XNAS:BRCD Brocade Communications Systems Inc Quarterly Report 10-Q Filing - 4/28/2012

Effective Date 4/28/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended April 28, 2012
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: 000-25601
 
Brocade Communications Systems, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
77-0409517
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
130 Holger Way
San Jose, CA 95134
(408) 333-8000
(Address, including zip code, of principal
executive offices and 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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ý    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
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
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  ý
The number of shares outstanding of the registrant’s common stock as of May 25, 2012 was 450,066,045 shares.




BROCADE COMMUNICATIONS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED APRIL 28, 2012
INDEX
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 



Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and future results. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including, but not limited to, statements regarding future revenue, margins, expenses, tax provisions, earnings, cash flows, benefit obligations, debt repayments, share repurchases or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning expected development, performance or market share relating to products or services; any statements regarding future economic conditions or performance; any statements regarding pending litigation, including claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Words such as “expects,” “anticipates,” “assumes,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on current expectations, estimates, forecasts and projections about the industries in which Brocade operates, and the beliefs and assumptions of management. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified below under “Part II - Other Information, Item 1A. Risk Factors” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Further, Brocade undertakes no obligation to revise or update any forward-looking statements for any reason.

3


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 

 
Three Months Ended
 
Six Months Ended
 
April 28,
2012
 
April 30,
2011
 
April 28,
2012
 
April 30,
2011
 
(In thousands, except per share amounts)
Net revenues
 
 
 
 
 
 
 
Product
$
456,104

 
$
457,495

 
$
932,406

 
$
914,524

Service
87,335

 
90,869

 
171,675

 
179,596

Total net revenues
543,439

 
548,364

 
1,104,081

 
1,094,120

Cost of revenues
 
 
 
 
 
 
 
Product
164,177

 
171,075

 
339,584

 
348,691

Service
42,180

 
48,680

 
82,646

 
95,937

Total cost of revenues
206,357

 
219,755

 
422,230

 
444,628

Gross margin
337,082

 
328,609

 
681,851

 
649,492

Operating expenses:
 
 
 
 
 
 
 
Research and development
92,931

 
91,941

 
182,250

 
183,349

Sales and marketing
158,855

 
156,979

 
311,543

 
309,646

General and administrative
18,790

 
18,469

 
37,140

 
36,559

Legal fees associated with indemnification obligations and other related costs, net

 

 

 
124

Amortization of intangible assets
14,737

 
15,023

 
29,730

 
31,213

Total operating expenses
285,313

 
282,412

 
560,663

 
560,891

Income from operations
51,769

 
46,197

 
121,188

 
88,601

Interest expense
(12,729
)
 
(20,745
)
 
(25,775
)
 
(42,291
)
Interest and other income (loss), net
(452
)
 
16

 
(1,448
)
 
359

Income before income tax benefit
38,588

 
25,468

 
93,965

 
46,669

Income tax benefit
(708
)
 
(611
)
 
(3,915
)
 
(6,328
)
Net income
$
39,296

 
$
26,079

 
$
97,880

 
$
52,997

Net income per share — basic
$
0.09

 
$
0.06

 
$
0.22

 
$
0.11

Net income per share — diluted
$
0.08

 
$
0.05

 
$
0.21

 
$
0.11

Shares used in per share calculation — basic
457,541

 
473,209

 
455,017

 
469,158

Shares used in per share calculation — diluted
476,848

 
501,511

 
472,793

 
496,338

 
See accompanying notes to condensed consolidated financial statements.

4


BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
April 28,
2012
 
October 29,
2011
 
(In thousands, except par value)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
544,339

 
$
414,202

Short-term investments
797

 
774

Total cash, cash equivalents and short-term investments
545,136

 
414,976

Accounts receivable, net of allowances for doubtful accounts of $1,144 and $1,388 at April 28, 2012 and October 29, 2011, respectively
217,837

 
249,141

Inventories
81,551

 
74,172

Deferred tax assets
62,014

 
53,604

Prepaid expenses and other current assets
52,277

 
52,308

Total current assets
958,815

 
844,201

Property and equipment, net
527,226

 
532,384

Goodwill
1,625,931

 
1,630,967

Intangible assets, net
160,164

 
214,697

Non-current deferred tax assets
200,535

 
210,028

Other assets
40,341

 
42,031

Total assets
$
3,513,012

 
$
3,474,308

Liabilities and Stockholders’ Equity

 
 
Current liabilities:
 
 
 
Accounts payable
$
102,699

 
$
109,471

Accrued employee compensation
129,901

 
118,298

Deferred revenue
207,084

 
201,421

Current liabilities associated with facilities lease losses
875

 
1,456

Current portion of long-term debt
17,330

 
40,539

Other accrued liabilities
95,245

 
94,802

Total current liabilities
553,134

 
565,987

Long-term debt, net of current portion
652,365

 
748,904

Non-current liabilities associated with facilities lease losses
2,122

 
2,496

Non-current deferred revenue
71,018

 
69,024

Non-current income tax liability
48,772

 
63,593

Other non-current liabilities
10,175

 
10,166

Total liabilities
1,337,586

 
1,460,170

Commitments and contingencies (Note 8)


 


Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value, 5,000 shares authorized, no shares issued and outstanding

 

Common stock, $0.001 par value, 800,000 shares authorized:
 
 
 
Issued and outstanding: 457,753 and 448,022 shares at April 28, 2012 and October 29, 2011, respectively
458

 
448

Additional paid-in capital
2,051,063

 
1,984,830

Accumulated other comprehensive loss
(14,831
)
 
(11,996
)
Retained earnings
138,736

 
40,856

Total stockholders’ equity
2,175,426

 
2,014,138

Total liabilities and stockholders’ equity
$
3,513,012

 
$
3,474,308

See accompanying notes to condensed consolidated financial statements.

5


BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
 
April 28,
2012
 
April 30,
2011
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
97,880

 
$
52,997

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Excess tax (benefits) detriments from stock-based compensation
(1,332
)
 
877

Depreciation and amortization
97,524

 
104,233

Loss on disposal of property and equipment
296

 
1,910

Amortization of debt issuance costs and original issue discount
2,626

 
9,195

Net gains on investments
(24
)
 
(10
)
Provision for doubtful accounts receivable and sales allowances
5,864

 
5,071

Non-cash compensation expense
45,677

 
42,436

Changes in assets and liabilities:
 
 
 
Accounts receivable
25,440

 
24,031

Inventories
(7,379
)
 
(17,664
)
Prepaid expenses and other assets
300

 
(6,907
)
Deferred tax assets
192

 
(30
)
Accounts payable
(6,689
)
 
(10,253
)
Accrued employee compensation
8,643

 
19,715

Deferred revenue
7,657

 
21,169

Other accrued liabilities
(8,401
)
 
(11,976
)
Liabilities associated with facilities lease losses
(955
)
 
(2,853
)
Net cash provided by operating activities
267,319

 
231,941

Cash flows from investing activities:
 
 
 
Purchases of short-term investments

 
(38
)
Proceeds from maturities and sale of short-term investments

 
20

Proceeds from sale of subsidiary
35

 

Purchases of property and equipment
(38,269
)
 
(50,575
)
Net cash used in investing activities
(38,234
)
 
(50,593
)
Cash flows from financing activities:
 
 
 
Payment of principal related to the term loan
(120,000
)
 
(98,640
)
Payment of principal related to capital leases
(920
)
 
(868
)
Common stock repurchases
(25,066
)
 

Proceeds from issuance of common stock
47,261

 
47,388

Excess tax benefits (detriments) from stock-based compensation
1,332

 
(877
)
Net cash used in financing activities
(97,393
)
 
(52,997
)
Effect of exchange rate fluctuations on cash and cash equivalents
(1,555
)
 
1,227

Net increase in cash and cash equivalents
130,137

 
129,578

Cash and cash equivalents, beginning of period
414,202

 
333,984

Cash and cash equivalents, end of period
$
544,339

 
$
463,562

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
23,568

 
$
32,238

Cash paid for income taxes
$
474

 
$
2,591

See accompanying notes to condensed consolidated financial statements.

6


BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation
Brocade Communications Systems, Inc. (“Brocade” or the “Company”) has prepared the accompanying Condensed Consolidated Financial Statements pursuant to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The October 29, 2011 Condensed Consolidated Balance Sheet was derived from the Company’s audited consolidated financial statements but does not include all disclosures required by U.S. GAAP. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 29, 2011.
The accompanying Condensed Consolidated Financial Statements are unaudited but, in the opinion of the Company's management, reflect all adjustments, including normal recurring adjustments, that management considers necessary for a fair presentation of these Condensed Consolidated Financial Statements. The results for the interim periods presented are not necessarily indicative of the results for the full fiscal year or any other future period.
The Company's fiscal year is 52 or 53 weeks ending on the last Saturday in October. Fiscal year 2012 is a 52-week fiscal year, and the second quarter of 2012 was a 13-week quarter. Fiscal year 2011 was a 52-week year, and the second quarter of 2011 was a 13-week quarter.
The Condensed Consolidated Financial Statements include the accounts of Brocade and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates in Preparation of Condensed Consolidated Financial Statements
The preparation of condensed consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and judgments that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, revenue recognition, sales allowances and programs, allowance for doubtful accounts, stock-based compensation, purchase price allocations, warranty obligations, inventory valuation and purchase commitments, restructuring costs, commissions, facilities lease losses, impairment of goodwill and intangible assets, litigation, income taxes and investments. Actual results may differ materially from these estimates.

2. Summary of Significant Accounting Policies
There have been no material changes in the Company’s significant accounting policies for the six months ended April 28, 2012 as compared to the significant accounting policies disclosed in Brocade’s Annual Report on Form 10-K for the fiscal year ended October 29, 2011.
Recent Accounting Pronouncements
There have been no new accounting pronouncements during the six months ended April 28, 2012, as compared to the recent accounting pronouncements disclosed in Brocade’s Annual Report on Form 10-K for the fiscal year ended October 29, 2011, that are expected to have a material impact on the Company's financial position, results of operations, cash flows or disclosure requirements.
Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable. The Company’s cash, cash equivalents and short-term investments are primarily maintained at five major financial institutions. Deposits held with banks may be redeemed upon demand and may exceed the amount of insurance provided on such deposits.

7


A majority of the Company’s accounts receivable balance is derived from sales to original equipment manufacturer (“OEM”) partners in the computer storage and server industry. As of April 28, 2012, three customers accounted for 20%, 12% and 11%, respectively, of total accounts receivable, for a combined total of 43% of total accounts receivable. As of October 29, 2011, two customers accounted for 16% and 14%, respectively, of total accounts receivable, for a combined total of 30% of total accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable balances. The Company has established reserves for credit losses, sales allowances, and other allowances.
For the three months ended April 28, 2012, four customers accounted for 20%, 15%, 13% and 10%, respectively, of the Company’s total net revenues for a combined total of 58% of total net revenues. For the three months ended April 30, 2011, four customers accounted for 15%, 14%, 13% and 11%, respectively, of the Company’s total net revenues for a combined total of 53% of total net revenues.
The Company currently relies on single and limited sources for multiple key components used in the manufacture of its products. Additionally, the Company relies on multiple contract manufacturers (“CMs”) for the manufacturing of its products. Although the Company uses standard parts and components for its products where possible, the Company’s CMs currently purchase, on the Company's behalf, several key product components from single or limited supplier sources.

3. Goodwill and Intangible Assets
The following table summarizes goodwill activity by reportable segment for the six months ended April 28, 2012 (in thousands):
 
Data Storage Products
 
Ethernet Products
 
Global Services
 
Total
Balance at October 29, 2011
 
 
 
 
 
 
 
Goodwill
$
176,968

 
$
1,344,415

 
$
155,416

 
$
1,676,799

Accumulated impairment losses

 
(45,832
)
 

 
(45,832
)
 
176,968

 
1,298,583

 
155,416

 
1,630,967

Tax and other adjustments during the six months ended April 28, 2012 (1)
(8
)
 
(5,028
)
 

 
(5,036
)
Balance at April 28, 2012
 
 
 
 
 
 
 
Goodwill
176,960

 
1,339,387

 
155,416

 
1,671,763

Accumulated impairment losses

 
(45,832
)
 

 
(45,832
)
 
$
176,960

 
$
1,293,555

 
$
155,416

 
$
1,625,931

 
(1)
The goodwill adjustments during the six months ended April 28, 2012 were primarily a result of tax benefits from the exercise of stock awards of acquired companies.
The Company conducts its goodwill impairment test annually, as of the first day of the second fiscal quarter, or whenever events or changes in facts and circumstances indicate that the fair value of the reporting unit may be less than its carrying amount. For the annual goodwill impairment test, the Company uses the income approach, the market approach, or a combination thereof, to determine each reporting unit’s fair value. The income approach provides an estimate of fair value based on discounted expected future cash flows (“DCF”). The market approach provides an estimate of fair value using various prices or market multiples applied to the reporting unit’s operating results and then applying an appropriate control premium. During the fiscal year 2012 annual goodwill impairment test, the Company used a combination of approaches to estimate each reporting unit’s fair value. The Company believed that at the time of impairment testing performed in second fiscal quarter of 2012, the income approach and the market approach were equally representative of a reporting unit’s fair value.

8


Determining the fair value of a reporting unit or an intangible asset requires judgment and involves the use of significant estimates and assumptions. The Company based its fair value estimates on assumptions it believes to be reasonable, but inherently uncertain. Estimates and assumptions with respect to the determination of the fair value of its reporting units using the income approach include, among other inputs:
The Company’s operating forecasts;
Revenue growth rates; and
Risk-commensurate discount rates and costs of capital.
The Company’s estimates of revenues and costs are based on historical data, various internal estimates and a variety of external sources, and are developed as part of our regular long-range planning process. The control premium used in market or combined approaches is determined by considering control premiums offered as part of the acquisitions that have occurred in the reporting units’ comparable market segments. Based on the results of the annual goodwill impairment analysis performed during the second fiscal quarter of 2012, the Company determined that no impairment needed to be recorded.
Intangible assets other than goodwill are amortized on a straight-line basis over the following estimated remaining useful lives, unless the Company has determined these lives to be indefinite. The following tables present details of the Company’s intangible assets (in thousands, except for weighted-average remaining useful life):
April 28, 2012
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
 
Weighted-
Average
Remaining
Useful Life
(in years)
Trade name
$
10,441

 
$
10,430

 
$
11

 
$
0.67

Core/developed technology
337,858

 
270,658

 
67,200

 
1.46

Customer relationships
352,581

 
259,628

 
92,953

 
1.52

Total intangible assets
$
700,880

 
$
540,716

 
$
160,164

 
$
1.50

 
 
 
 
 
 
 
 
October 29, 2011
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
 
Weighted-
Average
Remaining
Useful Life
(in years)
Trade name
$
10,441

 
$
10,422

 
$
19

 
$
1.17

Core/developed technology
337,858

 
245,855

 
92,003

 
2.04

Customer relationships
352,581

 
229,906

 
122,675

 
2.12

Total intangible assets
$
700,880

 
$
486,183

 
$
214,697

 
$
2.08

The following table presents the amortization of intangible assets included on the Condensed Consolidated Statements of Income (in thousands):
 
Three Months Ended
 
Six Months Ended
 
April 28, 2012
 
April 30, 2011
 
April 28, 2012
 
April 30, 2011
Cost of revenues
$
10,713

 
$
14,466

 
$
24,803

 
$
28,933

Operating expenses
14,737

 
15,023

 
29,730

 
31,213

Total
$
25,450

 
$
29,489

 
$
54,533

 
$
60,146



9


The following table presents the estimated future amortization of intangible assets as of April 28, 2012 (in thousands):
Fiscal Year
Estimated
Future
Amortization
2012 (remaining six months)
$
50,899

2013
93,109

2014
16,156

Total
$
160,164


4. Balance Sheet Details
The following table provides details of selected balance sheet items (in thousands):
 
April 28,
2012
 
October 29,
2011
Inventories:
 
 
 
Raw materials
$
22,282

 
$
25,535

Finished goods
59,269

 
48,637

Total
$
81,551

 
$
74,172

 
April 28,
2012
 
October 29,
2011
Property and equipment, net:
 
 
 
Computer equipment and software
$
55,835

 
$
55,175

Engineering and other equipment
385,017

 
357,827

Furniture and fixtures (1)
30,098

 
29,195

Leasehold improvements
25,695

 
23,793

Land and building (2)
384,666

 
384,666

Subtotal
881,311

 
850,656

Less: Accumulated depreciation and amortization (3)
(354,085
)
 
(318,272
)
Total
$
527,226

 
$
532,384

 
(1)     Furniture and fixtures include the following amounts under leases as of April 28, 2012 and October 29, 2011 (in thousands):
 
April 28,
2012
 
October 29,
2011
Cost
$
10,613

 
$
10,613

Accumulated depreciation
(2,889
)
 
(2,131
)
Total
$
7,724

 
$
8,482

 
(2)    In connection with the purchase of the property located in San Jose, California, the Company obtained a four-year option to purchase a fourth unimproved approximate four acre parcel for a fixed price of approximately $26.0 million as well as a right of first offer to purchase this parcel. The option needed to be exercised no less than six months before the option expiration date on May 22, 2012. As of April 28, 2012, the Company retained the right of first offer, however, the Company elected to not exercise the option and it terminated in November 2011.

10



(3)    The following table presents the depreciation and amortization of property and equipment included on the Condensed Consolidated Statements of Income (in thousands):
 
Three Months Ended
 
Six Months Ended
 
April 28,
2012
 
April 30,
2011
 
April 28,
2012
 
April 30,
2011
Depreciation expense
$
21,969

 
$
22,222

 
$
42,991

 
$
44,087


5. Fair Value Measurements
The Company applies fair value measurements for both financial and nonfinancial assets and liabilities. The Company has no nonfinancial assets and liabilities that are required to be measured at fair value on a recurring basis as of April 28, 2012.
The Company did not elect to measure any eligible financial instruments at fair value as April 28, 2012 and October 29, 2011.
Fair Value Hierarchy
The Company utilizes a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Assets and liabilities measured and recorded at fair value on a recurring basis as of April 28, 2012 were as follows (in thousands):
 
 
 
Fair Value Measurements Using
 
Balance as of
April 28, 2012
 
Quoted Prices in
Active Markets
For Identical
Instruments
(Level 1)
 
Significant  Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Money market funds (1)
$
238,958

 
$
238,958

 
$

 
$

Corporate bonds
797

 

 
797

 

Derivative assets
742

 

 
742

 

Total assets measured at fair value
$
240,497

 
$
238,958

 
$
1,539

 
$

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$
3,436

 
$

 
$
3,436

 
$

Total liabilities measured at fair value
$
3,436

 
$

 
$
3,436

 
$

 
(1)
Money market funds are reported within “Cash and cash equivalents” on the Condensed Consolidated Balance Sheets.

11


Assets and liabilities measured and recorded at fair value on a recurring basis as of October 29, 2011 were as follows (in thousands):
 
 
 
Fair Value Measurements Using
 
Balance as of
October 29, 2011
 
Quoted Prices in
Active Markets
For Identical
Instruments
(Level 1)
 
Significant  Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Money market funds (1)
$
138,959

 
$
138,959

 
$

 
$

Corporate bonds
774

 

 
774

 

Derivative assets
1,368

 

 
1,368

 

Total assets measured at fair value
$
141,101

 
$
138,959

 
$
2,142

 
$

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$
1,790

 
$

 
$
1,790

 
$

Total liabilities measured at fair value
$
1,790

 
$

 
$
1,790

 
$

 
(1)
Money market funds are reported within “Cash and cash equivalents” on the Condensed Consolidated Balance Sheets.
During the six months ended April 28, 2012, the Company had no transfers between levels of the fair value hierarchy of its assets measured at fair value.

6. Liabilities Associated with Facilities Lease Losses
The Company reevaluates its estimates and assumptions on a quarterly basis and makes adjustments to the reserve balance if necessary. The following table summarizes the activity related to the facilities lease loss reserve, net of expected sublease income (in thousands):
 
Lease Loss
Reserve
Reserve balance at October 29, 2011
$
3,952

Cash payments on facilities leases
(955
)
Reserve balance at April 28, 2012
$
2,997


Cash payments for facilities that are part of our lease loss reserve are expected to be paid over the respective lease terms through fiscal year 2017.


12


7. Borrowings
The following table provides details of the Company's long-term debt (in thousands):
 
 
 
 
 
 
 
April 28, 2012
 
October 29, 2011
 
 
Maturity
 
Stated Annual Interest Rate
 
Amount

 
Effective Interest Rate
 
Amount

 
Effective Interest Rate
Senior Secured Notes:
 
 
 
 
 
 
 
 
 
 
 
 
 
2018 Notes
 
2018
 
 
6.625
%
 
$
300,000

 
7.05
%
 
$
300,000

 
7.05
%
2020 Notes
 
2020
 
 
6.875
%
 
300,000

 
7.26
%
 
300,000

 
7.26
%
Senior Secured Credit Facility:
 
 
 
 
 
 
 
 
 
 
 
 
 
Term loan
 
2014
 
LIBOR+
2.25
%
 
70,000

 
6.48
%
 
190,000

 
4.41
%
Capital lease obligations
 
2015
 
 
5.80
%
 
5,863

 
5.80
%
 
6,782

 
5.80
%
Total long-term debt
 
 
 
 
 
 
675,863

 
 
 
796,782

 
 
Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
Unamortized discount
 
 
 
 
 
 
6,168

 
 
 
7,339

 
 
Current portion of long-term debt
 
 
 
 
 
 
17,330

 
 
 
40,539

 
 
Total long-term debt, net of current portion
 
 
 
 
 
 
$
652,365

 
 
 
$
748,904

 
 

Senior Secured Notes
In January 2010, the Company issued $300 million in aggregate principal amount of senior secured notes due 2018 (the “2018 Notes”) and $300 million in aggregate principal amount of senior secured notes due 2020 (the “2020 Notes" and together with the 2018 Notes, the “Senior Secured Notes”). The senior secured notes bear interest payable semi-annually. No payments were made towards the principal of the senior secured notes during the six months ended April 28, 2012.
As of April 28, 2012 and October 29, 2011, the fair value of the Company’s senior secured notes was approximately $646 million and $626 million, respectively, estimated based on broker trading prices.
On or after January 2013, the Company may redeem all or a part of the 2018 Notes at the redemption prices set forth in the Indenture governing the 2018 Notes (the 2018 Indenture), plus accrued and unpaid interest and special interest, if any, to the applicable redemption date. In addition, at any time prior to January 2013, the Company may, on one or more than one occasion, redeem some or all of the 2018 Notes at any time at a redemption price equal to 100% of the principal amount of the 2018 Notes redeemed, plus a “make-whole” premium determined as of, and accrued and unpaid interest and special interest, if any, to the applicable redemption date. On or after January 2015, the Company may redeem all or a part of the 2020 Notes at the redemption prices set forth in the Indenture governing the 2020 Notes (the 2020 Indenture), plus accrued and unpaid interest and special interest, if any, to the applicable redemption date. In addition, at any time prior to January 2015, the Company may, on one or more than one occasion, redeem some or all of the 2020 Notes at any time at a redemption price equal to 100% of the principal amount of the 2020 Notes redeemed, plus a “make-whole” premium determined as of, and accrued and unpaid interest and special interest, if any, to the applicable redemption date. At any time prior to January 2013, the Company may also redeem up to 35% of the aggregate principal amount of the 2018 Notes and 2020 Notes, using the proceeds of certain qualified equity offerings, at the redemption prices set forth in the 2018 Indenture and the 2020 Indenture, respectively.
If the Company experiences specified change of control triggering events, it must offer to repurchase the senior secured notes at a repurchase price equal to 101% of the principal amount of the senior secured notes repurchased, plus accrued and unpaid interest and special interest, if any, to the applicable repurchase date. If the Company or its subsidiaries sell assets under certain specified circumstances, the Company must offer to repurchase the senior secured notes at a repurchase price equal to 100% of the principal amount of the senior secured notes repurchased, plus accrued and unpaid interest and special interest, if any, to the applicable repurchase date.

13



Senior Secured Credit Facility
In October 2008, the Company entered into a credit facility agreement for (i) a five-year $1,100 million term loan facility and (ii) a five-year $125 million revolving credit facility, which includes a $25 million swing line loan sub-facility and a $25 million letter of credit sub-facility. The credit facility agreement was subsequently amended in January 2010 and June 2011.
The Company may draw additional proceeds from the revolving credit facility in the future for ongoing working capital and other general corporate purposes. The term loan facility and revolving credit facility are referred to together as the “Senior Secured Credit Facility.” There were no principal amounts outstanding under the revolving credit facility as of April 28, 2012 and October 29, 2011.
During the six months ended April 28, 2012, the Company paid $120.0 million towards the principal of the term loan, $104.9 million of which were voluntary prepayments.
The Company believes that the carrying value of its Senior Secured Credit Facility approximates its fair value as the interest rate is based on a floating market rate.
Debt Maturities
Fiscal Year
Estimated
Future
Maturities
2012 (remaining six months)
$
9,180

2013
18,448

2014
47,389

2015
846

2016

Thereafter
600,000

Total
$
675,863



8. Commitments and Contingencies
Product Warranties
The Company’s accrued liability for estimated future warranty costs is included in “Other accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets. The following table summarizes the activity related to the Company’s accrued liability for estimated future warranty costs during the six months ended April 28, 2012 and April 30, 2011 (in thousands):
 
Accrued Warranty
 
Six Months Ended
 
April 28,
2012
 
April 30,
2011
Beginning balance
$
11,298

 
$
5,980

Liabilities accrued for warranties issued during the period
4,640

 
3,502

Warranty claims paid and used during the period
(536
)
 
(618
)
Changes in liability for pre-existing warranties during the period
(1,040
)
 
(991
)
Ending balance
$
14,362

 
$
7,873


14


In addition, the Company has standard indemnification clauses contained within its various customer contracts. As such, the Company indemnifies the parties to whom it sells its products with respect to the Company’s product, alone or potentially in combination with others, infringing upon any patents, trademarks, copyrights, or trade secrets, as well as against bodily injury or damage to real or tangible personal property caused by a defective Company product. As of April 28, 2012, there have been no known material events or circumstances that have resulted in a customer contract-related indemnification liability to the Company.
Manufacturing and Purchase Commitments
Brocade has manufacturing arrangements with CMs under which Brocade provides twelve-month product forecasts and places purchase orders in advance of the scheduled delivery of products to Brocade’s customers. The required lead time for placing orders with the CMs depends on the specific product. Brocade issues purchase orders and the CMs then generate invoices based on prices and payment terms mutually agreed upon and set forth in those purchase orders. Although the purchase orders Brocade places with its CMs are cancellable, the terms of the agreements require Brocade to purchase all inventory components not returnable, usable by, or sold to other customers of the CMs.
As of April 28, 2012, the Company’s aggregate commitment to the CMs for inventory components used in the manufacture of Brocade products was $218.7 million, which the Company expects to utilize during future normal ongoing operations, net of a purchase commitments reserve of $4.4 million. The Company’s purchase commitments reserve reflects the Company’s estimate of purchase commitments it does not expect to consume in normal ongoing operations within the next twelve months.
Income Taxes
The Company has several ongoing income tax audits. For additional discussions, see Note 11, “Income Taxes,” of the Notes to Condensed Consolidated Financial Statements. The Company believes it has adequate reserves for all open tax years.

Legal Proceedings

Stockholder Litigation

In March 2012, a stockholder filed a complaint alleging that the proposal in Brocade’s proxy seeking additional shares for the 2009 Stock Plan pool was misleading and incomplete; the plaintiff claimed the right to enjoin the stockholders’ vote. In early April 2012, the plaintiff filed a motion for preliminary injunction seeking to enjoin the stockholders’ vote on the proposal. Brocade filed an opposition to the plaintiff’s motion for preliminary injunction. On April 10, 2012, the Court held a hearing and issued an order granting the plaintiff’s motion. On April 12, 2012, the Court entered a stipulation and order regarding settlement in which Brocade agreed to postpone the vote on the proposal at least seven days and to issue supplemental disclosures regarding the proposal. The supplemental disclosures were filed with the SEC on April 12, 2012. Brocade’s stockholders approved the proposal on April 20, 2012.

Intellectual Property Litigation
On June 21, 2005, Enterasys Networks, Inc. (“Enterasys”) filed a lawsuit against Foundry Networks, LLC (formerly Foundry Networks, Inc.) (“Foundry”) (and Extreme Networks, Inc.) in the United States District Court for the District of Massachusetts alleging that certain of Foundry’s products infringe six of Enterasys’ patents and seeking injunctive relief, as well as unspecified damages. The Court severed the claims against Extreme from the claims against Foundry for trial, and Enterasys subsequently added Brocade as a defendant. On August 28, 2007, the Court granted Foundry’s motion to stay the case based on petitions that Foundry had filed with the United States Patent and Trademark Office (“USPTO”) in 2007 for reexamination of five of the six Enterasys patents. Two of the patents received final rejections during their respective reexaminations, in which the USPTO held that the claims were invalid. The USPTO has issued reexamination certificates for the remaining three patents undergoing reexamination indicating that the patents were valid over the references that had been submitted. Meanwhile, on May 21, 2010, the Court lifted the stay of the litigation, and Enterasys subsequently dropped from the litigation the two invalid patents. Accordingly, four patents remain at issue in the litigation. No trial date has been set.

15


On September 6, 2006, Chrimar Systems, Inc. (“Chrimar”) filed a lawsuit against Foundry (and D-Link Corporation and PowerDsine, Ltd.) in the United States District Court for the Eastern District of Michigan alleging that certain of Foundry’s products infringe Chrimar’s U.S. Patent 5,406,260 and seeking injunctive relief, as well as unspecified damages. Discovery has been completed. No trial date has been set.
On August 4, 2010, Brocade and Foundry (“Plaintiffs”) filed a lawsuit against A10 Networks, Inc. (“A10”), A10’s founder and other individuals in the United States District Court for the Northern District of California. On October 29, 2010, Plaintiffs filed an amended complaint. In the amended complaint, Brocade alleged that A10 and the individual defendants have misappropriated Plaintiff’s trade secrets, infringed copyrighted works, interfered with existing contracts between the Plaintiffs and their employees, breached contracts, breached their fiduciary duties and duties of loyalty, and that certain of A10’s products infringe 13 of Brocade’s patents. Brocade is seeking injunctive relief, as well as monetary damages. On May 16, 2011, A10 filed an answer and counterclaim alleging that certain of Brocade’s products infringe a patent recently acquired by A10 and seeking injunctive relief, as well as unspecified damages. In addition, A10 filed petitions with the USPTO to have each of 13 of the patents reexamined, in view of prior art that A10 alleges invalidates the patents. The petitions were granted, and reexaminations of the patents are in progress. On January 6, 2012, the Court granted Brocade’s summary judgment motion of non-infringement of the A10 patent. Trial on Brocade’s claims against A10 and the individual defendants is scheduled for July 16, 2012.
On September 9, 2011, A10 filed a lawsuit against Brocade in the United States District Court for the Northern District of California. A10 alleged that certain of Brocade’s products infringed two patents acquired by A10. After Brocade moved to dismiss the complaint, A10 dismissed one of its patents-in-suit, leaving only one patent at issue. In lieu of answering the complaint, Brocade filed a new motion to dismiss the complaint. Trial is scheduled for May 2013.

General
From time to time, the Company is subject to other legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, copyrights, patents and/or other intellectual property rights and commercial contract disputes. Third parties assert patent infringement claims against the Company from time to time in the form of letters, lawsuits and other forms of communication. In addition, from time to time, the Company receives notification from customers claiming that they are entitled to indemnification or other obligations from the Company related to infringement claims made against them by third parties. Litigation, even if the Company is ultimately successful, can be costly and divert management’s attention away from the day-to-day operations of the Company.
On a quarterly basis, the Company reviews relevant information with respect to litigation contingencies and updates its accruals, disclosures and, when possible, estimates of reasonably possible losses or ranges of loss based on such reviews. However, litigation is inherently unpredictable, and outcomes are typically uncertain, and the Company’s past experience does not provide any additional visibility or predictability to estimate the range of loss that may occur because the costs, outcome and status of these types of claims and proceedings have varied significantly in the past. The Company is not currently able to reasonably estimate the possible loss or range of loss from the above legal proceedings and, accordingly, the Company is unable to estimate the effects of the above on its financial condition, results of operations or cash flows.
The Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.


9. Derivative Instruments and Hedging Activities
In the normal course of business, the Company is exposed to fluctuations in interest rates and the exchange rates associated with foreign currencies. The Company’s primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk. The Company currently does not enter into derivative instruments to manage credit risk. However, the Company manages its exposure to credit risk through its investment policies. The Company generally enters into derivative transactions with high-credit quality counterparties and, by policy, limits the amount of credit exposure to any one counterparty based on its analysis of that counterparty’s relative credit standing.

16


The amounts subject to credit risk related to derivative instruments are generally limited to the amounts, if any, by which counterparty’s obligations exceed the Company’s obligations with that counterparty.
Foreign Currency Exchange Rate Risk
A majority of the Company’s revenue, expense and capital purchasing activities is transacted in U.S. dollars. However, the Company is exposed to foreign currency exchange rate risk inherent in conducting business globally in numerous currencies, of which the most significant to its operations for the six months ended April 28, 2012 were the Chinese yuan, the euro, the Japanese yen, the Indian rupee, the British pound, the Singapore dollar and the Swiss franc. The Company is primarily exposed to foreign currency fluctuations related to operating expenses denominated in currencies other than the U.S. dollar. The Company has established a foreign currency risk management program to protect against fluctuations in the volatility of future cash flows caused by changes in foreign currency exchange rates. This program reduces, but does not always entirely eliminate, the impact of foreign currency exchange rate movements. The Company’s foreign currency risk management program includes foreign currency derivatives with cash flow hedge accounting designation that utilizes foreign currency forward and option contracts to hedge exposures to the variability in the U.S. dollar equivalent of anticipated non-U.S. dollar-denominated cash flows. These instruments generally have a maturity of less than one year. For these derivatives, the Company reports the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive loss in stockholders’ equity and reclassifies it into earnings in the same period in which the hedged transaction affects earnings. Net gains (losses) relating to the effective portion of foreign currency derivatives recorded in the condensed consolidated statements of income are as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
April 28, 2012
 
April 30, 2011
 
April 28, 2012
 
April 30, 2011
Cost of revenues
$
(217
)
 
$
186

 
$
(412
)
 
$
286

Research and development
(181
)
 
186

 
(346
)
 
186

Sales and marketing
(1,321
)
 
1,354

 
(2,384
)
 
1,923

General and administrative
(90
)
 
130

 
(165
)
 
130

Total
$
(1,809
)
 
$
1,856

 
$
(3,307
)
 
$
2,525

The net foreign currency exchange gains and losses recorded as part of “Interest and other income (loss), net” were losses of $0.2 million and $1.4 million for the three and six months ended April 28, 2012, respectively, and gains of $0.3 million and $0.5 million for the three and six months ended April 30, 2011, respectively.
Gross unrealized loss positions are recorded within “Other accrued liabilities” and “Other non-current liabilities,” and gross unrealized gain positions are recorded within “Prepaid expenses and other current assets.” As of April 28, 2012, the Company had gross unrealized loss positions of $3.3 million and $0.1 million, and gross unrealized gain positions of $0.7 million included in “Other accrued liabilities,” “Other non-current liabilities” and “Prepaid expenses and other current assets,” respectively. Effective cash flow hedges are reported as a component of accumulated other comprehensive loss. Ineffective cash flow hedges are included in the Company’s net income as part of “Interest and other income (loss), net.” The amount recorded was not significant.

17


Volume of Derivative Activity
Total gross notional amounts, presented by currency, are as follows (in thousands):
 
Derivatives Designated
as Hedging Instruments
 
Derivatives Not Designated
as Hedging Instruments
In United States Dollars
As of April 28, 2012
 
As of October 29, 2011
 
As of April 28, 2012
 
As of October 29, 2011
Euro
$
38,313

 
$
57,935

 
$

 
$

British pound
19,258

 
25,282

 

 

Indian rupee
17,862

 

 

 

Singapore dollar
12,162

 
16,136

 

 

Japanese yen
11,797

 
17,957

 

 

Swiss franc
9,407

 
13,060

 
3,998

 
5,012

Total
$
108,799

 
$
130,370

 
$
3,998

 
$
5,012


The Company utilizes a rolling hedge strategy for the majority of its foreign currency derivative instruments with cash flow hedge accounting designation that hedges exposures to the variability in the U.S. dollar equivalent of anticipated non-U.S. dollar-denominated cash flows. All of the Company’s foreign currency forward contracts are single delivery, which are settled at maturity involving one cash payment exchange.

10. Stock-Based Compensation
Stock-based compensation expense, net of estimated forfeitures, was included in the following line items on the Condensed Consolidated Statements of Income as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
April 28, 2012
 
April 30, 2011
 
April 28, 2012
 
April 30, 2011
Cost of revenues
$
4,596

 
$
4,167

 
$
8,971

 
$
7,027

Research and development
5,603

 
5,111

 
10,631

 
9,394

Sales and marketing
10,687

 
9,619

 
20,463

 
18,411

General and administrative
2,972

 
3,633

 
5,612

 
7,604

Total stock-based compensation
$
23,858

 
$
22,530

 
$
45,677

 
$
42,436

 
The following table presents stock-based compensation expense, net of estimated forfeitures, by grant type (in thousands):
 
Three Months Ended
 
Six Months Ended
 
April 28, 2012
 
April 30, 2011
 
April 28, 2012
 
April 30, 2011
Stock options, including variable options
$
455

 
$
1,553

 
$
730

 
$
2,648

Restricted stock awards and restricted stock units (“RSUs”)
19,650

 
13,510

 
36,721

 
25,383

Employee stock purchase plan (“ESPP”)
3,753

 
7,467

 
8,226

 
14,405

Total stock-based compensation
$
23,858

 
$
22,530

 
$
45,677

 
$
42,436


18


The following table presents unrecognized compensation expense, net of estimated forfeitures, of the Company’s equity compensation plans as of April 28, 2012, which is expected to be recognized over the following weighted-average periods (in thousands, except for weighted-average period):
 
Unrecognized
Compensation
Expense
 
Weighted-
Average Period
(in years)
Stock options
$
1,358

 
0.74

RSUs
$
76,046

 
1.72

ESPP
$
5,448

 
0.82


The following table presents details on grants made by the Company for the following periods:
 
Six Months Ended
 
Six Months Ended
 
April 28, 2012
 
April 30, 2011
 
Granted
(in  thousands)
 
Weighted-Average
Grant Date  Fair Value
 
Granted
(in  thousands)
 
Weighted-Average
Grant Date  Fair Value
Stock options
160

 
$
2.39

 
243

 
$
2.23

RSUs
1,491

 
$
5.60

 
3,763

 
$
5.33

The total intrinsic value of stock options exercised for the six months ended April 28, 2012 and April 30, 2011 was $19.8 million and $28.5 million, respectively.
11. Income Taxes
For the three and six months ended April 28, 2012, the Company recorded an income tax benefit of $0.7 million and $3.9 million, respectively, primarily due to a discrete benefit from net reserve releases of settling the federal research and development tax credit for fiscal years 2009 and 2010 with the Internal Revenue Service ("IRS"), closing the IRS audits for fiscal years 2004 through 2006, settling Foundry's 2006 and 2007 California franchise tax audit, and releases from expiring statutes of limitations, offset by a decrease to the federal research and development tax credit which expired on December 31, 2011.
For the three and six months ended April 30, 2011, the Company recorded an income tax benefit of $0.6 million and $6.3 million, respectively, primarily due to a discrete benefit from the retroactive reinstatement of the federal research and development tax credit for calendar year 2011, as a result of the Tax Relief Act enacted on December 17, 2010, and reserve releases from the settlement of certain issues with the IRS regarding the Company's fiscal years 2007 and 2008 audits.
The total amount of unrecognized tax benefits of $105.0 million as of April 28, 2012 would affect the Company’s effective tax rate, if recognized. Although the timing of the closure of audits is highly uncertain, it is reasonably possible that the balance of unrecognized tax benefits could significantly change during fiscal year 2012.
The IRS and other tax authorities regularly examine the Company's income tax returns. The IRS is currently examining fiscal years 2009 and 2010. In addition, the Company is under negotiations with the Appeals division of the IRS on transfer pricing issues for fiscal years 2007 and 2008, and in discussion with foreign tax authorities to obtain correlative relief on transfer pricing adjustments settled with the IRS. We believe that our reserves for unrecognized tax benefits are adequate for all open tax years. The timing of the resolution of income tax examinations, as well as the amounts and timing of related settlements, is highly uncertain. The Company believes that before the end of fiscal year 2012, it is reasonably possible that either certain audits will conclude or the statutes of limitations relating to certain income tax examination periods will expire, or both. As such, after we reach settlement with the tax authorities, we expect to record a corresponding adjustment to our unrecognized tax benefits. Given the uncertainty as to settlement terms, the timing of payments and the impact of such settlements on other uncertain tax positions, the range of estimated potential decreases in underlying uncertain tax positions is between $0 and $10 million in the next twelve months.

19


The Company believes that sufficient positive evidence exists from historical operations and projections of taxable income in future years to conclude that it is more likely than not that the Company will realize its deferred tax assets. Accordingly, the Company applies a valuation allowance only on the deferred tax assets relating to capital loss carryforwards, due to limited carryforward periods and the character of such tax attributes. The Governor of the State of California and the California state legislature have introduced tax proposals affecting future state income tax apportionment that may have a significant impact on our ability to realize certain California deferred tax assets. We will reevaluate the realization of these California deferred tax assets if and when the current law changes.

12. Segment Information
Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. Currently, the CODM is the Chief Executive Officer.

Brocade is organized into four operating segments. Two of the operating segments, Data Storage Products and Global Services are individually reportable segments. The other two operating segments, Ethernet Switching & Internet Protocol (“IP”) Routing and Application Delivery Products (“ADP”), combine to form a third reportable segment: Ethernet Products. These segments are organized principally by product category.
Financial decisions and the allocation of resources are based on the information from the Company’s internal management reporting system. The Company does not track its assets by operating segments. The majority of the Company’s assets as of April 28, 2012 were attributable to its United States operations.
Summarized financial information by reportable segment for the three and six months ended April 28, 2012 and April 30, 2011, based on the internal management reporting system, is as follows (in thousands):
 
Data Storage Products
 
Ethernet Products
 
Global Services
 
Total
Three months ended April 28, 2012
 
 
 
 
 
 
 
Net revenues
$
342,922

 
$
113,182

 
$
87,335

 
$
543,439

Cost of revenues
90,357

 
73,820

 
42,180

 
206,357

Gross margin
$
252,565

 
$
39,362

 
$
45,155

 
$
337,082

Three months ended April 30, 2011
 
 
 
 
 
 
 
Net revenues
$
328,836

 
$
128,659

 
$
90,869

 
$
548,364

Cost of revenues
97,831

 
73,244

 
48,680

 
219,755

Gross margin
$
231,005

 
$
55,415

 
$
42,189

 
$
328,609

Six months ended April 28, 2012
 
 
 
 
 
 
 
Net revenues
$
695,794

 
$
236,612

 
$
171,675

 
$
1,104,081

Cost of revenues
186,195

 
153,389

 
82,646

 
422,230

Gross margin
$
509,599

 
$
83,223

 
$
89,029

 
$
681,851

Six months ended April 30, 2011
 
 
 
 
 
 
 
Net revenues
$
659,739

 
$
254,785

 
$
179,596

 
$
1,094,120

Cost of revenues
198,303

 
150,388

 
95,937

 
444,628

Gross margin
$
461,436

 
$
104,397

 
$
83,659

 
$
649,492



20


13. Net Income per Share
The following table presents the calculation of basic and diluted net income per share (in thousands, except per share amounts): 
 
Three Months Ended
 
Six Months Ended
 
April 28,
2012
 
April 30,
2011
 
April 28,
2012
 
April 30,
2011
Basic net income per share
 
 
 
 
 
 
 
Net income
$
39,296

 
$
26,079

 
$
97,880

 
$
52,997

Weighted-average shares used in computing basic net income per share
457,541

 
473,209

 
455,017

 
469,158

Basic net income per share
$
0.09

 
$
0.06

 
$
0.22

 
$
0.11

Diluted net income per share
 
 
 
 
 
 
 
Net income
$
39,296

 
$
26,079

 
$
97,880

 
$
52,997

Weighted-average shares used in computing basic net income per share
457,541

 
473,209

 
455,017

 
469,158

Dilutive potential common shares in the form of stock options
9,112

 
15,967

 
9,501

 
16,168

Dilutive potential common shares in the form of other share based awards
10,195

 
12,335

 
8,275

 
11,012

Weighted-average shares used in computing diluted net income per share
476,848

 
501,511

 
472,793

 
496,338

Diluted net income per share
$
0.08

 
$
0.05

 
$
0.21

 
$
0.11

Antidilutive potential common shares in the form of (1)
 
 
 
 
 
 
 
Stock options
14,750

 
18,630

 
17,284

 
21,556

Other share based awards
108

 
403

 
592

 
771


(1)
These amounts are excluded from the computation of diluted net income per share.
14. Comprehensive Income
The components of comprehensive income, net of tax, are as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
April 28,
2012
 
April 30,
2011
 
April 28,
2012
 
April 30,
2011
Net income
$
39,296

 
$
26,079

 
$
97,880

 
$
52,997

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in net unrealized gains (losses) on cash flow hedges
1,486

 
1,967

 
(1,359
)
 
(865
)
Change in cumulative translation adjustments
84

 
1,350

 
(1,476
)
 
1,204

Total comprehensive income
$
40,866

 
$
29,396

 
$
95,045

 
$
53,336


15. Guarantor and Non-Guarantor Subsidiaries
On January 20, 2010, the Company issued in total $600.0 million aggregate principal amount of its senior secured notes. The Company's obligations under the senior secured notes are guaranteed by certain of the Company's domestic subsidiaries (the “Subsidiary Guarantors”). Each of the Subsidiary Guarantors is 100% owned by the Company and all guarantees are joint and several. The senior secured notes are not guaranteed by certain of the Company's domestic subsidiaries and all of the Company’s foreign subsidiaries (the “Non-Guarantor Subsidiaries”).

21


Pursuant to the terms of the senior secured notes, the guarantees are full and unconditional, but are subject to release under the following circumstances:
upon the sale of the subsidiary or all or substantially all of its assets;
upon the discharge of the guarantees under the credit facility or other debt provided that the credit facility has been paid in full and the applicable series of senior secured notes have an investment grade rating from both Standard & Poor's and Moody's;
upon designation of the subsidiary as an “unrestricted subsidiary” under the applicable Indenture;
upon the merger, consolidation or liquidation of the subsidiary into another subsidiary guarantor; and
upon legal or covenant defeasance or the discharge of the Company's obligations under the applicable indenture.
Because the guarantees are subject to release under the above described circumstances, they would not be deemed “full and unconditional” for purposes of Rule 3-10 of Regulation S-X. However, as these circumstances are customary, the Company concluded that it may rely on Rule 3-10 of Regulation S-X, as the other requirements of Rule 3-10 have been met.
The following tables present condensed consolidated financial statements for the parent company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries, respectively.
The following is the condensed consolidated balance sheet as of April 28, 2012 (in thousands):
 
Brocade
Communications
Systems, Inc.
 
Subsidiary
Guarantors
 
Non-Guarantor Subsidiaries
 
Consolidating
Adjustments
 
Total
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and short-term investments
$
186,562

 
$
3,585

 
$
354,989

 
$

 
$
545,136

Accounts receivable, net
146,108

 
(1,696
)
 
73,425

 

 
217,837

Inventories
59,350

 

 
22,201

 

 
81,551

Intercompany receivables

 
453,449

 

 
(453,449
)
 

Other current assets
100,360

 
696

 
11,529

 
1,706

 
114,291

Total current assets
492,380

 
456,034

 
462,144

 
(451,743
)
 
958,815

Property and equipment, net
454,602

 
54,667

 
17,957

 

 
527,226

Investment in subsidiaries
1,283,055

 

 

 
(1,283,055
)
 

Other non-current assets
1,490,192

 
535,525

 
1,254

 

 
2,026,971

Total assets
$
3,720,229

 
$
1,046,226

 
$
481,355

 
$
(1,734,798
)
 
$
3,513,012

Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
85,280

 
$
363

 
$
17,056

 
$

 
$
102,699

Current portion of long-term debt
17,330

 

 

 

 
17,330

Intercompany payables
406,451

 

 
46,998

 
(453,449
)
 

Other current liabilities
292,135

 
13,823

 
125,441

 
1,706

 
433,105

Total current liabilities
801,196

 
14,186

 
189,495

 
(451,743
)
 
553,134

Long-term debt, net of current portion
652,365

 

 

 

 
652,365

Other non-current liabilities
91,242

 
216

 
40,629

 

 
132,087

Total liabilities
1,544,803

 
14,402

 
230,124

 
(451,743
)
 
1,337,586

Total stockholders’ equity
2,175,426

 
1,031,824

 
251,231

 
(1,283,055
)
 
2,175,426

Total liabilities and stockholders’ equity
$
3,720,229

 
$
1,046,226

 
$
481,355

 
$
(1,734,798
)
 
$
3,513,012


22


The following is the condensed consolidated balance sheet as of October 29, 2011 (in thousands):
 
Brocade
Communications
Systems, Inc.
 
Subsidiary
Guarantors
 
Non-Guarantor Subsidiaries
 
Consolidating
Adjustments
 
Total
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and short-term investments
$
101,367

 
$
2,301

 
$
311,308

 
$

 
$
414,976

Accounts receivable, net
157,839

 
(2,149
)
 
93,451

 

 
249,141

Inventories
50,000

 

 
24,172

 

 
74,172

Intercompany receivables

 
446,455

 

 
(446,455
)
 

Other current assets
87,495

 
805

 
15,609

 
2,003

 
105,912

Total current assets
396,701

 
447,412

 
444,540

 
(444,452
)
 
844,201

Property and equipment, net
460,347

 
55,594

 
16,443

 

 
532,384

Investment in subsidiaries
1,285,356

 

 

 
(1,285,356
)
 

Other non-current assets
1,506,086

 
590,318

 
1,319

 

 
2,097,723

Total assets
$
3,648,490

 
$
1,093,324

 
$
462,302

 
$
(1,729,808
)
 
$
3,474,308

Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
85,700

 
$
376

 
$
23,395

 
$

 
$
109,471

Current portion of long-term debt
40,539

 

 

 

 
40,539

Intercompany payables
377,228

 

 
69,227

 
(446,455
)
 

Other current liabilities
276,982

 
17,261

 
119,731

 
2,003

 
415,977

Total current liabilities
780,449

 
17,637

 
212,353

 
(444,452
)
 
565,987

Long-term debt, net of current portion
748,904

 

 

 

 
748,904

Other non-current liabilities
104,999

 
580

 
39,700

 

 
145,279

Total liabilities
1,634,352

 
18,217

 
252,053

 
(444,452
)
 
1,460,170

Total stockholders’ equity
2,014,138

 
1,075,107

 
210,249

 
(1,285,356
)
 
2,014,138

Total liabilities and stockholders’ equity
$
3,648,490

 
$
1,093,324

 
$
462,302

 
$
(1,729,808
)
 
$
3,474,308


23


The following is the condensed consolidated statement of income for the three months ended April 28, 2012 (in thousands):
 
Brocade
Communications
Systems, Inc.
 
Subsidiary
Guarantors
 
Non-Guarantor Subsidiaries
 
Consolidating
Adjustments
 
Total
Revenues
$
352,760

 
$
1,250

 
$
189,429

 
$

 
$
543,439

Intercompany revenues
13,947

 

 
7,349

 
(21,296
)
 

Total net revenues
366,707

 
1,250

 
196,778

 
(21,296
)
 
543,439

Cost of revenues
141,052

 
10,852

 
51,546

 
2,907

 
206,357

Intercompany cost of revenues
(6,792
)
 

 
28,088

 
(21,296
)
 

Total cost of revenues
134,260

 
10,852

 
79,634

 
(18,389
)
 
206,357

Gross margin (loss)
232,447

 
(9,602
)
 
117,144

 
(2,907
)
 
337,082

Operating expenses
216,870

 
15,162

 
56,188

 
(2,907
)
 
285,313

Intercompany operating expenses
(30,169
)
 
(6,539
)
 
36,708

 

 

Total operating expenses
186,701

 
8,623

 
92,896

 
(2,907
)
 
285,313

Income (loss) from operations
45,746

 
(18,225
)
 
24,248

 

 
51,769

Other income (expense)
(12,915
)
 
(111
)
 
(155
)
 

 
(13,181
)
Income (loss) before income tax provision (benefit) and equity in net earnings (losses) of subsidiaries
32,831

 
(18,336
)
 
24,093

 

 
38,588

Income tax provision (benefit)
(2,565
)
 

 
1,857

 

 
(708
)
Equity in net earnings (losses) of subsidiaries
3,900