensation
|
|
2,200
|
|
1,660
|
|
Changes in assets and liabilities, net of impact of acquisitions and
divestitures
|
|
|
|
|
|
Accounts receivable
|
|
20,783
|
|
(6,996
|
)
|
Inventories
|
|
(21,469
|
)
|
6,443
|
|
Prepaid expenses and other current assets
|
|
(602
|
)
|
(2,995
|
)
|
Accounts payable
|
|
(3,299
|
)
|
3,451
|
|
Employee compensation and benefits payable
|
|
(1,895
|
)
|
(5,306
|
)
|
Deferred revenue
|
|
(7,018
|
)
|
(3,458
|
)
|
Income taxes payable
|
|
372
|
|
558
|
|
Deferred income taxes
|
|
(125
|
)
|
608
|
|
Other accrued liabilities
|
|
1,596
|
|
(502
|
)
|
Net cash provided by (used in) operating activities
|
|
(6,812
|
)
|
8,265
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Investments in property, plant and equipment
|
|
(4,016
|
)
|
(3,642
|
)
|
Acquisition of intangible assets
|
|
|
|
(4,790
|
)
|
Acquisition of business, net of cash received
|
|
|
|
(1,661
|
)
|
Net cash used in investing activities
|
|
(4,016
|
)
|
(10,093
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Payments of long-term borrowings
|
|
|
|
(1,000
|
)
|
Repurchases of common shares
|
|
(2,618
|
)
|
|
|
Proceeds from issuance of shares
|
|
634
|
|
502
|
|
Net cash used in financing activities
|
|
(1,984
|
)
|
(498
|
)
|
Change in cash and cash equivalents
|
|
(12,812
|
)
|
(2,326
|
)
|
Cash and cash equivalents at beginning of period
|
|
70,678
|
|
56,921
|
|
Cash and cash equivalents at end of period
|
|
$
|
57,866
|
|
$
|
54,595
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
12
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
operate in two business segments: Networked Storage Solutions (NSS) and Storage
Infrastructure (SI). Our NSS products are hard disk drive based data storage
subsystems. Our SI products include disk drive production test systems, process
automation for disk drive and solar panel manufacturing, servo track writers
and disk cleaning systems.
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, 2007 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, 2008.
3.
Equity
compensation plans
The following
table summarizes equity compensation expense related to share-based awards
under FAS 123R for the three month periods ended February 29, 2008 and February 28,
2007.
|
|
Three months
ended
February 29, 2008
|
|
Three months
ended
February 28, 2007
|
|
Equity compensation:
|
|
|
|
|
|
Cost of revenues
|
|
$
|
354
|
|
$
|
245
|
|
Research and development
|
|
708
|
|
491
|
|
Selling, general and administrative
|
|
1,138
|
|
924
|
|
Total equity compensation
|
|
2,200
|
|
1,660
|
|
Related income tax benefit
|
|
$
|
611
|
|
$
|
446
|
|
The Companys
share-based awards include restricted stock units (RSUs), share options, an
Employee Stock Purchase Plan and restricted shares. From March 2006 the
Companys share awards have principally consisted of RSUs. Based on an
agreement with the Companys managing underwriter for the Initial Public
Offering in 2004, there are 2,625 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
RSUs generally require
that shares be awarded over four years from the date of grant, subject to
continued service. The vesting of these units is also generally subject to the
achievement of certain performance conditions in the year of grant. Equity
compensation expense relating to RSUs totaling $1,814 has been recorded in the
three months ended February 29, 2008.
Restricted stock units granted, exercised, canceled and expired are
summarized as follows:
13
|
|
RSU
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic
Value
|
|
Non-vested restricted stock units at November 30, 2007
|
|
785
|
|
$
|
23.74
|
|
3.2
|
|
|
|
Granted
|
|
652
|
|
16.38
|
|
|
|
|
|
Vested
|
|
(192
|
)
|
24.12
|
|
|
|
|
|
Cancelled/forfeited
|
|
(158
|
)
|
22.94
|
|
|
|
|
|
Non-vested restricted stock units at February 29, 2008
|
|
1,087
|
|
$
|
19.38
|
|
2.9
|
|
|
|
Non-vested restricted stock units expected to vest at
February 29, 2008
|
|
801
|
|
|
|
2.8
|
|
$
|
14,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2007
|
|
1,761
|
|
$
|
10.41
|
|
5.8
|
|
$
|
7,625
|
|
Exercised
|
|
(69
|
)
|
9.56
|
|
|
|
|
|
Forfeited
|
|
(12
|
)
|
14.31
|
|
|
|
|
|
Outstanding at February 29, 2008
|
|
1,680
|
|
$
|
10.35
|
|
5.5
|
|
$
|
12,777
|
|
Exercisable at February 29, 2008
|
|
1,492
|
|
$
|
9.87
|
|
5.4
|
|
$
|
12,067
|
|
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.
Employee Stock Purchase Plan and
Restricted Shares
8 shares were granted under the Employee Stock
Purchase Plan in the three months ended
February 29,
2008
.
4.
Equity Share Capital
Share Buy-Back
On January 14, 2008 the Company commenced a
share buy-back program. The Company has announced that it will purchase its own
shares up to a value of $30 million and it is anticipated that the repurchase
will take place over a period of up to one year. During the three months ended February 29,
2008 the Company has purchased 169 shares at a total value of $2,618.
5.
Net earnings per share
Basic net earnings per share for the three month periods ended February 29,
2008 and February 28, 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 common share equivalents
outstanding during the period. The effect of 613 common share equivalents was excluded
from the diluted weighted average shares outstanding in the three months ended
February 29, 2008 due to the net loss recorded for the period.
14
|
|
Number of common shares
|
|
|
|
Three months ended
|
|
|
|
February 29,
|
|
February 28,
|
|
|
|
2008
|
|
2007
|
|
Total weighted average common shares basic
|
|
29,125
|
|
28,847
|
|
Dilutive effect of share options
|
|
|
|
747
|
|
Dilutive effect of restricted stock units
|
|
|
|
55
|
|
Total weighted average common shares diluted
|
|
29,125
|
|
29,699
|
|
6. 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 three months ended February 28, 2007.
7. 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 $452 and $1,001, net of tax of $200 and $429,
from AOCI to earnings during the three months ended February 29, 2008 and February 28,
2007, respectively due to the realization of the underlying transactions. The
Company recorded the decrease in fair market value of derivatives related to
its cash flow hedges of $707, net of tax of $303, to AOCI for the three months
ended February 29, 2008 compared to an increase of $170, net of tax of $73
for the three months ended February 28, 2007. Any remaining unrealized
amounts are expected to be reclassified to earnings during the next nineteen
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 February 29,
2008 and November 30, 2007:
|
|
February 29,
|
|
November 30,
|
|
Derivatives between U.K. pound and U.S. dollar
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Forward exchange contracts and options (notional value)
|
|
$
|
65,262
|
|
$
|
63,344
|
|
Fair value of contracts
|
|
$
|
495
|
|
$
|
2,440
|
|
Carrying value of contracts
|
|
$
|
495
|
|
$
|
2,440
|
|
Average rate of contract
|
|
$
|
1.98
|
|
$
|
1.98
|
|
Period end rate
|
|
$
|
1.99
|
|
$
|
2.06
|
|
Maximum period of contracts (months)
|
|
21
|
|
12
|
|
|
|
February 29,
|
|
November 30,
|
|
Derivatives between Malaysian ringgit and U.S. dollar
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Forward exchange contracts and options (notional value)
|
|
$
|
5,200
|
|
$
|
5,000
|
|
Fair value of contracts
|
|
$
|
447
|
|
$
|
196
|
|
Carrying value of contracts
|
|
$
|
447
|
|
$
|
196
|
|
Average rate of contract
|
|
$
|
0.29
|
|
$
|
0.29
|
|
Period end rate
|
|
$
|
0.32
|
|
$
|
0.29
|
|
Maximum period of contracts (months)
|
|
7
|
|
6
|
|
15
8.
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
61% of the total accounts receivable balance at February 29, 2008 and two
customers represented 61% of the total accounts receivable balance at November 30,
2007. 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 three months ended February 29, 2008 revenues from one
customer represented 62% of total revenues and during the three months ended February 28,
2007, revenues from two customers, represented 74% of total revenues. No other
customer accounted for more than 10% of revenues.
9.
Intangible
assets
During
the three months ended February 28, 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.
Identified
intangible assets
Identified intangible asset
balances are summarized as follows:
|
|
February 29,
2008
|
|
November 30,
2007
|
|
Existing technology
|
|
$
|
11,693
|
|
$
|
11,693
|
|
Patents and core technology
|
|
11,887
|
|
11,887
|
|
Non-competition agreements
|
|
1,000
|
|
1,000
|
|
Order backlog
|
|
2,100
|
|
2,100
|
|
Supplier contracts
|
|
39
|
|
39
|
|
Assembled workforce
|
|
1,516
|
|
1,516
|
|
Customer relationships
|
|
4,629
|
|
4,629
|
|
|
|
32,864
|
|
32,864
|
|
Accumulated amortization
|
|
(18,199
|
)
|
(16,820
|
)
|
|
|
$
|
14,665
|
|
$
|
16,044
|
|
Goodwill
The changes in the
carrying amount of goodwill for the three month period ended
February 29, 2008
are as follows:
|
|
Networked Storage
Solutions
|
|
Storage
Infrastructure
|
|
Total
|
|
Balance at November 30, 2007
|
|
$
|
17,330
|
|
$
|
20,801
|
|
$
|
38,131
|
|
Tax benefit of goodwill
|
|
|
|
1,486
|
|
1,486
|
|
Balance at February 29, 2008
|
|
$
|
17,330
|
|
$
|
22,287
|
|
$
|
39,617
|
|
The tax benefit of
goodwill includes an amount of $1,779 being an amount reclassified to deferred
income taxes. There is no effect on the Companys income statement.
10. Inventories
|
|
February 29,
|
|
November 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
29,843
|
|
$
|
19,517
|
|
Work in progress
|
|
15,541
|
|
18,364
|
|
Raw materials
|
|
67,747
|
|
57,381
|
|
|
|
$
|
113,131
|
|
$
|
91,662
|
|
16
11. Income Taxes
The provision for income taxes for the three month periods ended February 29,
2008 and February 28, 2007 is based on the Companys current estimates of
effective tax rates of 11% and 18% respectively, the rates being based on
forecasts of income before income taxes in the years ended November 30,
2008 and November 30, 2007. Forecasts of income exclude significant
unusual and extraordinary items that are separately included in the tax charge.
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 three
months ended February 29, 2008 included an expense of $462 relating to the
retranslation of U.K. deferred tax assets denominated in U.K. pounds and the
three months ended 28 February, 2007 included a benefit of $856 relating to the
agreement of a previous years computation.
Effective as of December 1, 2007, the Company adopted the provision
of FASB Interpretation No. 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 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.
As a result of the adoption of FIN 48, the Company recorded no changes
to its unrecognized tax benefits. As of December 1, 2007, the Company had
$7,700 of unrecognized tax benefits, of which approximately $3,400 represents
the amount of unrecognized tax benefits that would impact the effective tax
rate, if recognized. The remaining $4,300 relates to items that would result in
balance sheet reclassification only, with no impact to income tax expense. It
is possible that the amount of unrecognized tax benefits will change in the
next twelve months; however, an estimate of the range of the possible change
cannot be made at this time.
It is the Companys practice to recognize interest and penalties related
to uncertain tax positions in income tax expense. The Company had $100 net of
tax benefit, accrued for interest and no accrual for penalties related to
unrecognized tax benefits as of December 1, 2007.
The Companys subsidiaries are subject to income tax in the U.K. and the
U.S. Federal jurisdiction as well as other state and foreign jurisdictions. The
Companys U.K. income tax returns for its 2006 and 2007 fiscal years remain
open to examination. The Companys U.S.
Federal and state income tax returns for fiscal years 2003 through 2007 remain
open to examination. In addition, the Company files tax returns in multiple
other foreign taxing jurisdictions and generally is not subject to tax examination
in these jurisdictions for fiscal years prior to 2000.
12. Product warranty
liability
The Company
generally offers warranties between one and three years. Estimated future
warranty obligations related to product sales are charged to operations in the
period in which the related revenue is recognized. These estimates are based on
historical warranty experience and other relevant information of which the
Company is aware.
The following table provides the changes in the
product warranty accrual for the three months ended February 29, 2008:
|
|
Amount of
liability
|
|
Balance at November 30, 2007:
|
|
$
|
3,543
|
|
Accruals for warranties issued during the period
|
|
783
|
|
Settlements made during the period
|
|
(472
|
)
|
Balance at February 29, 2008:
|
|
$
|
3,854
|
|
17
13. 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.
P
rovision
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.
|
|
Three Months Ended
|
|
|
|
February 29,
|
|
February 28,
|
|
|
|
2008
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
Networked Storage Solutions
|
|
$
|
187,776
|
|
$
|
163,616
|
|
Storage Infrastructure
|
|
$
|
29,278
|
|
$
|
72,791
|
|
|
|
|
|
|
|
Total Segments
|
|
$
|
217,054
|
|
$
|
236,407
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
Networked Storage Solutions
|
|
$
|
27,599
|
|
$
|
22,286
|
|
Storage Infrastructure
|
|
$
|
5,526
|
|
$
|
22,994
|
|
|
|
|
|
|
|
|
|
Total Segments
|
|
$
|
33,125
|
|
$
|
45,280
|
|
Equity Compensation (note 3)
|
|
$
|
354
|
|
$
|
245
|
|
Total
|
|
$
|
32,771
|
|
$
|
45,035
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
Networked Storage Solutions
|
|
$
|
2,738
|
|
$
|
2,640
|
|
Storage Infrastructure
|
|
$
|
1,693
|
|
$
|
1,783
|
|
|
|
|
|
|
|
|
|
Total Segments
|
|
$
|
4,431
|
|
$
|
4,423
|
|
Corporate
|
|
$
|
433
|
|
$
|
265
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,864
|
|
$
|
4,688
|
|
|
|
|
|
|
|
|
|
|
|
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.
18
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: April 15, 2008
|
|
By:
|
/s/ Richard Pearce
|
|
|
|
Name: Richard Pearce
|
|
|
|
Title: Chief Financial Officer
|
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