Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

(Mark One)

     þ

  

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

For the quarterly period ended October 25, 2013

or

 

     ¨

  

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

  

 

For the transition period from              to             

Commission File Number 000-27130

NetApp, Inc.

(Exact name of registrant as specified in its charter)

Delaware   77-0307520

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

495 East Java Drive,

Sunnyvale, California 94089

(Address of principal executive offices, including zip code)

(408) 822-6000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ     No  ¨

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

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

 

Large accelerated filer  þ

  

Accelerated filer  ¨

   Non-accelerated filer  ¨   

Smaller reporting company  ¨

      (Do not check if a smaller reporting company)   

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of November 18, 2013, there were 340,818,219 shares of the registrant’s common stock, $0.001 par value, outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION   

Item 1

 

Condensed Consolidated Financial Statements (Unaudited)

     3   
 

Condensed Consolidated Balance Sheets as of October 25, 2013 and April 26, 2013

     3   
 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended October 25, 2013 and October 26, 2012

     4   
 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended October 25, 2013 and October 26, 2012

     5   
 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended October 25, 2013 and October 26, 2012

     6   
 

Notes to Condensed Consolidated Financial Statements

     7   

Item 2

 

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

     22   

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

     36   

Item 4

 

Controls and Procedures

     38   
PART II — OTHER INFORMATION   

Item 1

  Legal Proceedings      39   

Item 1A

  Risk Factors      39   

Item 2

  Unregistered Sales of Equity Securities and Use of Proceeds      51   

Item 3

  Defaults upon Senior Securities      51   

Item 4

  Mine Safety Disclosures      51   

Item 5

  Other Information      51   

Item 6

  Exhibits      51   

SIGNATURE

       52   

TRADEMARKS

© 2013 NetApp, Inc. All rights reserved. No portions of this document may be reproduced without prior written consent of NetApp, Inc. Specifications are subject to change without notice. NetApp, the NetApp logo, Go Further, Faster, ASUP, AutoSupport, Campaign Express, Clustered Data ONTAP, CyberSnap, Data Center Fitness, Data ONTAP, DataMotion, ExpressPod, FilerView, Flash Accel, Flash Cache, Flash Pool, FlashRay, FlexCache, FlexClone, FlexPod, FlexScale, FlexShare, FlexVol, GetSuccessful, LockVault, Manage ONTAP, Mars, MetroCluster, MultiStore, Network Appliance, the Network Appliance logo, OnCommand, ONTAP, ONTAPI, RAID-DP, SANtricity, SecureShare, Simplicity, Simulate ONTAP, Snap Creator, SnapCopy, SnapDrive, SnapIntegrator, SnapLock, SnapManager, SnapMirror, SnapProtect, SnapRestore, Snapshot, SnapValidator, SnapVault, StorageGRID, Tech OnTap, and WAFL are trademarks or registered trademarks of NetApp, Inc. in the United States and/or other countries. All other brands or products are trademarks or registered trademarks of their respective holders and should be treated as such.

 

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Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

NETAPP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except par value)

(Unaudited)

 

     October 25,
2013
     April 26,
2013
 
ASSETS   

Current assets:

     

Cash and cash equivalents

   $ 2,260.5       $ 3,277.1   

Short-term investments

     3,012.2         3,675.5   

Accounts receivable, net of allowances of $2.4 million and $4.2 million as of October 25, 2013 and April 26, 2013, respectively

     590.4         800.9   

Inventories

     115.9         139.5   

Other current assets

     441.0         525.2   
  

 

 

    

 

 

 

Total current assets

     6,420.0         8,418.2   

Property and equipment, net

     1,142.9         1,170.9   

Goodwill

     988.1         988.1   

Purchased intangible assets, net

     150.9         180.6   

Other non-current assets

     495.5         484.6   
  

 

 

    

 

 

 

Total assets

   $ 9,197.4       $ 11,242.4   
  

 

 

    

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

     

Accounts payable

   $ 223.8       $ 259.7   

Accrued compensation and related benefits

     306.7         348.0   

Other current liabilities

     352.4         401.8   

Current portion of long-term debt

     0.0         1,257.8   

Short-term deferred revenue

     1,525.8         1,563.3   
  

 

 

    

 

 

 

Total current liabilities

     2,408.7         3,830.6   

Long-term debt

     995.0         994.6   

Other long-term liabilities

     267.2         253.5   

Long-term deferred revenue

     1,406.1         1,446.2   
  

 

 

    

 

 

 

Total liabilities

     5,077.0         6,524.9   
  

 

 

    

 

 

 

Commitments and contingencies (Note 15)

     

Stockholders’ equity:

     

Common stock, $0.001 par value, (341.8 and 460.9 shares issued as of October 25, 2013 and April 26, 2013, respectively)

     0.3         0.5   

Additional paid-in capital

     3,998.3         4,738.9   

Treasury stock, at cost (no shares and 104.3 shares as of October 25, 2013 and April 26, 2013, respectively)

     0.0         (2,927.4

Retained earnings

     115.5         2,896.8   

Accumulated other comprehensive income

     6.3         8.7   
  

 

 

    

 

 

 

Total stockholders’ equity

     4,120.4         4,717.5   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 9,197.4       $ 11,242.4   
  

 

 

    

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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NETAPP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     October 25,
2013
    October 26,
2012
    October 25,
2013
    October 26,
2012
 

Revenues:

        

Product

   $ 955.3      $ 995.8      $ 1,886.1      $ 1,893.8   

Software entitlements and maintenance

     231.8        219.4        460.3        437.9   

Service

     362.8        326.0        719.7        654.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     1,549.9        1,541.2        3,066.1        2,985.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues:

        

Cost of product

     423.3        477.3        873.2        929.5   

Cost of software entitlements and maintenance

     7.5        7.0        15.0        13.6   

Cost of service

     153.9        143.0        303.1        278.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     584.7        627.3        1,191.3        1,221.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     965.2        913.9        1,874.8        1,764.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Sales and marketing

     479.5        488.2        947.3        971.1   

Research and development

     228.2        223.8        456.3        445.2   

General and administrative

     69.5        66.6        137.9        132.2   

Restructuring and other charges

     1.1        0.0        49.5        0.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     778.3        778.6        1,591.0        1,548.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     186.9        135.3        283.8        215.5   

Other income (expense), net:

        

Interest income

     8.5        11.0        18.5        21.8   

Interest expense

     (6.5     (19.8     (23.0     (39.7

Other income, net

     3.3        1.2        5.2        4.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     5.3        (7.6     0.7        (13.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     192.2        127.7        284.5        201.9   

Provision for income taxes

     25.4        18.1        36.1        28.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 166.8      $ 109.6      $ 248.4      $ 173.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

        

Basic

   $ 0.49      $ 0.30      $ 0.72      $ 0.48   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.48      $ 0.30      $ 0.70      $ 0.47   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in net income per share calculations:

        

Basic

     340.7        362.0        345.8        364.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     349.1        368.2        354.5        369.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per share

   $ 0.15      $ 0.00      $ 0.30      $ 0.00   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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NETAPP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     October 25,
2013
    October 26,
2012
    October 25,
2013
    October 26,
2012
 

Net income

   $ 166.8      $ 109.6      $ 248.4      $ 173.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Foreign currency translation adjustments

     4.8        3.6        3.6        (1.6

Defined benefit obligation adjustments

     0.1        0.1        0.2        0.2   

Unrealized gains (losses) on available-for-sale securities:

        

Unrealized holding gains (losses) arising during the period

     4.4        2.5        (4.0     6.6   

Income tax effect on unrealized holding gains (losses)

     0.0        0.2        1.0        (0.3

Reclassification adjustments for gains included in net income

     (1.0     (0.5     (1.1     (0.6

Unrealized gains (losses) on cash flow hedges:

        

Unrealized holding gains (losses) arising during the period

     (3.1     (5.5     (3.5     0.9   

Reclassification adjustments for (gains) losses included in net income

     2.4        2.6        1.4        (1.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     7.6        3.0        (2.4     3.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 174.4      $ 112.6      $ 246.0      $ 176.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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NETAPP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

     Six Months Ended  
     October 25,
2013
    October 26,
2012
 

Cash flows from operating activities:

    

Net income

   $ 248.4      $ 173.4   

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

    

Depreciation and amortization

     168.4        169.1   

Stock-based compensation

     133.9        144.2   

Accretion of discount and issuance costs on debt

     8.8        28.7   

Deferred income taxes

     (8.4     (50.0

Excess tax benefit from stock-based compensation

     (9.5     (43.6

Other non-cash items, net

     (16.5     38.3   

Changes in assets and liabilities:

    

Accounts receivable

     209.3        212.9   

Inventories

     23.6        (51.7

Other operating assets

     92.9        (16.9

Accounts payable

     (40.8     13.9   

Accrued compensation and other current liabilities

     (102.4     (15.9

Deferred revenue

     (67.6     (42.6

Other operating liabilities

     8.2        5.8   
  

 

 

   

 

 

 

Net cash provided by operating activities

     648.3        565.6   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of investments

     (476.1     (1,243.0

Maturities, sales and collections of investments

     1,148.2        1,336.4   

Purchases of property and equipment

     (107.5     (129.0

Other investing activities, net

     3.4        2.8   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     568.0        (32.8
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuance of common stock under employee stock plans

     123.9        45.1   

Repurchase of common stock and forward contract

     (1,000.0     (348.3

Excess tax benefit from stock-based compensation

     9.5        43.6   

Repayment of long-term debt

     (1,264.9     0.0   

Dividends paid

     (102.7     0.0   

Other financing activities, net

     (5.7     (0.3
  

 

 

   

 

 

 

Net cash used in financing activities

     (2,239.9     (259.9
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     7.0        (5.9

Net increase (decrease) in cash and cash equivalents

     (1,016.6     267.0   

Cash and cash equivalents:

    

Beginning of period

     3,277.1        1,549.8   
  

 

 

   

 

 

 

End of period

   $ 2,260.5      $ 1,816.8   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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NETAPP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.  The Company

Headquartered in Sunnyvale, California, NetApp, Inc. (we, us, or the Company) is a supplier of enterprise storage and data management software and hardware products and services. Our solutions help global enterprises meet information technology challenges such as managing storage growth, assuring secure and timely information access, protecting data and controlling costs by providing innovative solutions that simplify the complexity associated with managing corporate data.

2.  Condensed Consolidated Financial Statements

Fiscal Year  — Our fiscal year is reported on a 52- or 53-week year ending on the last Friday in April. The first and second quarters of fiscal 2014 and 2013 were each 13-week periods.

Basis of Presentation — The accompanying unaudited condensed consolidated financial statements have been prepared by the Company, and reflect all adjustments, consisting only of normal recurring adjustments, that are, in the opinion of management, necessary for the fair presentation of our financial position, results of operations, comprehensive income and cash flows for the interim periods presented. The statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these statements do not include all information and footnotes required by GAAP for annual consolidated financial statements, and should be read in conjunction with our audited consolidated financial statements as of and for the fiscal year ended April 26, 2013 contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 17, 2013. The results of operations for the three and six months ended October 25, 2013 are not necessarily indicative of the operating results to be expected for the full fiscal year or future operating periods.

3.  Significant Accounting Policies

There have been no significant changes in our significant accounting policies as of and for the six months ended October 25, 2013, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended April 26, 2013.

Recent Accounting Standards Not Yet Effective — In July 2013, the Financial Accounting Standards Board issued an accounting standard update providing presentation requirements for unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a similar tax credit carryforward exists. This accounting standard update will be effective for us beginning in our first quarter of fiscal 2015 and is not expected to have a significant impact on our consolidated financial statements.

Use of Estimates — The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates include, but are not limited to, revenue recognition, reserves and allowances; inventory valuation and purchase order accruals; valuation of goodwill and intangibles; restructuring reserves; product warranties; employee benefit accruals; stock-based compensation; loss contingencies; investment impairments; income taxes and fair value measurements. Actual results could differ materially from those estimates.

4.  Statements of Cash Flows

Non-cash investing and financing activities and supplemental cash flow information are as follows (in millions):

 

     Six Months Ended  
     October 25,
2013
     October 26,
2012
 

Non-cash Investing and Financing Activities:

     

Reclassification of equity component of Convertible Notes

   $ 0.0       $ 62.6   

Acquisition of property and equipment outstanding in accounts payable

   $ 27.1       $ 20.0   

Acquisition of software through long-term financing

   $ 11.4       $ 0.8   

Supplemental Cash Flow Information:

     

Income taxes paid, net of refunds

   $ 26.5       $ 26.5   

Interest paid, net of capitalized interest

   $ 23.2       $ 11.3   

 

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Table of Contents

5.  Purchased Intangible Assets, Net

Purchased intangible assets, net are summarized below (in millions):

 

     October 25, 2013      April 26, 2013  
     Gross
Assets
     Accumulated
Amortization
    Net
Assets
     Gross
Assets
     Accumulated
Amortization
    Net
Assets
 

Developed technology

   $ 283.0       $ (134.0   $ 149.0       $ 312.4       $ (134.9   $ 177.5   

Customer contracts/relationships

     9.6         (8.7     0.9         54.7         (53.1     1.6   

Trademarks and trade names

     2.9         (2.2     0.7         9.9         (8.9     1.0   

Covenants not to compete

     1.6         (1.3     0.3         2.2         (1.7     0.5   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total purchased intangible assets

   $ 297.1       $ (146.2   $ 150.9       $ 379.2       $ (198.6   $ 180.6   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense for purchased intangible assets is summarized below (in millions):

 

     Three Months Ended      Six Months Ended       
     October 25,
2013
     October 26,
2012
     October 25,
2013
     October 26,
2012
     Statements of  Operations
Classifications

Developed technology

   $ 14.3       $ 14.0       $ 28.6       $ 27.9       Cost of revenues

Customer contracts/relationships

     0.3         6.3         0.7         12.6       Operating expenses

Trademarks and trade names

     0.1         1.0         0.2         2.0       Operating expenses

Covenants not to compete

     0.2         0.2         0.3         0.4       Operating expenses
  

 

 

    

 

 

    

 

 

    

 

 

    
   $ 14.9       $ 21.5       $ 29.8       $ 42.9      
  

 

 

    

 

 

    

 

 

    

 

 

    

As of October 25, 2013, future amortization expense related to purchased intangible assets is as follows (in millions):

 

Fiscal Year

   Amount  

Remainder of 2014

   $ 29.5   

2015

     57.8   

2016

     53.6   

2017

     6.7   

2018

     3.3   
  

 

 

 

Total

   $ 150.9   
  

 

 

 

6.  Balance Sheet Details

Cash and cash equivalents (in millions):

 

                                           
     October 25,
2013
     April 26,
2013
 

Cash

   $ 2,088.8       $ 1,634.7   

Cash equivalents

     171.7         1,642.4   
  

 

 

    

 

 

 

Cash and cash equivalents

   $ 2,260.5       $ 3,277.1   
  

 

 

    

 

 

 

Inventories (in millions):

 

                                           
     October 25,
2013
     April 26,
2013
 

Purchased components

   $ 10.8       $ 16.3   

Finished goods

     105.1         123.2   
  

 

 

    

 

 

 

Inventories

   $ 115.9       $ 139.5   
  

 

 

    

 

 

 

Other current assets (in millions):

 

                                           
     October 25,
2013
     April 26,
2013
 

Prepaid expenses and other current assets

   $ 192.3       $ 262.6   

Short-term restricted cash

     7.7         8.9   

Deferred tax assets

     241.0         253.7   
  

 

 

    

 

 

 

Other current assets

   $ 441.0       $ 525.2   
  

 

 

    

 

 

 

 

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Table of Contents

Property and equipment, net (in millions):

 

                                           
     October 25,
2013
    April 26,
2013
 

Land and land improvements

   $ 265.7      $ 265.5   

Buildings and building improvements

     540.8        534.8   

Leasehold improvements

     101.8        100.3   

Computer, production, engineering and other equipment

     747.8        714.0   

Software

     430.1        422.6   

Furniture and fixtures

     84.9        82.2   

Construction-in-progress

     39.6        19.9   
  

 

 

   

 

 

 
     2,210.7        2,139.3   

Accumulated depreciation and amortization

     (1,067.8     (968.4
  

 

 

   

 

 

 

Property and equipment, net

   $ 1,142.9      $ 1,170.9   
  

 

 

   

 

 

 

Software includes capitalized internal-use software development costs with a net book value as follows (in millions):

 

                                           
     October 25,
2013
     April 26,
2013
 

Computer software

   $ 138.6       $ 162.5   
  

 

 

    

 

 

 

Other non-current assets (in millions):

 

                                           
     October 25,
2013
     April 26,
2013
 

Auction rate securities

   $ 39.5       $ 42.0   

Deferred tax assets

     211.8         200.4   

Other assets

     244.2         242.2   
  

 

 

    

 

 

 

Other non-current assets

   $ 495.5       $ 484.6   
  

 

 

    

 

 

 

Short-term and long-term deferred revenue (in millions):

 

                                           
     October 25,
2013
     April 26,
2013
 

Product

   $ 26.9       $ 15.7   

Software entitlements and maintenance and service

     2,905.0         2,993.8   
  

 

 

    

 

 

 

Total

   $ 2,931.9       $ 3,009.5   
  

 

 

    

 

 

 

Reported as:

     

Short-term

   $ 1,525.8       $ 1,563.3   

Long-term

     1,406.1         1,446.2   
  

 

 

    

 

 

 

Total

   $ 2,931.9       $ 3,009.5   
  

 

 

    

 

 

 

7.  Financial Instruments and Fair Value Measurements

The accounting guidance for fair value measurements provides a framework for measuring fair value on either a recurring or nonrecurring basis whereby the inputs used in our valuation techniques are assigned a hierarchical level. The following are the three levels of inputs to measure fair value:

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2: Inputs that reflect quoted prices for identical assets or liabilities in less active markets; quoted prices for similar assets or liabilities in active markets; benchmark yields, reported trades, broker/dealer quotes, inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3: Unobservable inputs that reflect our own assumptions incorporated in valuation techniques used to measure fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

We consider an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and consider an inactive market to be one in which there are infrequent or few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, our own or the counterparty’s non-performance risk is considered in measuring the fair values of liabilities and assets, respectively.

 

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Table of Contents

Investments

The following is a summary of our investments (in millions):

 

     October 25, 2013      April 26, 2013  
            Gross Unrealized                   Gross Unrealized        
     Cost or
Amortized
Cost
     Gains      Losses     Estimated
Fair Value
     Cost or
Amortized
Cost
     Gains      Losses     Estimated
Fair Value
 

Corporate bonds

   $ 2,558.6       $ 10.8       $ (0.9   $ 2,568.5       $ 3,132.8       $ 14.9       $ (0.6   $ 3,147.1   

U.S. Treasury and government debt securities

     278.2         0.4         0.0        278.6         392.8         0.9         0.0        393.7   

Commercial paper

     151.7         0.0         0.0        151.7         178.5         0.0         0.0        178.5   

Certificates of deposit

     185.0         0.1         0.0        185.1         135.4         0.1         0.0        135.5   

Money market funds

     0.0         0.0         0.0        0.0         1,463.1         0.0         0.0        1,463.1   

Auction rate securities

     41.9         0.0         (2.4     39.5         44.2         0.5         (2.7     42.0   

Equity funds

     31.6         0.0         0.0        31.6         28.3         0.0         0.0        28.3   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total debt and equity securities

   $ 3,247.0       $ 11.3       $ (3.3   $ 3,255.0       $ 5,375.1       $ 16.4       $ (3.3   $ 5,388.2   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

The unrealized losses on our available-for-sale investments were caused by market value declines as a result of the economic environment, as well as fluctuations in market interest rates. Because the declines in market value are attributable to changes in market conditions and not credit quality, and because we have currently concluded that we neither intend to sell nor is it more likely than not that we will be required to sell these investments prior to a recovery of par value, we do not consider these investments to be other-than temporarily impaired as of October 25, 2013.

The following table presents the contractual maturities of our debt investments as of October 25, 2013 (in millions):

 

     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ 1,130.1       $ 1,131.9   

Due in one through five years

     1,871.7         1,880.3   

Due after ten years*

     41.9         39.5   
  

 

 

    

 

 

 
   $ 3,043.7       $ 3,051.7   
  

 

 

    

 

 

 

 

*

Consists of auction rate securities (ARS) which have contractual maturities of greater than 10 years.

Fair Value of Financial Instruments

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of October 25, 2013 (in millions):

 

            Fair Value Measurements at Reporting Date Using  
     Total      Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets

           

Corporate bonds

   $ 2,568.5       $ 0.0       $ 2,568.5       $ 0.0   

U.S. Treasury and government debt securities

     278.6         176.4         102.2         0.0   

Commercial paper

     151.7         0.0         151.7         0.0   

Certificates of deposit

     185.1         0.0         185.1         0.0   

Auction rate securities

     39.5         0.0         0.0         39.5   

Equity funds

     31.6         31.6         0.0         0.0   

Foreign currency contracts

     1.2         0.0         1.2         0.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,256.2       $ 208.0       $ 3,008.7       $ 39.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Foreign currency contracts

   $ 4.4       $ 0.0       $ 4.4       $ 0.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table summarizes the balance sheet classifications of our financial assets and liabilities measured at fair value on a recurring basis as of October 25, 2013 (in millions):

 

            Fair Value Measurements at Reporting Date Using  
     Total      Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets

           

Cash equivalents

   $ 171.7       $ 0.0       $ 171.7       $ 0.0   

Short-term investments

     3,012.2         176.4         2,835.8         0.0   

Other current assets

     5.1         3.9         1.2         0.0   

Other non-current assets

     67.2         27.7         0.0         39.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,256.2       $ 208.0       $ 3,008.7       $ 39.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Other current liabilities

   $ 4.4       $ 0.0       $ 4.4       $ 0.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Level 2 investments are held by a custodian who prices some of the investments using standard inputs in various asset price models or obtains investment prices from a third-party pricing provider that incorporates standard inputs in various asset price models. We review Level 2 inputs and fair value for reasonableness and the values may be further validated by comparison to multiple independent pricing sources. In addition, we review third-party pricing providers’ models, key inputs and assumptions and understand the pricing processes at our third-party providers in determining the overall reasonableness of the fair value of our Level 2 financial instruments. As of October 25, 2013, we have not made any adjustments to the prices obtained from our third-party pricing providers.

Quantitative information about our Level 3 fair value measurements is as follows (fair value in millions):

 

     Estimated Fair
Value as of
October 25, 2013
     Valuation Techniques    Unobservable Inputs    Range
(Weighted  average)

ARS

   $ 39.5       Discounted cash flow    Time-to-economic maturity    6.7 yrs. – 10.9 yrs. (8.3 yrs.)
         Liquidity risk premium, market
credit spread and other factors
   1.7% - 3.6% (2.5%)
         Coupon rate    1.1% - 2.7% (1.9%)
     

 

      Market comparable securities    Discount rate    2.2% - 9.2% (5.4%)

All of our ARS are classified as other non-current assets and are backed by pools of student loans guaranteed by the U.S. Department of Education. We estimate the fair value of each individual ARS using an income (discounted cash flow) and market approach that incorporate both observable and unobservable inputs. Key inputs into the discounted cash flow analysis include the time-to-economic maturity, liquidity risk premium, market credit spread and other factors, and a coupon rate. The key input into the market approach is a discount rate. A significant increase (decrease) in the time-to-economic maturity, liquidity risk premium, market credit spread and other factors, coupon rate or discount rate could result in a significantly lower (higher) fair value estimate. We review the fair value of our Level 3 financial instruments for overall reasonableness by reviewing service provider pricing methodologies, key inputs and assumptions and by understanding the processes used by our third-party service provider. We will continue to monitor our ARS investments in light of the debt market environment and evaluate these investments for impairment and classification.

The table below provides a reconciliation of the beginning and ending balance of our Level 3 ARS measured at fair value on a recurring basis using significant unobservable inputs (in millions):

 

     Three Months Ended     Six Months Ended  
     October 25,
2013
    October 26,
2012
    October 25,
2013
    October 26,
2012
 

Balance at beginning of period

   $ 42.2      $ 46.3      $ 42.0      $ 51.0   

Total unrealized gains (losses), net included in other comprehensive income (loss)

     (0.4     0.2        (0.2     0.5   

Total realized gains included in earnings

     0.7        0.0        0.7        0.0   

Sales

     (3.0     0.0        (3.0     0.0   

Settlements

     (0.0     (0.0     (0.0     (5.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $     39.5      $     46.5      $     39.5      $     46.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Fair Value of Debt

As of October 25, 2013, the fair value of our 2.00% Senior Notes and 3.25% Senior Notes (collectively referred to as Senior Notes) was approximately $989.6 million. The fair value of our debt was based on observable market prices in a less active market and discounted cash flow models that take into consideration variables such as credit-rating and interest rate changes. All of our debt obligations are categorized as Level 2 instruments.

8.  Financing Arrangements

Long-term Debt

The following table summarizes the carrying value of our long-term debt (in millions):

 

     October 25, 2013     April 26, 2013  
     Amount     Effective
Interest Rate
    Amount     Effective
Interest Rate
 

2.00% Senior Notes due 2017

   $ 750.0        2.25   $ 750.0        2.25

3.25% Senior Notes due 2022

     250.0        3.43     250.0        3.43

1.75% Convertible Notes due 2013

     0.0        N/A        1,264.9        6.31
  

 

 

     

 

 

   

Total principal amount

     1,000.0          2,264.9     

Less: Unamortized discount

     (5.0       (12.5  
  

 

 

     

 

 

   

Total debt

     995.0          2,252.4     

Less: Current portion

     (0.0       (1,257.8  
  

 

 

     

 

 

   

Total long-term portion

   $ 995.0        $ 994.6     
  

 

 

     

 

 

   

 

N/A - Not Applicable

Senior Notes

Our Senior Notes, issued in December 2012, are unsecured, unsubordinated obligations, which pay interest semi-annually on June 15 and December 15 and rank equally in right of payment with any future senior unsecured indebtedness. Interest expense associated with the Senior Notes was $6.2 million and $12.5 million for the three and six months ended October 25, 2013, respectively.

We may redeem the Senior Notes in whole or in part, at any time at our option at specified redemption prices. In addition, upon the occurrence of certain change of control triggering events, we may be required to repurchase the Senior Notes at 101% of their aggregate principal amount, plus accrued and unpaid interest to the date of repurchase. The Senior Notes also include covenants that limit our ability to incur debt secured by liens on assets or on shares of stock or indebtedness of our subsidiaries; to engage in sale and lease-back transactions; and to consolidate, merge or sell all or substantially all of our assets. As of October 25, 2013, we were in compliance with all covenants associated with the Senior Notes.

1.75% Convertible Senior Notes due 2013

On June 10, 2008, we issued $1,265.0 million aggregate principal amount of 1.75% Convertible Senior Notes (the Convertible Notes) with a maturity date of June 1, 2013. The Convertible Notes were unsecured, unsubordinated obligations of the Company and paid interest in cash semi-annually at a rate of 1.75% per annum. Upon maturity, the Convertible Notes were converted into shares of common stock at a conversion rate of 31.40 shares of common stock per $1,000 principal amount of the Convertible Notes (which represented the effective conversion price of $31.85 per share). Upon conversion in June 2013, the holders received cash for the principal amount of the Convertible Notes and an aggregate of 4.9 million shares of common stock for the $178.9 million excess of the conversion value over the principal amount.

We separately accounted for the liability and equity components of the Convertible Notes. The initial debt component of the Convertible Notes was valued at $1,017.0 million based on the contractual cash flows discounted at an appropriate comparable market non-convertible debt borrowing rate at the date of issuance of 6.31%, with the equity component representing the residual amount of the proceeds of $248.0 million which was recorded as a debt discount. Issuance costs were allocated pro-rata based on the relative initial carrying amounts of the debt and equity components. As a result, $5.2 million of the issuance costs was allocated to the equity component of the Convertible Notes, and $21.4 million of the issuance costs remained classified as other non-current assets. The debt discount and the issuance costs allocated to the debt component were amortized as additional interest expense over the term of the Convertible Notes using the effective interest method.

 

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Table of Contents

Convertible Note Hedges and Warrants

Concurrent with the issuance of the Convertible Notes, we purchased Convertible Note hedges and sold warrants. The separate Convertible Note hedge and warrant transactions were structured to reduce the potential future economic dilution associated with the conversion of the Convertible Notes.

• Convertible Note Hedges: As of April 26, 2013, we had arrangements with counterparties to buy up to approximately 31.8 million shares of our common stock, at a price of $31.85 per share. In June 2013, concurrent with the repayment and conversion of the Convertible Notes, we exercised the Convertible Note hedges that were net settled for an aggregate of 3.9 million shares from the counterparties.

• Warrants: As of April 26, 2013, we had outstanding warrants for certain counterparties to acquire 39.7 million shares of our common stock at an exercise price of $41.28 per share. The warrants were exercisable on a series of days commencing on September 3, 2013 and ending on October 28, 2013. The number of warrants and exercise price were adjusted in July 2013 to 39.9 million and $41.12 per share, respectively, to reflect our July 2013 dividend. On October 17, 2013, the exercise price of the warrants then outstanding was further adjusted to $40.97 per share to reflect our October 2013 dividend. Through October 25, 2013, 31.9 million warrants were exercised and net settled with 1.1 million shares of our common stock equal to the difference between the market price on the date of exercise and the exercise price of the warrants on the respective exercise dates. The remaining warrants had an exercise price greater than the market price and expired unexercised by October 28, 2013.

Interest Expense on Convertible Notes

The following table presents the amount of interest expense related to the Convertible Notes (in millions):

 

     Three Months Ended     Six Months Ended  
     October 26, 2012     October 25, 2013      October 26, 2012  

Contractual coupon interest expense

   $ 5.5      $ 2.5       $ 11.0   

Amortization of debt discount

     13.6        7.1         27.1   

Amortization of debt issuance costs

     1.2        0.6         2.4   

Less capitalized interest

     (0.6     0.0         (1.1
  

 

 

   

 

 

    

 

 

 

Total interest expense related to Convertible Notes

   $ 19.7      $ 10.2       $ 39.4   
  

 

 

   

 

 

    

 

 

 

No interest expense related to the Convertible Notes was recognized in the three months ended October 25, 2013 due to their maturity.

Debt Maturities

As of October 25, 2013, our aggregate future principal debt maturities are as follows (in millions):

 

Fiscal Year

   Amount  

2018

   $ 750.0   

Thereafter

     250.0   
  

 

 

 

Total

   $ 1,000.0   
  

 

 

 

Credit Facility

In December 2012, we entered into a credit agreement with a syndicated group of lenders that provides for an unsecured $250.0 million revolving credit facility that is comprised of revolving loans, Eurocurrency loans and/or swingline loans. The credit facility includes a $100.0 million foreign currency sub-facility, a $50.0 million letter of credit sub-facility and a $10.0 million swingline sub-facility available on same-day notice. Available borrowings under the credit facility are reduced by the amount of any outstanding borrowings on the sub-facilities. We may also, subject to certain requirements, request an increase in the facility up to an additional $100.0 million and request two additional one-year extensions, subject to certain conditions. The proceeds from the facility may be used by us for general corporate purposes.

Borrowings under the facility, except for swingline loans, accrue interest in arrears at an alternate base rate as defined in the credit agreement or, at our option, an adjusted London Interbank Offered Rate (LIBOR) plus in each case, a spread (based on our public debt ratings and the type of loan) ranging from 0.2% to 1.2%. Swingline borrowings accrue interest at an alternate base rate. In addition, we are required to pay fees to maintain the credit facility, whether or not we have outstanding borrowings. The facility terminates on December 21, 2017 if no extensions have been requested and contains financial covenants requiring us to maintain a maximum leverage ratio of not more than 3.0:1.0 and a minimum interest coverage ratio of not less than 3.5:1.0. The facility contains customary affirmative and negative covenants, including covenants that limit our ability to incur debt secured by liens on assets or indebtedness of our subsidiaries and to consolidate, merge or sell all or substantially all of our assets. As of October 25, 2013, no borrowings were outstanding under the facility and we were in compliance with all covenants associated with the facility.

 

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Table of Contents

Other Long-Term Financing Arrangements

The following presents the amounts due under other long-term financing arrangements (in millions):

 

     October 25,
2013
     April 26,
2013
 

Current portion of other long-term financing arrangements

   $ 7.1       $ 5.2   

Non-current portion of other long-term financing arrangements

     9.5         5.6   
  

 

 

    

 

 

 

Total

   $ 16.6       $ 10.8   
  

 

 

    

 

 

 

9.  Stockholders’ Equity

Stock Options

The following table summarizes activity related to our stock options (in millions, except for exercise price and contractual term):

 

     Number
of Shares
    Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual Term

(Years)
     Aggregate
Intrinsic
Value
 

Outstanding as of April 26, 2013

     19.2      $ 31.27         

Granted

     2.7        38.14         

Exercised

     (4.4     25.90         

Forfeited and expired

     (0.7     40.85         
  

 

 

         

Outstanding as of October 25, 2013

     16.8        33.37         3.64       $ 139.5   
  

 

 

         

Vested and expected to vest as of October 25, 2013

     16.2        33.23         3.55         137.4   

Exercisable as of October 25, 2013

     11.8        31.18         2.73         121.6   

The aggregate intrinsic value represents the pre-tax difference between the exercise price of stock options and the quoted market price of our stock on that day for all in-the-money options.

Additional information related to our stock options is summarized below (in millions, except per share information):

 

     Three Months Ended      Six Months Ended  
     October 25, 2013      October 26, 2012      October 25, 2013      October 26, 2012  

Weighted-average fair value per share granted

   $ 10.49       $ 12.40       $ 9.86       $ 10.86   

Intrinsic value of exercises

   $ 33.0       $ 10.4       $ 60.4       $ 15.8   

Proceeds received from exercises

   $ 56.4       $ 12.8       $ 113.2       $ 19.5   

Fair value of options vested

   $ 13.4       $ 15.1       $ 25.4       $ 29.5   

Restricted Stock Units

The following table summarizes activity related to our restricted stock units (RSUs) (in millions, except for fair value):

 

     Number of
Shares
    Weighted-
Average
Grant Date
Fair Value
 

Outstanding as of April 26, 2013

     12.8      $ 38.36   

Granted

     5.9        38.58   

Vested

     (3.0     36.74   

Forfeited

     (1.1     39.39   
  

 

 

   

Outstanding as of October 25, 2013

     14.6        38.70   
  

 

 

   

 

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Table of Contents

RSUs are converted into common stock upon vesting. We primarily use the net share settlement approach upon vesting, where a portion of the shares are withheld as settlement of statutory employee withholding taxes, which decreases the shares issued to the employee by a corresponding value. The number and value of the shares netted for employee taxes are summarized in the table below (in millions):

 

                                                                                                   
     Three Months Ended      Six Months Ended  
     October 25, 2013      October 26, 2012      October 25, 2013      October 26, 2012  

Shares withheld for taxes

     0.1         0.1         1.0         0.7   

Fair value of shares withheld

   $     4.0       $     2.8       $     39.3       $     22.6   

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan (ESPP), employees who elect to participate are granted purchase rights that include a purchase price adjustment provision under which the employees may purchase common stock at a 15% discount from the market value of the common stock at certain specified dates within a two-year offering period. Information related to the purchase rights issued under the ESPP is provided below (in millions, except per right information):

 

                                           
     Six Months Ended  
     October 25, 2013      October 26, 2012  

Weighted-average fair value per right granted

   $ 10.53       $ 10.25   

Shares issued under the ESPP

     2.0         1.9   

Proceeds from issuance of shares

   $ 49.9       $ 48.2   

Stock-Based Compensation Expense

Stock-based compensation expense is included in the condensed consolidated statements of operations as follows (in millions):

 

                                                                                       
     Three Months Ended      Six Months Ended  
     October 25, 2013      October 26, 2012      October 25, 2013      October 26, 2012  

Cost of product revenues

   $ 1.4       $ 1.5       $ 2.7       $ 3.3   

Cost of service revenues

     4.2         4.6         8.2         10.2   

Sales and marketing

     31.1         30.9         61.6         69.9   

Research and development

     21.6         19.3         43.0         43.0   

General and administrative

     9.3         8.7         18.4         17.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 67.6       $ 65.0       $ 133.9       $ 144.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of October 25, 2013, total unrecognized compensation expense related to our equity awards was $500.1 million, which is expected to be recognized on a straight-line basis over a weighted-average remaining service period of 2.6 years.

Total income tax benefit associated with employee stock transactions and recognized in stockholders’ equity were as follows (in millions):

 

                                           
     Six Months Ended  
     October 25, 2013      October 26, 2012  

Income tax benefit associated with employee stock transactions

   $ 1.8       $ 28.2   

Valuation Assumptions

The fair value of each stock option and ESPP purchase right is estimated on the grant date using the Black-Scholes option pricing model and the following weighted-average assumptions:

 

                                                                                       
     Stock Options  
     Three Months Ended     Six Months Ended  
     October 25, 2013     October 26, 2012     October 25, 2013     October 26, 2012  

Expected term in years

     4.8        4.8        4.8        4.8   

Risk-free interest rate

     1.6     0.6     1.1     0.6

Volatility

     32     43     34     41

Dividend yield

     1.6     0.0     1.6     0.0

 

                                           
     ESPP  
     Six Months Ended  
     October 25, 2013     October 26, 2012  

Expected term in years

     1.2        1.2   

Risk-free interest rate

     0.2     0.2

Volatility

     32     38

Dividend yield

     1.6     0.0

 

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The weighted-average assumptions used to value RSUs are summarized as follows:

 

     Three Months Ended     Six Months Ended  
     October 25, 2013     October 26, 2012     October 25, 2013     October 26, 2012  

Grant date fair value per share

   $ 40.13      $ 31.91      $ 38.58      $ 29.31   

Expected dividend

     1.6     0.0     1.6     0.0

Prior to the initial declaration of a quarterly cash dividend on May 21, 2013, the fair value of RSUs was measured based on the grant date share price, as we did not historically pay cash dividends on our common stock. For awards granted on or subsequent to May 21, 2013, the fair value of RSUs was measured based on the grant date share price, less the present value of expected dividends during the vesting period, discounted at a risk-free interest rate.

Stock Repurchase Program

As of October 25, 2013, our Board of Directors has authorized the repurchase of up to $7.1 billion of our common stock. Under this program, which may be suspended or discontinued at any time, we may purchase shares of our outstanding common stock through open market and privately negotiated transactions at prices deemed appropriate by our management.

The following table summarizes activity related to this program for the six months ended October 25, 2013 (in millions, except per share information):

 

Number of shares repurchased

     25.3   

Average price per share

   $ 39.57   

Aggregate purchase price

   $ 1,000.0   

Remaining authorization at end of period

   $ 2,006.3   

The aggregate purchase price of our share repurchases for the six months ended October 25, 2013 consisted of $750.0 million under an accelerated share repurchase agreement (ASR) and $250.0 million of open market purchases, for which collectively $386.3 million and $613.7 million was allocated to additional paid-in capital and retained earnings, respectively.

During the six months ended October 25, 2013, we retired 104.3 million shares of common stock repurchased in prior years and previously reported as treasury stock, resulting in reductions of $0.1 million in common stock (par value), $614.0 million in additional paid-in capital and $2,313.3 million in retained earnings.

Accelerated Share Repurchase Agreement

On June 5, 2013, we entered into a collared ASR with a counterparty under which we prepaid $750.0 million to purchase shares of our common stock. The aggregate number of shares ultimately purchased was determined based on the volume weighted-average share price of our common stock over a specified period of time. The contract was settled in July 2013. The total number of shares repurchased under this ASR was 19.2 million shares, at an average price per share of $39.13. The value of the ASR forward contract was determined to be $13.9 million, which has been recorded as additional paid-in capital.

Dividends

During the six months ended October 25, 2013, we declared and paid quarterly cash dividends of $0.15 per share of outstanding common stock, or an aggregate of $102.7 million. On November 13, 2013, we declared a cash dividend of $0.15 per share of common stock, payable on January 22, 2014 to holders of record on January 9, 2014. No dividends were declared or paid during the six months ended October 26, 2012. The timing and amount of future dividends will depend on market conditions, corporate business and financial considerations and regulatory requirements.

Retained Earnings

A reconciliation of retained earnings for the six months ended October 25, 2013 is as follows (in millions):

 

Balance as of April 26, 2013

   $ 2,896.8   

Net income

     248.4   

Repurchases of common stock

     (613.7

Retirement of treasury stock

     (2,313.3

Dividends

     (102.7
  

 

 

 

Balance as of October 25, 2013

   $ 115.5   
  

 

 

 

 

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Accumulated Other Comprehensive Income

Changes in accumulated other comprehensive income (AOCI) by component, net of tax, are summarized below (in millions):

 

     Foreign
Currency
Translation
Adjustments
     Defined
Benefit
Obligation
Adjustments
    Unrealized
Gains on
Available-
for-Sale
Securities
    Unrealized
Gains
(Losses) on
Derivative
Instruments
    Total  

Balance as of April 26, 2013

   $ 2.0       $ (5.7   $ 11.4      $ 1.0      $ 8.7   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) (OCI) before reclassifications

     3.6         0.2        (3.0     (3.5     (2.7

Amounts reclassified from AOCI

     0.0         0.0        (1.1     1.4        0.3   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net OCI

     3.6         0.2        (4.1     (2.1     (2.4
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of October 25, 2013

   $ 5.6       $ (5.5   $ 7.3      $ (1.1   $ 6.3   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The amounts reclassified out of AOCI are as follows (in millions):

 

     Three Months Ended     Six Months Ended        
     October 25, 2013     October 26, 2012     October 25, 2013     October 26, 2012        

OCI Components

   Amounts Reclassified from AOCI     Amounts Reclassified from AOCI     Statements of Operations
Location
 

Realized gains on available-for-sale securities

   $ (1.0   $ (0.5   $ (1.1   $ (0.6    

 

Other income

(expense), net

  

  

Realized losses (gains) on cash flow hedges

     2.4        2.6        1.4        (1.9     Net revenues   
  

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassifications

   $ 1.4      $ 2.1      $ 0.3      $ (2.5  
  

 

 

   

 

 

   

 

 

   

 

 

   

10.  Derivatives and Hedging Activities

We use derivative instruments to manage exposures to foreign currency risk. All contracts have a maturity of less than six months. The notional amount of our outstanding U.S. dollar equivalent foreign currency exchange forward contracts consisted of the following (in millions):

 

     October 25,
2013
     April 26,
2013
 

Cash Flow Hedges

     

Forward contracts purchased

   $ 181.3       $ 108.4   

Balance Sheet Contracts

     

Forward contracts sold

     180.3         158.2   

Forward contracts purchased

     258.7         358.4   

We have master netting arrangements in place to mitigate the credit risk of our counterparties and to potentially reduce our losses due to counterparty nonperformance. We present our derivative instruments as net amounts in our condensed consolidated balance sheets. The gross and net fair value amounts of such instruments were not material as of October 25, 2013 and April 26, 2013. We did not recognize any gains and losses in earnings due to hedge ineffectiveness for any period presented.

The effect of derivative instruments designated as cash flow hedges recognized in net revenues on our condensed consolidated statements of operations is presented in the condensed consolidated statements of comprehensive income and Note 9.

 

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The effect of derivative instruments not designated as hedging instruments recognized in other income (expense), net on our condensed consolidated statements of operations was as follows (in millions):

 

     Three Months Ended     Six Months Ended  
     October 25, 2013      October 26, 2012     October 25, 2013      October 26, 2012  
     Gain (Loss) Recognized into Income     Gain Recognized into Income  

Foreign currency exchange forward contracts

   $ 0.6       $ (9.7   $ 0.8       $ 6.2   

11.  Restructuring and Other Charges

In May 2013, we initiated a business restructuring plan under which we realigned internal resources, resulting in a reduction of our global workforce of approximately 7%. Restructuring and other charges during the six months ended October 25, 2013 consisted primarily of employee severance-related costs.

Activities related to this plan for the six months ended October 25, 2013 were as follows (in millions):

 

     Total  

Net charges

   $ 49.5   

Cash payments

     (45.4
  

 

 

 

Balance as of October 25, 2013

   $ 4.1   
  

 

 

 

The reserve balance as of October 25, 2013 is included in accrued compensation and related benefits in our condensed consolidated balance sheet.

12.  Income Taxes

Our effective tax rates for the periods presented were as follows:

 

     Six Months Ended  
     October 25, 2013     October 26, 2012  

Effective tax rates

     12.7     14.1

Our effective tax rates reflect the impact of a significant amount of our earnings being taxed in foreign jurisdictions at rates below the U.S. statutory tax rate.

As of October 25, 2013, we had $199.8 million of unrecognized tax benefits, of which $142.7 million has been recorded in other long-term liabilities. Unrecognized tax benefits of $129.0 million, including penalties and interest, would affect our provision for income taxes if recognized. During the six months ended October 25, 2013, there was a gross increase in our unrecognized tax benefits of $13.6 million for tax positions related to the current year, and a gross increase of $1.0 million and gross decrease, including settlements and statute lapses, of $4.4 million for tax positions related to prior years.

Our fiscal 2005 through 2007 income tax returns are currently under audit by the IRS. In September 2012, we reached a tentative agreement with the IRS field examination team on certain transfer pricing matters under appeals, and in July 2013, we received a revised Revenue Agent’s Report (RAR) from the IRS. We are currently in the process of preparing for the review of the revised RAR by certain higher authorities within the IRS and the Joint Committee on Taxation. In February 2012, the IRS commenced an examination of our fiscal 2008 through fiscal 2010 income tax returns. Our open years in U.S. federal jurisdictions are fiscal 2005 and later years. In addition, we are effectively subject to federal tax examination adjustments for tax years ended on or after fiscal year 2000, in that we have tax attribute carryforwards from these years that could be subject to adjustments, if and when utilized. We are also currently under audit by the California Franchise Tax Board for our fiscal 2007 and 2008 income tax returns.

On September 17, 2010, the Danish Tax Authorities issued a decision concluding that distributions declared in 2005 and 2006 from our Danish subsidiary were subject to Danish at-source dividend withholding tax. We do not believe that our Danish subsidiary is liable for withholding tax and filed an appeal with the Danish Tax Tribunal to that effect. On December 19, 2011, the Danish Tax Tribunal issued a ruling that our Danish subsidiary was not liable for Danish withholding tax. The Danish tax examination agency appealed to the Danish High Court in March 2012.

We are in various stages of the examination and appeals process in connection with tax audits worldwide, and it is difficult to determine when these examinations will be settled. It is reasonably possible that over the next twelve-month period, we may experience an increase or decrease in unrecognized tax benefits. It is not possible to determine either the magnitude or the range of any increase or decrease at this time.

In April 2010, our Dutch subsidiary received a favorable tax ruling from the Dutch tax authorities effective May 1, 2010 that replaces the previous Dutch tax ruling that expired on April 30, 2010. This ruling results in both a lower level of earnings subject to tax in the Netherlands and an extension of the expiration date to April 30, 2015.

 

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13.  Net Income per Share

The following is a calculation of basic and diluted net income per share (in millions, except per share amounts):

 

     Three Months Ended      Six Months Ended  
     October 25,
2013
     October 26,
2012
     October 25,
2013
     October 26,
2012
 

Numerator:

           

Net income

   $ 166.8       $ 109.6       $ 248.4       $ 173.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Shares used in basic computation

     340.7         362.0         345.8         364.1   

Dilutive potential shares related to employee equity award plans

     7.5         5.2         7.2         5.1   

Dilutive impact of assumed conversion of Convertible Notes

     0.0         1.0         1.1         0.5   

Dilutive impact of warrants

     0.9         0.0         0.4         0.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Shares used in diluted computation

     349.1         368.2         354.5         369.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income per Share:

           

Basic

   $ 0.49       $ 0.30       $ 0.72       $ 0.48   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.48       $ 0.30       $ 0.70       $ 0.47   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following potential weighted-average shares of common stock have been excluded from the diluted net income per share calculations, as their effect would have been anti-dilutive (in millions):

 

     Three Months Ended      Six Months Ended  
     October 25,
2013
     October 26,
2012
     October 25,
2013
     October 26,
2012
 

Employee equity award plans

     7.2         16.3         6.9         17.1   

14.  Segment, Geographic, and Significant Customer Information

We operate in one industry segment: the design, manufacturing, marketing, and technical support of high-performance networked storage solutions. We conduct business globally, and our sales and support activities are managed on a geographic basis. Our management reviews financial information presented on a consolidated basis, accompanied by disaggregated information it receives from its internal management system about revenues by geographic region, based on the location from which the customer relationship is managed, for purposes of allocating resources and evaluating financial performance. We do not allocate costs of revenues, research and development, sales and marketing, or general and administrative expenses to our geographic regions using this internal management system because management does not review operations or operating results, or make planning decisions, below the consolidated entity level.

Summarized revenues by geographic region based on information from our internal management system and utilized by our Chief Executive Officer, who is considered our Chief Operating Decision Maker, is as follows (in millions):

 

     Three Months Ended      Six Months Ended  
     October 25,
2013
     October 26,
2012
     October 25,
2013
     October 26,
2012
 

Americas (United States, Canada and Latin America)

   $ 899.2       $ 897.3       $ 1,757.7       $ 1,698.4   

Europe, Middle East and Africa

     445.0         437.7         893.0         877.0   

Asia Pacific

     205.7         206.2         415.4         410.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net revenues

   $ 1,549.9       $ 1,541.2       $ 3,066.1       $ 2,985.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Americas revenues consist of Americas commercial and U.S. public sector revenues. Sales to customers inside the United States comprised $800.7 million and $797.6 million of Americas net revenues during the three months ended October 25, 2013 and October 26, 2012, respectively, and $1,573.5 million and $1,509.0 million of Americas net revenues during the six months ended October 25, 2013 and October 26, 2012, respectively. No single foreign country accounted for 10% or more of our net revenues for any period presented.

 

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The majority of our assets, excluding cash, cash equivalents, restricted cash, investments and accounts receivable, were attributable to our domestic operations. The following table presents cash, cash equivalents, restricted cash and investments held in the United States and internationally in various foreign subsidiaries (in millions):

 

                                           
     October 25,
2013
     April 26,
2013
 

United States

   $ 1,414.1       $ 3,419.3   

International

     3,908.2         3,586.8   
  

 

 

    

 

 

 

Total

   $ 5,322.3       $ 7,006.1   
  

 

 

    

 

 

 

With the exception of property and equipment, we do not identify or allocate our long-lived assets by geographic area. The following table presents property and equipment information for geographic areas based on the physical location of the assets (in millions):

 

                                           
     October 25,
2013
     April 26,
2013
 

United States

   $ 1,053.1       $ 1,076.3   

International

     89.8         94.6   
  

 

 

    

 

 

 

Total

   $ 1,142.9       $ 1,170.9   
  

 

 

    

 

 

 

The following customers, each of which is a distributor, accounted for 10% or more of our net revenues:

 

                                                                                       
     Three Months Ended     Six Months Ended  
     October 25,
2013
    October 26,
2012
    October 25,
2013
    October 26,
2012
 

Arrow Electronics, Inc. (1)

     23     21     22     19

Avnet, Inc. (1)

     16     15     16     15

 

(1)  

Net revenues for Arrow Electronics, Inc. for the three and six months ended October 26, 2012 have been corrected from 20% and 18%, respectively, previously disclosed to 21% and 19%, respectively. Net revenues for Avnet, Inc. for the six months ended October 26, 2012 have been corrected from 14% previously disclosed to 15%.

The following customers accounted for 10% or more of net accounts receivable:

 

                                           
     October 25,
2013
    April 26,
2013
 

Arrow Electronics, Inc.

     15     16

Avnet, Inc.

     10     14

15.  Commitments and Contingencies

Operating Lease Commitments

As of October 25, 2013, future annual minimum lease payments under non-cancelable operating leases with an initial term in excess of one year totaled $215.7 million.

Purchase Orders and Other Commitments

In the normal course of business we make commitments to our third-party contract manufacturers, to manage manufacturer lead times and meet product forecasts, and to other parties, to purchase various key components used in the manufacture of our products. We establish accruals for estimated losses on purchased components to the extent we believe it is probable that such components will not be utilized in future operations. To the extent that such forecasts are not achieved, our commitments and associated accruals may change. As of October 25, 2013, we had $306.8 million in non-cancelable purchase commitments with our contract manufacturers. In addition, we recorded a liability for firm, non-cancelable and unconditional purchase commitments with contract manufacturers for quantities in excess of our future demand forecasts through a charge to cost of product sales. As of October 25, 2013 and April 26, 2013, such liability amounted to $10.9 million and $9.5 million, respectively, and is included in other current liabilities in our condensed consolidated balance sheets.

In addition to commitments with contract manufacturers and component suppliers, we have open purchase orders and contractual obligations associated with our ordinary course business for which we have not received goods or services. As of October 25, 2013, we had $33.6 million in capital purchase commitments and $202.4 million in other purchase commitments.

 

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Table of Contents

Product Warranties

We provide customers a warranty on software of ninety days to five years and a warranty on hardware of one to five years. The following table summarizes our warranty reserves (in millions):

 

     Three Months Ended     Six Months Ended  
     October 25,
2013
    October 26,
2012
    October 25,
2013
    October 26,
2012
 

Beginning balance

   $ 119.8      $ 96.5      $ 117.2      $ 83.1   

Expense accrued during the period

     14.3        27.1        38.3        50.8   

Warranty costs incurred

     (18.1     (11.8     (39.5     (22.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 116.0      $ 111.8      $ 116.0      $ 111.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Our warranty reserves were reported in our condensed consolidated balance sheets as follows (in millions):

 

     October 25,
2013
     April 26,
2013
 

Other current liabilities

   $ 78.1       $ 81.6   

Other long-term liabilities

     37.9         35.6   
  

 

 

    

 

 

 

Total

   $ 116.0       $ 117.2   
  

 

 

    

 

 

 

Financing Guarantees

Some of our customers have entered into recourse and non-recourse financing leasing arrangements using third-party financing companies, and in some situations, we enter into customer financing arrangements for our products and services that are contemporaneously sold on a recourse or non-recourse basis to third-party financing companies. Under the terms of recourse leases, which are generally three years or less, we remain liable for the aggregate unpaid remaining lease payments to the third-party leasing companies in the event of end-user customer default. These arrangements are generally collateralized by a security interest in the underlying assets. Under the terms of the nonrecourse leases, we do not have any continuing obligations or liabilities to the third-party financing companies. Where we provide a guarantee for recourse leases, we defer revenues subject to the industry-specific software revenue recognition guidance, and recognize revenues for non-software deliverables in accordance with our multiple deliverable revenue arrangement policy. In connection with certain recourse financing arrangements, we receive advance payments associated with undelivered elements that are subject to customer refund rights. We defer revenue associated with these advance payments until the related refund rights expire and we perform the services.

The following schedule of financing guarantees represents the total maximum potential future payments under financing arrangements with third parties, and the related deferred revenue (in millions):

 

     October 25,
2013
    April 26,
2013
 

Maximum guaranteed payment contingencies

   $ 215.6      $ 182.4   

Deferred revenue associated with financing guarantees

     (199.0     (168.6
  

 

 

   

 

 

 

Maximum potential future payments relating to financing guarantees, net of associated deferred revenue

   $ 16.6      $ 13.8   
  

 

 

   

 

 

 

To date, we have not experienced material losses under our lease financing programs or other financing arrangements.

Legal Contingencies

When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency.

We are subject to various legal proceedings and claims that arise in the normal course of business. No accrual has been recorded as of October 25, 2013 related to such matters as they are not probable and/or reasonably estimable.

 

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Table of Contents

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Forward-looking statements are all statements (and their underlying assumptions) included in this document that refer, directly or indirectly, to future events or outcomes and, as such, are inherently not factual, but rather reflect only our current projections for the future. Consequently, forward-looking statements usually include words such as “estimate,” “intend,” “plan,” “predict,” “seek,” “may,” “will,” “should,” “would,” “could,” “anticipate,” “expect,” “believe,” or similar words, in each case, intended to refer to future events or circumstances. A non-comprehensive list of the topics including forward-looking statements in this document includes:

 

   

our future financial and operating results;

 

   

our strategies;

 

   

our beliefs and objectives for future operations, research and development;

 

   

political, economic and industry trends;

 

   

expected timing of, and benefits from, product introductions, developments, enhancements and acceptance;

 

   

expected benefits from acquisitions and joint ventures, growth opportunities and investments;

 

   

expected outcomes from legal, regulatory and administrative proceedings;

 

   

our competitive position;

 

   

our short-term and long-term cash requirements, including without limitation, anticipated capital expenditures;

 

   

our anticipated tax rate;

 

   

the repayment of our 2.00% Senior Notes due on December 15, 2017 and 3.25% Senior Notes due on December 15, 2022 (collectively referred to as the Senior Notes);

 

   

future uses of our cash, including, without limitation, the continuation of our stock repurchase and cash dividend programs.

All forward-looking statements included in this document are inherently uncertain as they are based on management’s current expectations and assumptions concerning future events, and are subject to numerous known and unknown risks and uncertainties. Therefore, actual events and results may differ materially from these forward-looking statements. Factors that could cause actual results to differ materially from those described herein include, but are not limited to:

 

   

our ability to accurately forecast demand for our products and services, and future financial performance;

 

   

our ability to understand, and effectively respond to changes affecting, our market environment, products, technologies and customer requirements;

 

   

the overall growth and structure of the data storage industry;

 

   

general global political, macroeconomic and market conditions;

 

   

disruptions in our supply chain, which could limit our ability to ship products to our customers in the amounts and at the prices forecasted;

 

   

failure of our products and services to meet our customers’ quality requirements, including, without limitation, any epidemic failure event relating to our products installed by our customers in their systems;

 

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our ability to maintain our gross profit margins;

 

   

our ability to successfully manage our backlog;

 

   

the quality of our strategy and our ability to successfully execute on the same, including, without limitation, our organic and acquisition-related growth strategies;

 

   

our ability to effectively integrate acquired businesses, products and technologies;

 

   

our ability to timely and successfully introduce, and increase volumes of new products and services, and to forecast demand and pricing for the same;

 

   

our ability to design, manufacture and market products meeting global environmental standards;

 

   

the impact of industry consolidation, affecting our suppliers, competitors, partners and customers;

 

   

our ability to successfully recruit and retain critical employees and to manage our investment in people, process and systems;

 

   

our ability to maintain our customer, partner, supplier and contract manufacturer relationships on favorable terms and conditions;

 

   

the actions of our competitors, most of which are larger and have greater financial and other resources than we have, including, without limitation, their ability to introduce competitive products and to acquire businesses and technologies that negatively impact our strategy, operations or customer demand for our products;

 

   

our ability to grow direct and indirect sales and to efficiently provide global service and support;

 

   

the availability of acceptable financing to support our future cash requirements;

 

   

valuation and liquidity of our investment portfolio;

 

   

the results of our ongoing litigation, tax audits, government audits, inquiries and investigations; and

 

   

those factors discussed under the heading “Risk Factors” elsewhere in this Quarterly Report on Form 10-Q.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based upon information available to us at this time. These statements are not guarantees of future performance. We disclaim any obligation to update information in any forward-looking statement. Actual results could vary from our forward-looking statements due to the foregoing factors as well as other important factors.

Overview

Financial Results and Key Performance Metrics Overview

The following table provides an overview of some of our key financial metrics (in millions, except per share amounts, percentages and days sales outstanding):

 

     Three Months Ended     Six Months Ended  
     October 25,
2013
    October 26,
2012
    October 25,
2013
    October 26,
2012
 

Net revenues

   $ 1,549.9      $ 1,541.2      $ 3,066.1      $ 2,985.8   

Gross profit

   $ 965.2      $ 913.9      $ 1,874.8      $ 1,764.0   

Gross profit margin percentage

     62.3     59.3     61.2     59.1

Income from operations

   $ 186.9      $ 135.3      $ 283.8      $ 215.5   

Income from operations as a percentage of net revenues

     12.1     8.8     9.3     7.2

Net income

   $ 166.8      $ 109.6      $ 248.4      $ 173.4   

Diluted income per share

   $ 0.48      $ 0.30      $ 0.70      $ 0.47   

Operating cash flows

   $ 362.5      $ 336.4      $ 648.3      $ 565.6   
                 October 25,
2013
    April 26,
2013
 

Deferred revenue

       $ 2,931.9      $ 3,009.5   

Days sales outstanding (DSO)

         35        42   

 

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1.75% Convertible Notes and Hedges

In June 2013, we settled our Convertible Notes. Upon conversion, we repaid the principal amount of $1.3 billion and issued an aggregate of 4.9 million shares of common stock for the excess of the conversion value over the principal amount of the Convertible Notes. Concurrently, we exercised our Convertible Note hedges, for which we received 3.9 million shares from the counterparties.

Dividends and Stock Repurchase Program Activity

In May 2013, our Board of Directors approved a $1.6 billion increase to our stock repurchase program under which during the six months ended October 25, 2013 we repurchased 25.3 million shares of our common stock at an average price of $39.57 per share, for an aggregate of $1.0 billion. We also declared quarterly cash dividends of $0.15 per share of common stock in fiscal 2014, for which we paid an aggregate of $102.7 million during the six months ended October 25, 2013.

Restructuring and Other Charges

In May 2013, we initiated a business restructuring plan under which we realigned internal resources, resulting in a reduction of our global workforce by approximately 7%, for which we have recognized $49.5 million of employee severance costs in the six months ended October 25, 2013.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. Our estimates are based on historical experience and 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. We believe that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates and such differences may be material.

The summary of significant accounting policies is included in under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended April 26, 2013. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. There have been no material changes to the critical accounting policies and estimates as filed in such report.

New Accounting Standards

See Note 3 of the accompanying condensed consolidated financial statements for a full description of new accounting pronouncements, including the respective expected dates of adoption and effects on results of operations and financial condition.

 

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Results of Operations

The following table sets forth certain Condensed Consolidated Statements of Operations data as a percentage of net revenues for the periods indicated:

 

     Three Months Ended     Six Months Ended  
     October 25,
2013
    October 26,
2012
    October 25,
2013
    October 26,
2012
 

Revenues:

        

Product

     61.6     64.6     61.5     63.4

Software entitlements and maintenance

     15.0        14.2        15.0        14.7   

Service

     23.4        21.2        23.5        21.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     100.0        100.0        100.0        100.0   

Cost of revenues:

        

Cost of product

     27.3        31.0        28.4        31.1   

Cost of software entitlements and maintenance

     0.5        0.4        0.5        0.5   

Cost of service

     9.9        9.3        9.9        9.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     62.3        59.3        61.2        59.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Sales and marketing

     30.9        31.7        30.9        32.5   

Research and development

     14.7        14.5        14.9        14.9   

General and administrative

     4.5        4.3        4.5        4.5   

Restructuring and other charges

     0.1        —          1.6        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     50.2        50.5        51.9        51.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     12.1        8.8        9.3        7.2   

Other income (expense), net

     0.3        (0.5     —          (0.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     12.4        8.3        9.3        6.8   

Provision for income taxes

     1.6        1.2        1.2        1.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     10.8     7.1     8.1     5.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Discussion and Analysis of Results of Operations

Overview

Net revenues for the three and six months ended October 25, 2013 were $1,549.9 million, up $8.7 million, or 1%, and $3,066.1 million, up $80.3 million, or 3%, respectively, compared to the prior year. The increase for the three months ended October 25, 2013 was primarily due to increases in hardware maintenance contract and software entitlements and maintenance (SEM) revenues, partially offset by a decrease in product revenues. The increase for the six months ended October 25, 2013 was primarily due to increases in hardware maintenance contract and SEM revenues.

Gross profit as a percentage of revenue increased 3% and 2% during the three and six months periods ended October 25, 2013, respectively, compared to the same period in the prior year, primarily due to lower unit materials costs due to supply chain efficiencies, and in the six months ended October 25, 2013, higher average selling price (ASP) for total configured systems. Additionally, gross profit was favorably impacted by changes in the mix between platforms and lower OEM revenues.

Sales and marketing, research and development, and general and administrative expenses for the three and six months ended October 25, 2013 totaled $777.2 million and $1,541.5 million, a decrease of 1% and 2%, respectively, as a percentage of revenue compared to the same periods in the prior year, reflecting cost control programs implemented in fiscal 2014.

Net Revenues (in millions, except percentages):

 

     Three Months Ended     Six Months Ended  
     October 25,
2013
     October 26,
2012
     % Change     October 25,
2013
     October 26,
2012
     % Change  
Net revenues    $ 1,549.9       $ 1,541.2         1   $ 3,066.1       $ 2,985.8         3

 

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The increase in net revenues for the three months ended October 25, 2013 was primarily due to increases in service and SEM revenues of $36.8 million and $12.4 million, respectively, partially offset by a decrease in product revenues of $40.5 million. The decrease in product revenue was due to a $57.4 million decrease in OEM product revenue, partially offset by a $16.9 million increase in branded product revenue. Product revenues comprised 62% of net revenues for the three months ended October 25, 2013 compared to 65% of net revenues for the three months ended October 26, 2012.

The increase in net revenues for the six months ended October 25, 2013 was primarily due to increases in service and SEM revenues of $65.6 million and $22.4 million, respectively, partially offset by a decrease in product revenues of $7.7 million. The decrease in product revenue was due to a $99.5 million decrease in OEM product revenue, mostly offset by a $91.8 million increase in branded product revenue. Product revenues comprised 62% of net revenues for the six months ended October 25, 2013 compared to 63% of net revenues for the six months ended October 26, 2012.

Sales through our indirect channels represented 83% and 81% of net revenues for the three and six months ended October 25, 2013, respectively, compared to 82% and 80% of net revenues for the three and six months ended October 26, 2012. Included in indirect channel sales were $151.1 million and $317.6 million of OEM revenue during the three and six months ended October 25, 2013, respectively, compared to $209.6 million and $418.5 million during the three and six months ended October 26, 2012, respectively.

The following customers, each of which is a distributor, accounted for 10% or more of net revenues:

 

     Three Months Ended     Six Months Ended  
     October 25,
2013
    October 26,
2012
    October 25,
2013
    October 26,
2012
 

Arrow Electronics, Inc. (1)

     23     21     22     19

Avnet, Inc. (1)

     16     15     16     15

 

(1)  

Net revenues for Arrow Electronics, Inc. for the three and six months ended October 26, 2012 have been corrected from 20% and 18%, respectively, previously disclosed to 21% and 19%, respectively. Net revenues for Avnet, Inc. for the six months ended October 26, 2012 have been corrected from 14% previously disclosed to 15%.

Product Revenues (in millions, except percentages):

 

     Three Months Ended     Six Months Ended  
     October 25,
2013
     October 26,
2012
     % Change     October 25,
2013
     October 26,
2012
     % Change  

Product revenues

   $ 955.3       $ 995.8         (4 )%    $ 1,886.1       $ 1,893.8         —  

Product revenues consist of configured systems, which include bundled hardware and software products, and non-configured products, which consist primarily of add-on storage, OEM products and add-on hardware and software products.

Total configured system revenues of $549.1 million increased by $12.5 million, or 2%, during the three months ended October 25, 2013 compared to the same period in the prior year, primarily due to an increase in the 3000 series systems revenues, partially offset by a decrease in the 2000 series systems revenues. Total configured systems unit volume increased 5% during the three months ended October 25, 2013 compared to the same period in the prior year. Unit volume of the 3000 series increased, while unit volume of the 2000 series systems decreased, reflecting a shift in demand of the older 2000 series systems to newer 3000 series systems. The ASP of total configured systems decreased during the three months ended October 25, 2013 compared to the same period in the prior year, with decreases in the 2000 and 3000 series ASPs.

Non-configured product revenues of $406.0 million decreased $53.1 million, or 12%, during the three months ended October 25, 2013 compared to the same period in the prior year. This decrease was primarily due to lower revenue from non-configured OEM products, which declined 29%.

Total configured system revenues of $1,086.1 million increased by $83.6 million, or 8%, during the six months ended October 25, 2013 compared to the same period in the prior year, due to revenue increases across all platforms, with the largest increases in the 6000 series systems. Total configured systems unit volume increased 7% during the six months ended October 25, 2013 compared to the same period in the prior year reflecting unit increases in all platforms. The ASP of total configured systems increased during the six months ended October 25, 2013 compared to the same period in the prior year, due to a higher ASP in our more highly configured 6000 series, partially offset by lower ASP in the 2000 and 3000 series.

Non-configured product revenues of $799.9 million decreased $91.4 million, or 10%, during the six months ended October 25, 2013 compared to the same period in the prior year. This decrease was primarily due to lower revenue from non-configured OEM products, which declined 26%.

 

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Our systems are highly configurable to respond to customer requirements in the open systems storage markets that we serve. This can cause a wide variation in product configurations that can significantly impact revenues, cost of revenues and gross profits. Pricing changes, discounting practices, product competition, foreign currency, unit volumes, customer mix, natural disasters and product materials costs can also impact revenues, cost of revenues and/or gross profits. Disks are a significant component of our storage systems. Industry disk pricing has fallen every year; however, when supplies are constrained, disk prices may increase. To the extent that disk prices increase or decrease, we intend to pass along those price increases or decreases to our customers while working to maintain relatively constant profit margins on our disk drives. While our sales price per terabyte historically declines over time, improved system performance, increased capacity and software to manage this increased capacity have an offsetting favorable impact on product revenues.

Software Entitlements and Maintenance Revenues (in millions, except percentages):

 

     Three Months Ended     Six Months Ended  
     October 25,
2013
     October 26,
2012
     % Change     October 25,
2013
     October 26,
2012
     % Change  

Software entitlements and maintenance revenues

   $ 231.8       $ 219.4         6   $ 460.3       $ 437.9         5

SEM revenues are associated with contracts which entitle customers to receive unspecified product upgrades and enhancements on a when-and-if-available basis, as well as bug fixes and patch releases.

The increases in SEM revenues for both the three and six months ended October 25, 2013 were due to increases in the aggregate contract value of the installed base under SEM contracts, which is recognized as revenue ratably over the terms of the underlying contracts.

Service Revenues (in millions, except percentages):

 

     Three Months Ended     Six Months Ended  
     October 25,
2013
     October 26,
2012
     % Change     October 25,
2013
     October 26,
2012
     % Change  

Service revenues

   $ 362.8       $ 326.0         11   $ 719.7       $ 654.1         10

Service revenues include hardware maintenance, professional services, and educational and training services.

Hardware maintenance contract revenues comprised 76% of service revenues for each of the three and six months ended October 25, 2013, and 74% and 72% for the three and six months ended October 26, 2012, respectively. These revenues increased $36.5 million, or 15%, and $76.0 million, or 16% during the three and six months ended October 25, 2013, respectively, compared to the same periods in the prior year, as a result of increases in the installed base and aggregate contract values under service contracts. Professional services and educational and training services comprised 24% of service revenues for each of the three and six months ended October 25, 2013, and 26% and 28% of service revenues for the three and six months ended October 26, 2012, respectively.

Revenues by Geographic Area (in millions, except percentages):

 

     Three Months Ended     Six Months Ended  
     October 25,
2013
     October 26,
2012
     % Change     October 25,
2013
     October 26,
2012
     % Change  

Americas (United States, Canada and Latin America)

   $ 899.2       $ 897.3         —     $ 1,757.7       $ 1,698.4         3

Europe, Middle East and Africa

     445.0         437.7         2     893.0         877.0         2

Asia Pacific

     205.7         206.2         —       415.4         410.4         1
  

 

 

    

 

 

      

 

 

    

 

 

    

Net revenues

   $ 1,549.9       $ 1,541.2         $ 3,066.1       $ 2,985.8      
  

 

 

    

 

 

      

 

 

    

 

 

    

Americas revenues consist of Americas commercial and U.S. public sector revenues. Sales to customers inside the United States comprised 89% of Americas net revenues during each of the three months ended October 25, 2013 and October 26, 2012, and 90% and 89% of Americas net revenues during the six months ended October 25, 2013 and October 26, 2012, respectively. No single foreign country accounted for 10% or more of our net revenues for any period presented.

 

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Cost of Revenues

Our cost of revenues consists of three elements: (1) cost of product revenues, which includes the costs of manufacturing and shipping of our storage products, amortization of purchased intangible assets, inventory write-downs, and warranty costs, (2) cost of SEM, which includes the costs of providing SEM and third-party royalty costs and (3) cost of service revenues, which reflects costs associated with providing support activities for hardware, global support partnership programs, professional services and educational and training services.

Our gross profit is impacted by a variety of factors, including pricing changes, discounting practices, foreign currency, product configuration, unit volumes, customer mix, revenue mix, natural disasters and product material costs. Service gross profit is typically impacted by factors such as changes in the size of our installed base of products, as well as the timing of support service initiations and renewals, and incremental investments in our customer support infrastructure. If any of these factors that impact our gross profit are adversely affected, whether by economic uncertainties or for other reasons, our gross profit could decline.

Cost of Product Revenues (in millions, except percentages):

 

                                                                                               
     Three Months Ended     Six Months Ended  
     October 25,
2013
     October 26,
2012
     % Change     October 25,
2013
     October 26,
2012
     % Change  

Cost of product revenues

   $ 423.3       $ 477.3         (11 )%    $ 873.2       $ 929.5         (6 )% 

The changes in cost of product revenues consisted of the following (in percentage points of the total change):

 

     Three Months Ended
Fiscal 2014 to Fiscal 2013

Percentage Change
Points
    Six Months Ended
Fiscal  2014 to Fiscal 2013
Percentage Change
Points
 

Materials cost

     (9     (4

Warranty

     (3     (1

Excess and obsolete inventory

     —          (1

Other

     1        —     
  

 

 

   

 

 

 

Total change

     (11     (6
  

 

 

   

 

 

 

Cost of product revenues represented 44% and 46% of product revenues for the three and six months ended October 25, 2013, respectively, compared to 48% and 49% for the three and six months ended October 26, 2012, respectively.

Materials cost represented 83% of product costs for each of the three months ended October 25, 2013 and October 26, 2012, and decreased $44.3 million from the prior year due to an overall decrease in average unit materials cost across all platforms, reflecting increased efficiencies in our supply chain and favorable configuration mix. This decrease was only partially offset by a 5% volume increase in configured systems, resulting in higher gross margins on products compared to the same period in the prior year. In addition, cost of product revenues were favorably impacted by a $12.8 million decrease in hardware-related warranty expense in the three months ended October 25, 2013 compared to the same period in the prior year.

Materials cost represented 83% and 82% of product costs for the six months ended October 25, 2013 and October 26, 2012, respectively, and decreased $39.6 million from the prior year due to an overall decrease in average unit materials cost across all platforms, reflecting increased efficiencies in our supply chain and favorable configuration mix. This decrease was only partially offset by a 7% volume increase in configured systems, resulting in higher gross margins on products compared to the same period in the prior year. In addition, cost of product revenues were favorably impacted by a $12.6 million decrease in hardware-related warranty expense and an $8.4 million decrease in inventory write-downs in the six months ended October 25, 2013 compared to the same period in the prior year.

Cost of Software Entitlements and Maintenance Revenues (in millions, except percentages):

 

                                                                                               
     Three Months Ended     Six Months Ended  
     October 25,
2013
     October 26,
2012
     % Change     October 25,
2013
     October 26,
2012
     % Change  

Cost of software entitlements and maintenance revenues

   $ 7.5       $ 7.0         7   $ 15.0       $ 13.6         10

Cost of SEM revenues represented 3% of SEM revenues for all periods presented. Cost of SEM revenues increases are primarily due to higher volume subject to royalty costs.

 

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Table of Contents

Cost of Service Revenues (in millions, except percentages):

 

                                                                                                                 
     Three Months Ended     Six Months Ended  
     October 25,
2013
     October 26,
2012
     % Change     October 25,
2013
     October 26,
2012
     % Change  

Cost of service revenues

   $ 153.9       $ 143.0         8   $ 303.1       $ 278.7         9

Costs represented 42% and 44% of service revenues for the three months ended October 25, 2013 and October 26, 2012, respectively, and represented 42% and 43% of service revenues for the three months ended October 25, 2013 and October 26, 2012, respectively. Cost of service revenues increases are primarily due to increases in service logistics and contractor costs.

Operating Expenses

Sales and Marketing, Research and Development and General and Administrative Expenses

Compensation costs comprise the largest component of operating expenses. Included in compensation costs are salaries, benefits, other compensation-related costs, stock-based compensation costs and employee incentive compensation plan costs.

Total compensation costs included in operating expenses were flat for the three and six months ended October 25, 2013 compared to the same periods in the prior year and the components within such costs did not fluctuate significantly.

Sales and Marketing (in millions, except percentages):

 

     Three Months Ended     Six Months Ended  
     October 25,
2013
     October 26,
2012
     % Change     October 25,
2013
     October 26,
2012
     % Change  

Sales and marketing expenses

   $ 479.5       $ 488.2         (2 )%    $ 947.3       $ 971.1         (2 )% 

Sales and marketing expenses consist primarily of compensation costs, commissions, outside services, allocated facilities and information technology (IT) costs, advertising and marketing promotional expense and travel and entertainment expense. Sales and marketing expenses decreased due to the following:

 

     Three Months Ended
Fiscal  2014 to Fiscal 2013
Percentage Change
Points
    Six Months Ended
Fiscal  2014 to Fiscal 2013
Percentage Change
Points
 

Compensation costs

     —          (1

Commissions

     (1     —     

Outside services

     (1     (1

Depreciation and amortization

     (1     (1

Facilities and IT support costs

     1        1   
  

 

 

   

 

 

 

Total change

     (2     (2
  

 

 

   

 

 

 

The decrease in compensation costs during the six months ended October 25, 2013 is primarily due to lower stock-based compensation expense compared to the same period in the prior year. The decrease in commissions expense during the three months ended October 25, 2013 is due to lower individual sales attainment. The decrease in outside services during the three and six months ended October 25, 2013 reflects lower spending for third party sales support. Depreciation and amortization expense decreased during the three and six months ended October 25, 2013 due to certain intangible assets becoming fully amortized during fiscal 2013. The increase in facilities and IT support costs reflect our investment in sales IT systems and infrastructure.

Research and Development (in millions, except percentages):

 

     Three Months Ended     Six Months Ended  
     October 25,
2013
     October 26,
2012
     % Change     October 25,
2013
     October 26,
2012
     % Change  

Research and development expenses

   $ 228.2       $ 223.8         2   $ 456.3       $ 445.2         2

 

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Table of Contents

Research and development expenses consist primarily of compensation costs, allocated facilities and IT costs, depreciation, equipment and software-related costs, prototypes, non-recurring engineering charges and other outside services costs. Research and development expense increased due to the following:

 

     Three Months Ended
Fiscal  2014 to Fiscal 2013
Percentage Change
Points
     Six Months Ended
Fiscal  2014 to Fiscal 2013
Percentage Change
Points
 

Compensation costs

     —           1   

Depreciation

     1         1   

Other

     1         —     
  

 

 

    

 

 

 

Total change

     2         2   
  

 

 

    

 

 

 

The increase in compensation costs during the six months ended October 25, 2013 is primarily due to higher salaries and incentive compensation, partially offset by lower benefits. Depreciation expense during the three and six months ended October 25, 2013 increased due to higher levels of investment in engineering equipment.

We believe that our future performance will depend in large part on our ability to maintain and enhance our current product line, develop new products that achieve market acceptance, maintain technological competitiveness and meet an expanding range of customer requirements. We expect to continue to spend on current and future product development efforts, broaden our existing product offerings and introduce new products that expand our solutions portfolio.

General and Administrative (in millions, except percentages):

 

     Three Months Ended     Six Months Ended  
     October 25,
2013
     October 26,
2012
     % Change     October 25,
2013
     October 26,
2012
     % Change  

General and administrative expenses

   $ 69.5       $ 66.6         4   $ 137.9       $ 132.2         4

General and administrative expenses consist primarily of compensation costs, professional and corporate legal fees, outside services and allocated facilities and IT support costs. General and administrative expense increased due to the following:

 

     Three Months Ended
Fiscal  2014 to Fiscal 2013
Percentage Change
Points
    Six Months Ended
Fiscal  2014 to Fiscal 2013
Percentage Change
Points
 

Compensation costs

     4        3   

Outside services

     (2     1   

Professional and corporate legal fees

     2        —     
  

 

 

   

 

 

 

Total change

     4        4   
  

 

 

   

 

 

 

The increase in compensation costs for the three and six months ended October 25, 2013 reflects increases in average headcount compared to the same periods in the prior year. The fluctuations in outside services during the three and six months ended October 25, 2013 reflect spending levels on contractors and professional services. Professional and corporate legal fees were higher during the three months ended October 25, 2013 as a result of spending on various legal activities.

Restructuring and other charges (in millions, except percentages):

 

     Three Months Ended      Six Months Ended  
     October 25,
2013
     October 26,
2012
     % Change      October 25,
2013
     October 26,
2012
     % Change  

Restructuring and other charges

   $ 1.1       $ —           NM       $ 49.5       $ —           NM   

 

NM - Not Meaningful

In May 2013, we initiated a business restructuring plan under which we realigned internal resources resulting in a reduction of our global workforce by approximately 7%. We recognized $49.5 million of employee severance costs in connection with the plan in the six months ended October 25, 2013. We do not anticipate incurring a significant amount of future expenses related to this plan.

 

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Table of Contents

Other Income (Expense), Net

Interest Income (in millions, except percentages):

 

     Three Months Ended     Six Months Ended  
     October 25,
2013
     October 26,
2012
     % Change     October 25,
2013
     October 26,
2012
     % Change  

Interest income

   $ 8.5       $ 11.0         (23 )%    $ 18.5       $ 21.8         (15 )% 

The decrease in interest income during the three and six months ended October 25, 2013 was primarily due to a decrease in our investment portfolio as a result of the liquidation of some of our investments to repay our Convertible Notes and to support our stock repurchase activities.

Interest Expense (in millions, except percentages):

 

     Three Months Ended     Six Months Ended  
     October 25,
2013
    October 26,
2012
    % Change     October 25,
2013
    October 26,
2012
    % Change  

Interest expense

   $ (6.5   $ (19.8     (67 )%    $ (23.0   $ (39.7     (42 )% 

Interest expense, including the amortization of debt discount and issuance costs, related to our Senior Notes and Convertible Notes was $6.2 million and $19.7 million for the three months ended October 25, 2013 and October 26, 2012, respectively. The decrease in interest expense reflects the maturity of our Convertible Notes in June 2013.

Interest expense related to our Senior Notes and Convertible Notes was $12.5 million and $10.2 million, respectively, for the six months ended October 25, 2013. Interest expense related to the Convertible Notes was $39.4 million for the six months ended October 26, 2012. The decrease in interest expense reflects the maturity of our Convertible Notes in June 2013.

Other Income, Net (in millions, except percentages):

 

     Three Months Ended     Six Months Ended  
     October 25,
2013
     October 26,
2012
     % Change     October 25,
2013
     October 26,
2012
     % Change  

Other income, net

   $ 3.3       $ 1.2         175   $ 5.2       $ 4.3         21

The increase in other income, net for the three months ended October 25, 2013 compared to the same period in the prior period is primarily due to higher realized net gains on investments. The increase in other income, net for the six months ended October 25, 2013 compared to the same period in the prior year is primarily due to higher realized net gains on investments, partially offset by lower net foreign exchange gains.

Provision for Income Taxes (in millions, except percentages):

 

     Three Months Ended     Six Months Ended  
     October 25,
2013
     October 26,
2012
     % Change     October 25,
2013
     October 26,
2012
     % Change  

Provision for income taxes

   $ 25.4       $ 18.1         40   $ 36.1       $ 28.5         27

Our effective tax rate for the three months ended October 25, 2013 was 13.2% compared to an effective tax rate of 14.2% for the three months ended October 26, 2012. Our effective tax rate for the six months ended October 25, 2013 was 12.7% compared to an effective tax rate of 14.1% for the six months ended October 26, 2012. Our effective tax rates reflect our corporate legal entity structure and the global nature of our business with a significant amount of our profits generated and taxed in foreign jurisdictions at rates below the U.S. statutory tax rate. The effective tax rates during the three and six months ended October 25, 2013 and October 26, 2012, respectively, were favorably impacted by the geographic mix of profits.

Our provision for income taxes increased for the three and six months ended October 25, 2013 compared to the prior year as a result of higher pre-tax income. Our effective tax rates decreased for the three and six months ended October 25, 2013 compared to the prior year primarily as a result of a higher discrete tax benefit from equity awards.

We continue to monitor the progress of various ongoing tax controversies and the impact, if any, of the expected tolling of the statute of limitations in various taxing jurisdictions, as further discussed in Note 12 of the accompanying condensed consolidated financial statements.

 

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Table of Contents

As of October 25, 2013, we had $199.8 million of unrecognized tax benefits, of which $142.7 million has been recorded in other long-term liabilities. Unrecognized tax benefits of $129.0 million, including penalties and interest, would affect our provision for income taxes if recognized. During the six months ended October 25, 2013, there was a gross increase in our unrecognized tax benefits of $13.6 million for tax positions related to the current year, and a gross increase of $1.0 million and gross decrease, including settlements and statute lapses, of $4.4 million for tax positions related to prior years.

Liquidity and Capital Resources

The following sections discuss our principal liquidity requirements, as well as our sources and uses of cash flows on our liquidity and capital resources. The principal objectives of our investment policy are the preservation of principal and maintenance of liquidity. We attempt to mitigate default risk by investing in high-quality investment grade securities, limiting the time to maturity and monitoring the counter-parties and underlying obligors closely. We believe our cash equivalents and short-term investments are liquid and accessible. We are not aware of any significant deterioration in the fair value of our cash equivalents or investments from the values reported as of October 25, 2013.

Liquidity, Capital Resources and Cash Requirements

 

                                                       
($ in Millions)    October 25, 2013     April 26, 2013  

Cash and cash equivalents and short-term investments

   $ 5,272.7      $ 6,952.6   

Current portion of principal amount of Convertible Notes

     —          1,264.9   

Principal amount of Senior Notes

     1,000.0        1,000.0   

Debt as a % of stockholders’ equity

     24     48

The following is a summary of our cash flows:

            
     Six Months Ended