UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 December 28, 2003 |
OR
| [ ] | Transition Report Pursuant to Section 13 or 15(d) of the | |
| Securities Exchange Act of 1934 |
Commission File No. 001-31353
EMULEX CORPORATION
| Delaware | 51-0300558 | |
| (State or other jurisdiction | (I.R.S Employer | |
| of incorporation or organization) | Identification No.) | |
| 3333 Susan Street | ||
| Costa Mesa, California | 92626 | |
| (Address of principal executive offices) | (Zip Code) |
(714) 662-5600
(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 filing 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).
As of February 5, 2004, the registrant had 81,874,938 shares of common stock outstanding.
EMULEX CORPORATION AND SUBSIDIARIES
INDEX
| PAGE | |||||
Part I. FINANCIAL INFORMATION |
|||||
Item 1. Financial Statements |
|||||
Condensed Consolidated Balance Sheets
December 28, 2003 and June 29, 2003 |
2 | ||||
Condensed Consolidated Statements of Income
Three and six months ended December 28, 2003
and December 29, 2002 |
3 | ||||
Condensed Consolidated Statements of Cash Flows
Three and six months ended December 28, 2003
and December 29, 2002 |
4 | ||||
Notes to Condensed Consolidated Financial Statements |
5 | ||||
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations |
17 | ||||
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
48 | ||||
Item 4. Controls and Procedures |
48 | ||||
Part II. OTHER INFORMATION |
|||||
Item 1. Legal Proceedings |
49 | ||||
Item 2. Changes in Securities and Use of Proceeds |
50 | ||||
Item 4. Submission of Matters to a Vote of Security Holders |
51 | ||||
Item 5. Other Information |
52 | ||||
Item 6. Exhibits and Reports on Form 8-K |
52 | ||||
Signatures |
55 | ||||
1
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
| December 28, | June 29, | |||||||||
| 2003 | 2003 | |||||||||
Assets |
||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 191,640 | $ | 136,971 | ||||||
Restricted cash |
1,380 | 9,342 | ||||||||
Investments |
190,700 | 239,302 | ||||||||
Accounts and other receivables, net |
59,033 | 46,678 | ||||||||
Litigation settlements receivable |
13,095 | 13,095 | ||||||||
Inventories, net |
22,522 | 10,998 | ||||||||
Prepaid expenses |
5,122 | 5,516 | ||||||||
Deferred income taxes |
25,695 | 36,330 | ||||||||
Total current assets |
509,187 | 498,232 | ||||||||
Property and equipment, net |
44,919 | 26,585 | ||||||||
Investments |
182,677 | 234,847 | ||||||||
Goodwill |
584,150 | 397,256 | ||||||||
Other intangibles, net |
136,010 | 27,067 | ||||||||
Deferred income taxes |
6,280 | — | ||||||||
Other assets |
1,853 | 5,782 | ||||||||
| $ | 1,465,076 | $ | 1,189,769 | |||||||
Liabilities and Stockholders’ Equity |
||||||||||
Current liabilities: |
||||||||||
Accounts payable |
33,431 | 11,298 | ||||||||
Accrued liabilities |
19,982 | 18,806 | ||||||||
Accrued litigation settlements |
— | 39,500 | ||||||||
Income taxes payable |
8,118 | 5,457 | ||||||||
Total current liabilities |
61,531 | 75,061 | ||||||||
Convertible subordinated notes |
469,148 | 208,518 | ||||||||
Contracts payable |
11 | — | ||||||||
Deferred income taxes |
— | 4,260 | ||||||||
Total liabilities |
530,690 | 287,839 | ||||||||
Commitments and contingencies (note 8) |
||||||||||
Subsequent events (note 10) |
||||||||||
Stockholders’ equity: |
||||||||||
Preferred stock, $0.01 par value; 1,000,000 shares authorized
(150,000 shares designated as Series A Junior Participating
Preferred Stock); none issued and outstanding |
— | — | ||||||||
Common stock, $0.10 par value; 240,000,000 shares authorized;
81,632,412 and 82,465,813 issued and outstanding at
December 28, 2003, and June 29, 2003, respectively |
8,163 | 8,247 | ||||||||
Additional paid-in capital |
923,909 | 907,976 | ||||||||
Deferred compensation |
(12,755 | ) | (3,159 | ) | ||||||
Retained earnings (accumulated deficit) |
15,069 | (11,134 | ) | |||||||
Total stockholders’ equity |
934,386 | 901,930 | ||||||||
| $ | 1,465,076 | $ | 1,189,769 | |||||||
See accompanying notes to condensed consolidated financial statements.
2
EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||||
| December 28, | December 29, | December 28, | December 29, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Net revenues |
$ | 94,369 | $ | 76,448 | $ | 178,946 | $ | 146,873 | ||||||||||
Cost of sales |
34,806 | 27,341 | 63,133 | 55,223 | ||||||||||||||
Gross profit |
59,563 | 49,107 | 115,813 | 91,650 | ||||||||||||||
Operating expenses: |
||||||||||||||||||
Engineering and development |
18,311 | 15,922 | 34,655 | 29,595 | ||||||||||||||
Selling and marketing |
6,850 | 4,359 | 11,452 | 9,023 | ||||||||||||||
General and administrative |
5,588 | 3,322 | 9,245 | 6,068 | ||||||||||||||
In-process research and development |
11,400 | — | 11,400 | — | ||||||||||||||
Amortization of other intangibles |
4,301 | 1,452 | 5,751 | 2,905 | ||||||||||||||
Total operating expenses |
46,450 | 25,055 | 72,503 | 47,591 | ||||||||||||||
Operating income |
13,113 | 24,052 | 43,310 | 44,059 | ||||||||||||||
Nonoperating income (loss): |
||||||||||||||||||
Interest income |
1,978 | 3,237 | 4,476 | 6,939 | ||||||||||||||
Interest expense |
(727 | ) | (1,227 | ) | (1,760 | ) | (3,031 | ) | ||||||||||
Gain (loss) on repurchase of
convertible subordinated notes |
(1,764 | ) | — | 2,901 | 28,729 | |||||||||||||
Other income (expense), net |
58 | (56 | ) | 164 | (86 | ) | ||||||||||||
Total nonoperating income (loss) |
(455 | ) | 1,954 | 5,781 | 32,551 | |||||||||||||
Income before income taxes |
12,658 | 26,006 | 49,091 | 76,610 | ||||||||||||||
Income tax provision |
9,043 | 10,489 | 22,888 | 29,112 | ||||||||||||||
Net income |
$ | 3,615 | $ | 15,517 | $ | 26,203 | $ | 47,498 | ||||||||||
Net income per share: |
||||||||||||||||||
Basic |
$ | 0.04 | $ | 0.19 | $ | 0.32 | $ | 0.58 | ||||||||||
Diluted |
$ | 0.04 | $ | 0.19 | $ | 0.31 | $ | 0.56 | ||||||||||
Number of shares used in per share
computations: |
||||||||||||||||||
Basic |
82,558 | 81,979 | 82,550 | 81,912 | ||||||||||||||
Diluted |
85,015 | 87,486 | 84,577 | 88,329 | ||||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Six Months Ended | |||||||||||
| December 28, | December 29, | ||||||||||
| 2003 | 2002 | ||||||||||
Cash flows from operating activities: |
|||||||||||
Net income |
$ | 26,203 | $ | 47,498 | |||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
|||||||||||
Depreciation and amortization of property and equipment |
5,849 | 5,254 | |||||||||
Gain on repurchase of convertible subordinated notes |
(2,901 | ) | (28,729 | ) | |||||||
Payment of litigation settlements |
(39,500 | ) | — | ||||||||
Stock-based compensation |
3,040 | 1,947 | |||||||||
Amortization of other intangibles |
5,751 | 2,905 | |||||||||
In-process research and development |
11,400 | — | |||||||||
Loss on disposal of property and equipment |
50 | 141 | |||||||||
Deferred income taxes |
10,081 | 24,218 | |||||||||
Tax benefit from exercise of stock options |
3,397 | 1,287 | |||||||||
Provision for doubtful accounts |
73 | 118 | |||||||||
Changes in assets and liabilities: |
|||||||||||
Accounts and other receivables |
(6,274 | ) | (7,974 | ) | |||||||
Inventories |
(10,123 | ) | (1,400 | ) | |||||||
Prepaid expenses and other assets |
2,216 | 1,085 | |||||||||
Accounts payable |
20,354 | 1,039 | |||||||||
Accrued liabilities |
(7,910 | ) | 652 | ||||||||
Income taxes payable |
2,618 | (427 | ) | ||||||||
Net cash provided by operating activities |
24,324 | 47,614 | |||||||||
Cash flows from investing activities: |
|||||||||||
Net proceeds from sale of property and equipment |
36 | — | |||||||||
Additions to property and equipment |
(22,124 | ) | (6,997 | ) | |||||||
Decrease (increase) in restricted cash related to the
construction escrow
account |
7,962 | (11,144 | ) | ||||||||
Payments for Vixel Corporation, net of cash acquired |
(294,755 | ) | — | ||||||||
Payments for the technology assets of Trebia Networks, Inc. |
(2,094 | ) | — | ||||||||
Purchases of investments |
(121,942 | ) | (371,326 | ) | |||||||
Maturities of investments |
232,390 | 275,821 | |||||||||
Net cash used in investing activities |
(200,527 | ) | (113,646 | ) | |||||||
Cash flows from financing activities: |
|||||||||||
Payments for notes payable and capital leases |
(1,279 | ) | — | ||||||||
Proceeds from issuance of common stock under stock option plans |
5,505 | 877 | |||||||||
Proceeds from issuance of common stock under employee
stock purchase plan |
1,199 | 437 | |||||||||
Repurchase of common stock |
(40,500 | ) | — | ||||||||
Net proceeds from issuance of convertible subordinated notes |
439,198 | — | |||||||||
Repurchase of convertible subordinated notes |
(173,251 | ) | (104,169 | ) | |||||||
Net cash provided by (used in) financing activities |
230,872 | (102,855 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
54,669 | (168,887 | ) | ||||||||
Cash and cash equivalents at beginning of period |
136,971 | 282,561 | |||||||||
Cash and cash equivalents at end of period |
$ | 191,640 | $ | 113,674 | |||||||
Supplemental disclosures: |
|||||||||||
Noncash investing and financing activities: |
|||||||||||
Fair value of assets acquired |
$ | 20,936 | $ | — | |||||||
Fair value of liabilities assumed |
13,449 | — | |||||||||
Stock options assumed for acquired business |
47,538 | — | |||||||||
Cash paid during the period for: |
|||||||||||
Interest |
$ | 1,982 | $ | 3,053 | |||||||
Income taxes |
6,788 | 4,494 | |||||||||
See accompanying notes to condensed consolidated financial statements.
4
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
| 1. | Summary of Significant Accounting Policies and Basis of Presentation | |
| In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which are normal recurring accruals) necessary to present fairly its financial position as of December 28, 2003, and June 29, 2003, and its condensed consolidated statements of income for the three and six months ended December 28, 2003, and December 29, 2002, and its condensed consolidated statements of cash flows for the six month period then ended. Interim results for the three and six months ended December 28, 2003, are not necessarily indicative of the results that may be expected for the year ending June 27, 2004. The interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2003. | ||
| Recently Adopted Accounting Standards | ||
| The Emerging Issues Task Force (“EITF”) recently reached a consensus on its tentative conclusions for EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 provides accounting guidance for customer solutions where delivery or performance of products, services and/or performance may occur at different points in time or over different periods of time. Companies are required to adopt this consensus for fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a material impact on the Company’s financial position, results of operations or liquidity. | ||
| In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation 46, “Consolidation of Variable Interest Entities,” an interpretation of ARB No. 51. Interpretation 46 addresses consolidation by business enterprises of variable interest entities. Interpretation 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first year or interim period beginning after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of Interpretation 46 did not have a material impact on the Company’s financial position, results of operations or liquidity. | ||
| In April 2003, the FASB issued Statement 149, an amendment of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which requires prospective application for contracts entered into or modified after June 30, 2003, except for contracts that exist in fiscal quarters that began prior to June 15, 2003, and for hedging relationships designated after June 30, 2003. For existing contracts in fiscal quarters that began prior to June 15, 2003, the provisions of this Statement that relate to Statement 133 implementation issues should continue to be applied in accordance with their respective effective dates. Statement 149 requires that contracts with comparable characteristics be accounted for similarly. The adoption of this pronouncement did not have a material impact on the Company’s financial position, results of operations or liquidity. | ||
| In May 2003, the FASB issued Statement 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” Statement 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. Statement 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Statement 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for public companies during the first interim period beginning after June 15, 2003. The adoption of this pronouncement did not have a material impact on the Company’s financial position, results of operations or liquidity. | ||
| Stock-Based Compensation | ||
| In December 2002, the FASB issued Statement 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Statement 148 amends the disclosure requirements in Statement 123, “Accounting for Stock-Based Compensation” for annual periods ending after December 15, 2002, and for interim periods beginning after December 15, 2002. The Company adopted the disclosure provisions of Statement 148 during the three months ended March 30, 2003. Effective for financial statements for fiscal years ending after December 15, 2002, Statement 148 also provides three alternative transition methods for companies that choose to adopt the fair value measurement provisions of Statement 123. Should the Company be required to adopt the fair value |
5
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
| measurement provisions of Statement 123 and Statement 148, it would have a material non-cash impact on the Company’s results of operations. However, the Company has no plans to adopt the fair value measurement provisions of Statement 123 unless required to under new accounting standards and, as such, the adoption of Statement 148 did not have a material impact on the Company’s financial position, results of operations or liquidity. | ||
| The Company accounts for its stock-based awards to employees using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25 and related Interpretations. Stock-based awards to non-employees, if any, are recorded using the fair value method. Had the Company determined compensation cost based on the fair value at the grant date for all its stock options under Statement 123, the Company’s net income would have been the pro forma amounts indicated below: |
| Three Months Ended | Six Months Ended | ||||||||||||||||
| December 28, | December 29, | December 28, | December 29, | ||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net income as reported |
$ | 3,615 | $ | 15,517 | $ | 26,203 | $ | 47,498 | |||||||||
Add: total employee
stock-based compensation
expense included in net
income as reported, net of
related tax effects |
1,732 | & | |||||||||||||||