UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended June 29, 2003 | ||
| or | ||
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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 0-23298
QLogic Corporation
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Delaware
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33-0537669 | |
| (State of incorporation) |
(I.R.S. Employer Identification No.) |
26650 Aliso Viejo Parkway
(949) 389-6000
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 filing requirements for the past 90 days.
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
As of July 31, 2003, 94,237,410 shares of the Registrant’s common stock were outstanding.
QLOGIC CORPORATION
INDEX
| Page | ||||||
| PART I. FINANCIAL INFORMATION | ||||||
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Item 1.
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Financial Statements (unaudited): | |||||
| Condensed Consolidated Balance Sheets at June 29, 2003 and March 30, 2003. | 1 | |||||
| Condensed Consolidated Statements of Income for the three months ended June 29, 2003 and June 30, 2002 | 2 | |||||
| Condensed Consolidated Statements of Cash Flows for the three months ended June 29, 2003 and June 30, 2002 | 3 | |||||
| Notes to Condensed Consolidated Financial Statements | 4 | |||||
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 7 | ||||
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk | 19 | ||||
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Item 4.
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Controls and Procedures | 19 | ||||
| PART II. OTHER INFORMATION | ||||||
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Item 1.
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Legal Proceedings | 20 | ||||
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Item 6.
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Exhibits and Reports on Form 8-K | 20 | ||||
| Signatures | 21 | |||||
i
PART I.
FINANCIAL INFORMATION
| Item 1. | Financial Statements |
QLOGIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 29, | March 30, | |||||||||
| 2003 | 2003 | |||||||||
| (Unaudited; In | ||||||||||
| thousands, except share | ||||||||||
| and per share amounts) | ||||||||||
| ASSETS | ||||||||||
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Current assets:
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||||||||||
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Cash and cash equivalents
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$ | 156,565 | $ | 137,810 | ||||||
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Short-term investments
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537,733 | 505,387 | ||||||||
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Accounts receivable, less allowance for doubtful
accounts of $2,778 and $2,830 as of June 29, 2003 and
March 30, 2003, respectively
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60,240 | 49,694 | ||||||||
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Inventories
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19,718 | 19,365 | ||||||||
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Deferred income taxes
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32,068 | 31,914 | ||||||||
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Prepaid expenses and other current assets
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3,317 | 4,010 | ||||||||
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Total current assets
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809,641 | 748,180 | ||||||||
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Property and equipment, net
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61,834 | 59,813 | ||||||||
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Other assets
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8,107 | 9,426 | ||||||||
| $ | 879,582 | $ | 817,419 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
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Current liabilities:
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Accounts payable
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$ | 19,729 | $ | 15,301 | ||||||
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Accrued compensation
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27,963 | 21,997 | ||||||||
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Income taxes payable
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29,126 | 19,201 | ||||||||
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Other accrued liabilities
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11,405 | 10,185 | ||||||||
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Total current liabilities
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88,223 | 66,684 | ||||||||
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Commitments and contingencies
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Stockholders’ equity:
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Preferred stock, $0.001 par value; 1,000,000
shares authorized (200,000 shares designated as Series A
Junior Participating Preferred, $0.001 par value); no shares
issued and outstanding
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— | — | ||||||||
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Common stock, $0.001 par value; 500,000,000
shares authorized; 94,278,000 and 93,945,000 shares issued at
June 29, 2003 and March 30, 2003, respectively
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94 | 94 | ||||||||
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Additional paid-in capital
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451,332 | 442,594 | ||||||||
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Retained earnings
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340,129 | 308,453 | ||||||||
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Accumulated other comprehensive income
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4,081 | 4,346 | ||||||||
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Treasury stock, at cost: 91,000 shares
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(2,978 | ) | (2,978 | ) | ||||||
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Deferred stock-based compensation
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(1,299 | ) | (1,774 | ) | ||||||
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Total stockholders’ equity
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791,359 | 750,735 | ||||||||
| $ | 879,582 | $ | 817,419 | |||||||
See accompanying notes to condensed consolidated financial statements.
1
QLOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
| Three Months Ended | ||||||||||
| June 29, | June 30, | |||||||||
| 2003 | 2002 | |||||||||
| (Unaudited; In thousands, | ||||||||||
| except per share amounts) | ||||||||||
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Gross revenues
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$ | 126,235 | $ | 100,780 | ||||||
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Stock-based sales discounts
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— | 1,818 | ||||||||
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Net revenues
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126,235 | 98,962 | ||||||||
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Cost of revenues
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42,002 | 37,107 | ||||||||
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Gross profit
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84,233 | 61,855 | ||||||||
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Operating expenses:
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Engineering and development
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22,735 | 18,179 | ||||||||
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Selling and marketing
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11,729 | 10,618 | ||||||||
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General and administrative
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4,091 | 3,194 | ||||||||
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Total operating expenses
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38,555 | 31,991 | ||||||||
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Operating income
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45,678 | 29,864 | ||||||||
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Interest and other income
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5,412 | 4,612 | ||||||||
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Income before income taxes
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51,090 | 34,476 | ||||||||
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Income taxes
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19,414 | 11,420 | ||||||||
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Net income
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$ | 31,676 | $ | 23,056 | ||||||
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Net income per share:
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Basic
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$ | 0.34 | $ | 0.25 | ||||||
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Diluted
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$ | 0.33 | $ | 0.24 | ||||||
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Number of shares used in per share computations:
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Basic
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94,017 | 93,177 | ||||||||
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Diluted
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96,002 | 95,857 | ||||||||
See accompanying notes to condensed consolidated financial statements.
2
QLOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Three Months Ended | |||||||||||||
| June 29, | June 30, | ||||||||||||
| 2003 | 2002 | ||||||||||||
| (Unaudited, In thousands) | |||||||||||||
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Cash flows from operating activities:
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Net income
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$ | 31,676 | $ | 23,056 | |||||||||
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Adjustments to reconcile net income to net cash
provided by operating activities:
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Depreciation and amortization
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3,629 | 3,352 | |||||||||||
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Tax benefit from issuance of stock under stock
plans
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3,884 | 3,568 | |||||||||||
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Deferred income taxes
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1,184 | 1,921 | |||||||||||
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Amortization of deferred stock-based compensation
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475 | 476 | |||||||||||
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Loss on disposal of property and equipment
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82 | 96 | |||||||||||
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Stock-based sales discounts
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— | 1,818 | |||||||||||
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Write-down of non-marketable investments
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— | 1,000 | |||||||||||
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Changes in assets and liabilities:
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Accounts receivable
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(10,546 | ) | 5,176 | ||||||||||
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Inventories
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(353 | ) | (4,332 | ) | |||||||||
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Prepaid expenses and other current assets
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693 | 602 | |||||||||||
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Other assets
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(19 | ) | (136 | ) | |||||||||
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Accounts payable
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4,428 | 3,820 | |||||||||||
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Accrued compensation
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5,966 | 4,290 | |||||||||||
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Incomes taxes payable
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9,925 | 6,892 | |||||||||||
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Other accrued liabilities
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1,220 | (181 | ) | ||||||||||
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Net cash provided by operating activities
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52,244 | 51,418 | |||||||||||
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Cash flows from investing activities:
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Purchases of marketable securities
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(267,926 | ) | (231,061 | ) | |||||||||
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Sales and maturities of marketable securities
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235,315 | 228,493 | |||||||||||
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Additions to property and equipment
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(5,732 | ) | (2,349 | ) | |||||||||
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Net cash used in investing activities
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(38,343 | ) | (4,917 | ) | |||||||||
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Cash flows from financing activities:
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Proceeds from issuance of stock under stock plans
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4,854 | 3,194 | |||||||||||
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Net increase in cash and cash equivalents
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18,755 | 49,695 | |||||||||||
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Cash and cash equivalents at beginning of period
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137,810 | 76,124 | |||||||||||
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Cash and cash equivalents at end of period
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$ | 156,565 | $ | 125,819 | |||||||||
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Supplemental disclosure of cash flow information:
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Cash paid during the period for income taxes
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$ | 4,476 | $ | 368 | |||||||||
See accompanying notes to condensed consolidated financial statements.
3
QLOGIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Note (1) Basis of Presentation |
In the opinion of management of QLogic Corporation (the “Company”), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting solely of normal recurring accruals) necessary to present fairly the Company’s financial position, results of operations and cash flows. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 30, 2003. The results of operations for the three months ended June 29, 2003 are not necessarily indicative of the results that may be expected for the entire fiscal year. Certain prior year amounts have been reclassified to conform to the current year presentation.
| Note (2) | Supplemental Financial Statement Data |
| Inventories |
Components of inventories are as follows:
| June 29, | March 30, | |||||||
| 2003 | 2003 | |||||||
| (In thousands) | ||||||||
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Raw materials
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$ | 11,959 | $ | 9,368 | ||||
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Work in process
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697 | 1,519 | ||||||
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Finished goods
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7,062 | 8,478 | ||||||
| $ | 19,718 | $ | 19,365 | |||||
| Product Warranties |
The Company’s product warranty obligation was $2.9 million at June 29, 2003. The changes in the product warranty obligation during the three months ended June 29, 2003 were not significant.
Note (3) Other Comprehensive Income
The components of total comprehensive income are as follows:
| Three Months Ended | |||||||||
| June 29, | June 30, | ||||||||
| 2003 | 2002 | ||||||||
| (In thousands) | |||||||||
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Net income
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$ | 31,676 | $ | 23,056 | |||||
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Other comprehensive income (loss):
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Change in unrealized gains on investments
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(265 | ) | 2,575 | ||||||
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Total comprehensive income
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$ | 31,411 | $ | 25,631 | |||||
| Note (4) Net Income Per Share |
Basic net income per share is based on the weighted-average number of common shares outstanding during the periods presented. Diluted net income per share is based on the weighted-average number of common and dilutive potential common shares outstanding during the periods presented. The Company has granted certain stock options and warrants which have been treated as dilutive potential common shares.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets forth the computation of basic and diluted net income per share:
| Three Months Ended | |||||||||
| June 29, | June 30, | ||||||||
| 2003 | 2002 | ||||||||
| (In thousands, except | |||||||||
| per share amounts) | |||||||||
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Net income
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$ | 31,676 | $ | 23,056 | |||||
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Shares:
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Weighted-average shares outstanding —
basic
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94,017 | 93,177 | |||||||
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Dilutive potential common shares, using treasury
stock method
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1,985 | 2,680 | |||||||
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Weighted-average shares outstanding —
diluted
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96,002 | 95,857 | |||||||
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Net income per share:
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Basic
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$ | 0.34 | $ | 0.25 | |||||
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Diluted
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$ | 0.33 | $ | 0.24 | |||||
Options to purchase 4,425,000 and 4,733,000 shares of common stock were outstanding as of June 29, 2003 and June 30, 2002, respectively, but were not included in the computation of diluted net income per share, as the effect would be antidilutive.
Note (5) Stock-Based Compensation
The Company accounts for its stock-based awards to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations, rather than the alternative fair value accounting allowed by Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock Based Compensation.” APB 25 provides that compensation expense relative to the Company’s employee stock options is measured based on the intrinsic value of stock options granted and the Company recognizes compensation expense in its statement of income using the straight-line method over the vesting period for fixed awards. Under SFAS 123, the fair value of stock options at the date of grant is recognized in earnings over the vesting period of the options.
The following table shows pro forma net income as if the fair value method of SFAS 123 had been used to account for stock-based compensation expense:
| Three Months Ended | |||||||||
| June 29, | June 30, | ||||||||
| 2003 | 2002 | ||||||||
| (In thousands, except | |||||||||
| per share amounts) | |||||||||
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Net income, as reported
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$ | 31,676 | $ | 23,056 | |||||
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Add: Stock-based compensation expense included in
reported net income, net of related tax effects
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295 | 309 | |||||||
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Deduct: Stock-based compensation expense
determined under the fair value based method for all awards, net
of related tax effects
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(9,333 | ) | (9,155 | ) | |||||
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Pro forma net income
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$ | 22,638 | $ | 14,210 | |||||
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Net income per share:
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Basic, as reported
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$ | 0.34 | $ | 0.25 | |||||
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Diluted, as reported
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$ | 0.33 | $ | 0.24 | |||||
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Basic, pro forma
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$ | 0.24 | $ | 0.15 | |||||
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Diluted, pro forma
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$ | 0.24 | $ | 0.15 | |||||
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair value of stock options granted has been estimated at the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including expected stock price volatility. Because the Company’s stock options have characteristics significantly different than those of traded options, and because changes in the subjective input assumptions can materially affect the estimate, in management’s opinion, the existing models do not provide a reliable single measure of the fair value of the Company’s stock options.
Note (6) Litigation
In January 2003, Raytheon Company filed suit in the United States District Court for the Eastern District of Texas, alleging that the Company, along with several other defendants, infringed a Raytheon patent directed to a mass data storage system. The suit seeks injunctive relief and damages in an unspecified amount. The Company filed an answer to the complaint in March 2003 and a trial is currently scheduled to begin in May 2004. The parties are currently engaged in discovery. The Company disputes the plaintiff’s claims and intends to defend the lawsuit vigorously.
In February 2003, Vixel Corporation filed suit in the United States District Court for the District of Delaware alleging infringement of a Vixel patent directed to a method and apparatus for Fibre Channel interconnection of private loop devices. In March 2003, Vixel amended its complaint to add two additional Vixel patents. These additional patents are directed to substantially the same technology as the original Vixel patent. The suit seeks injunctive relief and damages in an unspecified amount. The Company filed an answer to the complaint in March 2003 denying all allegations. The parties are currently engaged in discovery. The court has scheduled mediation for December 2003 and a trial date has been set for November 2004. The Company disputes the plaintiff’s claims and intends to defend the lawsuit vigorously.
Various lawsuits, claims and proceedings have been or may be instituted against the Company, including the matters discussed above. The outcome of litigation cannot be predicted with certainty and some lawsuits, claims and proceedings may be disposed of unfavorably to the Company. Many intellectual property disputes have a risk of injunctive relief and there can be no assurance that a license will be granted to the Company. Injunctive relief could have a material adverse effect on the financial condition or results of operations of the Company. Based on its evaluation of matters which are pending or asserted, management believes the disposition of such matters will not have a material adverse effect on the financial condition or results of operations of the Company.
6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our unaudited condensed consolidated financial statements and related notes thereto contained elsewhere in