JUNIPER NETWORKS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

[X]

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


		For the quarterly period ended September 30, 2003


[ ]		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


		For the transition period from __________ to __________

Commission file number 0-26339

JUNIPER NETWORKS, INC.

(Exact name of registrant as specified in its charter)


Delaware		77-0422528

(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1194 North Mathilda Avenue
Sunnyvale, California 94089		(408) 745-2000

(Address of principal executive offices, including zip code)		(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

There were approximately 389,238,000 shares of the Company’s Common Stock, par value $0.00001, outstanding as of October 31, 2003.

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Report on Form 8-K
SIGNATURES
Exhibit Index
EXHIBIT 3.2
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

Table of Contents


PART I – FINANCIAL INFORMATION		1
	Item 1. Financial Statements	1
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	29
	Item 4. Controls and Procedures	30
PART II – OTHER INFORMATION		31
	Item 1. Legal Proceedings	31
	Item 6. Exhibits and Report on Form 8-K	32
SIGNATURES		34

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Juniper Networks, Inc.

Condensed Consolidated Balance Sheets
(in thousands)


			September 30,			December 31,
			2003			2002

			(unaudited)			(a)
ASSETS
Current assets:
	Cash and cash equivalents		$	457,510		$	194,435
	Short-term investments			309,143			384,036
	Accounts receivable, net			48,526			78,501
	Prepaid expenses and other current assets			24,409			23,957

		Total current assets		839,588			680,929
Property and equipment, net				243,526			266,962
Long-term investments				557,346			583,664
Restricted cash				24,983			—
Goodwill				983,397			987,661
Purchased intangible assets, net and other long-term assets				79,076			95,453

		Total assets	$	2,727,916		$	2,614,669

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	54,057		$	51,747
	Accrued warranty			32,598			32,358
	Other accrued liabilities			120,723			111,773
	Deferred revenue			53,779			46,146

		Total current liabilities		261,157			242,024
Convertible subordinated notes				542,076			942,114
Convertible senior notes				400,000			—

Commitments and contingencies

Stockholders’ equity:
	Common stock and additional-paid-in-capital			1,532,209			1,461,910
	Deferred stock compensation			(1,849	)		(11,113	)
	Accumulated other comprehensive income			7,175			17,052
	Accumulated deficit			(12,852	)		(37,318	)

		Total stockholders’ equity		1,524,683			1,430,531

		Total liabilities and stockholders’ equity	$	2,727,916		$	2,614,669

(a) The balance sheet at December 31, 2002 has been derived from the audited consolidated financial statements at that date, but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.

See accompanying Notes to the Condensed Consolidated Financial Statements

Juniper Networks, Inc.

Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)


			Three months ended						Nine months ended
			September 30,						September 30,

			2003			2002			2003			2002

Net revenues:
	Product		$	147,110		$	130,264		$	423,351		$	333,822
	Service			25,018			21,762			71,087			57,459

		Total net revenues		172,128			152,026			494,438			391,281
Cost of revenues:
	Product			48,694			54,336			145,868			130,200
	Service			14,245			14,529			40,852			36,816

		Total cost of revenues		62,939			68,865			186,720			167,016

Gross margin				109,189			83,161			307,718			224,265
Operating expenses:
	Research and development			44,932			48,771			131,409			117,610
	Sales and marketing			34,710			37,749			101,404			91,221
	General and administrative			6,524			9,108			21,292			27,761
	Restructuring			13,985			22,830			13,985			22,830
	In-process research and development			—			83,479			—			83,479
	Integration			—			2,507			—			2,507
	Amortization of purchased intangible assets and deferred stock compensation ⁽¹⁾			1,998			8,727			17,323			17,640

		Total operating expenses		102,149			213,171			285,413			363,048

Operating income (loss)				7,040			(130,010	)		22,305			(138,783	)
Interest and other income				8,031			13,987			27,300			46,119
Interest and other expenses				(9,386	)		(13,631	)		(33,689	)		(43,526	)
Gain on sale of investments				—			—			8,739			—
Write-down of investments				—			(19,851	)		—			(50,451	)
Gain on partial retirement of convertible subordinated notes				9,220			62,855			14,108			62,855
Equity in net loss of joint venture				—			(180	)		—			(1,316	)

Income (loss) before income taxes				14,905			(86,830	)		38,763			(125,102	)
Provision for income taxes				7,700			1,500			14,297			3,000

Net income (loss)			$	7,205		$	(88,330	)	$	24,466		$	(128,102	)

Net income (loss) per share:
	Basic		$	0.02		$	(0.24	)	$	0.06		$	(0.37	)

	Diluted		$	0.02		$	(0.24	)	$	0.06		$	(0.37	)

Shares used in computing net income (loss) per share:
	Basic			384,795			369,944			379,792			343,423

	Diluted			408,083			369,944			399,525			343,423


⁽¹⁾ Amortization of deferred stock compensation relates to the following cost and expense categories by period:
	Cost of revenues		$	(287	)	$	294		$	(48	)	$	927
	Research and development			(2,098	)		2,197			1,414			5,356
	Sales and marketing			(573	)		609			127			1,705
	General and administrative			(346	)		325			(77	)		1,058

		Total	$	(3,304	)	$	3,425		$	1,416		$	9,046

See accompanying Notes to the Condensed Consolidated Financial Statements

Juniper Networks, Inc.

Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)


				Nine months ended
				September 30,

				2003			2002

OPERATING ACTIVITIES:
Net income (loss)				$	24,466		$	(128,102	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
	Depreciation				35,754			28,919
	Amortization of purchased intangibles, deferred stock compensation, debt costs and other non-cash transactions				23,597			25,735
	In-process research and development				—			83,479
	Gain on sale of investments				(8,739	)		—
	Write-down of investments				—			50,451
	Gain on retirement of convertible subordinated notes				(14,108	)		(62,855	)
	Changes in operating assets and liabilities:
		Accounts receivable, net			29,975			40,563
		Prepaid expenses, other current assets and other assets			1,268			10,222
		Accounts payable			5,783			(18,351	)
		Accrued warranty			240			3,778
		Other accrued liabilities			9,740			(31,877	)
		Deferred revenue			7,633			(5,828	)

			Net cash provided by (used in) operating activities		115,609			(3,866	)
INVESTING ACTIVITIES:
Purchases of property and equipment, net					(14,136	)		(24,755	)
Purchases of available-for-sale investments					(671,826	)		(707,688	)
Maturities and sales of available-for-sale investments					770,334			882,902
Increase in restricted cash					(25,000	)		—
Cash paid in connection with the Unisphere Networks acquisition, net of cash and cash equivalents acquired					—			(375,803	)
Minority equity investments					(900	)		(1,075	)

			Net cash Provided by (used in) investing activities		58,472			(226,419	)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock					77,403			18,185
Proceeds from issuance of convertible senior notes					392,750			—
Retirement of convertible subordinated notes					(381,159	)		(145,975	)

			Net cash provided by (used in) financing activities		88,994			(127,790	)

			Net increase (decrease) in cash and cash equivalents		263,075			(358,075	)
			Cash and cash equivalents at beginning of period		194,435			606,845

			Cash and cash equivalents at end of period	$	457,510		$	248,770

Supplemental Disclosure of Cash Flow Information:
	Cash paid for interest			$	42,863		$	53,787
Supplemental disclosure of non-cash investing and financing activities:
	Common stock issued in connection with the Unisphere Networks acquisition			$	—		$	359,888
	Common stock issued in connection with the Pacific Broadband earn-out provision			$	—		$	10,844

See accompanying Notes to the Condensed Consolidated Financial Statements

Juniper Networks, Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)

Note 1. Description of Business

Juniper Networks, Inc. (“Juniper Networks” or the “Company”) was founded in 1996 to develop and sell products that would be able to meet the stringent demands of service providers. Juniper Networks is a leading provider of network infrastructure solutions that transform the business of networking. The Company’s products enable customers to convert their business models from one of providing a commodity service to that of providing more differentiation and value to end users as well as increased reliability and security, thereby making the network a more valuable asset. The Company sells and markets its products through its direct sales organization and value-added resellers.

In July 2002, the Company completed its acquisition of Unisphere Networks, Inc. (“Unisphere”), a subsidiary of Siemens Corporation, which itself is a subsidiary of Siemens AG (“Siemens”). Unisphere developed, manufactured and sold data networking equipment optimized for applications at the edge of service provider networks. Although the Company took a one-time restructuring charge in connection with the acquisition of Unisphere to eliminate certain duplicative activities and to rationalize costs consistent with its existing business model, the acquisition enabled the Company to add a complementary product to its existing product line without reorganizing its existing organization or modifying its cost and business structure. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 141, “Business Combinations,” the Company included in its results of operations for 2002, the results of Unisphere from July 1, 2002. Therefore, results for the nine months ended September 30, 2002 only include the results of Unisphere for the three months ended September 30, 2002, whereas results for the nine months ended September 30, 2003 include the results of the combined companies for the entire nine-month period.

Note 2. Summary of Significant Accounting Policies

Stock-Based Compensation

The Company’s stock option plans are accounted for under the intrinsic value recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. As the exercise price of all options granted under these plans was equal to the market price of the underlying common stock on the grant date, no stock-based employee compensation cost, other than acquisition-related compensation, is recognized in net income (loss). The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to employee stock benefits, including shares issued under the stock option plans and under the Company’s Stock Purchase Plan, collectively called “options.” Pro forma information, net of the tax effect, follows (in thousands, except per share amounts):


	Three months ended						Nine months ended
	September 30,						September 30,

	2003			2002			2003			2002

Net income (loss) as reported	$	7,205		$	(88,330	)	$	24,466		$	(128,102	)
Add: amortization of deferred stock compensation included in reported net income (loss), net of tax		(2,048	)		2,124			878			5,609
Deduct: total stock-based employee compensation expense determined under fair value based method, net of tax		(8,081	)		(24,760	)		(43,839	)		(71,198	)

Pro forma net loss	$	(2,924	)	$	(110,966	)	$	(18,495	)	$	(193,691	)