UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2010
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number 001-34501
JUNIPER NETWORKS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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77-0422528
(IRS Employer
Identification No.)
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1194 North Mathilda Avenue
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Sunnyvale, California 94089
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(408) 745-2000
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(Address of principal executive offices,
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(
Registrants telephone number,
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including zip code)
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including area code)
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Indicate by check mark whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filings requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large Accelerated Filer
þ
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Accelerated Filer
o
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Non-Accelerated Filer
o
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Smaller Reporting Company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
o
No
þ
There
were approximately 523,202,000 shares of the Companys Common Stock, par value $0.00001,
outstanding as of October 29, 2010.
PART I FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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Juniper Networks, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2010
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2009
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2010
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2009
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Net revenues:
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Product
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$
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801,183
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$
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634,074
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$
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2,296,442
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$
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1,828,896
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Service
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211,224
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189,838
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606,883
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545,562
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Total net revenues
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1,012,407
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823,912
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2,903,325
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2,374,458
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Cost of revenues:
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Product
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247,033
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206,329
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701,166
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606,966
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Service
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87,587
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74,300
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252,413
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215,535
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Total cost of revenues
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334,620
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280,629
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953,579
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822,501
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Gross margin
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677,787
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543,283
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1,949,746
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1,551,957
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Operating expenses:
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Research and development
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231,151
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185,204
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662,913
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554,498
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Sales and marketing
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204,704
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183,424
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599,382
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547,843
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General and administrative
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43,773
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39,877
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132,791
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118,263
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Amortization of purchased intangible assets
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917
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1,330
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3,258
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9,259
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Restructuring charges
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181
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4,493
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8,550
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16,251
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Acquisition-related and other charges
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1,525
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1,000
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2,066
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1,000
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Total operating expenses
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482,251
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415,328
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1,408,960
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1,247,114
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Operating income
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195,536
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127,955
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540,786
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304,843
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Interest and other income, net
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205
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1,733
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2,497
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6,581
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Gain (loss) on equity investments
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3,232
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(3,311
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)
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Income before income taxes and noncontrolling interest
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195,741
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129,688
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546,515
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308,113
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Income tax provision
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61,404
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45,902
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117,225
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214,018
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Consolidated net income
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134,337
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83,786
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429,290
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94,095
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Adjust for net loss (income) attributable to noncontrolling interest
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206
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(1,121
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)
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Net income attributable to Juniper Networks
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$
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134,543
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$
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83,786
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$
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428,169
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$
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94,095
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Net income per share attributable to Juniper Networks common
stockholders:
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Basic
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$
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0.26
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$
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0.16
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$
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0.82
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$
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0.18
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Diluted
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$
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0.25
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$
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0.16
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$
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0.80
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$
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0.18
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Shares used in computing net income per share:
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Basic
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520,581
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523,878
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522,069
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523,802
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Diluted
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534,880
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538,132
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537,158
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532,686
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See accompanying Notes to Condensed Consolidated Financial Statements
3
Juniper Networks, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except par values)
(Unaudited)
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September 30,
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December 31,
|
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2010
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2009
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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1,460,914
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$
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1,604,723
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Short-term investments
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638,523
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570,522
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Accounts receivable, net of allowances
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473,953
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458,652
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Deferred tax assets, net
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181,955
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196,318
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Prepaid expenses and other current assets
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111,466
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48,744
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Total current assets
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2,866,811
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2,878,959
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Property and equipment, net
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484,802
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455,651
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Long-term investments
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599,036
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483,505
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Restricted cash
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79,080
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53,732
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Purchased intangible assets, net
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47,629
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13,834
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Goodwill
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3,759,631
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3,658,602
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Long-term deferred tax assets, net
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10,555
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Other long-term assets
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53,908
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35,425
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Total assets
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$
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7,890,897
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$
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7,590,263
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LIABILITIES AND EQUITY
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Current liabilities:
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Accounts payable
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$
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251,431
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$
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242,591
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Accrued compensation
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184,941
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176,551
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Accrued warranty
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36,360
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38,199
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Deferred revenue
|
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594,437
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571,652
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Income taxes payable
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29,762
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34,936
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Accrued litigation settlements
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169,330
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Other accrued liabilities
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143,836
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142,526
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Total current liabilities
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1,240,767
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1,375,785
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Long-term deferred revenue
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|
190,701
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181,937
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Long-term income tax payable
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98,198
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170,245
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Other long-term liabilities
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44,332
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|
|
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37,531
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Commitments and Contingencies See Note 15
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Juniper Networks stockholders equity:
|
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Convertible preferred stock, $0.00001 par
value; 10,000 shares authorized; none issued
and outstanding
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Common stock, $0.00001 par value; 1,000,000
shares authorized; 521,141 shares and
519,341 shares issued and outstanding at
September 30, 2010, and December 31, 2009,
respectively
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5
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5
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Additional paid-in capital
|
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|
9,449,553
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9,060,089
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Accumulated other comprehensive income (loss)
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4,427
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(1,433
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)
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Accumulated deficit
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(3,137,836
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)
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(3,236,525
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)
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Total Juniper Networks stockholders equity
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6,316,149
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5,822,136
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Noncontrolling interest
|
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|
750
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2,629
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|
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Total equity
|
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|
6,316,899
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|
|
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5,824,765
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Total liabilities and equity
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$
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7,890,897
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$
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7,590,263
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See accompanying Notes to Condensed Consolidated Financial Statements
4
Juniper Networks, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Nine Months Ended September 30,
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2010
|
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|
2009
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Cash flows from operating activities:
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Consolidated net income
|
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$
|
429,290
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|
|
$
|
94,095
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|
Adjustments to reconcile consolidated net income to net cash from operating activities:
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|
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Depreciation and amortization
|
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|
112,366
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|
|
|
111,803
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Share-based compensation
|
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|
129,555
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|
|
|
101,445
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(Gain) loss on equity investments
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|
(3,232
|
)
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|
3,311
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|
Change in excess tax benefits from share-based compensation
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|
(32,932
|
)
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|
673
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|
Deferred income taxes
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|
|
26,425
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|
|
|
41,996
|
|
Changes in operating assets and liabilities:
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|
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Accounts receivable, net
|
|
|
(15,093
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)
|
|
|
56,729
|
|
Prepaid expenses and other assets
|
|
|
(67,813
|
)
|
|
|
(11,444
|
)
|
Accounts payable
|
|
|
8,464
|
|
|
|
(778
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)
|
Accrued compensation
|
|
|
8,390
|
|
|
|
(20,873
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)
|
Accrued litigation settlements
|
|
|
(169,330
|
)
|
|
|
|
|
Income tax payable
|
|
|
(16,900
|
)
|
|
|
84,813
|
|
Other accrued liabilities
|
|
|
836
|
|
|
|
21,790
|
|
Deferred revenue
|
|
|
31,274
|
|
|
|
52,932
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
441,300
|
|
|
|
536,492
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, net
|
|
|
(137,481
|
)
|
|
|
(113,210
|
)
|
Purchases of trading investments
|
|
|
(2,338
|
)
|
|
|
|
|
Purchases of available-for-sale investments
|
|
|
(1,361,510
|
)
|
|
|
(1,164,833
|
)
|
Proceeds from sales of available-for-sale investments
|
|
|
440,788
|
|
|
|
202,276
|
|
Proceeds from maturities of available-for-sale investments
|
|
|
744,464
|
|
|
|
262,325
|
|
Payment for business acquisition, net of cash and cash equivalents acquired
|
|
|
(133,333
|
)
|
|
|
|
|
Changes in restricted cash
|
|
|
(12,432
|
)
|
|
|
(11,276
|
)
|
Purchases of privately-held and other equity investments, net
|
|
|
(5,288
|
)
|
|
|
(5,289
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(467,130
|
)
|
|
|
(830,007
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
257,693
|
|
|
|
131,391
|
|
Purchases and retirement of common stock
|
|
|
(388,698
|
)
|
|
|
(241,481
|
)
|
Change in customer financing arrangements
|
|
|
(16,906
|
)
|
|
|
3,784
|
|
Change in excess tax benefit from share-based compensation
|
|
|
32,932
|
|
|
|
(673
|
)
|
Return of capital to noncontrolling interest
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(117,979
|
)
|
|
|
(106,979
|
)
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(143,809
|
)
|
|
|
(400,494
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
1,604,723
|
|
|
|
2,019,084
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,460,914
|
|
|
$
|
1,618,590
|
|
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements
5
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The unaudited Condensed Consolidated Financial Statements of Juniper Networks, Inc. (Juniper
Networks or the Company) have been prepared in accordance with U.S. generally accepted
accounting principles (U.S. GAAP) for interim financial information as well as the instructions
to Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission (SEC).
Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for
complete financial statements. In the opinion of management, all adjustments, including normal
recurring accruals, considered necessary for a fair presentation have been included. The results of
operations for the three and nine months ended September 30, 2010, are not necessarily indicative
of the results that may be expected for the year ending December 31, 2010, or any future period.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of Operations, Risk
Factors, Quantitative and Qualitative Disclosures About Market Risk, and the Consolidated
Financial Statements and footnotes thereto included in the Companys Annual Report on Form 10-K for
the year ended December 31, 2009.
As of September 30, 2010, the Company owned a 60 percent interest in a joint venture with Nokia
Siemens Networks B.V. (NSN). Given the Companys majority ownership interest in the joint
venture, the accounts of the joint venture have been consolidated with the accounts of the Company,
and a noncontrolling interest has been recorded for the noncontrolling investors interests in the
net assets and operations of the joint venture.
Reclassifications
In the first quarter of 2010, the Company reclassified certain selling and marketing costs that
were previously reported as cost of service revenues as sales and marketing expense. Accordingly,
$6.1 million and $18.7 million of costs reported in the three and nine months ended September 30,
2009, respectively, have been reclassified from cost of service revenues to sales and marketing
expense to conform to the current periods presentation. The reclassification did not impact the
Companys previously reported net revenues, segment results, operating income, net income, or
earnings per share.
Note 2. Summary of Significant Accounting Policies
Recent Accounting Policy Changes
Revenue Recognition
In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2009-13, Topic 605
Multiple-Deliverable Revenue Arrangements
(ASU 2009-13).
ASU 2009-13 changes the requirements for establishing separate units of accounting in a multiple
element arrangement and requires the allocation of arrangement consideration to each deliverable to
be based on the relative selling price. Under the new standard, the Company allocates the total
arrangement consideration to each separable element of an arrangement based upon the relative
selling price of each element. Arrangement consideration allocated to undelivered elements is
deferred until delivery. Concurrently with issuing ASU 2009-13, the FASB also issued ASU No.
2009-14, Topic 985
Certain Revenue Arrangements That Include Software Elements
(ASU 2009-14).
ASU 2009-14 excludes software that is contained on a tangible product from the scope of software
revenue guidance if the software component and the non-software component function together to
deliver the tangible products essential functionality. The Company early adopted these standards
on a prospective basis as of the beginning of fiscal 2010 for new and materially modified
arrangements originating after December 31, 2009.
As a result of the adoption of ASU 2009-13 and ASU 2009-14, net revenues for the three and nine
months ended September 30, 2010, were approximately $50 million and $128 million higher,
respectively, than the net revenues that would have been recorded under the previous accounting
rules. The increase in revenues was due to recognition of revenue for products booked and shipped
during these periods which consisted primarily of $31 million and $91 million for the three and
nine month periods ended September 30, 2010, respectively, related to undelivered product
commitments for which the Company was unable to demonstrate fair value pursuant to the previous
accounting standards. The remainder of the increase in revenue for the three and nine month periods
was due to products sold into multiple-year service arrangements which were recognized ratably
under the previous accounting standards and for the change in the Companys allocation methodology
from the residual method to the relative selling price method as prescribed by ASU 2009-13.
6
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Revenue is recognized when all of the following criteria have been met:
|
|
|
Persuasive evidence of an arrangement exists.
The Company generally relies upon sales
contracts, or agreements, and customer purchase orders to determine the existence of an
arrangement.
|
|
|
|
|
Delivery has occurred.
The Company uses shipping terms and related documents, or
written evidence of customer acceptance, when applicable, to verify delivery or
performance. In instances where the Company has outstanding obligations related to product
delivery or the final acceptance of the product, revenue is deferred until all the delivery
and acceptance criteria have been met.
|
|
|
|
|
Sales price is fixed or determinable.
The Company assesses whether the sales price is
fixed or determinable based on the payment terms and whether the sales price is subject to
refund or adjustment.
|
|
|
|
|
Collectability is reasonably assured.
The Company assesses collectability based on
creditworthiness of customers as determined by our credit checks and their payment
histories. The Company records accounts receivable net of allowance for doubtful accounts,
estimated customer returns, and pricing credits.
|
For fiscal 2010 and future periods, pursuant to the guidance of ASU 2009-13, when a sales
arrangement contains multiple elements and software and non-software components function together
to deliver the tangible products essential functionality, the Company allocates revenue to each
element based on a selling price hierarchy. The selling price for a deliverable is based on its
vendor-specific objective evidence (VSOE) if available, third-party evidence (TPE) if VSOE is
not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. The Company
then recognizes revenue on each deliverable in accordance with its policies for product and service
revenue recognition. VSOE of selling price is based on the price charged when the element is sold
separately. In determining VSOE, the Company requires that a substantial majority of the selling
prices fall within a reasonable range based on historical discounting trends for specific products
and services. TPE of selling price is established by evaluating largely interchangeable competitor
products or services in stand-alone sales to similarly situated customers. However, as the
Companys products contain a significant element of proprietary technology and its solutions offer
substantially different features and functionality, the comparable pricing of products with similar
functionality typically cannot be obtained. Additionally, as the Company is unable to reliably
determine what competitors products selling prices are on a stand-alone basis, the Company is not
typically able to determine TPE. The best estimate of selling price is established considering
multiple factors including, but not limited to pricing practices in different geographies and
through different sales channels, gross margin objectives, internal costs, competitor pricing
strategies, and industry technology lifecycles.
In multiple element arrangements where more-than-incidental software deliverables are included,
revenue is allocated to each separate unit of accounting for each of the non-software deliverables
and to the software deliverables as a group using the relative selling prices of each of the
deliverables in the arrangement based on the aforementioned selling price hierarchy. If the
arrangement contains more than one software deliverable, the arrangement consideration allocated to
the software deliverables as a group is then allocated to each software deliverable using the
guidance for recognizing software revenue, as amended.
The Company limits the amount of revenue recognition for delivered elements to the amount that is
not contingent on the future delivery of products or services, future performance obligation, or
subject to customer-specific return or refund privileges. The Company evaluates each deliverable in
an arrangement to determine whether they represent separate units of accounting. A deliverable
constitutes a separate unit of accounting when it has stand-alone value and there are no
customer-negotiated refunds or return rights for the delivered elements. If the arrangement
includes a customer-negotiated refund or return right relative to the delivered item, and the
delivery and performance of the undelivered item is considered probable and substantially in the
Companys control, the delivered element constitutes a separate unit of accounting. In
circumstances when the aforementioned criteria are not met, the deliverable is combined with the
undelivered elements, and the allocation of the arrangement consideration and revenue recognition
is determined for the combined unit as a single unit. Allocation of the consideration is determined
at arrangement inception on the basis of each units relative selling price. The new standards do
not generally change the units of accounting for the Companys revenue transactions. The Company
cannot reasonably estimate the effect of adopting these standards on future financial periods as
the impact will vary depending on the nature and volume of new or materially modified deals in any
given period.
7
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
For transactions entered into prior to January 1, 2010, revenue for arrangements with multiple
elements, such as sales of products that include services, is allocated to each element using the
residual method based on the VSOE of fair value of the undelivered items pursuant to ASC Topic 985-605,
Software Revenue Recognition
. Under the residual
method, the amount of revenue allocated to delivered elements equals the total arrangement
consideration less the aggregate fair value of any undelivered elements. If VSOE of one or more
undelivered items does not exist, revenue from the entire arrangement is deferred and recognized at
the earlier of: (i) delivery of those elements or (ii) when fair value can be established unless
maintenance is the only undelivered element, in which case, the entire arrangement fee is
recognized ratably over the contractual support period.
The Company accounts for multiple agreements with a single customer as one arrangement if the
contractual terms and/or substance of those agreements indicate that they may be so closely related
that they are, in effect, parts of a single arrangement. The Companys ability to recognize revenue
in the future may be affected if actual selling prices are significantly less than fair value. In
addition, the Companys ability to recognize revenue in the future could be impacted by conditions
imposed by its customers.
For sales to direct end-users, value-added resellers, and original equipment manufacturer (OEM)
partners, the Company recognizes product revenue upon transfer of title and risk of loss, which is
generally upon shipment. It is the Companys practice to identify an end-user prior to shipment to
a value-added reseller. For the Companys end-users and value-added resellers, there are no
significant obligations for future performance such as rights of return or pricing credits. The
Companys agreements with its OEM partners may allow future rights of return. A portion of the
Companys sales is made through distributors under agreements allowing for pricing credits or
rights of return. Product revenue on sales made through these distributors is recognized upon
sell-through, as reported by the distributors to the Company. Deferred revenue on shipments to
distributors reflects the effects of distributor pricing credits and the amount of gross margin
expected to be realized upon sell-through. Deferred revenue is recorded net of the related product
costs of revenue.
The Company records reductions to revenue for estimated product returns and pricing adjustments,
such as rebates and price protection, in the same period that the related revenue is recorded. The
amount of these reductions is based on historical sales returns and price protection credits,
specific criteria outlined in rebate agreements, and other factors known at the time. Should actual
product returns or pricing adjustments differ from estimates, additional adjustments to revenue may
be required. In addition, the Company reports revenue net of sales taxes.
Service revenues include revenue from maintenance, training, and professional services. Maintenance
is offered under renewable contracts. Revenue from maintenance service contracts is deferred and
recognized ratably over the contractual support period, which is generally one to three years.
Revenue from training and professional services is recognized as services are completed or ratably
over the contractual period, which is generally one year or less.
The Company sells certain interests in accounts receivable on a non-recourse basis as part of
customer financing arrangements primarily with one major financing company. Cash received under
this arrangement in advance of revenue recognition is recorded as short-term debt.
Recent Accounting Pronouncements
In July 2010, the FASB issued ASU No. 2010-20, Topic 310
Disclosure about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses
(ASU 2010-20), which improves the
disclosures that an entity provides about the credit quality of its financing receivables and the
related allowance for credit losses. This guidance is effective for interim and annual reporting
periods ending on or after December 15, 2010. ASU 2010-20 relates to disclosure requirements only
and as such does not impact the Companys consolidated results of operations or financial
condition.
In May 2010, the FASB issued ASU No. 2010-19, Topic 830
Foreign Currency Issues: Multiple Foreign
Currency Exchange Rates-An announcement made by the staff of the U.S. Securities and Exchange
Commission
(ASU 2010-19), which incorporates the SEC Staff Announcement made at the March 18,
2010 meeting of the FASB Emerging Issues Task Force (EITF). The Staff Announcement provided the
SEC staffs view on certain foreign currency issues related to investments in Venezuela. This
guidance is effective as of the announcement date, March 18, 2010. The Companys adoption of ASU
2010-19 did not have an impact on the Companys consolidated results of operations or financial
condition.
In April 2010, the FASB issued ASU No. 2010-17, Topic 605
Revenue Recognition Milestone Method
(ASU 2010-17), which provides guidance on defining a milestone and determining when it may be
appropriate to apply the milestone method of revenue recognition for research or development
transactions. The amendments in ASU 2010-17 are effective on a prospective basis for milestones
achieved in fiscal years beginning on or after June 15, 2010, and interim periods within those
years. Early
8
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
adoption is permitted; however, if a Company elects to early adopt, the amendment must
be applied retrospectively from the beginning of the year of adoption. The Companys adoption of ASU 2010-17 is not expected to have an
impact on its consolidated results of operations or financial condition.
In April 2010, the FASB issued ASU No. 2010-13, Topic 718
Effect of Denominating the Exercise
Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity
Security Trades
(ASU 2010-13), which provides guidance on the classification of a share-based
payment award as either equity or a liability. A share-based payment award that contains a
condition that is not a market, performance, or service condition is required to be classified as a
liability. The amendments in ASU 2010-13 are effective for fiscal years, and interim periods within
those years beginning on or after December 15, 2010. The Companys adoption of ASU 2010-13 is not
expected to have an impact on the Companys consolidated results of operations or financial
condition.
In January 2010, the FASB issued ASU No. 2010-06, Topic 820
Improving Disclosures about Fair
Value Measurements
(ASU 2010-06), which provides additional fair value measurement disclosures
and clarifies certain existing disclosure requirements. Except for the requirement to disclose
purchases, sales, issuances, and settlements of Level 3 measurements on a gross basis, the
disclosure and clarification requirements are effective for interim and annual reporting periods
beginning after December 15, 2009. The requirement to separately disclose purchases, sales,
issuances, and settlements of recurring Level 3 measurements on a gross basis is effective for
fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.
ASU 2010-06 relates to disclosure requirements only and as such does not impact the Companys
consolidated results of operations or financial condition.
Note 3. Business Combination
In the nine months ended September 30, 2010, the Company completed the acquisitions of Ankeena
Networks, Inc., (Ankeena) and SMobile Systems, Inc. (SMobile).
Ankeena Acquisition
On April 19, 2010, the Company acquired 100% of the equity securities of Ankeena, a privately-held
provider of new media infrastructure technology. The acquisition of Ankeena will provide the
Company with strong video delivery capabilities, as Ankeenas products optimize web-based video
delivery, provide key components of a content delivery network architecture/solution, improve
consumers online video experience, and reduce service provider and carrier service provider
infrastructure costs for providing web-based video.
In connection with the acquisition of Ankeena, the Company assumed net assets of $3.6 million,
including cash and cash equivalents of $2.3 million, and recognized goodwill of $53.1 million,
which was assigned to the Companys Infrastructure segment. The goodwill recognized is attributable
primarily to expected synergies, the assembled workforce of Ankeena, and the economies of scale
expected from combining the operations of Ankeena and the Company. None of the goodwill is expected
to be deductible for income tax purposes.
Prior to the acquisition, the Company had a $2.0 million, or a 7.7% ownership interest in Ankeena,
and accounted for it as a privately-held equity investment. As of the acquisition-date, the fair
value of the equity interest in Ankeena was $5.2 million based on a noncontrolling interest fair
value and was included in the purchase price. The Company recognized a $3.2 million gain, which was
reported within gain (loss) on equity investments in its condensed consolidated statement of
operations.
SMobile Acquisition
On July 30, 2010, the Company acquired 100% of the equity securities of SMobile, a privately-held
software company focused solely on smartphone and tablet security solutions for the enterprise,
service provider, and consumer markets. The acquisition of SMobile will allow the Company to extend
its security focus through integration of SMobiles product portfolio with Junos
®
Pulse.
In connection with the acquisition of SMobile, the Company assumed net liabilities of $5.0 million,
including cash and cash equivalents of $0.4 million, and recognized goodwill of $47.9 million,
which was assigned to the Companys Service Layer Technology (SLT) segment. The goodwill
recognized is attributable primarily to expected synergies, the assembled workforce of SMobile, and
the economies of scale expected from combining the operations of SMobile and the Company. None of
the goodwill is expected to be deductible for income tax purposes.
9
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
The Companys consolidated financial statements include the operating results of both businesses
from the date of each acquisition. Pro forma results of operations for these acquisitions have not
been presented because the financial impact to the Companys consolidated results of operations,
both individually and in aggregate, is not material.
Total purchase consideration for these acquisitions is summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ankeena
|
|
|
SMobile
|
|
|
Total
|
|
Cash
|
|
$
|
66.5
|
|
|
$
|
69.5
|
|
|
$
|
136.0
|
|
Assumed stock option and RSU awards allocated to purchase price (1)
|
|
|
2.4
|
|
|
|
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
68.9
|
|
|
$
|
69.5
|
|
|
$
|
138.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The fair value of the stock option and RSU awards assumed was based on the acquired
companys determined value on the acquisition date.
|
Allocation of the purchase consideration for acquisitions completed during the nine months ended
September 30, 2010, is summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ankeena
|
|
|
SMobile
|
|
|
Total
|
|
Net assets (liabilities) assumed
|
|
$
|
3.6
|
|
|
$
|
(5.0
|
)
|
|
$
|
(1.4
|
)
|
Intangible assets acquired
|
|
|
12.2
|
|
|
|
26.6
|
|
|
|
38.8
|
|
Goodwill
|
|
|
53.1
|
|
|
|
47.9
|
|
|
|
101.0
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
68.9
|
|
|
$
|
69.5
|
|
|
$
|
138.4
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $1.5 million and $2.1 million of acquisition-related costs in the three and
nine months ended September 30, 2010, respectively, as a result of both acquisitions. These costs
were expensed in the period incurred and reported in the Companys condensed consolidated statement
of operations as acquisition-related and other charges.
The following table presents details of the intangible assets acquired through the business
combinations completed during the nine months ended September 30, 2010 (in millions, except years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ankeena
|
|
|
SMobile
|
|
|
|
|
|
|
Estimated Useful
|
|
|
|
|
|
|
Estimated Useful
|
|
|
|
|
|
|
|
|
|
Life (In Years)
|
|
|
Amount
|
|
|
Life (In Years)
|
|
|
Amount
|
|
|
Total Amount
|
|
Existing technology
|
|
|
4.0
|
|
|
$
|
5.2
|
|
|
|
5.0
|
|
|
$
|
24.3
|
|
|
$
|
29.5
|
|
In-process research and development
|
|
|
4.0
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
3.8
|
|
Core technology
|
|
|
4.0
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Customer contracts and related relationships
|
|
|
|
|
|
|
|
|
|
|
6.0
|
|
|
|
2.1
|
|
|
|
2.1
|
|
Support agreements and related relationships
|
|
|
|
|
|
|
|
|
|
|
6.0
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Non-compete agreements
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4.0
|
|
|
$
|
12.2
|
|
|
|
5.0
|
|
|
$
|
26.6
|
|
|
$
|
38.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4. Net Income per Share
Basic net income per share is computed by dividing net income available to common stockholders by
the weighted-average number of common shares outstanding for that period. Diluted net income per
share is computed giving effect to all dilutive potential shares that were outstanding during the
period. Dilutive potential common shares consist of common shares issuable upon exercise of stock
options, vesting of restricted stock units (RSUs), and
vesting of performance share awards (PSAs).
10
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
The following table presents the calculation of basic and diluted net income per share attributable
to Juniper Networks common stockholders (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Juniper Networks
|
|
$
|
134.5
|
|
|
$
|
83.8
|
|
|
$
|
428.2
|
|
|
$
|
94.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute
basic net income per share
|
|
|
520.6
|
|
|
|
523.9
|
|
|
|
522.1
|
|
|
|
523.8
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock awards
|
|
|
14.3
|
|
|
|
14.2
|
|
|
|
15.1
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute
diluted net income per share
|
|
|
534.9
|
|
|
|
538.1
|
|
|
|
537.2
|
|
|
|
532.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to
Juniper Networks common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.26
|
|
|
$
|
0.16
|
|
|
$
|
0.82
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.25
|
|
|
$
|
0.16
|
|
|
$
|
0.80
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company excludes outstanding stock options with exercise prices that are greater than the
average market price from the calculation of diluted net income per share because their effect
would be anti-dilutive. The Company includes the common shares underlying PSAs in the calculation
of diluted net income per share when they become contingently issuable and excludes such shares
when they are not contingently issuable. Employee stock option awards and PSAs covering
approximately 16.8 million and 16.4 million shares of the Companys common stock were outstanding
but were not included in the computation of diluted earnings per share for the three and nine
months ended September 30, 2010, respectively, because their effect would have been anti-dilutive.
Employee stock awards covering approximately 24.4 million and 48.4 million shares of the Companys
common stock in the three and nine months ended September 30, 2009, respectively, were outstanding,
but were not included in the computation of diluted earnings per share because their effect would
have been anti-dilutive.
11
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Note 5. Cash, Cash Equivalents, and Investments
Cash and Cash Equivalents
The following table summarizes the Companys cash and cash equivalents (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash:
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
$
|
430.0
|
|
|
$
|
427.2
|
|
Time deposits
|
|
|
276.3
|
|
|
|
127.9
|
|
|
|
|
|
|
|
|
Total cash
|
|
|
706.3
|
|
|
|
555.1
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
|
7.0
|
|
|
|
|
|
Certificate of deposit
|
|
|
5.0
|
|
|
|
|
|
Commercial paper
|
|
|
10.0
|
|
|
|
17.0
|
|
Money market funds
|
|
|
732.6
|
|
|
|
1,032.6
|
|
|
|
|
|
|
|
|
Total cash equivalents
|
|
|
754.6
|
|
|
|
1,049.6
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
1,460.9
|
|
|
$
|
1,604.7
|
|
|
|
|
|
|
|
|
Investments in Available-for-Sale and Trading Securities
The following tables summarize the Companys unrealized gains and losses, and fair value of
investments designated as trading or available-for-sale, as of September 30, 2010, and December 31,
2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Gross Unrealized Losses
|
|
|
Estimated Fair Value
|
|
As of September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
$
|
288.4
|
|
|
$
|
0.3
|
|
|
$
|
|
|
|
$
|
288.7
|
|
Government-sponsored enterprise obligations
|
|
|
246.8
|
|
|
|
0.7
|
|
|
|
|
|
|
|
247.5
|
|
Foreign government debt securities
|
|
|
52.1
|
|
|
|
0.4
|
|
|
|
|
|
|
|
52.5
|
|
Certificate of deposit
|
|
|
18.6
|
|
|
|
|
|
|
|
|
|
|
|
18.6
|
|
Commercial paper
|
|
|
16.5
|
|
|
|
|
|
|
|
|
|
|
|
16.5
|
|
Asset-backed securities
|
|
|
74.1
|
|
|
|
0.1
|
|
|
|
(0.1
|
)
|
|
|
74.1
|
|
Corporate debt securities
|
|
|
522.5
|
|
|
|
3.5
|
|
|
|
(0.1
|
)
|
|
|
525.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,219.0
|
|
|
|
5.0
|
|
|
|
(0.2
|
)
|
|
|
1,223.8
|
|
Publicly-traded equity securities
|
|
|
11.3
|
|
|
|
2.5
|
|
|
|
|
|
|
|
13.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,230.3
|
|
|
$
|
7.5
|
|
|
$
|
(0.2
|
)
|
|
$
|
1,237.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
634.9
|
|
|
$
|
3.7
|
|
|
$
|
(0.1
|
)
|
|
$
|
638.5
|
|
Long-term investments
|
|
|
595.4
|
|
|
|
3.8
|
|
|
|
(0.1
|
)
|
|
|
599.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,230.3
|
|
|
$
|
7.5
|
|
|
$
|
(0.2
|
)
|
|
$
|
1,237.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Gross Unrealized Losses
|
|
|
Estimated Fair Value
|
|
As of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
$
|
245.0
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
245.1
|
|
Government-sponsored enterprise obligations
|
|
|
212.0
|
|
|
|
0.6
|
|
|
|
(0.3
|
)
|
|
|
212.3
|
|
Foreign government debt securities
|
|
|
96.4
|
|
|
|
0.3
|
|
|
|
(0.1
|
)
|
|
|
96.6
|
|
Corporate debt securities
|
|
|
488.2
|
|
|
|
2.0
|
|
|
|
(0.3
|
)
|
|
|
489.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,041.6
|
|
|
|
3.0
|
|
|
|
(0.7
|
)
|
|
|
1,043.9
|
|
Publicly-traded equity securities
|
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,051.7
|
|
|
$
|
3.0
|
|
|
$
|
(0.7
|
)
|
|
$
|
1,054.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
569.5
|
|
|
$
|
1.0
|
|
|
$
|
|
|
|
$
|
570.5
|
|
Long-term investments
|
|
|
482.2
|
|
|
|
2.0
|
|
|
|
(0.7
|
)
|
|
|
483.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,051.7
|
|
|
$
|
3.0
|
|
|
$
|
(0.7
|
)
|
|
$
|
1,054.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the Companys maturities of its available-for-sale investments
and publicly-traded securities as of September 30, 2010 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Gross Unrealized Losses
|
|
|
Estimated Fair Value
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
$
|
623.6
|
|
|
$
|
1.2
|
|
|
$
|
(0.1
|
)
|
|
$
|
624.7
|
|
Due between one and five years
|
|
|
595.4
|
|
|
|
3.8
|
|
|
|
(0.1
|
)
|
|
|
599.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,219.0
|
|
|
|
5.0
|
|
|
|
(0.2
|
)
|
|
|
1,223.8
|
|
Publicly-traded equity securities
|
|
|
11.3
|
|
|
|
2.5
|
|
|
|
|
|
|
|
13.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,230.3
|
|
|
$
|
7.5
|
|
|
$
|
(0.2
|
)
|
|
$
|
1,237.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the Companys trading and available-for sale investments that are
in a continuous unrealized loss position as of September 30, 2010 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
Corporate debt securities
|
|
$
|
101.6
|
|
|
$
|
(0.1
|
)
|
|
$
|
19.5
|
|
|
$
|
|
|
|
$
|
121.1
|
|
|
$
|
(0.1
|
)
|
U.S. government securities
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.0
|
|
|
|
|
|
Government-sponsored enterprise
obligations
|
|
|
17.2
|
|
|
|
|
|
|
|
5.0
|
|
|
|
|
|
|
|
22.2
|
|
|
|
|
|
Foreign government debt securities
|
|
|
1.2
|
|
|
|
|
|
|
|
5.0
|
|
|
|
|
|
|
|
6.2
|
|
|
|
|
|
Asset-backed securities
|
|
|
46.2
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
46.2
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
172.2
|
|
|
$
|
(0.2
|
)
|
|
$
|
29.5
|
|
|
$
|
|
|
|
$
|
201.7
|
|
|
$
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had 46 and 52 investments in unrealized loss positions as of September 30, 2010,
and December 31, 2009, respectively. The gross unrealized losses related to these investments were
primarily due to changes in interest rates. The contractual terms of fixed income securities do not
permit the issuer to settle the securities at a price less than the amortized cost of the
investments. For the fixed income securities and publicly-traded equity securities that have
unrealized losses, the Company has determined that (i) it does not have the intent to sell any of
these investments and (ii) it is not more likely than not that it will be required to sell any of
these investments before recovery of the entire amortized cost basis. The Company did not consider
these investments to be other-than-temporarily impaired as of September 30, 2010, and December 31,
2009, respectively. The Company reviews its investments to identify and evaluate investments that
have an indication of possible impairment. The Company aggregates its investments by category and
length of time the securities have been in a continuous unrealized loss position to facilitate its evaluation.
13
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Privately-Held and Other Equity Investments
The Companys minority equity investments in privately-held and other companies are carried at
cost, as the Company does not have a controlling interest or the ability to exercise significant
influence over these companies. The Company adjusts its privately-held and other equity investments
for any impairment if the fair value exceeds the carrying value of the respective assets.
As of September 30, 2010, and December 31, 2009, the carrying values of the Companys
privately-held and other equity investments of $22.5 million and $13.9 million, respectively, were
included in other long-term assets in the condensed consolidated balance sheets. During the three
and nine months ended September 30, 2010, the Company invested $4.6 million and $9.8 million,
respectively, in privately-held and other equity investments. In the nine months ended September
30, 2010, the Company recognized a gain of $3.2 million from its minority equity investment in
Ankeena upon the acquisition of Ankeena.
During the three and nine months ended September 30, 2009, the Company recognized a loss of nil and
$3.3 million, respectively, due to the impairment of its minority equity investments in
privately-held companies, that the Company judged to be other than temporary. The company invested
$6.3 million in privately-held companies during the nine months ended September 30, 2009.
Additionally, during the nine months ended September 30, 2009, the Company had a minority equity
investment in a privately-held company that was acquired by a publicly-traded company for which the
Company received a cash payment of $1.0 million and common stock of the acquiring company of $1.0
million, which is classified as an available-for-sale investment. The Company had no minority
equity investments in publicly-held companies during the three and nine months ended September 30,
2009.
Restricted Cash
Restricted cash consists of cash and investments held for escrow accounts required by certain
acquisitions completed in 2005 and 2010, the India Gratuity Trust and the Israel Retirement Trust
which cover statutory severance obligations in the event of termination of the Companys India and
Israel employees, respectively, and the Directors and Officers (D&O) indemnification trust.
During the three and nine months ended September 30, 2010, the Company increased its restricted
cash by $69.6 million and $150.1 million, respectively, primarily for the escrow accounts required
by the acquisition of Ankeena and SMobile that were completed in the second and third quarter of
2010, respectively, and to a lesser extent for the Israel Retirement Trust established in the first
quarter of 2010. During the three and nine months ended September 30, 2010, the Company distributed
approximately $64.1 million and $124.9 million, respectively, from its restricted accounts, mainly
resulting from the Ankeena and SMobile acquisitions. In connection with the Ankeena acquisition,
the Company agreed to pay from escrow a total amount of $10.7 million, representing the cash value
of unvested restricted shares in Ankeena as of April 8, 2010, to certain former Ankeena employees.
As of September 30, 2010, the Company expects to release $8.1 million from escrow as these
restricted shares vest over the next two years.
The following table summarizes the Companys cash and investments that are classified as restricted
cash in the condensed consolidated balance sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Restricted cash:
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
$
|
25.8
|
|
|
$
|
3.8
|
|
|
|
|
|
|
|
|
Total restricted cash
|
|
|
25.8
|
|
|
|
3.8
|
|
Restricted investments:
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
|
0.6
|
|
|
|
19.8
|
|
Corporate debt securities
|
|
|
2.7
|
|
|
|
|
|
Money market funds
|
|
|
50.0
|
|
|
|
30.1
|
|
|
|
|
|
|
|
|
Total restricted investments
|
|
|
53.3
|
|
|
|
49.9
|
|
|
|
|
|
|
|
|
Total restricted cash and investments
|
|
$
|
79.1
|
|
|
$
|
53.7
|
|
|
|
|
|
|
|
|
14
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
As of September 30, 2010, and December 31, 2009, the unrealized gains and losses related to
restricted investments were immaterial.
Note 6. Fair Value Measurements
The Company determines the fair values of its financial instruments based on a fair value
hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. Fair value is defined as the price that would be
received upon sale of an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value assumes that the transaction to sell
the asset or transfer the liability occurs in the principal or most advantageous market for the
asset or liability and establishes that the fair value of an asset or liability shall be determined
based on the assumptions that market participants would use in pricing the asset or liability. The
classification of a financial asset or liability within the hierarchy is based upon the lowest
level input that is significant to the fair value measurement. The fair value hierarchy prioritizes
the inputs into three levels that may be used to measure fair value:
Level 1 Inputs are unadjusted quoted prices in active markets for identical assets or
liabilities.
Level 2 Inputs are quoted prices for similar assets and liabilities in active markets or inputs
that are observable for the asset or liability, either directly or indirectly through market
corroboration, for substantially the full term of the financial instrument. These inputs are valued
using market based approaches.
Level 3 Inputs are unobservable inputs based on the Companys assumptions. These inputs, if any,
are valued using internal financial models.
15
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables provide a summary of assets measured at fair value on a recurring basis and
their presentation on the Companys condensed consolidated balance sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2010 Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant Other
|
|
|
|
|
|
|
Active Markets For
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Remaining Inputs
|
|
|
Remaining Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
7.2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities (1)
|
|
$
|
111.1
|
|
|
$
|
185.2
|
|
|
$
|
|
|
|
$
|
296.3
|
|
Government-sponsored enterprise obligations
|
|
|
226.7
|
|
|
|
20.8
|
|
|
|
|
|
|
|
247.5
|
|
Foreign government debt securities
|
|
|
21.2
|
|
|
|
31.3
|
|
|
|
|
|
|
|
52.5
|
|
Commercial paper
|
|
|
|
|
|
|
26.5
|
|
|
|
|
|
|
|
26.5
|
|
Corporate debt securities (2)
|
|
|
2.7
|
|
|
|
525.9
|
|
|
|
|
|
|
|
528.6
|
|
Certificate of deposit
|
|
|
|
|
|
|
23.6
|
|
|
|
|
|
|
|
23.6
|
|
Asset-backed securities
|
|
|
|
|
|
|
74.1
|
|
|
|
|
|
|
|
74.1
|
|
Money market funds (3)
|
|
|
782.6
|
|
|
|
|
|
|
|
|
|
|
|
782.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale debt securities
|
|
|
1,144.3
|
|
|
|
887.4
|
|
|
|
|
|
|
|
2,031.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology securities
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale equity securities
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
|
1,150.9
|
|
|
|
887.4
|
|
|
|
|
|
|
|
2,038.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
1.7
|
|
|
|
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets
|
|
|
|
|
|
|
1.7
|
|
|
|
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
1,158.1
|
|
|
$
|
889.1
|
|
|
$
|
|
|
|
$
|
2,047.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Balance includes $0.6 million of restricted investments measured at fair market value,
related to an acquisition completed in 2005. For additional information regarding the
Companys restricted investments, see Note 5,
Cash, Cash Equivalents, and Investments
, under
the heading Restricted Cash. Restricted investments are included in the restricted cash
balance in the condensed consolidated balance sheet.
|
|
(2)
|
|
Balance includes $2.7 million of restricted investments measured at fair market value,
related to the Companys India Gratuity Trust.
|
|
(3)
|
|
Balance includes $50.0 million of restricted investments measured at fair market value,
related to the Companys D&O trust.
|
16
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2010 Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant Other
|
|
|
|
|
|
|
Active Markets For
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Remaining Inputs
|
|
|
Remaining Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Reported as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
732.6
|
|
|
$
|
22.0
|
|
|
$
|
|
|
|
$
|
754.6
|
|
Short-term investments
|
|
|
198.6
|
|
|
|
439.9
|
|
|
|
|
|
|
|
638.5
|
|
Long-term investments
|
|
|
174.2
|
|
|
|
424.9
|
|
|
|
|
|
|
|
599.1
|
|
Restricted cash
|
|
|
52.7
|
|
|
|
0.6
|
|
|
|
|
|
|
|
53.3
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
|
1.7
|
|
|
|
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
1,158.1
|
|
|
$
|
889.1
|
|
|
$
|
|
|
|
$
|
2,047.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2009 Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant Other
|
|
|
|
|
|
|
Active Markets For
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Remaining Inputs
|
|
|
Remaining Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Reported as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
1,032.6
|
|
|
$
|
17.0
|
|
|
$
|
|
|
|
$
|
1,049.6
|
|
Short-term investments
|
|
|
101.3
|
|
|
|
469.2
|
|
|
|
|
|
|
|
570.5
|
|
Long-term investments
|
|
|
181.2
|
|
|
|
302.3
|
|
|
|
|
|
|
|
483.5
|
|
Restricted cash
|
|
|
49.9
|
|
|
|
|
|
|
|
|
|
|
|
49.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
1,365.0
|
|
|
$
|
788.5
|
|
|
$
|
|
|
|
$
|
2,153.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 and December 31, 2009, the Company had nil and $1.5 million, respectively,
of derivative liabilities measured at fair value on a recurring basis. The Company recorded the
derivative liabilities, which related to its foreign exchange contracts, within other accrued
liabilities in its condensed consolidated balance sheets. These liabilities were measured using
significant other observable remaining inputs (Level 2) pursuant to the fair value hierarchy.
The Companys policy is to recognize asset or liability transfers among Level 1, Level 2, and Level
3 as of the actual date of the events or change in circumstances that caused the transfer. During
the three and nine months ended September 30, 2010, the Company had no transfers between levels of
the fair value hierarchy of its assets or liabilities measured at fair value.
Assets Measured at Fair Value on a Nonrecurring Basis
The following table presents the Companys assets that are measured at fair value on a nonrecurring
basis at least annually or on a quarterly basis if impairment is indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant Other
|
|
|
|
|
|
|
|
|
|
Carrying Value as
|
|
|
Active Markets For
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Total Loss for the
|
|
|
Total Loss for the
|
|
|
|
of September 30,
|
|
|
Identical Assets
|
|
|
Remaining Inputs
|
|
|
Remaining Inputs
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
September 30, 2010
|
|
|
September 30, 2010
|
|
Privately-held
equity investments
|
|
$
|
0.7
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.7
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.7
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.7
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant Other
|
|
|
|
|
|
|
|
|
|
Carrying Value as
|
|
|
Active Markets For
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Total Loss for the
|
|
|
Total Loss for the Nine
|
|
|
|
of September 30,
|
|
|
Identical Assets
|
|
|
Remaining Inputs
|
|
|
Remaining Inputs
|
|
|
Three Months Ended
|
|
|
Months Ended September
|
|
|
|
2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
September 30, 2009
|
|
|
30, 2009
|
|
Privately-held
equity investments
|
|
$
|
1.7
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.7
|
|
|
$
|
|
|
|
$
|
(3.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.7
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.7
|
|
|
$
|
|
|
|
$
|
(3.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Privately-held equity investments, which are normally carried at cost, were measured at fair value
due to events and circumstances that the Company identified as significantly impacting the fair
value of the investments. The Company measured the fair value of its privately-held equity
investments using an analysis of the financial condition and near-term prospects of the investee,
including recent financing activities and their capital structure. As a result, the Company
recognized an impairment loss of $3.3 million during the nine months ended September 30, 2009, and
classified the investments as a Level 3 asset due to the absence of quoted market prices and
inherent lack of liquidity. The Company had no impairment charges against its privately-held equity
investments during the three and nine months ended September 30, 2010.
Note 7. Goodwill and Purchased Intangible Assets
Goodwill
The following table summarizes the Companys goodwill activities by segment in the nine months
ended September 30, 2010 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure
|
|
|
SLT
|
|
|
Total
|
|
Balance as of January 1, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,500.5
|
|
|
$
|
3,438.1
|
|
|
$
|
4,938.6
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(1,280.0
|
)
|
|
|
(1,280.0
|
)
|
|
|
|
|
|
|
|
|
|
|
Carrying value at January 1, 2010
|
|
|
1,500.5
|
|
|
|
2,158.1
|
|
|
|
3,658.6
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired during the nine months ended September 30, 2010
|
|
|
53.1
|
|
|
|
47.9
|
|
|
|
101.0
|
|
Balance as of September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
1,553.6
|
|
|
|
3,486.0
|
|
|
|
5,039.6
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(1,280.0
|
)
|
|
|
(1,280.0
|
)
|
|
|
|
|
|
|
|
|
|
|
Carrying value at September 30, 2010
|
|
$
|
1,553.6
|
|
|
$
|
2,206.0
|
|
|
$
|
3,759.6
|
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2010, the Company recorded goodwill of $47.9
million and $101.0 million, respectively, as a result of its acquisitions of Ankeena and SMobile.
For further discussion, see Note 3,
Business Combinations
, in the Notes to Condensed Consolidated
Financial Statements. There were no impairments to goodwill during the three and nine months ended
September 30, 2010, and 2009.
18
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Purchased Intangible Assets
The following table presents the Companys purchased intangible assets with definite lives (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Additions
|
|
|
Net
|
|
As of September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technologies and patents
|
|
$
|
380.0
|
|
|
$
|
(378.6
|
)
|
|
$
|
32.7
|
|
|
$
|
34.1
|
|
Other
|
|
|
68.9
|
|
|
|
(61.5
|
)
|
|
|
6.1
|
|
|
|
13.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
448.9
|
|
|
$
|
(440.1
|
)
|
|
$
|
38.8
|
|
|
$
|
47.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technologies and patents
|
|
$
|
380.0
|
|
|
$
|
(376.0
|
)
|
|
$
|
|
|
|
$
|
4.0
|
|
Other
|
|
|
68.9
|
|
|
|
(59.1
|
)
|
|
|
|
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
448.9
|
|
|
$
|
(435.1
|
)
|
|
$
|
|
|
|
$
|
13.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2010, the Company recorded $26.6 million and
$38.8 million, respectively, of purchased intangible assets as a result of its acquisitions of
Ankeena and SMobile. For further discussion, see Note 3,
Business Combinations
, in the Notes to
Condensed Consolidated Financial Statements.
Amortization of purchased intangible assets included in operating expenses and cost of product
revenues totaled $2.4 million and $2.7 million for the three months ended September 30, 2010, and
2009, respectively, and $5.0 million and $13.4 million for the nine months ended September 30,
2010, and 2009, respectively. There were no impairment charges with respect to the purchased
intangible assets in the three and nine months ended September 30, 2010, and 2009.
The estimated future amortization expense of purchased intangible assets with definite lives for
future periods is as follows (in millions):
|
|
|
|
|
Years Ending December 31,
|
|
Amount
|
|
2010 (remaining three months)
|
|
$
|
2.9
|
|
2011
|
|
|
10.4
|
|
2012
|
|
|
9.6
|
|
2013
|
|
|
9.4
|
|
2014
|
|
|
7.6
|
|
Thereafter
|
|
|
7.7
|
|
|
|
|
|
Total
|
|
$
|
47.6
|
|
|
|
|
|
19
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Note 8. Other Financial Information
Warranties
The Company provides for the estimated cost of product warranties at the time revenue is
recognized. This provision is reported as accrued warranty within current liabilities on the
condensed consolidated balance sheets. Changes in the Companys warranty reserve were as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Beginning balance
|
|
$
|
38.3
|
|
|
$
|
35.8
|
|
|
$
|
38.2
|
|
|
$
|
40.1
|
|
Provisions made during the period, net
|
|
|
13.7
|
|
|
|
14.7
|
|
|
|
37.9
|
|
|
|
33.4
|
|
Change in estimate
|
|
|
(1.9
|
)
|
|
|
(1.1
|
)
|
|
|
(2.4
|
)
|
|
|
(4.5
|
)
|
Actual costs incurred during the period
|
|
|
(13.7
|
)
|
|
|
(12.1
|
)
|
|
|
(37.3
|
)
|
|
|
(31.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
36.4
|
|
|
$
|
37.3
|
|
|
$
|
36.4
|
|
|
$
|
37.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Revenue
Details of the Companys deferred revenue were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
Deferred product revenue:
|
|
|
|
|
|
|
|
|
Undelivered product commitments and other product deferrals
|
|
$
|
277.7
|
|
|
$
|
254.7
|
|
Distributor inventory and other sell-through items
|
|
|
128.2
|
|
|
|
136.6
|
|
|
|
|
|
|
|
|
Deferred gross product revenue
|
|
|
405.9
|
|
|
|
391.3
|
|
Deferred cost of product revenue
|
|
|
(147.7
|
)
|
|
|
(150.0
|
)
|
|
|
|
|
|
|
|
Deferred product revenue, net
|
|
|
258.2
|
|
|
|
241.3
|
|
Deferred service revenue
|
|
|
526.9
|
|
|
|
512.3
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
785.1
|
|
|
$
|
753.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
594.4
|
|
|
$
|
571.7
|
|
Long-term
|
|
|
190.7
|
|
|
|
181.9
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
785.1
|
|
|
$
|
753.6
|
|
|
|
|
|
|
|
|
Deferred product revenue primarily represents unrecognized revenue related to shipments to
distributors that have not sold through to end-users, undelivered product commitments, and other
shipments that have not met all revenue recognition criteria. Deferred product revenue is recorded
net of the related product costs of revenue. Deferred service revenue represents customer payments
made in advance for services, which include technical support, hardware and software maintenance,
professional services, and training.
Restructuring Liabilities
In 2009, the Company implemented a restructuring plan (the 2009 Restructuring Plan) in an effort
to better align its business operations with the current market and macroeconomic conditions. The
2009 Restructuring Plan included a worldwide workforce reduction and restructuring of certain
business functions and the reduction of facilities.
20
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
The following table provides a summary of changes in the Companys restructuring liability (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
Liability as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability as of
|
|
|
|
December 31, 2009
|
|
|
Charges
|
|
|
Cash payments
|
|
|
Adjustments
|
|
|
September 30, 2010
|
|
Facilities
|
|
$
|
4.9
|
|
|
$
|
6.8
|
|
|
$
|
(1.8
|
)
|
|
$
|
(1.6
|
)
|
|
$
|
8.3
|
|
Severance,
contractual
commitments, and
other charges
|
|
|
4.5
|
|
|
|
1.8
|
|
|
|
(5.4
|
)
|
|
|
(0.3
|
)
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9.4
|
|
|
$
|
8.6
|
|
|
$
|
(7.2
|
)
|
|
$
|
(1.9
|
)
|
|
$
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the 2009 Restructuring Plan, the Company recorded $0.2 million and $8.6 million
of restructuring charges in the condensed consolidated statements of operations during the three
and nine months ended September 30, 2010, respectively. The Company paid $1.4 million and $7.2
million for severance and facilities related charges associated with the 2009 Restructuring Plan
during the three and nine months ended September 30, 2010, respectively. The Company recorded $4.5
million and $16.3 million in restructuring charges during the three and nine months ended September
30, 2009, for its 2009 Restructuring Plan. The Company paid $2.8 million and $6.0 million for
severance related charges associated with the 2009 Restructuring Plan during the three and nine
months ended September 30, 2009, respectively.
Restructuring charges were based on the Companys restructuring plans that were committed by
management. Any changes in the estimates of executing the approved plans will be reflected in the
Companys results of operations.
Interest and Other Income, Net
Interest and other income, net, consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Interest income and expense, net
|
|
$
|
0.3
|
|
|
$
|
1.6
|
|
|
$
|
1.8
|
|
|
$
|
5.2
|
|
Other income and expense, net
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
|
|
0.7
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and other income, net
|
|
$
|
0.2
|
|
|
$
|
1.7
|
|
|
$
|
2.5
|
|
|
$
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and expense, net, primarily includes interest income from the Companys cash, cash
equivalents, and investments and interest expense from our customer financing arrangements. Other
income and expense, net, primarily includes foreign exchange gains and losses and other
miscellaneous expenses such as bank fees.
Note 9. Financing Arrangements
The Company has customer financing arrangements to sell its accounts receivable to a major
third-party financing provider. The program does not and is not intended to affect the timing of
revenue recognition because the Company only recognizes revenue upon sell-through. Under the
financing arrangements, proceeds from the financing provider are due to the Company 30 days from
the sale of the receivable. In these transactions with the financing provider, the Company
surrendered control over the transferred assets. The accounts receivable were isolated from the
Company and put beyond the reach of creditors, even in the event of bankruptcy. The Company does
not maintain effective control over the transferred assets through obligations or rights to redeem,
transfer, or repurchase the receivables after they have been transferred.
Pursuant to the financing arrangements for the sale of receivables, the Company sold net
receivables of $153.1 million and $122.5 million during the three months ended September 30, 2010,
and 2009, respectively, and $435.5 million and $294.9 million during the nine months ended
September 30, 2010, and 2009, respectively.
During the three months ended September 30, 2010, and 2009, the Company received cash proceeds of
$147.0 million and $101.5 million respectively, and $423.5 million and $277.2 million during the
nine months ended September 30, 2010, and 2009, respectively, from the financing provider. The
amounts owed by the financing provider recorded as accounts receivable on the Companys condensed
consolidated balance sheets as of September 30, 2010, and
December 31, 2009, was $101.6 million and $89.8 million, respectively.
21
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
The portion of the receivable financed that has not been recognized as revenue is accounted for as
a financing arrangement and is included in other accrued liabilities and other long-term
liabilities in the condensed consolidated balance sheet
.
As of September 30, 2010, and December 31,
2009, the estimated cash received from the financing provider not recognized as revenue from
distributors was $35.7 million and $52.6 million, respectively.
Note 10. Derivative Instruments
The Company uses derivatives partially to offset its market exposure to fluctuations in certain
foreign currencies and does not enter into derivatives for speculative or trading purposes.
Cash Flow Hedges
The Company uses foreign currency forward or option contracts to hedge certain forecasted foreign
currency transactions relating to cost of services and operating expenses. The derivatives are
intended to protect the U.S. Dollar equivalent of the Companys planned cost of services and
operating expenses denominated in foreign currencies. These derivatives are designated as cash flow
hedges. Execution of these cash flow hedge derivatives typically occurs every month with maturities
of less than one year. The effective portion of the derivatives gain or loss is initially reported
as a component of accumulated other comprehensive income (loss) on the condensed consolidated
balance sheets, and upon occurrence of the forecasted transaction, is subsequently reclassified
into the cost of services or operating expense line item to which the hedged transaction relates.
The Company records any ineffectiveness of the hedging instruments, which was immaterial during the
three and nine months ended September 30, 2010, and 2009, respectively, in interest and other
income, net, on its condensed consolidated statements of operations. Cash flows from such hedges
are classified as operating activities. All amounts within accumulated other comprehensive income
(loss) are expected to be reclassified into earnings within the next 12 months.
The total fair value of the Companys derivative assets located in other current assets on the
condensed consolidated balance sheet as of September 30, 2010, and December 31, 2009, was $1.7
million and $0.2 million, respectively. The total fair value of the Companys derivative
liabilities located in other accrued liabilities on the condensed consolidated balance sheet as of
September 30, 2010, and December 31, 2009, was nil and $1.5 million, respectively.
The Company recognized a gain of $2.9 million in accumulated other comprehensive income for the
effective portion of its derivative instruments and reclassified a loss of $1.5 million from other
comprehensive income to operating expense in the condensed consolidated statements of operations
during the three months ended September 30, 2010. During the nine months ended September 30, 2010,
the Company recognized a loss of $1.6 million in accumulated other comprehensive income for the
effective portion of its derivative instruments and reclassified a loss of $4.8 million from other
comprehensive income to operating expense in the condensed consolidated statements of operations.
During the three months ended September 30, 2009, the Company recognized a gain of $2.1 million in
accumulated other comprehensive income for the effective portion of its derivative instruments and
reclassified a gain of $3.3 million from other comprehensive income to operating expense in the
condensed consolidated statements of operations. The Company recognized a gain of $1.4 million in
accumulated other comprehensive income for the effective portion of its derivative instruments and
reclassified a gain of $1.6 million from other comprehensive income to operating expense in the
condensed consolidated statements of operations during the nine months ended September 30, 2009.
The ineffective portion of the Companys derivative instruments recognized in its condensed
consolidated statements of operations was immaterial during the three and nine months ended
September 30, 2010, and 2009.
Non-Designated Hedges
The Company also uses foreign currency forward contracts to mitigate variability in gains and
losses generated from the re-measurement of certain monetary assets and liabilities denominated in
foreign currencies. These derivatives do not qualify for special hedge accounting treatment. These
derivatives are carried at fair value with changes recorded in interest and other income, net.
Changes in the fair value of these derivatives are largely offset by re-measurement of the
underlying assets and liabilities. Cash flows from such derivatives are classified as operating
activities. The derivatives have maturities of approximately two months.
22
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
As of September 30, 2010, the Companys top three outstanding derivative positions by currency
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy
|
|
|
Buy
|
|
|
Buy
|
|
|
|
EUR
|
|
|
GBP
|
|
|
INR
|
|
Foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount of foreign currency
|
|
|
25.3
|
|
|
£
|
9.8
|
|
|
|
1,333.1
|
|
U.S dollar equivalent
|
|
$
|
32.3
|
|
|
$
|
14.8
|
|
|
$
|
28.9
|
|
Weighted-average maturity
|
|
2 months
|
|
2 months
|
|
2 months
|
During the three and nine months ended September 30, 2010, the Company recognized a gain on
non-designated derivative instruments within interest and other income, net, on its condensed
consolidated statements of operations of $0.5 million and a loss of $0.9 million, respectively. The
Company recognized a gain of $1.8 million and $5.0 million on non-designated derivative instruments
within interest and other income, net, on its condensed consolidated statements of operations
during the three and nine months ended September 30, 2009, respectively.
Note 11. Equity
Stock Repurchase Activities
In February 2010, the Companys Board of Directors (the Board) approved a new stock repurchase
program (the 2010 Stock Repurchase Program) which authorized the Company to repurchase up to $1.0
billion of its common stock. This new authorization is in addition to the stock repurchase program
approved by the Board in March 2008 (the 2008 Stock Repurchase Program), which also enabled the
Company to repurchase up to $1.0 billion of the Companys common stock.
The Company repurchased approximately 5.0 million shares of its common stock at an average price of
$26.81 per share for an aggregate purchase price of $134.9 million during the three months ended
September 30, 2010, and approximately 14.3 million shares of its common stock at an average price
of $27.09 per share for an aggregate purchase price of $386.7 million during the nine months ended
September 30, 2010, under the two stock repurchase programs. The Company repurchased approximately
2.9 million shares of its common stock at an average price of $24.67 per share for an aggregate
purchase price of $71.9 million during the three months ended September 30, 2009, and approximately
12.6 million shares of its common stock at an average price of $19.18 per share for an aggregate
purchase price of $241.1 million during the nine months ended September 30, 2009, under the 2008
Stock Repurchase Program. As of September 30, 2010, there were no remaining authorized funds under
the 2008 Stock Repurchase Program and $931.8 million remaining authorized funds under the 2010
Stock Repurchase Program.
In addition to repurchases under the Companys stock repurchase programs, the Company repurchased
common stock from its employees in connection with net issuance of shares to satisfy its tax
withholding obligations for the vesting of certain RSUs and PSAs. The Company repurchased an
immaterial amount of common stock from its employees in connection with net issuance of shares
during the three months ended September 30, 2010, and repurchased approximately 0.1 million shares
of its common stock at an average price of $25.75 per share for an aggregate purchase price of $1.9
million in connection with the net issuances during the nine months ended September 30, 2010. The
Company repurchased an immaterial amount of common stock from its employees in connection with net
issuance of shares during the three and nine months ended September 30, 2009.
All shares of common stock repurchased under the Companys 2008 and 2010 stock repurchase programs
and from its employees in connection with net issuances have been retired. Future share repurchases
under the Companys 2010 Stock Repurchase Program will be subject to a review of the circumstances
in place at that time and will be made from time to time in private transactions or open market
purchases as permitted by securities laws and other legal requirements. This program may be
discontinued at any time.
23
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Comprehensive Income Attributable to Juniper Networks
Comprehensive
income attributable to Juniper Networks consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Consolidated net income
|
|
$
|
134.3
|
|
|
$
|
83.8
|
|
|
$
|
429.3
|
|
|
$
|
94.1
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on investments, net tax of nil
|
|
|
8.7
|
|
|
|
(0.9
|
)
|
|
|
7.0
|
|
|
|
1.7
|
|
Change in foreign currency translation adjustment, net tax of nil
|
|
|
6.3
|
|
|
|
4.9
|
|
|
|
(1.2
|
)
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income, net of tax
|
|
|
15.0
|
|
|
|
4.0
|
|
|
|
5.8
|
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated comprehensive income
|
|
|
149.3
|
|
|
|
87.8
|
|
|
|
435.1
|
|
|
|
101.8
|
|
Adjust for comprehensive income attributable to noncontrolling interest
|
|
|
0.2
|
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Juniper Networks
|
|
$
|
149.5
|
|
|
$
|
87.8
|
|
|
$
|
434.0
|
|
|
$
|
101.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
The following table summarizes equity activity for the three and nine months ended September 30,
2010 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Other
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
& Additional
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
controlling
|
|
|
Total
|
|
|
|
Paid-in-Capital
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Interest
|
|
|
Equity
|
|
Balance at December 31, 2009
|
|
$
|
9,060.1
|
|
|
$
|
(1.4
|
)
|
|
$
|
(3,236.5
|
)
|
|
$
|
2.6
|
|
|
$
|
5,824.8
|
|
Consolidated net income
|
|
|
|
|
|
|
|
|
|
|
163.1
|
|
|
|
1.5
|
|
|
|
164.6
|
|
Change in unrealized loss on investments, net tax of nil
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.4
|
)
|
Change in foreign currency translation adjustment, net tax of nil
|
|
|
|
|
|
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
|
(2.7
|
)
|
Issuance of shares in connection with Employee Stock Purchase Plan
|
|
|
20.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.8
|
|
Exercise of stock options by employees, net of repurchases
|
|
|
101.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.2
|
|
Return of capital to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.0
|
)
|
|
|
(2.0
|
)
|
Retirement of common stock
|
|
|
(5.7
|
)
|
|
|
|
|
|
|
(68.7
|
)
|
|
|
|
|
|
|
(74.4
|
)
|
Repurchases related to net issuances
|
|
|
|
|
|
|
|
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
(1.8
|
)
|
Share-based compensation expense
|
|
|
40.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40.6
|
|
Adjustment related to tax benefit from employee stock option plans
|
|
|
50.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010
|
|
|
9,267.6
|
|
|
|
(4.5
|
)
|
|
|
(3,143.9
|
)
|
|
|
2.1
|
|
|
|
6,121.3
|
|
Consolidated net income
|
|
|
|
|
|
|
|
|
|
|
130.5
|
|
|
|
(0.2
|
)
|
|
|
130.3
|
|
Change in unrealized loss on investments, net tax of nil
|
|
|
|
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
(1.3
|
)
|
Change in foreign currency translation adjustment, net tax of nil
|
|
|
|
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
|
(4.8
|
)
|
Exercise of stock options by employees, net of repurchases
|
|
|
53.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53.7
|
|
Return of capital to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.0
|
)
|
|
|
(1.0
|
)
|
Shares assumed in connection with business acquisition
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.3
|
|
Retirement of common stock
|
|
|
(9.1
|
)
|
|
|
|
|
|
|
(168.3
|
)
|
|
|
|
|
|
|
(177.4
|
)
|
Share-based compensation expense
|
|
|
43.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43.3
|
|
Adjustment related to tax benefit from employee stock option plans
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010
|
|
|
9,363.2
|
|
|
|
(10.6
|
)
|
|
|
(3,181.7
|
)
|
|
|
0.9
|
|
|
|
6,171.8
|
|
Consolidated net income
|
|
|
|
|
|
|
|
|
|
|
134.5
|
|
|
|
(0.2
|
)
|
|
|
134.3
|
|
Change in unrealized gain on investments, net tax of nil
|
|
|
|
|
|
|
8.7
|
|
|
|
|
|
|
|
|
|
|
|
8.7
|
|
Change in foreign currency translation adjustment, net tax of nil
|
|
|
|
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
6.3
|
|
Issuance of shares in connection with Employee Stock Purchase Plan
|
|
|
21.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.0
|
|
Exercise of stock options by employees, net of repurchases
|
|
|
62.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62.4
|
|
Return of capital to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of common stock
|
|
|
(44.4
|
)
|
|
|
|
|
|
|
(90.5
|
)
|
|
|
|
|
|
|
(134.9
|
)
|
Repurchases related to net issuances
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
Share-based compensation expense
|
|
|
43.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43.1
|
|
Adjustment related to tax benefit from employee stock option plans
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
$
|
9,449.6
|
|
|
$
|
4.4
|
|
|
$
|
(3,137.8
|
)
|
|
$
|
0.7
|
|
|
$
|
6,316.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
The following table summarizes equity activity for the three and nine months ended September 30,
2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
& Additional
|
|
|
Comprehensive Income
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
Paid-in-Capital
|
|
|
(Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
Balance at December 31, 2008
|
|
$
|
8,811.5
|
|
|
$
|
(4.2
|
)
|
|
$
|
(2,905.9
|
)
|
|
$
|
5,901.4
|
|
Consolidated net income
|
|
|
|
|
|
|
|
|
|
|
(4.5
|
)
|
|
|
(4.5
|
)
|
Change in unrealized loss on investments, net tax of nil
|
|
|
|
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
(3.6
|
)
|
Change in foreign currency translation adjustment, net tax of nil
|
|
|
|
|
|
|
(10.5
|
)
|
|
|
|
|
|
|
(10.5
|
)
|
Issuance of shares in connection with Employee Stock Purchase Plan
|
|
|
19.3
|
|
|
|
|
|
|
|
|
|
|
|
19.3
|
|
Exercise of stock options by employees, net of repurchases
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Retirement of common stock
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(119.7
|
)
|
|
|
(119.8
|
)
|
Share-based compensation expense
|
|
|
33.6
|
|
|
|
|
|
|
|
|
|
|
|
33.6
|
|
Adjustment related to tax benefit from employee stock option plans
|
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009
|
|
|
8,878.1
|
|
|
|
(18.3
|
)
|
|
|
(3,030.1
|
)
|
|
|
5,829.7
|
|
Consolidated net income
|
|
|
|
|
|
|
|
|
|
|
14.7
|
|
|
|
14.7
|
|
Change in unrealized gain on investments, net tax of nil
|
|
|
|
|
|
|
6.2
|
|
|
|
|
|
|
|
6.2
|
|
Change in foreign currency translation adjustment, net tax of nil
|
|
|
|
|
|
|
11.6
|
|
|
|
|
|
|
|
11.6
|
|
Exercise of stock options by employees, net of repurchases
|
|
|
29.2
|
|
|
|
|
|
|
|
|
|
|
|
29.2
|
|
Retirement of common stock
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
(49.1
|
)
|
|
|
(49.5
|
)
|
Share-based compensation expense
|
|
|
33.5
|
|
|
|
|
|
|
|
|
|
|
|
33.5
|
|
Adjustment related to tax benefit from employee stock option plans
|
|
|
(58.6
|
)
|
|
|
|
|
|
|
|
|
|
|
(58.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
|
8,881.8
|
|
|
|
(0.5
|
)
|
|
|
(3,064.5
|
)
|
|
|
5,816.8
|
|
Consolidated net income
|
|
|
|
|
|
|
|
|
|
|
83.8
|
|
|
|
83.8
|
|
Change in unrealized loss on investments, net tax of nil
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
(0.9
|
)
|
Change in foreign currency translation adjustment, net tax of nil
|
|
|
|
|
|
|
4.9
|
|
|
|
|
|
|
|
4.9
|
|
Issuance of shares in connection with Employee Stock Purchase Plan
|
|
|
19.8
|
|
|
|
|
|
|
|
|
|
|
|
19.8
|
|
Exercise of stock options by employees, net of repurchases
|
|
|
61.1
|
|
|
|
|
|
|
|
|
|
|
|
61.1
|
|
Retirement of common stock
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
(71.5
|
)
|
|
|
(71.9
|
)
|
Repurchases related to net issuances
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
Share-based compensation expense
|
|
|
34.4
|
|
|
|
|
|
|
|
|
|
|
|
34.4
|
|
Adjustment related to tax benefit from employee stock option plans
|
|
|
9.6
|
|
|
|
|
|
|
|
|
|
|
|
9.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009
|
|
$
|
9,006.3
|
|
|
$
|
3.5
|
|
|
$
|
(3,052.4
|
)
|
|
$
|
5,957.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12. Employee Benefit Plans
Share-Based Compensation Plans
The Companys share-based compensation plans include the 2006 Equity Incentive Plan (the 2006
Plan), 2000 Nonstatutory Stock Option Plan (the 2000 Plan), Amended and Restated 1996 Stock Plan
(the 1996 Plan), as well as various equity incentive plans assumed through acquisitions. Under
these plans, the Company has granted (or in the case of acquired plans, assumed) stock options, and
in certain plans RSUs and PSAs. In addition, the Companys 2008 Employee Stock Purchase Plan (the
2008 Purchase Plan) permits eligible employees to acquire shares of the Companys common stock at
a 15% discount to the offering price (as determined in the 2008 Purchase Plan) through periodic
payroll deductions of up to 10% of base compensation,
26
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
subject to individual purchase limits of 6,000 shares in any twelve-month period or $25,000
worth of stock, determined at the fair market value of the shares at the time the stock purchase
option is granted, in one calendar year.
When the 2006 Plan was adopted and approved by the Companys stockholders in May 2006, it had an
initial authorized share reserve of 64.5 million shares of common stock plus the addition of any
shares subject to options under the 2000 Plan and the 1996 Plan that were outstanding as of May 18,
2006, and that subsequently expire unexercised, up to a maximum of an additional 75 million shares.
In the second quarter of 2010, the Companys stockholders approved an amendment to the 2006 Plan
that increased the number of shares reserved for issuance thereunder by an additional 30.0 million
shares. As of September 30, 2010, the 2006 Plan had 58.8 million shares subject to currently
outstanding equity awards and 31.8 million shares available for future issuance.
In connection with the acquisition of Ankeena, the Company assumed stock option and RSU awards
under the Ankeena stock plan and exchanged those awards for stock options and RSUs covering
approximately 0.8 million shares of the Companys common stock, based upon an exchange ratio
prescribed by the acquisition agreement. As of September 30, 2010, stock options and RSUs covering
approximately 2.1 million shares of common stock were outstanding under plans assumed through the
Companys past acquisitions.
Stock Option Activities
The following table summarizes the Companys stock option activity and related information as of
and for the nine months ended September 30, 2010 (in millions, except for per share amounts and
years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Remaining
|
|
|
Aggregate Intrinsic
|
|
|
|
Number of Shares
|
|
|
Exercise
Price per Share
|
|
|
Contractual Term
|
|
|
Value
|
|
Balance at January 1, 2010
|
|
|
67.4
|
|
|
$
|
20.84
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
5.7
|
|
|
|
28.71
|
|
|
|
|
|
|
|
|
|
Options assumed (1)
|
|
|
0.4
|
|
|
|
29.42
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
(1.8
|
)
|
|
|
21.64
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(12.2
|
)
|
|
|
17.94
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(0.7
|
)
|
|
|
61.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
|
58.8
|
|
|
$
|
21.66
|
|
|
4.2 years
|
|
|
$
|
526.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected-to-vest options
|
|
|
55.8
|
|
|
$
|
21.56
|
|
|
4.1 years
|
|
|
$
|
505.3
|
|
Exercisable options
|
|
|
39.4
|
|
|
$
|
20.86
|
|
|
3.6 years
|
|
|
$
|
386.8
|
|
|
|
|
(1)
|
|
Stock options assumed in connection with the acquisition of Ankeena.
|
Aggregate intrinsic value represents the difference between the Companys closing stock price on
the last trading day of the period, which was $30.35 per share as of September 30, 2010, and the
exercise price multiplied by the number of related options. The pre-tax intrinsic value of options
exercised, representing the difference between the fair market value of the Companys common stock
on the date of the exercise and the exercise price of each option, was $37.5 million and $133.9
million for the three and nine months ended September 30, 2010, respectively. Total fair value of
options vested for the three and nine months ended September 30, 2010, was $19.2 million and $66.3
million, respectively.
Restricted Stock Units and Performance Share Awards Activities
RSUs generally vest over a period of three to four years from the date of grant, and PSAs granted
generally vest after three years provided that certain annual performance targets and other vesting
criteria are met. Until vested, RSUs and PSAs do not have the voting and dividend participation
rights of common stock and the shares underlying the awards are not considered issued and
outstanding.
27
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
The following table summarizes information about the Companys RSUs and PSAs as of and for the nine
months ended September 30, 2010 (in millions, except per share amounts and years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding RSUs and PSAs
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
Grant-Date Fair
|
|
|
Remaining
|
|
|
Aggregate Intrinsic
|
|
|
|
Number of Shares
|
|
|
Value
per Share
|
|
|
Contractual Term
|
|
|
Value
|
|
Balance at January 1, 2010
|
|
|
9.1
|
|
|
$
|
21.76
|
|
|
|
|
|
|
|
|
|
RSUs granted
|
|
|
3.4
|
|
|
|
29.27
|
|
|
|
|
|
|
|
|
|
RSUs assumed (1)
|
|
|
0.4
|
|
|
|
31.18
|
|
|
|
|
|
|
|
|
|
PSAs granted (2)
|
|
|
3.5
|
|
|
|
28.73
|
|
|
|
|
|
|
|
|
|
RSUs vested
|
|
|
(1.6
|
)
|
|
|
26.01
|
|
|
|
|
|
|
|
|
|
PSAs vested
|
|
|
(0.4
|
)
|
|
|
20.64
|
|
|
|
|
|
|
|
|
|
RSUs canceled
|
|
|
(0.5
|
)
|
|
|
24.72
|
|
|
|
|
|
|
|
|
|
PSAs canceled
|
|
|
(0.3
|
)
|
|
|
20.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010:
|
|
|
13.6
|
|
|
$
|
25.13
|
|
|
1.8 years
|
|
|
$
|
411.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected-to-vest RSUs and PSAs
|
|
|
10.4
|
|
|
$
|
24.83
|
|
|
1.7 years
|
|
|
$
|
315.7
|
|
|
|
|
(1)
|
|
RSUs assumed in connection with the acquisition of Ankeena.
|
|
(2)
|
|
The number of shares subject to PSAs granted represents the aggregate maximum number of
shares that may be issued pursuant to the award over its full term. The aggregate number of
shares subject to these PSAs that would be issued if performance goals determined by the
Compensation Committee are achieved at target is 1.4 million shares. Depending on achievement
of such performance goals, the range of shares that could be issued under these awards is 0 to
3.5 million shares.
|
Employee Stock Purchase Plan
The Companys 2008 Purchase Plan is implemented in a series of offering periods, each six months in
duration, or a shorter period as determined by the Board. Under the
2008 Purchase Plan, employees purchased approximately 1.0
million shares at an average per share price of $21.30 for the three months ended September 30,
2010, and 2.0 million shares at an average per share price of $21.20
in the nine months ended September 30, 2010. Employees purchased approximately 1.6 million shares
of common stock through the 2008 Purchase Plan at an average price of $12.28 per share in the three
and nine months ended September 30, 2009.
Employees purchased approximately 1.6 million shares of common stock through the 1999 Employee
Stock Purchase Plan at an average price of $12.04 per share in the nine months ended September 30,
2009. Effective February 1, 2009, immediately following the conclusion of the offering period ended
January 30, 2009, the 1999 Employee Stock Purchase Plan was discontinued, and no shares remained
available for future issuance.
As of September 30, 2010, approximately 2.0 million shares had been issued under the 2008 Purchase
Plan, and 8.4 million shares remained available for future issuance under the 2008 Purchase Plan.
28
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Shares Available for Grant
The following table presents the stock grant activity for the nine months ended September 30, 2010,
and the total number of shares available for grant under the 2006 Plan as of September 30, 2010 (in
millions):
|
|
|
|
|
|
|
Number of Shares
|
|
Balance at January 1, 2010
|
|
|
18.0
|
|
Additional authorized share reserve approved by stockholders
|
|
|
30.0
|
|
RSUs and PSAs granted (1)
|
|
|
(14.5
|
)
|
Options granted
|
|
|
(5.7
|
)
|
RSUs canceled (1)
|
|
|
1.5
|
|
Options canceled (2)
|
|
|
1.8
|
|
Options expired (2)
|
|
|
0.7
|
|
|
|
|
|
Balance at September 30, 2010
|
|
|
31.8
|
|
|
|
|
|
|
|
|
(1)
|
|
RSUs and PSAs with a per share or unit purchase price lower than 100% of the fair market
value of the Companys common stock on the day of the grant under the 2006 Plan are counted
against shares authorized under the plan as two and one-tenth shares of common stock for each
share subject to such award. The number of shares subject to PSAs granted the maximum number
of shares that may be issued pursuant to the award over its full term.
|
|
(2)
|
|
Includes canceled or expired options under the 1996 Plan and the 2000 Plan that expired
unexercised after May 18, 2006, which become available for grant under the 2006 Plan according
to its terms.
|
Common Stock Reserved for Future Issuance
As of September 30, 2010, the Company had reserved an aggregate of approximately 112.6 million
shares of common stock for future issuance under its equity incentive plans and the 2008 Purchase
Plan.
Share-Based Compensation Expense
The Company determines the fair value of its stock options utilizing the Black-Scholes-Merton
(BSM) option-pricing model, which incorporates various assumptions including volatility,
risk-free interest rate, expected life, and dividend yield. The expected volatility is based on the
implied volatility of market-traded options on the Companys common stock, adjusted for other
relevant factors including historical volatility of the Companys common stock over the most recent
period commensurate with the estimated expected life of the Companys stock options. The expected
life of a stock option award is based on historical experience and on the terms and conditions of
the stock awards granted to employees, as well as the potential effect from stock options that had
not been exercised at the time. S
i
nce 2006, the Company has granted stock option awards
that have a maximum contractual life of seven years from the date of grant. Prior to 2006, stock
option awards generally had a ten-year contractual life from the date of grant.
29
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
The Company determines the fair value of its RSUs and PSAs based upon the fair market value of the
shares of the Companys common stock at the date of grant.
The assumptions used and the resulting estimates of fair value for employee stock options and the
employee stock purchase plan during the three and nine months ended September 30, 2010, and 2009
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Employee Stock Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility factor
|
|
|
39% - 42
|
%
|
|
|
43% - 46
|
%
|
|
|
33% - 42
|
%
|
|
|
43% - 58
|
%
|
Risk-free interest rate
|
|
|
1.1% - 1.4
|
%
|
|
|
0.4% - 4.2
|
%
|
|
|
1.1% - 2.2
|
%
|
|
|
0.4% - 4.2
|
%
|
Expected life (years)
|
|
|
4.3
|
|
|
|
4.3 - 5.7
|
|
|
|
4.3
|
|
|
|
4.3 - 5.8
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value per share
|
|
$
|
8.93 - $9.81
|
|
|
$
|
9.52 - $10.25
|
|
|
$
|
7.83 - $30.36
|
|
|
$
|
6.02 - $10.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility factor
|
|
|
36
|
%
|
|
|
46
|
%
|
|
|
35% - 36
|
%
|
|
|
46% - 58
|
%
|
Risk-free interest rate
|
|
|
0.2
|
%
|
|
|
0.3
|
%
|
|
|
0.2
|
%
|
|
|
0.3% - 0.4
|
%
|
Expected life (years)
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value per share
|
|
$
|
7.09
|
|
|
$
|
7.35
|
|
|
$
|
6.19 - $7.09
|
|
|
$
|
4.51 - $7.35
|
|
|
The Company expenses the cost of its stock options, on a straight line basis, over the vesting
period. The Company expenses the cost of its RSUs ratably over the
vesting period. The Company recognizes PSA expense over the vesting
period, beginning in the period in which the performance conditions
are set. The weighted-average fair value per share of RSUs and PSAs
granted during these periods were:
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Weighted-average fair value per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
$
|
28.18
|
|
|
$
|
25.86
|
|
|
$
|
29.27
|
|
|
$
|
16.09
|
|
PSAs
|
|
$
|
27.76
|
|
|
$
|
26.30
|
|
|
$
|
28.73
|
|
|
$
|
17.18
|
|
|
The Companys share-based compensation expense associated with stock options, employee stock
purchases, RSUs, and PSAs is recorded in the following cost and expense categories for the three
and nine months ended September 30, 2010, and 2009 (in millions):
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Cost of revenues Product
|
|
$
|
1.0
|
|
|
$
|
0.9
|
|
|
$
|
3.1
|
|
|
$
|
2.8
|
|
Cost of revenues Service (1)
|
|
|
3.2
|
|
|
|
2.6
|
|
|
|
10.0
|
|
|
|
7.6
|
|
Research and development
|
|
|
19.3
|
|
|
|
14.3
|
|
|
|
55.0
|
|
|
|
44.0
|
|
Sales and marketing (1)
|
|
|
13.4
|
|
|
|
11.0
|
|
|
|
39.0
|
|
|
|
31.8
|
|
General and administrative
|
|
|
7.5
|
|
|
|
5.5
|
|
|
|
22.5
|
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
44.4
|
|
|
$
|
34.3
|
|
|
$
|
129.6
|
|
|
$
|
101.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Prior period information has been reclassified to conform to the current periods presentation.
|
30
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
The following table summarizes share-based compensation expense by award type (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Options
|
|
$
|
20.5
|
|
|
$
|
20.5
|
|
|
$
|
61.4
|
|
|
$
|
60.0
|
|
Assumed options
|
|
|
|
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
Other acquisition-related compensation
|
|
|
1.3
|
|
|
|
|
|
|
|
2.6
|
|
|
|
|
|
Assumed RSUs
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
RSUs and PSAs
|
|
|
19.1
|
|
|
|
10.3
|
|
|
|
54.6
|
|
|
|
30.3
|
|
Employee stock purchase plan
|
|
|
3.5
|
|
|
|
3.5
|
|
|
|
9.9
|
|
|
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
44.4
|
|
|
$
|
34.3
|
|
|
$
|
129.6
|
|
|
$
|
101.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010, approximately $118.2 million of unrecognized compensation cost, adjusted
for estimated forfeitures, related to unvested stock options will be recognized over a
weighted-average period of approximately 2.4 years while approximately $130.0 million of
unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs and
PSAs will be recognized over a weighted-average period of approximately 2.4 years.
401(k) Plan
The Company maintains a savings and retirement plan qualified under Section 401(k) of the Internal
Revenue Code of 1986, as amended. Employees meeting the eligibility requirements, as defined, may
contribute up to the statutory limits of the year. The Company has matched employee contributions
since January 1, 2001, currently matching 25% of all eligible employee contributions. All matching
contributions vest immediately. The Companys matching contributions to the plan totaled $3.2
million and $10.7 million in the three and nine months ended September 30, 2010, respectively, and
$2.8 million and $9.8 million in the three and nine months ended September 30, 2009, respectively.
Deferred Compensation Plan
The Companys non-qualified deferred compensation (NQDC) plan is an unfunded and unsecured
deferred compensation arrangement. Under the NQDC plan, officers and other senior employees may
elect to defer a portion of their compensation and contribute such amounts to one or more
investment funds. The NQDC plan assets are included within investments, and offsetting obligations
are included within accrued compensation on the condensed consolidated balance sheet. The
investments are considered trading securities and are reported at fair value. The realized and
unrealized holding gains and losses related to these investments are recorded in interest and other
income, net, and the offsetting compensation expense are recorded as operating expenses in the
condensed consolidated results of operations. The deferred compensation liability under the NQDC
plan was approximately $7.2 million and $4.7 million as of September 30, 2010, and December 31,
2009, respectively.
Note 13. Segments
The Companys chief operating decision maker (CODM) allocates resources and assesses performance
based on financial information by the Companys business groups. The Companys operations are
organized into two reportable segments: Infrastructure and SLT. The Infrastructure segment includes
products from the E-, M-, MX-, and T-series router product families, EX-series switching products,
as well as the circuit-to-packet products. The SLT segment consists primarily of Firewall virtual
private network (Firewall) systems and appliances, SRX service gateways, secure socket layer
(SSL) virtual private network (VPN) appliances, intrusion detection and prevention (IDP)
appliances, the J-series router product family and wide area network (WAN) optimization
platforms.
The primary financial measure used by the CODM in assessing performance of the segments is segment
operating income, which includes certain cost of revenues, research and development (R&D)
expenses, sales and marketing expenses, and general and administrative (G&A) expenses. The CODM
does not allocate certain miscellaneous expenses to its segments
even though such expenses are included in the Companys management operating income.
31
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
For arrangements with both Infrastructure and SLT products and services, revenue is attributed to
the segment based on the underlying purchase order, contract, or sell-through report. Direct costs
and operating expenses, such as standard costs, R&D, and product marketing expenses, are generally
applied to each segment. Indirect costs, such as manufacturing overhead and other cost of revenues,
are allocated based on standard costs. Indirect operating expenses, such as sales, marketing,
business development, and G&A expenses are generally allocated to each segment based on factors
including headcount, usage, and revenue. The CODM does not allocate share-based compensation,
amortization of purchased intangible assets, restructuring and impairment charges, gains or losses
on equity investments, other net income and expense, income taxes, or certain other charges to the
segments.
The following table summarizes financial information for each segment used by the CODM (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
607.6
|
|
|
$
|
472.0
|
|
|
$
|
1,753.9
|
|
|
$
|
1,396.2
|
|
Service
|
|
|
136.5
|
|
|
|
123.2
|
|
|
|
389.2
|
|
|
|
350.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Infrastructure revenues
|
|
|
744.1
|
|
|
|
595.2
|
|
|
|
2,143.1
|
|
|
|
1,746.3
|
|
SLT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
193.6
|
|
|
|
162.1
|
|
|
|
542.5
|
|
|
|
432.7
|
|
Service
|
|
|
74.7
|
|
|
|
66.6
|
|
|
|
217.7
|
|
|
|
195.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SLT revenues
|
|
|
268.3
|
|
|
|
228.7
|
|
|
|
760.2
|
|
|
|
628.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
1,012.4
|
|
|
|
823.9
|
|
|
|
2,903.3
|
|
|
|
2,374.5
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure
|
|
|
179.9
|
|
|
|
126.9
|
|
|
|
537.6
|
|
|
|
358.8
|
|
SLT
|
|
|
64.6
|
|
|
|
44.4
|
|
|
|
152.3
|
|
|
|
79.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total management operating income
|
|
|
244.5
|
|
|
|
171.3
|
|
|
|
689.9
|
|
|
|
438.4
|
|
Amortization of purchased intangible assets (1)
|
|
|
(2.4
|
)
|
|
|
(2.7
|
)
|
|
|
(5.0
|
)
|
|
|
(13.4
|
)
|
Share-based compensation expense
|
|
|
(44.4
|
)
|
|
|
(34.3
|
)
|
|
|
(129.6
|
)
|
|
|
(101.4
|
)
|
Share-based payroll tax expense
|
|
|
(0.5
|
)
|
|
|
(0.8
|
)
|
|
|
(3.8
|
)
|
|
|
(1.5
|
)
|
Restructuring charges
|
|
|
(0.2
|
)
|
|
|
(4.5
|
)
|
|
|
(8.6
|
)
|
|
|
(16.3
|
)
|
Acquisition-related and other charges
|
|
|
(1.5
|
)
|
|
|
(1.0
|
)
|
|
|
(2.1
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
195.5
|
|
|
|
128.0
|
|
|
|
540.8
|
|
|
|
304.8
|
|
Interest and other income, net
|
|
|
0.2
|
|
|
|
1.7
|
|
|
|
2.5
|
|
|
|
6.6
|
|
Gain (loss) on equity investment
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and noncontrolling interest
|
|
$
|
195.7
|
|
|
$
|
129.7
|
|
|
$
|
546.5
|
|
|
$
|
308.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amount includes amortization expense of purchased intangible assets in operating expenses
and in cost of revenues.
|
Depreciation expense allocated to the Infrastructure segment was $27.8 million and $78.9 million in
the three and nine months ended September 30, 2010, respectively, and $24.1 million and $69.1
million in the three and nine months ended September 30, 2009, respectively. The depreciation
expense allocated to the SLT segment was 9.4 million and $28.5 million in the three and nine months
ended September 30, 2010, respectively, and $9.7 million and $29.4 million in the three and nine
months ended September 30, 2009, respectively.
32
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
The Company attributes revenues to geographic region based on the customers ship-to location. The
following table shows net revenues by geographic region (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Americas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
481.2
|
|
|
$
|
380.3
|
|
|
$
|
1,368.0
|
|
|
$
|
1,045.4
|
|
Other
|
|
|
51.6
|
|
|
|
42.5
|
|
|
|
147.4
|
|
|
|
128.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Americas
|
|
|
532.8
|
|
|
|
422.8
|
|
|
|
1,515.4
|
|
|
|
1,173.4
|
|
Europe, Middle East and Africa
|
|
|
275.9
|
|
|
|
243.2
|
|
|
|
829.5
|
|
|
|
698.3
|
|
Asia Pacific
|
|
|
203.7
|
|
|
|
157.9
|
|
|
|
558.4
|
|
|
|
502.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,012.4
|
|
|
$
|
823.9
|
|
|
$
|
2,903.3
|
|
|
$
|
2,374.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended September 30, 2010, no single customer accounted for greater than
10.0% of the Companys net revenues, and during the nine months ended September 30, 2010, Verizon
Communications, Inc. (Verizon) accounted for 10.0% of net revenues. During the three months ended
September 30, 2009, Verizon accounted for 10.4% of net revenues. No single customer accounted for
greater than 10.0% or more of the Companys net revenues during the nine months ended September 30,
2009.
The Company tracks assets by physical location. The majority of the Companys assets, excluding
cash and cash equivalents and investments, as of September 30, 2010, and December 31, 2009, were
attributable to U.S. operations. As of September 30, 2010, and December 31, 2009, property and
equipment, held in the U.S. as a percentage of total property and equipment was approximately
80.0%. Although management reviews asset information on a corporate level and allocates
depreciation expense by segment, the CODM does not review asset information on a segment basis.
Note 14. Income Taxes
The Company recorded a tax provision of $61.4 million and $45.9 million for the three months ended
September 30, 2010, and 2009, or effective tax rates of 31% and 35%, respectively. The Company
recorded a tax provision of $117.2 million and $214.0 million for the nine months ended September
30, 2010, and 2009, or effective tax rates of 21% and 69%, respectively.
The effective tax rates for the three and nine months ended September 30, 2010, differ from the
federal statutory rate of 35% primarily due to the benefit of earnings in foreign jurisdictions
which are subject to lower tax rates, and a $54.1 million income tax benefit recorded during the
Companys first quarter resulting from a change in the Companys estimate of unrecognized tax
benefits related to share-based compensation. The change in estimate was a result of the taxpayer
favorable ruling by the U.S. Court of Appeals for the Ninth Circuit (the Court) in
Xilinx Inc. v.
Commissioner
in March 2010. These benefits were partially offset by charges for increases in the
valuation allowance against the Companys California deferred tax assets of approximately $3.2
million and $8.4 million in the three and nine months ended September 30, 2010, respectively.
The effective tax rates for the three and nine months ended September 30, 2009, differ from the
federal statutory rate of 35% primarily due to three income tax charges: a $4.6 million charge in
the Companys third quarter of 2009 related to an investigation by the Indian tax authorities, a
$52.1 million charge in the Companys second quarter of 2009, related to a change in the Companys
estimate of unrecognized tax benefits as a result of the original decision reached in May of 2009
by the Court in
Xilinx Inc. v. Commissioner
, which was not held in favor of the taxpayer, and a
$61.8 million charge which resulted from changes in California income tax laws enacted during the
Companys first quarter of 2009. The tax rates for the three and nine month periods ended September
30, 2009, were favorably impacted by the benefit of earnings in foreign jurisdictions, which are
subject to lower tax rates, and the federal R&D credit.
The gross unrecognized tax benefits decreased by approximately $68.3 million for the nine months
ended September 30, 2010. Interest and penalties for the same period decreased by approximately
$5.1 million. Interest and penalties accrued for the three months ended September 30, 2010, were
not significant. The decrease in the gross unrecognized tax benefits and the accrued interest and
penalties is primarily related to the change in estimate during the Companys first quarter of
2010, resulting from the Courts decision in
Xilinx v. Commissioner
referenced above.
33
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
The Company is currently under examination by the Internal Revenue Service (IRS) for the 2004
through 2006 tax years, the China tax authorities for the 2009 tax year, and the France tax
authorities for the 2007 through 2009 tax years. The Company is also subject to two separate
ongoing examinations by the India tax authorities for the 2004 tax year and 2004 through 2008 tax
years, respectively, and has received an inquiry from the Hong Kong tax authorities for the 2002
through 2008 tax years. Additionally, the Company has not reached a final resolution with the IRS
on an adjustment it proposed for the 1999 and 2000 tax years. The Company is not aware of any other
income tax examination by taxing authorities in any other major jurisdictions in which it files
income tax returns as of September 30, 2010.
In 2009, as part of the on-going 2004 IRS audit, the Company received a proposed adjustment related
to the license of acquired intangibles under an intercompany R&D cost sharing arrangement. In March
2009 and April 2010, the Company received assessments from the Hong Kong tax authorities
specifically related to inquiries of the 2002 and 2003 tax years, respectively. In December 2008,
the Company received a proposed adjustment from the India tax authorities related to the 2004 tax
year.
In July 2009, the India tax authorities commenced a separate investigation of our 2004 through 2008
tax returns and are disputing the Companys determination of taxable income due to the cost basis
of certain fixed assets. The Company accrued $4.6 million in penalties and interest in 2009 related
to this matter. The Company understands that the India tax authorities may issue an initial
assessment that is substantially higher than this amount. As a result, in accordance with the
administrative and judicial process in India, the Company may be required to make payments that are
substantially higher than the amount accrued in order to ultimately settle this issue. The Company
strongly believes that any assessment it may receive in excess of the amount accrued would be
inconsistent with applicable India tax laws and intends to defend this position vigorously. The
Company is pursuing all available administrative procedures relative to the matters referenced
above. The Company believes that it has adequately provided for any reasonably foreseeable outcomes
related to these proposed adjustments, and the ultimate resolution of these matters is unlikely to
have a material effect on its consolidated financial condition or results of operations; however,
there is a possibility that an adverse outcome of these matters could have a material effect on its
consolidated financial condition and results of operations. For more information, please see Note
15,
Commitments and Contingencies,
under the heading IRS Notices of Proposed Adjustments.
The Company engages in continuous discussions and negotiations with tax authorities regarding tax
matters in various jurisdictions. It is reasonably possible that the balance of the gross
unrecognized tax benefits will decrease by approximately $7.1 million within the next twelve months
due to lapses of applicable statutes of limitation in multiple jurisdictions that the Company
operated in. However, at this time, the Company is unable to make a reasonably reliable estimate of
the timing of payments related to the remaining unrecognized tax liabilities due to uncertainties
in the timing of tax audit outcomes.
Note 15. Commitments and Contingencies
Commitments
The following table summarizes the Companys future principal contractual obligations as of
September 30, 2010 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
Other
|
|
Operating leases
|
|
$
|
278.8
|
|
|
$
|
13.3
|
|
|
$
|
45.8
|
|
|
$
|
40.6
|
|
|
$
|
31.1
|
|
|
$
|
25.8
|
|
|
$
|
122.2
|
|
|
$
|
|
|
Sublease rental income
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase commitments
|
|
|
186.0
|
|
|
|
186.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax liabilities
|
|
|
102.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102.2
|
|
Other contractual
obligations
|
|
|
57.9
|
|
|
|
28.6
|
|
|
|
18.0
|
|
|
|
9.5
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
624.7
|
|
|
$
|
227.7
|
|
|
$
|
63.8
|
|
|
$
|
50.1
|
|
|
$
|
32.9
|
|
|
$
|
25.8
|
|
|
$
|
122.2
|
|
|
$
|
102.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
The Company leases its facilities under operating leases that expire at various times, the longest
of which expires in November 22, 2022. Future minimum payments under the non-cancelable operating
leases, net of committed sublease income, totaled $278.6 million as of September 30, 2010. Rent
expense was $14.0 million and $41.8 million for the three and nine months ended September 30, 2010,
respectively, and $14.2 million and $42.6 million for the three and nine months ended September 30,
2009, respectively.
34
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Purchase Commitments
In order to reduce manufacturing lead times and ensure adequate component supply, contract
manufacturers utilized by the Company place non-cancelable, non-returnable (NCNR) orders for
components based on the Companys build forecasts. As of September 30, 2010, there were NCNR
component orders placed by the contract manufacturers with a value of $186.0 million. The contract
manufacturers use the components to build products based on the Companys forecasts and customer
purchase orders received by the Company. Generally, the Company does not own the components and
title to the products transfers from the contract manufacturers to the Company and immediately to
the Companys customers upon delivery at a designated shipment location. If the components remain
unused or the products remain unsold for specified periods, the Company may incur carrying charges
or obsolete materials charges for components that the contract manufacturers purchased to build
products to meet the Companys forecast or customer orders. As of September 30, 2010, the Company
had accrued $21.2 million based on its estimate of such charges.
Tax Liabilities
As of September 30, 2010, the Company had $102.2 million included in current and long-term
liabilities in the condensed consolidated balance sheet for unrecognized tax positions. At this
time, the Company is unable to make a reasonably reliable estimate of the timing of payments
related to the additional $102.2 million in liability due to uncertainties in the timing of tax
audit outcomes.
Other Contractual Obligations
As of September 30, 2010, other contractual obligations primarily consisted of $26.9 million of
indemnity-related and service related escrows, required by certain acquisitions completed in 2005
and 2010, $14.1 million remaining balance for a data center hosting agreement that requires
payments through the end of April 2013, $9.1 million for license and service agreements, and $7.7
million under a software subscription agreement that requires payments through the end of January
2011.
Guarantees
The Company enters into agreements with customers that contain indemnification provisions relating
to potential situations where claims could be alleged that the Companys products infringe the
intellectual property rights of a third-party. Other guarantees or indemnification arrangements
include guarantees of product and service performance, guarantees related to third-party
customer-financing arrangements, and standby letters of credit for certain lease facilities. As of
September 30, 2010, the Company had $22.4 million in guarantees and standby letters of credit and
recorded a liability of $8.8 million related to a third-party customer-financing guarantee. As of
December 31, 2009, the Company had $34.0 million in guarantees and standby letters of credit along
with a liability of $21.9 million related to a third-party customer-financing guarantee.
Legal Proceedings
The Company is subject to legal claims and litigation arising in the ordinary course of business,
such as employment or intellectual property claims, including the matters described below. The
outcome of any such matters is currently not determinable. Although the Company does not expect
that any such legal claims or litigation will ultimately have a material adverse effect on its
consolidated financial condition or results of operations, an adverse result in one or more of such
matters could negatively affect the Companys consolidated financial results in the period in which
they occur.
Federal Securities Class Action
On July 14, 2006, and August 29, 2006, two purported class actions were filed in the Northern
District of California against the Company and certain of the Companys current and former officers
and directors. On November 20, 2006, the Court consolidated the two actions as
In re Juniper
Networks, Inc. Securities Litigation,
No. C06-04327-JW, and appointed the New York City Pension
Funds as lead plaintiffs. The lead plaintiffs filed a Consolidated Class Action Complaint on
January 12, 2007, and filed an Amended Consolidated Class Action Complaint on April 9, 2007. The
Amended Consolidated Complaint alleges that the defendants violated federal securities laws by
manipulating stock option grant dates to coincide with low stock prices and issuing false and
misleading statements including, among others, incorrect financial statements due to the improper
accounting of stock option grants. The Amended Consolidated Complaint asserts claims for violations
of the Securities Act of 1933 and the Securities Exchange Act of 1934 on behalf of all persons who
purchased or otherwise acquired Juniper Networks publicly-traded securities from July 12, 2001,
through and including August 10, 2006. Plaintiffs seek unspecified damages in an
35
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
unspecified amount. On June 7, 2007, the defendants filed a motion to dismiss certain of the
claims, and a hearing was held on September 10, 2007. On March 31, 2008, the Court issued an order
granting in part and denying in part the defendants motion to dismiss. The order dismissed with
prejudice plaintiffs section 10(b) claim to the extent it was based on challenged statements made
before July 14, 2001. The order also dismissed, with leave to amend, plaintiffs section 10(b)
claim against Pradeep Sindhu. The order upheld all of plaintiffs remaining claims. Plaintiffs did
not amend their complaint.
On September 25, 2009, the Court certified a plaintiff class consisting of all persons and entities
who purchased or otherwise acquired the Companys securities from July 11, 2003 to August 10, 2006
inclusive, and were damaged thereby, including those who received or acquired Juniper Networks
common stock issued pursuant to the registration statement on SEC Form S-4, dated March 10, 2004,
for the Companys merger with NetScreen Technologies Inc. and purchasers of Zero Coupon Convertible
Senior Notes due June 15, 2008 issued pursuant to a registration statement on SEC Form S-3 dated
November 20, 2003. Excluded from the class are the defendants and the current and former officers
and directors of the Company, their immediate families, their heirs, successors, or assigns and any
entity controlled by any such person.
On February 5, 2010, the Company and the lead plaintiffs entered into an agreement in principle to
settle the claims against the Company and each of the Companys current and former officers and
directors. The settlement was contingent upon final approval by the Court. On April 12, 2010, the
Court granted preliminary approval of the proposed settlement. On August 30, 2010, the Court held a
fairness hearing to consider whether to grant final approval of the settlement. On August 31, 2010,
the Court granted final approval of the settlement and issued a Final Judgment and Order of
Dismissal with Prejudice. Under the settlement, the claims against the Company and its officers and
directors were dismissed with prejudice and released in exchange for a $169.0 million cash payment
by the Company. The Company considered the proposed payment to be probable and reasonably estimable
and, therefore, recorded the cash settlement amount as a pre-tax operating expense in its
consolidated statement of operations for the fourth quarter ended December 31, 2009.
IPO Allocation Case
In December 2001, a class action complaint was filed in the United States District Court for the
Southern District of New York against the Goldman Sachs Group, Inc., Credit Suisse First Boston
Corporation, FleetBoston Robertson Stephens, Inc., Royal Bank of Canada (Dain Rauscher Wessels), SG
Cowen Securities Corporation, UBS Warburg LLC (Warburg Dillon Read LLC), Chase (Hambrecht & Quist
LLC), J.P. Morgan Chase & Co., Lehman Brothers, Inc., Salomon Smith Barney, Inc., Merrill Lynch,
Pierce, Fenner & Smith, Incorporated (collectively, the Underwriters), Juniper Networks and
certain of Juniper Networks officers. This action was brought on behalf of purchasers of the
Companys common stock in its initial public offering in June 1999 and the Companys secondary
offering in September 1999.
Specifically, among other things, this complaint alleged that the prospectus pursuant to which
shares of common stock were sold in the Companys initial public offering and the Companys
subsequent secondary offering contained certain false and misleading statements or omissions
regarding the practices of the Underwriters with respect to their allocation of shares of common
stock in these offerings and their receipt of commissions from customers related to such
allocations. Various plaintiffs have filed actions asserting similar allegations concerning the
initial public offerings of approximately 300 other issuers. These various cases pending in the
Southern District of New York have been coordinated for pretrial proceedings as
In re Initial
Public Offering Securities Litigation
, 21 MC 92. In April 2002, the plaintiffs filed a consolidated
amended complaint in the action against the Company, alleging violations of the Securities Act of
1933 and the Securities Exchange Act of 1934.
The parties have reached a global settlement of the litigation. On October 5, 2009, the Court
entered an Opinion and Order granting final approval of the settlement. Under the settlement, the
insurers are to pay the full amount of settlement share allocated to the Company, and the Company
will bear no financial liability. The Company, as well as the officer and director defendants who
were previously dismissed from the action pursuant to tolling agreements, will receive complete
dismissals from the case. Certain objectors have appealed the Courts October 5, 2009, final order
to the Second Circuit Court of Appeals.
IRS Notices of Proposed Adjustments
In 2007, the IRS opened an examination of the Companys U.S. federal income tax and employment tax
returns for the 2004 fiscal year. Subsequently, the IRS extended their examination of the Companys
employment tax returns to include fiscal years 2005 and 2006. As of September 30, 2010, the IRS has
not yet concluded its examinations of these returns. In September 2008, as part of its ongoing
audit of the U.S. federal income tax return, the IRS issued a Notice of Proposed Adjustment
(NOPA) regarding the Companys business credits. The Company believes that it has adequately
provided for any reasonably foreseeable
outcome related to this proposed adjustment.
36
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
In July 2009, the Company received a NOPA from the IRS claiming that the Company owes additional
taxes, plus interest and possible penalties, for the 2004 tax year based on a transfer pricing
transaction related to the license of acquired intangibles under an intercompany R&D cost sharing
arrangement. The asserted changes to the Companys 2004 tax year would affect the Companys income
tax liabilities in tax years subsequent to 2003. Because of the NOPA, the estimated incremental tax
liability would be approximately $807.0 million, excluding interest and penalties. The Company has
filed a protest to the proposed deficiency with the IRS, which has been referred to the Appeals
Division of the IRS; however an Appeals conference has not yet been scheduled. The Company strongly
believes the IRS position with regard to this matter is inconsistent with applicable tax laws and
existing Treasury regulations, and that the Companys previously reported income tax provision for
the year in question is appropriate. However, there can be no assurance that this matter will be
resolved in the Companys favor. Regardless of whether this matter is resolved in the Companys
favor, the final resolution of this matter could be expensive and time-consuming to defend and/or
settle. While the Company believes it has provided adequately for this matter, there is a
possibility that an adverse outcome of the matter could have a material effect on its results of
operations and financial condition.
The Company has not reached a final resolution with the IRS on an adjustment the IRS proposed for
the 1999 and 2000 tax years. The Company is also under routine examination by certain state and
non-U.S. tax authorities. The Company believes that it has adequately provided for any reasonably
foreseeable outcomes related to these audits.
Note 16. Joint Venture
In 2009, the Company entered into an agreement to form a joint venture to provide a combined
carrier Ethernet-based solution with NSN. Since inception, the Company has had a 60 percent
interest in the joint venture. Both NSN and Juniper Networks are entitled to appoint two board
members to the board of the joint venture. The board shall consist of four board members at all
times.
Given the Companys majority ownership interest in the joint venture, the ventures financial
results have been consolidated with the accounts of the Company, and a noncontrolling interest has
been recorded to reflect the noncontrolling investors interest in the ventures results. All
intercompany transactions have been eliminated, with the exception of the noncontrolling interest.
Note 17. Subsequent Events
Stock Repurchases
Subsequent to September 30, 2010, through the
filing of this report, the Company repurchased and
retired approximately 2.9 million shares of its common stock for
approximately $92.6 million under
its 2010 Stock Repurchase program at an average purchase price of
$31.85 per share. The Companys
2010 Stock Repurchase Program had remaining authorized funds of $839.2 million as of the report
filing date. Purchases under the Companys 2010 Stock Repurchase Program are subject to a review of
the circumstances in place at the time and will be made from time to time as permitted by
securities laws and other legal requirements. This program may be discontinued at any time.
37
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q (Report), including the Managements Discussion and Analysis
of Financial Condition and Results of Operations, contains forward-looking statements regarding
future events and the future results of Juniper Networks, Inc. (we, us, or the Company) that
are based on our current expectations, estimates, forecasts, and projections about our business,
our results of operations, the industry in which we operate and the beliefs and assumptions of our
management. Words such as expects, anticipates, targets, goals, projects, would,
could, intends, plans, believes, seeks, estimates, variations of such words, and
similar expressions are intended to identify such forward-looking statements. These forward-looking
statements are only predictions and are subject to risks, uncertainties, and assumptions that are
difficult to predict. Therefore, actual results may differ materially and adversely from those
expressed in any forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed in this Report under the section
entitled Risk Factors in Item 1A of Part II and elsewhere, and in other reports we file with the
SEC, specifically our most recent Annual Report on Form 10-K. While forward-looking statements are
based on reasonable expectations of our management at the time that they are made, you should not
rely on them. We undertake no obligation to revise or update publicly any forward-looking
statements for any reason.
The following discussion is based upon our unaudited Condensed Consolidated Financial Statements
included elsewhere in this Report, which have been prepared in accordance with U.S. generally
accepted accounting principles (U.S. GAAP). In the course of operating our business, we routinely
make decisions as to the timing of the payment of invoices, the collection of receivables, the
manufacturing and shipment of products, the fulfillment of orders, the purchase of supplies, and
the building of inventory and spare parts, among other matters. Each of these decisions has some
impact on the financial results for any given period. In making these decisions, we consider
various factors including contractual obligations, customer satisfaction, competition, internal and
external financial targets and expectations, and financial planning objectives. The preparation of
these financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, expenses, and related disclosure of contingencies. On an
ongoing basis, we evaluate our estimates, including those related to sales returns, pricing
credits, warranty costs, allowance for doubtful accounts, impairment of long-term assets,
especially goodwill and intangible assets, contract manufacturer exposures for carrying and
obsolete material charges, assumptions used in the valuation of share-based compensation, and
litigation. We base our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. For further information about our critical accounting policies and estimates, see
Note 2,
Summary of Significant Accounting Policies
, in Notes to Condensed Consolidated Financial
Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, and our Critical Accounting
Policies and Estimates section included in this Managements Discussion and Analysis of Financial
Condition and Results of Operations. Actual results may differ from these estimates under
different assumptions or conditions.
To aid in understanding our operating results for the periods covered by this Report, we have
provided an executive overview and a summary of the business and market environment. These sections
should be read in conjunction with the more detailed discussion and analysis of our consolidated
financial condition and results of operations in this Item 2, our Risk Factors section included
in Item 1A of Part II, and our unaudited condensed consolidated financial statements and notes
included in Item 1 of Part I of this report.
Executive Overview
Our financial performance for the third quarter of 2010 reflects our continued focus on investing
in innovations that deliver long-term value to our customers and expanding operating margins. In
the third quarter of 2010, net revenues increased year-over-year in both the
enterprise and service provider markets across our three geographic regions. These increases
reflect the recovering global economy, as well as growing market demand for networking and security
products in response to our customers network expansions. Additionally, while our net revenues
grew, we continued to control costs as we invest in our innovation and customer satisfaction
initiatives.
38
The following table provides an overview of our key financial metrics for the three and nine months
ended September 30, 2010, and 2009 (in millions, except per share amounts and percentages):
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2010
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2009
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$ Change
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%Change
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2010
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2009
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$ Change
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%Change
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Net revenues
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$
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1,012.4
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$
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823.9
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$
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188.5
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23
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%
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$
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2,903.3
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$
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2,374.5
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$
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528.8
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22
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%
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Operating income
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$
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195.5
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$
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128.0
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67.5
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53
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%
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$
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540.8
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$
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304.8
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|
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236.0
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77
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%
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Percentage of net revenues
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19.3
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%
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15.5
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%
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18.6
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%
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12.8
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%
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|
|
|
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Net income attributable
to Juniper Networks
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$
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134.5
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|
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$
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83.8
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|
|
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50.7
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|
|
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61
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%
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$
|
428.2
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|
|
|
94.1
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|
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$
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334.1
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|
|
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355
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%
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Percentage of net revenues
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13.3
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%
|
|
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10.2
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%
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|
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14.7
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%
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|
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4.0
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%
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|
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|
|
|
|
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Net income per share
attributable to Juniper
Networks common stock
holders:
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Basic
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$
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0.26
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|
|
$
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0.16
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|
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$
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0.10
|
|
|
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63
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%
|
|
$
|
0.82
|
|
|
$
|
0.18
|
|
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$
|
0.64
|
|
|
|
356
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%
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Diluted
|
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$
|
0.25
|
|
|
$
|
0.16
|
|
|
$
|
0.09
|
|
|
|
56
|
%
|
|
$
|
0.80
|
|
|
$
|
0.18
|
|
|
$
|
0.62
|
|
|
|
344
|
%
|
|
|
|
|
|
|
|
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|
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Net revenues
: Our net revenues increased across all three regions, in both the service
provider and enterprise markets, in the three and nine months ended September 30, 2010,
compared to the same periods in 2009. These increases were primarily due to the recovering
global economy and increased demand for our most recent product lines, the EX-series
switches, MX-series routers, and SRX service gateways.
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Operating Income:
Our operating income as well as operating margin increased in the
three and nine months ended September 30, 2010, compared to the same periods in 2009. These
increases were, in large part, due to the increase in revenues and our continued efforts to
control expenses and improve efficiencies while focusing our investments in key strategic
growth areas.
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Net Income Attributable to Juniper Networks and Net Income Per Share Attributable to
Juniper Networks Common Stock Holders
: The increase in net income attributable to Juniper Networks in
the three months ended September 30, 2010, compared to the same period in 2009, is
primarily due to the increase in operating income during the period. Net income
attributable to Juniper Networks increased in the nine months ended September 30, 2010, compared to
the same period in 2009, is primarily due to the increase in operating income during the
period and the non-recurring income tax benefit of $54.1 million we received in the first
quarter from a change in estimate of unrecognized tax benefits related to share-based
compensation. The change resulted from the decision in the first quarter of 2010 of the
U.S. Court of Appeals for the Ninth Circuit in
Xilinx Inc. v. Commissioner
.
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Stock Repurchase Activity
:
Under our stock repurchase programs, we repurchased
approximately 5.0 million shares of our common stock on the open market at an average price
of $26.81 per share for an aggregate purchase price of $134.9 million during the three
months ended September 30, 2010, and approximately 14.3 million shares of our common stock
at an average price of $27.09 per share for an aggregate purchase price of $386.7 million
during the nine months ended September 30, 2010.
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Other Financial Highlights
:
Total deferred revenue increased $31.5 million to $785.1
million as of September 30, 2010, compared to $753.6 million as of December 31, 2009,
primarily due to an increase in deferred product revenue from undelivered product
commitments and an increase in deferred service revenue, largely due
to higher sales of service contracts and multi-year service billings.
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Business and Market Environment
We design, develop, and sell products and services that together provide our customers with
high-performance network infrastructure that creates responsive and trusted environments for
accelerating the deployment of services and applications over a single network. We serve the
high-performance networking requirements of global service providers, enterprises, governments, and
research and public sector organizations that view the network as critical to their success.
High-performance networking is designed to provide fast, reliable, and secure access to
applications and services at scale. We offer a high-performance network infrastructure that
includes IP routing, Ethernet switching, security and application
acceleration solutions, as well as partnerships designed to extend the value of the network and worldwide services and
support designed to optimize customer investments.
39
Over the first three quarters of 2010, the global economy continued to recover, yet the pace and
trajectory of that recovery varied by geography. In this economic climate, we experienced an
increase in demand for our products and services due to the growing demand for networking, as more
traffic is being carried over the internet, computing is being centralized in massive data centers,
and more people in businesses rely on digital devices connected to the network. This demand
improved the purchasing behavior of our customers across all regions for enterprise and among
service providers in Europe, Middle East, and Africa (EMEA) year-over-year. In the three and nine
months ended September 30, 2010, we continued to invest in key research and development (R&D)
projects that we believe will lead to future growth and remained focused on containing costs and
allocating resources effectively.
Strategically, we are making progress toward our vision of the New Network by expanding
our portfolio of products and solutions and aligning those products with mobile internet and cloud
computing market trends. During the first three quarters of 2010, we continued to deliver new and
innovative, high-performance network infrastructure solutions. We also expanded our portfolio of
offerings for the enterprise market to provide a comprehensive portfolio of routing, switching, and
security products that are running on Junos
®
. We launched our next generation data center
architecture named 3-2-1, that enables customers to connect large numbers of data center
servers and storage devices in a way that we believe improves the economics and the performance of
these massive data centers. We announced and began shipping the EX4500, a data center switch that
can leverage our Virtual Chassis technology to create a data center fabric across multiple
networking devices and can offer up to 48 10-gigabit Ethernet
(10GbE) ports. We began shipping the
new EX2200 line of fixed-configuration managed Ethernet switches that offers a plug-and-play
solution that addresses access connectivity requirements of high performance businesses. We
also announced and began shipping the EX8200-40XS line card that
enables our modular switch EX8200 to
deliver 40 10GbE ports per line card and the MX80 3D Universal Edge Router, powered by the Junos Trio chipset
and designed for both service provider and enterprise deployments. Additionally, we announced our
latest fabric chipset that will enable customers to upgrade their existing T-series core routers.
In the area of mobility, we announced and began shipping Junos Pulse, a downloadable client
software for secure connections across mobile devices including notebooks, netbooks, smartphones,
and tablets as well as non-mobile devices to a broad range of corporate applications for a better,
simpler experience for users. Additionally, we announced several new and expanded mobility
partnerships intended to deliver software and solutions for mobile operators and improve experience
and economics of their networks.
In addition to our infrastructure and mobility products, we announced four new applications that
will enable IT managers to orchestrate the automation and security of networks from a single
user-oriented management interface: (i) Juniper Virtual Control, a Junos Space-based application to
help data center customers manage their Juniper physical switches and VMware virtual switches;
(ii) Juniper Ethernet Design, a unified Ethernet management application that enables the data center or
campus network to dial up or down as needed in response to the needs
of applications and users; (iii)
Juniper Security Design, a software application that allows point-and-click turn-up of both
security devices and services; and (iv) Juniper Service Insight, a software application for proactive
detection, diagnosis, and resolution of network performance issues.
In April 2010, we completed our acquisition of Ankeena Networks, Inc. (Ankeena), a privately-held
company, which gives us video delivery capabilities that optimize
web-based video delivery, provides
key components of a content delivery network architecture/solution, improve consumers online video
experience, and reduces service provider and carrier service provider infrastructure costs for
providing web-based video. Additionally, in July 2010, we completed our acquisition of SMobile
Systems, Inc. (SMobile), a privately-held software company, which will allow us to extend our
security focus through integration of SMobiles product portfolio with Junos Pulse.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP
requires us to make judgments, assumptions, and estimates that affect the amounts reported in the
condensed consolidated financial statements and the accompanying notes. We base our estimates and
assumptions on current facts, historical experience, and various other factors that we believe are
reasonable under the circumstances to determine the carrying values of assets and liabilities that
are not readily apparent from other sources. Note 2,
Summary of Significant Accounting Policies
, in
Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report
on Form 10-Q, describes the significant accounting policies and methods used in the preparation of
the condensed consolidated financial statements. The critical accounting policies described below
are significantly affected by critical accounting estimates. Such accounting policies require
significant judgments, assumptions, and estimates used in the preparation of the condensed
consolidated financial statements and actual results could
differ materially from the amounts reported based on these policies. To the extent there are
material differences between our estimates and the actual results, our future consolidated results
of operations may be affected.
40
|
|
Revenue recognition. Revenue is recognized when all of the following criteria have been met:
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|
Persuasive evidence of an arrangement exists.
We generally rely upon sales contracts,
or agreements and customer purchase orders, to determine the existence of an arrangement.
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|
Delivery has occurred
. We use shipping terms and related documents or written evidence
of customer acceptance, when applicable, to verify delivery or performance. In instances
where we have outstanding obligations related to product delivery or the final acceptance
of the product, revenue is deferred until all the delivery and acceptance criteria have
been met.
|
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Sales price is fixed or determinable
. We assess whether the sales price is fixed or
determinable based on the payment terms and whether the sales price is subject to refund or
adjustment.
|
|
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|
Collectability is reasonably assured
. We assess collectability based on the
creditworthiness of customers as determined by our credit checks and their payment
histories. We record accounts receivable net of allowance for doubtful accounts, estimated
customer returns, and pricing credits.
|
We adopted Accounting Standards Update (ASU) No. 2009-13, Topic 605
Multiple-Deliverable
Revenue Arrangements
(ASU 2009-13) and ASU No. 2009-14, Topic 985
Certain Revenue Arrangements
That Include Software Elements
(ASU 2009-14) on a prospective basis as of the beginning of fiscal
2010 for new and materially modified arrangements originating after December 31, 2009. Under the
new standards, we allocate the total arrangement consideration to each separable element of an
arrangement based on the relative selling price of each element. Arrangement consideration
allocated to undelivered elements is deferred until delivery.
For fiscal 2010 and future periods, pursuant to the guidance of ASU 2009-13, when a sales
arrangement contains multiple elements, and software and non-software components that function
together to deliver the tangible products essential functionality, we allocate revenue to each
element based on a selling price hierarchy. The selling price for a deliverable is based on our
vendor-specific objective evidence (VSOE) if available, third-party evidence (TPE) if VSOE is
not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. We then
recognize revenue on each deliverable in accordance with our policies for product and service
revenue recognition.
VSOE is based on the price charged when the element is sold separately. In determining VSOE, we
require that a substantial majority of the selling prices fall within a reasonable range based on
historical discounting trends for specific products and services. TPE of selling price is
established by evaluating largely interchangeable competitor products or services in stand-alone
sales to similarly situated customers. However, as our products contain a significant element of
proprietary technology and our solutions offer substantially different features and functionality,
the comparable pricing of products with similar functionality typically cannot be obtained.
Additionally, as we are unable to reliably determine what competitors products selling prices are
on a stand-alone basis, we are not typically able to determine TPE. When determining the best
estimate of selling price, we apply management judgment by considering multiple factors including,
but not limited to pricing practices in different geographies and through different sales channels,
gross margin objectives, internal costs, competitor pricing strategies and industry technology
lifecycles.
For transactions initiated prior to January 1, 2010, revenue for arrangements with multiple
elements, such as sales of products that include services, is allocated to each element using the
residual method based on the VSOE of fair value of the undelivered items pursuant to Accounting
Standards Codification (ASC) Topic 985-605,
Software Revenue Recognition
. Under the residual
method, the amount of revenue allocated to delivered elements equals the total arrangement
consideration less the aggregate fair value of any undelivered elements. If VSOE of fair value of
one or more undelivered items does not exist, revenue from the entire arrangement is deferred and
recognized at the earlier of (i) delivery of those elements or (ii) when fair value can be
established unless maintenance is the only undelivered element, in which case, the entire
arrangement fee is recognized ratably over the contractual support period.
As a result of the adoption of ASU 2009-13 and ASU 2009-14, net revenues for the three and nine
months ended September 30, 2010, were approximately $50 million and $128 million higher than the
net revenues that would have been recorded under the previous accounting rules. The increase in
revenues was due to recognition of revenue for products booked and shipped during these periods
which consisted primarily of $31 million and $91 million for the three and nine month periods ended
September 30, 2010, respectively, related to undelivered product commitments for which we were
unable to demonstrate fair value
pursuant to the previous accounting standards. The remainder of the increase in revenue for the
three and nine month periods was due to products sold into multiple-year service arrangements which
were recognized ratably under the previous accounting standards and for the change in our
allocation methodology from the residual method to the relative selling price method as prescribed
by ASU 2009-13.
41
We cannot reasonably estimate the effect of adopting these standards on future financial periods as
the impact will vary depending on the nature and volume of new or materially modified arrangements
in any given period as well as on changes in our business practices. However, as ASU 2009-13 and
ASU 2009-14 would allow us to recognize revenue for the portion allocated to delivered items in
multiple element arrangements and defer revenue for only the portion allocated to the undelivered
items, we expect that the magnitude of deferrals related to undelivered product commitments and
other items, for which we previously would not have been able to establish VSOE, will gradually
decrease over time.
We account for multiple agreements with a single customer as one arrangement if the contractual
terms and/or substance of those agreements indicate that they may be so closely related that they
are, in effect, parts of a single arrangement. Our ability to recognize revenue in the future may
be affected if actual selling prices are significantly less than fair value. In addition, our
ability to recognize revenue in the future could be impacted by conditions imposed by our
customers.
For sales to direct end-users, value-added resellers, and original equipment manufacturers (OEM)
partners, we recognize product revenue upon transfer of title and risk of loss, which is generally
upon shipment. It is our practice to identify an end-user prior to shipment to a value-added
reseller. For our end-users and value-added resellers, there are no significant obligations for
future performance such as rights of return or pricing credits. Our agreements with OEM partners
may allow future rights of returns. Additionally, a portion of our sales are made through
distributors under agreements allowing for pricing credits or rights of return. We recognize
product revenue on sales made through these distributors upon sell-through as reported to us by the
distributors. Deferred revenue on shipments to distributors reflects the effects of distributor
pricing credits and the amount of gross margin expected to be realized upon sell-through. Deferred
revenue is recorded net of the related product costs of revenue.
We record reductions to revenue for estimated product returns and pricing adjustments, such as
rebates and price protection, in the same period that the related revenue is recorded. The amount
of these reductions is based on historical sales returns and price protection credits, specific
criteria included in rebate agreements, and other factors known at the time. Should actual product
returns or pricing adjustments differ from our estimates, additional reductions to revenue may be
required. In addition, we report revenue net of sales taxes.
Service revenues include revenue from maintenance, training, and professional services. Maintenance
is offered under renewable contracts. Revenue from maintenance service contracts is deferred and
recognized ratably over the contractual support period, which is generally one to three years.
Revenue from training and professional services is recognized as the services are completed or
ratably over the contractual period, which is generally one year or less.
We sell certain interests in accounts receivable on a non-recourse basis as part of a customer
financing arrangement primarily with one major financing company. We record cash received under
this arrangement in advance of revenue recognition as short-term debt.
|
|
Contract Manufacturer Liabilities.
We outsource most of our manufacturing, repair, and supply
chain management operations to our independent contract manufacturers, and a significant
portion of our cost of revenues consists of payments to them. Our independent contract
manufacturers manufacture our products primarily in China, Malaysia, Mexico, and the U.S. We
have employees in our manufacturing and operations organization who manage relationships with
our independent contract manufacturers, manage our supply chain, and monitor product testing
and quality. We generally do not own the components and title to products transfers from our
independent contract manufacturers to us and immediately to our customers upon shipment. Our
independent contract manufacturers produce our products using design specifications, quality
assurance programs, and standards that we establish, and they procure components and
manufacture our products based on our demand forecasts. These forecasts are our estimates of
future demand for our products, based upon historical trends and analysis from our sales and
marketing organizations, adjusted for overall market conditions. We establish a provision for
inventory, carrying costs, and obsolete material exposures for excess components purchased
based on historical trends. If the actual component usage and product demand are significantly
lower than forecasted, which may be caused by factors outside of our control, we may incur
charges for excess components, which could have an adverse impact on our gross margins and
profitability. Supply chain management remains an area of focus as we balance the risk of
material obsolescence and supply chain flexibility in order to reduce lead times.
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|
|
Warranty Costs.
We generally offer a one-year warranty on all of our hardware products and a
90-day warranty on the media that contains the software embedded in the products. We accrue
for warranty costs as part of our cost of sales based on associated material costs, labor
costs for customer support, and overhead at the time revenue is recognized. Material cost is
estimated primarily based upon the historical costs to repair or replace product returns
within the warranty period.
|
42
|
|
Technical support labor and overhead cost are estimated primarily
based upon historical trends in the cost to support the customer cases within the warranty
period. Although we engage in extensive product quality programs and processes, our warranty
obligation is affected by product failure rates, use of materials, technical labor costs, and
associated overhead incurred. Should actual product failure rates, use of materials, or
service delivery costs differ from our estimates, we may incur additional warranty costs,
which could reduce gross margin.
|
|
|
Goodwill and Purchased Intangible Assets.
We make significant estimates and assumptions when
evaluating impairment of goodwill and other intangible assets on an ongoing basis, as well as
when valuing goodwill and other intangible assets in connection with the initial purchase
price allocation of an acquired entity. The amounts and useful lives assigned to identified
intangible assets impacts the amount and timing of future amortization expense. The value of
our intangible assets, including goodwill, could be impacted by future adverse changes such
as: (i) future declines in our operating results, (ii) a sustained decline in our market
capitalization, (iii) significant slowdown in the worldwide economy or the networking
industry, or (iv) failure to meet our forecasted operating results. We evaluate these assets
on an annual basis as of November 1 or more frequently if we believe impairment indicators
exist. The process of evaluating the potential impairment of goodwill and intangible assets is
subjective and requires significant judgment at many points during the analysis. Impairment of
goodwill is tested at the reporting unit level by comparing the reporting units carrying
value, including goodwill, to the fair value of the reporting unit. The fair values of the
reporting units are estimated using a combination of the income and the market approaches.
Under the income approach, we calculate fair value of a reporting unit based on the present
value of estimated future cash flows. Under the market approach, we estimate fair value of our
reporting units based on market multiples of revenue or earnings for comparable companies. If
the fair value of the reporting unit exceeds the carrying value of the net assets assigned to
that unit, goodwill is not impaired and we are not required to perform further testing. If the
fair value of the reporting unit does not exceed the carrying value of the net assets assigned
to the reporting unit, then we must perform the second step of the impairment test in order to
determine the implied fair value of the reporting units goodwill. When the carrying value of
a reporting units goodwill exceeds its implied fair value, we record an impairment loss equal
to the difference. Intangible assets are evaluated for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be recoverable. An
asset is considered impaired if its carrying amount exceeds the future net cash flow the asset
is expected to generate and the impairment loss recognized is the amount by which the carrying
amount of the asset exceeds its fair value. We assess the recoverability of our intangible
assets by determining whether the unamortized balances are greater than the sum of
undiscounted future net cash flows of the related assets. The amount of impairment, if any, is
measured based on projected discounted future net cash flows. The estimates used are
consistent with the plans and estimates that we use to manage our business. If our actual
results or the plans and estimates used in future impairment analyses are lower than the
original estimates used to assess the recoverability of these assets, we could incur
additional impairment charges.
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|
|
Share-Based Compensation.
We recognize share-based compensation expense for all share-based
payment awards including employee stock options, restricted stock units (RSUs), performance
share awards (PSAs), and purchases under our Employee Stock Purchase Plan in accordance with
FASB ASC Topic 718,
Compensation Stock Compensation
(FASB ASC Topic 718). Share-based
compensation expense for expected-to-vest share-based awards is valued under the single-option
approach and amortized on a straight-line basis, net of estimated forfeitures.
|
|
|
We utilize the Black-Scholes-Merton (BSM) option-pricing model in order to determine the fair
value of stock options. The BSM model requires various highly subjective assumptions including
volatility, expected option life, and risk-free interest rate. The expected volatility is based
on the implied volatility of market traded options on our common stock, adjusted for other
relevant factors including historical volatility of our common stock over the most recent period
commensurate with the estimated expected life of our stock options. The expected life of an
award is based on historical experience, the terms and conditions of the stock awards granted to
employees, as well as the potential effect from options that have not been exercised at the
time. We determine the fair value of RSUs and PSAs based on the closing market price of our
common stock on the grant date. In addition, we estimate stock compensation expense for our PSAs
based on the vesting criteria and only recognize expense for the portions of such awards for
which annual targets have been set.
|
|
|
The assumptions used in calculating the fair value of share-based payment awards represent
managements best estimates. These estimates involve inherent uncertainties and the application
of managements judgment. If factors change and different assumptions are used, our share-based
compensation expense could be materially different in the future. In addition, we are required
to estimate the expected forfeiture rate and recognize expense only for those expected-to-vest
shares. If our actual forfeiture rate is materially different from our estimate, our recorded
share-based compensation
expense could be different.
|
|
|
Income Taxes.
Estimates and judgments occur in the calculation of certain tax liabilities and
in the determination of the recoverability of certain deferred tax assets, which arise from
temporary differences and carryforwards. Deferred tax assets and liabilities are measured
using the currently enacted tax rates that apply to taxable income in effect for the years in
which those tax assets are expected to be realized or settled. We regularly assess the
likelihood that our deferred tax assets
|
43
|
|
will be realized from recoverable income taxes or
recovered from future taxable income based on the realization criteria set forth in FASB ASC
Topic,
Income Taxes
(FASB ASC Topic 740). To the extent that we believe any amounts are not
more likely than not to be realized, we record a valuation allowance to reduce our deferred
tax assets. We believe it is more likely than not that future income from the reversal of the
deferred tax liabilities and forecasted income will be sufficient to fully recover the
remaining deferred tax assets. In the event we determine that all or part of the net deferred
tax assets are not realizable in the future, an adjustment to the valuation allowance is
charged to earnings in the period such determination is made. Similarly, if we subsequently
realize deferred tax assets that were previously determined to be unrealizable, the respective
valuation allowance is reversed, resulting in an adjustment to earnings in the period such
determination is made. In addition, the calculation of our tax liabilities involves dealing
with uncertainties in the application of complex tax regulations. We recognize and measure
potential liabilities based upon our estimate of whether, and the extent to which, additional
taxes will be due.
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|
|
Significant judgment is required in determining any valuation allowance recorded against
deferred tax assets. 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. In the event that we change our determination as to the
amount of deferred tax assets that can be realized, we will adjust our valuation allowance with
a corresponding effect to the provision for income taxes in the period in which such
determination is made.
|
|
|
Significant judgment is also required in evaluating our uncertain tax positions under FASB ASC
Topic 740 and determining our provision for income taxes. Although we believe our reserves under
FASB ASC Topic 740 are reasonable, no assurance can be given that the final tax outcome of these
matters will not be different from that which is reflected in our historical income tax
provisions and accruals. We adjust these reserves in light of changing facts and circumstances,
such as the closing of a tax audit or the refinement of an estimate. To the extent that the
final tax outcome of these matters is different from the amounts recorded, such differences will
affect the provision for income taxes in the period in which such determination is made as it
was during the first quarter of 2010, when we recorded a non-recurring income tax benefit as a
result of a taxpayer favorable federal appellate court ruling in
Xilinx, Inc. v. Commissioner
.
The provision for income taxes includes the effect of reserves under FASB ASC Topic 740 and any
changes to the reserves that are considered appropriate, as well as the related net interest and
penalties, if applicable.
|
|
|
Loss Contingencies.
We are subject to the possibility of various loss contingencies arising
in the ordinary course of business. We consider the likelihood of loss or impairment of an
asset, or the incurrence of a liability, as well as our ability to reasonably estimate the
amount of loss, in determining loss contingencies. An estimated loss contingency is accrued
when it is probable that an asset has been impaired or a liability has been incurred and the
amount of loss can be reasonably estimated. We record a charge equal to the minimum estimated
liability for litigation costs or a loss contingency only when both of the following
conditions are met: (i) information available prior to issuance of our consolidated financial
statements indicates that it is probable that an asset had been impaired or a liability had
been incurred at the date of the financial statements, and (ii) the range of loss can be
reasonably estimated. We regularly evaluate current information available to us to determine
whether such accruals should be adjusted and whether new accruals are required.
|
|
|
From time to time, we are involved in disputes, litigation, and other legal actions. We are
aggressively defending our current litigation matters. However, there are many uncertainties
associated with any litigation, and these actions or other third-party claims against us may
cause us to incur costly litigation and/or substantial settlement charges. In addition, the
resolution of any future intellectual property litigation may require us to make royalty
payments, which could adversely affect gross margins in future periods. If any of those events
were to occur, our business, financial condition, results of operations, and cash flows could be
adversely affected. The actual liability in any such matters may be materially different from
our estimates, which could result in the need to adjust our liability and record additional
expenses. For a discussion of current litigation, please see Note 15,
Commitments and
Contingencies,
under the heading Legal Proceedings in the Notes to Condensed Consolidated
Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.
|
Recent Accounting Pronouncements
See Note 2,
Summary of Significant Accounting Policies
, in the Notes to Condensed Consolidated
Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, for a full
description of recent accounting pronouncements, including the
actual and expected dates of adoption and estimated effects on our consolidated results of
operations and financial condition, which is incorporated herein by reference.
44
Results of Operations
The following table presents product and service net revenues (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
801.2
|
|
|
$
|
634.1
|
|
|
$
|
167.1
|
|
|
|
26
|
%
|
|
$
|
2,296.4
|
|
|
$
|
1,828.9
|
|
|
$
|
467.5
|
|
|
|
26
|
%
|
Percentage of net revenues
|
|
|
79.1
|
%
|
|
|
77.0
|
%
|
|
|
|
|
|
|
|
|
|
|
79.1
|
%
|
|
|
77.0
|
%
|
|
|
|
|
|
|
|
|
Service
|
|
|
211.2
|
|
|
|
189.8
|
|
|
|
21.4
|
|
|
|
11
|
%
|
|
|
606.9
|
|
|
|
545.6
|
|
|
|
61.3
|
|
|
|
11
|
%
|
Percentage of net revenues
|
|
|
20.9
|
%
|
|
|
23.0
|
%
|
|
|
|
|
|
|
|
|
|
|
20.9
|
%
|
|
|
23.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
1,012.4
|
|
|
$
|
823.9
|
|
|
$
|
188.5
|
|
|
|
23
|
%
|
|
$
|
2,903.3
|
|
|
$
|
2,374.5
|
|
|
$
|
528.8
|
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net product revenues increased in the three and nine months ended September 30, 2010,
compared to the same periods in 2009, primarily due to an increase in Infrastructure product sales
to service provider and enterprise customers across all regions and
Service Layer Technologies (SLT) product sales to enterprise
customers across all regions. The increased revenue was the result of the improved macroeconomic
environment as compared to the first three quarters of 2009. Our net service revenues increased in
the three and nine months ended September 30, 2010, compared to the same period in 2009, primarily
due to an increase in service and support sales to enterprise customers in the Americas and EMEA
regions and to service provider customers in the EMEA and Asia Pacific (APAC) regions. The
increase in service revenue was primarily driven by growth in the installed base and continued
strength in service contract renewals.
Infrastructure Segment Revenues
The following table presents net Infrastructure segment revenues and net Infrastructure segment
revenues as a percentage of total net revenues by product and service categories (in millions,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
Net Infrastructure
segment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure product
revenue
|
|
$
|
607.6
|
|
|
$
|
472.0
|
|
|
$
|
135.6
|
|
|
|
29
|
%
|
|
$
|
1,753.9
|
|
|
$
|
1,396.2
|
|
|
$
|
357.7
|
|
|
|
26
|
%
|
Percentage of net revenues
|
|
|
60.0
|
%
|
|
|
57.2
|
%
|
|
|
|
|
|
|
|
|
|
|
60.4
|
%
|
|
|
58.8
|
%
|
|
|
|
|
|
|
|
|
Infrastructure service
revenue
|
|
|
136.5
|
|
|
|
123.2
|
|
|
|
13.3
|
|
|
|
11
|
%
|
|
|
389.2
|
|
|
|
350.1
|
|
|
|
39.1
|
|
|
|
11
|
%
|
Percentage of net revenues
|
|
|
13.5
|
%
|
|
|
15.0
|
%
|
|
|
|
|
|
|
|
|
|
|
13.4
|
%
|
|
|
14.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Infrastructure
segment revenues
|
|
$
|
744.1
|
|
|
$
|
595.2
|
|
|
$
|
148.9
|
|
|
|
25
|
%
|
|
$
|
2,143.1
|
|
|
$
|
1,746.3
|
|
|
$
|
396.8
|
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net revenues
|
|
|
73.5
|
%
|
|
|
72.2
|
%
|
|
|
|
|
|
|
|
|
|
|
73.8
|
%
|
|
|
73.5
|
%
|
|
|
|
|
|
|
|
|
Infrastructure Product
During the three and nine months ended September 30, 2010, Infrastructure products revenue
experienced growth in the enterprise and service provider markets across all regions. This increase
was primarily attributable to revenue growth from our MX-series routers and EX-series switches.
We track Infrastructure chassis revenue
units and ports shipped to analyze customer trends and
identify areas of potential network growth. Most of our Infrastructure product platforms are
modular, with the chassis serving as the base of the platform. Each modular chassis has a certain
number of slots that are available to be populated with components we refer to as modules or
interfaces. The modules are the components through which the platform receives incoming packets of
data from a variety of transmission media. The physical connection between a transmission medium
and a module is referred to as a port. The number
45
of ports on a module varies widely depending on
the functionality and throughput offered by the module. Chassis revenue units represent the number
of chassis on which revenue was recognized during the period. The following table presents
Infrastructure revenue units and ports shipped:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Unit Change
|
|
|
% Change
|
|
|
2010
|
|
|
2009
|
|
|
Unit Change
|
|
|
% Change
|
|
Infrastructure
chassis revenue
units (1)
|
|
|
3,535
|
|
|
|
3,227
|
|
|
|
308
|
|
|
|
10
|
%
|
|
|
9,328
|
|
|
|
9,253
|
|
|
|
75
|
|
|
|
1
|
%
|
Infrastructure
ports shipped (1)
|
|
|
141,846
|
|
|
|
109,749
|
|
|
|
32,097
|
|
|
|
29
|
%
|
|
|
378,844
|
|
|
|
317,260
|
|
|
|
61,584
|
|
|
|
19
|
%
|
|
|
|
(1)
|
|
Excludes modular and fixed configuration EX-series Ethernet switching products and circuit-to-packet products.
|
Infrastructure port shipments increased in the three months ended September 30, 2010, compared
to the same period in 2009, which was commensurate with the growth in chassis revenue units. In the
nine months ended September 30, 2010, compared to the same period in 2009, the increase in
Infrastructure port shipments was greater than chassis revenue units primarily due to an increase
in the shipments of MX-series products, which generally contain a higher number of ports per
chassis.
Infrastructure Service
A majority of our service revenue is earned from customers that purchase our products and enter
into service contracts for support. The increase in Infrastructure service revenue for the three
and nine months ended September 30, 2010, was primarily driven by the increased revenue from new
product sales and strong service contract renewals. From a geographical and market perspective, the
increase in Infrastructure service revenues was primarily due to an increase in the enterprise
business across all regions and the service provider business in the EMEA and APAC regions. These
increases were partially offset by a decrease in service revenue in the Americas service provider
market.
SLT Segment Revenues
The following table presents net SLT segment revenues and net SLT segment revenues as a percentage
of total net revenues by product and service categories (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
Net SLT segment
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SLT product revenue
|
|
$
|
193.6
|
|
|
$
|
162.1
|
|
|
$
|
31.5
|
|
|
|
19
|
%
|
|
$
|
542.5
|
|
|
$
|
432.7
|
|
|
$
|
109.8
|
|
|
|
25
|
%
|
Percentage of net
revenues
|
|
|
19.1
|
%
|
|
|
19.7
|
%
|
|
|
|
|
|
|
|
|
|
|
18.7
|
%
|
|
|
18.2
|
%
|
|
|
|
|
|
|
|
|
SLT service revenue
|
|
|
74.7
|
|
|
|
66.6
|
|
|
|
8.1
|
|
|
|
12
|
%
|
|
|
217.7
|
|
|
|
195.5
|
|
|
|
22.2
|
|
|
|
11
|
%
|
Percentage of net
revenues
|
|
|
7.4
|
%
|
|
|
8.1
|
%
|
|
|
|
|
|
|
|
|
|
|
7.5
|
%
|
|
|
8.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SLT segment
revenues
|
|
$
|
268.3
|
|
|
$
|
228.7
|
|
|
$
|
39.6
|
|
|
|
17
|
%
|
|
$
|
760.2
|
|
|
$
|
628.2
|
|
|
$
|
132.0
|
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net
revenues
|
|
|
26.5
|
%
|
|
|
27.8
|
%
|
|
|
|
|
|
|
|
|
|
|
26.2
|
%
|
|
|
26.5
|
%
|
|
|
|
|
|
|
|
|
SLT Product
We experienced an increase in SLT product revenue in the three and nine months ended
September 30, 2010, compared to the same periods in 2009, primarily due to an increase in revenue
from our branch and high-end SRX service gateway products partially offset by declines in revenue
generated by older branch and high-end firewall products. From a geographical and market
perspective, during the three and nine months ended September 30, 2010, we experienced revenue
growth in the enterprise market across all regions and in the Americas service provider market.
46
The following table presents SLT revenue units recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Unit Change
|
|
|
% Change
|
|
|
2010
|
|
|
2009
|
|
|
Unit Change
|
|
|
% Change
|
|
SLT revenue units
|
|
|
55,905
|
|
|
|
55,319
|
|
|
|
586
|
|
|
|
1
|
%
|
|
|
170,571
|
|
|
|
147,717
|
|
|
|
22,854
|
|
|
|
15
|
%
|
The year-over-year growth in SLT revenue units was less than the year-over-year growth in SLT
product revenues in the three months ended September 30, 2010, compared to the same period in
2009, due to the transition from older branch and high-end firewall products to branch and high-end
SRX service gateway products, which have a higher revenue per unit. In the nine months ended
September 30, 2010, compared to the same period in 2009, the increase in SLT revenue units was
commensurate with and due to year-over-year growth of SLT product revenue.
SLT Service
The increase in SLT service revenue for the three and nine months ended September 30, 2010, was
primarily driven by the increased revenue from new product sales and strong service contract
renewals. From a geographical and market perspective, the increase in SLT service revenues was
primarily due to growth in both the enterprise and service provider markets across all regions.
Net Revenues by Geographic Region
The following table presents the total net revenues by geographic region (in millions, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
Americas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
481.2
|
|
|
$
|
380.3
|
|
|
$
|
100.9
|
|
|
|
27
|
%
|
|
$
|
1,368.0
|
|
|
$
|
1,045.4
|
|
|
$
|
322.6
|
|
|
|
31
|
%
|
Other
|
|
|
51.6
|
|
|
|
42.5
|
|
|
|
9.1
|
|
|
|
21
|
%
|
|
|
147.4
|
|
|
|
128.0
|
|
|
|
19.4
|
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Americas
|
|
|
532.8
|
|
|
|
422.8
|
|
|
|
110.0
|
|
|
|
26
|
%
|
|
|
1,515.4
|
|
|
|
1,173.4
|
|
|
|
342.0
|
|
|
|
29
|
%
|
Percentage of net revenues
|
|
|
52.6
|
%
|
|
|
51.3
|
%
|
|
|
|
|
|
|
|
|
|
|
52.2
|
%
|
|
|
49.4
|
%
|
|
|
|
|
|
|
|
|
Europe, Middle East, and
Africa
|
|
|
275.9
|
|
|
|
243.2
|
|
|
|
32.7
|
|
|
|
13
|
%
|
|
|
829.5
|
|
|
|
698.3
|
|
|
|
131.2
|
|
|
|
19
|
%
|
Percentage of net revenues
|
|
|
27.3
|
%
|
|
|
29.5
|
%
|
|
|
|
|
|
|
|
|
|
|
28.6
|
%
|
|
|
29.4
|
%
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
|
203.7
|
|
|
|
157.9
|
|
|
|
45.8
|
|
|
|
29
|
%
|
|
|
558.4
|
|
|
|
502.8
|
|
|
|
55.6
|
|
|
|
11
|
%
|
Percentage of net revenues
|
|
|
20.1
|
%
|
|
|
19.2
|
%
|
|
|
|
|
|
|
|
|
|
|
19.2
|
%
|
|
|
21.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,012.4
|
|
|
$
|
823.9
|
|
|
$
|
188.5
|
|
|
|
23
|
%
|
|
$
|
2,903.3
|
|
|
$
|
2,374.5
|
|
|
$
|
528.8
|
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues in the Americas region increased in absolute dollars and as a percentage of total
net revenues in the three and nine months ended September 30, 2010, compared to the same periods in
2009, primarily due to increased demand in the United States. In the United States, net revenues
increased in absolute dollars and as a percentage of total net revenue, in the three and nine
months ended September 30, 2010, compared to the same periods in 2009, primarily due to increased
product sales to service provider and enterprise customers.
Net revenues in EMEA increased in absolute dollars in the three and nine months ended
September 30, 2010, compared to the same periods in 2009, primarily due to increased demand in the
Russian Federation, the Netherlands, and the United Kingdom. This increase was largely driven by
product sales to both the enterprise and service provider markets. Net revenue in EMEA as a
percentage of total net revenues decreased in the three and nine months ended September 30, 2010,
as compared to the same periods in 2009, primarily due to the relative strength of the Americas
region.
Net revenues in APAC increased in absolute dollars in the three and nine months ended
September 30, 2010, compared to the same period in 2009, primarily due to increased demand in
Australia, Japan, and South Korea. This increase was primarily driven by product sales to
enterprise customers and service sales to service provider customers. Net revenue in APAC as a
percentage of total net revenues increased in the three months ended September 30, 2010, as
compared to the same period in 2009, as the macroeconomic environment improved in the APAC region,
and decreased in the nine months ended September 30, 2010, as compared to the same period in 2009,
primarily due to the relative strength of the Americas region.
47
Net Revenues by Market and Customer
The following table presents the total net revenues by market (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
Service Provider
|
|
$
|
634.0
|
|
|
$
|
524.0
|
|
|
$
|
110.0
|
|
|
|
21
|
%
|
|
$
|
1,847.6
|
|
|
$
|
1,557.8
|
|
|
$
|
289.8
|
|
|
|
19
|
%
|
Percentage of net revenues
|
|
|
62.6
|
%
|
|
|
63.6
|
%
|
|
|
|
|
|
|
|
|
|
|
63.6
|
%
|
|
|
65.6
|
%
|
|
|
|
|
|
|
|
|
Enterprise
|
|
|
378.4
|
|
|
|
299.9
|
|
|
|
78.5
|
|
|
|
26
|
%
|
|
|
1,055.7
|
|
|
|
816.7
|
|
|
|
239.0
|
|
|
|
29
|
%
|
Percentage of net revenues
|
|
|
37.4
|
%
|
|
|
36.4
|
%
|
|
|
|
|
|
|
|
|
|
|
36.4
|
%
|
|
|
34.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,012.4
|
|
|
$
|
823.9
|
|
|
$
|
188.5
|
|
|
|
23
|
%
|
|
$
|
2,903.3
|
|
|
$
|
2,374.5
|
|
|
$
|
528.8
|
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We sell our high-performance network products and service offerings from our Infrastructure
and SLT segments to two primary markets service provider and enterprise. The service provider
market includes wireline, wireless, and cable operators, as well as major internet content and
application providers. The enterprise market represents businesses; federal, state, and local
governments; and research and education institutions.
Net revenues from sales to the service provider market increased in absolute dollars in the three
and nine months ended September 30, 2010, compared to the same periods in 2009, primarily due to
our customers increased investment in new network build-outs and purchases of additional
networking capacity to support network growth. Net revenues from sales to the enterprise market
increased in absolute dollars and as a percentage of total net revenues in the three and nine
months ended September 30, 2010, compared to the same periods in 2009, primarily due to our
expanded portfolio of products and our continued investments to expand our footprint in the
enterprise market.
During the three months ended September 30, 2010, no single customer accounted for greater than
10.0% or more of our net revenues and during the nine months ended September 30, 2010, Verizon
Communications, Inc. (Verizon) accounted for 10.0% of our net revenues. During the three months
ended September 30, 2009, Verizon accounted for 10.4% of our net revenues. No single customer
accounted for greater than 10.0% or more of our net revenues during the nine months ended
September 30, 2009.
48
Cost of Revenues
The following table presents cost of product and service revenues and the related gross margins (in
millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
247.0
|
|
|
$
|
206.3
|
|
|
$
|
40.7
|
|
|
|
20
|
%
|
|
$
|
701.2
|
|
|
$
|
607.0
|
|
|
$
|
94.2
|
|
|
|
16
|
%
|
percentage of net revenues
|
|
|
24.4
|
%
|
|
|
25.1
|
%
|
|
|
|
|
|
|
|
|
|
|
24.1
|
%
|
|
|
25.5
|
%
|
|
|
|
|
|
|
|
|
Service (1)
|
|
|
87.6
|
|
|
|
74.3
|
|
|
|
13.3
|
|
|
|
18
|
%
|
|
|
252.4
|
|
|
|
215.5
|
|
|
|
36.9
|
|
|
|
17
|
%
|
percentage of net revenues
|
|
|
8.7
|
%
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
|
8.7
|
%
|
|
|
9.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues (1)
|
|
$
|
334.6
|
|
|
$
|
280.6
|
|
|
$
|
54.0
|
|
|
|
19
|
%
|
|
$
|
953.6
|
|
|
$
|
822.5
|
|
|
$
|
131.1
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
percentage of net revenues
|
|
|
33.1
|
%
|
|
|
34.1
|
%
|
|
|
|
|
|
|
|
|
|
|
32.8
|
%
|
|
|
34.6
|
%
|
|
|
|
|
|
|
|
|
Gross margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross margin
|
|
$
|
554.2
|
|
|
$
|
427.8
|
|
|
$
|
126.4
|
|
|
|
30
|
%
|
|
$
|
1,595.2
|
|
|
$
|
1,222.0
|
|
|
$
|
373.2
|
|
|
|
31
|
%
|
Percentage of product
revenues
|
|
|
69.2
|
%
|
|
|
67.5
|
%
|
|
|
|
|
|
|
|
|
|
|
69.5
|
%
|
|
|
66.8
|
%
|
|
|
|
|
|
|
|
|
Service gross margin
|
|
|
123.6
|
|
|
|
115.5
|
|
|
|
8.1
|
|
|
|
7
|
%
|
|
|
354.5
|
|
|
|
330.0
|
|
|
|
24.5
|
|
|
|
7
|
%
|
Percentage of service
revenues
|
|
|
58.5
|
%
|
|
|
60.9
|
%
|
|
|
|
|
|
|
|
|
|
|
58.4
|
%
|
|
|
60.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$
|
677.8
|
|
|
$
|
543.3
|
|
|
$
|
134.5
|
|
|
|
25
|
%
|
|
$
|
1,949.7
|
|
|
$
|
1,552.0
|
|
|
$
|
397.7
|
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net revenues
|
|
|
66.9
|
%
|
|
|
65.9
|
%
|
|
|
|
|
|
|
|
|
|
|
67.2
|
%
|
|
|
65.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Prior period information has been reclassified to conform to the current periods presentation.
|
Most of our manufacturing, repair, and supply chain operations are outsourced to independent
contract manufacturers. Accordingly, most of our cost of revenues consists of payments to our
independent contract manufacturers for standard product costs. The cost of product revenues
increased in absolute dollars in the three and nine months ended September 30, 2010, compared to
the same periods in 2009, primarily due to an increase in product volume. Product gross margin and
product gross margin as a percentage of product revenues increased primarily due to a change in
product mix that favored higher margin products and our continued efforts to manage costs. As of
September 30, 2010, and 2009, we had 254 and 242 employees, respectively, in our manufacturing and
operations organization that primarily manage relationships with our independent contract
manufacturers, manage our supply chain, orchestrate new product introductions, and monitor and
manage product testing and quality.
The cost of service revenues increased in the three and nine months ended September 30, 2010,
compared to the same periods in 2009, primarily due to increased headcount and outside services to
support our customer needs and variable compensation. Service-related headcount increased by 11% to
964 employees as of September 30, 2010, compared to 868 employees as of September 30, 2009. Total
personnel-related costs as a percentage of service revenues were relatively flat in the three and
nine months ended September 30, 2009, respectively, as we continued to manage costs while growing
our revenues. Facilities and information technology (IT) expenses related to cost of service
revenues increased in the three and nine months ended September 30, 2010, compared to the same
periods in 2009, which is commensurate with the increase in headcount. The change in operating
expenses, including cost of service revenue, R&D, sales and marketing, and G&A expenses, due to
foreign currency fluctuations was immaterial in the three months ended September 30, 2010, and
approximately 1% in the nine months ended September 30, 2010. The change in operating expenses,
including cost of service revenue, R&D, sales and marketing, and G&A expenses, due to foreign
currency fluctuations was 4% in each of the three and nine month periods ended September 30, 2009,
respectively.
Service gross margin increased in absolute dollars primarily due to increased service revenues, and
service gross margin as a percentage of service revenues decreased primarily due to a shift in mix
that was driven by an increase in value-added service related revenue.
49
Facility and IT departmental costs are allocated to costs and operating expense based on usage and
headcount, respectively. Such costs increased by $4.8 million and $12.7 million in the three and
nine months ended September 30, 2010, respectively, compared to the same periods in 2009 due to an
increase in departmental headcount, the continued build-out of our domestic and international
development and test centers, and IT applications to support our internal operations. Facility and
IT related headcount was 376 employees as of September 30, 2010, compared to 243 employees as of
September 30, 2009. We expect to continue investment in our company-wide IT infrastructure.
Operating Expenses
Personnel-related costs, including wages, commissions, bonuses, vacation, benefits, share-based
compensation, and travel, have historically been the primary driver of our operating expenses, and
we expect this trend to continue. We increased our total headcount by 15% to 8,104 employees as of
September 30, 2010, from 7,034 employees as of September 30, 2009, due to increases in almost all
of our organizations in an effort to grow the business.
The following table presents operating expenses (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
Research and development
|
|
$
|
231.2
|
|
|
$
|
185.2
|
|
|
$
|
46.0
|
|
|
|
25
|
%
|
|
$
|
662.9
|
|
|
$
|
554.5
|
|
|
$
|
108.4
|
|
|
|
21
|
%
|
Sales and marketing (1)
|
|
|
204.7
|
|
|
|
183.4
|
|
|
|
21.3
|
|
|
|
12
|
%
|
|
|
599.3
|
|
|
|
547.9
|
|
|
|
51.4
|
|
|
|
9
|
%
|
General and administrative
|
|
|
43.8
|
|
|
|
39.9
|
|
|
|
3.9
|
|
|
|
10
|
%
|
|
|
132.8
|
|
|
|
118.3
|
|
|
|
14.5
|
|
|
|
12
|
%
|
Amortization of purchased
intangible assets
|
|
|
0.9
|
|
|
|
1.3
|
|
|
|
(0.4
|
)
|
|
|
(31
|
)%
|
|
|
3.3
|
|
|
|
9.2
|
|
|
|
(5.9
|
)
|
|
|
(65
|
)%
|
Restructuring charges
|
|
|
0.2
|
|
|
|
4.5
|
|
|
|
(4.3
|
)
|
|
|
(96
|
)%
|
|
|
8.6
|
|
|
|
16.2
|
|
|
|
(7.6
|
)
|
|
|
(47
|
)%
|
Acquisition-related and
other charges
|
|
|
1.5
|
|
|
|
1.0
|
|
|
|
0.5
|
|
|
|
50
|
%
|
|
|
2.1
|
|
|
|
1.0
|
|
|
|
1.1
|
|
|
|
110
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
(1)
|
|
$
|
482.3
|
|
|
$
|
415.3
|
|
|
$
|
67.0
|
|
|
|
16
|
%
|
|
$
|
1,409.0
|
|
|
$
|
1,247.1
|
|
|
$
|
161.9
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Prior period information has been reclassified to conform to the current periods presentation.
|
The following table highlights our operating expenses as a percentage of net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Research and development
|
|
|
22.8
|
%
|
|
|
22.5
|
%
|
|
|
22.8
|
%
|
|
|
23.3
|
%
|
Sales and marketing (1)
|
|
|
20.2
|
%
|
|
|
22.3
|
%
|
|
|
20.6
|
%
|
|
|
23.1
|
%
|
General and administrative
|
|
|
4.3
|
%
|
|
|
4.8
|
%
|
|
|
4.7
|
%
|
|
|
5.0
|
%
|
Amortization of purchased intangible assets
|
|
|
0.1
|
%
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
|
|
0.4
|
%
|
Restructuring charges
|
|
|
|
%
|
|
|
0.5
|
%
|
|
|
0.3
|
%
|
|
|
0.7
|
%
|
Acquisition-related and other charges
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses (1)
|
|
|
47.6
|
%
|
|
|
50.4
|
%
|
|
|
48.6
|
%
|
|
|
52.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Prior period information has been reclassified to conform to the current periods presentation.
|
In the three and nine months ended September 30, 2010, R&D expenses primarily consisted of
personnel-related expenses and other costs related to product development such as equipment and
repairs expense, and engineering and development expense. Personnel-related costs increased
$22.3 million, or 23%, to $119.2 million and $63.7 million, or 21%, to $363.9 million in the three
and nine months ended September 30, 2010, respectively, compared to the same periods in 2009,
primarily due to a 18% increase in our engineering organization headcount, from 3,237 at
September 30, 2009, to 3,819 employees at September 30, 2010, to support continued product
innovation, and timing of personnel-related expenses. Additionally, product development cost
increased $3.2 million, or 17%, to $21.3 million and $5.6 million, or 11%, to $54.5 million in the
three and nine months ended September 30, 2010, respectively, compared to the same periods in 2009,
primarily due to strategic initiatives to expand our product portfolio and maintain our
technological advantage over competitors.
50
Sales and marketing expenses increased in the three and nine months ended September 30, 2010,
compared to the same periods in 2009, primarily due to an increase in personnel-related expenses of
$9.5 million and $46.6 million, respectively. The increase was primarily due to an 8% increase in
our sales and marketing headcount from 2,092 to 2,263 employees, an increase in variable
compensation driven by growth in our revenues, and an increase in outside services to support our
sales and marketing programs.
G&A expenses increased in the three and nine months ended September 30, 2010, compared to the same
periods in 2009, primarily due to an increase in personnel-related expenses, partially offset by a
decrease in outside services. Personnel-related costs increased by $4.2 million and $13.2 million
in the three and nine months ended September 30, 2010, respectively, compared to the same periods
in 2009, primarily due to a 22% increase in headcount in our worldwide G&A functions, from 352 to
428 employees, in anticipation of future growth in our business. Outside professional service fees
decreased in the three and nine months ended September 30, 2010, compared to the same periods in
2009, due to a decline in legal, contractor, and consulting fees.
Amortization of purchased intangible assets decreased in the three and nine months ended September
30, 2010, compared to the same periods in 2009, primarily due to a decrease in amortization expense
of certain purchased intangible assets that fully amortized in 2009 and, to a lesser extent, the
full amortization of an intangible asset during the second quarter of 2010.
We incurred $0.2 million and $8.6 million of restructuring charges in the three and nine months
ended September 30, 2010, respectively, and $4.5 million and $16.3 million of restructuring charges
in the three and nine months ended September 30, 2009, respectively, as a result of the
implementation of a restructuring plan as part of our 2009 cost reduction initiatives (the 2009
Restructuring Plan). For the remainder of 2010, we do not expect to incur significant charges in
connection with the 2009 Restructuring Plan. See Note 8,
Other Financial Information
in the Notes
to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form
10-Q, for further discussion of restructuring charges.
On April 19, 2010, the Company acquired 100% of the equity securities of Ankeena, a privately-held
provider of new media infrastructure technology, and on July 30, 2010, the Company acquired 100% of
the net assets of SMobile, a privately-held software company focused solely on smartphone and
tablet security solutions for the enterprise, service provider, and
consumer markets. In the three and nine months ended September 30,
2010, the Company
recognized $1.5 million and $2.1 million, respectively, in direct and indirect acquisition-related costs such as financial
advisory, legal, due diligence, and integration costs as a result of these acquisitions. See Note
3,
Business Combination
in the Notes to Condensed Consolidated Financial Statements in Item 1 of
Part I of this Quarterly Report on Form 10-Q, for further discussion of the acquisitions of Ankeena
and SMobile.
Interest and Other Income, Net, Gain (Loss) on Equity Investments, and Income Tax Provision
The following table presents net interest and other income, gain (loss) on equity investments, and
income tax provision (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
Interest and other
income, net
|
|
$
|
0.2
|
|
|
$
|
1.7
|
|
|
$
|
(1.5
|
)
|
|
|
(88
|
)%
|
|
$
|
2.5
|
|
|
$
|
6.6
|
|
|
$
|
(4.1
|
)
|
|
|
(62
|
)%
|
Percentage of net revenues
|
|
|
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
0.1
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
Gain (loss) on equity
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M
|
|
|
|
3.2
|
|
|
|
(3.3
|
)
|
|
|
6.5
|
|
|
|
198
|
%
|
Percentage of net revenues
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
0.1
|
%
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
61.4
|
|
|
|
45.9
|
|
|
|
15.5
|
|
|
|
34
|
%
|
|
|
117.2
|
|
|
|
214.0
|
|
|
|
(96.8
|
)
|
|
|
(45
|
)%
|
Percentage of net revenues
|
|
|
6.0
|
%
|
|
|
5.6
|
%
|
|
|
|
|
|
|
|
|
|
|
4.1
|
%
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
Net interest and other income decreased in the three and nine months ended September 30, 2010,
compared to the same periods in 2009, primarily due to lower interest rates and an increase in
interest expense from our customer financing arrangements.
There were no gains or losses from our equity investments during the three months ended September
30, 2010. In the nine months ended September 30, 2010, we recognized a $3.2 million gain from our
privately-held equity investment as a result of our acquisition of Ankeena. For further discussion,
see Note 3,
Business Combination
, in the Notes to Condensed Consolidated
Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q. In the nine months
ended September 30, 2009, we recognized a $3.3 million impairment loss on our privately-held equity
investments for changes in fair value that we deemed were other-than-temporary.
51
We recorded a tax provision of $61.4 million and $45.9 million, or effective tax rates of 31% and
35%, for the three months ended September 30, 2010, and 2009, respectively, and a tax provision of
$117.2 million and $214.0 million, or effective tax rates of 21% and 69%, for the nine months ended
September 30, 2010, and 2009, respectively. The effective tax rates for the three and nine months
ended September 30, 2010, differ from the federal statutory rate of 35% primarily due to the
benefit of earnings in foreign jurisdictions, which are subject to lower tax rates, and a $54.1
million income tax benefit recorded during the first quarter of 2010 resulting from a change in our
estimate of unrecognized tax benefits related to share-based compensation. These benefits were
partially offset by charges for increases in the valuation allowance against the Companys
California deferred tax assets of approximately $3.2 million and $8.4 million during the three and
nine months ended September 30, 2010, respectively.
The effective tax rates for the three and nine months ended September 30, 2009, differed from the
federal statutory rate of 35% primarily due to three income tax charges: a $4.6 million charge in
the Companys third quarter of 2009 related to an investigation by the Indian tax authorities, a
$52.1 million charge in the second quarter of 2009 related to a change in the our estimate of
unrecognized tax benefits, and a $61.8 million charge which resulted from changes in California
income tax laws enacted during the Companys first quarter of 2009. The tax rates for the three and
nine months ended September 30, 2010, and 2009 were favorably impacted by the benefit of earnings
in foreign jurisdictions, which are subject to lower tax rates, and the federal R&D credit.
For a further explanation of our income tax provision, see Note 14,
Income Taxes
, in Notes to
Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report.
Segment Information
For a description of the products and services for each segment, See Note 13,
Segments,
in Notes to
Condensed Consolidated Financial Statement in Item I of this Form 10-Q.
52
Financial information for each segment used by management to make financial decisions and allocate
resources is as follows (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
607.6
|
|
|
$
|
472.0
|
|
|
$
|
135.6
|
|
|
|
29
|
%
|
|
$
|
1,753.9
|
|
|
$
|
1,396.2
|
|
|
$
|
357.7
|
|
|
|
26
|
%
|
Service
|
|
|
136.5
|
|
|
|
123.2
|
|
|
|
13.3
|
|
|
|
11
|
%
|
|
|
389.2
|
|
|
|
350.1
|
|
|
|
39.1
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Infrastructure
revenues
|
|
|
744.1
|
|
|
|
595.2
|
|
|
|
148.9
|
|
|
|
25
|
%
|
|
|
2,143.1
|
|
|
|
1,746.3
|
|
|
|
396.8
|
|
|
|
23
|
%
|
SLT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
193.6
|
|
|
|
162.1
|
|
|
|
31.5
|
|
|
|
19
|
%
|
|
|
542.5
|
|
|
|
432.7
|
|
|
|
109.8
|
|
|
|
25
|
%
|
Service
|
|
|
74.7
|
|
|
|
66.6
|
|
|
|
8.1
|
|
|
|
12
|
%
|
|
|
217.7
|
|
|
|
195.5
|
|
|
|
22.2
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SLT revenues
|
|
|
268.3
|
|
|
|
228.7
|
|
|
|
39.6
|
|
|
|
17
|
%
|
|
|
760.2
|
|
|
|
628.2
|
|
|
|
132.0
|
|
|
|
21
|
%
|
Total net revenues
|
|
|
1,012.4
|
|
|
|
823.9
|
|
|
|
188.5
|
|
|
|
23
|
%
|
|
|
2,903.3
|
|
|
|
2,374.5
|
|
|
|
528.8
|
|
|
|
22
|
%
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure
|
|
|
179.9
|
|
|
|
126.9
|
|
|
|
53.0
|
|
|
|
42
|
%
|
|
|
537.6
|
|
|
|
358.8
|
|
|
|
178.8
|
|
|
|
50
|
%
|
SLT
|
|
|
64.6
|
|
|
|
44.4
|
|
|
|
20.2
|
|
|
|
46
|
%
|
|
|
152.3
|
|
|
|
79.6
|
|
|
|
72.7
|
|
|
|
91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total management
operating income
|
|
|
244.5
|
|
|
|
171.3
|
|
|
|
73.2
|
|
|
|
43
|
%
|
|
|
689.9
|
|
|
|
438.4
|
|
|
|
251.5
|
|
|
|
57
|
%
|
Amortization of purchased
intangible assets
|
|
|
(2.4
|
)
|
|
|
(2.7
|
)
|
|
|
0.3
|
|
|
|
(11
|
)%
|
|
|
(5.0
|
)
|
|
|
(13.4
|
)
|
|
|
8.4
|
|
|
|
(63
|
)%
|
Share-based compensation
expense
|
|
|
(44.4
|
)
|
|
|
(34.3
|
)
|
|
|
(10.1
|
)
|
|
|
29
|
%
|
|
|
(129.6
|
)
|
|
|
(101.4
|
)
|
|
|
(28.2
|
)
|
|
|
28
|
%
|
Share-based payroll tax
expense
|
|
|
(0.5
|
)
|
|
|
(0.8
|
)
|
|
|
0.3
|
|
|
|
(38
|
)%
|
|
|
(3.8
|
)
|
|
|
(1.5
|
)
|
|
|
(2.3
|
)
|
|
|
163
|
%
|
Restructuring charges
|
|
|
(0.2
|
)
|
|
|
(4.5
|
)
|
|
|
4.3
|
|
|
|
(96
|
)%
|
|
|
(8.6
|
)
|
|
|
(16.3
|
)
|
|
|
7.7
|
|
|
|
(47
|
)%
|
Acquisition-related and
other charges
|
|
|
(1.5
|
)
|
|
|
(1.0
|
)
|
|
|
(0.5
|
)
|
|
|
50
|
%
|
|
|
(2.1
|
)
|
|
|
(1.0
|
)
|
|
|
(1.1
|
)
|
|
|
110
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
195.5
|
|
|
|
128.0
|
|
|
|
67.5
|
|
|
|
53
|
%
|
|
|
540.8
|
|
|
|
304.8
|
|
|
|
236.0
|
|
|
|
77
|
%
|
Interest and other
income, net
|
|
|
0.2
|
|
|
|
1.7
|
|
|
|
(1.5
|
)
|
|
|
(88
|
)%
|
|
|
2.5
|
|
|
|
6.6
|
|
|
|
(4.1
|
)
|
|
|
(62
|
)%
|
Gain (loss) on equity
investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M
|
|
|
|
3.2
|
|
|
|
(3.3
|
)
|
|
|
6.5
|
|
|
|
198
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income
taxes and noncontrolling
interest
|
|
$
|
195.7
|
|
|
$
|
129.7
|
|
|
$
|
66.0
|
|
|
|
51
|
%
|
|
$
|
546.5
|
|
|
$
|
308.1
|
|
|
$
|
238.4
|
|
|
|
77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
The following table presents financial information for each segment as a percentage of total
net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
60.0
|
%
|
|
|
57.2
|
%
|
|
|
60.4
|
%
|
|
|
58.8
|
%
|
Service
|
|
|
13.5
|
%
|
|
|
15.0
|
%
|
|
|
13.4
|
%
|
|
|
14.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total infrastructure revenues
|
|
|
73.5
|
%
|
|
|
72.2
|
%
|
|
|
73.8
|
%
|
|
|
73.5
|
%
|
SLT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
19.1
|
%
|
|
|
19.7
|
%
|
|
|
18.7
|
%
|
|
|
18.2
|
%
|
Service
|
|
|
7.4
|
%
|
|
|
8.1
|
%
|
|
|
7.5
|
%
|
|
|
8.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SLT revenues
|
|
|
26.5
|
%
|
|
|
27.8
|
%
|
|
|
26.2
|
%
|
|
|
26.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure
|
|
|
17.7
|
%
|
|
|
15.4
|
%
|
|
|
18.5
|
%
|
|
|
15.1
|
%
|
SLT
|
|
|
6.4
|
%
|
|
|
5.4
|
%
|
|
|
5.3
|
%
|
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total management operating income
|
|
|
24.1
|
%
|
|
|
20.8
|
%
|
|
|
23.8
|
%
|
|
|
18.5
|
%
|
Amortization of purchased intangible assets
|
|
|
(0.2
|
)%
|
|
|
(0.3
|
)%
|
|
|
(0.2
|
)%
|
|
|
(0.6
|
)%
|
Share-based compensation expense
|
|
|
(4.4
|
)%
|
|
|
(4.2
|
)%
|
|
|
(4.5
|
)%
|
|
|
(4.3
|
)%
|
Share-based payroll tax expense
|
|
|
|
%
|
|
|
(0.1
|
)%
|
|
|
(0.1
|
)%
|
|
|
(0.1
|
)%
|
Restructuring charges
|
|
|
|
%
|
|
|
(0.6
|
)%
|
|
|
(0.3
|
)%
|
|
|
(0.7
|
)%
|
Acquisition-related and other charges
|
|
|
(0.2
|
)%
|
|
|
(0.1
|
)%
|
|
|
(0.1
|
)%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
19.3
|
%
|
|
|
15.5
|
%
|
|
|
18.6
|
%
|
|
|
12.8
|
%
|
Interest and other income, net
|
|
|
|
%
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
|
|
0.3
|
%
|
Gain (loss) on equity investments
|
|
|
|
%
|
|
|
|
%
|
|
|
0.1
|
%
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and noncontrolling interest
|
|
|
19.3
|
%
|
|
|
15.7
|
%
|
|
|
18.8
|
%
|
|
|
13.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure Segment
An analysis of the change in revenue for the Infrastructure segment, and the change in units, can
be found above in the section titled Infrastructure Segment Revenues.
Infrastructure product gross margin and gross margin percentage increased in the three and nine
months ended September 30, 2010, compared to the same periods in 2009, primarily due to changes in
product mix that favored higher margin products.
Infrastructure segment operating income and operating margin increased in the three and nine months
ended September 30, 2010, compared to the same periods in 2009, primarily due to revenue growth
discussed above in the section titled Net Revenues outpacing our expenses. We allocate sales and
marketing, G&A, and facility and IT expenses to the Infrastructure segment generally based upon
revenue, usage, and headcount. In the three and nine months ended September 30, 2010, R&D expense
increased in absolute dollars as we continued our R&D investment efforts to develop innovative
products and expand our Infrastructure product portfolio. However, R&D expense decreased as a
percentage of Infrastructure net revenues in the three months ended September 30, 2010, as our
revenue growth outpaced our expenses for the period. R&D increased as a percentage of
Infrastructure net revenues in the nine months ended September 30, 2010, due to greater investments
in R&D in the first three quarters of 2010, compared to 2009. Sales and marketing expense increased
in absolute dollars and as a percentage of Infrastructure net revenues in the three and nine months
ended September 30, 2010, compared to the same periods in 2009, as we amplified our efforts to
reach enterprise and service provider customers.
54
SLT Segment
An analysis of the change in revenue for the SLT segment, and the change in units, can be found
above in the section titled SLT Segment Revenues.
SLT product gross margin and gross margin percentage increased in the three and nine months ended
September 30, 2010, compared to the same periods in 2009, primarily due to changes in product mix
that favored higher margin products. SLT segment operating income and operating margin increased in the three and nine months ended
September 30, 2010, compared to the same periods in 2009, primarily due to revenue growth discussed
above in the section titled Net Revenues outpacing our expenses. We allocate sales and marketing,
G&A, as well as facility and IT expenses to the SLT segment generally based on revenue, usage, and
headcount. R&D related costs increased in absolute dollars in the three and nine months ended
September 30, 2010, compared to the same periods in 2009, primarily due to our continued efforts to
expand our product features and functionality based upon the trends in the marketplace.
Additionally, sales and marketing expense increased in absolute dollars in the three and nine
months ended September 30, 2010, compared to the same periods in 2009, as we increased our efforts
to reach enterprise and service provider customers. In the three and nine months ended September
30, 2010, compared to the same periods in 2009, R&D and sales and marketing expenses decreased as a
percentage of SLT net revenues primarily due to the increase in net revenues and our continued
efforts to manage costs.
Amortization of Purchased Intangible Assets, Share-Based Compensation and Related Payroll Tax
Expense, Restructuring Charges, Interest and Other Income, Net, and Gain (Loss) on Equity
Investment.
See
Operating Expenses and Interest and Other Income,
Net, Gain (Loss) on Equity Investment, and
Income Tax Provision sections above for further discussion.
Key Performance Measures
In addition to the financial metrics included in the condensed consolidated financial statements,
we use the following key performance measures to assess quarterly operating results:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Days sales outstanding (DSO) (1)
|
|
|
42
|
|
|
|
41
|
|
Book-to-bill ratio (2)
|
|
|
>1
|
|
|
|
>1
|
|
|
|
|
(1)
|
|
DSO represents the ending accounts receivable, net of allowances, divided by average daily net sales for the
preceding 90 days for the applicable quarter. DSO increased in the third quarter of 2010, compared to the
third quarter of 2009, primarily due to timing of shipments.
|
|
(2)
|
|
Book-to-bill ratio represents the ratio of product orders booked divided by product revenues during the period.
|
55
Liquidity and Capital Resources
The following sections discuss the effects of changes in our consolidated balance sheet and cash
flows, contractual obligations, and stock repurchase program on our liquidity and capital
resources.
Overview
Historically, we have funded our business primarily through our operating activities and the
issuance of our common stock. The following table shows our capital resources (in millions, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
Working capital
|
|
$
|
1,626.0
|
|
|
$
|
1,503.2
|
|
|
$
|
122.8
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,460.9
|
|
|
$
|
1,604.7
|
|
|
$
|
(143.8
|
)
|
|
|
(9
|
)%
|
Short-term investments
|
|
|
638.5
|
|
|
|
570.5
|
|
|
|
68.0
|
|
|
|
12
|
%
|
Long-term investments
|
|
|
599.1
|
|
|
|
483.5
|
|
|
|
115.6
|
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and investments
|
|
$
|
2,698.5
|
|
|
$
|
2,658.7
|
|
|
$
|
39.8
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of our working capital are cash and cash equivalents, short-term
investments, and accounts receivable, reduced by accounts payable, income tax payable, accrued
liabilities, and short-term deferred revenue. Working capital increased by $122.8 million in the
nine months ended September 30, 2010, primarily due to a decrease in accrued litigation
settlements.
Stock Repurchase Activities
In
February 2010, our Board of Directors (the Board) approved a stock repurchase program (the 2010 Stock Repurchase
Program), which authorized us to repurchase up to $1.0 billion of our common stock. This new
authorization is in addition to the stock repurchase program approved by the Board in March 2008
(the 2008 Stock Repurchase Program), which also enabled us to repurchase up to $1.0 billion of
our common stock.
We repurchased approximately 5.0 million shares of our common stock at an average price of $26.81
per share for an aggregate purchase price of $134.9 million during the three months ended September
30, 2010, and approximately 14.3 million shares of our common stock at an average price of $27.09
per share for an aggregate purchase price of $386.7 million during the nine months ended September
30, 2010, under our two stock repurchase programs. We repurchased approximately 2.9 million shares
of our common stock at an average price of $24.67 per share for an aggregate purchase price of
$71.9 million during the three months ended September 30, 2009, and approximately 12.6 million
shares of our common stock at an average price of $19.18 per share for an aggregate purchase price
of $241.1 million during the nine months ended September 30, 2009, under our 2008 Stock Repurchase
Program. As of September 30, 2010, there were no remaining authorized funds under our 2008 Stock
Repurchase Program and $931.8 million remaining authorized funds under our 2010 Stock Repurchase
Program.
In addition to repurchases under our stock repurchase programs, we repurchased common stock from
our employees in connection with net issuance of shares to satisfy tax withholding obligations for
the vesting of certain RSUs and PSAs. There were immaterial repurchases in connection with net
issuances during the three months ended September 30, 2010. We repurchased approximately 0.1
million shares of common stock at an average price of $25.75 per share for an aggregate purchase
price of $1.9 million in connection with the net issuances during the nine months ended September
30, 2010. We repurchased an immaterial amount of common stock from our employees in connection with
net issuance of shares during the three and nine months ended September 30, 2009.
All shares of our common stock repurchased under our 2008 and 2010 stock repurchase programs and
from our employees in connection with net issuances have been retired. Future share repurchases
under our 2010 Stock Repurchase Program will be subject to a review of the circumstances in place
at that time and will be made from time to time in private transactions or open market purchases as
permitted by securities laws and other legal requirements. This program may be discontinued at any
time.
56
Summary of Cash Flows
In the nine months ended September 30, 2010, cash and cash equivalents decreased by $143.8 million.
This decrease was the result of cash used in our investing and financing activities of $467.1
million and $118.0 million, respectively, partially offset by cash generated by operations of
$441.3 million.
Operating Activities
We generated cash from operating activities of $441.3 million in the nine months ended September
30, 2010, compared to $536.5 million in the same period of 2009. This decrease was primarily due to
payment of the litigation settlement in the first quarter of 2010, higher income taxes paid, and
the timing of cash collections for the nine months ended September 30, 2010. These changes were
partially offset by higher net income.
Investing Activities
For the nine months ended September 30, 2010, net cash used by investing activities was $467.1
million compared to $830.0 million in the nine months ended September 30, 2009. The change was
primarily due to a decrease in net investment purchases in the nine months ended 2010 as compared
to the same period a year ago, partially offset by net cash payments for the acquisitions of
Ankeena and SMobile.
Financing Activities
Net cash used in financing activities was $118.0 million for the nine months ended September 30,
2010, compared to $107.0 million in the same period for 2009. The change was due to an increase in
cash used to repurchase our common stock through our stock repurchase programs, which was partially
offset by greater cash proceeds in 2010 from common stock issued to employees and, to a lesser
extent, the change in excess tax benefits from share-based compensation compared to the same period
a year ago.
Deferred Revenue
The following table summarizes our deferred product and service revenues (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Deferred product revenue:
|
|
|
|
|
|
|
|
|
Undelivered product commitments and other product deferrals
|
|
$
|
277.7
|
|
|
$
|
254.7
|
|
Distributor inventory and other sell-through items
|
|
|
128.2
|
|
|
|
136.6
|
|
|
|
|
|
|
|
|
Deferred gross product revenue
|
|
|
405.9
|
|
|
|
391.3
|
|
Deferred cost of product revenue
|
|
|
(147.7
|
)
|
|
|
(150.0
|
)
|
|
|
|
|
|
|
|
Deferred product revenue, net
|
|
|
258.2
|
|
|
|
241.3
|
|
Deferred service revenue
|
|
|
526.9
|
|
|
|
512.3
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
785.1
|
|
|
$
|
753.6
|
|
|
|
|
|
|
|
|
Deferred gross product revenue as of September 30, 2010, increased $14.6 million compared to
December 31, 2009, due to an increase in undelivered product commitments and other product
deferrals. Total deferred service revenue increased $14.6 million compared to December 31, 2009,
largely due to higher sales of service contracts and multi-year service billings.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 30, 2010.
57
Contractual Obligations
Our principal commitments primarily consist of obligations outstanding under operating leases,
purchase commitments, tax liabilities, and other contractual obligations.
Our contractual obligations under operating leases primarily relate to our leased facilities under
our non-cancelable operating leases. Rent payments are allocated to costs and operating expenses in
our condensed consolidated statements of operations. We occupy approximately 2.2 million square
feet worldwide under operating leases. The majority of our office space is in North America,
including our corporate headquarters in Sunnyvale, California. Our longest lease expires on
November 22, 2022. As of September 30, 2010, future minimum payments under our non-cancelable
operating leases, net of committed sublease income, were $278.6 million, of which $13.1 million
will be paid over the remaining three months of 2010.
In order to reduce manufacturing lead times and ensure adequate component supply, contract
manufacturers utilized by us place non-cancelable, non-returnable (NCNR) orders for components
based on our build forecasts. As of September 30, 2010, there were NCNR component orders placed by
the contract manufacturers with a value of $186.0 million. The contract manufacturers use the
components to build products based on our forecasts and on purchase orders that we have received
from customers. Generally, we do not own the components, and title to the products transfers from
the contract manufacturers to us and immediately to our customers upon delivery at a designated
shipment location. If the components remain unused or the products remain unsold for specified
period, we may incur carrying charges or obsolete materials charges for components that the
contract manufacturers purchased to build products to meet our forecast or customer orders. As of
September 30, 2010, we had accrued $21.2 million based on our estimate of such charges.
As of September 30, 2010, we had $102.2 million in current and long-term liabilities in the
condensed consolidated balance sheet for unrecognized tax positions. At this time, we are unable to
make a reasonably reliable estimate of the timing of payments related to the additional $102.2
million in liabilities due to uncertainties in the timing of tax audit outcomes.
As of September 30, 2010, other contractual obligations primarily consisted of indemnity- and
service-related escrows of $26.9 million, $14.1 million remaining balance for a data center hosting
agreement that requires payments through the end of April 2013, $9.1 million for license and
service agreements, and $7.7 million under a software subscription agreement that requires payments
through the end of January 2011.
Liquidity and Capital Resource Requirements
Liquidity and capital resources may be impacted by our operating activities as well as acquisitions
and investments in strategic relationships that we have made or we may make in the future.
Additionally, if we were to repurchase additional shares of our common stock under the 2010 Stock
Repurchase Program, our liquidity may be impacted. As of September 30, 2010, we have over 50% of
our cash and investment balances held outside of the U.S., which may be subject to U.S. taxes if
repatriated.
In August 2010, we filed a $1.5 billion shelf registration with the SEC. The filing replaced our
prior $1.0 billion shelf registration which had expired. The shelf registration is intended to give
us flexibility to take advantage of financing opportunities as needed or deemed desirable in light
of market conditions. Any offerings of securities will be made pursuant to a prospectus.
We have been focused on managing our annual equity usage as a percentage of the common stock
outstanding to align with peer group competitive levels and have made changes in recent years to
reduce the number of shares underlying the equity awards we grant. Our intention for fiscal years
2010 and 2011 is to target the number of shares underlying equity awards granted on an annual basis
at approximately three percent (3%) of our common stock outstanding. Based upon shares underlying
our grants to date of options, RSUs and PSAs (counting only the on-target measure of such
performance share awards), we believe we are on track with respect to this goal for 2010.
Based on past performance and current expectations, we believe that our existing cash and cash
equivalents, short-term, and long-term investments, together with cash generated from operations as
well as cash generated from the exercise of employee stock options and purchases under our employee
stock purchase plan will be sufficient to fund our operations and anticipated growth for at least
the next 12 months. We believe our working capital is sufficient to meet our liquidity requirements
for capital expenditures, commitments, and other liquidity requirements associated with our
existing operations during the same period. However, our future liquidity and capital requirements
may vary materially from those now planned depending on many factors, including:
|
|
|
level and mix of our product, sales, and gross profit margins;
|
|
|
|
|
our business, product, capital expenditures and R&D plans;
|
58
|
|
|
|
repurchases of our common stock;
|
|
|
|
|
incurrence and repayment of debt;
|
|
|
|
|
litigation expenses, settlements, and judgments, or similar items related to resolution
of tax audits;
|
|
|
|
|
volume price discounts and customer rebates;
|
|
|
|
|
accounts receivable levels that we maintain;
|
|
|
|
|
acquisitions and/or funding of other businesses, assets, products, or technologies;
|
|
|
|
|
changes in our compensation policies;
|
|
|
|
|
capital improvements for new and existing facilities;
|
|
|
|
|
technological advances;
|
|
|
|
|
our competitors responses to our products and/or pricing;
|
|
|
|
|
our relationships with supplies, partners, and customers;
|
|
|
|
|
possible future investments in raw material and finished goods inventories;
|
|
|
|
|
expenses related to future restructuring plans, if any;
|
|
|
|
|
tax expense associated with share-based awards;
|
|
|
|
|
issuance of share-based awards and the related payment in cash for withholding taxes in
the current year and possibly during future years;
|
|
|
|
|
level of exercises of stock options and stock purchases under our equity incentive
plans; and
|
|
|
|
|
general economic conditions and specific conditions in our industry and markets,
including the effects of disruptions in global credit and financial markets, international
conflicts, and related uncertainties.
|
Factors That May Affect Future Results
A description of the risk factors associated with our business is included under Risk Factors in
Item 1A of Part II of this report.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We maintain an investment portfolio of various holdings, types, and maturities. The values of our
investments are subject to market price volatility. In addition, as of September 30, 2010, over 50%
of our cash and marketable securities were held in non-U.S. domiciled countries. Our marketable
securities are generally classified as available-for-sale and, consequently, are recorded on our
condensed consolidated balance sheet at fair value with unrealized gains or losses reported as a
separate component of accumulated other comprehensive income (loss).
At any time, a rise in interest rates could have a material adverse impact on the fair value of our
investment portfolio. Conversely, declines in interest rates could have a material impact on
interest income from our investment portfolio. We do not currently hedge these interest rate
exposures. We recognized immaterial gains and losses during the three and nine months
ended September 30, 2010, and 2009, related to the sales of our investments.
59
Foreign Currency Risk and Foreign Exchange Forward Contracts
Periodically, we use derivatives to hedge against fluctuations in foreign exchange rates. We do not
enter into derivatives for speculative or trading purposes.
We use foreign currency forward contracts to mitigate variability in gains and losses generated
from the re-measurement of certain monetary assets and liabilities denominated in non-functional
currencies. These derivatives are carried at fair value with changes recorded in other income and
expense, net, in the same period as the changes in the fair value from the re-measurement of the
underlying assets and liabilities. These foreign exchange contracts have maturities of
approximately two months.
Our sales and costs of revenues are primarily denominated in U.S. dollars. Our cost of service
revenue and operating expenses are denominated in U.S. dollars as well as other foreign currencies
including the British Pound, Euro, Indian Rupee, and Japanese Yen. Periodically, we use foreign
currency forward and/or option contracts to hedge certain forecasted foreign currency transactions
relating to cost of service revenue and operating expenses. These derivatives are designated as
cash flow hedges and have maturities of less than one year. The effective portion of the
derivatives gain or loss is initially reported as a component of accumulated other comprehensive
income (loss) and, upon occurrence of the forecasted transaction, is subsequently reclassified into
the line item in the condensed consolidated statements of operations to which the hedged
transaction relates. We record the ineffectiveness of the hedging instruments, which was immaterial
during the three and nine months ended September 30, 2010, and 2009, in other income and expense,
net, on our condensed consolidated statements of operations. The change in operating expenses,
including cost of service revenue, R&D, sales and marketing, and G&A expenses, due to foreign
currency fluctuations was immaterial in the three months ended September 30, 2010, and
approximately 1% in the nine months ended September 30, 2010. The change in operating expenses,
including cost of service revenue, R&D, sales and marketing, and G&A expenses, due to foreign
currency fluctuations was 2% and 5% in each of the three and nine month periods ended September 30,
2009, respectively.
Equity Price Risk
Our portfolio of publicly-traded equity securities is inherently exposed to equity price risk as
the stock market fluctuates. We monitor our publicly-traded equity investments for impairment on a
periodic basis. In the event that the carrying value of a publicly-traded equity investment exceeds
its fair value, and we determine the decline in the value to be other than temporary, we reduce the
carrying value to its current fair value. We do not purchase our publicly-traded equity securities
with the intent to use them for trading or speculative purposes. They are classified as
available-for-sale securities in our condensed consolidated balance sheets
.
The aggregate fair
value of our marketable equity securities was $6.6 million and $5.4 million as of September 30,
2010, and December 31, 2009, respectively. Additionally, our non-qualified deferred compensation
(NQDC) plan may also hold publicly-traded securities. Investments under the NQDC plan are
considered trading securities and are reported at fair value on our condensed consolidated balance
sheets. As of September 30, 2010, and December 31, 2009, the total investment under the NQDC plan
was $7.2 million and $4.7 million, respectively. A hypothetical 30% adverse change in the stock
prices of our portfolio of publicly-traded equity securities would result in an immaterial loss.
In addition to publicly-traded equity securities, we have also invested in privately-held
companies. These investments are carried at cost. The aggregate cost of our investments in
privately-held companies was $18.7 million and $13.9 million as of September 30, 2010, and December
31, 2009, respectively.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Attached, as exhibits to this report are certifications of our principal executive officer and
principal financial officer, which are required in accordance with Rule 13a-14 of the Securities
Exchange Act of 1934, as amended (the Exchange Act). This Controls and Procedures section
includes information concerning the controls and related evaluations referred to in the
certifications and it should be read in conjunction with the certifications for a more complete
understanding of the topics presented.
We carried out an evaluation, under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, of the effectiveness of
the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act. Based upon that evaluation, our principal executive officer
and principal financial officer concluded that, as of the end of the period covered in this report,
our disclosure
controls and procedures were effective to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in Securities and Exchange Commission rules and forms
and is accumulated and communicated to our management, including our principal executive officer
and principal financial officer, as appropriate to allow timely decisions regarding required
disclosure.
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Changes in Internal Controls
We have initiated a multi-year implementation to upgrade certain key internal systems and
processes, including our company-wide human resources management system, customer relationship
management (CRM) system, and our enterprise resource planning (ERP) system. This project is the
result of our normal business process to evaluate and upgrade or replace our systems software and
related business processes to support our evolving operational needs. There were no changes in our
internal control over financial reporting that occurred during the third quarter of 2010 that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
does not expect that our disclosure controls or our internal control over financial reporting will
prevent or detect all error and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control systems objectives
will be met. Our controls and procedures are designed to provide reasonable assurance that our
control systems objective will be met and our CEO and CFO have concluded that our disclosure
controls and procedures are effective at the reasonable assurance level. The design of a control
system must reflect the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that misstatements due to error
or fraud will not occur or that all control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by collusion of two or
more people, or by management override of these controls. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events. Projections of any
evaluation of controls effectiveness to future periods are subject to risks. Over time, controls
may become inadequate because of changes in conditions or deterioration in the degree of compliance
with policies or procedures.
PART II OTHER INFORMATION
Item 1.
Legal Proceedings
The information set forth under Legal Proceedings section in Note 15 Commitments and
Contingencies in the Notes to Condensed Consolidated Financial Statements in Item 1 Part I of this
Quarterly Report on Form 10-Q, is incorporated herein by reference.
Item 1A.
Risk Factors
Factors That May Affect Future Results
Investments in equity securities of publicly-traded companies involve significant risks. The market
price of our stock has historically reflected a higher multiple of expected future earnings than
many other companies. Accordingly, even small changes in investor expectations for our future
growth and earnings, whether as a result of actual or rumored financial or operating results,
changes in the mix of the products and services sold, acquisitions, industry changes or other
factors, could trigger, and have triggered in the past, significant fluctuations in the market
price of our common stock. Investors in our securities should carefully consider all of the
relevant factors, including, but not limited to, the following factors, that could affect our stock
price.
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Our quarterly results are inherently unpredictable and subject to substantial fluctuations, and, as
a result, we may fail to meet the expectations of securities analysts and investors, which could
adversely affect the trading price of our common stock.
Our revenues and operating results may vary significantly from quarter-to-quarter due to a number
of factors, many of which are outside of our control and any of which may cause our stock price to
fluctuate.
The factors that may affect the unpredictability of our quarterly results include, but are not
limited to: limited visibility into customer spending plans, changes in the mix of products and
services sold, changes in geographies in which our products and services are sold, changing market
conditions, including current and potential customer consolidation, competition, customer
concentration, long sales and implementation cycles, regional economic and political conditions,
and seasonality. For example, many companies in our industry experience adverse seasonal
fluctuations in customer spending patterns, particularly in the first and third quarters.
As a result of these risk factors, we believe that quarter-to-quarter comparisons of operating
results are not necessarily a good indication of what our future performance will be. It is likely
that in some future quarters, our operating results may be below the expectations of securities
analysts or investors, in which case the price of our common stock may decline. Such a decline
could occur, and has occurred in the past, even when we have met our publicly stated revenues
and/or earnings guidance.
Fluctuating economic conditions make it difficult to predict revenues for a particular period and a
shortfall in revenues or increase in costs of production may harm our operating results.
Our revenues depend significantly on general economic conditions and the demand for products in the
markets in which we compete. Economic weakness, customer financial difficulties, and constrained
spending on network expansion and enterprise infrastructure have recently resulted, and may in the
future result, in decreased revenues and earnings and could negatively impact our ability to
forecast sales and operating results and our ability to forecast and manage our contract
manufacturer relationships. In addition, the recent recession and economic weakness, particularly
in the United States and Europe, as well as turmoil in the geopolitical environment in many parts
of the world, may continue to put pressure on global economic conditions, which could lead to
reduced demand for our products and/or higher costs of production. Economic weakness may also lead
to longer collection cycles for payments due from our customers, an increase in customer bad debt,
restructuring initiatives and associated expenses, and impairment of investments. Furthermore, the
continued weakness and uncertainty in worldwide credit markets may adversely impact the ability of
our customers to adequately fund their expected capital expenditures, which could lead to delays or
cancellations of planned purchases of our products or services. In addition, our operating expenses
are largely based on anticipated revenue trends and a high percentage of our expenses is, and will
continue to be, fixed in the short-term.
Uncertainty about future economic conditions makes it difficult to forecast operating results and
to make decisions about future investments. Future or continued economic weakness, failure of our
customers and markets to recover from such weakness, customer financial difficulties, increases in
costs of production, and reductions in spending on network maintenance and expansion could have a
material adverse effect on demand for our products and consequently on our business, financial
condition, and results of operations.
A limited number of our customers comprise a significant portion of our revenues and any decrease
in revenues from these customers could have an adverse effect on our net revenues and operating
results.
A substantial majority of our net revenues depend on sales to a limited number of customers and
distribution partners. For example, Verizon accounted for greater than 10% of our net revenues for
the nine months ended September 30, 2010. This customer concentration increases the risk of
quarterly fluctuations in our revenues and operating results. Changes in the business requirements,
vendor selection, financial prospects, capital resources, or purchasing behavior of our key
customers or potential new customers could significantly decrease sales to such customers or could
lead to delays or cancellations of planned purchases of our products or services. Any of these
factors could adversely affect our business, financial condition, and results of operations.
In addition, in recent years, there has been consolidation in the telecommunications industry (for
example, the acquisitions of AT&T, Inc., MCI, Inc., and BellSouth Corporation) and consolidation
among the large vendors of telecommunications equipment and services (for example, the acquisition
of Redback by Ericsson, the joint venture of NSN, and the acquisition of Foundry Networks by
Brocade). Such consolidation may cause our customers who are involved in these transactions to
suspend or indefinitely reduce their purchases of our products or have other unforeseen
consequences that could harm our business, financial condition, and results of operations.
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If we receive Infrastructure product orders late in a quarter, we may be unable to recognize
revenue for these orders in the same period, which could adversely affect our quarterly revenues.
Generally, our Infrastructure products are not stocked by distributors or resellers due to their
cost and complexity and configurations required by our customers, and we generally build such
products as orders are received. In recent years, the volume of orders received late in any given
quarter, which is unpredictable, has continued to increase. If orders for these products are
received late in any quarter, we may not be able to build, ship, and recognize revenue for these
orders in the same period, which could adversely affect our ability to meet our expected revenues
for such quarter.
The long sales and implementation cycles for our products, as well as our expectation that some
customers will sporadically place large orders with short lead times, may cause our revenues and
operating results to vary significantly from quarter-to-quarter.
A customers decision to purchase certain of our products involves a significant commitment of its
resources and a lengthy evaluation and product qualification process. As a result, the sales cycle
may be lengthy. In particular, customers making critical decisions regarding the design and
implementation of large network deployments may engage in very lengthy procurement processes that
may delay or impact expected future orders. Throughout the sales cycle, we may spend considerable
time educating and providing information to prospective customers regarding the use and benefits of
our products. Even after making the decision to purchase, customers may deploy our products slowly
and deliberately. Timing of deployment can vary widely and depends on the skill set of the
customer, the size of the network deployment, the complexity of the customers network environment,
and the degree of hardware and operating system configuration necessary to deploy the products.
Customers with large networks usually expand their networks in large increments on a periodic
basis. Accordingly, we may receive purchase orders for significant dollar amounts on an irregular
basis. These long cycles, as well as our expectation that customers will tend to sporadically place
large orders with short lead times, may cause revenues and operating results to vary significantly
and unexpectedly from quarter-to-quarter.
We face intense competition that could reduce our revenues and adversely affect our financial
results.
Competition is intense in the markets that we address. The infrastructure market has historically
been dominated by Cisco with other companies such as Alcatel-Lucent, Brocade, Ericsson, Extreme
Networks, Hewlett Packard Company, and Huawei providing products to a smaller segment of the
market. In addition, a number of other small public and private companies have products or have
announced plans for new products to address the same challenges and markets that our products
address.
In the SLT market, we face intense competition from a broader group of companies such as
CheckPoint, Cisco, Fortinet, F5 Networks, and Riverbed. In addition, a number of other small public
and private companies have products or have announced plans for new products to address the same
challenges and markets that our products address.
In addition, actual or speculated consolidation among competitors, or the acquisition of our
partners and/or resellers by competitors, can increase the competitive pressures faced by us. In
this regard, Ericsson acquired Redback in 2007, and Brocade acquired Foundry Networks in 2009. A
number of our competitors have substantially greater resources and can offer a wider range of
products and services for the overall network equipment market than we do. If we are unable to
compete successfully against existing and future competitors on the basis of product offerings or
price, we could experience a loss in market share and revenues and/or be required to reduce prices,
which could reduce our gross margins, and which could materially and adversely affect our business,
financial condition, and results of operations.
We rely on value-added resellers, distribution, and original equipment manufacturer partners to
sell our products, and disruptions to, or our failure to effectively develop and manage our
distribution channel and the processes and procedures that support it could adversely affect our
ability to generate revenues from the sale of our products.
Our future success is highly dependent upon establishing and maintaining successful relationships
with a variety of value-added reseller and distribution partners, including our worldwide strategic
partners such as Ericsson, IBM, and NSN. The majority of our revenues are derived through
value-added resellers and distributors, most of which also sell competitors products. Our revenues
depend in part on the performance of these partners. The loss of or reduction in sales to our
value-added resellers or distributors could materially reduce our revenues. For example, in 2006,
one of our largest resellers, Lucent, merged with Alcatel, a competitor of ours. As a result of
becoming a competitor, their resale of our products declined subsequent to the merger, and we
ultimately terminated our reseller agreement. Our competitors may in some cases be effective in
providing incentives to current or potential resellers and distributors to favor their products or
to prevent or reduce sales of our products. If
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we fail to develop and maintain relationships with our partners, fail to develop new relationships
with value-added resellers and distributors in new markets, or expand the number of distributors
and resellers in existing markets, fail to manage, train or motivate existing value-added resellers
and distributors effectively, or if these partners are not successful in their sales efforts, sales
of our products may decrease, and our business, financial condition, and results of operations
would suffer.
In addition, we recognize a portion of our revenues based on a sell-through model using information
provided by our distributors. If those distributors provide us with inaccurate or untimely
information, the amount or timing of our revenues could be adversely impacted.
Further, in order to develop and expand our distribution channel, we must continue to scale and
improve our processes and procedures that support it, and those processes and procedures may become
increasingly complex and inherently difficult to manage. For example, we recently entered into an
agreement to form a joint venture with NSN to develop and resell joint carrier Ethernet solutions
and entered into OEM agreements with Dell and IBM where they will rebrand and resell our products
as part of their product portfolios. These relationships are complex and require additional
processes and procedures that may be challenging and costly to implement, maintain and manage. Our
failure to successfully manage and develop our distribution channel and the processes and
procedures that support it could adversely affect our ability to generate revenues from the sale of
our products.
Our ability to process orders and ship products in a timely manner is dependent in part on our
business systems and performance of the systems and processes of third parties such as our contract
manufacturers, suppliers, or other partners, as well as interfaces with the systems of such third
parties. If our systems, the systems and processes of those third parties, or the interfaces
between them experience delays or fail, our business processes and our ability to build and ship
products could be impacted, and our financial results could be harmed.
Some of our business processes depend upon our IT systems, the systems and processes of third
parties, and on interfaces with the systems of third parties. For example, our order entry system
feeds information into the systems of our contract manufacturers, which enable them to build and
ship our products. If those systems fail or are interrupted, our processes may function at a
diminished level or not at all. This could negatively impact our ability to ship products or
otherwise operate our business, and our financial results could be harmed. For example, although it
did not adversely affect our shipments, an earthquake in late December of 2006 disrupted
communications with China, where a significant part of our manufacturing occurs.
We also rely upon the performance of the systems and processes of our contract manufacturers to
build and ship our products. If those systems and processes experience interruption or delay, our
ability to build and ship our products in a timely manner may be harmed. For example, as we have
expanded our contract manufacturing base to China, we have experienced instances where our contract
manufacturer was not able to ship products in the time periods expected by us. If we are not able
to ship our products or if product shipments are delayed, our ability to recognize revenue in a
timely manner for those products would be affected and our financial results could be harmed.
Upgrades to key internal systems and processes, and problems with the design or implementation of
these systems and processes could interfere with our business and operations.
We previously initiated a multi-year project to upgrade certain key internal systems and processes,
including our company-wide human resources management system, our customer relationship management
(CRM) system and enterprise resource planning (ERP) system. In the first quarter of 2010, we
implemented a major upgrade of our CRM system. We have invested, and will continue to invest,
significant capital and human resources in the design and implementation of these systems and
processes, which may be disruptive to our underlying business. Any disruptions or delays in the
design and implementation of the new systems or processes, particularly any disruptions or delays
that impact our operations, could adversely affect our ability to process customer orders, ship
products, provide service and support to our customers, bill and track our customers, fulfill
contractual obligations, record and transfer information in a timely and accurate manner, file SEC
reports in a timely manner, or otherwise run our business. Even if we do not encounter these
adverse effects, the design and implementation of these new systems and processes may be much more
costly than we anticipated. If we are unable to successfully design and implement these new systems
and processes as planned, or if the implementation of these systems and processes is more costly
than anticipated, our business, financial condition, and results of operations could be negatively
impacted.
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Governmental regulations affecting the import or export of products or affecting products
containing encryption capabilities could negatively affect our revenues.
The United States and various foreign governments have imposed controls, export license
requirements, and restrictions on the import or export of some technologies, especially encryption
technology. In addition, from time to time, governmental agencies have proposed additional
regulation of encryption technology, such as requiring certification, notifications, review of
source code, or the escrow and governmental recovery of private encryption keys. For example,
Russia and China recently have implemented new requirements relating to products containing
encryption and India has imposed special warranty and other obligations associated with technology
deemed critical. Governmental regulation of encryption technology and regulation of imports or
exports, or our failure to obtain required import or export approval for our products, could harm
our international and domestic sales and adversely affect our revenues. In addition, failure to
comply with such regulations could result in penalties, costs, and restrictions on import or export
privileges or adversely affect sales to government agencies or government funded projects.
We expect gross margin to vary over time, and our recent level of product gross margin may not be
sustainable.
Our product gross margins will vary from quarter-to-quarter, and the recent level of gross margins
may not be sustainable and may be adversely affected in the future by numerous factors, including
product mix shifts, increased price competition in one or more of the markets in which we compete,
increases in material or labor costs, excess product component or obsolescence charges from our
contract manufacturers, increased costs due to changes in component pricing or charges incurred due
to component holding periods if our forecasts do not accurately anticipate product demand, warranty
related issues, or our introduction of new products or entry into new markets with different
pricing and cost structures.
We are dependent on sole source and limited source suppliers for several key components, which
makes us susceptible to shortages or price fluctuations in our supply chain, and we may face
increased challenges in supply chain management in the future.
During periods of high demand for electronic products, component shortages are possible, and the
predictability of the availability of such components may be limited. In addition, during the
recent economic downturn, many component suppliers reduced their workforces and production capacity
and may not be able to increase production in the short run as rapidly as demand increases,
resulting in increased delivery periods and component shortages. Any future growth in our business
and the economy is likely to create greater pressures on us and our suppliers to accurately project
overall component demand and to establish optimal component levels. If shortages or delays persist,
the price of these components may increase, or the components may not be available at all. We may
not be able to secure enough components at reasonable prices or of acceptable quality to build new
products in a timely manner, and our revenues and gross margins could suffer until other sources
can be developed. For example, from time to time, including the first quarter of 2008, we have
experienced component shortages that resulted in delays of product shipments. We currently purchase
numerous key components, including ASICs, from single or limited sources. The development of
alternate sources for those components is time-consuming, difficult, and costly. In addition, the
lead times associated with certain components are lengthy and preclude rapid changes in quantities
and delivery schedules. In the event of a component shortage or supply interruption from these
suppliers, we may not be able to develop alternate or second sources in a timely manner. If, as a
result, we are unable to buy these components in quantities sufficient to meet our requirements on
a timely basis, we will not be able to deliver product to our customers, which would seriously
affect present and future sales, which would, in turn, adversely affect our business, financial
condition, and results of operations.
In addition, the development, licensing, or acquisition of new products in the future may increase
the complexity of supply chain management. Failure to effectively manage the supply of key
components and products would adversely affect our business.
If we do not successfully anticipate market needs and opportunities, and develop products and
product enhancements that meet those needs and opportunities, or if those products are not made
available in a timely manner or do not gain market acceptance, we may not be able to compete
effectively and our ability to generate revenues will suffer.
We cannot guarantee that we will be able to anticipate future market needs and opportunities or be
able to develop new products or product enhancements to meet such needs or opportunities in a
timely manner or at all. If we fail to anticipate market requirements or fail to develop and
introduce new products or product enhancements to meet those needs in a timely manner, such failure
could substantially decrease or delay market acceptance and sales of our present and future
products, which would significantly harm our business, financial condition, and results of
operations. Even if we are able to anticipate, develop, and commercially introduce new products and
enhancements, there can be no assurance that new products or enhancements will
achieve widespread market acceptance.
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For example, in 2008, we announced new products designed to address the Ethernet switching market,
a market in which we had not had a historical presence. In addition, in 2009, we announced plans to
develop and introduce new data center products with our Project Stratus and mobility solutions with
our Project Falcon. If these or other new products do not gain market acceptance at a sufficient
rate of growth, our ability to meet future financial targets may be adversely affected. In
addition, if we fail to achieve market acceptance deliver new or announced products to the market
in a timely manner, it could adversely affect the market acceptance of those products and harm our
competitive position and our business and financial results.
Changes in effective tax rates or adverse outcomes resulting from examination of our income or
other tax returns could adversely affect our results.
Our future effective tax rates could be subject to volatility or adversely affected by: earnings
being lower than anticipated in countries where we have lower statutory rates and higher than
anticipated earnings in countries where we have higher statutory rates; changes in the valuation of
our deferred tax assets and liabilities; expiration of or lapses in the R&D tax credit laws;
transfer pricing adjustments related to certain acquisitions including the license of acquired
intangibles under our intercompany R&D cost sharing arrangement; tax effects of share-based
compensation; costs related to intercompany restructurings; or changes in tax laws, regulations,
accounting principles, or interpretations thereof. In addition, we are subject to the continuous
examination of our income tax returns by the Internal Revenue Service (IRS) and other tax
authorities. We regularly assess the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for income taxes. There can be no assurance
that the outcomes from these continuous examinations will not have an adverse effect on our
business, financial condition, and results of operations.
For example, in 2009, we received a proposed adjustment from the IRS claiming that we owe
additional taxes, plus interest and possible penalties, for the 2004 tax year based on a transfer
pricing transaction related to the license of acquired intangibles under an intercompany R&D cost
sharing arrangement. As a result of the proposed adjustment, the incremental tax liability would be
approximately $807 million excluding interest and penalties. We strongly believe the IRS position
with regard to this matter is inconsistent with applicable tax laws and existing Treasury
regulations, and that our previously reported income tax provision for the year in question is
appropriate. However, there can be no assurance that this matter will be resolved in our favor.
Regardless of whether this matter is resolved in our favor, the final resolution of this matter
could be expensive and time-consuming to defend and/or settle. While we believe we have provided
adequately for this matter, there is a possibility that an adverse outcome of the matter could have
a material effect on our results of operations and financial condition.
Telecommunications companies and other large companies generally require more onerous terms and
conditions of their vendors. As we seek to sell more products to such customers, we may be required
to agree to terms and conditions that could have an adverse effect on our business or ability to
recognize revenues.
Telecommunications service provider companies and other large companies, because of their size,
generally have greater purchasing power and, accordingly, have requested and received more
favorable terms, which often translate into more onerous terms and conditions for their vendors. As
we seek to sell more products to this class of customer, we may be required to agree to such terms
and conditions, which may include terms that affect the timing of our ability to recognize revenue
and have an adverse effect on our business, financial condition, and results of operations.
Consolidation among such large customers can further increase their buying power and ability to
require onerous terms.
For example, many customers in this class have purchased products from other vendors who promised
but failed to deliver certain functionality and/or had products that caused problems or outages in
the networks of these customers. As a result, this class of customers may request additional
features from us and require substantial penalties for failure to deliver such features or may
require substantial penalties for any network outages that may be caused by our products. These
additional requests and penalties, if we are required to agree to them, require us to defer revenue
recognition from such sales, which may negatively affect our business, financial condition, and
results of operations.
We adopted Accounting Standards Update (ASU) No. 2009-13, Topic 605
Multiple-Deliverable
Revenue Arrangements
(ASU 2009-13) and ASU No. 2009-14, Topic 985
Certain Revenue Arrangements
That Include Software Elements
(ASU 2009-14) on a prospective basis as of the beginning of fiscal
2010 for new and materially modified arrangements originating after December 31, 2009. Under these
new rules, we allocate revenue to each element of a multiple element arrangement based on a selling
price hierarchy. The selling price for a deliverable is based on its vendor-specific objective
evidence (VSOE) if available, third-party evidence (TPE) if VSOE is not available, or estimated
selling price if neither VSOE nor TPE is available. We allocate each separable element of an
arrangement to the total arrangement consideration. While the new standards allow us to recognize
revenue related to elements that have been delivered, we are required to defer revenue allocated
to undelivered elements as of the balance sheet date.
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For multiple element arrangements entered into prior to the first quarter of 2010, our accounting
policies require VSOE of selling price of the undelivered elements to separate the components and
to account for elements of the arrangement separately. However, customers may require terms and
conditions that make it more difficult or impossible for us to maintain VSOE for the undelivered
elements to a similar group of customers, the result of which could cause us to defer the entire
arrangement fees for a similar group of customers (product, maintenance, professional services,
etc.) and recognize revenue only when the last element is delivered, or if the only undelivered
element is maintenance revenue, we would recognize revenue ratably over the contractual maintenance
period, which is generally one year, but could be substantially longer.
If we fail to accurately predict our manufacturing requirements, we could incur additional costs or
experience manufacturing delays, which would harm our business.
We provide demand forecasts to our contract manufacturers and the manufacturers order components
and plan capacity based on these forecasts. If we overestimate our requirements, our contract
manufacturers may assess charges, or we may have liabilities for excess inventory, each of which
could negatively affect our gross margins. Conversely, because lead times for required materials
and components vary significantly and depend on factors such as the specific supplier, contract
terms, and the demand for each component at a given time, if we underestimate our requirements, as
we did in the third quarter of 2010 with respect to certain components, our contract manufacturers
may have inadequate time, materials, and/or components required to produce our products, which
could increase costs or could delay or interrupt manufacturing of our products and result in delays
in shipments and deferral or loss of revenues.
We are dependent on contract manufacturers with whom we do not have long-term supply contracts, and
changes to those relationships, expected or unexpected, may result in delays or disruptions that
could cause us to lose revenues and damage our customer relationships.
We depend on independent contract manufacturers (each of which is a third-party manufacturer for
numerous companies) to manufacture our products. Although we have contracts with our contract
manufacturers, those contracts do not require them to manufacture our products on a long-term basis
in any specific quantity or at any specific price. In addition, it is time-consuming and costly to
qualify and implement additional contract manufacturer relationships. Therefore, if we fail to
effectively manage our contract manufacturer relationships or if one or more of them experiences
delays, disruptions, or quality control problems in our manufacturing operations, or if we had to
change or add additional contract manufacturers or contract manufacturing sites, our ability to
ship products to our customers could be delayed. Also, the addition of manufacturing locations or
contract manufacturers would increase the complexity of our supply chain management. Moreover, an
increasing portion of our manufacturing is performed in China and other countries and is therefore
subject to risks associated with doing business in other countries. Each of these factors could
adversely affect our business, financial condition, and results of operations.
Our ability to develop, market, and sell products could be harmed if we are unable to retain or
hire key personnel.
Our future success depends upon our ability to recruit and retain the services of executive,
engineering, sales and marketing, and support personnel. The supply of highly qualified
individuals, in particular engineers in very specialized technical areas, or sales people
specializing in the service provider and enterprise markets, is limited and competition for such
individuals is intense. None of our officers or key employees is bound by an employment agreement
for any specific term. The loss of the services of any of our key employees, the inability to
attract or retain personnel in the future or delays in hiring required personnel, particularly
engineers and sales people, and the complexity and time involved in replacing or training new
employees, could delay the development and introduction of new products, and negatively impact our
ability to market, sell, or support our products.
We are a party to lawsuits, which are costly to defend and, if determined adversely to us, could
require us to pay damages or prevent us from taking certain actions, any or all of which could harm
our business, financial condition, and results of operations.
We and certain of our current and former officers and current and former members of our Board of
Directors are subject to various lawsuits. For example, we are a party to a number of patent
infringement and other lawsuits. In addition, we have been served with lawsuits related to certain
matters related to securities, a description of which can be found in Note 15,
Commitments and
Contingencies,
in Notes to Condensed Consolidated Financial Statements of this Quarterly Report on
Form 10-Q, under the heading Legal Proceedings. There can be no assurance that these or any
actions that have been or may be brought against us will be resolved in our favor or that tentative
settlements will become final. Regardless of whether they are resolved in our favor, these lawsuits
are, and any future lawsuits to which we may become a party will likely be, expensive and
67
time-consuming to defend, settle, and/or resolve. Such costs of defense, as well as any losses
resulting from these claims or settlement of these claims, could significantly increase our
expenses and could harm our business, financial condition, and results of operations.
Litigation or claims regarding intellectual property rights may be time
-
consuming, expensive and
require a significant amount of resources to prosecute, defend, or make our products
non-infringing.
Third parties have asserted and may in the future assert claims or initiate litigation related to
patent, copyright, trademark, and other intellectual property rights to technologies and related
standards that are relevant to our products. The asserted claims and/or initiated litigation may
include claims against us or our manufacturers, suppliers, partners, or customers, alleging that
our products or services infringe proprietary rights. Regardless of the merit of these claims, they
have been and can be time consuming, result in costly litigation, and may require us to develop
non-infringing technologies or enter into license agreements. Furthermore, because of the potential
for high awards of damages or injunctive relief that are not necessarily predictable, even arguably
unmeritorious claims may be settled for significant amounts of money. If any infringement or other
intellectual property claim made against us by any third-party is successful, if we are required to
settle litigation for significant amounts of money, or if we fail to develop non-infringing
technology or license required proprietary rights on commercially reasonable terms and conditions,
our business, financial condition, and results of operations could be materially and adversely
affected.
Integration of acquisitions could disrupt our business and harm our financial condition and stock
price and may dilute the ownership of our stockholders.
We have made, and may continue to make, acquisitions in order to enhance our business. For example,
in April 2010 we acquired Ankeena Networks Inc., in July 2010 we acquired SMobile Systems, Inc.,
and in 2005 we completed the acquisitions of five other privately-held companies. Acquisitions
involve numerous risks, including problems combining the purchased operations, technologies or
products, unanticipated costs, diversion of managements attention from our core businesses,
adverse effects on existing business relationships with suppliers and customers, risks associated
with entering markets in which we have no or limited prior experience, and potential loss of key
employees. There can be no assurance that we will be able to integrate successfully any businesses,
products, technologies, or personnel that we might acquire. The integration of businesses that we
may acquire is likely to be, a complex, time-consuming, and expensive process. Acquisitions may
also require us to issue common stock or assume equity awards that dilute the ownership of our
current stockholders, assume liabilities, record goodwill and amortizable intangible assets that
will be subject to impairment testing on a regular basis and potential periodic impairment charges,
incur amortization expenses related to certain intangible assets, and incur large and immediate
write-offs and restructuring and other related expenses, all of which could harm our financial
condition and results of operations.
In addition, if we fail in any acquisition integration efforts and are unable to efficiently
operate as a combined organization utilizing common information and communication systems,
operating procedures, financial controls, and human resources practices, our business, financial
condition, and results of operations may be adversely affected.
Our success depends upon our ability to effectively plan and manage our resources and restructure
our business through rapidly fluctuating economic and market conditions.
Our ability to successfully offer our products and services in a rapidly evolving market requires
an effective planning, forecasting, and management process to enable us to effectively scale and
adjust our business in response to fluctuating market opportunities and conditions. In periods of
market expansion, we have increased investment in our business by, for example, increasing
headcount and increasing our investment in R&D and other parts of our business as we have in the
first nine months of 2010. Conversely, during 2009, in response to downward trending industry and
market conditions, we restructured our business, rebalanced our workforce, and reduced our real
estate portfolio. Many of our expenses, such as real estate expenses, cannot be rapidly or easily
adjusted because of fluctuations in our business or numbers of employees. Moreover, rapid changes
in the size of our workforce could adversely affect the ability to develop and deliver products and
services as planned or impair our ability to realize our current or future business objectives.
We sell our products to customers that use those products to build networks and IP infrastructure,
and if the demand for network and IP systems does not continue to grow, then our business,
financial condition, and results of operations could be adversely affected.
A substantial portion of our business and revenues depends on the growth of secure IP
infrastructure and on the deployment of our products by customers that depend on the continued
growth of IP services. As a result of changes in the economy and capital spending or the building
of network capacity in excess of demand, all of which have in the past particularly affected
telecommunications service providers, spending on IP infrastructure can vary, which could have a
material adverse effect on our business, financial condition, and results of operations. In
addition, a number of our existing customers are evaluating the build
68
out of their next generation networks. During the decision-making period when the customers are
determining the design of those networks and the selection of the equipment they will use in those
networks, such customers may greatly reduce or suspend their spending on secure IP infrastructure.
Such delays in purchases can make it more difficult to predict revenues from such customers, can
cause fluctuations in the level of spending by these customers and, even where our products are
ultimately selected, can have a material adverse effect on our business, financial condition, and
results of operations.
A breach of network security could harm public perception of our security products, which could
cause us to lose revenues.
If an actual or perceived breach of network security occurs in our network or in the network of a
customer of our security products, regardless of whether the breach is attributable to our
products, the market perception of the effectiveness of our products could be harmed. This could
cause us to lose current and potential end-customers or cause us to lose current and potential
value-added resellers and distributors. Because the techniques used by computer hackers to access
or sabotage networks change frequently and generally are not recognized until launched against a
target, we may be unable to anticipate these techniques.
We are subject to risks arising from our international operations, which may adversely affect our
business and results of operations.
We derive a majority of our revenues from our international operations, and we plan to continue
expanding our business in international markets in the future. We conduct significant sales and
customer support operations directly and indirectly through our distributors and value-added
resellers in countries throughout the world and depend on the operations of our contract
manufacturers and suppliers that are located inside and outside of the United States. In addition,
our R&D and our general and administrative operations are conducted in the United States as well as
other countries.
As a result of our international operations, we are affected by economic, regulatory, social, and
political conditions
in foreign countries, including changes in general IT spending, the imposition of government
controls, changes or limitations in trade protection laws, other regulatory requirements, which may
affect our ability to import or export our products from various countries, service provider and
government spending patterns affected by political considerations, unfavorable changes in tax
treaties or laws, natural disasters, epidemic disease, labor unrest, earnings expatriation
restrictions, misappropriation of intellectual property, military actions, acts of terrorism,
political and social unrest and difficulties in staffing and managing international operations. In
particular, in some countries, we may experience reduced intellectual property protection. Any or
all of these factors could have a material adverse impact on our business, financial condition, and
results of operations.
Moreover, local laws and customs in many countries differ significantly from those in the United
States. In many foreign countries, particularly in those with developing economies, it is common
for others to engage in business practices that are prohibited by our internal policies and
procedures or United States regulations applicable to us. Although we implement policies and
procedures designed to ensure compliance with these laws and policies, there can be no assurance
that none of our employees, contractors, and agents will take actions in violation of such policies
and procedures. Violations of laws or key control policies by our employees, contractors, or agents
could result in financial reporting problems, fines, penalties, or prohibition on the importation
or exportation of our products and could have a material adverse effect on our business.
We are exposed to fluctuations in currency exchange rates, which could negatively affect our
financial condition and results of operations.
Because a majority of our business is conducted outside the United States, we face exposure to
adverse movements in non-U.S. currency exchange rates. These exposures may change over time as
business practices evolve and could have a material adverse impact on our financial condition and
results of operations.
The majority of our revenues and expenses are transacted in U.S. Dollars. We also have some
transactions that are denominated in foreign currencies, primarily the British Pound, the Euro,
Indian Rupee, and Japanese Yen related to our sales and service operations outside of the United
States. An increase in the value of the U.S. Dollar could increase the real cost to our customers
of our products in those markets outside the United States in which we sell in U.S. Dollars, and a
weakened U.S. Dollar could increase the cost of local operating expenses and procurement of raw
materials to the extent we must purchase components in foreign currencies.
Currently, we hedge only those currency exposures associated with certain assets and liabilities
denominated in nonfunctional currencies and periodically will hedge anticipated foreign currency
cash flows. The hedging activities undertaken by us are intended to offset the impact of currency
fluctuations on certain nonfunctional currency assets and liabilities. However, no amount of
hedging can be effective against all circumstances, including long-term declines in the value of
the U.S. Dollar. If our attempts to hedge against these risks are not successful, or if long-term
declines in the value of the U.S. Dollar persist, our
financial condition and results of operations could be adversely impacted.
69
If we fail to adequately evolve our financial and managerial control and reporting systems and
processes, our ability to manage and grow our business will be negatively affected.
Our ability to successfully offer our products and implement our business plan in a rapidly
evolving market depends upon an effective planning and management process. We will need to continue
to improve our financial and managerial control and our reporting systems and procedures in order
to manage our business effectively in the future. If we fail to continue to implement improved
systems and processes, our ability to manage our business, financial condition, and results of
operations may be negatively affected.
Regulation of the telecommunications industry could harm our operating results and future
prospects.
The telecommunications industry is highly regulated, and our business and financial condition could
be adversely affected by changes in the regulations relating to the telecommunications industry.
Currently, there are few laws or regulations that apply directly to access to or commerce on IP
networks. We could be adversely affected by regulation of IP networks and commerce in any country
where we operate. Moreover, regulations limiting the range of services and business models that can
be offered by service providers or content providers could adversely affect those customers need
for products designed to enable a wide range of such services or business models. Such regulations
could address matters such as voice over the Internet or using IP, encryption technology, and
access charges for service providers. In addition, regulations have been adopted with respect to
environmental matters, such as the Waste Electrical and Electronic Equipment (WEEE) Directive,
Restriction of Hazardous Substances (RoHS), and Registration, Evaluation, Authorization, and
Restriction of Chemicals (REACH) regulations adopted by the European Union, as well as
regulations prohibiting government entities from purchasing security products that do not meet
specified local certification criteria. Similar regulations are in effect or under consideration in
other jurisdictions where we do business. Compliance with such regulations may be costly and
time-consuming for us and our suppliers and partners. The adoption and implementation of such
regulations could decrease demand for our products, and at the same time could increase the cost of
building and selling our products as well as impact our ability to ship products into affected
areas and recognize revenue in a timely manner, which could have a material adverse effect on our
business, financial condition, and results of operations.
Our products are highly technical and if they contain undetected errors, our business could be
adversely affected, and we may need to defend lawsuits or pay damages in connection with any
alleged or actual failure of our products and services.
Our products are highly technical and complex, are critical to the operation of many networks, and,
in the case of our security products, provide and monitor network security and may protect valuable
information. Our products have contained and may contain one or more undetected errors, defects, or
security vulnerabilities. Some errors in our products may only be discovered after a product has
been installed and used by end-customers. Any errors, defects, or security vulnerabilities
discovered in our products after commercial release could result in loss of revenues or delay in
revenue recognition, loss of customers, loss of future business, and increased service and warranty
cost, any of which could adversely affect our business, financial condition, and results of
operations. In addition, in the event an error, defect, or vulnerability is attributable to a
component supplied by a third-party vendor, we may not be able to recover from the vendor all of
the costs of remediation that we may incur. In addition, we could face claims for product
liability, tort, or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and
may divert managements attention. In addition, if our business liability insurance coverage is
inadequate, or future coverage is unavailable on acceptable terms or at all, our financial
condition and results of operations could be harmed.
If our products do not interoperate with our customers networks, installations will be delayed or
cancelled and could harm our business.
Our products are designed to interface with our customers existing networks, each of which have
different specifications and utilize multiple protocol standards and products from other vendors.
Many of our customers networks contain multiple generations of products that have been added over
time as these networks have grown and evolved. Our products must interoperate with many or all of
the products within these networks as well as future products in order to meet our customers
requirements. If we find errors in the existing software or defects in the hardware used in our
customers networks, we may need to modify our software or hardware to fix or overcome these errors
so that our products will interoperate and scale with the existing software and hardware, which
could be costly and could negatively affect our business, financial condition, and results of
operations. In addition, if our products do not interoperate with those of our customers networks,
demand for our products could be adversely affected or orders for our products could be cancelled.
This could hurt our operating results, damage our reputation, and seriously harm our business and
prospects.
70
Our products incorporate and rely upon licensed third-party technology, and if licenses of
third-party technology do not continue to be available to us or become very expensive, our revenues
and ability to develop and introduce new products could be adversely affected.
We integrate licensed third-party technology into certain of our products. From time to time, we
may be required to license additional technology from third-parties to develop new products or
product enhancements. Third-party licenses may not be available or continue to be available to us
on commercially reasonable terms. The failure to comply with the terms of any license may result in
our inability to continue to use such license. Our inability to maintain or re-license any
third-party licenses required in our products or our inability to obtain third-party licenses
necessary to develop new products and product enhancements, could require us to develop substitute
technology or obtain substitute technology of lower quality or performance standards or at a
greater cost, any of which could impact product shipment and harm our business, financial
condition, and results of operations.
Our financial condition and results of operations could suffer if there is an additional impairment
of goodwill or other intangible assets with indefinite lives.
We are required to test annually and review on an interim basis, our goodwill and intangible assets
with indefinite lives, including the goodwill associated with past acquisitions and any future
acquisitions, to determine if impairment has occurred. If such assets are deemed impaired, an
impairment loss equal to the amount by which the carrying amount exceeds the fair value of the
assets would be recognized. This would result in incremental expenses for that quarter, which would
reduce any earnings or increase any loss for the period in which the impairment was determined to
have occurred. For example, such impairment could occur if the market value of our common stock
falls below certain levels for a sustained period, or if the portions of our business related to
companies we have acquired fail to grow at expected rates or decline. In the second quarter of
2006, our impairment evaluation resulted in a reduction of $1,280.0 million to the carrying value
of goodwill on our balance sheet for the SLT operating segment, primarily due to the decline in our
market capitalization that occurred over a period of approximately nine months prior to the
impairment review and, to a lesser extent, a decrease in the forecasted future cash flows used in
the income approach. Recently, economic weakness contributed to extreme price and volume
fluctuations in global stock markets that reduced the market price of many technology company
stocks, including ours. Future declines in our stock price, as well as any marked decline in our
level of revenues or gross margins, increase the risk that goodwill and intangible assets may
become impaired in future periods. We cannot accurately predict the amount and timing of any
impairment of assets.
While we believe that we currently have adequate internal control over financial reporting, we are
exposed to risks from legislation requiring companies to evaluate those internal controls.
Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our
independent auditors to attest to, the effectiveness of our internal control over financial
reporting. We have an ongoing program to perform the system and process evaluation and testing
necessary to comply with these requirements. We have and will continue to incur significant
expenses and devote management resources to Section 404 compliance on an ongoing basis. In the
event that our CEO, CFO, or independent registered public accounting firm determine in the future
that, our internal controls over financial reporting are not effective as defined under Section
404, investor perceptions may be adversely affected and could cause a decline in the market price
of our stock.
The investment of our cash balance and our investments in government and corporate debt securities
are subject to risks, which may cause losses and affect the liquidity of these investments.
At September 30, 2010, we had $1,460.9 million in cash and cash equivalents and $1,237.6 million in
short- and long-term investments. We have invested these amounts primarily in U.S. government
securities, government-sponsored enterprise obligations, foreign government debt securities,
corporate notes and bonds, commercial paper, and money market funds meeting certain criteria.
Certain of these investments are subject to general credit, liquidity, market, and interest rate
risks, which may be exacerbated by U.S. sub-prime mortgage defaults that have affected various
sectors of the financial markets and caused credit and liquidity issues at many financial
institutions. These market risks associated with our investment portfolio may have a negative
adverse effect on our liquidity, financial condition, and results of operations.
Uninsured losses could harm our operating results.
We self-insure against many business risks and expenses, such as intellectual property litigation
and our medical benefit programs, where we believe we can adequately self-insure against the
anticipated exposure and risk or where insurance is either not deemed cost-effective or is not
available. We also maintain a program of insurance coverage for various types of property,
casualty, and other risks. We place our insurance coverage with various carriers in numerous
jurisdictions. The types and
71
amounts of insurance that we obtain vary from time to time and from location to location, depending
on availability, cost, and our decisions with respect to risk retention. The policies are subject
to deductibles, policy limits, and exclusions that result in our retention of a level of risk on a
self-insurance basis. Losses not covered by insurance could be substantial and unpredictable and
could adversely affect our financial condition and results of operations.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of equity securities during the period covered by this report.
(c) Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Maximum Dollar
|
|
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
Value of Shares
|
|
|
|
|
|
|
|
|
|
|
|
Part of Publicly
|
|
|
that May Yet Be
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Announced
|
|
|
Purchased
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Plans or
|
|
|
Under the Plans or
|
|
Period
|
|
Purchased (2)
|
|
|
per Share (2)
|
|
|
Programs (1)
|
|
|
Programs (1)
|
|
July 1 - July 31, 2010
|
|
|
2,841,119
|
|
|
$
|
25.56
|
|
|
|
2,841,119
|
|
|
$
|
994,138,100.46
|
|
August 1 - August 31, 2010
|
|
|
974,020
|
|
|
|
27.47
|
|
|
|
974,020
|
|
|
|
967,377,168.81
|
|
September 1 - September 30, 2010
|
|
|
1,221,193
|
|
|
|
29.19
|
|
|
|
1,217,525
|
|
|
|
931,847,622.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,036,332
|
|
|
$
|
26.81
|
|
|
|
5,032,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
In March 2008, the Companys Board of Directors (the Board) approved a stock repurchase
program (the 2008 Stock Repurchase Program), which authorized the Company to purchase up to
$1.0 billion of the Companys common stock. In February 2010, the Board approved an additional
stock repurchase program (the 2010 Stock Repurchase Program), which authorized the Company
to purchase up to an additional $1.0 billion of the Companys common stock. During the three
and nine months ended September 30, 2010, the Company repurchased and retired an aggregate of
5,032,664 and 14,276,301 shares of common stock, respectively, at an average price of $26.81
and $27.09 per share, respectively, under the two stock repurchase programs.
|
|
(2)
|
|
Amounts include repurchases under the Companys stock repurchase programs and repurchases of
the Companys common stock from its employees in connection with net issuance of shares to
satisfy the employee tax withholding obligations for the vesting of certain restricted stock
units and performance share awards. We repurchased an immaterial amount and number of common
stock from our employees in connection with net issuances during the three and nine months
ended September 30, 2010, and 2009. All shares of common stock that have been repurchased
under the Companys stock repurchase programs and from its employees in connection with net
issuances have been retired. As of September 30, 2010, the 2008 Stock Repurchase Program had
no remaining authorized funds available for future stock repurchases. Future share repurchases
under the Companys 2010 Stock Repurchase Program will be subject to a review of the
circumstances in place at that time and will be made from time to time in private transactions
or open market purchases as permitted by securities laws and other legal requirements. This
program may be discontinued at any time.
|
72
Item 6.
Exhibits
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
3.1
|
|
Juniper Networks, Inc. Amended and Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to the Companys Annual Report on Form 10-K filed with the Securities and Exchange Commission
on March 27, 2001)
|
|
|
|
3.2
|
|
Amended and Restated Bylaws of Juniper Networks, Inc. (incorporated by reference to Exhibit 3.1 to the
Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on September 3,
2010)
|
|
|
|
10.1
|
|
Juniper Networks, Inc. 2006 Equity Incentive Plan, as amended August 24, 2010
|
|
|
|
10.2
|
|
Australian Addendum to the Juniper Networks, Inc. 2006 Equity Incentive Plan, as amended
|
|
|
|
10.3
|
|
Australian Addendum to the Juniper Networks, Inc. 2008 Employee Stock Purchase Plan, as amended
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
101
|
|
The following materials from Juniper Network Inc.s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2010, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed
Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, and (iii) the
Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial
Statements
|
|
|
|
101.INS
|
|
XBRL Instance Document
|
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
73
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant had duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
Juniper Networks, Inc.
|
|
November 5, 2010
|
By:
|
/s/ Robyn M. Denholm
|
|
|
|
Robyn M. Denholm
|
|
|
|
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial
Officer)
|
|
|
|
|
|
November 5, 2010
|
By:
|
/s/ Gene Zamiska
|
|
|
|
Gene Zamiska
|
|
|
|
Vice President, Finance and Corporate Controller
(Duly Authorized Officer and Principal Accounting
Officer)
|
|
74
Exhibit Index
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
3.1
|
|
Juniper Networks, Inc. Amended and Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to the Companys Annual Report on Form 10-K filed with the Securities and Exchange Commission
on March 27, 2001)
|
|
|
|
3.2
|
|
Amended and Restated Bylaws of Juniper Networks, Inc. (incorporated by reference to Exhibit 3.1 to the
Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on September 3,
2010)
|
|
|
|
10.1
|
|
Juniper Networks, Inc. 2006 Equity Incentive Plan, as amended August 24, 2010
|
|
|
|
10.2
|
|
Australian Addendum to the Juniper Networks, Inc. 2006 Equity Incentive Plan, as amended
|
|
|
|
10.3
|
|
Australian Addendum to the Juniper Networks, Inc. 2008 Employee Stock Purchase Plan, as amended
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
101
|
|
The following materials from Juniper Network Inc.s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2010, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed
Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, and (iii) the
Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial
Statements
|
|
|
|
101.INS
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XBRL Instance Document
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101.SCH
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XBRL Taxonomy Extension Schema Document
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase Document
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document
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101.LAB
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XBRL Taxonomy Extension Label Linkbase Document
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document
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75
Exhibit 10.1
JUNIPER NETWORKS, INC.
2006 EQUITY INCENTIVE PLAN
As amended August 24, 2010
1.
Purposes of the Plan
. The purposes of this Equity Incentive Plan are to attract and
retain the best available personnel for positions of substantial responsibility, to provide
additional incentive to Service Providers and Outside Directors and to promote the success of the
Companys business.
Awards to Service Providers granted hereunder may be Incentive Stock Options, Nonstatutory
Stock Options, Restricted Stock, Restricted Stock Units, Stock Appreciation Rights, Performance
Shares, Performance Units, Deferred Stock Units or Dividend Equivalents, at the discretion of the
Administrator and as reflected in the terms of the written option agreement. This Equity Incentive
Plan also provides for the automatic, non-discretionary award of Nonstatutory Stock Options to
Outside Directors.
2.
Definitions
. As used herein, the following definitions shall apply:
(a)
Administrator
shall mean the Board or any of its Committees as shall be
administering the Plan, in accordance with Section 4 of the Plan.
(b)
Annual Revenue
shall mean the Companys or a business units net sales for the
Fiscal Year, determined in accordance with generally accepted accounting principles.
(c)
Applicable Laws
shall mean the legal requirements relating to the administration
of equity incentive plans under California corporate and securities laws and the Code.
(d)
Award
shall mean, individually or collectively, a grant under the Plan of
Incentive Stock Options, Nonstatutory Stock Options, Restricted Stock, Restricted Stock Units,
Stock Appreciation Rights, Performance Shares, Performance Units, Deferred Stock Units or Dividend
Equivalents.
(e)
Award Agreement
shall mean the written or electronic agreement setting forth the
terms and provisions applicable to each Award granted under the Plan. The Award Agreement is
subject to the terms and conditions of the Plan.
(f)
Awarded Stock
shall mean the Common Stock subject to an Award.
(g)
Board
shall mean the Board of Directors of the Company.
(h)
Cash Position
shall mean the Companys level of cash and cash equivalents.
(i)
Code
shall mean the Internal Revenue Code of 1986, as amended.
(j)
Common Stock
shall mean the Common Stock of the Company.
(k)
Committee
shall mean the Committee appointed by the Board of Directors or a
sub-committee appointed by the Boards designated committee in accordance with Section 4(a) of the
Plan, if one is appointed.
(l)
Company
shall mean Juniper Networks, Inc.
(m)
Consultant
shall mean any person, including an advisor, engaged by the Company
or a Parent or Subsidiary to render services and who is compensated for such services; provided,
however, that the term Consultant shall not include Outside Directors, unless such Outside
Directors are compensated for services to the Company other than through payment of directors fees
and Option grants under Section 11 hereof.
(n)
Continuous Status as a Director
means that the Director relationship is not
interrupted or terminated.
(o)
Deferred Stock Unit
means a deferred stock unit Award granted to a Participant
pursuant to Section 16.
(p)
Director
shall mean a member of the Board.
(q)
Disability
means total and permanent disability as defined in Section 22(e)(3)
of the Code.
(r)
Dividend Equivalent
shall mean a credit, payable in cash, made at the discretion
of the Administrator, to the account of a Participant in an amount equal to the cash dividends paid
on one Share for each Share represented by an Award held by such Participant. Dividend Equivalents
may be subject to the same vesting restrictions as the related Shares subject to an Award, at the
discretion of the Administrator.
(s)
Employee
shall mean any person, including Officers and Directors, employed by
the Company or any Parent or Subsidiary of the Company. An Employee shall not cease to be an
Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between
locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For
purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon
expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of
a leave of absence approved by the Company is not so guaranteed, then three (3) months following
the 91
st
day of such leave any Incentive Stock Option held by the Participant shall
cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a
Nonstatutory Stock Option.
(t)
Exchange Act
shall mean the Securities Exchange Act of 1934, as amended.
(u)
Fair Market Value
shall mean, as of any date, the value of Common Stock
determined as follows:
(i) If the Common Stock is listed on a stock exchange, the fair market value per Share shall
be the closing price on such exchange, as reported in the Wall Street Journal on
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the date of
determination or, if the date of determination is not a trading day, the immediately preceding
trading day;
(ii) If there is a public market for the Common Stock, the fair market value per Share shall
be the mean of the bid and asked prices, or closing price in the event quotations for the Common
Stock are reported on the National Market System, of the Common Stock on the date of determination,
as reported in the Wall Street Journal (or, if not so reported, as otherwise reported by the
National Association of Securities Dealers Automated Quotation (NASDAQ) System); or
(iii) In the absence of an established market for the Common Stock, the Fair Market Value
shall be determined in good faith by the Administrator.
(v)
Fiscal Year
shall mean a fiscal year of the Company.
(w)
Full Value Award
shall mean a grant of Restricted Stock, a Restricted Stock
Unit, a Performance Share or a Deferred Stock Unit hereunder.
(x)
Incentive Stock Option
shall mean an Option intended to qualify as an incentive
stock option within the meaning of Section 422 of the Code.
(y)
Nonstatutory Stock Option
shall mean an Option not intended to qualify as an
Incentive Stock Option.
(z)
Officer
shall mean a person who is an officer of the Company within the meaning
of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.
(aa)
Option
shall mean a stock option granted pursuant to the Plan.
(bb)
Optioned Stock
shall mean the Common Stock subject to an Option.
(cc)
Outside Director
means a Director who is not an Employee or Consultant.
(dd)
Parent
shall mean a parent corporation, whether now or hereafter existing, as
defined in Section 424(e) of the Code.
(ee)
Participant
shall mean an Employee or Consultant who receives an Award.
(ff)
Performance Goals
shall mean the goal(s) (or combined goal(s)) determined by
the Administrator (in its discretion) to be applicable to a Participant with respect to an Award.
As determined by the Administrator, the performance measures for any performance period will be any
one or more of the following objective performance criteria, applied to either the Company as a
whole or, except with respect to stockholder return metrics, to
a region, business unit, affiliate or business segment, and measured either on an absolute
basis or relative to a pre-established target, to a previous periods results or to a designated
comparison group, and, with respect to financial metrics, which may be determined in accordance
with United States Generally Accepted Accounting Principles (GAAP), in accordance with accounting
principles
-3-
established by the International Accounting Standards Board (IASB Principles) or which
may be adjusted when established to exclude any items otherwise includable under GAAP or under IASB
Principles: (i) cash flow (including operating cash flow or free cash flow), (ii) cash position,
(iii) revenue (on an absolute basis or adjusted for currency effects), (iv) revenue growth, (v)
contribution margin, (vi) gross margin, (vii) operating margin (viii) operating expenses or
operating expenses as a percentage of revenue, (ix) earnings (which may include earnings before
interest and taxes, earnings before taxes and net earnings), (x) earnings per share, (xi) operating
income, (xii) net income, (xiii) stock price, (xiv) return on equity, (xv) total stockholder
return, (xvi) growth in stockholder value relative to a specified publicly reported index (such as
the S&P 500 Index), (xvii) return on capital, (xviii) return on assets or net assets, (xix) return
on investment, (xx) economic value added, (xxi) operating profit or net operating profit, (xxii)
operating margin, (xxiii) market share, (xxiv) contract awards or backlog, (xxv) overhead or other
expense reduction, (xxvi) credit rating, (xxvii) objective customer indicators, (xxviii) new
product invention or innovation, (xxix) attainment of research and development milestones, (xxx)
improvements in productivity, (xxxi) attainment of objective operating goals, and (xxxii) objective
employee metrics. The Performance Goals may differ from Participant to Participant and from Award
to Award. In particular, the Administrator may appropriately adjust any evaluation of performance
under a Performance Goal to exclude (a) any extraordinary non-recurring items, (b) the affect of
any merger, acquisition, or other business combination or divestiture or (ii) the effect of any
changes in accounting principles affecting the Companys or a business units, regions,
affiliates or business segments reported results.
(gg)
Performance Share
shall mean a performance share Award granted to a Participant
pursuant to Section 14.
(hh)
Performance Unit
means a performance unit Award granted to a Participant
pursuant to Section 15.
(ii)
Plan
shall mean this 2006 Equity Incentive Plan, as amended.
(jj)
Plan Minimum Vesting Requirements
shall mean the minimum vesting requirements
for Full Value Awards under Plan Section 4(b)(vi) hereunder.
(kk)
Restricted Stock
shall mean a restricted stock Award granted to a Participant
pursuant to Section 11.
(ll)
Restricted Stock Unit
shall mean a bookkeeping entry representing an amount
equal to the Fair Market Value of one Share, granted pursuant to Section 13. Each Restricted Stock
Unit represents an unfunded and unsecured obligation of the Company.
(mm)
Rule 16b-3
shall mean Rule 16b-3 of the Exchange Act or any successor to Rule
16b-3, as in effect when discretion is being exercised with respect to the Plan.
(nn)
Section 16(b)
shall mean Section 16(b) of the Exchange Act.
(oo)
Service Provider
means an Employee or Consultant.
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(pp)
Share
shall mean a share of the Common Stock, as adjusted in accordance with
Section 21 of the Plan.
(qq)
Stock Appreciation Right
or SAR shall mean a stock appreciation right granted
pursuant to Section 9 below.
(rr)
Subsidiary
shall mean a subsidiary corporation, whether now or hereafter
existing, as defined in Section 424(f) of the Code.
3.
Stock Subject to the Plan
. Subject to the provisions of Section 21 of the Plan, the
maximum aggregate number of shares which may be optioned and sold under the Plan is 94,500,000
shares of Common Stock plus any Shares subject to any options under the Companys 2000 Nonstatutory
Stock Option Plan and 1996 Stock Incentive Plan that are outstanding on the date this Plan becomes
effective and that subsequently expire unexercised
,
up to a maximum of an additional 75,000,000
Shares
.
All of the shares issuable under the Plan may be authorized, but unissued, or reacquired
Common Stock.
Any Shares subject to Options or SARs shall be counted against the numerical limits of this
Section 3 as one Share for every Share subject thereto. Any Shares subject to Performance Shares,
Restricted Stock or Restricted Stock Units with a per share or unit purchase price lower than 100%
of Fair Market Value on the date of grant shall be counted against the numerical limits of this
Section 3 as two and one-tenth Shares for every one Share subject thereto. To the extent that a
Share that was subject to an Award that counted as two and one-tenth Shares against the Plan
reserve pursuant to the preceding sentence is recycled back into the Plan under the next paragraph
of this Section 3, the Plan shall be credited with two and one-tenth Shares.
If an Award expires or becomes unexercisable without having been exercised in full, or, with
respect to Restricted Stock, Performance Shares or Restricted Stock Units, is forfeited to or
repurchased by the Company at its original purchase price due to such Award failing to vest, the
unpurchased Shares (or for Awards other than Options and SARs, the forfeited or repurchased shares)
which were subject thereto shall become available for future grant or sale under the Plan (unless
the Plan has terminated). With respect to SARs, when an SAR is exercised, the shares subject to a
SAR grant agreement shall be counted against the numerical limits of Section 3 above, as one share
for every share subject thereto, regardless of the number of shares used to settle the SAR upon
exercise (i.e., shares withheld to satisfy the exercise price of an SAR shall not remain available
for issuance under the Plan). Shares that have actually been issued under the Plan under any Award
shall not be returned to the Plan and shall not become available for future distribution under the
Plan; provided, however, that if Shares of Restricted Stock, Performance Shares or Restricted Stock
Units are repurchased by the Company at their original purchase price or are forfeited to the
Company due to such Awards failing to vest, such Shares shall become available for future grant
under the Plan. Shares used to pay the exercise price of an Option shall not become available for
future grant or sale under the Plan. Shares used to satisfy tax withholding obligations shall not
become available for future grant or sale under the
Plan. To the extent an Award under the Plan is paid out in cash rather than stock, such cash
payment shall not reduce the number of Shares available for issuance under the Plan. Any payout of
Dividend Equivalents or Performance Units, because they are payable only in cash, shall not reduce
the number of Shares available for issuance under the Plan. Conversely, any
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forfeiture of Dividend
Equivalents or Performance Units shall not increase the number of Shares available for issuance
under the Plan.
4.
Administration of the Plan
.
(a)
Procedure
.
(i)
Multiple Administrative Bodies
. If permitted by Applicable Laws, the Plan may be
administered by different bodies with respect to Directors, Officers who are not Directors, and
Employees who are neither Directors nor Officers.
(ii)
Section 162(m)
. To the extent that the Administrator determines it to be
desirable to qualify Awards granted hereunder as performance-based compensation within the
meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee consisting
solely of two or more outside directors within the meaning of Section 162(m) of the Code.
(iii)
Administration With Respect to Officers Subject to Section 16(b)
. With respect
to Option grants made to Employees who are also Officers subject to Section 16(b) of the Exchange
Act, the Plan shall be administered by (A) the Board, if the Board may administer the Plan in
compliance with Rule 16b-3, or (B) a committee designated by the Board to administer the Plan,
which committee shall be constituted to comply with Rule 16b-3. Once appointed, such Committee
shall continue to serve in its designated capacity until otherwise directed by the Board. From
time to time the Board may increase the size of the Committee and appoint additional members,
remove members (with or without cause) and substitute new members, fill vacancies (however caused),
and remove all members of the Committee and thereafter directly administer the Plan, all to the
extent permitted by Rule 16b-3.
(iv)
Administration With Respect to Other Persons
. With respect to Award grants made
to Employees or Consultants who are not Officers of the Company, the Plan shall be administered by
(A) the Board, (B) a committee designated by the Board, or (C) a sub-committee designated by the
designated committee, which committee or sub-committee shall be constituted to satisfy Applicable
Laws. Once appointed, such Committee shall serve in its designated capacity until otherwise
directed by the Board. The Board may increase the size of the Committee and appoint additional
members, remove members (with or without cause) and substitute new members, fill vacancies (however
caused), and remove all members of the Committee and thereafter directly administer the Plan, all
to the extent permitted by Applicable Laws.
(v)
Administration With Respect to Automatic Grants to Outside Directors
. Automatic
Grants to Outside Directors shall be pursuant to a non-discretionary
formula as set forth in Section 11 hereof and therefore shall not be subject to any
discretionary administration.
(b)
Powers of the Administrator
. Subject to the provisions of the Plan (including the
non-discretionary automatic grant to Outside Director provisions of Section 11), and in the case of
a Committee, subject to the specific duties delegated by the Board to such Committee, the
Administrator shall have the authority, in its discretion:
-6-
(i) to determine the Fair Market Value in accordance with Section 2(v) of the Plan;
(ii) to select the Service Providers to whom Awards may be granted hereunder;
(iii) to determine whether and to what extent Awards are granted hereunder;
(iv) to determine the number of shares of Common Stock to be covered by each Award granted
hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of
any Award granted hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Awards vest or may be exercised (which may be based on
performance criteria), any vesting acceleration or waiver of forfeiture restrictions (subject to
compliance with applicable laws, including Code Section 409A), and any restriction or limitation
regarding any Award or the shares of Common Stock relating thereto, based in each case on such
factors as the Administrator, in its sole discretion, shall determine; provided, however, that
with respect to Full Value Awards vesting solely based on continuing as a Service Provider, they
will vest in full no earlier (except if accelerated pursuant to Section 21 hereof or pursuant to
change of control severance agreements entered into by and between the Company and any Service
Provider) than the three (3) year anniversary of the grant date; provided, further, that if vesting
is not solely based on continuing as a Service Provider, they will vest in full no earlier (except
if accelerated pursuant to Section 21 hereof or pursuant to change of control severance agreements
entered into by and between the Company and any Service Provider) than the one (1) year anniversary
of the grant date;
(vii) to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan;
(viii) to prescribe, amend and rescind rules and regulations relating to the Plan;
(ix) to modify or amend each Award (subject to Section 7 and Section 24(c) of the Plan);
(x) to authorize any person to execute on behalf of the Company any instrument required to
effect the grant of an Award previously granted by the Administrator;
(xi) to determine the terms and restrictions applicable to Awards;
(xii) to determine whether Awards will be adjusted for Dividend Equivalents and whether such
Dividend Equivalents shall be subject to vesting; and
(xiii) to make all other determinations deemed necessary or advisable for administering the
Plan.
-7-
(c)
Effect of Administrators Decision
. All decisions, determinations and
interpretations of the Administrator shall be final and binding on all Participants and any other
holders of any Awards granted under the Plan.
(d)
Exception to Plan Minimum Vesting Requirements
.
(i) Full Value Awards that result in issuing up to 5% of the maximum aggregate number of
shares of Stock authorized for issuance under the Plan (the 5% Limit) may be granted to any one
or more employees or Non-employee Directors without respect to the Plan Minimum Vesting
Requirements.
(ii) All Full Value Awards that have their vesting discretionarily accelerated, and all
Options and SARs that have their vesting discretionarily accelerated 100%, other than, in either
case, pursuant to (A) a merger or asset sale transaction described in Section 21(c) hereof
(including vesting acceleration in connection with employment termination following such event),
(B) a Participants death, or (C) a Participants Disability, are subject to the 5% Limit.
(iii) Notwithstanding the foregoing, the Administrator may accelerate the vesting of Full
Value Awards such that the Plan Minimum Vesting Requirements are still satisfied, without such
vesting acceleration counting toward the 5% Limit.
(iv) The 5% Limit applies in the aggregate to Full Value Award grants that do not satisfy Plan
minimum vesting requirements and to the discretionary vesting acceleration of Awards.
5.
Eligibility
. Awards may be granted only to Service Providers. Incentive Stock Options
may be granted only to Employees. A Service Provider who has been granted an Award may, if he or
she is otherwise eligible, be granted an additional Award or Awards. Outside Directors may only be
granted Awards as specified in Section 11 hereof.
6.
Code Section 162(m) Provisions
.
(a)
Option and SAR Annual Share Limit
. Subject to Section 7 below, no Participant
shall be granted, in any Fiscal Year, Options and Stock Appreciation Rights to
purchase more than 2,000,000 Shares; provided, however, that such limit shall be 4,000,000
Shares in the Participants first Fiscal Year of Company service.
(b)
Restricted Stock, Performance Share and Restricted Stock Unit Annual Limit
. No
Participant shall be granted, in any Fiscal Year, more than 1,000,000 Shares in the aggregate of
the following: (i) Restricted Stock, (ii) Performance Shares, or (iii) Restricted Stock Units;
provided, however, that such limit shall be 2,000,000 Shares in the Participants first Fiscal Year
of Company service.
(c)
Performance Units Annual Limit
. No Participant shall receive Performance Units,
in any Fiscal Year, having an initial value greater than $2,000,000, provided, however, that such
limit shall be $4,000,000 in the Participants first Fiscal Year of Company service.
-8-
(d)
Section 162(m) Performance Restrictions
. For purposes of qualifying grants of
Restricted Stock, Performance Shares, Performance Units or Restricted Stock Units as
performance-based compensation under Section 162(m) of the Code, the Administrator, in its
discretion, may set restrictions based upon the achievement of Performance Goals. The Performance
Goals shall be set by the Administrator on or before the latest date permissible to enable the
Restricted Stock, Performance Shares, Performance Units or Restricted Stock Units to qualify as
performance-based compensation under Section 162(m) of the Code. In granting Restricted Stock,
Performance Shares, Performance Units or Restricted Stock Units which are intended to qualify under
Section 162(m) of the Code, the Administrator shall follow any procedures determined by it from
time to time to be necessary or appropriate to ensure qualification of the Award under Section
162(m) of the Code (e.g., in determining the Performance Goals).
(e)
Changes in Capitalization
. The numerical limitations in Sections 6(a) and (b)
shall be adjusted proportionately in connection with any change in the Companys capitalization as
described in Section 16(a).
7.
No Repricing
. The exercise price for an Option or SAR may not be reduced without the
consent of the Companys stockholders. This shall include, without limitation, a repricing of the
Option or SAR as well as an Option or SAR exchange program whereby the Participant agrees to cancel
an existing Option in exchange for an Option, SAR or other Award. If an Option or SAR is cancelled
in the same Fiscal Year in which it was granted (other than in connection with a transaction
described in Section 14), the cancelled Option or SAR as well as any replacement Option or SAR will
be counted against the limits set forth in section 6(a) above. Moreover, if the exercise price of
an Option or SAR is reduced, the transaction will be treated as a cancellation of the Option or SAR
and the grant of a new Option or SAR.
8.
Stock Options
.
(a)
Type of Option
. Each Option shall be designated in the Award Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such
designations, to the extent that the aggregate Fair Market Value of Shares subject to a
Participants incentive stock options granted by the Company, any Parent or Subsidiary, that
become exercisable for the first time during any calendar year (under all plans of the Company
or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory
Stock Options. For purposes of this Section 8(a), incentive stock options shall be taken into
account in the order in which they were granted, and the Fair Market Value of the Shares shall be
determined as of the time of grant.
(b)
Term of Option
. The term of each Option shall be stated in the Notice of Grant;
provided, however, that the term shall be seven (7) years from the date of grant or such shorter
term as may be provided in the Notice of Grant. Moreover, in the case of an Incentive Stock Option
granted to a Participant who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of stock of the Company
or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from
the date of grant or such shorter term as may be provided in the Notice of Grant.
-9-
(c)
Exercise Price and Consideration
.
(i) The per Share exercise price for the Shares to be issued pursuant to exercise of an Option
shall be such price as is determined by the Administrator, but shall be subject to the following:
(A) In the case of an Incentive Stock Option
(1) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of stock of the Company
or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(2) granted to any Employee, the per Share exercise price shall be no less than 100% of the
Fair Market Value per Share on the date of grant.
(B) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be no less
than 100% of the Fair Market Value per Share on the date of grant.
(ii) Except with respect to automatic stock option grants to Outside Directors, the
consideration to be paid for the Shares to be issued upon exercise of an Option, including the
method of payment, shall be determined by the Administrator and may consist entirely of cash;
check; delivery of a properly executed exercise notice together with such other documentation as
the Committee and the broker, if applicable, shall require to effect an exercise of the option and
delivery to the Company of the sale proceeds required; or any combination of such methods of
payment, or such other consideration and method of payment for the issuance of Shares to the extent
permitted under Applicable Law.
9.
Stock Appreciation Rights.
(a)
Grant of SARs
. Subject to the terms and conditions of the Plan, SARs may be
granted to Participants at any time and from time to time as shall be determined by the
Administrator, in its sole discretion. Subject to Section 6(a) hereof, the Administrator
shall have complete discretion to determine the number of SARs granted to any Participant.
(b)
Exercise Price and other Terms
. The per share exercise price for the Shares to be
issued pursuant to exercise of an SAR shall be determined by the Administrator and shall be no less
than 100% of the Fair Market Value per share on the date of grant. Otherwise, subject to Section
6(a) of the Plan, the Administrator, subject to the provisions of the Plan, shall have complete
discretion to determine the terms and conditions of SARs granted under the Plan; provided, however,
that no SAR may have a term of more than seven(=7) years from the date of grant.
(c)
Payment of SAR Amount
. Upon exercise of a SAR, a Participant shall be entitled to
receive payment from the Company in an amount determined by multiplying:
-10-
(i) The difference between the Fair Market Value of a Share on the date of exercise over the
exercise price; times
(ii) The number of Shares with respect to which the SAR is exercised.
(d)
Payment upon Exercise of SAR
. At the discretion of the Administrator, but only as
specified in the Award Agreement, payment for a SAR may be in cash, Shares or a combination
thereof. If the Award Agreement is silent as to the form of payment, payment of the SAR may only
be in Shares.
(e)
SAR Agreement
. Each SAR grant shall be evidenced by an Award Agreement that shall
specify the exercise price, the term of the SAR, the conditions of exercise, whether it may be
settled in cash, Shares or a combination thereof, and such other terms and conditions as the
Administrator, in its sole discretion, shall determine.
(f)
Expiration of SARs
. A SAR granted under the Plan shall expire upon the date
determined by the Administrator, in its sole discretion, and set forth in the Award Agreement.
10.
Exercise of Option or SAR
.
(a)
Procedure for Exercise; Rights as a Shareholder
. Any Option or SAR granted
hereunder shall be exercisable at such times and under such conditions as determined by the
Administrator, including performance criteria with respect to the Company and/or the Participant,
and as shall be permissible under the terms of the Plan.
An Option or SAR may not be exercised for a fraction of a Share.
An Option or SAR shall be deemed to be exercised when written notice of such exercise has been
given to the Company in accordance with the terms of the Option or SAR by the person entitled to
exercise the Option or SAR and, with respect to Options only, full payment for the Shares with
respect to which the Option is exercised has been received by the Company. With respect to Options
only, full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(d) of the Plan. Until the issuance
(as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other
right for which the record date is prior to the date the stock certificate is issued, except as
provided in Section 21 of the Plan.
(b)
Termination of Status as a Service Provider
. If an Employee or Consultant ceases
to serve as a Service Provider, he or she may, but only within 90 days (or such other period of
time as is determined by the Administrator and as set forth in the Option or SAR Agreement) after
the date he or she ceases to be a Service Provider, exercise his or her Option or SAR to the extent
that he or she was entitled to exercise it at the date of such termination. To the extent that he
or she was not entitled to exercise the Option or SAR at the date of such
-11-
termination, or if he or
she does not exercise such Option or SAR (which he or she was entitled to exercise) within the time
specified herein, the Option or SAR shall terminate.
(c)
Disability
. If a Participant ceases to be a Service Provider as a result of the
Participants Disability, the Participant may exercise his or her Option or SAR within such period
of time as is specified in the Award Agreement to the extent the Option or SAR is vested on the
date of termination (but in no event later than the expiration of the term of such Option or SAR as
set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the
Option or SAR shall remain exercisable for twelve (12) months following the Participants
termination. If, on the date of termination, the Participant is not vested as to his or her entire
Option or SAR, the Shares covered by the unvested portion of the Option or SAR shall revert to the
Plan. If, after termination, the Participant does not exercise his or her Option or SAR within the
time specified herein, the Option shall terminate, and the Shares covered by such Option or SAR
shall revert to the Plan.
(d)
Death of Participant
. If a Participant dies while a Service Provider, the Option
or SAR may be exercised following the Participants death within such period of time as is
specified in the Award Agreement (but in no event may the option be exercised later than the
expiration of the term set forth in the Award Agreement), by the Participants designated
beneficiary, provided such beneficiary has been designated prior to Participants death in a form
acceptable to the Administrator. If no such beneficiary has been designated by the Participant,
then such Option or SAR may be exercised by the personal representative of the Participants estate
or by the person(s) to whom the Option or SAR is transferred pursuant to the Participants will or
in accordance with the laws of descent and distribution. In the absence of a specified time in the
Award Agreement, the Option or SAR shall remain exercisable for twelve (12) months following
Participants death. If the Option or SAR is not so exercised within the time specified herein,
the Option or SAR shall terminate, and the Shares covered by such Option or SAR shall revert to the
Plan.
11.
Automatic Stock Option Grants to Outside Directors
.
(a)
Procedure for Grants
. All grants of Options to Outside Directors under this Plan
shall be automatic and non-discretionary and shall be made strictly in accordance with the
following provisions:
(i) No person shall have any discretion to select which Outside Directors shall be granted
Options or Restricted Stock Units or to determine the number of Shares to be covered by Options or
Restricted Stock Units granted to Outside Directors.
(ii) Each Outside Director shall be automatically granted an Option to purchase 50,000 Shares
(the First Option) upon the date on which such person first becomes a Director, whether through
election by the stockholders of the Company or appointment by the Board of Directors to fill a
vacancy.
(iii) At each of the Companys annual stockholder meetings (A) each Outside Director who was
an Outside Director on the date of the prior years annual stockholder meeting shall be
automatically granted Restricted Stock Units for a number of Shares equal to the Annual
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Value, and
(B) each Outside Director who was not an Outside Director on the date of the prior years annual
stockholder meeting shall receive a Restricted Stock Unit for a number of Shares determined by
multiplying the Annual Value by a fraction, the numerator of which is the number of days since the
Outside Director received their First Option, and the denominator of which is 365, rounded down to
the nearest whole Share. Each award specified in A and B are generically referred to as an Annual
Award. The Annual Value means the number equal to $125,000 divided by the average daily closing
price over the six month period ending on the last day of the fiscal year preceding the date of
grant (for example, the period from July 1, 2008 December 31, 2008 for Annual Awards granted in
May 2009).
(iv) Notwithstanding the provisions of subsections (ii) and (iii) hereof, in the event that an
automatic grant hereunder would cause the number of Shares subject to outstanding Options and
Restricted Stock Units plus the number of Shares previously purchased upon exercise of Options or
issued upon vesting of Restricted Stock Units to exceed the number of Shares available for issuance
under the Plan, then each such automatic grant shall be for that number of Shares determined by
dividing the total number of Shares remaining available for grant by the number of Outside
Directors on the automatic grant date. Any further grants shall then be deferred until such time,
if any, as additional Shares become available for grant under the Plan.
(v) The terms of an Option granted hereunder shall be as follows:
(A) the term of the Option shall be seven (7) years.
(B) the Option shall be exercisable only while the Outside Director remains a Director of the
Company, except as set forth in subsection (c) hereof.
(C) the exercise price per Share shall be 100% of the Fair Market Value on the date of grant
of the Option.
(D) the First Option shall vest and become exercisable as to 1/36
th
of the covered
Shares each month following the grant date, with the last 1/36
th
vesting on the day
prior to the Companys annual stockholder meeting in the third calendar year following the date of
grant, so as to become 100% vested on the approximately three-year anniversary of the grant date,
subject to the Participant maintaining Continuous Status as a Director on each vesting date.
(E) the Annual Award shall become 100% vested on the one year anniversary of the grant date,
subject to the Participant maintaining Continuous Status as a Director on each vesting date.
(b)
Consideration for Exercising Outside Director Stock Options
. The consideration to
be paid for the Shares to be issued upon exercise of an automatic Outside Director Option shall
consist entirely of cash, check, and to the extent permitted by Applicable Laws, delivery of a
properly executed exercise notice together with such other documentation as the Administrator and
the broker, if applicable, shall require to effect an exercise of the Option and delivery to the
Company of the sale proceeds required to pay the exercise price, or any combination of such methods
of payment.
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(c)
Post-Directorship Exercisability
. If an Outside Director ceases to serve as a
Director, (including pursuant to his or her death or Disability) he or she may, but only within 90
days
,
after the date he or she ceases to be a Director of the Company, exercise his or her Option
to the extent that he or she was entitled to exercise it at the date of such termination. To the
extent that he or she was not entitled to exercise an Option at the date of such termination, or if
he or she does not exercise such Option (which he was entitled to exercise) within the time
specified herein, the Option shall terminate.
12.
Restricted Stock
.
(a)
Grant of Restricted Stock
. Subject to the terms and conditions of the Plan,
Restricted Stock may be granted to Participants at any time as shall be determined by the
Administrator, in its sole discretion. Subject to Section 6(b) hereof as well as the Plan Minimum
Vesting Requirements set forth in Sections 4(b)(vi) and 4(d) hereof, the Administrator shall have
complete discretion to determine (i) the number of Shares subject to a Restricted Stock award
granted to any Participant, and (ii) the conditions that must be satisfied, which typically will be
based principally or solely on continued provision of services but may include a performance-based
component, upon which is conditioned the grant, vesting or issuance of Restricted Stock.
(b)
Other Terms
. The Administrator, subject to the provisions of the Plan, shall have
complete discretion to determine the terms and conditions of Restricted Stock granted under the
Plan; provided that Restricted Stock may only be issued in the form of Shares. Restricted Stock
grants shall be subject to the terms, conditions, and restrictions determined by the Administrator
at the time the stock or the restricted stock unit is awarded. The Administrator may require the
recipient to sign a Restricted Stock Award agreement as a condition of the award. Any certificates
representing the Shares of stock awarded shall bear such legends as shall be determined by the
Administrator.
(c)
Restricted Stock Award Agreement
. Each Restricted Stock grant shall be evidenced
by an agreement that shall specify the purchase price (if any) and such other terms and conditions
as the Administrator, in its sole discretion, shall determine; provided; however, that if the
Restricted Stock grant has a purchase price, such purchase price must be paid no more than seven
(7) years following the date of grant.
13.
Restricted Stock Units
.
(a)
Grant
. Restricted Stock Units may be granted at any time and from time to time as
determined by the Administrator. After the Administrator determines that it will grant Restricted
Stock Units under the Plan, it shall advise the Participant in writing or electronically of the
terms, conditions, and restrictions related to the grant, including the number of Restricted Stock
Units and the form of payout, which, subject to Section 6(b) hereof, may be left to the discretion
of the Administrator.
(b)
Vesting Criteria and Other Terms
. Subject to the Plan Minimum Vesting
Requirements set forth in Sections 4(b)(vi) and 4(d) hereof, the Administrator shall set vesting
criteria in its discretion, which, depending on the extent to which the criteria are met, will
determine the number of Restricted Stock Units that will be paid out to the Participant. The
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Administrator may set vesting criteria based upon the achievement of Company-wide, business unit,
or individual goals (including, but not limited to, continued employment), or any other basis
determined by the Administrator in its discretion.
(c)
Earning Restricted Stock Units
. Upon meeting the applicable vesting criteria, the
Participant shall be entitled to receive a payout as specified in the Restricted Stock Unit Award
Agreement. Notwithstanding the foregoing, at any time after the grant of Restricted Stock Units,
the Administrator, in its sole discretion, may reduce or waive any vesting criteria that must be
met to receive a payout.
(d)
Form and Timing of Payment
. Payment of earned Restricted Stock Units shall be
made as soon as practicable after the date(s) set forth in the Restricted Stock Unit Award
Agreement. The Administrator, in its sole discretion, but only as specified in the Award
Agreement, may pay earned Restricted Stock Units in cash, Shares, or a combination thereof. If the
Award Agreement is silent as to the form of payment, payment of the Restricted Stock Units may only
be in Shares.
(e)
Cancellation
. On the date set forth in the Restricted Stock Unit Award Agreement,
all unearned Restricted Stock Units shall be forfeited to the Company.
14.
Performance Shares
.
(a)
Grant of Performance Shares
. Subject to the terms and conditions of the Plan,
Performance Shares may be granted to Participants at any time as shall be determined by the
Administrator, in its sole discretion. Subject to Section 6(b) hereof as well as the Plan Minimum
Vesting Requirements set forth in Sections 4(b)(vi) and 4(d) hereof, the Administrator shall have
complete discretion to determine (i) the number of Shares subject to a Performance Share award
granted to any Participant, and (ii) the conditions that must be satisfied, which
typically will be based principally or solely on achievement of performance milestones but may
include a service-based component, upon which is conditioned the grant or vesting of Performance
Shares. Performance Shares shall be granted in the form of units to acquire Shares. Each such
unit shall be the equivalent of one Share for purposes of determining the number of Shares subject
to an Award. Until the Shares are issued, no right to vote or receive dividends or any other
rights as a stockholder shall exist with respect to the units to acquire Shares.
(b)
Other Terms
. The Administrator, subject to the provisions of the Plan, shall have
complete discretion to determine the terms and conditions of Performance Shares granted under the
Plan. Performance Share grants shall be subject to the terms, conditions, and restrictions
determined by the Administrator at the time the stock is awarded, which may include such
performance-based milestones as are determined appropriate by the Administrator. The Administrator
may require the recipient to sign a Performance Shares Award Agreement as a condition of the award.
Any certificates representing the Shares of stock awarded shall bear such legends as shall be
determined by the Administrator.
(c)
Performance Share Award Agreement
. Each Performance Share grant shall be
evidenced by an Award Agreement that shall specify such other terms and conditions as the
Administrator, in its sole discretion, shall determine.
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15.
Performance Units
.
(a)
Grant of Performance Units
. Performance Units are similar to Performance Shares,
except that they shall be settled in a cash equivalent to the Fair Market Value of the underlying
Shares, determined as of the vesting date. Subject to the terms and conditions of the Plan,
Performance Units may be granted to Participants at any time and from time to time as shall be
determined by the Administrator, in its sole discretion. The Administrator shall have complete
discretion to determine the conditions that must be satisfied, which typically will be based
principally or solely on achievement of performance milestones but may include a service-based
component, upon which is conditioned the grant or vesting of Performance Units. Performance Units
shall be granted in the form of units to acquire Shares. Each such unit shall be the cash
equivalent of one Share of Common Stock. No right to vote or receive dividends or any other rights
as a stockholder shall exist with respect to Performance Units or the cash payable thereunder.
(b)
Number of Performance Units
. Subject to Section 6(c) hereof, the Administrator
will have complete discretion in determining the number of Performance Units granted to any
Participant.
(c)
Other Terms
. The Administrator, subject to the provisions of the Plan, shall have
complete discretion to determine the terms and conditions of Performance Units granted under the
Plan. Performance Unit grants shall be subject to the terms, conditions, and restrictions
determined by the Administrator at the time the grant is awarded, which may include such
performance-based milestones as are determined appropriate by the Administrator. The Administrator
may require the recipient to sign a Performance Unit agreement as a condition of the award. Any
certificates representing the units awarded shall bear such legends as shall be determined by the
Administrator.
(d)
Performance Unit Award Agreement
. Each Performance Unit grant shall be evidenced
by an agreement that shall specify such terms and conditions as the Administrator, in its sole
discretion, shall determine.
16.
Deferred Stock Units
.
(a)
Description
. Deferred Stock Units shall consist of a Restricted Stock, Restricted
Stock Unit, Performance Share or Performance Unit Award that the Administrator, in its sole
discretion permits to be paid out in installments or on a deferred basis, in accordance with rules
and procedures established by the Administrator, subject to the Plan Minimum Vesting Requirements
set forth in Sections 4(b)(vi) and 4(d) hereof. Deferred Stock Units shall remain subject to the
claims of the Companys general creditors until distributed to the Participant.
(b)
162(m) Limits
. Deferred Stock Units shall be subject to the annual 162(m) limits
applicable to the underlying Restricted Stock, Restricted Stock Unit, Performance Share or
Performance Unit Award as set forth in Section 6 hereof.
17.
Leaves of Absence
. If as a condition to be granted an unpaid leave of absence by the
Company, a Participant agrees that vesting shall be suspended during all or a portion of such
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leave
of absence, (except as otherwise required by Applicable Laws) vesting of Awards granted hereunder
shall cease during such agreed upon portion of the unpaid leave of absence and shall only
recommence upon return to active service.
18.
Part-Time Service
. Unless otherwise required by Applicable Laws, if as a condition to
being permitted to work on a less than full-time basis, the Participant agrees that any
service-based vesting of Awards granted hereunder shall be extended on a proportionate basis in
connection with such transition to a less than a full-time basis, vesting shall be adjusted in
accordance with such agreement. Such vesting shall be proportionately re-adjusted prospectively
in the event that the Employee subsequently becomes regularly scheduled to work additional hours of
service.
19.
Non-Transferability of Awards
. Except as determined otherwise by the Administrator in
its sole discretion (but never a transfer in exchange for value), Awards may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws
of descent or distribution and may be exercised, during the lifetime of the Participant, only by
the Participant, without the prior written consent of the Administrator.
20.
Stock Withholding to Satisfy Withholding Tax Obligations
. When a Participant incurs
tax liability in connection with the exercise, vesting or payout, as applicable, of an Award, which
tax liability is subject to tax withholding under applicable tax laws, and the Participant is
obligated to pay the Company an amount required to be withheld under applicable tax laws, the
Participant may satisfy the withholding tax obligation by electing to have the Company withhold
from the Shares to be issued upon exercise of the Option or SAR or the Shares to be issued upon
payout or vesting of the other Award, if any, that number of Shares having a Fair Market Value
equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld
shall be determined on the date that the amount of tax to be withheld is to be determined (the Tax
Date).
All elections by a Participant to have Shares withheld for this purpose shall be made in
writing in a form acceptable to the Administrator and shall be subject to the following
restrictions:
(a) the election must be made on or prior to the applicable Tax Date; and
(b) all elections shall be subject to the consent or disapproval of the Administrator.
In the event the election to have Shares subject to an Award withheld is made by a Participant
and the Tax Date is deferred under Section 83 of the Code because no election is filed under
Section 83(b) of the Code, the Participant shall receive the full number of Shares with respect to
which the Option or SAR is exercised or other Award is vested but such Participant shall be
unconditionally obligated to tender back to the Company the proper number of Shares on the Tax
Date.
21.
Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale
.
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(a)
Changes in Capitalization
. Subject to any required action by the shareholders of
the Company, the number of shares of Common Stock covered by each outstanding Award, and the number
of shares of Common Stock which have been authorized for issuance under the Plan but as to which no
Awards have yet been granted or which have been returned to the Plan upon cancellation or
expiration of an Award, as well as the price per share of Common Stock covered by each such
outstanding Award, the annual share limitations under Sections 6(a) and (b) hereof, and the number
of Shares subject to ongoing automatic First Option and Annual Award grants to Outside Directors
under Section 11 hereof shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other increase or decrease in
the number of issued shares of Common Stock effected without receipt of consideration by the
Company; provided, however, that conversion of any convertible securities of the Company shall not
be deemed to have been effected without receipt of consideration. Such adjustment shall be made
by the Board, whose determination in that respect shall be final, binding and conclusive. Except
as expressly provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of shares of Common Stock subject to an
Award.
(b)
Dissolution or Liquidation
. In the event of the proposed dissolution or
liquidation of the Company, the Administrator shall notify each Participant as soon as practicable
prior to the effective date of such proposed transaction. The Administrator in its discretion (but
not with respect to Options granted to Outside Directors) may provide for a Participant to have the
right to exercise his or her Option or SAR until ten (10) days prior to such transaction as to all
of the Awarded Stock covered thereby, including Shares as to which the Award would not otherwise be
exercisable. In addition, the Administrator may provide that any Company repurchase option or
forfeiture rights applicable to any Award shall lapse 100%, and that any Award vesting shall
accelerate 100%, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has not been previously
exercised (with respect to Options and SARs) or vested (with respect to other Awards), an Award
will terminate immediately prior to the consummation of such proposed action.
(c)
Merger or Asset Sale
.
(i)
Stock Options and SARs
. In the event of a merger of the Company with or into
another corporation, or the sale of substantially all of the assets of the Company, each
outstanding Option and SAR shall be assumed or an equivalent option or SAR substituted by the
successor corporation or a Parent or Subsidiary of the successor corporation. In the event that
the successor corporation refuses to assume or substitute for the Option or SAR, the Participant
shall fully vest in and have the right to exercise the Option or SAR as to all of the Awarded
Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option
or SAR becomes fully vested and exercisable in lieu of assumption or substitution in the event of a
merger or asset sale, the Administrator shall notify the Participant in writing or electronically
that the Option or SAR shall be fully vested and exercisable for a period of thirty (30) days from
the date of such notice, and the Option or SAR shall terminate upon the expiration of such period.
With respect to Options granted to Outside Directors, in the event that the Outside
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Director is
required to terminate his or her position as an Outside Director at the request of the acquiring
entity within 12 months following such merger or asset sale, each outstanding Option held by such
Outside Director shall become fully vested and exercisable, including as to Shares as to which it
would not otherwise be exercisable, unless the Board, in its discretion, determines otherwise.
(ii)
Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units,
Deferred Stock Units and Dividend Equivalents
. In the event of a merger of the Company with or
into another corporation, or the sale of substantially all of the assets of the Company, each
outstanding Restricted Stock, Restricted Stock Unit, Performance Share, Performance Unit, Dividend
Equivalent and Deferred Stock Unit award (and any related Dividend Equivalent) shall be assumed or
an equivalent Restricted Stock, Restricted Stock Unit, Performance Share, Performance Unit,
Dividend Equivalent and Deferred Stock Unit award (and any related Dividend Equivalent) substituted
by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Restricted Stock, Restricted
Stock Unit, Performance Share, Performance Unit, Dividend Equivalent and Deferred Stock Unit award
(and any related Dividend Equivalent), the Participant shall fully vest in the Restricted Stock,
Restricted Stock Unit, Performance Share, Performance Unit, Dividend Equivalent and Deferred Stock
Unit award (and any related Dividend Equivalent), including as to Shares (or with respect to
Dividend Equivalents and Performance Units, the cash equivalent thereof) which would not otherwise
be vested. For the purposes of this paragraph, a Restricted Stock, Restricted Stock Unit,
Performance Share, Performance Unit, Dividend Equivalent and Deferred Stock Unit award (and any
related Dividend Equivalent) shall be considered assumed if, following the merger or asset sale,
the award confers the right to purchase or receive, for each Share (or with respect to Dividend
Equivalents and Performance Units, the cash equivalent thereof) subject to the Award immediately
prior to the merger or asset sale, the consideration (whether stock, cash, or other securities or
property) received in the merger or asset sale by holders of the Companys common
stock for each Share held on the effective date of the transaction (and if holders were
offered a choice of consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares); provided, however, that if such consideration received in the merger or
asset sale is not solely common stock of the successor corporation or its Parent, the Administrator
may, with the consent of the successor corporation, provide for the consideration to be received,
for each Share and each unit/right to acquire a Share subject to the Award (other than Dividend
Equivalents and Performance Units) to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration received by holders of the
Companys common stock in the merger or asset sale.
22.
Time of Granting Awards
. The date of grant of an Award shall, for all purposes, be the
date on which the Administrator makes the determination granting such Award. Notice of the
determination shall be given to each Employee or Consultant to whom an Award is so granted within a
reasonable time after the date of such grant.
23.
Term of Plan
. The Plan shall continue in effect until March 1, 2016.
24.
Amendment and Termination of the Plan
.
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(a)
Amendment and Termination
. The Board may at any time amend, alter, suspend or
terminate the Plan.
(b)
Shareholder Approval
. The Company shall obtain shareholder approval of any Plan
amendment to the extent necessary and desirable to comply with Rule 16b-3 or with Section 422 of
the Code (or any successor rule or statute or other applicable law, rule or regulation, including
the requirements of any exchange or quotation system on which the Common Stock is listed or
quoted). Such shareholder approval, if required, shall be obtained in such a manner and to such a
degree as is required by the applicable law, rule or regulation.
(c)
Effect of Amendment or Termination
. No amendment, alteration, suspension or
termination of the Plan shall impair the rights of any Participant, unless mutually agreed
otherwise between the Participant and the Administrator, which agreement must be in writing and
signed by the Participant and the Company.
25.
Conditions Upon Issuance of Shares
. Shares shall not be issued pursuant to the
exercise of an Option unless the exercise of such Option and the issuance and delivery of such
Shares pursuant thereto shall comply with all relevant provisions of law, including, without
limitation, the Securities Act, the Exchange Act, the rules and regulations promulgated thereunder,
state securities laws, and the requirements of any stock exchange upon which the Shares may then be
listed, and shall be further subject to the approval of counsel for the Company with respect to
such compliance.
As a condition to the exercise or payout, as applicable, of an Award, the Company may require
the person exercising such Option or SAR, or in the case of another Award (other than a Dividend
Equivalent or Performance Unit), the person receiving the Shares upon vesting, to render to the
Company a written statement containing such representations and warranties as, in the opinion of
counsel for the Company, may be required to ensure compliance with any of the
aforementioned relevant provisions of law, including a representation that the Shares are being
purchased only for investment and without any present intention to sell or distribute such Shares,
if, in the opinion of counsel for the Company, such a representation is required.
26.
Reservation of Shares
. The Company, during the term of this Plan, will at all times
reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements
of the Plan. Inability of the Company to obtain authority from any regulatory body having
jurisdiction, which authority is deemed by the Companys counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of
the failure to issue or sell such Shares as to which such requisite authority shall not have been
obtained.
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