UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-23298

 

QLogic Corporation

Delaware		33-0537669
(State of incorporation)		(I.R.S. Employer Identification No.)

Aliso Viejo, California 92656
(Address of principal executive office and zip code)

(949) 389-6000
(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 þ       No o

     Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes o      No o

     Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o       No þ

     As of January 28, 2010, 113,905,000 shares of the Registrant’s common stock were outstanding.

 

 

QLOGIC CORPORATION

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at December 27, 2009 and March 29, 2009			1
Condensed Consolidated Statements of Income for the three and nine months ended December 27, 2009 and December 28, 2008			2
Condensed Consolidated Statements of Cash Flows for the nine months ended December 27, 2009 and December 28, 2008			3
Notes to Condensed Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures About Market Risk			25
Item 4. Controls and Procedures			26
PART II. OTHER INFORMATION
Item 1A. Risk Factors			27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 6. Exhibits			39
Signatures			40
EX-31.1
EX-31.2
EX-32

PART I.
FINANCIAL INFORMATION

Item 1. Financial Statements

QLOGIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

		December 27,				March 29,
		2009				2009
		(Unaudited; In thousands,
		except share and per
		share amounts)
ASSETS
Current assets:
Cash and cash equivalents		$	145,142			$	203,722
Short-term investment securities			204,059				139,561
Accounts receivable, less allowance for doubtful accounts of $1,873 and $1,366 as of December 27, 2009 and March 29, 2009, respectively			86,101				68,519
Inventories			21,820				40,293
Deferred tax assets			17,827				19,002
Other current assets			13,892				10,854
Total current assets			488,841				481,951
Long-term investment securities			—				34,986
Property and equipment, net			86,060				92,547
Goodwill			119,748				118,859
Purchased intangible assets, net			18,786				19,117
Deferred tax assets			33,402				28,785
Other assets			3,813				4,045
		$	750,650			$	780,290
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	35,459			$	36,874
Accrued compensation			19,199				28,702
Accrued taxes			3,586				13,499
Deferred revenue			9,177				7,470
Other current liabilities			5,821				6,728
Total current liabilities			73,242				93,273
Accrued taxes			41,882				47,116
Deferred revenue			8,147				8,559
Other liabilities			4,865				4,797
Total liabilities			128,136				153,745
Stockholders’ equity:
Preferred stock, $0.001 par value; 1,000,000 shares authorized; no shares issued and outstanding			—				—
Common stock, $0.001 par value; 500,000,000 shares authorized; 203,874,000 and 202,009,000 shares issued at December 27, 2009 and March 29, 2009, respectively			204				202
Additional paid-in capital			756,401				712,064
Retained earnings			1,253,501				1,193,727
Accumulated other comprehensive income			1,163				634
Treasury stock, at cost; 89,523,000 and 82,478,000 shares at December 27, 2009 and March 29, 2009, respectively			(1,388,755	)			(1,280,082	)
Total stockholders’ equity			622,514				626,545
		$	750,650			$	780,290

See accompanying notes to condensed consolidated financial statements.

QLOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

		Three Months Ended								Nine Months Ended
		December 27,				December 28,				December 27,				December 28,
		2009				2008				2009				2008
		(Unaudited; In thousands, except per share amounts)
Net revenues		$	149,122			$	163,691			$	403,354			$	503,315
Cost of revenues			53,020				54,770				145,258				165,542
Gross profit			96,102				108,921				258,096				337,773
Operating expenses:
Engineering and development			33,978				33,117				102,294				100,565
Sales and marketing			18,812				20,918				58,268				67,895
General and administrative			8,780				8,172				24,923				24,892
Special charges			—				1,407				848				1,407
Total operating expenses			61,570				63,614				186,333				194,759
Operating income			34,532				45,307				71,763				143,014
Interest and other income, net			1,736				2,511				6,996				2,035
Income before income taxes			36,268				47,818				78,759				145,049
Income taxes			7,620				17,028				18,985				55,457
Net income		$	28,648			$	30,790			$	59,774			$	89,592
Net income per share:
Basic		$	0.25			$	0.24			$	0.51			$	0.69
Diluted		$	0.25			$	0.24			$	0.51			$	0.68
Number of shares used in per share calculations:
Basic			114,695				126,180				116,935				130,050
Diluted			116,479				126,497				117,965				130,932

See accompanying notes to condensed consolidated financial statements.

QLOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months Ended
		December 27,				December 28,
		2009				2008
		(Unaudited; In thousands)
Cash flows from operating activities:
Net income		$	59,774			$	89,592
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			23,912				24,579
Stock-based compensation			27,022				22,144
Acquisition-related:
Amortization of purchased intangible assets			6,719				12,319
Stock-based compensation			403				787
Deferred income taxes			4,554				15,632
Net gains on investment securities			(2,639	)			(4,469	)
Impairment of investment securities			—				12,002
Provision for losses on accounts receivable			512				111
Loss on disposal of property and equipment			657				137
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable			(17,378	)			(6,000	)
Inventories			19,503				(2,651	)
Other assets			148				(2,149	)
Accounts payable			(2,446	)			(2,073	)
Accrued compensation			(9,505	)			(5,376	)
Accrued taxes			(19,359	)			6,725
Deferred revenue			1,295				1,821
Other liabilities			(695	)			(702	)
Net cash provided by operating activities			92,477				162,429
Cash flows from investing activities:
Purchases of available-for-sale securities			(213,704	)			(60,266	)
Proceeds from sales and maturities of available-for-sale securities			175,513				102,198
Proceeds from disposition of trading securities			10,525				2,675
Reclassification of cash equivalents to other investment securities			—				(57,209	)
Distributions from other investment securities			3,076				6,540
Purchases of property and equipment			(17,605	)			(21,410	)
Acquisition of business, net of cash acquired			(14,931	)			—
Net cash used in investing activities			(57,126	)			(27,472	)
Cash flows from financing activities:
Proceeds from issuance of stock under stock plans			18,966				23,605
Minimum tax withholding paid on behalf of employees for restricted stock units			(2,833	)			(1,981	)
Tax effect from issuance of stock under stock plans			(154	)			323
Purchases of treasury stock			(108,976	)			(165,232	)
Payoff of line of credit assumed in acquisition			(934	)			—
Net cash used in financing activities			(93,931	)			(143,285	)
Net decrease in cash and cash equivalents			(58,580	)			(8,328	)
Cash and cash equivalents at beginning of period			203,722				160,009
Cash and cash equivalents at end of period		$	145,142			$	151,681

See accompanying notes to condensed consolidated financial statements.

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

     In the opinion of management of QLogic Corporation (QLogic or the Company), the accompanying unaudited condensed consolidated financial statements contain all normal recurring accruals and adjustments necessary to present fairly the Company’s consolidated 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 fiscal year ended March 29, 2009. The results of operations for the three and nine months ended December 27, 2009 are not necessarily indicative of the results that may be expected for the entire fiscal year. The Company has evaluated subsequent events through February 2, 2010, the date the financial statements were issued. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. Among the significant estimates affecting the consolidated financial statements are those related to revenue recognition, stock-based compensation, income taxes, investment securities, inventories, goodwill and long-lived assets.

     The Company evaluates its estimates on an ongoing basis using historical experience and other factors, including the current economic environment. The current volatility in the capital markets and the economy has increased the uncertainty in the Company’s estimates, including estimates impacting investment securities and long-lived assets. Significant judgment is required in determining the fair value of investment securities in inactive markets, as well as determining when declines in fair value constitute an other-than-temporary impairment. In addition, significant judgment is required in determining whether a potential indicator of impairment of the Company’s long-lived assets exists and in estimating future cash flows for any necessary impairment tests. Significant judgment is also required in determining the fair value of assets acquired and liabilities assumed in a business combination, including the fair value of identifiable intangible assets. As future events unfold and their effects cannot be determined with precision, actual results could differ significantly from management’s estimates.

Note 2. Business Combination

     On April 27, 2009, the Company acquired NetXen, Inc. (NetXen) in a merger transaction. Cash consideration was $17.6 million for all outstanding NetXen capital stock. NetXen developed, marketed and sold Ethernet adapter and controller products targeted at the enterprise server market. The acquisition expanded the Company’s product portfolio to include Ethernet networking products that are complementary to existing products. The acquisition also expanded the Company’s expertise to better address a wider range of emerging customer requirements for converged networks. The acquisition agreement provided for an adjustment to the purchase price based on the final working capital as of the date of acquisition. The Company finalized the working capital adjustment in the second quarter of fiscal 2010 and paid an additional $0.4 million. The acquisition agreement also required that $5.1 million of the consideration be placed into an escrow account in connection with certain representations and warranties. The consideration placed in escrow is scheduled to be released between 18 and 24 months after the date of the acquisition. The escrowed amounts have been accounted for as cash consideration as of the date of the acquisition.

     The consideration paid in excess of the fair value of the net assets acquired totaled $0.9 million, which has been recorded as goodwill in the accompanying condensed consolidated balance sheet as of December 27, 2009. None of the goodwill resulting from the acquisition will be tax deductible.

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The following table summarizes the allocation of the purchase price to the fair value of the assets acquired and liabilities assumed:

		(In thousands)
Cash		$	2,659
Accounts receivable			716
Inventories			1,030
Property and equipment			854
Goodwill			889
Identifiable intangible assets			6,410
Deferred tax assets			8,302
Other assets			352
Accounts payable and other liabilities			(1,751	)
Accrued compensation			(937	)
Line of credit			(934	)
		$	17,590

     A summary of the purchased intangible assets acquired as part of the acquisition of NetXen and their respective estimated useful lives are as follows:

		Weighted
		Average
		Useful Lives
		(Years)				Amount
						(In thousands)
Intangible Assets:
Core technology			7			$	5,400
Contractual licenses			5				1,010
						$	6,410

     The results of operations for NetXen have been included in the condensed consolidated financial statements from the date of acquisition. Pro forma results of operations have not been presented as the results of operations for NetXen are not material in relation to the condensed consolidated financial statements of the Company.

Note 3. Investment Securities

     Components of investment securities are as follows:

		December 27,				March 29,
		2009				2009
		(In thousands)
Available-for-sale securities		$	179,102			$	136,027
Trading securities			24,396				34,891
Other investment securities			561				3,629
Total investment securities			204,059				174,547
Less long-term investment securities			—				34,986
Short-term investment securities		$	204,059			$	139,561

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Available-For-Sale Securities

     The Company’s portfolio of available-for-sale securities consists of the following:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Fair Value
						(In thousands)
December 27, 2009
U.S. Government and agency securities		$	43,130			$	315			$	(22	)		$	43,423
Corporate debt obligations			76,629				1,471				(40	)			78,060
Asset and mortgage-backed securities			20,573				472				(9	)			21,036
Municipal bonds			5,707				1				—				5,708
Other governmental securities			750				—				(3	)			747
Total debt securities			146,789				2,259				(74	)			148,974
Certificates of deposit			30,128				—				—				30,128
Total available-for-sale securities		$	176,917			$	2,259			$	(74	)		$	179,102
March 29, 2009
U.S. Government and agency securities		$	51,776			$	868			$	(4	)		$	52,640
Corporate debt obligations			39,434				390				(190	)			39,634
Asset and mortgage-backed securities			20,691				418				(96	)			21,013
Municipal bonds			2,530				61				—				2,591
Total debt securities			114,431				1,737				(290	)			115,878
Certificate of deposit			20,054				—				—				20,054
Auction rate preferred securities			100				—				(5	)			95
Total available-for-sale securities		$	134,585			$	1,737			$	(295	)		$	136,027

     The amortized cost and estimated fair value of debt securities as of December 27, 2009, by contractual maturity, are presented below. Expected maturities will differ from contractual maturities because the issuers of securities may have the right to repay obligations without prepayment penalties. Certain debt instruments, although possessing a contractual maturity greater than one year, are classified as short-term investment securities based on their ability to be traded on active markets and availability for current operations.

		Amortized				Estimated
		Cost				Fair Value
		(In thousands)
Due in one year or less		$	8,927			$	9,090
Due after one year through three years			93,941				95,254
Due after three years through five years			19,047				19,302
Due after five years			24,874				25,328
		$	146,789			$	148,974

     As of December 27, 2009 and December 28, 2008, the fair value of certain of the Company’s available-for-sale securities was less than their cost basis. Management reviewed various factors in determining whether to recognize an impairment charge related to these unrealized losses, including the current financial and credit market environment, the financial condition and near-term prospects of the issuer of the investment security, the magnitude of the unrealized loss compared to the cost of the investment, the length of time the investment had been in a loss position and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery of market value. As of December 27, 2009, the Company determined that the unrealized losses are temporary in nature and recorded them as a component of accumulated other comprehensive income. Based on this analysis, the Company determined that a portion of the unrealized losses associated with the Company’s portfolio of available-for-sale securities were other-than-temporary and recorded impairment charges of $4.3 million and $10.3 million, which are included in interest and other income, net, in the accompanying condensed consolidated statements of income for the three and nine months ended December 28, 2008, respectively.

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The following table presents the Company’s investments with unrealized losses by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 27, 2009 and March 29, 2009.

		Less Than 12 Months								12 Months or Greater								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
Description of Securities		Value				Losses				Value				Losses				Value				Losses
										(In thousands)
December 27, 2009
U.S. Government and agency securities		$	3,597			$	(22	)		$	—			$	—			$	3,597			$	(22	)
Corporate debt obligations			11,469				(40	)			—				—				11,469				(40	)
Asset and mortgage-backed securities			3,318				(9	)			—				—				3,318				(9	)
Other governmental securities			747				(3	)			—				—				747				(3	)
Total		$	19,131			$	(74	)		$	—			$	—			$	19,131			$	(74	)
March 29, 2009
U.S. Government and agency securities		$	2,002			$	(4	)		$	—			$	—			$	2,002			$	(4	)
Corporate debt obligations			10,605				(190	)			—				—				10,605				(190	)
Asset and mortgage-backed securities			2,842				(96	)			—				—				2,842				(96	)
Auction rate preferred securities			95				(5	)			—				—				95				(5	)
Total		$	15,544			$	(295	)		$	—			$	—				15,544			$	(295	)

     The accompanying condensed consolidated statement of cash flows for the nine months ended December 28, 2008 has been adjusted to reflect net gains from the sale of available-for-sale securities as an investing activity. This adjustment resulted in a $0.9 million decrease in cash flow from operating activities and a corresponding increase in cash flow from investing activities. The Company has evaluated the materiality of this adjustment from a qualitative and quantitative perspective and concluded it is not material.

     Trading Securities

     The Company’s portfolio of trading securities consists of the following:

		December 27,				March 29,
		2009				2009
		(In thousands)
Auction rate debt securities		$	17,081			$	20,741
Auction rate preferred securities			4,334				4,869
Put options related to auction rate securities			2,981				9,281
Total trading securities		$	24,396			$	34,891

     The Company’s trading securities include investments in auction rate securities (ARS), the majority of which are rated AA or higher. During late fiscal 2008, the market auctions of many ARS began to fail, including auctions for the Company’s ARS. The underlying assets for the auction rate debt securities in the Company’s portfolio are student loans, substantially all of which are backed by the federal government under the Federal Family Education Loan Program. The underlying assets of the Company’s auction rate preferred securities are the respective funds’ investment portfolios.

     In November 2008, the Company entered into an agreement with the broker for all of the ARS currently held by the Company, which provides the Company with certain rights (ARS Rights), in exchange for the release of potential claims and damages against the broker. The ARS Rights entitle the Company to sell the related ARS back to the broker for a price equal to the liquidation preference of the ARS plus accrued but unpaid dividends or interest, if any, which price is referred to as “par.” The ARS Rights may be exercised by the Company at any time between June 30, 2010 and July 2, 2012, if the securities are not earlier redeemed or sold. Under the ARS Rights, the broker may, at its discretion, purchase the ARS at any time through July 2, 2012 without prior notice to the Company and must pay the Company par value for the ARS within one day of the sale transaction settlement.

     The ARS Rights agreement, a legally enforceable contract, resulted in put options that were recognized as free standing assets separate from the ARS. The Company elected to measure the put options at fair value. In connection with the election to measure the put options at fair value, the Company classified these financial instruments as trading securities and recorded the initial fair value of $8.1 million in investment securities. The associated gains are recognized in interest and other income, net, in the accompanying

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

condensed consolidated statements of income for the three and nine months ended December 28, 2008. The ARS associated with the ARS Rights, previously classified as available-for-sale securities, were reclassified to trading securities during the three months ended December 28, 2008. As a result, the Company recognized a loss of $3.4 million, which had previously been recorded in accumulated other comprehensive income and $1.1 million related to changes in the fair market value of the trading securities subsequent to the reclassification. The loss related to the ARS is included in interest and other income, net, in the accompanying condensed consolidated statements of income for the three and nine months ended December 28, 2008.

     As the ARS Rights may be exercised beginning June 30, 2010, the Company has classified its auction rate debt and preferred securities, as well as the related put options, as short-term investment securities as of December 27, 2009.

     Other Investment Securities

     The Company’s other investment securities are comprised of a money market fund and an enhanced cash fund sponsored by The Reserve (an asset management company), which suspended trading and redemptions in September 2008. These funds are in the process of being liquidated and the Company expects the liquidation to occur in stages with proceeds distributed as the underlying securities mature or are sold. These funds do not have readily determinable fair values and thus have been accounted for under the cost method.

     During fiscal 2009, the Company reclassified $57.2 million of investments in the funds sponsored by The Reserve from cash equivalents to short-term investments. This reclassification has been presented separately as an investing activity in the accompanying condensed consolidated statement of cash flows for the nine months ended December 28, 2008, to conform to the presentation in the fiscal 2009 annual consolidated financial statements. The Company received net proceeds from the partial liquidation of these funds totaling $3.1 million and $6.5 million for the nine months ended December 27, 2009 and December 28, 2008, respectively, which are presented separately as an investing activity in the accompanying condensed consolidated statements of cash flows. Also during the nine months ended December 28, 2008, the Company recorded a $1.7 million impairment charge related to these investments.

     Fair Value Measurements

     Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. A description of the three levels of inputs is as follows:

	•		Level 1 — Quoted prices in active markets for identical assets or liabilities.
	•		Level 2 — Inputs other than Level 1 inputs that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
	•		Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Assets measured at fair value on a recurring basis as of December 27, 2009 and March 29, 2009 are as follows:

		Fair Value Measurements Using
		Level 1				Level 2				Level 3				Total
		(In thousands)
December 27, 2009
U.S. Government and agency securities		$	43,423			$	—			$	—			$	43,423
Corporate debt obligations			—				78,060				—				78,060
Asset and mortgage-backed securities			—				21,036				—				21,036
Municipal bonds			—				5,708				—				5,708
Other governmental securities			—				747				—				747
Certificates of deposit			30,128				—				—				30,128
Total available-for-sale securities			73,551				105,551				—				179,102
Auction rate debt securities			—				—				17,081				17,081
Auction rate preferred securities			—				—				4,334				4,334
Put options related to auction rate securities			—				—				2,981				2,981
Total trading securities			—				—				24,396				24,396
Balance as of December 27, 2009		$	73,551			$	105,551			$	24,396			$	203,498

		Fair Value Measurements Using
		Level 1				Level 2				Level 3				Total
						(In thousands)
March 29, 2009
U.S. Government and agency securities		$	52,640			$	—			$				$	52,640
Corporate debt obligations			36,586				3,048				—				39,634
Asset and mortgage-backed securities			3,621				17,392				—				21,013
Municipal bonds			2,591				—				—				2,591
Certificate of deposit			20,054				—				—				20,054
Auction rate preferred securities			—				—				95				95
Total available-for-sale securities			115,492				20,440				95				136,027
Auction rate debt securities			—				—				20,741				20,741
Auction rate preferred securities			—				—				4,869				4,869
Put options related to auction rate securities			—				—				9,281				9,281
Total trading securities			—				—				34,891				34,891
Balance as of March 29, 2009		$	115,492			$	20,440			$	34,986			$	170,918

     The Company’s investments in auction rate securities and the related put options are classified within Level 3 because there are currently no active markets for these securities and the Company is unable to obtain independent valuations from market sources. Therefore, the auction rate securities and the related put options were primarily valued based on an income approach using estimates of future cash flows. The assumptions used in preparing these discounted cash flow models included estimates for the amount and timing of future interest and principal payments, the collateralization of underlying security investments, the creditworthiness of the issuer and the rate of return required by investors to own these securities in the current environment, including call and liquidity premiums. The total amount of assets measured using Level 3 valuation methodologies represented 3% of total assets as of December 27, 2009.

     A summary of the changes in Level 3 assets measured at fair value on a recurring basis for the three and nine months ended December 27, 2009 is as follows:

		Balance				Total Realized				Total Unrealized				Sales and Other				Balance
Three Months Ended December 27, 2009		September 27, 2009				Gains and Losses				Gains and Losses				Settlements				December 27, 2009
										(In thousands)
Auction rate debt securities		$	18,574			$	269			$	—			$	(1,762	)		$	17,081
Auction rate preferred securities			4,334				—				—				—				4,334
Put options related to auction rate securities			3,230				(249	)			—				—				2,981
Total		$	26,138			$	20			$	—			$	(1,762	)		$	24,396

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

		Balance				Total Realized				Total Unrealized				Sales and Other				Balance
Nine Months Ended December 27, 2009		March 29, 2009				Gains and Losses				Gains and Losses				Settlements				December 27, 2009
										(In thousands)
Auction rate debt securities		$	20,741			$	644			$	—			$	(4,304	)		$	17,081
Auction rate preferred securities			4,964				5,802				5				(6,437	)			4,334
Put options related to auction rate securities			9,281				(6,300	)			—				—				2,981
Total		$	34,986			$	146			$	5			$	(10,741	)		$	24,396

     Realized gains and losses are included in interest and other income, net, in the accompanying condensed consolidated statements of income for the three and nine months ended December 27, 2009.

Note 4. Inventories

     Components of inventories are as follows:

		December 27,				March 29,
		2009				2009
		(In thousands)
Raw materials		$	8,401			$	15,780
Finished goods			13,419				24,513
		$	21,820			$	40,293

Note 5. Purchased Intangible Assets

     Purchased intangible assets consist of the following:

		December 27, 2009												March 29, 2009
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
		Value				Amortization				Value				Value				Amortization				Value
		(In thousands)
Acquisition-related intangibles:
Core/developed technology		$	49,100			$	31,897			$	17,203			$	43,700			$	27,277			$	16,423
Customer relationships			9,700				9,700				—				9,700				7,814				1,886
Other			1,785				910				875				775				697				78
			60,585				42,507				18,078				54,175				35,788				18,387
Other purchased intangibles:
Technology-related			3,432				2,724				708				2,911				2,181				730
		$	64,017			$	45,231			$	18,786			$	57,086			$	37,969			$	19,117

     A summary of the amortization expense, by classification, included in the accompanying condensed consolidated statements of income is as follows:

		Three Months Ended								Nine Months Ended
		December 27,				December 28,				December 27,				December 28,
		2009				2008				2009				2008
						(in thousands)
Cost of revenues		$	1,815			$	2,082			$	5,376			$	10,421
Engineering and development			—				32				—				94
Sales and marketing			269				808				1,886				2,425
		$	2,084			$	2,922			$	7,262			$	12,940

     The following table presents the estimated future amortization expense of purchased intangible assets as of December 27, 2009:

Fiscal		(In thousands)
2010 (remaining three months)		$	1,676
2011			6,718
2012			6,653
2013			1,088
2014			1,023
2015 and thereafter			1,628
		$	18,786

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 6. Treasury Stock

     Since fiscal 2003, the Company has had various stock repurchase programs that authorized the purchase of up to $1.55 billion of the Company’s outstanding common stock. During the nine months ended December 27, 2009, the Company purchased 7.0 million shares of its common stock for an aggregate purchase price of $108.7 million. As of December 27, 2009, the Company had purchased a total of 89.5 million shares of common stock under these repurchase programs for an aggregate purchase price of $1.39 billion.

     Repurchased shares have been recorded as treasury shares and will be held until the Company’s Board of Directors designates that these shares be retired or used for other purposes.

Note 7. Stock-Based Compensation

     During the nine months ended December 27, 2009, the Company granted options to purchase 3.8 million shares of common stock and 1.5 million restricted stock units with weighted average grant date fair values of $5.30 and $13.84 per share, respectively.

     A summary of stock-based compensation expense, excluding stock-based compensation related to acquisitions, recorded by functional line item in the accompanying condensed consolidated statements of income is as follows:

		Three Months Ended								Nine Months Ended
		December 27,				December 28,				December 27,				December 28,
		2009				2008				2009				2008
		(In thousands)
Cost of revenues		$	650			$	569			$	2,039			$	1,577
Engineering and development			4,222				3,748				13,719				11,600
Sales and marketing			1,629				1,288				5,230				4,303
General and administrative			1,955				1,400				6,034				4,664
		$	8,456			$	7,005			$	27,022			$	22,144

Note 8. Special Charges

     The Company recorded special charges of $0.9 million during the three months ended September 27, 2009 related to its acquisition of NetXen. The special charges consisted of exit costs related to the former NetXen leased facility that the Company vacated and severance benefits for involuntarily terminated employees. As of December 27, 2009, all severance benefits had been paid. The unpaid exit costs associated with the leased facility are expected to be paid over the next nine months.

     During the three months ended December 28, 2008, the Company implemented a workforce reduction initiative, primarily in response to the macroeconomic environment, and recorded special charges totaling $1.4 million associated with the cost of severance benefits for the affected employees, all of which had been paid as of December 27, 2009.

Note 9. Interest and Other Income, Net

     Components of interest and other income, net, are as follows:

		Three Months Ended								Nine Months Ended
		December 27,				December 28,				December 27,				December 28,
		2009				2008				2009				2008
		(In thousands)
Interest income		$	1,203			$	2,850			$	4,216			$	9,435
Gain on sales of available-for-sale securities			798				559				4,200				993
Loss on sales of available-for-sale securities			(282	)			(87	)			(1,715	)			(129	)
Gain on recognition of put options (see Note 3)			—				8,147				—				8,147
Loss on trading securities			—				(4,542	)			—				(4,542	)
Impairment of investment securities			—				(4,259	)			—				(12,002	)
Other			17				(157	)			295				133
		$	1,736			$	2,511			$	6,996			$	2,035

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 10. Income Taxes

     The Company’s provision for income taxes was $19.0 million and $55.5 million for the nine months ended December 27, 2009 and December 28, 2008, respectively. The effective income tax rate was 24% and 38% for the nine months ended December 27, 2009 and December 28, 2008, respectively. The effective income tax rate is based upon the estimated income for the year, the composition of the estimated income in different tax jurisdictions, and adjustments, if any, in the applicable quarterly periods for the potential tax consequences, benefits or resolutions of tax audits or other tax contingencies. The allocation of taxable income to domestic and foreign tax jurisdictions impacts the effective tax rate as the Company’s income tax rate in foreign jurisdictions is lower than its income tax rate in the U.S.

Note 11. Net Income Per Share

     The following table sets forth the computation of basic and diluted net income per share:

		Three Months Ended								Nine Months Ended
		December 27,				December 28,				December 27,				December 28,
		2009				2008				2009				2008
		(In thousands, except per share amounts)
Net income		$	28,648			$	30,790			$	59,774			$	89,592
Shares:
Weighted-average shares outstanding — basic			114,695				126,180				116,935				130,050
Dilutive potential common shares, using treasury stock method			1,784				317				1,030				882
Weighted-average shares outstanding — diluted			116,479				126,497				117,965				130,932
Net income per share:
Basic		$	0.25			$	0.24			$	0.51			$	0.69
Diluted		$	0.25			$	0.24			$	0.51			$	0.68

     Stock-based awards, including stock options and restricted stock units, representing 18.1 million and 23.7 million shares of common stock have been excluded from the diluted net income per share calculations for the three and nine months ended December 27, 2009, respectively, and 27.5 million and 25.2 million shares of common stock have been excluded from the diluted net income per share calculations for the three and nine months ended December 28, 2008, respectively. These stock-based awards have been excluded from the diluted net income per share calculations because their effect would have been antidilutive.

Note 12. Comprehensive Income

     Components of comprehensive income are as follows:

		Three Months Ended								Nine Months Ended
		December 27,				December 28,				December 27,				December 28,
		2009				2008				2009				2008
		(In thousands)
Net income		$	28,648			$	30,790			$	59,774			$	89,592
Other comprehensive income:
Changes in unrealized gains on investment securities, net of tax			16				4,173				529				2,821
		$	28,664			$	34,963			$	60,303			$	92,413

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes. In this discussion and elsewhere in this report, we make forward-looking statements. These forward-looking statements are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, descriptions of our expectations regarding future trends affecting our business and other statements regarding future events or our objectives, goals, strategies, beliefs and underlying assumptions that are other than statements of historical fact. When used in this report, the words “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” “will” and similar expressions, or the negative of such expressions, are intended to identify these forward-looking statements. Statements concerning current conditions may also be forward-looking if they imply a continuation of current conditions. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of several factors, including, but not limited to those factors set forth and discussed in Part II, Item 1A “Risk Factors” and elsewhere in this report. In light of the significant uncertainties inherent in the forward-looking information included in this report, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. You are cautioned, therefore, not to place undue reliance on these forward-looking statements, which are made only as of the date of this report. We undertake no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

     We are a designer and supplier of high performance storage networking, server networking, data networking and converged networking infrastructure solutions. Our solutions are sold worldwide, primarily to original equipment manufacturers, or OEMs, and distributors. We sell Fibre Channel and Internet Small Computer Systems Interface, or iSCSI, host bus adapters; InfiniBand^® host channel adapters; Fibre Channel over Ethernet, or FCoE, converged network adapters; and Ethernet adapters, which we collectively refer to as Host Products. We sell Fibre Channel switches, including stackable edge, blade and virtualized pass-through switches; InfiniBand switches, including high-end multi-protocol directors, edge and blade switches; Enhanced Ethernet pass-through modules; and storage routers for bridging Fibre Channel and iSCSI networks, which we collectively refer to as Network Products. We also sell Fibre Channel controllers, iSCSI controllers, converged network controllers and Ethernet controllers, all for select embedded and target applications, which we collectively refer to as Silicon Products.

     Our products are incorporated in solutions from a number of OEM customers, including Cisco Systems, Inc., Dell Inc., EMC Corporation, Hewlett-Packard Company, International Business Machines Corporation, NetApp, Inc., Sun Microsystems, Inc. and many others.

     Business Combination

     On April 27, 2009, we acquired NetXen, Inc. (NetXen) in a merger transaction. Cash consideration was $17.6 million for all outstanding NetXen capital stock. NetXen developed, marketed and sold Ethernet adapter and controller products targeted at the enterprise server market. The acquisition expanded our product portfolio to include Ethernet networking products that are complementary to our existing products. The acquisition also expanded our expertise to better address a wider range of emerging customer requirements for converged networks. The acquisition agreement required that $5.1 million of the consideration be placed into an escrow account in connection with certain representations and warranties. The consideration placed in escrow is scheduled to be released between 18 and 24 months after the date of the acquisition. The escrowed amounts have been accounted for as cash consideration as of the date of the acquisition.

     Third Quarter Financial Highlights and Other Information

     A summary of the key factors and significant events which impacted our financial performance during the third quarter of fiscal 2010 are as follows:

	•		Net revenues of $149.1 million for the third quarter of fiscal 2010 increased sequentially by $17.6 million, or 13%, from $131.5 million in the second quarter of fiscal 2010. Revenues from Host Products of $110.4 million for the third quarter of fiscal 2010 increased sequentially by $16.4 million, or 17%, from $94.0 million in the second quarter of fiscal 2010.
	•		Gross profit as a percentage of net revenues increased to 64.4% for the third quarter of fiscal 2010 from 63.7% in the second quarter of fiscal 2010.

	•		Operating income as a percentage of net revenues increased to 23.2% for the third quarter of fiscal 2010 from 15.8% in the second quarter of fiscal 2010.
	•		Net income increased to $28.6 million, or $0.25 per diluted share, in the third quarter of fiscal 2010 from $16.2 million, or $0.14 per diluted share, in the second quarter of fiscal 2010.
	•		Cash, cash equivalents and investment securities increased to $349.2 million at December 27, 2009 from $340.4 million at September 27, 2009.
	•		Accounts receivable was $86.1 million as of December 27, 2009, compared to $75.2 million as of September 27, 2009. Days sales outstanding (DSO) in receivables was 53 days as of December 27, 2009 compared to 52 days as of September 27, 2009.
	•		Inventories were $21.8 million as of December 27, 2009, compared to $23.3 million as of September 27, 2009. Our annualized inventory turns in the third quarter of fiscal 2010 increased to 9.7 turns from 8.2 turns in the second quarter of fiscal 2010.

     As a result of worldwide economic uncertainty, it is extremely difficult for us and our customers to forecast future sales levels based on historical information and trends. Portions of our expenses are fixed and others are tied to expected levels of sales activities. To the extent that we do not achieve our anticipated level of sales, our gross profit and net income could be adversely affected until such expenses are reduced to an appropriate level.

Results of Operations

     Net Revenues

          A summary of the components of our net revenues is as follows:

		Three Months Ended								Nine Months Ended
		December 27,				December 28,				December 27,				December 28,
		2009				2008				2009				2008
		(Dollars in millions)
Net revenues:
Host Products		$	110.4			$	112.2			$	292.8			$	352.5
Network Products			27.4				32.8				76.9				92.5
Silicon Products			8.7				16.5				25.7				47.7
Royalty and Service			2.6				2.2				8.0				10.6
Total net revenues		$	149.1			$	163.7			$	403.4			$	503.3
Percentage of net revenues:
Host Products			74	%			69	%			73	%			70	%
Network Products			18				20				19				18
Silicon Products			6				10				6				10
Royalty and Service			2				1				2				2
Total net revenues			100	%			100	%			100	%			100	%

     Historically, the global marketplace for network infrastructure solutions has expanded in response to the information storage requirements of enterprise business environments, as well as the market for solutions in high performance computing environments. These markets have been characterized by rapid advances in technology and related product performance, which has generally resulted in declining average selling prices over time. In general, our revenues have been favorably affected by increases in units sold as a result of market expansion and the release of new products. The favorable effect on our revenues as a result of increases in volume has been partially offset by the impact of declining average selling prices.

     The United States and other countries around the world have been experiencing deteriorating economic conditions. This economic decline has resulted in a global downturn in information technology spending rates, which has negatively impacted our revenue and operating results. Accordingly, it is extremely difficult for us to forecast future sales levels and historical information may not be indicative of future trends.

     Our net revenues are derived primarily from the sale of Host Products, Network Products and Silicon Products. Net revenues decreased 9% to $149.1 million for the three months ended December 27, 2009 from $163.7 million for the three months ended

December 28, 2008. This decrease was primarily the result of a $1.8 million, or 2%, decrease in revenue from Host Products; a $5.4 million, or 16%, decrease in revenue from Network Products; and a $7.8 million, or 47%, decrease in revenue from Silicon Products. The decrease in revenue from Host Products was primarily due to a 6% decrease in the average selling prices of host bus adapters on a consistent unit volume, partially offset by an over 400% increase in revenue from the early market acceptance of FCoE adapters and the addition of Ethernet adapters as a result of the NetXen acquisition. The decrease in revenue from Network Products was primarily due to a 61% decrease in the number of Infiniband switches sold, partially offset by a 48% increase in the average selling prices of these products, primarily due to a change in mix to higher capacity switches. Revenue from Network Products was also impacted by a 10% decrease in the number of Fibre Channel switches sold and a 2% decrease in the average selling prices of these products. The decrease in revenue from Silicon Products was due primarily to a 42% decrease in the units of protocol chips sold and a 10% decrease in the average selling prices of these products. Net revenues for the three months ended December 27, 2009 included $2.6 million of royalty and service revenue compared with $2.2 million of royalty and service revenue for the three months ended December 28, 2008. Royalty and service revenues are unpredictable and we do not expect them to be significant to our overall revenues.

     Net revenues decreased 20% to $403.4 million for the nine months ended December 27, 2009 from $503.3 million for the nine months ended December 28, 2008. This decrease was primarily the result of a $59.7 million, or 17%, decrease in revenue from Host Products; a $15.6 million, or 17%, decrease in revenue from Network Products; and a $22.0 million, or 46%, decrease in revenue from Silicon Products. The decrease in revenue from Host Products was primarily due to a 14% decrease in the quantity of host bus adapters sold and a 6% decrease in the average selling prices of these products, partially offset by an over 500% increase in revenue from the early market acceptance of FCoE adapters and the addition of Ethernet adapters as a result of the NetXen acquisition. The decrease in revenue from Network Products was primarily due to a 15% decrease in the number of Fibre Channel switches sold and a 10% decrease in the average selling prices of these products. The decrease in revenue from Silicon Products was due primarily to a 34% decrease in the units of protocol chips sold, an 11% decrease in the average selling prices of these products and a $3.8 million decrease in revenue from management controller chips, as these products reached end-of-life in fiscal 2009. Net revenues for the nine months ended December 27, 2009 included $8.0 million of royalty and service revenue compared with $10.6 million of royalty and service revenue for the nine months ended December 28, 2008.

     A small number of our customers account for a substantial portion of our net revenues, and we expect that a small number of customers will continue to represent a substantial portion of our net revenues for the foreseeable future. Our top ten customers accounted for 88% and 83% of net revenues during the nine months ended December 27, 2009 and December, 28, 2008, respectively.

     We believe that our major customers continually evaluate whether or not to purchase products from alternative or additional sources. Accordingly, there can be no assurance that a major customer will not reduce, delay or eliminate its purchases from us. Any such reduction, delay or loss of purchases could have a material adverse effect on our business, financial condition or results of operations.

     Net revenues by geographic area are as follows:

		Three Months Ended								Nine Months Ended
		December 27,				December 28,				December 27,				December 28,
		2009				2008				2009				2008
		(In millions)
United States		$	66.5			$	75.8			$	185.9			$	240.1
Asia-Pacific and Japan			37.6				39.0				100.4				111.4
Europe, Middle East and Africa			35.5				40.4				91.7				123.4
Rest of the world			9.5				8.5				25.4				28.4
Total net revenues		$	149.1			$	163.7			$	403.4			$	503.3

     Revenues by geographic area are presented based upon the country of destination, which is not necessarily indicative of the location of the ultimate end-user of our products.

  Gross Profit

     Gross profit represents net revenues less cost of revenues. Cost of revenues consists primarily of the cost of purchased products, assembly and test services; costs associated with product procurement, inventory management, logistics and product quality; and the amortization of purchased intangible assets. A summary of our gross profit and related percentage of net revenues is as follows:

		Three Months Ended								Nine Months Ended
		December 27,				December 28,				December 27,				December 28,
		2009				2008				2009				2008
		(Dollars in millions)
Gross profit		$	96.1			$	108.9			$	258.1			$	337.8
Percentage of net revenues			64.4	%			66.5	%			64.0	%			67.1	%

     Gross profit for the three months ended December 27, 2009 decreased $12.8 million, or 12%, from gross profit for the three months ended December 28, 2008. The gross profit percentage for the three months ended December 27, 2009 was 64.4% and decreased from 66.5% for the corresponding period in the prior year. The decrease in gross profit percentage was primarily due to lower volumes to absorb manufacturing costs and a change in product mix.

     Gross profit for the nine months ended December 27, 2009 decreased $79.7 million, or 24%, from gross profit for the nine months ended December 28, 2008. The gross profit percentage for the nine months ended December 27, 2009 was 64.0% and decreased from 67.1% for the corresponding period in the prior year. The decrease in gross profit percentage was primarily due to lower volumes to absorb manufacturing costs, a change in product mix and a $3.5 million one-time royalty in fiscal 2009, partially offset by a $5.0 million decrease in amortization of purchased intangible assets.

     Our ability to maintain our current gross profit percentage can be significantly affected by factors such as manufacturing volumes over which fixed costs are absorbed, sales discounts and customer incentives, component costs, the mix of products shipped, the transition to new products, competitive price pressures, the timeliness of volume shipments of new products, the level of royalties received, our ability to achieve manufacturing cost reductions, and amortization and impairments of purchased intangible assets. We anticipate that it will be increasingly difficult to reduce manufacturing costs. As a result of these and other factors, it may be difficult to maintain our gross profit percentage consistent with historical periods and it may decline in the future.

  Operating Expenses

     Our operating expenses are summarized in the following table:

		Three Months Ended								Nine Months Ended
		December 27,				December 28,				December 27,				December 28,
		2009				2008				2009				2008
		(Dollars in millions)
Operating expenses:
Engineering and development		$	34.0			$	33.1			$	102.3			$	100.6
Sales and marketing			18.8				20.9				58.2				67.9
General and administrative			8.8				8.2				24.9				24.9
Special charges			—				1.4				0.9				1.4
Total operating expenses		$	61.6			$	63.6			$	186.3			$	194.8
Percentage of net revenues:
Engineering and development			22.8	%			20.2	%			25.4	%			20.0	%
Sales and marketing			12.6				12.8				14.4				13.5
General and administrative			5.9				5.0				6.2				4.9
Special charges			—				0.9				0.2				0.3
Total operating expenses			41.3	%			38.9	%			46.2	%			38.7	%