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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 30, 2012

Commission file number 0-23298

 

 

QLogic Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   33-0537669
(State of incorporation)  

(I.R.S. Employer

Identification No.)

26650 Aliso Viejo Parkway

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  x    No  ¨

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  x    No  ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of January 25, 2013, 90,901,000 shares of the Registrant’s common stock were outstanding.

 

 

 


Table of Contents

QLOGIC CORPORATION

INDEX

 

         Page  
    PART I. FINANCIAL INFORMATION       

Item 1.

 

Financial Statements:

  
 

Condensed Consolidated Balance Sheets as of December 30, 2012 and April 1, 2012

     1   
 

Condensed Consolidated Statements of Income for the three and nine months ended December 30, 2012 and January 1, 2012

     2   
 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended December 30, 2012 and January 1, 2012

     3   
 

Condensed Consolidated Statements of Cash Flows for the nine months ended December 30, 2012 and January 1, 2012

     4   
 

Notes to Condensed Consolidated Financial Statements

     5   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     10   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     19   

Item 4.

 

Controls and Procedures

     19   
  PART II. OTHER INFORMATION   

Item 1A.

 

Risk Factors

     20   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     31   

Item 6.

 

Exhibits

     32   
 

Signatures

     33   

 

i


Table of Contents

PART I.

FINANCIAL INFORMATION

 

Item 1. Financial Statements

QLOGIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     December 30,
2012
    April 1,
2012
 
    

(Unaudited; In thousands,
except share and per

share amounts)

 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 99,856      $ 164,516   

Marketable securities

     395,327        373,439   

Accounts receivable, less allowance for doubtful accounts of $1,355 and $1,446 as of December 30, 2012 and April 1, 2012, respectively

     69,499        76,588   

Inventories

     23,035        19,724   

Deferred tax assets

     13,838        16,780   

Other current assets

     23,006        35,842   
  

 

 

   

 

 

 

Total current assets

     624,561        686,889   

Property and equipment, net

     88,393        78,010   

Goodwill

     110,976        110,976   

Purchased intangible assets, net

     4,360        5,277   

Deferred tax assets

     35,655        30,558   

Other assets

     1,553        1,708   
  

 

 

   

 

 

 
   $ 865,498      $ 913,418   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 30,547      $ 34,198   

Accrued compensation

     25,941        28,326   

Accrued taxes

     2,452        2,799   

Deferred revenue

     5,711        6,504   

Other current liabilities

     11,080        9,390   
  

 

 

   

 

 

 

Total current liabilities

     75,731        81,217   

Accrued taxes

     66,953        64,853   

Other liabilities

     6,284        7,505   
  

 

 

   

 

 

 

Total liabilities

     148,968        153,575   
  

 

 

   

 

 

 

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; 211,931,000 and 210,688,000 shares issued as of December 30, 2012 and April 1, 2012, respectively

     212        211   

Additional paid-in capital

     924,604        901,734   

Retained earnings

     1,660,702        1,617,201   

Accumulated other comprehensive income

     1,883        1,033   

Treasury stock, at cost: 120,429,000 and 111,911,000 shares as of December 30, 2012 and April 1, 2012, respectively

     (1,870,871     (1,760,336
  

 

 

   

 

 

 

Total stockholders’ equity

     716,530        759,843   
  

 

 

   

 

 

 
   $ 865,498      $ 913,418   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

1


Table of Contents

QLOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

     Three Months Ended      Nine Months Ended  
     December 30,
2012
    January 1,
2012
     December 30,
2012
    January 1,
2012
 
     (Unaudited; In thousands, except per share amounts)  

Net revenues

   $ 119,386      $ 142,779       $ 367,624      $ 423,535   

Cost of revenues

     39,089        45,766         121,382        133,979   
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     80,297        97,013         246,242        289,556   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating expenses:

         

Engineering and development

     38,409        34,229         115,891        104,146   

Sales and marketing

     19,325        19,858         57,950        58,088   

General and administrative

     8,139        8,803         24,951        26,820   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

     65,873        62,890         198,792        189,054   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     14,424        34,123         47,450        100,502   

Interest and other income, net

     903        798         2,935        2,926   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations before income taxes

     15,327        34,921         50,385        103,428   

Income taxes

     1,622        5,700         6,459        13,504   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations

     13,705        29,221         43,926        89,924   

Income (loss) from discontinued operations, net of income taxes

     (464     804         (425     1,181   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 13,241      $ 30,025       $ 43,501      $ 91,105   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations per share:

         

Basic

   $ 0.15      $ 0.29       $ 0.46      $ 0.88   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

   $ 0.15      $ 0.29       $ 0.46      $ 0.87   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) from discontinued operations per share:

         

Basic

   $ (0.01   $ 0.01       $      $ 0.01   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

   $ (0.01   $ 0.01       $      $ 0.01   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income per share:

         

Basic

   $ 0.14      $ 0.30       $ 0.46      $ 0.89   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

   $ 0.14      $ 0.30       $ 0.46      $ 0.88   
  

 

 

   

 

 

    

 

 

   

 

 

 

Number of shares used in per share calculations:

         

Basic

     92,386        100,135         94,518        102,696   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

     92,570        100,668         94,963        103,340   
  

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

2


Table of Contents

QLOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Three Months Ended     Nine Months Ended  
     December 30,
2012
    January 1,
2012
    December 30,
2012
     January 1,
2012
 
     (Unaudited; In thousands)  

Net income

   $ 13,241      $ 30,025      $ 43,501       $ 91,105   

Other comprehensive income, net of income taxes:

         

Changes in unrealized gains on marketable securities

     (314     276        847         (99

Foreign currency translation adjustments

     (71     (58     3         (216
  

 

 

   

 

 

   

 

 

    

 

 

 

Total other comprehensive income (loss)

     (385     218        850         (315
  

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive income

   $ 12,856      $ 30,243      $ 44,351       $ 90,790   
  

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

QLOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Nine Months Ended  
     December 30,
2012
    January 1,
2012
 
     (Unaudited; In thousands)  

Cash flows from operating activities:

    

Net income

   $ 43,501      $ 91,105   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     21,071        24,514   

Stock-based compensation

     23,295        25,787   

Deferred income taxes

     (3,810     (4,334

Other non-cash items

     3,138        5,082   

Changes in operating assets and liabilities:

    

Accounts receivable

     7,179        (12,244

Inventories

     (3,311     (36

Other assets

     113        119   

Accounts payable

     (2,499     (2,333

Accrued compensation

     (2,385     2,382   

Accrued taxes, net

     14,367        4,531   

Deferred revenue

     (625     (1,412

Other liabilities

     1,495        936   
  

 

 

   

 

 

 

Net cash provided by operating activities

     101,529        134,097   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of available-for-sale securities

     (228,202     (336,005

Proceeds from sales and maturities of available-for-sale securities

     204,325        247,928   

Purchases of property and equipment

     (31,728     (23,480
  

 

 

   

 

 

 

Net cash used in investing activities

     (55,605     (111,557
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of common stock under stock-based awards

     6,571        12,674   

Excess tax benefits from stock-based awards

     129        529   

Minimum tax withholding paid on behalf of employees for restricted stock units

     (5,555     (5,425

Purchases of treasury stock

     (111,729     (103,900
  

 

 

   

 

 

 

Net cash used in financing activities

     (110,584     (96,122
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (64,660     (73,582

Cash and cash equivalents at beginning of period

     164,516        147,780   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 99,856      $ 74,198   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

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 April 1, 2012. The results of operations for the three and nine months ended December 30, 2012 are not necessarily indicative of the results that may be expected for the entire fiscal year. The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. The Company evaluates its estimates on an ongoing basis using historical experience and other factors, including the current economic environment. 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 actual results experienced by the Company could differ materially from management’s estimates.

Certain immaterial reclassifications have been made to prior year amounts to conform to the current year presentation.

Recently Adopted Accounting Standards

In June 2011, the Financial Accounting Standards Board issued an accounting standards update regarding the presentation of comprehensive income. Presentation of the components of net income, the components of other comprehensive income and total comprehensive income is required in either a single continuous statement of comprehensive income or in two separate consecutive statements. The Company adopted this standard beginning in the first quarter of fiscal 2013 on a retrospective basis, as reflected in the condensed consolidated statements of comprehensive income.

Note 2. Discontinued Operations

On February 29, 2012, the Company completed the sale of the product lines and certain assets associated with its InfiniBand business (the IB Business). The IB Business meets the criteria to be presented as discontinued operations. As a result of this divestiture, the Company’s condensed consolidated financial statements for all periods present the operations of the IB Business as discontinued operations.

Income from discontinued operations consists of direct revenues and direct expenses of the IB Business, including cost of revenues, as well as other fixed and allocated costs to the extent that such costs were eliminated as a result of the transaction. General corporate overhead costs have not been allocated to discontinued operations. A summary of the operating results of the IB Business included in discontinued operations in the condensed consolidated statements of income is as follows:

 

     Three Months Ended     Nine Months Ended  
     December 30,
2012
    January 1,
2012
    December 30,
2012
    January 1,
2012
 
     (In thousands)  

Net revenues

   $      $ 9,882      $ 421      $ 30,928   

Income (loss) from operations before income taxes

   $ (754   $ (717   $ (690   $ (2,534

 

5


Table of Contents

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Note 3. Marketable Securities

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

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 
     (In thousands)  

December 30, 2012

          

U.S. government and agency securities

   $ 133,208       $ 351       $ (2   $ 133,557   

Corporate debt obligations

     176,796         1,424         (47     178,173   

Mortgage-backed securities

     50,879         470         (66     51,283   

Municipal bonds

     31,607         112         (7     31,712   

Other debt securities

     600         2                602   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 393,090       $ 2,359       $ (122   $ 395,327   
  

 

 

    

 

 

    

 

 

   

 

 

 

April 1, 2012

          

U.S. government and agency securities

   $ 141,680       $ 257       $ (78   $ 141,859   

Corporate debt obligations

     166,763         1,071         (166     167,668   

Asset and mortgage-backed securities

     46,395         272         (73     46,594   

Municipal bonds

     16,548         22         (2     16,568   

Other debt securities

     750                        750   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 372,136       $ 1,622       $ (319   $ 373,439   
  

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost and estimated fair value of debt securities as of December 30, 2012, 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 marketable securities based on their ability to be traded on active markets and availability for current operations.

 

     Amortized
Cost
     Estimated
Fair Value
 
     (In thousands)  

Due in one year or less

   $ 76,204       $ 76,264   

Due after one year through three years

     224,605         225,793   

Due after three years through five years

     45,600         45,823   

Due after five years

     46,681         47,447   
  

 

 

    

 

 

 
   $ 393,090       $ 395,327   
  

 

 

    

 

 

 

The following table presents the Company’s marketable securities with unrealized losses by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 30, 2012 and April 1, 2012.

 

     Less Than 12 Months     12 Months or Greater     Total  

Description of Securities

   Fair
Value
     Unrealized
Losses
    Fair
    Value     
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 
     (In thousands)  

December 30, 2012

               

U.S. government and agency securities

   $ 5,589       $ (2   $       $      $ 5,589       $ (2

Corporate debt obligations

     37,537         (47                    37,537         (47

Mortgage-backed securities

     12,709         (63     158         (3     12,867         (66

Municipal bonds

     6,512         (7                    6,512         (7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 62,347       $ (119   $ 158       $ (3   $ 62,505       $ (122
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

April 1, 2012

               

U.S. government and agency securities

   $ 76,239       $ (78   $       $      $ 76,239       $ (78

Corporate debt obligations

     66,997         (166                    66,997         (166

Asset and mortgage-backed securities

     12,996         (69     139         (4     13,135         (73

Municipal bonds

     1,978         (2                    1,978         (2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 158,210       $ (315   $ 139       $ (4   $ 158,349       $ (319
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

6


Table of Contents

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

As of December 30, 2012 and April 1, 2012, 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 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 30, 2012 and April 1, 2012, the Company determined that the unrealized losses were temporary in nature and recorded them as a component of accumulated other comprehensive income.

Note 4. Fair Value Measurements

Fair value is 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 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.

Assets measured at fair value on a recurring basis as of December 30, 2012 and April 1, 2012 are as follows:

 

     Fair Value Measurements Using         
     Level 1      Level 2         Level 3         Total  
     (In thousands)  

December 30, 2012

           

Cash and cash equivalents

   $ 99,087       $ 769       $       $ 99,856   

Marketable securities:

           

U.S. government and agency securities

     133,557                         133,557   

Corporate debt obligations

             178,173                 178,173   

Mortgage-backed securities

             51,283                 51,283   

Municipal bonds

             31,712                 31,712   

Other debt securities

             602                 602   
  

 

 

    

 

 

    

 

 

    

 

 

 
     133,557         261,770                 395,327   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 232,644       $ 262,539       $       $ 495,183   
  

 

 

    

 

 

    

 

 

    

 

 

 

April 1, 2012

           

Cash and cash equivalents

   $ 162,266       $ 2,250       $       $ 164,516   

Marketable securities:

           

U.S. government and agency securities

     141,859                         141,859   

Corporate debt obligations

             167,668                 167,668   

Asset and mortgage-backed securities

             46,594                 46,594   

Municipal bonds

             16,568                 16,568   

Other debt securities

             750                 750   
  

 

 

    

 

 

    

 

 

    

 

 

 
     141,859         231,580                 373,439   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 304,125       $ 233,830       $       $ 537,955   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The Company’s investments classified within Level 2 were primarily valued based on valuations obtained from a third-party pricing service. To estimate fair value, the pricing service utilizes industry-standard valuation models, including both income and market-based approaches for which all significant inputs are observable either directly or indirectly. The Company obtained documentation from the pricing service as to the methodology and summary of inputs used for the various types of securities. The pricing service maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs. These observable inputs include reported trades and broker/dealer quotes of the same or similar securities, issuer credit spreads, benchmark securities and other observable inputs. The Company compares valuation information from the pricing service with other pricing sources to validate the reasonableness of the valuations.

Note 5. Inventories

Components of inventories are as follows:

 

     December 30,
2012
     April 1,
2012
 
     (In thousands)  

Raw materials

   $ 2,320       $ 3,743   

Finished goods

     20,715         15,981   
  

 

 

    

 

 

 
   $ 23,035       $ 19,724   
  

 

 

    

 

 

 

Note 6. Stock-Based Compensation

During the nine months ended December 30, 2012, the Company granted options to purchase 1.4 million shares of common stock and 1.8 million restricted stock units with weighted average grant date fair values of $4.98 and $13.68 per share, respectively. The restricted stock units included 0.2 million restricted stock units with service conditions and either a performance or market condition, which were granted to certain senior executives.

A summary of stock-based compensation expense, by functional line item in the condensed consolidated statements of income, is as follows:

 

     Three Months Ended      Nine Months Ended  
     December 30,
2012
     January 1,
2012
     December 30,
2012
     January 1,
2012
 
     (In thousands)  

Cost of revenues

   $ 529       $ 590       $ 1,839       $ 1,924   

Engineering and development

     3,030         3,256         10,444         10,948   

Sales and marketing

     1,619         1,783         5,217         5,166   

General and administrative

     1,795         1,991         5,795         6,311   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total continuing operations

     6,973         7,620         23,295         24,349   

Discontinued operations

             480                 1,438   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,973       $ 8,100       $ 23,295       $ 25,787   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 7. Income Taxes

The Company’s provision for income taxes from continuing operations was $1.6 million and $6.5 million for the three and nine months ended December 30, 2012, respectively, and $5.7 million and $13.5 million for the three and nine months ended January 1, 2012, respectively.

The effective tax rate from continuing operations was 13% for each of the nine-month periods ended December 30, 2012 and January 1, 2012. The effective tax rate is based upon the estimated income for the year, the composition of the estimated income in different tax jurisdictions, and the tax effect, if any, in the applicable quarterly periods of newly enacted tax legislation, resolution of tax audits, changes in uncertain tax positions, and other discrete tax-related items. 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 generally lower than its income tax rate in the United States.

On January 2, 2013, the federal research tax credit was retroactively reinstated as part of the American Taxpayer Relief Act of 2012. The Company expects to record an income tax benefit of approximately $6 million in the fourth quarter of fiscal 2013 as a result of the retroactive reinstatement of this tax credit.

 

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QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

As of December 30, 2012, the Company has a deferred tax asset, net of federal benefit, of $10.1 million related to state research tax credits. These state tax credits have no expiration date and may be carried forward indefinitely. The determination of whether it is more likely than not that the Company will realize the full benefit of its deferred tax assets, including the deferred tax asset related to the state research tax credits, requires significant judgment and estimates. These estimates may include projections of future taxable income by tax jurisdiction and the amount of tax credits to be generated in future periods. Such estimates are subject to uncertainty due to various factors, including the economic environment, industry and market conditions, and the length of time of the projections included in the analyses. If the Company’s actual results, or estimates used in future analyses related to deferred tax assets, are less favorable than current estimates, or the Company concludes it expects to generate more state research tax credits than it can utilize for the indefinite future, a valuation allowance may be required related to this deferred tax asset with a corresponding adjustment to earnings in the period in which such determination is made. As of December 30, 2012, based upon the Company’s estimates, management believes it is more likely than not that the Company will realize the full benefit of the existing deferred tax asset related to these state research tax credits and accordingly has not recorded a valuation allowance.

The Company’s federal consolidated income tax returns for fiscal years 2008 and 2009 are currently under examination by the Internal Revenue Service. Management does not believe that the results of these examinations will have a material impact on the Company’s financial condition or results of operations.

Note 8. Income Per Share

The following table sets forth the computation of basic and diluted income from continuing operations per share:

 

     Three Months Ended      Nine Months Ended  
     December 30,
2012
     January 1,
2012
     December 30,
2012
     January 1,
2012
 
     (In thousands, except per share amounts)  

Income from continuing operations

   $ 13,705       $ 29,221       $ 43,926       $ 89,924   
  

 

 

    

 

 

    

 

 

    

 

 

 

Shares:

           

Weighted-average shares outstanding — basic

     92,386         100,135         94,518         102,696   

Dilutive potential common shares, using treasury stock method

     184         533         445         644   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares outstanding — diluted

     92,570         100,668         94,963         103,340   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations per share:

           

Basic

   $ 0.15       $ 0.29       $ 0.46       $ 0.88   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.15       $ 0.29       $ 0.46       $ 0.87   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock-based awards, including stock options and restricted stock units, representing 20.3 million and 18.9 million shares of common stock have been excluded from the diluted per share calculations for the three and nine months ended December 30, 2012, and 19.2 million and 18.2 million shares of common stock have been excluded from the diluted per share calculations for the three and nine months ended January 1, 2012, respectively. These stock-based awards have been excluded from the diluted per share calculations because their effect would have been antidilutive.

 

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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 design and supply high performance network infrastructure products that provide, enhance and manage computer data communication. These products facilitate the rapid transfer of data and enable efficient resource sharing between servers, networks and storage. Our products are used in enterprise data centers, cloud computing, Web 2.0 and other environments dependent on high performance, reliable data networking.

Our products are based primarily on Fibre Channel and Ethernet technologies and are used in connection with storage networks, local area networks, and converged networks. Storage networks are used to provide data across enterprise environments. Fibre Channel is currently the dominant technology for enterprise storage networking. Local area networks, or LANs, are used to provide workstation-to-server, server-to-server, and server-to-storage connectivity using Ethernet. Converged networks are designed to address the evolving data center by consolidating and unifying various classes of connectivity and networks, such as storage area networks and LANs, using Ethernet speeds of 10Gb per second and greater. Fibre Channel over Ethernet, or FCoE, is a converged networking technology that uses an Ethernet LAN for both storage and local area data transmission, thus combining the benefits of Fibre Channel technology with the pervasiveness of Ethernet-based networks. Similarly, Internet Small Computer System Interface, or iSCSI, is an alternative to FCoE, also providing storage over Ethernet capabilities. Our converged products can operate individually as 10Gb Ethernet network products, FCoE products, iSCSI products, or in combination as multi-protocol products.

We classify our products into three broad categories: Host Products, Network Products and Silicon Products. Host Products consist primarily of Fibre Channel adapters, FCoE converged network adapters, and 10Gb Ethernet adapters. Network Products consist of blade, edge and high-port count modular-chassis Fibre Channel switches, Fibre Channel virtualized pass-through modules, universal access point switches, Enhanced Ethernet pass-through modules and storage routers. Silicon Products consist of Fibre Channel controllers, iSCSI controllers, converged network controllers, Ethernet controllers, converged switch controllers, and converged LAN on Motherboard, or cLOM, controllers.

Our adaptive convergence strategy, which we call Adaptive Convergence, is to design and supply networking infrastructure connectivity products for server, fabric, and storage to provide optimal flexibility and utility for our customers. Adaptive Convergence embodies multi-protocol functionality within a single product, support for widely used operating systems and virtualization environments, a broad range of hardware platforms, and multiple physical form-factors.

Our products are sold worldwide, primarily to original equipment manufacturers, or OEMs, and distributors. Our customers rely on our various networking infrastructure products to deliver solutions to information technology professionals in virtually every business sector. Our products are found primarily in server and storage subsystem solutions that are used by small, medium and large enterprises with critical business data requirements. These products are incorporated in solutions from a number of server and storage system OEM customers, including Cisco Systems, Inc., Dell Inc., EMC Corporation, Fujitsu Ltd., Hewlett-Packard Company, Huawei Technology Co. Ltd., Inspur Worldwide Services Ltd., International Business Machines Corporation, NetApp, Inc. and Oracle Corporation.

 

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Disposition of Business

In February 2012, we completed the sale of the product lines and certain assets associated with our InfiniBand business (the IB Business). As a result of this divestiture, our condensed consolidated statements of income for all periods present the operations of the IB Business as discontinued operations. The following discussion and analysis is based on our continuing operations and excludes any results or discussion of our discontinued operations.

Third Quarter Financial Highlights and Other Information

A summary of our financial performance during the third quarter of fiscal 2013 is as follows:

 

   

Net revenues increased to $119.4 million in the third quarter of fiscal 2013 from $117.9 million in the second quarter of fiscal 2013. Revenues from Host Products increased to $89.8 million in the third quarter of fiscal 2013 from $89.6 million in the second quarter of fiscal 2013. Revenues from Network Products were $20.0 million for the third quarter of fiscal 2013 and increased sequentially by $2.4 million from the second quarter of fiscal 2013. Revenues from Silicon Products were $9.6 million for the third quarter of fiscal 2013 compared to $10.7 million in the second quarter of fiscal 2013.

 

   

Gross profit as a percentage of net revenues increased to 67.3% in the third quarter of fiscal 2013 from 66.9% in the second quarter of fiscal 2013.

 

   

Operating income as a percentage of net revenues increased to 12.1% in the third quarter of fiscal 2013 from 11.0% in the second quarter of fiscal 2013.

 

   

Income from continuing operations increased to $13.7 million, or $0.15 per diluted share, in the third quarter of fiscal 2013 from $11.8 million, or $0.13 per diluted share, in the second quarter of fiscal 2013.

 

   

Cash, cash equivalents and marketable securities increased to $495.2 million as of December 30, 2012 from $484.4 million as of September 30, 2012.

 

   

Accounts receivable decreased to $69.5 million as of December 30, 2012 from $72.9 million as of September 30, 2012. Days sales outstanding (DSO) in receivables was 53 days as of December 30, 2012.

 

   

Inventories were $23.0 million as of December 30, 2012 compared to $21.8 million as of September 30, 2012. Our annualized inventory turns were 6.8 turns in the third quarter of fiscal 2013.

Results of Operations

Net Revenues

A summary of our net revenues by product category is as follows:

 

     Three Months Ended     Nine Months Ended  
     December 30,
2012
    January 1,
2012
    December 30,
2012
    January 1,
2012
 
     (Dollars in millions)  

Net revenues:

        

Host Products

   $ 89.8      $ 111.8      $ 280.4      $ 324.2   

Network Products

     20.0        18.5        57.1        56.2   

Silicon Products

     9.6        12.5        30.1        43.1   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 119.4      $ 142.8      $ 367.6      $ 423.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of net revenues:

        

Host Products

     75     78     76     77

Network Products

     17        13        16        13   

Silicon Products

     8        9        8        10   
  

 

 

   

 

 

   

 

 

   

 

 

 
     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Historically, the global marketplace for network infrastructure solutions has expanded in response to the information requirements of enterprise data centers, cloud computing, Web 2.0 and other environments dependent on high performance, reliable data networking. The markets we serve have been characterized by rapid advances in technology and related product performance, which has generally resulted in declining average selling prices over time.

The United States and other countries around the world have experienced, and may continue to experience, economic weakness and uncertainty. Economic uncertainty has adversely affected, and in the future may adversely affect, 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 from the sale of Host Products, Network Products and Silicon Products. Net revenues of $119.4 million for the three months ended December 30, 2012 decreased from $142.8 million for the three months ended January 1, 2012. The decrease in net revenues was primarily the result of a $22.0 million, or 20%, decrease in revenue from Host Products and a $2.9 million, or 23%, decrease in revenue from Silicon Products. The decrease in revenue from Host Products was primarily due to a decrease in the quantity of adapters sold. The decrease in revenue from Silicon Products was due to a decrease in the quantity of chips sold. Revenue from Silicon Products can vary from quarter to quarter based on the purchasing cycles of our customers for these long-lead time products.

Net revenues of $367.6 million for the nine months ended December 30, 2012 decreased from $423.5 million for the nine months ended January 1, 2012. The decrease in net revenues was primarily the result of a $43.8 million, or 14%, decrease in revenue from Host Products and a $13.0 million, or 30%, decrease in revenue from Silicon Products. The decrease in revenue from Host Products was primarily due to a decrease in the quantity of adapters sold. The decrease in revenue from Silicon Products was primarily due to a decrease in the quantity of chips sold.

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 84% and 86% of net revenues during the nine months ended December 30, 2012 and January 1, 2012, respectively.

We believe 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 30,
2012
     January 1,
2012
     December 30,
2012
     January 1,
2012
 
     (In millions)  

United States

   $ 51.5       $ 59.5       $ 159.8       $ 182.6   

Asia-Pacific and Japan

     40.5         46.6         122.1         134.7   

Europe, Middle East and Africa

     21.3         29.5         67.3         84.8   

Rest of world

     6.1         7.2         18.4         21.4   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 119.4       $ 142.8       $ 367.6       $ 423.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues by geographic area are presented based upon the ship-to location of the customer, which is not necessarily indicative of the location of the ultimate end-user of our products. The United States and China are the only countries that represented 10% or more of net revenues for the periods presented. Net revenues from customers in China were $17.0 million and $50.9 million for the three and nine months ended December 30, 2012, respectively, and $19.8 million and $54.9 million for the three and nine months ended January 1, 2012, respectively.

 

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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 30,
2012
    January 1,
2012
    December 30,
2012
    January 1,
2012
 
     (Dollars in millions)  

Gross profit

   $ 80.3      $ 97.0      $ 246.2      $ 289.6   

Percentage of net revenues

     67.3     67.9     67.0     68.4

Gross profit for the three months ended December 30, 2012 decreased $16.7 million, or 17%, from gross profit for the three months ended January 1, 2012. The gross profit percentage for the three months ended December 30, 2012 was 67.3% compared to 67.9% for the corresponding quarter in the prior year. The decrease in gross profit percentage was primarily due to lower volumes to absorb manufacturing costs.

Gross profit for the nine months ended December 30, 2012 decreased $43.4 million, or 15%, from gross profit for the nine months ended January 1, 2012. The gross profit percentage for the nine months ended December 30, 2012 was 67.0% compared to 68.4% for the corresponding period in the prior year. The decrease in gross profit percentage was primarily due to an unfavorable product mix.

Our ability to maintain our current gross profit percentage may 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, our ability to achieve manufacturing cost reductions, and amortization and impairments of purchased intangible assets. We anticipate that it will continue to be difficult to reduce manufacturing costs. As a result of these and other factors, our gross profit percentage may decline in future periods.

Operating Expenses

Our operating expenses are summarized in the following table:

 

     Three Months Ended     Nine Months Ended  
     December 30,
2012
    January 1,
2012
    December 30,
2012
    January 1,
2012
 
     (Dollars in millions)  

Operating expenses:

        

Engineering and development

   $ 38.4      $ 34.2      $ 115.9      $ 104.2   

Sales and marketing

     19.3        19.9        57.9        58.1   

General and administrative

     8.2        8.8        25.0        26.8   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 65.9      $ 62.9      $ 198.8      $ 189.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of net revenues:

        

Engineering and development

     32.2     24.0     31.5     24.6

Sales and marketing

     16.2        13.9        15.8        13.7   

General and administrative

     6.8        6.1        6.8        6.3   
  

 

 

   

 

 

   

 

 

   

 

 

 
     55.2     44.0     54.1     44.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Engineering and Development. Engineering and development expenses consist primarily of compensation and related employee benefit costs, service and material costs, occupancy and equipment costs and related computer support costs. During the three months ended December 30, 2012, engineering and development expenses increased to $38.4 million from $34.2 million for the three months ended January 1, 2012. The increase was primarily due to a $2.9 million increase in cash compensation and related employee benefit costs, principally due to an increase in headcount related to our planned incremental investments to drive future revenue growth, a $0.7 million increase in service and material costs related to new product development, and a $0.7 million increase in equipment depreciation and maintenance costs.

During the nine months ended December 30, 2012, engineering and development expenses increased to $115.9 million from $104.2 million for the nine months ended January 1, 2012. The increase was primarily due to a $6.5 million increase in cash

 

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compensation and related employee benefit costs, principally due to an increase in headcount related to our planned incremental investments to drive future revenue growth, a $3.9 million increase in service and material costs related to new product development, and a $1.6 million increase in equipment depreciation and maintenance costs.

We believe continued investments in engineering and development activities are critical to achieving future design wins, expansion of our customer base and revenue growth opportunities.

Sales and Marketing. Sales and marketing expenses consist primarily of compensation and related employee benefit costs, sales commissions, promotional activities and travel for sales and marketing personnel. During the three months ended December 30, 2012, sales and marketing expenses decreased to $19.3 million from $19.9 million for the three months ended January 1, 2012.

During the nine months ended December 30, 2012, sales and marketing expenses decreased to $57.9 million from $58.1 million for the nine months ended January 1, 2012. Cash compensation and related employee benefit costs increased $1.2 million primarily due to an increase in headcount. This increase was offset by decreases in promotional expenses and outside services.

We believe continued investments in our sales and marketing organizational infrastructure and related marketing programs are critical to the success of our strategy of expanding our customer base and enhancing relationships with our existing customers.

General and Administrative. General and administrative expenses consist primarily of compensation and related employee benefit costs for executive, finance, accounting, human resources, legal and information technology personnel. Non-compensation components of general and administrative expenses include accounting, legal and other professional fees, facilities expenses and other corporate expenses. General and administrative expenses decreased to $8.2 million for the three months ended December 30, 2012 from $8.8 million for the three months ended January 1, 2012.

General and administrative expenses decreased to $25.0 million for the nine months ended December 30, 2012 from $26.8 million for the nine months ended January 1, 2012. The decrease was primarily due to a $1.0 million decrease in cash compensation and related employee benefit costs.

Income Taxes

Our provision for income taxes from continuing operations was $1.6 million and $6.5 million for the three and nine months ended December 30, 2012, respectively, and $5.7 million and $13.5 million for the three and nine months ended January 1, 2012. Our effective tax rate from continuing operations was 13% for each of the nine-month periods ended December 30, 2012 and January 1, 2012.

On January 2, 2013, the federal research tax credit was retroactively reinstated as part of the American Taxpayer Relief Act of 2012. We expect to record an income tax benefit of approximately $6 million in the fourth quarter of fiscal 2013 as a result of the retroactive reinstatement of this tax credit.

As of December 30, 2012, we have a deferred tax asset, net of federal benefit, of $10.1 million related to state research tax credits. These state tax credits have no expiration date and may be carried forward indefinitely. The determination of whether it is more likely than not that we will realize the full benefit of our deferred tax assets, including the deferred tax asset related to the state research tax credits, requires significant judgment and estimates. These estimates may include projections of future taxable income by tax jurisdiction and the amount of tax credits to be generated in future periods. Such estimates are subject to uncertainty due to various factors, including the economic environment, industry and market conditions, and the length of time of the projections included in the analyses. If our actual results, or estimates used in future analyses related to deferred tax assets, are less favorable than current estimates, or we conclude that we expect to generate more state research tax credits than we can utilize for the indefinite future, a valuation allowance may be required related to this deferred tax asset with a corresponding adjustment to earnings in the period in which such determination is made. As of December 30, 2012, based upon our estimates, we believe it is more likely than not that we will realize the full benefit of the existing deferred tax asset related to these state research tax credits and accordingly have not recorded a valuation allowance.

Our federal consolidated income tax returns for fiscal years 2008 and 2009 are currently under examination by the Internal Revenue Service. We do not believe that the results of these examinations will have a material impact on our financial condition or results of operations.

 

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Table of Contents

Given the global scope of our operations and the complexity of global tax and transfer pricing rules and regulations, it is difficult to estimate earnings within each tax jurisdiction. If actual earnings within each tax jurisdiction differ materially from our estimates, we may not achieve our expected effective tax rate. Additionally, our effective tax rate may be impacted by other items, including the tax effects of acquisitions, dispositions, newly-enacted tax legislation, examinations by tax authorities, stock-based compensation, uncertain tax positions and changes in the realizability of deferred tax assets.

Liquidity and Capital Resources

Our combined balances of cash, cash equivalents and marketable securities decreased to $495.2 million as of December 30, 2012 from $538.0 million as of April 1, 2012. As of December 30, 2012 and April 1, 2012, our international subsidiaries held $396.1 million and $351.0 million, respectively, of our total cash, cash equivalents and marketable securities. These holdings by our international subsidiaries as of December 30, 2012 consisted primarily of debt securities due from U.S. issuers, including the U.S. government and related agencies, and U.S. dollar denominated cash and money market funds. Certain foreign regulations could impact our ability to transfer funds to the United States. We currently intend to reinvest the funds held outside of the United States in our international operations and, as a result, do not intend to repatriate these funds. Should we decide to repatriate funds held outside of the United States, we may incur a significant tax obligation.

We believe that existing cash, cash equivalents, marketable securities and expected cash flow from operations will provide sufficient funds to finance our operations for at least the next twelve months. However, it is possible that we may need to supplement our existing sources of liquidity to finance our activities beyond the next twelve months or for the future acquisition of businesses, products or technologies and there can be no assurance that sources of liquidity will be available to us at that time.

Cash provided by operating activities decreased to $101.5 million for the nine months ended December 30, 2012 from $134.1 million for the nine months ended January 1, 2012. Operating cash flow for the nine months ended December 30, 2012 consisted of our net income of $43.5 million, net non-cash expenses of $43.7 million and net cash provided as a result of changes in operating assets and liabilities of $14.3 million. The changes in operating assets and liabilities included a $14.4 million increase in accrued taxes, net, and a $7.2 million decrease in accounts receivable, partially offset by a $3.3 million increase in inventories and a $2.5 million decrease in accounts payable. The increase in accrued taxes, net, is primarily due to a tax refund received during the period. The decrease in accounts receivable was primarily due to the timing of cash collections and a decrease in net revenues. The increase in inventories was primarily due to advanced purchases of silicon chips to maintain flexibility due to long lead times for these products. The decrease in accounts payable was primarily due to the timing of payment obligations.

Cash provided by operating activities of $134.1 million for the nine months ended January 1, 2012 consisted of our net income of $91.1 million and net non-cash expenses of $51.1 million, partially offset by net cash used as a result of changes in operating assets and liabilities of $8.1 million. The changes in operating assets and liabilities included a $12.2 million increase in accounts receivable, partially offset by a $4.5 million increase in accrued taxes. The increase in accounts receivable was primarily due to the timing of cash collections. The increase in accrued taxes was primarily due to the timing of payment obligations.

Cash used in investing activities was $55.6 million for the nine months ended December 30, 2012 and consisted of $23.9 million of net purchases of available-for-sale securities and $31.7 million of purchases of property and equipment. During the nine months ended January 1, 2012, cash used in investing activities was $111.6 million and consisted of $88.1 million of net purchases of available-for-sale securities and $23.5 million of purchases of property and equipment.

We expect capital expenditures to increase in the future as we continue to invest in machinery and equipment, more costly engineering and production tools for new technologies, and enhancements to our corporate information technology infrastructure.

Cash used in financing activities of $110.6 million for the nine months ended December 30, 2012 consisted of $111.7 million for purchases of common stock under our stock repurchase program and $5.6 million for minimum tax withholdings paid on behalf of employees for restricted stock units that vested during the period, partially offset by $6.7 million of proceeds from the issuance of common stock and excess tax benefits from stock-based awards. During the nine months ended January 1, 2012, cash used in financing activities of $96.1 million consisted of $103.9 million for purchases of common stock under our stock repurchase program and $5.4 million for minimum tax withholdings paid on behalf of employees for restricted stock units that vested during the period, partially offset by $13.2 million of proceeds from the issuance of common stock and excess tax benefits from stock-based awards.

Since fiscal 2003, we have had various stock repurchase programs that authorized the purchase of up to $1.95 billion of our outstanding common stock. As of December 30, 2012, we had repurchased a total of 120.4 million shares of common stock under our stock repurchase programs for an aggregate purchase price of $1.87 billion. Pursuant to the existing stock repurchase program, we are authorized to repurchase shares with an aggregate cost of up to $79.1 million as of December 30, 2012.

 

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We have certain contractual obligations and commitments to make future payments in the form of non-cancelable purchase orders to our suppliers and commitments under operating lease arrangements. A summary of our contractual obligations as of December 30, 2012, and their impact on our cash flows in future fiscal years, is as follows:

 

     2013
(Remaining
three months)
     2014      2015      2016      2017      Thereafter      Total  
     (In millions)  

Operating leases

   $ 2.3       $         8.9       $         5.7       $         1.9       $         1.9       $ 2.1       $         22.8   

Non-cancelable purchase obligations

     22.2         2.4                                         24.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24.5       $ 11.3       $ 5.7       $ 1.9       $ 1.9       $ 2.1       $ 47.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The amount of unrecognized tax benefits, including related accrued interest and penalties, was $67.0 million as of December 30, 2012. We are not able to provide a reasonable estimate of the timing of future tax payments related to these obligations.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenues and expenses during the reporting period. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, including the current economic environment, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We believe the accounting policies described below to be our most critical accounting policies. These accounting policies are affected significantly by judgments, assumptions and estimates used in the preparation of the financial statements and actual results could differ materially from the amounts reported based on these policies.

Revenue Recognition

We recognize revenue from product sales when all of the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured.

For all sales, we use a binding purchase order or a signed agreement as evidence of an arrangement. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the terms specified in the arrangement with the customer. The customer’s obligation to pay and the payment terms are set at the time of delivery and are not dependent on the subsequent resale of the product. However, certain of our sales are made to distributors under agreements that contain a limited right to return unsold product and price protection provisions. These return rights and price protection provisions limit our ability to reasonably estimate product returns and the final price of the inventory sold to distributors. As a result, the price to the customer is not fixed or determinable at the time products are delivered to distributors. Accordingly, we recognize revenue from these distributors based on the sell-through method using inventory information provided by the distributor. At times, we provide standard incentive programs to our customers. We account for our competitive pricing incentives and rebates as a reduction of revenue in the period the related revenue is recorded based on the specific program criteria and historical experience. In addition, we record provisions against revenue and cost of revenue for estimated product returns in the same period that revenue is recognized. These provisions are based on historical experience as well as specifically identified product returns. Service and other revenue is recognized when earned and receipt is reasonably assured.

For those sales that include multiple deliverables, we allocate revenue based on the relative selling price of the individual components. When more than one element, such as hardware and services, are contained in a single arrangement, we allocate revenue between the elements based on each element’s relative selling price, provided that each element meets the criteria for treatment as a separate unit of accounting. When applying the relative selling price method, we determine the selling price for each deliverable using vendor-specific objective evidence (VSOE) of the selling price, if it exists. In order to establish VSOE of the selling price, we must regularly sell the product and/or service on a standalone basis with a substantial majority of the sales priced within a relatively narrow range. If VSOE of the selling price cannot be determined, we then consider third party evidence (TPE) of the selling price. Generally, we are not able to determine TPE due to the lack of similar products and services sold by other companies within the industry. If neither VSOE nor TPE exists, we determine the estimated selling price based on multiple factors including, but not limited to, cost, gross margin, market conditions and pricing practices. Revenue allocated to each element is then recognized when the basic revenue recognition criteria is met for each deliverable.

 

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We sell certain software products and related post-contract customer support. We recognize revenue from software products when all of the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is probable. Revenue is allocated to undelivered elements based upon VSOE of the fair value of the element. VSOE of the fair value is based upon the price charged when the element is sold separately. Revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for each element. If we are unable to determine VSOE of fair value for an undelivered element, the entire amount of revenue from the arrangement is deferred and recognized over the service period or when all elements have been delivered.

Stock-Based Compensation

We recognize compensation expense for all stock-based awards made to employees and non-employee directors, including stock options, restricted stock units and stock purchases under our Employee Stock Purchase Plan (the ESPP), based on estimated fair values on the measurement date, which is generally the date of grant. Stock-based compensation is recognized for the portion of the award that is ultimately expected to vest. Forfeitures are estimated at the time of grant based on historical trends and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We recognize stock-based compensation expense for awards that are subject to only a service condition on a straight-line basis over the requisite service period for the entire award, which is the vesting period for stock options and restricted stock units, and the offering period for the ESPP. For all other stock-based awards, stock-based compensation is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. The determination of fair value of stock-based awards on the date of grant using an option-pricing model is affected by our stock price, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. In estimating expected stock price volatility, we use a combination of both historical volatility, calculated based on the daily closing prices of our common stock over a period equal to the expected term of the option, and implied volatility, utilizing market data of actively traded options on our common stock. We believe that the historical volatility of the price of our common stock over the expected term of the option is a strong indicator of the expected future volatility. We also believe that implied volatility takes into consideration market expectations of how future volatility will differ from historical volatility. Accordingly, we believe a combination of both historical and implied volatility provides the best estimate of the future volatility of the market price of our common stock. Changes in the subjective assumptions can materially affect the estimated fair value of stock-based awards.

Income Taxes

We utilize the asset and liability method of accounting for income taxes. Income tax positions taken or expected to be taken in a tax return should be recognized in the first reporting period that it is more likely than not the tax position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. Previously recognized income tax positions that fail to meet the recognition threshold in a subsequent period are derecognized in that period. Differences between actual results and our assumptions, or changes in our assumptions in future periods, are recorded in the period they become known. We record potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.

Deferred income taxes are recognized for the future tax consequences of temporary differences using enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Temporary differences include the difference between the financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carryforwards. The effect on deferred taxes of a change in tax rates is recognized in earnings in the period that includes the enactment date.

A valuation allowance is recorded when it is more likely than not that some or all of a deferred tax asset will not be realized. Significant judgment and estimates are required in determining whether a valuation allowance is recorded. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. Our estimates and projections require significant judgment and are subject to uncertainty due to various factors, including the economic environment, industry and market conditions, and the length of time of the projections included in the analyses. If our actual results, or estimates used in future analyses related to deferred tax assets, are less favorable than current estimates, a valuation allowance may be required with a corresponding adjustment to earnings in the period in which such determination is made.

 

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As a multinational corporation, we are subject to complex tax laws and regulations in various jurisdictions. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional liabilities or potentially to reverse previously recorded tax liabilities. Differences between actual results and our assumptions, or changes in our assumptions in future periods, are recorded in the period they become known.

Investment Securities

Investment securities include available-for-sale securities, trading securities and other investment securities. Our investment securities are classified in the consolidated balance sheets based on the nature of the security and the availability for use in current operations.

Available-for-sale securities are recorded at fair value based on quoted market prices or other observable inputs. Unrealized gains and losses, net of related income taxes, on available-for-sale securities are excluded from earnings and reported as a separate component of accumulated other comprehensive income until realized.

Trading securities are recorded at fair value with unrealized holding gains and losses included in earnings and reported in interest and other income, net. In the absence of quoted market prices, these securities are valued based on an income approach using an estimate of future cash flows.

Other investment securities are accounted for under the cost method and recorded at the lower of fair value or cost.

We recognize an impairment charge on available-for-sale securities when the decline in the fair value of an investment below its cost basis is judged to be other-than-temporary. If we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, we would recognize the entire impairment in earnings. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is separated into (a) the amount representing the credit loss and (b) the amount related to all other factors. The amount of the other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes. 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 and the portion of any impairment that is due to a credit loss. We consider various factors in determining whether to recognize an impairment charge, including the current financial and credit market environment, the financial condition and near-term prospects of the issuer of the security, the magnitude of the unrealized loss compared to the cost of the investment, the length of time the investment has been in a loss position and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery of market value.

Realized gains or losses are determined on a specific identification basis and reported in interest and other income, net, as incurred.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market. We write down the carrying value of our inventory to estimated net realizable value for estimated excess and obsolete inventory based upon assumptions about future demand and market conditions. These assumptions are based on economic conditions and trends (both current and projected), anticipated customer demand and acceptance of our current products, expected future products and other assumptions. If actual market conditions are less favorable than those projected by management, additional write-downs may be required. Once we write down the carrying value of inventory, a new cost basis is established. Subsequent changes in facts and circumstances do not result in an increase in the newly-established cost basis.

Goodwill and Other Intangible Assets

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. The amounts and useful lives assigned to intangible assets acquired, other than goodwill, impact the amount and timing of future amortization. The amount assigned to in-process research and development is capitalized and accounted for as an indefinite-lived intangible asset until the underlying projects are completed or abandoned.

Goodwill is not amortized but instead is tested at least annually for impairment, or more frequently when events or changes in circumstances indicate a potential impairment, by comparing the carrying value to the fair value of the reporting unit to which the

 

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goodwill is assigned. A two-step test is used to identify the potential impairment and to measure the amount of impairment, if any. The first step is to compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit is less than its carrying amount, goodwill is considered impaired and the loss is measured by performing step two. Under step two, the impairment loss is measured by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. We perform the annual test for impairment as of the first day of our fourth fiscal quarter.

The initial recording and subsequent evaluation for impairment of goodwill and purchased intangible assets requires the use of significant management judgment regarding the forecasts of future operating results. It is possible that our business plans may change and our estimates used may prove to be inaccurate. If our actual results or estimates used in future impairment analyses are lower than current estimates, we could incur impairment charges.

Long-Lived Assets

Long-lived assets, including property and equipment and purchased intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Significant judgment is required in determining whether a potential indicator of impairment of our long-lived assets exists. Recoverability of assets to be held and used is measured by the comparison of the carrying amount of an asset or asset group to future undiscounted net cash flows expected to be generated by the asset or asset group. If such an asset or asset group is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group. Assets to be disposed of are reported at the lower of their carrying amount or fair value less costs to sell. Estimating future net cash flows and determining proper asset groupings for the purpose of this impairment test requires the use of significant management judgment. If our actual results, or estimates used in future impairment analyses, are lower than our current estimates, we could incur impairment charges.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of December 30, 2012, the carrying value of our cash and cash equivalents approximates fair value.

We maintain a portfolio of marketable securities consisting primarily of U.S. government and agency securities, corporate debt obligations, mortgage-backed securities and municipal bonds, the majority of which have remaining terms of three years or less. We are exposed to fluctuations in interest rates as movements in interest rates can result in changes in the market value of our investments in debt securities. However, due to the short-term expected duration of our portfolio of marketable securities, we do not believe that we are subject to material interest rate risk.

In accordance with our investment guidelines, we only invest in instruments with high credit quality ratings and we limit our exposure to any one issuer or type of investment. Our portfolio of marketable securities as of December 30, 2012 consists of $395.3 million of securities that are classified as available-for-sale. As of December 30, 2012, we had gross unrealized losses associated with our available-for-sale securities of $0.1 million that were determined by management to be temporary in nature.

We do not use derivative financial instruments.

 

Item 4. Controls and Procedures

We maintain disclosure controls and procedures to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Our management evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of December 30, 2012. There was no change in our internal control over financial reporting during our quarter ended December 30, 2012 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.

OTHER INFORMATION

 

Item 1A. Risk Factors

We have updated the risk factors discussed in Item 1A of our Annual Report on Form 10-K for the year ended April 1, 2012, as set forth below. We do not believe any of the updates constitute material changes from the risk factors previously discussed in our Annual Report on Form 10-K for the year ended April 1, 2012.

Our operating results have been, are being, and may in the future be, adversely affected by unfavorable economic conditions.

The United States and other countries around the world have experienced, and are continuing to experience, economic weakness and uncertainty, including unfavorable economic conditions resulting from the ongoing debt crisis in certain countries in the European Union. Economic uncertainty is adversely affecting, and in the future may adversely affect, information technology, or IT, spending rates. For example, certain of our large customers are reporting significant weakness in particular markets and geographies. Reductions in IT spending rates have resulted in reduced sales volumes, and could result in lower prices for our products, longer sales cycles, increased inventory provisions and increased production costs, all of which could negatively impact our results of operations.

As a result of worldwide economic weakness and uncertainty, it is extremely difficult for us and our customers to forecast future revenue levels based on historical information and trends. To the extent that we do not achieve our anticipated level of revenue, our operating results could be adversely affected.

Our operating results may fluctuate in future periods, which could cause our stock price to decline.

We have experienced, are currently experiencing, and expect to experience in future periods, fluctuations in sales and operating results from quarter to quarter. In addition, there can be no assurance that we will maintain our current gross margins or profitability in the future. A significant portion of our net revenues in each fiscal quarter results from orders booked in that quarter. Orders placed by major customers are typically based on their forecasted sales and inventory levels for our products.

Fluctuations in our quarterly operating results may also be the result of:

 

   

the timing, size and mix of orders from customers;

 

   

gain or loss of significant customers;

 

   

industry consolidation among both our competitors and our customers;

 

   

customer policies pertaining to desired inventory levels of our products;

 

   

sales discounts and customer incentives;

 

   

the availability and sale of new products;

 

   

changes in our average selling prices;

 

   

the timing of server refresh cycles;

 

   

variations in manufacturing capacities, efficiencies and costs;

 

   

the availability and cost of components, including silicon chips;

 

   

variations in product development costs, especially related to advanced technologies;

 

   

variations in operating expenses;

 

   

changes in effective income tax rates, including those resulting from changes in tax laws;

 

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our ability to timely produce products that comply with new environmental restrictions or related requirements of our original equipment manufacturer, or OEM, customers;

 

   

actual events, circumstances, outcomes and amounts differing from judgments, assumptions and estimates used in determining the value of certain assets (including the amounts of related valuation allowances), liabilities and other items reflected in our consolidated financial statements;

 

   

the timing of revenue recognition and revenue deferrals;

 

   

gains or losses related to our marketable securities; or

 

   

changes in accounting rules or our accounting policies.

In addition, our quarterly results of operations are influenced by competitive factors, including the pricing and availability of our products and our competitors’ products. Furthermore, communications regarding new products and technologies could cause our customers to defer or cancel purchases of our products. Order deferrals by our customers, delays in our introduction of new products, and longer than anticipated design-in cycles for our products have in the past adversely affected our quarterly results of operations. Due to these factors, as well as other unanticipated factors, it is likely that in some future quarter or quarters our operating results will be below the expectations of public market analysts or investors, and as a result, the price of our common stock could significantly decrease.

We expect gross margin to vary over time and our recent level of gross margin may not be sustainable.

Our recent level of gross margin may not be sustainable and may be adversely affected by numerous factors, including:

 

   

changes in product mix;

 

   

transitions to products based on emerging technologies, such as 10Gb Ethernet, which may have lower gross margins;

 

   

changes in manufacturing volumes over which fixed costs are absorbed;

 

   

increased price competition;

 

   

introduction of new products by us or our competitors, including products with advantages in price, performance or features;

 

   

our inability to reduce manufacturing-related or component costs;

 

   

entry into new markets;

 

   

amortization and impairments of purchased intangible assets;

 

   

sales discounts and customer incentives;

 

   

increases in material, labor or overhead costs;

 

   

excess inventory and inventory holding charges;

 

   

changes in distribution channels;

 

   

increased warranty costs; and

 

   

acquisitions and dispositions of businesses or product lines.

A decrease in our gross margin could adversely affect the market price of our common stock.

 

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Our stock price may be volatile.

The market price of our common stock has fluctuated substantially, and there can be no assurance that such volatility will not continue. Several factors could impact our stock price including, but not limited to:

 

   

differences between our actual revenues and operating results and the published expectations of public market analysts;

 

   

quarterly fluctuations in our revenues and operating results;

 

   

introduction of new products or changes in product pricing policies by our competitors or us;

 

   

conditions in the markets in which we operate;

 

   

changes in market projections by industry forecasters;

 

   

changes in estimates of our earnings or rating upgrades or downgrades of our stock by public market analysts;

 

   

operating results or forecasts of our major customers or competitors;

 

   

rumors or dissemination of false information; and

 

   

general economic and geopolitical conditions.

In addition, stock markets have experienced extreme price and volume volatility in recent years and stock prices of technology companies have been especially volatile. This volatility has had a substantial effect on the market prices of securities of many public companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations could adversely affect the market price of our common stock, which could have a material adverse impact on investor confidence and employee retention.

Our business is dependent, in large part, on the continued growth of the networking markets that we serve and if these markets do not continue to develop, our business will suffer.

Our products are used in storage, local area and converged networks, and therefore our business is dependent on these markets. Our success in generating revenue in these markets will depend on, among other things, our ability to:

 

   

educate potential OEM customers, distributors, resellers, system integrators, storage system providers and end-user organizations about the benefits of our products;

 

   

maintain and enhance our relationships with OEM customers, distributors, resellers, system integrators and storage system providers;

 

   

predict and base our products on standards that ultimately become industry standards; and

 

   

achieve and maintain interoperability between our products and other equipment and components from diverse vendors.

If we are not successful in any or all of these items, our business and results of operations could be materially and adversely affected.

Our financial condition will be materially harmed if we do not maintain and gain market acceptance of our products.

The markets in which we compete involve rapidly changing technology, evolving industry standards and continuing improvements in products and services. Our future success depends, in part, on our ability to:

 

   

enhance our current products and develop and introduce, in a timely manner, new products that keep pace with technological developments and industry standards;

 

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compete effectively on the basis of price and performance; and

 

   

adequately address OEM and end-user customer requirements and achieve market acceptance.

We believe that to remain competitive, we will need to continue to develop new products and enter new markets, which will require significant investment. Our competitors may be developing alternative technologies, which may adversely affect the market acceptance of our products. Although we continue to explore and develop products based on new technologies, a substantial portion of our revenues is generated today from Fibre Channel technology. If alternative technologies are adopted by the industry, we may not be able to develop products for these technologies in a timely manner. Further, even if alternative technologies do augment Fibre Channel revenues, our products may not be fully developed in time to be accepted by our customers. Even if our new products are developed on time, we may not be able to manufacture them at competitive prices or in sufficient volumes.

Some of our products are based on Fibre Channel over Ethernet, or FCoE, or 10Gb Ethernet technologies. FCoE is a relatively new converged networking technology that provides a unified storage and data network over Enhanced Ethernet, while preserving the investment by end users in their existing Fibre Channel infrastructure and storage. As with most emerging technologies, it is expected that the market for FCoE will take a number of years to fully develop and mature. We expect products based on FCoE to supplement, and perhaps replace, certain products based on Fibre Channel technology. 10Gb Ethernet is a developing technology for use in enterprise data centers. This emerging market includes well-established participants who have significantly more engineering, sales and marketing resources to dedicate to developing and penetrating the market than we do. An inability to maintain, or build on, our market share in the Fibre Channel, converged or 10Gb Ethernet markets, or the failure of these markets to expand, could have a material adverse effect on our business or results of operations.

We depend on a small number of customers and any decrease in revenues from any one of our major customers could adversely affect our results of operations and cause our stock price to decline.

A small number of 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 in the foreseeable future. Our top ten customers accounted for 84% and 86% of net revenues for the nine months ended December 30, 2012 and January 1, 2012, respectively. Total revenue from our two largest customers, Hewlett-Packard Company and International Business Machines Corporation, together accounted for over 40% of net revenues during the nine months ended December 30, 2012 and January 1, 2012. We are also subject to credit risk associated with the concentration of our accounts receivable.

A significant portion of the products we sell are incorporated into servers manufactured by our major customers. Certain of our large customers are reporting weakness in this market. If server sales by our major customers continue to be adversely affected by the IT spending environment or server market factors, demand for our products could decrease further, which could have a material adverse effect on our business, financial condition or results of operations.

Our customers generally order products through written purchase orders instead of long-term supply contracts and, therefore, are generally not obligated to purchase products from us for any extended period. Customers typically incorporate our products into complex devices and systems, which creates supply chain cross-dependencies. Accordingly, supply chain disruptions affecting components of our customers’ devices and/or systems could negatively impact the demand for our products, even if the supply of our products is not directly affected. Major customers also have significant leverage over us and may attempt to change the sales terms, including pricing, customer incentives and payment terms, or insist that we undertake or fund significant aspects of the design, qualification and testing that our customers have typically been responsible for, either of which could have a material adverse effect on our business, financial condition or results of operations. As our OEM customers are pressured to reduce prices as a result of competitive factors, we may be required to contractually commit to price reductions for our products before we know how, or if, cost reductions can be achieved. If we are unable to achieve these cost reductions, our gross margins could decline and such a decline could have a material adverse effect on our business, financial condition or results of operations.

The ongoing consolidation in the technology industry could adversely impact our business. There is the potential for some of our customers to merge with or acquire one or more of our other customers. There is also a potential that one of our large customers could acquire one of our current competitors. In either case, demand for our products could decrease as a result of such industry consolidation, which could have a material adverse effect on our business, financial condition or results of operations.

 

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Competition within the markets for products such as ours is intense and includes various established competitors.

The markets for networking infrastructure components are highly competitive and are characterized by short product life cycles, price erosion, rapidly changing technology, frequent product performance improvements and evolving industry standards. Due to the diversity of products required in storage, local area and converged networking infrastructure, we compete with many companies. In the traditional enterprise storage Fibre Channel adapter and ASIC markets, our primary competitor is Emulex Corporation. In the 10Gb Ethernet adapter and ASIC markets, which include converged networking products such as FCoE and Internet Small Computer Systems Interface, or iSCSI, we primarily compete with Emulex Corporation, Broadcom Corporation and Intel Corporation. In the Fibre Channel switch and storage router markets, we compete primarily with Brocade Communications Systems, Inc. and Cisco Systems, Inc. We may also compete with some of our server and storage systems customers, some of which have the capability to develop products comparable to those we offer.

We need to continue to develop products appropriate to our markets to remain competitive as our competitors continue to introduce products with improved features. While we continue to devote significant resources to engineering and development, these efforts may not be successful or competitive products may not be developed and introduced in a timely manner. In addition, while relatively few competitors offer a full range of storage, local area and converged networking infrastructure products, additional domestic and foreign manufacturers may increase their presence in these markets either through the development of new products or through industry consolidation. We may not be able to compete successfully against these or other competitors. If we are unable to design, develop or introduce competitive new products on a timely basis, or if our competitors introduce new products that are more successful than ours in the marketplace, our future operating results may be materially and adversely affected.

Our products are complex and may contain undetected software or hardware errors that could lead to an increase in our costs, reduce our net revenues or damage our reputation.

Our products are complex and may contain undetected software or hardware errors when first introduced or as newer versions are released. We are also exposed to risks associated with latent defects in existing products and to risks that components purchased from third-party subcontractors and incorporated into our products may not meet our specifications or may otherwise fail prematurely. From time to time, we have found errors in existing, new or enhanced products. In addition, our products are frequently combined with other products, including software, from other vendors, and these products often need to interface with existing networks, each of which have different specifications and utilize multiple protocol standards. As a result, when problems occur, it may be difficult to identify the source of the problem. The occurrence of hardware or software errors could adversely affect the sales of our products, cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems, any of which could materially and adversely affect our operating results.

We expect the pricing of our products to continue to decline, which could reduce our revenues, gross margins and profitability.

We expect the average unit prices of our products (on a like-for-like product comparison basis) to decline in the future as a result of competitive pricing pressures, increased sales discounts and customer incentives, new product introductions by us or our competitors, or other factors. If we are unable to offset these factors by increasing sales volumes or reducing product manufacturing costs, our total revenues and gross margins may decline. Moreover, most of our expenses are fixed in the short-term or incurred in advance of receipt of corresponding revenues. As a result, we may not be able to decrease our spending to offset any unexpected shortfall in revenues. If this occurs, our revenues, gross margins and profitability could decline.

We are dependent on sole source and limited source suppliers for certain key components.

Certain key components used in the manufacture of our products are purchased from single or limited sources. Application-specific integrated circuits, or ASICs, are purchased from single sources and other key components such as microprocessors, logic chips, power supplies and programmable logic devices are purchased from limited sources. If one of these suppliers experiences an interruption in its ability to supply our needs, or chooses to sever its relationship with us, we may be unable to produce certain of our products, which could result in the loss of customers and have a material adverse effect on our results of operations.

 

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We are dependent on worldwide third-party subcontractors and contract manufacturers.

Third-party subcontractors located outside the United States assemble and test certain products for us. To the extent that we rely on third-party subcontractors to perform these functions, we will not be able to directly control product delivery schedules and quality assurance. This lack of control may result in product shortages or quality assurance problems that could delay shipments of products or increase manufacturing, assembly, testing or other costs. If a subcontractor experiences capacity constraints or financial difficulties, suffers damage to its facilities, experiences power outages, natural disasters or any other disruption of assembly or testing capacity, we may not be able to obtain alternative assembly and testing services in a timely manner.

In addition, the loss of any of our major third-party contract manufacturers could significantly impact our ability to produce products for an indefinite period of time. Qualifying a new contract manufacturer and commencing volume production is a lengthy and expensive process. Some customers will not purchase any products, other than a limited number of evaluation units, until they qualify the manufacturing line for the product. If we are required to change a contract manufacturer or if a contract manufacturer experiences delays, disruptions, capacity constraints, component parts shortages or quality control problems in its manufacturing operations, shipment of our products to our customers could be delayed, resulting in loss or postponement of revenues and potential harm to our competitive position and relationships with customers.

If we are unable to attract and retain key personnel, we may not be able to sustain or grow our business.

Our future success largely depends on our key engineering, sales, marketing and executive personnel, including highly skilled semiconductor design personnel and software developers, as well as Simon Biddiscombe, our Chief Executive Officer, and H.K. Desai, our Executive Chairman. Our retention of both Messrs. Biddiscombe and Desai is particularly important to our business. If we lose the services of Messrs. Biddiscombe or Desai or other key personnel, or do not hire or retain other personnel for key positions, our business could be adversely affected.

We believe that the market for key personnel in the industries in which we compete is highly competitive. In particular, we have periodically experienced difficulty in attracting and retaining qualified engineers and other technical personnel and anticipate that competition for such personnel will increase in the future. For example, the market for qualified technical personnel within India has become extremely competitive, resulting in significant wage inflation. As a result, we may not be able to attract and retain key personnel with the skills and expertise necessary to develop new products in the future or to manage our business, both in the United States and abroad.

We have historically used stock options, restricted stock units and our employee stock purchase program as key components of our total employee compensation program in order to align employees’ interests with the interests of our stockholders, encourage retention of key personnel, and provide competitive compensation packages. However, applicable stock exchange listing standards relating to obtaining stockholder approval of equity compensation plans could make it more difficult or expensive for us to grant stock-based awards to employees in the future, which may result in changes in our stock-based compensation strategy. These and other developments relating to the provision of stock-based compensation to employees could make it more difficult to attract, retain and motivate key personnel.

The migration of our customers toward new products could adversely affect our results of operations.

As new or enhanced products are introduced, we must successfully manage the transition from older products in order to minimize the effects of product inventories that may become excess and obsolete, as well as ensure that sufficient supplies of new products can be delivered to meet customer demand. Our failure to manage the transition to newer products in the future or to develop and successfully introduce new products and product enhancements could adversely affect our business or results of operations. In addition, our customers are demanding a higher level of customization for new products, which prevents us from fully leveraging our product design work and adds to our new product development costs. When we introduce new products and product enhancements, we face additional risks relating to product transitions, including risks relating to forecasting demand. Any such adverse event or increased costs could have a material adverse effect on our business, financial condition or results of operations.

Historically, the technology industry has developed higher performance ASICs, which create chip-level solutions that replace selected board-level or box-level solutions at a significantly lower average selling price. We have previously offered ASICs to customers for certain applications that have effectively resulted in a lower-priced solution when compared to an adapter solution. This transition to ASICs may also occur with respect to other current and future products. The result of this transition may have an adverse effect on our business, financial condition or results of operations. In the future, a similar adverse effect to our business could occur if there were rapid shifts in customer purchases from our midrange networking infrastructure products to lower-cost products.

 

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Our business is subject to seasonal fluctuations and uneven sales patterns.

A large percentage of our products are sold to customers who experience seasonality and uneven sales patterns in their businesses. As a result, we experience similar seasonality and uneven sales patterns. We believe this uneven sales pattern is a result of many factors including:

 

   

the tendency of our customers to close a disproportionate percentage of their sales transactions in the last month, weeks and days of each quarter;

 

   

spikes in sales during the fourth quarter of each calendar year that some of our customers experience; and

 

   

differences between our quarterly fiscal periods and the fiscal periods of our customers.

In addition, because our customers require us to maintain products at hub locations near their facilities, it is difficult for us to predict sales trends. Our uneven sales pattern also makes it extremely difficult to predict the demand of our customers and adjust manufacturing capacity accordingly. If we predict demand that is substantially greater than actual customer orders, we will have excess inventory. Alternatively, if customer orders substantially exceed predicted demand, the ability to assemble, test and ship orders received in the last weeks and days of each quarter may be limited, or at an increased cost, which could have a material adverse effect on our quarterly revenues and earnings.

Our distributors may not adequately stock and sell our products and their reseller customers may purchase products from our competitors, which could negatively affect our results of operations.

Our distributors, which typically account for 20% or less of our net revenues, generally offer a diverse array of products from several different manufacturers and suppliers. Accordingly, we are at risk that these distributors may give higher priority to stocking and selling products from other suppliers, thus reducing their efforts and ability to sell our products. A reduction in sales efforts by our current distributors could materially and adversely impact our business or results of operations. In addition, if we decrease our distributor-incentive programs (i.e., competitive pricing and rebates), our distributors may decrease the amount of product purchased from us. This could result in a change of business behavior, and distributors may decide to decrease their inventory levels, which could impact availability of our products to their customers.

As a result of these factors regarding our distributors or other unrelated factors, the reseller customers of our distributors could decide to purchase products developed and manufactured by our competitors. Any loss of demand for our products by value-added resellers and system integrators could have a material adverse effect on our business or results of operations.

Unanticipated changes in our tax provisions or adverse outcomes resulting from examination of our income tax returns could adversely affect our results of operations.

We are subject to income taxes in the United States and various foreign jurisdictions. Our effective tax rate has been and could in the future be adversely affected by changes in tax laws or interpretations of those tax laws, by changes in the mix of earnings in countries with differing statutory tax rates, or by changes in the valuation of our deferred tax assets and liabilities. Our effective tax rate is also affected by intercompany transactions for licenses, services, funding and other items. Given the global scope of our operations, and the complexity of global tax and transfer pricing rules and regulations, it is difficult to estimate earnings within each tax jurisdiction. If actual earnings within a tax jurisdiction differ materially from our estimates, we may not achieve our expected effective tax rate.

Additionally, our effective tax rate may be impacted by the tax effects of acquisitions, dispositions, newly enacted tax legislation, examinations by tax authorities, stock-based compensation, uncertain tax positions and changes in the realizability of deferred tax assets. Significant judgment and estimates are required in determining the impact on our effective tax rate related to these items, including whether it is more likely than not that some or all of our deferred tax assets will be realized. Such estimates are subject to uncertainty due to various factors, including the economic environment, industry and market conditions, and the length of time of the projections included in the analyses. If our actual results, or estimates used in future analyses related to deferred assets, are less favorable than current estimates, a valuation allowance may be required related to our deferred tax assets, with a corresponding adjustment to earnings in the period in which such determination is made, which could have a material effect on our results of operations.

 

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Finally, we are subject to examination of our income tax returns by the United States Internal Revenue Service (IRS) and other tax authorities, which may result in the assessment of additional income taxes. Our federal consolidated income tax returns for fiscal years 2008 and 2009 are currently under examination by the IRS. We regularly assess the likelihood of adverse outcomes resulting from examinations to determine the adequacy of our provisions for income taxes. However, unanticipated outcomes from examinations could have a material adverse effect on our financial condition or results of operations.

Because we have operations in foreign countries and depend on foreign customers and suppliers, we are subject to international economic, currency, regulatory, political and other risks that could harm our business, financial condition and results of operations.

International revenues accounted for 57% of our net revenues for each of the nine-month periods ended December 30, 2012 and January 1, 2012. We expect that international revenues will continue to account for a significant percentage of our net revenues for the foreseeable future. In addition, we maintain operations in foreign countries and a significant portion of our inventory purchases are from suppliers that are located outside the United States. As a result, we are subject to several risks, which include:

 

   

a greater difficulty of administering and managing our business globally;

 

   

compliance with multiple, and potentially conflicting, regulatory requirements, such as import or export requirements, tariffs and other barriers;

 

   

less effective intellectual property protections outside of the United States;

 

   

currency fluctuations;

 

   

overlapping or differing tax structures;

 

   

political and economic instability, including terrorism and war; and

 

   

general trade restrictions.

As of December 30, 2012, our international subsidiaries held $396.1 million of our total cash, cash equivalents and marketable securities. These holdings by our international subsidiaries consist primarily of debt securities due from U.S. issuers, including the U.S. government and related agencies, and U.S. dollar denominated cash and money market funds. Certain foreign regulations could impact our ability to transfer funds to the United States. Additionally, should we decide to repatriate cash held outside of the United States, we may incur a significant tax obligation.

Our international sales are invoiced in U.S. dollars and, accordingly, if the relative value of the U.S. dollar in comparison to the currency of our foreign customers should increase, the resulting effective price increase of our products to such foreign customers could result in decreased sales. In addition, a significant portion of our inventory is purchased from international suppliers, who invoice us in U.S. dollars. If the relative value of the U.S. dollar in comparison to the currency of our foreign suppliers should decrease, our suppliers may increase prices, which could result in a decline of our gross margin. Any of the foregoing factors could have a material adverse effect on our business, financial condition or results of operations.

Our facilities and the facilities of our suppliers and customers are located in regions that are subject to natural disasters.

Our California facilities, including our principal executive offices, our principal design facilities and our critical business operations, are located near major earthquake faults. We are not specifically insured for earthquakes or other natural disasters. Any personal injury at, or damages to, the facilities as a result of such occurrences could have a material adverse effect on our business, results of operations or financial condition. Additionally, we have operations, suppliers and customers in regions that have historically experienced natural disasters. Any earthquake or other natural disaster, including a hurricane, flood, volcanic eruption, tsunami or fire, affecting any of these regions could adversely affect our business, results of operations and financial condition.

 

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In addition, as a result of a natural disaster, our major customers may face shortages of components that could negatively impact their ability to build the servers and data center devices into which our products are integrated, thereby negatively impacting the demand for our products even if the supply of our products is not directly affected by the natural disaster. For example, the earthquake, tsunami and related events that occurred in Japan in March 2011, and the extensive flooding that occurred in Thailand beginning in October 2011, caused widespread destruction in regions that include suppliers of components for many technology companies.

Our proprietary rights may be inadequately protected and difficult to enforce.

In some jurisdictions, we have patent protection on certain aspects of our technology. However, we rely primarily on trade secrets, trademarks, copyrights and contractual provisions to protect our proprietary rights. There can be no assurance that these protections will be adequate to protect our proprietary rights, that others will not independently develop or otherwise acquire equivalent or superior technology, or that we can maintain such technology as trade secrets. There also can be no assurance that any patents we possess will not be invalidated, circumvented or challenged. We have taken steps in several jurisdictions to enforce our trademarks against third parties. No assurances can be given that we will ultimately be successful in protecting our trademarks. The laws of certain countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products and intellectual property rights to the same extent as the laws of the United States, or at all. If we fail to protect our intellectual property rights, our business could be negatively impacted.

Disputes relating to claimed infringement of intellectual property rights may adversely affect our business.

We have in the past received notices of claimed infringement of intellectual property rights and been involved in intellectual property litigation. There can be no assurance that third parties will not assert future claims of infringement of intellectual property rights against us, or against customers who we are contractually obligated to indemnify, with respect to existing and future products. In addition, our supply of silicon chips and other components can also be interrupted by intellectual property infringement claims against our suppliers.

Individuals and groups are purchasing intellectual property assets for the sole purpose of making claims of infringement and attempting to extract settlements from companies such as ours. Although patent and intellectual property disputes may be settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and the necessary licenses or similar arrangements may not be available to us on satisfactory terms, or at all. As a result, we could be prevented from manufacturing and selling some of our products. In addition, if we litigate these kinds of claims, the litigation could be expensive, time consuming and could divert management’s attention from other matters and there is no guarantee we would prevail. Our business could suffer regardless of the outcome of the litigation.

We may engage in mergers, acquisitions, divestitures and strategic investments and these activities could adversely affect our results of operations and stock price.

Our future growth may depend in part on our ability to identify and acquire complementary businesses, technologies or product lines that are compatible with our existing business. Mergers and acquisitions involve numerous risks, including:

 

   

the failure of markets for the products of acquired companies to develop as expected;

 

   

uncertainties in identifying and pursuing target companies;

 

   

difficulties in assimilating the operations, technologies and products of the acquired companies;

 

   

the existence of unknown defects in acquired companies’ products or assets that may not be identified due to the inherent limitations involved in the due diligence process of an acquisition;

 

   

the diversion of management’s attention from other business concerns;

 

   

risks associated with entering markets or conducting operations with which we have no or limited direct prior experience;

 

   

risks associated with assuming the legal obligations of acquired companies;

 

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risks related to the effect that acquired companies’ internal control processes might have on our financial reporting and management’s report on our internal control over financial reporting;

 

   

the potential loss of, or impairment of our relationships with, current customers or failure to retain the acquired companies’ customers;

 

   

the potential loss of key employees of acquired companies; and

 

   

the incurrence of significant exit charges if products or technologies acquired in business combinations are unsuccessful.

Further, we may never realize the perceived benefits of a business combination or divestiture. Acquisitions by us could negatively impact gross margins or dilute stockholders’ investment and cause us to incur debt, contingent liabilities and amortization/impairment charges related to intangible assets, all of which could materially and adversely affect our financial condition or results of operations. Divestitures involve risks, such as difficulty splitting up businesses, distracting employees, potential loss of revenue and negatively impacting margins, and potentially disrupting customer relationships. In addition, our effective tax rate for future periods could be negatively impacted by acquisitions or divestitures.

We have made, and could make in the future, investments in technology companies, including privately-held companies in a development stage. Many of these private equity investments are inherently risky because the companies’ businesses may never develop, and we may incur losses related to these investments. In addition, we may be required to write down the carrying value of these investments to reflect other-than-temporary declines in their value, which could have a material adverse effect on our financial condition and results of operations.

Our portfolio of marketable securities could experience a decline in market value, which could materially and adversely affect our financial results.

As of December 30, 2012, we held short-term marketable securities totaling $395.3 million. We invest in debt securities, the majority of which are high investment grade, and we limit the exposure to credit risk through diversification and investment in highly-rated securities. However, investing in highly-rated securities does not entirely mitigate the risk of potential declines in market value. For example, in the past we have recorded impairment charges related to investment securities, including securities issued by companies in the financial services sector that had previously been rated AA or higher. A deterioration in the economy, including tightening of credit markets or significant volatility in interest rates, could cause declines in value of our marketable securities or could impact the liquidity of the portfolio. If market conditions deteriorate significantly, our results of operations or financial condition could be materially and adversely affected.

Changes in and compliance with regulations could materially adversely affect us.

Our business, results of operations or financial condition could be materially adversely affected if new laws, regulations or standards relating to us or our products are implemented or existing ones are changed. In addition, our compliance with existing regulations may have a material adverse impact on us. For example, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that require the U.S. Securities and Exchange Commission to adopt additional rules and regulations in these areas. The U.S. Securities and Exchange Commission has also finalized new disclosure requirements relating to the sourcing of so-called conflict minerals from the Democratic Republic of Congo and certain other adjoining countries. These new requirements could adversely affect our costs, the availability of minerals used in our products and our relationships with customers and suppliers.

We and our customers are subject to various import and export regulations of the United States government and other countries. Certain government export regulations apply to the encryption or other features contained in some of our products. Changes in or violations of any such import or export regulations could materially and adversely affect our business, financial condition or results of operations.

In many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by regulations applicable to us, such as the Foreign Corrupt Practices Act and other anti-bribery laws. Although we have policies and procedures designed to ensure compliance with these laws, our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation of our policies. Any such violation, even if prohibited by our policies, could have a material adverse effect on our business, financial condition or results of operations.

 

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We face increasing complexity in our product design and procurement operations as we adjust to new and future requirements relating to the chemical and material composition of our products, their safe use, the energy consumption associated with those products and product take-back legislation (i.e., legislation that makes producers of electrical goods financially responsible for specified collection, recycling, treatment and disposal of past and future covered products). We could incur substantial costs, our products could be restricted from entering certain jurisdictions, and we could face other sanctions, if we were to violate or become liable under environmental laws or if our products become non-compliant with environmental laws.

We continually seek ways to increase the energy efficiency of our products. Recent analyses have estimated the amount of global carbon emissions that are due to information technology products. As a result, governmental and non-governmental organizations have turned their attention to development of regulations and standards to drive technological improvements and reduce the amount of carbon emissions. There is a risk that these regulations or standards, once developed, will not fully address the complexity of the technology developed by the IT industry or will favor certain technological approaches that we do not currently utilize. Depending on the regulations or standards that are ultimately adopted, compliance could adversely affect our business, results of operations or financial condition.

We may experience difficulties in transitioning to smaller geometry process technologies.

We expect to continue to transition our semiconductor products to increasingly smaller line width geometries. This transition requires us to modify the manufacturing processes for our products and to redesign some products, as well as standard cells and other integrated circuit designs that we may use in multiple products. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies. In the past, we have experienced some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, which resulted in reduced manufacturing yields, delays in product deliveries and increased expenses. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes.

If we fail to carefully manage the use of “open source” software in our products, we may be required to license key portions of our products on a royalty-free basis or expose key parts of our source code.

Certain of our software may be derived from “open source” software that is generally made available to the public by its authors and/or other third parties. Such open source software is often made available to us under licenses, such as the GNU General Public License (GPL), that impose certain obligations on us in the event we were to distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public, and/or license such derivative works under a particular type of license, rather than the forms of licenses customarily used to protect our intellectual property. In the event the copyright holder of any open source software were to successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public and/or stop distributing that work.

System security risks, data protection breaches and cyber-attacks could disrupt our internal operations, and any such disruption could reduce our expected revenues, increase our expenses, damage our reputation and adversely affect our stock price.

Experienced computer programmers and hackers may be able to penetrate our network and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant and, if our efforts to address these problems are not successful, this could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions.

We manage and store various proprietary information and sensitive or confidential data relating to our business. We have also outsourced a number of our business functions to third party contractors. Breaches of our or our third party contractors’ security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us or our customers, including the potential loss or disclosure of such information or data as a result of fraud, trickery or other forms of deception, could expose us or our customers to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. In addition, the cost and operational consequences of implementing further data protection measures could be significant.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In November 2011, our Board of Directors approved a program to repurchase up to $200 million of our common stock over a two-year period. Set forth below is information regarding our stock repurchases made during the third quarter of fiscal 2013 under this program.

 

Period

  Total Number of
Shares  Purchased
    Average Price
Paid per  Share
    Total Number of
Shares  Purchased
as Part of Publicly
Announced Plan
    Approximate Dollar
Value  of Shares that
May Yet be Purchased
Under the Plan
 

October 1, 2012 – October 28, 2012

         $             $ 92,419,000   

October 29, 2012 – November 25, 2012

    531,800      $ 9.19        531,800      $ 87,532,000   

November 26, 2012 – December 30, 2012

    907,000      $ 9.27        907,000      $ 79,127,000   
 

 

 

     

 

 

   
    1,438,800      $ 9.24        1,438,800      $ 79,127,000   
 

 

 

     

 

 

   

 

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Item 6. Exhibits

Exhibits

 

Exhibit No.

     
10.1    Amendment No. 2 to Change in Control Severance Agreement, effective December 20, 2012, by and between QLogic Corporation and Simon Biddiscombe.*
10.2    Amendment to Employment Agreement, effective December 20, 2012, by and between QLogic Corporation and H.K. Desai.*
10.3    Amendment No. 2 to Change in Control Severance Agreement, effective December 20, 2012, by and between QLogic Corporation and H.K. Desai.*
10.4    Form of Change in Control Severance Agreement between QLogic Corporation and Executive Officers.*
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

* Compensation plan, contract or arrangement required to be filed as an exhibit pursuant to applicable rules of the Securities and Exchange Commission.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

QLOGIC CORPORATION
By:  

/s/ SIMON BIDDISCOMBE

  Simon Biddiscombe
  President and
  Chief Executive Officer
By:  

/s/ JEAN HU

  Jean Hu
  Senior Vice President and
  Chief Financial Officer
  (Principal Financial and Accounting Officer)

Date: January 31, 2013

 

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EXHIBIT INDEX

 

Exhibit No.

     
10.1    Amendment No. 2 to Change in Control Severance Agreement, effective December 20, 2012, by and between QLogic Corporation and Simon Biddiscombe.*
10.2    Amendment to Employment Agreement, effective December 20, 2012, by and between QLogic Corporation and H.K. Desai.*
10.3    Amendment No. 2 to Change in Control Severance Agreement, effective December 20, 2012, by and between QLogic Corporation and H.K. Desai.*
10.4    Form of Change in Control Severance Agreement between QLogic Corporation and Executive Officers.*
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

* Compensation plan, contract or arrangement required to be filed as an exhibit pursuant to applicable rules of the Securities and Exchange Commission.

 

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