e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-34501
JUNIPER NETWORKS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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77-0422528 |
(State or other jurisdiction of
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(IRS Employer |
incorporation or organization)
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Identification No.) |
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1194 North Mathilda Avenue |
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Sunnyvale, California 94089
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(408) 745-2000 |
(Address of principal executive offices,
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(Registrants telephone number, |
including zip code)
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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 filings requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large Accelerated Filer þ
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Accelerated Filer o
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Non-Accelerated Filer o
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Smaller Reporting Company o |
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(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
There were approximately 526,139,000 shares of the Companys Common Stock, par value $0.00001,
outstanding as of April 30, 2010.
PART I FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
Juniper Networks, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
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Three Months Ended March 31, |
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2010 |
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2009 |
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Net revenues: |
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Product |
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$ |
721,201 |
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$ |
587,863 |
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Service |
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191,417 |
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176,320 |
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Total net revenues |
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912,618 |
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764,183 |
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Cost of revenues: |
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Product |
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222,381 |
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193,061 |
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Service |
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78,216 |
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68,830 |
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Total cost of revenues |
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300,597 |
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261,891 |
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Gross margin |
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612,021 |
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502,292 |
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Operating expenses: |
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Research and development |
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206,994 |
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185,400 |
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Sales and marketing |
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192,375 |
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187,864 |
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General and administrative |
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43,138 |
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39,211 |
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Amortization of purchased intangible assets |
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1,137 |
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4,390 |
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Restructuring charges |
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8,105 |
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4,229 |
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Total operating expenses |
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451,749 |
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421,094 |
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Operating income |
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160,272 |
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81,198 |
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Interest and other income, net |
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1,459 |
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1,950 |
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Loss on equity investment |
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(1,686 |
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Income before income taxes and noncontrolling interest |
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161,731 |
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81,462 |
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Income tax (benefit) provision |
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(2,879 |
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85,922 |
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Consolidated net income (loss) |
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164,610 |
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(4,460 |
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Less: Net income attributable to noncontrolling interest |
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(1,495 |
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Net income (loss) attributable to Juniper Networks |
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$ |
163,115 |
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$ |
(4,460 |
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Net income (loss) per share attributable to Juniper
Networks common stockholders: |
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Basic |
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$ |
0.31 |
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$ |
(0.01 |
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Diluted |
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$ |
0.30 |
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$ |
(0.01 |
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Shares used in computing net income(loss) per share: |
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Basic |
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521,141 |
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524,429 |
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Diluted |
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536,718 |
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524,429 |
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See accompanying Notes to Condensed Consolidated Financial Statements
3
Juniper Networks, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except par values)
(Unaudited)
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March 31, |
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December 31, |
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2010 |
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2009 |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
1,723,949 |
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$ |
1,604,723 |
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Short-term investments |
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592,679 |
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570,522 |
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Accounts receivable, net of allowances |
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402,934 |
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458,652 |
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Deferred tax assets, net |
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209,560 |
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196,318 |
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Prepaid expenses and other current assets |
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67,858 |
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48,744 |
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Total current assets |
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2,996,980 |
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2,878,959 |
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Property and equipment, net |
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457,957 |
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455,651 |
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Long-term investments |
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450,450 |
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483,505 |
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Restricted cash |
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55,391 |
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53,732 |
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Purchased intangible assets, net |
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12,672 |
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13,834 |
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Goodwill |
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3,658,602 |
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3,658,602 |
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Long-term deferred tax assets, net |
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9,784 |
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10,555 |
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Other long-term assets |
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36,899 |
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35,425 |
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Total assets |
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$ |
7,678,735 |
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$ |
7,590,263 |
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities: |
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Accounts payable |
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$ |
230,330 |
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$ |
242,591 |
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Accrued compensation |
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156,704 |
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176,551 |
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Accrued warranty |
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37,828 |
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38,199 |
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Deferred revenue |
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619,968 |
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571,652 |
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Income taxes payable |
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60,903 |
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34,936 |
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Accrued litigation settlements |
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169,330 |
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Other accrued liabilities |
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149,419 |
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142,526 |
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Total current liabilities |
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1,255,152 |
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1,375,785 |
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Long-term deferred revenue |
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169,920 |
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181,937 |
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Long-term income tax payable |
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92,576 |
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170,245 |
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Other long-term liabilities |
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39,764 |
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37,531 |
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Commitments and Contingencies See Note 14 |
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Juniper Networks stockholders equity: |
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Convertible preferred stock, $0.00001 par value;
10,000 shares authorized; none issued and
outstanding |
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Common stock, $0.00001 par value; 1,000,000 shares
authorized; 524,909 shares and 519,341 shares
issued and outstanding at March 31, 2010, and
December 31, 2009, respectively |
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5 |
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5 |
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Additional paid-in capital |
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9,267,584 |
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9,060,089 |
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Accumulated other comprehensive loss |
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(4,466 |
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(1,433 |
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Accumulated deficit |
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(3,143,924 |
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(3,236,525 |
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Total Juniper Networks stockholders equity |
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6,119,199 |
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5,822,136 |
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Noncontrolling interest |
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2,124 |
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2,629 |
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Total equity |
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6,121,323 |
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5,824,765 |
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Total liabilities and stockholders equity |
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$ |
7,678,735 |
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$ |
7,590,263 |
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See accompanying Notes to Condensed Consolidated Financial Statements
4
Juniper Networks, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Three Months Ended March 31, |
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2010 |
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2009 |
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Cash flows from operating activities: |
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Consolidated net income (loss) |
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$ |
164,610 |
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$ |
(4,460 |
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Adjustments to reconcile net income (loss) to net cash from
operating activities: |
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Depreciation and amortization |
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35,269 |
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37,536 |
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Share-based compensation |
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40,561 |
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33,562 |
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Loss on equity investment |
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1,686 |
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Excess tax benefits from share-based compensation |
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(20,520 |
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(3,110 |
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Deferred income taxes |
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(12,471 |
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48,438 |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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55,718 |
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68,012 |
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Prepaid expenses and other assets |
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(11,150 |
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8,312 |
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Accounts payable |
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(14,125 |
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(39,224 |
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Accrued compensation |
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(19,847 |
) |
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(31,720 |
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Accrued litigation settlements |
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(169,330 |
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Income tax payable |
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(1,088 |
) |
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19,307 |
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Other accrued liabilities |
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4,620 |
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3,442 |
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Deferred revenue |
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36,299 |
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22,084 |
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Net cash provided by operating activities |
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88,546 |
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163,865 |
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Cash flows from investing activities: |
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Purchases of property and equipment, net |
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(37,807 |
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(34,226 |
) |
Purchases of trading investments |
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(1,245 |
) |
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Purchases of available-for-sale investments |
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(447,716 |
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(109,290 |
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Proceeds from sales of available-for-sale investments |
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224,514 |
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62,401 |
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Proceeds from maturities of available-for-sale investments |
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235,960 |
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16,850 |
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Changes in restricted cash |
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(1,550 |
) |
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(Purchases of) proceeds from privately-held equity investments, net |
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(4,773 |
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1,013 |
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Net cash used in investing activities |
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(32,617 |
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(63,252 |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock |
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118,920 |
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22,628 |
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Purchases and retirement of common stock |
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(76,225 |
) |
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(119,846 |
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Net proceeds from (payments for) customer financing arrangements |
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2,082 |
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(20,606 |
) |
Excess tax benefits from share-based compensation |
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20,520 |
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3,110 |
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Return of capital to noncontrolling interest |
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(2,000 |
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Net cash provided by (used in) financing activities |
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63,297 |
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(114,714 |
) |
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Net increase (decrease) in cash and cash equivalents |
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119,226 |
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(14,101 |
) |
Cash and cash equivalents at beginning of period |
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1,604,723 |
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2,019,084 |
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Cash and cash equivalents at end of period |
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$ |
1,723,949 |
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$ |
2,004,983 |
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See accompanying Notes to Condensed Consolidated Financial Statements
5
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The unaudited Condensed Consolidated Financial Statements of Juniper Networks, Inc. (Juniper
Networks or the Company) have been prepared in accordance with U.S. generally accepted
accounting principles (U.S. GAAP) for interim financial information as well as the instructions
to Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission (SEC).
Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for
complete financial statements. In the opinion of management, all adjustments, including normal
recurring accruals, considered necessary for a fair presentation have been included. The results of
operations for the three months ended March 31, 2010, are not necessarily indicative of the results
that may be expected for the year ending December 31, 2010, or any future period. The information
included in this Quarterly Report on Form 10-Q should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operations, Risk Factors,
Quantitative and Qualitative Disclosures About Market Risk, and the Consolidated Financial
Statements and footnotes thereto included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2009.
As of March 31, 2010, the Company owned a 60 percent interest in a joint venture with Nokia Siemens
Networks B.V. (NSN). Given the Companys majority ownership interest in the joint venture, the
accounts of the joint venture have been consolidated with the accounts of the Company, and a
noncontrolling interest has been recorded for the noncontrolling investors interests in the net
assets and operations of the joint venture.
Reclassifications
During the three months ended March 31, 2010, the Company reclassified certain selling and
marketing costs that were previously reported as cost of service revenues as sales and marketing
expense. Accordingly, $6.6 million of costs reported in the first quarter of 2009 have been
reclassified from cost of service revenues to sales and marketing expense to conform to the current
periods presentation. The reclassification did not impact the Companys previously reported net
revenues, segment results, operating income, net income, or earnings per share.
Note 2. Summary of Significant Accounting Policies
Recent Accounting Policy Changes
Revenue Recognition
In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU
2009-13 changes the requirements for establishing separate units of accounting in a multiple
element arrangement and requires the allocation of arrangement consideration to each deliverable to
be based on the relative selling price. Concurrently with issuing ASU 2009-13, the FASB also issued
ASU No. 2009-14, Certain Revenue Arrangements That Include Software Elements (ASU 2009-14). ASU
2009-14 excludes software that is contained on a tangible product from the scope of software
revenue guidance if the software component and the non-software component function together to
deliver the tangible products essential functionality. The Company early adopted these standards
on a prospective basis as of the beginning of fiscal 2010 for new and materially modified
arrangements originating after December 31, 2009. As a result, net revenues for the first quarter
of 2010 were approximately $25 million higher than the net revenues that would have been recorded
under the previous accounting rules. The increase in revenues was due to recognition of revenue for
products booked and shipped during the first quarter of 2010, that contained undelivered elements
for which the Company was unable to demonstrate fair value pursuant to the previous standards.
Under the new standards the Company allocates the total arrangement consideration to each separable
element of an arrangement based upon the relative selling price of each element. Arrangement
consideration allocated to undelivered elements is deferred until delivery.
6
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Revenue is recognized when all of the following criteria have been met:
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Persuasive evidence of an arrangement exists. The Company generally relies upon sales
contracts, or agreements, and customer purchase orders to determine the existence of an
arrangement. |
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Delivery has occurred. The Company uses shipping terms and related documents, or written
evidence of customer acceptance, when applicable, to verify delivery or performance. In
instances where the Company has outstanding obligations related to product delivery or the
final acceptance of the product, revenue is deferred until all the delivery and acceptance
criteria have been met. |
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Sales price is fixed or determinable. The Company assesses whether the sales price is
fixed or determinable based on the payment terms and whether the sales price is subject to
refund or adjustment. |
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Collectability is reasonably assured. The Company assesses collectability based on the
creditworthiness of the customer as determined by our credit checks and the customers
payment history. The Company records accounts receivable net of allowance for doubtful
accounts, estimated customer returns and pricing credits. |
For fiscal 2010 and future periods, pursuant to the guidance of ASU 2009-13, when a sales
arrangement contains multiple elements and software and non-software components function together
to deliver the tangible products essential functionality, the Company allocates revenue to each
element based on a selling price hierarchy. The selling price for a deliverable is based on its
vendor-specific objective evidence (VSOE) if available, third party evidence (TPE) if VSOE is
not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. The Company
then recognizes revenue on each deliverable in accordance with its policies for product and service
revenue recognition. VSOE of fair value is based on the price charged when the element is sold
separately. In determining VSOE, the Company requires that a substantial majority of the selling
prices fall within a reasonable range based on historical discounting trends for specific products
and services. TPE of selling price is established by evaluating largely interchangeable competitor
products or services in stand-alone sales to similarly situated customers. However, as the
Companys products contain a significant element of proprietary technology and its solutions offer
substantially different features and functionality, the comparable pricing of products with similar
functionality typically cannot be obtained. Additionally, as the Company is unable to reliably
determine what competitors products selling prices are on a stand-alone basis, the Company is not
typically able to determine TPE. The best estimate of selling price is established considering
multiple factors including, but not limited to pricing practices in different geographies and
through different sales channels, gross margin objectives, internal costs, competitor pricing
strategies, and industry technology lifecycles.
In multiple element arrangements where more-than-incidental software deliverables are included,
revenue is allocated to each separate unit of accounting for each of the non-software deliverables
and to the software deliverables as a group using the relative selling prices of each of the
deliverables in the arrangement based on the aforementioned selling price hierarchy. If the
arrangement contains more than one software deliverable, the arrangement consideration allocated to
the software deliverables as a group is then allocated to each software deliverable using the
guidance for recognizing software revenue, as amended.
The Company limits the amount of revenue recognition for delivered elements to the amount that is
not contingent on the future delivery of products or services, future performance obligation, or
subject to customer-specific return or refund privileges. The Company evaluates each deliverable in
an arrangement to determine whether they represent separate units of accounting. A deliverable
constitutes a separate unit of accounting when it has stand-alone value and there are no
customer-negotiated refunds or return rights for the delivered elements. If the arrangement
includes a customer-negotiated refund or return right relative to the delivered item, and the
delivery and performance of the undelivered item is considered probable and substantially in the
Companys control, the delivered element constitutes a separate unit of accounting. In
circumstances when the aforementioned criteria are not met, the deliverable is combined with the
undelivered elements, and the allocation of the arrangement consideration and revenue recognition
is determined for the combined unit as a single unit. Allocation of the
7
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
consideration is determined at arrangement inception on the basis of each units relative selling
price. The new standards do not generally change the units of accounting for the Companys revenue
transactions. The Company cannot reasonably estimate the effect of adopting these standards on
future financial periods as the impact will vary depending on the nature and volume of new or
materially modified deals in any given period.
For transactions entered into prior to the first quarter of 2010, revenues for arrangements with
multiple elements, such as sales of products that include services, are allocated to each element
using the residual method based on the VSOE of fair value of the undelivered items pursuant to
Accounting Standards Codification (ASC) Topic 985-605, Software Revenue Recognition. Under the
residual method, the amount of revenue allocated to delivered elements equals the total arrangement
consideration less the aggregate fair value of any undelivered elements. If VSOE of fair value of
one or more undelivered items does not exist, revenue is deferred and recognized at the earlier of:
(i) delivery of those elements or (ii) when fair value can be established unless maintenance is the
only undelivered element, in which case, the entire arrangement fee is recognized ratably over the
contractual support period.
The Company accounts for multiple agreements with a single customer as one arrangement if the
contractual terms and/or substance of those agreements indicate that they may be so closely related
that they are, in effect, parts of a single arrangement. The Companys ability to recognize revenue
in the future may be affected if actual selling prices are significantly less than fair value. In
addition, the Companys ability to recognize revenue in the future could be impacted by conditions
imposed by its customers.
For sales to direct end-users, value-added resellers, and original equipment manufacturer (OEM)
partners, the Company recognizes product revenue upon transfer of title and risk of loss, which is
generally upon shipment. It is the Companys practice to identify an end-user prior to shipment to
a value-added reseller or to an OEM partner. For the Companys end-users and value-added resellers,
there are no significant obligations for future performance such as rights of return or pricing
credits. A portion of the Companys sales is made through distributors under agreements allowing
for pricing credits or rights of return. Product revenue on sales made through these distributors
is recognized upon sell-through as reported by the distributors to the Company. Deferred revenue on
shipments to distributors reflects the effects of distributor pricing credits and the amount of
gross margin expected to be realized upon sell-through. Deferred revenue is recorded net of the
related product costs of revenue.
The Company records reductions to revenue for estimated product returns and pricing adjustments,
such as rebates and price protection, in the same period that the related revenue is recorded. The
amount of these reductions is based on historical sales returns and price protection credits,
specific criteria included in rebate agreements, and other factors known at the time. Should actual
product returns or pricing adjustments differ from estimates, additional reductions to revenue may
be required. In addition, the Company reports revenues net of sales taxes. Service revenues include
revenue from maintenance, training, and professional services. Maintenance is offered under
renewable contracts. Revenue from maintenance service contracts is deferred and is recognized
ratably over the contractual support period, which is generally one to three years. Revenue from
training and professional services is recognized as the services are completed or ratably over the
contractual period, which is generally one year or less.
The Company sells certain interests in accounts receivable on a non-recourse basis as part of a
customer financing arrangement primarily with one major financing company. Cash received under this
arrangement in advance of revenue recognition is recorded as short-term debt.
8
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Recent Accounting Pronouncements
In January 2010, the FASB issued ASU No. 2010-06, Topic 820 Improving Disclosures about Fair
Value Measurements (ASU 2010-06), which provides additional fair value measurement disclosures
and clarifies certain existing disclosure requirements. Except for the requirement to disclose
purchases, sales, issuances, and settlements of Level 3 measurements on a gross basis, the
disclosure and clarification requirements are effective for interim and annual reporting periods
beginning after December 15, 2009. The requirement to separately disclose purchases, sales,
issuances, and settlements of recurring Level 3 measurements on a gross basis is effective for
fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.
ASU 2010-06 relates to disclosure requirements only and as such does not impact the Companys
consolidated results of operations or financial condition.
In December 2009, the FASB issued ASU No. 2009-17, Topic 810 Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities (ASU 2009-17), which incorporated the
revised accounting guidance of variable interest entities into FASB ASC Topic 810, Consolidation.
Initially issued by the FASB in June 2009, the revised guidance eliminates the qualifying
special-purpose entities (QSPE) concept, amends the provisions on determining whether an entity
is a variable interest entity and would require consolidation, and requires additional disclosures.
This guidance is effective for a companys first annual reporting period that begins after
November 15, 2009, interim periods within the first annual reporting period, and for interim and
annual reporting periods thereafter. The Companys adoption of ASU 2009-17 during the first quarter
of 2010 did not impact its consolidated results of operations or financial condition.
In December 2009, the FASB issued ASU No. 2009-16, Accounting for Transfers of Financial Assets
(ASU 2009-16), which incorporated the revised accounting guidance for the transfers of financial
assets into FASB ASC Topic 860, Transfers and Servicing. Initially issued by the FASB in June 2009,
the revised guidance eliminates the concept of QSPE, removes the scope exception for QSPE when
applying the accounting guidance related to variable interest entities, changes the requirements
for derecognizing financial assets, and requires additional disclosures. This accounting guidance
is effective for a companys first annual and interim reporting periods that begin after
November 15, 2009. This accounting guidance is applied to transfers of financial assets occurring
on or after the effective date. The Companys adoption of ASU 2009-16 during the first quarter of
2010 did not impact its consolidated results of operations or financial condition.
Note 3. Net Income (Loss) per Share
Basic net income (loss) per share and diluted net loss per share are computed by dividing net
income (loss) available to common stockholders by the weighted-average number of common shares
outstanding for that period. Diluted net income per share is computed giving effect to all dilutive
potential shares that were outstanding during the period. Dilutive potential common shares consist
of common shares issuable upon exercise of stock options, vesting of restricted stock units
(RSUs), and performance share awards (PSAs).
9
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
The following table presents the calculation of basic and diluted net income (loss) per share
attributable to Juniper Networks (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
Numerator: |
|
|
|
|
|
|
|
|
Net income (loss) attributable to Juniper Networks |
|
$ |
163.1 |
|
|
$ |
(4.5 |
) |
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted-average shares used to compute basic net income (loss) per share |
|
|
521.1 |
|
|
|
524.4 |
|
Effective of dilutive securities: |
|
|
|
|
|
|
|
|
Employee stock awards |
|
|
15.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute diluted net income (loss) per share |
|
|
536.7 |
|
|
|
524.4 |
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to Juniper Networks common
stockholders: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.31 |
|
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
Diluted |
|
$ |
0.30 |
|
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
Employee stock awards covering approximately 19.6 million shares of the Companys common stock were
not included in the computation of diluted earnings per share for the quarter ended March 31, 2010,
because their effect would have been anti-dilutive. As a result of the net loss for the quarter
ended March 31, 2009, approximately 69.4 million common stock equivalents were excluded in the
computation of diluted net loss per share because their effect would have been anti-dilutive.
Note 4. Cash, Cash Equivalents, and Investments
Cash and Cash Equivalents
The
following table summarizes the Companys cash and cash equivalents (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash: |
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
428.2 |
|
|
$ |
427.2 |
|
Time deposits |
|
|
225.5 |
|
|
|
127.9 |
|
|
|
|
|
|
|
|
Total cash |
|
|
653.7 |
|
|
|
555.1 |
|
Cash equivalents: |
|
|
|
|
|
|
|
|
U.S. government securities |
|
|
127.7 |
|
|
|
|
|
Commercial paper |
|
|
23.5 |
|
|
|
17.0 |
|
Money market funds |
|
|
919.0 |
|
|
|
1,032.6 |
|
|
|
|
|
|
|
|
Total cash equivalents |
|
|
1,070.2 |
|
|
|
1,049.6 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
$ |
1,723.9 |
|
|
$ |
1,604.7 |
|
|
|
|
|
|
|
|
10
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Investments in Available-for-Sale and Trading Securities
The following table summarizes the Companys unrealized gains and losses, and fair value of
investments designated as trading or available-for-sale, as of March 31, 2010, and December 31,
2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
As of March 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities |
|
$ |
231.2 |
|
|
$ |
0.2 |
|
|
$ |
(0.1 |
) |
|
$ |
231.3 |
|
Government-sponsored enterprise obligations |
|
|
223.3 |
|
|
|
0.5 |
|
|
|
(0.1 |
) |
|
|
223.7 |
|
Foreign government debt securities |
|
|
80.9 |
|
|
|
0.4 |
|
|
|
|
|
|
|
81.3 |
|
Commercial paper |
|
|
79.2 |
|
|
|
|
|
|
|
|
|
|
|
79.2 |
|
Corporate debt securities |
|
|
414.2 |
|
|
|
2.0 |
|
|
|
(0.2 |
) |
|
|
416.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities |
|
|
1,028.8 |
|
|
|
3.1 |
|
|
|
(0.4 |
) |
|
|
1,031.5 |
|
Publicly-traded equity securities |
|
|
11.6 |
|
|
|
0.1 |
|
|
|
|
|
|
|
11.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,040.4 |
|
|
$ |
3.2 |
|
|
$ |
(0.4 |
) |
|
$ |
1,043.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
$ |
591.5 |
|
|
$ |
1.4 |
|
|
$ |
(0.2 |
) |
|
$ |
592.7 |
|
Long-term investments |
|
|
448.9 |
|
|
|
1.8 |
|
|
|
(0.2 |
) |
|
|
450.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,040.4 |
|
|
$ |
3.2 |
|
|
$ |
(0.4 |
) |
|
$ |
1,043.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
As of December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities |
|
$ |
245.0 |
|
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
245.1 |
|
Government-sponsored enterprise obligations |
|
|
212.0 |
|
|
|
0.6 |
|
|
|
(0.3 |
) |
|
|
212.3 |
|
Foreign government debt securities |
|
|
96.4 |
|
|
|
0.3 |
|
|
|
(0.1 |
) |
|
|
96.6 |
|
Corporate debt securities |
|
|
488.2 |
|
|
|
2.0 |
|
|
|
(0.3 |
) |
|
|
489.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities |
|
|
1,041.6 |
|
|
|
3.0 |
|
|
|
(0.7 |
) |
|
|
1,043.9 |
|
Publicly-traded equity securities |
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,051.7 |
|
|
$ |
3.0 |
|
|
$ |
(0.7 |
) |
|
$ |
1,054.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
$ |
569.5 |
|
|
$ |
1.0 |
|
|
$ |
|
|
|
$ |
570.5 |
|
Long-term investments |
|
|
482.2 |
|
|
|
2.0 |
|
|
|
(0.7 |
) |
|
|
483.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,051.7 |
|
|
$ |
3.0 |
|
|
$ |
(0.7 |
) |
|
$ |
1,054.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had 54 and 52 investments that were in an unrealized loss position as of March 31,
2010, and December 31, 2009, respectively. The gross unrealized losses related to these investments
were due to changes in interest rates. The contractual terms of these investments do not permit the
issuer to settle the securities at a price less than the amortized cost of the investment. For
fixed income securities that have unrealized losses, the Company has determined that (i) it does
not have the intent to sell any of these investments, and (ii) it is not more likely than not that
it will be required to sell any of these investments before recovery of the entire amortized cost
basis. The Company did not consider these investments to be other-than-temporarily impaired as of
March 31, 2010, and December 31, 2009, respectively. The Company reviews its investments to
identify and evaluate investments that have an indication of possible impairment. The Company
aggregates its investments by category and length of time the securities have been in a continuous
unrealized loss position to facilitate its evaluation.
11
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Privately-Held Equity Investments
The Companys minority equity investments in privately-held companies are carried at cost, as the
Company does not have a controlling interest and does not have the ability to exercise significant
influence over these companies. The Company adjusts its privately-held equity investments for any
impairment if the fair value exceeds the carrying value of the respective assets.
As of March 31, 2010, and December 31, 2009, the carrying values of the Companys minority equity
investments in privately-held companies of $18.6 million and $13.9 million, respectively, were
included in other long-term assets in the condensed consolidated balance sheets. During the three
months ended March 31, 2010, and 2009, the Company invested $4.8 million and nil in privately held
companies, respectively. The Company recognized other-than-temporary impairment loss of nil and
$1.7 million for the three months ended March 31, 2010, and 2009, respectively, in connection with
its minority equity investments in privately-held companies. In addition, during the three months
ended March 31, 2009, the Company had a minority equity investment in a privately-held company that
was acquired by a publicly-traded company for which the Company received a cash payment of
$1.0 million and $1.0 million in common stock of the acquiring company, which is classified as an
available-for-sale investment.
Restricted Cash
Restricted cash consists of escrow accounts required by certain acquisitions completed in 2005, the
India Gratuity Trust, which covers statutory severance obligations in the event of termination of
the Companys India employees who have provided five or more years of continuous service, and the
Directors & Officers (D&O) indemnification trust. Additionally, during the three months ended
March 31, 2010, the Company increased its restricted cash by $1.6 million for the Israel Retirement
Trust, which was established in the first quarter of 2010 to satisfy statutory severance
obligations in the event of termination of the Companys Israeli employees. During the three months
ended March 31, 2009, the Company had immaterial restricted cash distributions.
The following table summarizes the Companys restricted cash as reported in the condensed
consolidated balance sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Restricted cash: |
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
4.8 |
|
|
$ |
3.8 |
|
|
|
|
|
|
|
|
Total restricted cash |
|
|
4.8 |
|
|
|
3.8 |
|
Restricted investments: |
|
|
|
|
|
|
|
|
U.S. government securities |
|
|
0.6 |
|
|
|
19.8 |
|
Money market funds |
|
|
50.0 |
|
|
|
30.1 |
|
|
|
|
|
|
|
|
Total restricted investments |
|
|
50.6 |
|
|
|
49.9 |
|
|
|
|
|
|
|
|
Total restricted cash and investments |
|
$ |
55.4 |
|
|
$ |
53.7 |
|
|
|
|
|
|
|
|
As of March 31, 2010, and December 31, 2009, the unrealized gains and losses related to restricted
investments were immaterial.
12
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Note 5. Fair Value Measurements
The Company determines the fair values of its financial instruments based on a fair value
hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. Fair value is defined as the price that would be
received upon sale of an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value assumes that the transaction to sell
the asset or transfer the liability occurs in the principal or most advantageous market for the
asset or liability and establishes that the fair value of an asset or liability shall be determined
based on the assumptions that market participants would use in pricing the asset or liability. The
classification of a financial asset or liability within the hierarchy is based upon the lowest
level input that is significant to the fair value measurement. The fair value hierarchy prioritizes
the inputs into three levels that may be used to measure fair value:
Level 1 Inputs are unadjusted quoted prices in active markets for identical assets or
liabilities.
Level 2 Inputs are quoted prices for similar assets and liabilities in active markets or inputs
that are observable for the asset or liability, either directly or indirectly through market
corroboration, for substantially the full term of the financial instrument. These inputs are valued
using market based approaches.
Level 3 Inputs are unobservable inputs based on the Companys assumptions. These inputs, if any,
are valued using internal financial models.
13
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table provides a summary of assets measured at fair value on a recurring basis (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2010 Using |
|
|
|
|
|
|
|
Significant |
|
|
Significant |
|
|
|
|
|
|
Quoted Prices in |
|
|
Other |
|
|
Other |
|
|
|
|
|
|
Active Markets |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
For Identical |
|
|
Remaining |
|
|
Remaining |
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
Total |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds |
|
$ |
6.1 |
|
|
|
|
|
|
|
|
|
|
$ |
6.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities |
|
|
6.1 |
|
|
|
|
|
|
|
|
|
|
|
6.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities (1) |
|
|
89.8 |
|
|
|
269.8 |
|
|
|
|
|
|
|
359.6 |
|
Government sponsored enterprise obligation |
|
|
195.5 |
|
|
|
28.2 |
|
|
|
|
|
|
|
223.7 |
|
Foreign government debt securities |
|
|
26.4 |
|
|
|
54.9 |
|
|
|
|
|
|
|
81.3 |
|
Commercial paper |
|
|
|
|
|
|
102.7 |
|
|
|
|
|
|
|
102.7 |
|
Corporate debt securities |
|
|
|
|
|
|
416.0 |
|
|
|
|
|
|
|
416.0 |
|
Money market funds (2) |
|
|
969.0 |
|
|
|
|
|
|
|
|
|
|
|
969.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale debt securities |
|
|
1280.7 |
|
|
|
871.6 |
|
|
|
|
|
|
|
2,152.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology securities |
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale equity securities |
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
|
1,286.3 |
|
|
|
871.6 |
|
|
|
|
|
|
|
2,157.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets |
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,292.4 |
|
|
|
871.8 |
|
|
|
|
|
|
$ |
2,164.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Balance includes $0.6 million of restricted investments measured at fair market value, related to the Companys
Directors and Officers (D&O) indemnification trust. For additional information regarding the D&O indemnification trust, see
Note 4, Cash, Cash Equivalents, and Investments, under the heading Restricted Cash. Restricted investments are included in
the restricted cash balance in the consolidated balance sheet. |
|
(2) |
|
Balance includes $50.0 million of restricted investments measured at fair market value, related to the Companys D&O
trust. |
The following table provides a summary of the liabilities measured at fair value on a
recurring basis (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2010 Using |
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
Active |
|
|
Significant Other |
|
|
Other |
|
|
|
|
|
|
Markets For |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Identical |
|
|
Remaining |
|
|
Remaining |
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
Total |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
|
|
|
|
(1.5 |
) |
|
|
|
|
|
$ |
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities |
|
|
|
|
|
|
(1.5 |
) |
|
|
|
|
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value |
|
$ |
|
|
|
|
(1.5 |
) |
|
|
|
|
|
$ |
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys policy is to recognize transfers in and transfers out as of the actual date of the
event or change in circumstances that caused the transfer. During the three months ended March 31,
2010, the Company had no transfers of investments between levels of fair value hierarchy of its
assets or liabilities measured at fair value.
14
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Net assets measured at fair value on a recurring basis were presented on the Companys condensed
consolidated balance sheets as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2010 Using |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant Other |
|
|
Other |
|
|
|
|
|
|
|
Active Markets |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
For Identical |
|
|
Remaining |
|
|
Remaining |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
Total |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
Reported as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
919.0 |
|
|
$ |
151.2 |
|
|
$ |
|
|
|
|
$ |
1070.2 |
|
Short-term investments |
|
|
156.0 |
|
|
|
436.7 |
|
|
|
|
|
|
|
|
592.7 |
|
Long-term investments |
|
|
167.4 |
|
|
|
283.1 |
|
|
|
|
|
|
|
|
450.5 |
|
Restricted cash |
|
|
50.0 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
50.6 |
|
Prepaid expenses and other current assets |
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
0.2 |
|
Other accrued liabilities |
|
|
|
|
|
|
(1.5 |
) |
|
|
|
|
|
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets measured at fair value |
|
$ |
1,292.4 |
|
|
$ |
870.3 |
|
|
$ |
|
|
|
|
$ |
2,162.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2009 Using |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant Other |
|
|
Other |
|
|
|
|
|
|
|
Active Markets |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
For Identical |
|
|
Remaining |
|
|
Remaining |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
Total |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
Reported as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
1,032.6 |
|
|
$ |
17.0 |
|
|
$ |
|
|
|
|
$ |
1,049.6 |
|
Short-term investments |
|
|
101.3 |
|
|
|
469.2 |
|
|
|
|
|
|
|
|
570.5 |
|
Long-term investments |
|
|
181.2 |
|
|
|
302.3 |
|
|
|
|
|
|
|
|
483.5 |
|
Restricted cash |
|
|
49.9 |
|
|
|
|
|
|
|
|
|
|
|
|
49.9 |
|
Other accrued liabilities |
|
|
|
|
|
|
(1.3 |
) |
|
|
|
|
|
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets measured at fair value |
|
$ |
1,365.0 |
|
|
$ |
787.2 |
|
|
$ |
|
|
|
|
$ |
2,152.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Measured at Fair Value on a Nonrecurring Basis
The following table presents the Companys assets that are measured at fair value on a nonrecurring
basis at least annually or on a quarterly basis, if impairment is indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (Losses) |
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
for |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant Other |
|
|
Significant Other |
|
|
the Three |
|
|
|
Carrying Value |
|
|
Active Markets |
|
|
Observable |
|
|
Unobservable |
|
|
Months |
|
|
|
as of |
|
|
for Identical |
|
|
Remaining |
|
|
Remaining |
|
|
Ended March |
|
|
|
March 31, 2010 |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
31, 2010 |
|
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
Privately-held equity investments |
|
$ |
0.7 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.7 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.7 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.7 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (Losses) |
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
for |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant Other |
|
|
Significant Other |
|
|
the Three |
|
|
|
Carrying Value |
|
|
Active Markets |
|
|
Observable |
|
|
Unobservable |
|
|
Months |
|
|
|
as of |
|
|
for Identical |
|
|
Remaining |
|
|
Remaining |
|
|
Ended March |
|
|
|
March 31, 2009 |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
31, 2009 |
|
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
Privately-held equity investments |
|
$ |
1.2 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1.2 |
|
|
$ |
(1.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1.2 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1.2 |
|
|
$ |
(1.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The privately-held equity investments in the preceding tables, which are normally carried at cost,
were measured at fair value due to events and circumstances that the Company identified as
significantly impacting the fair value of the investments during the quarter. The Company measured
the fair value of these privately-held equity investments using an analysis of the financial
condition and near-term prospects of the investee, including recent financing activities and their
capital structure. As a result, the Company recognized an impairment loss of $1.7 million during
the three months ended March 31, 2009, and classified the investment as a Level 3 asset due to the
absence of quoted market prices and inherent lack of liquidity. The Company had no impairment
charges against its privately-held equity investments during the three months ended March 31, 2010.
Note 6. Goodwill and Purchased Intangible Assets
Goodwill
The following table presents goodwill by segment as of March 31, 2010, and December 31, 2009 (in
millions):
|
|
|
|
Segments |
|
|
Infrastructure |
|
$ |
1,500.5 |
Service Layer Technologies |
|
|
2,158.1 |
|
|
|
Total |
|
$ |
3,658.6 |
|
|
|
There were no changes to goodwill during the first quarter of 2010.
Purchased Intangible Assets
The following table presents the Companys purchased intangible assets with definite lives (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
As of March 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
Technologies and patents |
|
$ |
380.0 |
|
|
$ |
(376.2 |
) |
|
$ |
3.8 |
|
Other |
|
|
68.9 |
|
|
|
(60.0 |
) |
|
|
8.9 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
448.9 |
|
|
$ |
(436.2 |
) |
|
$ |
12.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Technologies and patents |
|
$ |
380.0 |
|
|
$ |
(376.0 |
) |
|
$ |
4.0 |
|
Other |
|
|
68.9 |
|
|
|
(59.1 |
) |
|
|
9.8 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
448.9 |
|
|
$ |
(435.1 |
) |
|
$ |
13.8 |
|
|
|
|
|
|
|
|
|
|
|
Amortization of purchased intangible assets of $1.1 million and $5.7 million were included in
operating expenses and cost of product revenues for the three months ended March 31, 2010, and
2009, respectively. There were no impairment charges with respect to purchased intangible assets in
the three months ended March 31, 2010, and 2009.
16
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
The estimated future amortization expense of purchased intangible assets with definite lives for
future periods is as follows (in millions):
|
|
|
|
|
Years Ending December 31, |
|
Amount |
|
2010 (remaining nine months) |
|
$ |
2.8 |
|
2011 |
|
|
2.1 |
|
2012 |
|
|
1.3 |
|
2013 |
|
|
1.2 |
|
2014 |
|
|
1.0 |
|
Thereafter |
|
|
4.3 |
|
|
|
|
|
Total |
|
$ |
12.7 |
|
|
|
|
|
Note 7. Other Financial Information
Warranties
The Company provides for the estimated cost of product warranties at the time revenue is
recognized. This provision is reported as accrued warranty within current liabilities on the
condensed consolidated balance sheets. Changes in the Companys warranty reserve were as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
Beginning balance |
|
$ |
38.2 |
|
|
$ |
40.1 |
|
Provisions made during the period, net |
|
|
12.1 |
|
|
|
9.8 |
|
Change in estimate |
|
|
(0.5 |
) |
|
|
(2.1 |
) |
Actual costs incurred during the period |
|
|
(12.0 |
) |
|
|
(10.3 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
37.8 |
|
|
$ |
37.5 |
|
|
|
|
|
|
|
|
Deferred Revenue
Details of the Companys deferred revenue were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Deferred product revenue: |
|
|
|
|
|
|
|
|
Deferred gross product revenue |
|
$ |
402.6 |
|
|
$ |
391.3 |
|
Deferred cost of product revenue |
|
|
(152.5 |
) |
|
|
(150.0 |
) |
|
|
|
|
|
|
|
Deferred product revenue, net |
|
|
250.1 |
|
|
|
241.3 |
|
Deferred service revenue |
|
|
539.8 |
|
|
|
512.3 |
|
|
|
|
|
|
|
|
Total |
|
$ |
789.9 |
|
|
$ |
753.6 |
|
|
|
|
|
|
|
|
Reported as: |
|
|
|
|
|
|
|
|
Current |
|
$ |
620.0 |
|
|
$ |
571.7 |
|
Long-term |
|
|
169.9 |
|
|
|
181.9 |
|
|
|
|
|
|
|
|
Total |
|
$ |
789.9 |
|
|
$ |
753.6 |
|
|
|
|
|
|
|
|
17
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Restructuring Liabilities
In 2009, the Company implemented a restructuring plan (the 2009 Restructuring Plan) in an effort
to better align its business operations with the current market and macroeconomic conditions. The
2009 Restructuring Plan included a worldwide workforce reduction and restructuring of certain
business functions and the reduction of facilities. The Company incurred restructuring charges of
$8.1 million and paid $4.1 million for severance and facilities related charges associated with the
2009 Restructuring Plan during the three months ended March 31, 2010. During the three months ended
March 31, 2009, the Company recorded $4.2 million in restructuring charges and paid $2.5 million
for severance related charges associated with the 2009 Restructuring Plan.
The following table provides a summary of changes in the Companys restructuring liability (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
Liability as of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability as of |
|
|
|
December 31, |
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
March 31, |
|
|
|
2009 |
|
|
Charges |
|
|
Payments |
|
|
Adjustment |
|
|
2010 |
|
Facilities |
|
$ |
4.9 |
|
|
$ |
6.8 |
|
|
$ |
(0.3 |
) |
|
$ |
(1.6 |
) |
|
$ |
9.8 |
|
Severance, contractual
commitments, and other
charges |
|
|
4.5 |
|
|
|
1.3 |
|
|
|
(3.8 |
) |
|
|
0.2 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring charges |
|
$ |
9.4 |
|
|
$ |
8.1 |
|
|
$ |
(4.1 |
) |
|
$ |
(1.4 |
) |
|
$ |
12.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no acquisition related restructuring charges during the three months ended March
31, 2010 or 2009. Restructuring charges were based on the Companys restructuring plans that were
committed by management. Any changes in the estimates of executing the approved plans will be
reflected in the Companys results of operations.
Interest and Other Income, Net
Interest and other income, net, consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
Interest income and expense, net |
|
$ |
0.9 |
|
|
$ |
2.1 |
|
Other income and expense, net |
|
|
0.6 |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
Total interest and other income, net |
|
$ |
1.5 |
|
|
$ |
1.9 |
|
|
|
|
|
|
|
|
Interest income and expense, net, primarily includes interest income from the Companys cash, cash
equivalents, and investments and interest expense from our customer financing arrangements. Other
income and expense, net, primarily includes foreign exchange gains and losses and other
miscellaneous expenses such as bank fees.
Note 8. Financing Arrangements
The Company has customer financing arrangements to sell its accounts receivable to a major
third-party financing provider. The program does not and is not intended to affect the timing of
revenue recognition because the Company only recognizes revenue upon sell-through. Under the
financing arrangements, proceeds from the financing provider are due to the Company 30 days from
the sale of the receivable. In these transactions with the financing provider, the Company has
surrendered control over the transferred assets. The accounts receivable have been isolated from
the Company and put beyond the reach of creditors, even in the event of bankruptcy. The Company
does not maintain effective control over the transferred assets through obligations or rights to
redeem, transfer, or repurchase the receivables after they have been transferred.
Pursuant to the financing arrangements for the sale of receivables, the Company sold net
receivables of $135.6 million and $91.2 million during the three months ended March 31, 2010, and
2009, respectively. During the three months ended March 31, 2010, and 2009, the Company received
cash proceeds of $138.9 million and
18
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
$95.6 million, respectively, from the financing provider. The amounts owed by the financing
provider recorded as accounts receivable on the Companys condensed consolidated balance sheets as
of March 31, 2010, and December 31, 2009, were $82.6 million and $89.8 million, respectively.
The portion of the receivable financed that has not been recognized as revenue is accounted for as
a financing arrangement and is included in other accrued liabilities in the condensed consolidated
balance sheet. As of March 31, 2010, and December 31, 2009, the estimated amounts of cash received
from the financing provider that has not been recognized as revenue from distributors were
$54.7 million and $52.6 million, respectively.
Note 9. Derivative Instruments
The Company uses derivatives partially to offset its market exposure to fluctuations in certain
foreign currencies and does not enter into derivatives for speculative or trading purposes.
Cash Flow Hedges
The Company uses foreign currency forward or option contracts to hedge certain forecasted foreign
currency transactions relating to cost of services and operating expenses. The derivatives are
intended to protect the U.S. Dollar equivalent of the Companys planned cost of services and
operating expenses denominated in foreign currencies. These derivatives are designated as cash flow
hedges. Execution of these cash flow hedge derivatives typically occurs every month with maturities
of less than one year. The effective portion of the derivatives gain or loss is initially reported
as a component of accumulated other comprehensive income (loss), and upon occurrence of the
forecasted transaction, is subsequently reclassified into the cost of services or operating expense
line item to which the hedged transaction relates. The Company records any ineffectiveness of the
hedging instruments, which was immaterial during the first quarter of 2010 and 2009, respectively,
in interest and other income, net, on its condensed consolidated statements of operations. Cash
flows from such hedges are classified as operating activities. All amounts within other
comprehensive income (loss) are expected to be reclassified into income within the next 12 months.
The total fair value of the Companys derivative assets located in other current assets on the
condensed consolidated balance sheet as of March 31, 2010 and 2009 was $0.2 million and
$0.7 million, respectively. The total fair value of the Companys derivative liabilities located in
other accrued liabilities on the condensed consolidated balance sheet as of March 31, 2010, and
2009, was $1.5 million and $1.2 million, respectively.
The Company recognized a loss of $1.5 million and $5.7 million in other comprehensive income for
the effective portion of its derivative instruments as of March 31, 2010, and 2009, respectively.
The amount of loss reclassified from other comprehensive loss to the condensed consolidated
statements of operations was $0.7 million and $2.7 million as of March 31, 2010, and 2009,
respectively. The ineffective portion of the Companys derivative instruments recognized in its
condensed consolidated statements of operations was immaterial during the three months ended March
31, 2010, and 2009.
Non-Designated Hedges
The Company also uses foreign currency forward contracts to mitigate variability in gains and
losses generated from the re-measurement of certain monetary assets and liabilities denominated in
foreign currencies. These derivatives do not qualify for special hedge accounting treatment. These
derivatives are carried at fair value with changes recorded in interest and other income, net.
Changes in the fair value of these derivatives are largely offset by re-measurement of the
underlying assets and liabilities. Cash flows from such derivatives are classified as operating
activities. The derivatives have maturities of approximately two months.
19
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
As of March 31, 2010, the Companys top three outstanding derivative positions by currency were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy |
|
Buy |
|
Buy |
Foreign currency forward contracts: |
|
EUR |
|
GBP |
|
INR |
Notional amount of foreign currency |
|
|
29.5 |
|
|
|
13.7 |
|
|
|
1,520.7 |
|
U.S dollar equivalent |
|
$ |
40.9 |
|
|
$ |
21.1 |
|
|
|
$33.2 |
|
Weighted-average maturity |
|
2 months |
|
2 months |
|
2 months |
The Company recognized a loss on non-designated derivative instruments located in other income,
net, on its condensed consolidated statements of operations during the three months ended March 31,
2010, and 2009, of $0.3 million and $3.8 million, respectively.
Note 10. Stockholders Equity
Stock Repurchase Activities
In February 2010, the Companys Board of Directors (the Board) approved a new stock repurchase
program (the 2010 Stock Repurchase Program) which authorized the Company to repurchase up to $1.0
billion of its common stock. This new authorization is in addition to the stock repurchase program
approved by the Board in March 2008 (the 2008 Stock Repurchase Program), which also enabled the
Company to repurchase up to $1.0 billion of the Companys common stock.
During the three months ended March 31, 2010, the Company repurchased approximately 2.8 million
shares of its common stock at an average price of $27.04 per share for an aggregate purchase price
of $74.4 million under the 2008 Stock Repurchase Program. As of March 31, 2010, the 2008 and 2010
Stock Repurchase Programs had remaining aggregate authorized funds of $1,244.2 million.
In addition to repurchases under the Companys stock repurchase programs, the Company repurchased
common stock from its employees in connection with net issuance of shares to satisfy its tax
withholding obligations for the vesting of certain RSUs and PSAs. During the three months ended
March 31, 2010, the Company repurchased approximately 0.1 million shares of its common stock at an
average price of $25.47 per share for an aggregate purchase price of $1.8 million in connection
with the net issuances. The Company repurchased an immaterial amount of common stock from its
employees in connection with net issuance of shares, during the three months ended March 31, 2009.
All shares of common stock that have been repurchased under the Companys stock repurchase programs
and from its employees in connection with net issuances have been retired. Future share repurchases
under the Companys stock repurchase programs will be subject to a review of the circumstances in
place at that time and will be made from time to time in private transactions or open market
purchases as permitted by securities laws and other legal requirements. These programs may be
discontinued at any time.
20
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Comprehensive
Income (Loss) Attributable to Juniper Networks
Comprehensive
income (loss) consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Consolidated net income (loss) |
|
$ |
164.6 |
|
|
$ |
(4.5 |
) |
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
Change in net unrealized losses on investments, net of tax of nil |
|
|
(0.4 |
) |
|
|
(3.6 |
) |
Change in foreign currency translation adjustment, net of tax of nil |
|
|
(2.7 |
) |
|
|
(10.5 |
) |
|
|
|
|
|
|
|
Total other comprehensive loss, net of tax |
|
|
(3.1 |
) |
|
|
(14.1 |
) |
|
|
|
|
|
|
|
Consolidated comprehensive income (loss) |
|
|
161.5 |
|
|
|
(18.6 |
) |
Less: comprehensive income attributable to noncontrolling interest |
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to Juniper Networks |
|
$ |
160.0 |
|
|
$ |
(18.6 |
) |
|
|
|
|
|
|
|
The following tables summarize stockholders equity activity for the three months ended March 31,
2010, and 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock & |
|
|
Other |
|
|
|
|
|
|
Non- |
|
|
Total |
|
|
|
Additional Paid-in- |
|
|
Comprehensive |
|
|
Accumulated |
|
|
controlling |
|
|
Stockholders |
|
|
|
Capital |
|
|
Loss |
|
|
Deficit |
|
|
Interest |
|
|
Equity |
|
Balance at December 31, 2009 |
|
$ |
9,060.1 |
|
|
$ |
(1.4 |
) |
|
$ |
(3,236.5 |
) |
|
$ |
2.6 |
|
|
$ |
5,824.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income |
|
|
|
|
|
|
|
|
|
|
163.1 |
|
|
|
1.5 |
|
|
|
164.6 |
|
Change in unrealized loss on
investments, net tax of nil |
|
|
|
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
(0.4 |
) |
Foreign currency translation loss,
net tax of nil |
|
|
|
|
|
|
(2.7 |
) |
|
|
|
|
|
|
|
|
|
|
(2.7 |
) |
Issuance of shares in connection
with Employee Stock Purchase Plan |
|
|
20.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.8 |
|
Exercise of stock options by
employees, net of repurchases |
|
|
101.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.2 |
|
Return of capital to noncontrolling
interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.0 |
) |
|
|
(2.0 |
) |
Retirement of common stock |
|
|
(5.7 |
) |
|
|
|
|
|
|
(68.7 |
) |
|
|
|
|
|
|
(74.4 |
) |
Repurchases related to net issuances |
|
|
|
|
|
|
|
|
|
|
(1.8 |
) |
|
|
|
|
|
|
(1.8 |
) |
Share-based compensation expense |
|
|
40.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40.6 |
|
Adjustment related to tax benefit
from employee stock option plans |
|
|
50.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010 |
|
$ |
9,267.6 |
|
|
$ |
(4.5 |
) |
|
$ |
(3,143.9 |
) |
|
$ |
2.1 |
|
|
$ |
6,121.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Common Stock & |
|
|
Other |
|
|
|
|
|
|
Total |
|
|
|
Additional Paid-in- |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Capital |
|
|
Loss |
|
|
Deficit |
|
|
Equity |
|
Balance at December 31, 2008 |
|
$ |
8,811.5 |
|
|
$ |
(4.2 |
) |
|
$ |
(2,905.9 |
) |
|
$ |
5,901.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income including noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
(4.5 |
) |
|
|
(4.5 |
) |
Change in unrealized loss on investments, net tax of nil |
|
|
|
|
|
|
(3.6 |
) |
|
|
|
|
|
|
(3.6 |
) |
Foreign currency translation loss, net tax of nil |
|
|
|
|
|
|
(10.5 |
) |
|
|
|
|
|
|
(10.5 |
) |
Issuance of shares in connection with Employee Stock Purchase Plan |
|
|
19.3 |
|
|
|
|
|
|
|
|
|
|
|
19.3 |
|
Exercise of stock options by employees, net of repurchases |
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
3.3 |
|
Retirement of common stock |
|
|
(0.1 |
) |
|
|
|
|
|
|
(119.7 |
) |
|
|
(119.8 |
) |
Share-based compensation expense |
|
|
33.6 |
|
|
|
|
|
|
|
|
|
|
|
33.6 |
|
Adjustment related to tax benefit from employee stock option plans |
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009 |
|
$ |
8,878.1 |
|
|
$ |
(18.3 |
) |
|
$ |
(3,030.1 |
) |
|
$ |
5,829.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Note 11. Employee Benefit Plans
Share-Based Compensation Plans
The Companys share-based compensation plans include the 2006 Equity Incentive Plan (the 2006
Plan), 2000 Nonstatutory Stock Option Plan (the 2000 Plan), Amended and Restated 1996 Stock Plan
(the 1996 Plan), as well as various equity incentive plans assumed through acquisitions. Under
these plans the Company has granted (or in the case of acquired plans, assumed) stock options, and
in certain plans RSUs and PSAs. In addition, the Companys 2008 Employee Stock Purchase Plan (the
2008 Purchase Plan) permits eligible employees to acquire shares of the Companys common stock at
a 15% discount to the offering price (as determined in the 2008 Plan) through periodic payroll
deductions of up to 10% of base compensation, subject to individual purchase limits of 6,000 shares
in any twelve-month period or $25,000 worth of stock, determined at the fair market value of the
shares at the time the stock purchase option is granted, in one calendar year.
Stock Option Activities
The following table summarizes the Companys stock option activity and related information as of
and for the three months ended March 31, 2010 (in millions, except for per share amounts and
years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
|
|
|
|
Number of |
|
|
Exercise |
|
|
Contractual |
|
|
Aggregate |
|
|
|
Shares |
|
|
Price |
|
|
Term |
|
|
Intrinsic Value |
|
Balance at January 1, 2010 |
|
|
67.4 |
|
|
$ |
20.84 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
5.0 |
|
|
|
28.77 |
|
|
|
|
|
|
|
|
|
Options canceled |
|
|
(0.6 |
) |
|
|
20.96 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(5.7 |
) |
|
|
18.03 |
|
|
|
|
|
|
|
|
|
Options expired |
|
|
(0.3 |
) |
|
|
48.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010 |
|
|
65.8 |
|
|
$ |
21.55 |
|
|
|
4.6 |
|
|
$ |
631.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected-to-vest options |
|
|
58.0 |
|
|
$ |
21.42 |
|
|
|
4.4 |
|
|
$ |
566.3 |
|
Exercisable options |
|
|
41.7 |
|
|
$ |
20.90 |
|
|
|
3.9 |
|
|
$ |
436.3 |
|
Aggregate intrinsic value represents the difference between the Companys closing stock price on
the last trading day of the period, which was $30.68 as of March 31, 2010, and the exercise price
multiplied by the number of related options. The pre-tax intrinsic value of options exercised,
representing the difference between the fair market value of the Companys common stock on the date
of the exercise and the exercise price of each option, was $59.2 million for the three months ended
March 31, 2010. Total fair value of options vested for the three months ended March 31, 2010, was
$27.5 million.
Restricted Stock Units and Performance Share Awards Activities
RSUs generally vest over a period of three to four years from the date of grant, and PSAs granted
generally vest after three years provided that certain annual performance targets and other vesting
criteria are met. Until vested, RSUs and PSAs do not have the voting and dividend participation
rights of common stock and the shares underlying the awards are not considered issued and
outstanding.
22
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
The following table summarizes information about the Companys RSUs and PSAs as of and for the
three months ended March 31, 2010 (in millions, except per share amounts and years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding RSUs and PSAs |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
|
|
|
|
Number of |
|
|
Grant-Date |
|
|
Contractual |
|
|
Aggregate |
|
|
|
Shares |
|
|
Fair Value |
|
|
Term |
|
|
Intrinsic Value |
|
Balance at January 1, 2010 |
|
|
9.1 |
|
|
$ |
21.76 |
|
|
|
|
|
|
|
|
|
RSUs and PSAs granted |
|
|
5.7 |
|
|
|
29.12 |
|
|
|
|
|
|
|
|
|
RSUs and PSAs vested |
|
|
(1.8 |
) |
|
|
24.89 |
|
|
|
|
|
|
|
|
|
RSUs and PSAs canceled |
|
|
(0.2 |
) |
|
|
20.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010 |
|
|
12.8 |
|
|
$ |
24.61 |
|
|
|
2.2 |
|
|
$ |
393.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected-to-vest RSUs and PSAs |
|
|
8.3 |
|
|
$ |
24.58 |
|
|
|
2.1 |
|
|
$ |
254.1 |
|
In the three months ended March 31, 2010, the Company granted RSUs covering approximately
2.6 million shares of common stock under the 2006 Plan. Additionally, the Company granted PSAs
covering approximately 3.1 million shares of common stock under the 2006 Plan. The number of shares
subject to PSAs granted represents the maximum number of shares that may be issued pursuant to the
award over its full term.
Employee Stock Purchase Plan
The 2008 Purchase Plan is implemented in a series of offering periods, each six months in duration,
or a shorter period as determined by the Board. Employees purchased approximately 1.0 million and
nil shares of common stock through the 2008 Purchase Plan at an average price of $21.11 and nil per
share during the three months ended March 31, 2010, and 2009, respectively. As of March 31, 2010,
approximately 1.0 million shares had been issued under the 2008 Purchase Plan, and 9.4 million
shares remained available for future issuance under the 2008 Purchase Plan.
Employees purchased approximately 1.6 million shares of common stock through the 1999 Employee
Stock Purchase Plan at an average price of $12.04 per share in the three months ended March 31,
2009. Effective February 1, 2009, immediately following the conclusion of the offering period ended
January 30, 2009, the 1999 Employee Stock Purchase Plan was discontinued, and no shares remained
available for future issuance.
Shares Available for Grant
The following table presents the total number of shares available for grant under the 2006 Plan as
of March 31, 2010 (in millions):
|
|
|
|
|
|
|
Number of |
|
|
Shares |
Balance at January 1, 2010 |
|
|
18.0 |
|
RSUs and PSAs granted (1) |
|
|
(12.0 |
) |
Options granted |
|
|
(5.0 |
) |
RSUs canceled (1) |
|
|
0.4 |
|
Options canceled (2) |
|
|
0.6 |
|
Options expired (2) |
|
|
0.3 |
|
|
|
|
|
|
Balance at March 31, 2010 |
|
|
2.3 |
|
|
|
|
|
|
|
|
|
(1) |
|
RSUs and PSAs with a per share or unit purchase price lower than 100% of the fair market
value of the Companys common stock on the day of the grant under the 2006 Plan are counted
against shares authorized under the plan as two and one-tenth shares of common stock for each
share subject to such award. The number of shares subject to PSAs granted represents the
maximum number of shares that may be issued pursuant to the award over its full term. |
|
(2) |
|
Includes canceled or expired options under the 1996 Plan and the 2000 Plan that expired
unexercised after May 18, 2006, which become available for grant under the 2006 Plan according
to its terms. |
23
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Common Stock Reserved for Future Issuance
As of March 31, 2010, the Company had reserved an aggregate of approximately 90.3 million shares of
common stock for future issuance under its equity incentive plans and the 2008 Purchase Plan.
Share-Based Compensation Expense
The Company determines the fair value of its stock options utilizing the Black-Scholes-Merton
(BSM) option-pricing model, which incorporates various assumptions including volatility,
risk-free interest rate, expected life, and dividend yield. The expected volatility is based on the
implied volatility of market-traded options on the Companys common stock, adjusted for other
relevant factors including historical volatility of the Companys common stock over the most recent
period commensurate with the estimated expected life of the Companys stock options. The expected
life of a stock option award is based on historical experience and on the terms and conditions of
the stock awards granted to employees, as well as the potential effect from stock options that had
not been exercised at the time. Since 2006, the Company has granted stock option awards that have a
maximum contractual life of seven years from the date of grant. Prior to 2006, stock option awards
generally had a ten-year contractual life from the date of grant.
The Company determines the fair value of its RSUs and PSAs based upon the fair market value of the
shares of the Companys common stock at the date of grant.
The assumptions used and the resulting estimates of fair value for employee stock options and the
employee stock purchase plan during the three months ended March 31, 2010, and 2009 were:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2010 |
|
2009 |
Employee Stock Options: |
|
|
|
|
|
|
|
|
Volatility factor |
|
|
37% - 41 |
% |
|
|
52% - 58 |
% |
Risk-free interest rate |
|
|
2.1% - 2.2 |
% |
|
|
0.4% - 2.9 |
% |
Expected life (years) |
|
|
4.3 |
|
|
|
4.3 5.8 |
|
Dividend yield |
|
|
|
|
|
|
|
|
Fair value per share |
|
$ |
9.31 - $9.92 |
|
|
$ |
6.02 - $7.57 |
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan: |
|
|
|
|
|
|
|
|
Volatility factor |
|
|
35 |
% |
|
|
58 |
% |
Risk-free interest rate |
|
|
1.7 |
% |
|
|
0.4 |
% |
Expected life (years) |
|
|
0.5 |
|
|
|
0.5 |
|
Dividend yield |
|
|
|
|
|
|
|
|
Weighted-average fair value per share |
|
$ |
6.19 |
|
|
$ |
4.51 |
|
The Company expenses the cost of its stock options, on a straight line basis, over the vesting
period. The Company expenses the cost of its RSUs ratably over the period during which the
restrictions lapse. In addition, the Company estimates share-based compensation expense for its
PSAs based on the vesting criteria and only recognizes expense for the portions of such awards for
which annual targets have been set. The weighted-average fair value per share of RSUs and PSAs
granted during these periods were:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2010 |
|
2009 |
Weighted-average fair value per share: |
|
|
|
|
|
|
|
|
RSUs |
|
$ |
29.57 |
|
|
$ |
15.09 |
|
PSAs |
|
$ |
28.77 |
|
|
$ |
14.92 |
|
24
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
The Companys share-based compensation expense associated with stock options, employee stock
purchases, RSUs, and PSAs is recorded in the following cost and expense categories for the three
months ended March 31, 2010, and 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 (1) |
|
Cost of revenues Product |
|
$ |
1.1 |
|
|
$ |
1.1 |
|
Cost of revenues Service |
|
|
3.6 |
|
|
|
2.4 |
|
Research and development |
|
|
17.0 |
|
|
|
14.7 |
|
Sales and marketing |
|
|
11.7 |
|
|
|
10.2 |
|
General and administrative |
|
|
7.2 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
Total |
|
$ |
40.6 |
|
|
$ |
33.6 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior period information has been reclassified to conform to the
current periods presentation. |
Share-based compensation expense of $40.6 million incurred during the three months ended March
31, 2010 included $20.1 million pertaining to employee stock options, $4.1 million pertaining to
issuances through the employee stock purchase plan, and $16.3 million pertaining to RSU and PSA
grants. Share-based compensation expense of $33.6 million recorded during the three months ended
March 31, 2009 included $18.8 million pertaining to employee stock options, $3.9 million pertaining
to issuances through the employee stock purchase plan, and $10.8 million pertaining to RSU and PSA
grants.
As of March 31, 2010, approximately $146.2 million of unrecognized compensation cost, adjusted for
estimated forfeitures, related to unvested stock options will be recognized over a weighted-average
period of approximately 2.7 years while approximately $120.8 million of unrecognized compensation
cost, adjusted for estimated forfeitures, related to unvested RSUs and unvested PSAs will be
recognized over a weighted-average period of approximately 2.8 years.
401(k) Plan
The Company maintains a savings and retirement plan qualified under Section 401(k) of the Internal
Revenue Code of 1986, as amended. Employees meeting the eligibility requirements, as defined, may
contribute up to the statutory limits of the year. The Company has matched employee contributions
since January 1, 2001, currently matching 25% of all eligible employee contributions. All matching
contributions vest immediately. The Companys matching contributions to the plan totaled
$4.2 million and $3.8 million in the three months ended March 31, 2010, and 2009, respectively.
Deferred Compensation Plan
The Companys non-qualified deferred compensation (NQDC) plan is an unfunded and unsecured
deferred compensation arrangement. Under the NQDC plan, officers and other senior employees may
elect to defer a portion of their compensation and contribute such amounts to one or more
investment funds. The NQDC plan assets are included within investments, and offsetting obligations
are included within accrued compensation on the condensed consolidated balance sheet. The
investments are considered trading securities and are reported at fair value. The realized and
unrealized holding gains and losses related to these investments are recorded in interest and other
income, net, and the offsetting compensation expense are recorded as operating expenses in the
condensed consolidated results of operations. The deferred compensation liability under the NQDC
plan was approximately $6.1 million and $4.7 million as of March 31, 2010, and December 31, 2009,
respectively.
25
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Note 12. Segments
The Companys chief operating decision maker (CODM) allocates resources and assesses performance
based on financial information by the Companys business groups. The Companys operations are
organized into two reportable segments: Infrastructure and Service Layer Technologies (SLT). The
Infrastructure segment includes products from the E-, M-, MX-, and T-series router product
families, EX-series switching products, as well as the circuit-to-packet products. The SLT segment
consists primarily of Firewall virtual private network (Firewall) systems and appliances, SRX
service gateways, secure socket layer (SSL) virtual private network (VPN) appliances, intrusion
detection and prevention (IDP) appliances, the J-series router product family and wide area
network (WAN) optimization platforms.
The primary financial measure used by the CODM in assessing performance of the segments is segment
operating income, which includes certain cost of revenues, research and development (R&D)
expenses, sales and marketing expenses, and general and administrative (G&A) expenses. The CODM
does not allocate certain miscellaneous expenses to its segments even though such expenses are
included in the Companys management operating income.
For arrangements with both Infrastructure and SLT products and services, revenue is attributed to
the segment based on the underlying purchase order, contract, or sell-through report. Direct costs
and operating expenses, such as standard costs, R&D, and product marketing expenses, are generally
applied to each segment. Indirect costs, such as manufacturing overhead and other cost of revenues,
are allocated based on standard costs. Indirect operating expenses, such as sales, marketing,
business development, and G&A expenses are generally allocated to each segment based on factors
including headcount, usage, and revenue. The CODM does not allocate share-based compensation,
amortization of purchased intangible assets, restructuring and impairment charges, gains or losses
on equity investments, other net income and expense, income taxes, or certain other charges to the
segments.
The following table summarizes financial information for each segment used by the CODM (in
millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009(1) |
|
Net revenues: |
|
|
|
|
|
|
|
|
Infrastructure: |
|
|
|
|
|
|
|
|
Product |
|
$ |
556.1 |
|
|
$ |
454.4 |
|
Service |
|
|
122.6 |
|
|
|
112.8 |
|
|
|
|
|
|
|
|
Total Infrastructure revenues |
|
|
678.7 |
|
|
|
567.2 |
|
Service Layer Technologies: |
|
|
|
|
|
|
|
|
Product |
|
|
165.1 |
|
|
|
133.5 |
|
Service |
|
|
68.8 |
|
|
|
63.5 |
|
|
|
|
|
|
|
|
Total Service Layer Technologies revenues |
|
|
233.9 |
|
|
|
197.0 |
|
|
|
|
|
|
|
|
Total net revenues |
|
|
912.6 |
|
|
|
764.2 |
|
Operating income: |
|
|
|
|
|
|
|
|
Infrastructure |
|
|
176.5 |
|
|
|
111.9 |
|
Service Layer Technologies |
|
|
35.1 |
|
|
|
13.1 |
|
|
|
|
|
|
|
|
Total management operating income |
|
|
211.6 |
|
|
|
125.0 |
|
Amortization of purchased intangible assets (2) |
|
|
(1.1 |
) |
|
|
(5.7 |
) |
Share-based compensation expense |
|
|
(40.6 |
) |
|
|
(33.6 |
) |
Share-based payroll tax expense |
|
|
(1.6 |
) |
|
|
(0.3 |
) |
Restructuring charges |
|
|
(8.1 |
) |
|
|
(4.2 |
) |
|
|
|
|
|
|
|
Total operating income |
|
|
160.2 |
|
|
|
81.2 |
|
Interest and other income, net |
|
|
1.5 |
|
|
|
2.0 |
|
Loss on equity investment |
|
|
|
|
|
|
(1.7 |
) |
|
|
|
|
|
|
|
Income before income taxes and noncontrolling interest |
|
$ |
161.7 |
|
|
$ |
81.5 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior period information has been reclassified to conform to the current periods presentation. |
|
(2) |
|
Amount includes amortization expense of purchased intangible assets in operating expenses and
in cost of revenues. |
26
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Depreciation expense allocated to the Infrastructure segment was $24.7 million and
$22.1 million in the three months ended March 31, 2010, and 2009, respectively. The depreciation
expense allocated to the SLT segment was $9.5 million and $9.7 million in the three months ended
March 31, 2010, and 2009, respectively.
The Company attributes revenues to geographic region based on the customers ship-to location. The
following table shows net revenues by geographic region (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
Americas: |
|
|
|
|
|
|
|
|
United States |
|
$ |
447.0 |
|
|
$ |
314.9 |
|
Other |
|
|
41.5 |
|
|
|
44.8 |
|
|
|
|
|
|
|
|
Total Americas |
|
|
488.5 |
|
|
|
359.7 |
|
Europe, Middle East and Africa |
|
|
264.0 |
|
|
|
223.2 |
|
Asia Pacific: |
|
|
|
|
|
|
|
|
Japan |
|
|
62.3 |
|
|
|
79.7 |
|
Other |
|
|
97.8 |
|
|
|
101.6 |
|
|
|
|
|
|
|
|
Total Asia Pacific |
|
|
160.1 |
|
|
|
181.3 |
|
|
|
|
|
|
|
|
Total |
|
$ |
912.6 |
|
|
$ |
764.2 |
|
|
|
|
|
|
|
|
Verizon Communications, Inc. (Verizon) accounted for 11.2% and 10.0% of net revenues for the
three months ended March 31, 2010, and 2009, respectively.
The Company tracks assets by physical location. The majority of the Companys assets, excluding
cash and cash equivalents and investments, as of March 31, 2010, and December 31, 2009, were
attributable to U.S. operations. As of March 31, 2010, and December 31, 2009, property and
equipment, held in the U.S. as a percentage of total property and equipment was 80% and 81%,
respectively. Although management reviews asset information on a corporate level and allocates
depreciation expense by segment, the CODM does not review asset information on a segment basis.
Note 13. Income Taxes
The Company recorded a tax benefit of $2.9 million, or an effective tax benefit rate of 1.8%, and a
tax provision of $85.9 million, or an effective tax rate of 105%, for the three months ended March
31, 2010, and 2009, respectively. The effective tax rate for the three months ended March 31, 2010,
differs from the federal statutory rate of 35% primarily due to a $54.1 million income tax benefit
resulting from a change in the Companys estimate of unrecognized tax benefits related to
share-based compensation. This change in estimate was a result of the taxpayer favorable ruling by
the U.S. Court of Appeals for the Ninth Circuit (the Court) in Xilinx Inc. v. Commissioner
discussed below. The effective tax rate for the three months ended March 31, 2009, differed from
the federal statutory rate of 35% primarily due to a $61.8 million charge, which resulted from
changes in California income tax laws enacted during the Companys first quarter of 2009, partially
offset by the benefit of the federal Research and Development credit. The tax rates for the three
months ended March 31, 2010, and 2009 were favorably impacted by the benefit of earnings in foreign
jurisdictions, which are subject to lower tax rates.
On March 22, 2010, the Court overturned its May 27, 2009 decision in Xilinx v. Commissioner and
affirmed the original U.S. Tax Court decision, which held in favor of the taxpayer. While Juniper
Networks was not a named party to the case, the Courts decision does eliminate the uncertainty
regarding the benefit of the tax position taken by the Company in certain years prior to fiscal
2004 relative to the allocable transfer price of share-based compensation related to the Companys
intangible development costs. The Courts decision affirms that the value of share-based
compensation related to share-based compensation grants made prior to 2004 is not required to be
included in cost sharing agreements between related parties. In light of the Courts decision, the
Company has determined that tax benefit recognized under its prior tax position is more likely than
not to be sustained.
27
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
The gross unrecognized tax benefits decreased by approximately $72.5 million for the three months
ended March 31, 2010. Interest and penalties for the three months ended March 31, 2010, decreased
by approximately $5.9 million. The decrease in the gross unrecognized tax benefits and the accrued
interest and penalties is primarily related to the change in estimate resulting from the Courts
decision in Xilinx v. Commissioner referenced above.
The Company is currently under examination by the Internal Revenue Service (IRS) for the
2004 through 2006 tax years. The Company is also subject to two separate ongoing examinations by
the India tax authorities for the 2004 tax year and 2004 through 2008 tax years, respectively, and
has received an inquiry from the Hong Kong tax authorities for the 2002 through 2008 tax years.
Additionally, the Company has not reached a final resolution with the IRS on an adjustment it
proposed for the 1999 and 2000 tax years. The Company is not aware of any other income tax
examination by taxing authorities in any other major jurisdictions in which it files income tax
returns as of March 31, 2010.
In 2009, as part of the on-going 2004 IRS audit, the Company received a proposed adjustment related
to the license of acquired intangibles under an intercompany R&D cost sharing arrangement. In March
2009, the Company received an assessment from the Hong Kong tax authorities specifically related to
an inquiry of the 2002 tax year. In December 2008, the Company received a proposed adjustment from
the India tax authorities related to the 2004 tax year.
In July 2009, the India tax authorities commenced a separate investigation of our 2004 through 2008
tax returns and are disputing the Companys determination of taxable income due to the cost basis
of certain fixed assets. The Company accrued $4.6 million in penalties and interest in 2009 related
to this matter. The Company understands that the India tax authorities may issue an initial
assessment that is substantially higher than this amount. As a result, in accordance with the
administrative and judiciary process in India, the Company may be required to make payments that
are substantially higher than the amount accrued in order to ultimately settle this issue. The
Company strongly believes that any assessment it may receive in excess of the amount accrued would
be inconsistent with applicable India tax laws and intends to defend this position vigorously.
The Company is pursuing all available administrative procedures relative to the matters referenced
above. The Company believes that it has adequately provided for any reasonably foreseeable outcomes
related to these proposed adjustments, and the ultimate resolution of these matters is unlikely to
have a material effect on its consolidated financial condition or results of operations. Although
the Company believes a material effect is unlikely, there is a possibility that an adverse outcome
of these matters could have a material effect on its consolidated financial condition and results
of operations. For more information, please see Note 14, Commitments and Contingencies, under the
heading IRS Notices of Proposed Adjustments.
The Company engages in continuous discussion and negotiation with tax authorities regarding tax
matters in various jurisdictions. It is likely that the Company may reach agreement on certain
issues and, as a result, the amount of the liability for unrecognized tax benefits may decrease by
approximately $1.5 million within the next 12 months. At this time, the Company is unable to make a
reasonably reliable estimate of the timing of payments related to the remaining unrecognized tax
liabilities due to uncertainties in the timing of tax audit outcomes.
28
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Note 14. Commitments and Contingencies
Commitments
The following table summarizes the Companys principal contractual obligations as of March 31, 2010
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
Thereafter |
|
|
Other |
|
Operating leases |
|
$ |
302.6 |
|
|
$ |
39.4 |
|
|
$ |
44.6 |
|
|
$ |
39.7 |
|
|
$ |
31.0 |
|
|
$ |
25.6 |
|
|
|
122.3 |
|
|
$ |
|
|
Sublease rental income |
|
|
(0.5 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase commitments |
|
|
110.8 |
|
|
|
110.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax liabilities |
|
|
97.7 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96.2 |
|
Other contractual obligations |
|
|
32.1 |
|
|
|
8.6 |
|
|
|
15.0 |
|
|
|
6.6 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
542.7 |
|
|
$ |
159.8 |
|
|
$ |
59.6 |
|
|
$ |
46.3 |
|
|
$ |
32.9 |
|
|
$ |
25.6 |
|
|
$ |
122.3 |
|
|
$ |
96.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
The Company leases its facilities under operating leases that expire at various times, the longest
of which expires in November 2022. Future minimum payments under the non-cancelable operating
leases, net of committed sublease income, totaled $302.1 million as of March 31, 2010. Rent expense
for the three months ended March 31, 2010, and 2009 was $14.1 million and $14.0 million,
respectively.
Purchase Commitments
In order to reduce manufacturing lead times and ensure adequate component supply, contract
manufacturers utilized by the Company place non-cancelable, non-returnable (NCNR) orders for
components based on the Companys build forecasts. As of March 31, 2010, there were NCNR component
orders placed by the contract manufacturers with a value of $110.8 million. The contract
manufacturers use the components to build products based on the Companys forecasts and customer
purchase orders received by the Company. Generally, the Company does not own the components and
title to the products transfers from the contract manufacturers to the Company and immediately to
the Companys customers upon delivery at a designated shipment location. If the components remain
unused or the products remain unsold for specified periods, the Company may incur carrying charges
or obsolete materials charges for components that the contract manufacturers purchased to build
products to meet the Companys forecast or customer orders. As of March 31, 2010, the Company had
accrued $28.2 million based on its estimate of such charges.
Tax Liabilities
As of March 31, 2010, the Company had $97.7 million included in current and long-term liabilities
in the condensed consolidated balance sheet for unrecognized tax positions. It is reasonably
possible that the Company may reach agreement on certain issues and, as a result, the amount of the
liability for unrecognized tax benefits may decrease by approximately $1.5 million within the next
12 months. At this time, the Company is unable to make a reasonably reliable estimate of the timing
of payments related to the additional $96.2 million in liability due to uncertainties in the timing
of tax audit outcomes.
Other Contractual Obligations
As of March 31, 2010, other contractual obligations primarily consisted of $1.3 million of
indemnity-related escrows, $19.1 million remaining balance for a data center hosting agreement that
requires payments through the end of April 2013, and $7.7 million under a software subscription
agreement that requires payments through the end of January 2011.
29
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Guarantees
The Company enters into agreements with customers that contain indemnification provisions relating
to potential situations where claims could be alleged that the Companys products infringe the
intellectual property rights of a third party. Other guarantees or indemnification arrangements
include guarantees of product and service performance, guarantees related to third-party
customer-financing arrangements, and standby letters of credit for certain lease facilities. As of
March 31, 2010, the Company had $32.1 million in guarantees and standby letters of credit and
recorded a liability of $17.6 million related to a third-party customer-financing guarantee. As of
December 31, 2009, the Company had $34.0 million in guarantees and standby letters of credit along
with a liability of $21.9 million related to a third-party customer-financing guarantee.
Legal Proceedings
The Company is subject to legal claims and litigation arising in the ordinary course of business,
such as employment or intellectual property claims, including the matters described below. The
outcome of any such matters is currently not determinable. Although the Company does not expect
that any such legal claims or litigation will ultimately have a material adverse effect on its
consolidated financial condition or results of operations, an adverse result in one or more of such
matters could negatively affect the Companys consolidated financial results in the period in which
they occur.
Federal Securities Class Action
On July 14, 2006, and August 29, 2006, two purported class actions were filed in the Northern
District of California against the Company and certain of the Companys current and former officers
and directors. On November 20, 2006, the Court consolidated the two actions as In re Juniper
Networks, Inc. Securities Litigation, No. C06-04327-JW, and appointed the New York City Pension
Funds as lead plaintiffs. The lead plaintiffs filed a Consolidated Class Action Complaint on
January 12, 2007, and filed an Amended Consolidated Class Action Complaint on April 9, 2007. The
Amended Consolidated Complaint alleges that the defendants violated federal securities laws by
manipulating stock option grant dates to coincide with low stock prices and issuing false and
misleading statements including, among others, incorrect financial statements due to the improper
accounting of stock option grants. The Amended Consolidated Complaint asserts claims for violations
of the Securities Act of 1933 and the Securities Exchange Act of 1934 on behalf of all persons who
purchased or otherwise acquired Juniper Networks publicly-traded securities from July 12, 2001,
through and including August 10, 2006. Plaintiffs seek unspecified damages in an unspecified
amount. On June 7, 2007, the defendants filed a motion to dismiss certain of the claims, and a
hearing was held on September 10, 2007. On March 31, 2008, the Court issued an order granting in
part and denying in part the defendants motion to dismiss. The order dismissed with prejudice
plaintiffs section 10(b) claim to the extent it was based on challenged statements made before
July 14, 2001. The order also dismissed, with leave to amend, plaintiffs section 10(b) claim
against Pradeep Sindhu. The order upheld all of plaintiffs remaining claims. Plaintiffs did not
amend their complaint.
On September 25, 2009, the Court certified a plaintiff class consisting of all persons and entities
who purchased or otherwise acquired the Companys securities from July 11, 2003 to August 10, 2006
inclusive, and were damaged thereby, including those who received or acquired Juniper Networks
common stock issued pursuant to the registration statement on SEC Form S-4, dated March 10, 2004,
for the Companys merger with NetScreen Technologies Inc. and purchasers of Zero Coupon Convertible
Senior Notes due June 15, 2008 issued pursuant to a registration statement on SEC Form S-3 dated
November 20, 2003. Excluded from the class are the defendants and the current and former officers
and directors of the Company, their immediate families, their heirs, successors, or assigns and any
entity controlled by any such person.
On February 5, 2010, the Company and the lead plaintiffs entered into an agreement in principle to
settle the claims against the Company and each of the Companys current and former officers and
directors. The settlement is contingent upon final approval by the Court. On April 12, 2010, the
Court granted preliminary approval of the proposed settlement and scheduled a fairness hearing for
August 30, 2010 to consider whether to grant final
30
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
approval of the settlement. Under the proposed settlement, the claims against the Company and its
officers and directors will be dismissed with prejudice and released in exchange for a
$169.0 million cash payment by the Company. The Company considers the proposed payment to be
probable and reasonably estimable and, therefore, recorded the cash settlement amount as a pre-tax
operating expense in its consolidated statement of operations for the fourth quarter ended December
31, 2009.
Calamore Proxy Statement Action
On March 28, 2007, an action titled Jeanne M. Calamore v. Juniper Networks, Inc., et al., No.
C-07-1772-JW, was filed by Jeanne M. Calamore in the Northern District of California against the
Company and certain of the Companys current and former officers and directors. The complaint
alleges that the proxy statement for the Companys 2006 Annual Meeting of Stockholders contained
various false and misleading statements in that it failed to disclose stock option backdating
information. As a result, the plaintiff seeks preliminary and permanent injunctive relief with
respect to the Companys 2006 Equity Incentive Plan, including seeking to invalidate the plan and
all equity awards granted and grantable thereunder. On May 21, 2007, the Company filed a motion to
dismiss, and the plaintiff filed a motion for preliminary injunction. On July 19, 2007, the Court
issued an order denying the plaintiffs motion for a preliminary injunction and dismissing the
complaint in its entirety with leave to amend. The plaintiff filed an amended complaint on August
27, 2007, and the defendants filed a motion to dismiss on October 9, 2007. On August 13, 2008, the
Court issued an order granting the Companys motion to dismiss with prejudice, and entered final
judgment in favor of the Company. On September 9, 2008, the plaintiff filed a Notice of Appeal in
the United States Court of Appeals for the Ninth Circuit. The plaintiffs appeal was fully briefed
and the Court of Appeals heard oral argument on the appeal on October 7, 2009. On February 5, 2010,
the Ninth Circuit issued a memorandum decision affirming the District Courts dismissal with
prejudice. On February 19, 2010, plaintiff filed a Petition for Rehearing and Suggestion for
Rehearing En Banc and on March 24, 2010, the Ninth Circuit denied that petition.
IPO Allocation Case
In December 2001, a class action complaint was filed in the United States District Court for the
Southern District of New York against the Goldman Sachs Group, Inc., Credit Suisse First Boston
Corporation, FleetBoston Robertson Stephens, Inc., Royal Bank of Canada (Dain Rauscher Wessels), SG
Cowen Securities Corporation, UBS Warburg LLC (Warburg Dillon Read LLC), Chase (Hambrecht & Quist
LLC), J.P. Morgan Chase & Co., Lehman Brothers, Inc., Salomon Smith Barney, Inc., Merrill Lynch,
Pierce, Fenner & Smith, Incorporated (collectively, the Underwriters), Juniper Networks and
certain of Juniper Networks officers. This action was brought on behalf of purchasers of the
Companys common stock in its initial public offering in June 1999 and the Companys secondary
offering in September 1999.
Specifically, among other things, this complaint alleged that the prospectus pursuant to which
shares of common stock were sold in the Companys initial public offering and the Companys
subsequent secondary offering contained certain false and misleading statements or omissions
regarding the practices of the Underwriters with respect to their allocation of shares of common
stock in these offerings and their receipt of commissions from customers related to such
allocations. Various plaintiffs have filed actions asserting similar allegations concerning the
initial public offerings of approximately 300 other issuers. These various cases pending in the
Southern District of New York have been coordinated for pretrial proceedings as In re Initial
Public Offering Securities Litigation, 21 MC 92. In April 2002, the plaintiffs filed a consolidated
amended complaint in the action against the Company, alleging violations of the Securities Act of
1933 and the Securities Exchange Act of 1934. The defendants in the coordinated proceeding filed
motions to dismiss. In October 2002, the Companys officers were dismissed from the case without
prejudice pursuant to a stipulation. On February 19, 2003, the Court granted in part and denied in
part the motion to dismiss, but declined to dismiss the claims against the Company.
In June 2004, a stipulation of settlement and release of claims against the issuer defendants,
including the Company, was submitted to the Court for approval. On August 31, 2005, the Court
preliminarily approved the settlement. In December 2006, the Appellate Court overturned the
certification of classes in the six test cases that were selected by
31
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
the underwriter defendants and plaintiffs in the coordinated proceedings (the action involving the
Company is not one of the six test cases). Because class certification was a condition of the
settlement, it was unlikely that the settlement would receive final Court approval. On June 25,
2007, the Court entered an order terminating the proposed settlement based upon a stipulation among
the parties to the settlement. The plaintiffs have filed amended master allegations and amended
complaints in the six focus cases. On March 26, 2008, the Court largely denied the defendants
motion to dismiss the amended complaints in the six test cases.
The parties have reached a global settlement of the litigation. On October 5, 2009, the Court
entered an Opinion and Order granting final approval of the settlement. Under the settlement, the
insurers are to pay the full amount of settlement share allocated to the Company, and the Company
will bear no financial liability. The Company, as well as the officer and director defendants who
were previously dismissed from the action pursuant to tolling agreements, will receive complete
dismissals from the case. Certain objectors have appealed the Courts October 5, 2009, final order
to the Second Circuit Court of Appeals.
IRS Notices of Proposed Adjustments
In 2007, the IRS opened an examination of the Companys U.S. federal income tax and employment tax
returns for the 2004 fiscal year. Subsequently, the IRS extended their examination of the Companys
employment tax returns to include fiscal years 2005 and 2006. As of December 31, 2009, the IRS has
not yet concluded its examinations of these returns. In September 2008, as part of its ongoing
audit of the U.S. federal income tax return, the IRS issued a Notice of Proposed Adjustment
(NOPA) regarding the Companys business credits. The Company believes that it has adequately
provided for any reasonably foreseeable outcome related to this proposed.
In July 2009, the Company received a NOPA from the IRS claiming that the Company owes additional
taxes, plus interest and possible penalties, for the 2004 tax year based on a transfer pricing
transaction related to the license of acquired intangibles under an intercompany R&D cost sharing
arrangement. The asserted changes to the Companys 2004 tax year would affect the Companys income
tax liabilities in tax years subsequent to 2003. Because of the NOPA, the estimated incremental tax
liability would be approximately $807 million, excluding interest and penalties. The Company has
filed a protest to the proposed deficiency with the IRS, which will cause the matter to be referred
to the Appeals Division of the IRS. The Company strongly believes the IRS position with regard to
this matter is inconsistent with applicable tax laws and existing Treasury regulations, and that
the Companys previously reported income tax provision for the year in question is appropriate.
However, there can be no assurance that this matter will be resolved in the Companys favor.
Regardless of whether this matter is resolved in the Companys favor, the final resolution of this
matter could be expensive and time-consuming to defend and/or settle. While the Company believes it
has provided adequately for this matter, there is a possibility that an adverse outcome of the
matter could have a material effect on its results of operations and financial condition.
The Company has not reached a final resolution with the IRS on an adjustment the IRS proposed for
the 1999 and 2000 tax years. The Company is also under routine examination by certain state and
non-U.S. tax authorities. The Company believes that it has adequately provided for any reasonably
foreseeable outcome related to these audits.
Note 15. Joint Venture
In 2009, the Company entered into an agreement to form a joint venture to provide a combined
carrier Ethernet-based solution with NSN. Since inception, the Company has had a 60 percent
interest in the joint venture. Both NSN and Juniper Networks are entitled to appoint two board
members to the Board of the joint venture. The Board shall consist of four board members at all
times.
Given the Companys majority ownership interest in the joint venture, the ventures financial
results have been consolidated with the accounts of the Company, and a noncontrolling interest has
been recorded to reflect the noncontrolling investors interest in the ventures results. All
intercompany transactions have been eliminated, with the exception of the noncontrolling interest.
32
Juniper Networks, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Note 16. Subsequent Events
Stock Repurchases
Subsequent to March 31, 2010, through the filing of this report, the Company repurchased and
retired approximately 1.3 million shares of its common stock for approximately $39.4 million
through its 2008 Stock Repurchase Program at an average purchase price of $30.41 per share. The
Companys stock repurchase programs had aggregate remaining authorized funds of $1,204.8 million as
of the report filing date. Purchases under the Companys stock repurchase programs are subject to a
review of the circumstances in place at the time and will be made from time to time as permitted by
securities laws and other legal requirements. These programs may be discontinued at any time.
Business Acquisition
In April 2010, the Company announced it had entered into a definitive agreement to acquire Ankeena
Networks, Inc., a privately-held provider of new media infrastructure technology for a total
consideration of less than $100 million in cash and assumed employee equity awards. The acquisition
of Ankeena Networks was consummated on April 19, 2010.
33
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
This Quarterly Report on Form 10-Q (Report), including the Managements Discussion and Analysis
of Financial Condition and Results of Operations, contains forward-looking statements regarding
future events and the future results of Juniper Networks, Inc. (we, us, or the Company) that
are based on our current expectations, estimates, forecasts, and projections about the industry in
which we operate and the beliefs and assumptions of our management. Words such as expects,
anticipates, targets, goals, projects, would, could, intends, plans, believes,
seeks, estimates, variations of such words, and similar expressions are intended to identify
such forward-looking statements. These forward-looking statements are only predictions and are
subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual
results may differ materially and adversely from those expressed in any forward-looking statements.
Factors that might cause or contribute to such differences include, but are not limited to, those
discussed in this Report under the section entitled Risk Factors in Item 1A of Part II and
elsewhere, and in other reports we file with the SEC, specifically the most recent Annual Report on
Form 10-K. While forward-looking statements are based on reasonable expectations of our management
at the time that they are made, you should not rely on them. We undertake no obligation to revise
or update publicly any forward-looking statements for any reason.
The following discussion is based upon our unaudited Condensed Consolidated Financial Statements
included elsewhere in this Report, which have been prepared in accordance with U.S. generally
accepted accounting principles (U.S. GAAP). In the course of operating our business, we routinely
make decisions as to the timing of the payment of invoices, the collection of receivables, the
manufacturing and shipment of products, the fulfillment of orders, the purchase of supplies, and
the building of inventory and spare parts, among other matters. Each of these decisions has some
impact on the financial results for any given period. In making these decisions, we consider
various factors including contractual obligations, customer satisfaction, competition, internal and
external financial targets and expectations, and financial planning objectives. The preparation of
these financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, expenses, and related disclosure of contingencies. On an
ongoing basis, we evaluate our estimates, including those related to sales returns, pricing
credits, warranty costs, allowance for doubtful accounts, impairment of long-term assets,
especially goodwill and intangible assets, contract manufacturer exposures for carrying and
obsolete material charges, assumptions used in the valuation of share-based compensation, and
litigation. We base our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. For further information about our critical accounting policies and estimates, see
Note 2 Critical Accounting Policies to our Condensed Consolidated Financial Statements and our
Critical Accounting Policies and Estimates section included in this Managements Discussion and
Analysis of Financial Condition and Results of Operations. Actual results may differ from these
estimates under different assumptions or conditions.
To aid in understanding our operating results for the periods covered by this Report, we have
provided an executive overview and a summary of the significant events that affected the most
recent fiscal quarter and a discussion of the nature of our operating expenses. These sections
should be read in conjunction with the more detailed discussion and analysis of our consolidated
financial condition and results of operations in this Item 2, our Risk Factors section included
in Item 1A of Part II, and our unaudited condensed consolidated financial statements and notes
included in Item 1 of Part I of this report.
34
Executive Overview
Our performance for the first quarter of 2010 reflects the increase in market demand for networking
and security products in response to the recovering economy and our customers growing networks.
The increase in net revenues was due to the revenue growth in both the service provider and
enterprise markets and strength in the Americas and Europe, the Middle East and Africa (EMEA)
regions. While net revenues grew, we also controlled costs and continued to invest in our
innovation and customer satisfaction initiatives.
The following table provides an overview of our key financial metrics for the three months ended
March 31, 2010, and 2009 (in millions, except per share amounts and percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
%Change |
|
Net revenues |
|
$ |
912.6 |
|
|
$ |
764.2 |
|
|
$ |
148.4 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
160.3 |
|
|
$ |
81.2 |
|
|
|
79.1 |
|
|
|
97 |
% |
Percentage of net revenues |
|
|
17.6 |
% |
|
|
10.6 |
% |
|
|
|
|
|
|
|
|
Net income (loss) attributable to Juniper Networks |
|
$ |
163.1 |
|
|
$ |
(4.5 |
) |
|
|
167.6 |
|
|
|
N/M |
|
Percentage of net revenues |
|
|
17.9 |
% |
|
|
(0.6 |
)% |
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to
Juniper Networks common stock holders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.31 |
|
|
$ |
(0.01 |
) |
|
$ |
0.32 |
|
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.30 |
|
|
$ |
(0.01 |
) |
|
$ |
0.31 |
|
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues: Our net revenues increased in the three months ended March 31, 2010, compared
to the same period in 2009, primarily due to the recovering economy and increased demand from
our enterprise and service provider customers. Net revenues increased in the Americas and the
EMEA regions, partially offset by a decrease in the APAC region, in the three months ended
March 31, 2010, compared to the same period in 2009. |
|
|
Operating Income: Our operating income as well as operating margin increased in the three
months ended March 31, 2010, compared to the same period in 2009. These increases were, in
large part, due to the increase in revenues and our continued efforts to control expenses and
improve efficiencies. |
|
|
Net Income (Loss) Attributable to Juniper Networks and Net Income (Loss) Per Share
Attributable to Juniper Networks Common Stock Holders: The net income attributable to Juniper
Networks in the three months ended March 31, 2010, compared to the net loss attributable to
Juniper Networks during the same period in 2009, is primarily due to the increase in revenues
during the quarter and the non-recurring income tax benefit of $54.1 million we received from
a change in estimate of unrecognized tax benefits related to share-based compensation. The
change resulted from decision in the first quarter of 2010 of the U.S. Court of Appeals for
the Ninth Circuit in Xilinx Inc. v. Commissioner. |
|
|
Stock Repurchase Activity: In February 2010, our Board approved an additional stock
repurchase program, which authorized the repurchase of up to $1.0 billion of our common stock.
This new authorization is in addition to our 2008 Stock Repurchase Program. During the three
months ended March 31, 2010, we repurchased 2.8 million shares of our common stock through our
2008 Stock Repurchase Program, at an average price of $27.04 per share for a total purchase
price of $74.4 million. |
|
|
Other Financial Highlights: Total deferred revenue increased $36.3 million to $789.9 million
as of March 31, 2010, compared to $753.6 million as of December 31, 2009, primarily due to
growth in our installed equipment base for maintenance and customer support contracts. |
35
Business and Market Environment
We design, develop, and sell products and services that together provide our customers with
high-performance network infrastructure that creates responsive and trusted environments for
accelerating the deployment of services and applications over a single network. We serve the
high-performance networking requirements of global service providers, enterprises, governments, and
research and public sector organizations that view the network as critical to their success.
High-performance networking is designed to provide fast, reliable and secure access to applications
and services at scale. We offer a high-performance network infrastructure that includes IP routing,
Ethernet switching, security and application acceleration solutions, as well as partnerships
designed to extend the value of the network and worldwide services and support designed to optimize
customer investments.
In the first quarter of 2010, we continued to deliver new and innovative, high-performance network
infrastructure solutions. We announced our latest fabric chipset that will enable customers to upgrade their existing T-series
core routers to a system capacity of 4 Terabits per second without service interruption.
Additionally, we announced the new EX2200 line of fixed-configuration managed Ethernet switches
that offers a plug-and-play solution that addresses access connectivity requirements of todays
high performance businesses. We achieved engineering milestones on our Stratus project, which
advances our vision for future data center architecture. In the area of mobility, we announced
Junos Pulse, a downloadable client software that provides secure connections across mobile devices
including notebooks, netbooks, and smart-phones as well as non-mobile devices to a broad range of
corporate applications for a better, simpler experience for users. On the partnership front, we
announced several new and expanded mobility partnerships intended to deliver software and solutions
for mobile operators and improve experience and economics of their networks. Additionally, in April
2010, we acquired Ankeena Networks, Inc., a privately-held provider of new media infrastructure
technology for total consideration of less than $100 million in cash and assumption of employee
equity awards.
The gradual recovery of the global economy during the first quarter of 2010 improved the purchasing
behavior of our customers across all theaters for enterprise and among service providers in the
Americas and EMEA. Macroeconomic indicators in Asia remain strong with the exception of Japan. In
the first quarter of 2010, we continued to both invest in key research and development (R&D)
projects that we believe will lead to future growth and remained focused on continuing our efforts
to contain costs and allocate resources effectively.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP
requires us to make judgments, assumptions, and estimates that affect the amounts reported in the
condensed consolidated financial statements and the accompanying notes. We base our estimates and
assumptions on current facts, historical experience, and various other factors that we believe are
reasonable under the circumstances to determine the carrying values of assets and liabilities that
are not readily apparent from other sources. Note 2, Summary of Significant Accounting Policies, in
Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report
on Form 10-Q, describes the significant accounting policies and methods used in the preparation of
the condensed consolidated financial statements. The critical accounting policies described below
are significantly affected by critical accounting estimates. Such accounting policies require
significant judgments, assumptions, and estimates used in the preparation of the condensed
consolidated financial statements and actual results could differ materially from the amounts
reported based on these policies. To the extent there are material differences between our
estimates and the actual results, our future consolidated results of operations may be affected.
|
|
Revenue Recognition. Revenue is recognized when all of the following criteria have been
met: |
|
|
|
Persuasive evidence of an arrangement exists. We generally rely upon sales contracts, or
agreements and customer purchase orders, to determine the existence of an arrangement. |
|
|
|
Delivery has occurred. We use shipping terms and related documents or written evidence of
customer acceptance, when applicable, to verify delivery or performance. In instances where
we have outstanding obligations related to product delivery or the final acceptance of the
product, revenue is deferred until all the delivery and acceptance criteria have been met. |
36
|
|
|
Sales price is fixed or determinable. We assess whether the sales price is fixed or
determinable based on the payment terms and whether the sales price is subject to refund or
adjustment. |
|
|
|
Collectability is reasonably assured. We assess collectability based on the
creditworthiness of the customer as determined by our credit checks and the customers
payment history. We record accounts receivable net of allowance for doubtful accounts,
estimated customer returns, and pricing credits. |
We adopted Accounting Standards Update (ASU) No. 2009-13 Multiple-Deliverable Revenue
Arrangements (ASU 2009-13) and ASU No. 2009-14, Certain Revenue Arrangements That Include
Software Elements (ASU 2009-14) on a prospective basis as of the beginning of fiscal 2010 for
new and materially modified arrangements originating after December 31, 2009. Under the new
standards we allocate the total arrangement consideration to each separable element of an
arrangement based on the relative selling price of each element. Arrangement consideration
allocated to undelivered elements is deferred until delivery.
As a result of the adoption of ASU 2009-13 and ASU 2009-14, net revenues for the first quarter of
2010 were approximately $25 million higher than the net revenues that would have been recorded
under the previous accounting rules. The increase in revenues was due to recognition of revenue
for products booked and shipped during the first quarter of 2010, which contained deliverables for
which we were unable to demonstrate fair value pursuant to the previous standards. We cannot
reasonably estimate the effect of adopting these standards on future financial periods as the
impact will vary depending on the nature and volume of new or materially modified arrangements in
any given period.
For fiscal 2010 and future periods, pursuant to the guidance of ASU 2009-13, when a sales
arrangement contains multiple elements, and software and non-software components that function
together to deliver the tangible products essential functionality, we allocate revenue to each
element based on a selling price hierarchy. The selling price for a deliverable is based on our
vendor-specific objective evidence (VSOE) if available, third party evidence (TPE) if VSOE is
not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. We then
recognize revenue on each deliverable in accordance with our policies for product and service
revenue recognition.
VSOE of fair value is based on the price charged when the element is sold separately. In
determining VSOE, we require that a substantial majority of the selling prices fall within a
reasonable range based on historical discounting trends for specific products and services. TPE of
selling price is established by evaluating largely interchangeable competitor products or services
in stand-alone sales to similarly situated customers. However, as our products contain a
significant element of proprietary technology and our solutions offer substantially different
features and functionality, the comparable pricing of products with similar functionality
typically cannot be obtained. Additionally, as we are unable to reliably determine what
competitors products selling prices are on a stand-alone basis, we are not typically able to
determine TPE. When determining the best estimate of selling price, we apply management judgment
by considering multiple factors including, but not limited to pricing practices in different
geographies and through different sales channels, gross margin objectives, internal costs,
competitor pricing strategies and industry technology lifecycles.
For transactions initiated prior to the first quarter of 2010, revenue for arrangements with
multiple elements, such as sales of products that include services, was allocated to each element
using the residual method based on the VSOE of fair value of the undelivered items pursuant to
Accounting Standards Codification (ASC) Topic 985-605, Software Revenue Recognition. Under the
residual method, the amount of revenue allocated to delivered elements equals the total
arrangement consideration less the aggregate fair value of any undelivered elements. If VSOE of
fair value of one or more undelivered items does not exist, revenue is deferred and recognized at
the earlier of (i) delivery of those elements or (ii) when fair value can be established unless
maintenance is the only undelivered element, in which case, the entire arrangement fee is
recognized ratably over the contractual support period. We account for multiple agreements with a
single customer as one arrangement if the contractual terms and/or substance of those agreements
indicate that they may be so closely related that they are, in effect, parts of a single
arrangement. Our ability to recognize revenue in the future may be affected if actual selling
prices are significantly less than fair value. In addition, our ability to recognize revenue in
the future could be impacted by
conditions imposed by our customers.
37
For sales to direct end-users, value-added resellers, and OEM partners, we recognize product
revenue upon transfer of title and risk of loss, which is generally upon shipment. It is our
practice to identify an end-user prior to shipment to a value-added reseller or to an OEM partner.
For our end-users and value-added resellers, there are no significant obligations for future
performance such as rights of return or pricing credits. A portion of our sales is made through
distributors under agreements allowing for pricing credits or rights of return. We recognize
product revenue on sales made through these distributors upon sell-through as reported to us by
the distributors. Deferred revenue on shipments to distributors reflects the effects of
distributor pricing credits and the amount of gross margin expected to be realized upon
sell-through. Deferred revenue is recorded net of the related product costs of revenue.
We record reductions to revenue for estimated product returns and pricing adjustments, such as
rebates and price protection, in the same period that the related revenue is recorded. The amount
of these reductions is based on historical sales returns and price protection credits, specific
criteria included in rebate agreements, and other factors known at the time. Should actual product
returns or pricing adjustments differ from our estimates, additional reductions to revenue may be
required. In addition, we report revenue net of sales taxes.
Service revenues include revenue from maintenance, training, and professional services.
Maintenance is offered under renewable contracts. Revenue from maintenance service contracts is
deferred and is recognized ratably over the contractual support period, which is generally one to
three years. Revenue from training and professional services is recognized as the services are
completed or ratably over the contractual period, which is generally one year or less.
We sell certain interests in accounts receivable on a non-recourse basis as part of a customer
financing arrangement primarily with one major financing company. We record cash received under
this arrangement in advance of revenue recognition as short-term debt.
|
|
Contract Manufacturer Liabilities. We outsource most of our manufacturing, repair, and
supply chain management operations to our independent contract manufacturers, and a
significant portion of our cost of revenues consists of payments to them. Our independent
contract manufacturers manufacture our products primarily in China, Malaysia, Mexico, and the
U.S. We have employees in our manufacturing and operations organization who manage
relationships with our contract manufacturers, manage our supply chain, and monitor product
testing and quality. We generally do not own the components, and title to products transfers
from the contract manufacturers to us and immediately to our customers upon shipment. Our
independent contract manufacturers produce our products using design specifications, quality
assurance programs, and standards that we establish, and they procure components and
manufacture our products based on our demand forecasts. These forecasts are based on our
estimates of future demand for our products, which are in turn based on historical trends and
an analysis from our sales and marketing organizations, adjusted for overall market
conditions. We establish a provision for inventory, carrying costs, and obsolete material
exposures for excess components purchased based on historical trends. If the actual component
usage and product demand are significantly lower than forecasted, which may be caused by
factors outside of our control, we may incur charges for excess components, which could have
an adverse impact on our gross margins and profitability. Supply chain management remains an
area of focus as we balance the risk of material obsolescence and supply chain flexibility in
order to reduce lead times. |
|
|
Warranty Costs. We generally offer a one-year warranty on all of our hardware products
and a 90-day warranty on the media that contains the software embedded in the products. We
accrue for warranty costs as part of our cost of sales based on associated material costs,
labor costs for customer support, and overhead at the time revenue is recognized. Material
cost is estimated primarily based upon the historical costs to repair or replace product
returns within the warranty period. Technical support labor and overhead cost are estimated
primarily based upon historical trends in the cost to support the customer cases within the
warranty period. Although we engage in extensive product quality programs and processes, our
warranty obligation is affected by product failure rates, use of materials, technical labor
costs, and associated overhead incurred. Should actual product failure rates, use of
materials, or service delivery costs differ from our estimates, we may incur additional
warranty costs, which could
reduce gross margin. |
38
|
|
Goodwill and Purchased Intangible Assets. We make significant estimates and
assumptions when evaluating impairment of goodwill and other intangible assets on an ongoing
basis, as well as when valuing goodwill and other intangible assets in connection with the
initial purchase price allocation of an acquired entity. The amounts and useful lives assigned
to identified intangible assets impacts the amount and timing of future amortization expense.
The value of our intangible assets, including goodwill, could be impacted by future adverse
changes such as: (i) future declines in our operating results, (ii) a sustained decline in our
market capitalization, (iii) significant slowdown in the worldwide economy or the networking
industry, or (iv) failure to meet our forecasted operating results. We evaluate these assets
on an annual basis as of November 1 or more frequently if we believe indicators of impairment
exist. The process of evaluating the potential impairment of goodwill and intangible assets is
subjective and requires significant judgment at many points during the analysis. Impairment of
goodwill is tested at the reporting unit level by comparing the reporting units carrying
value, including goodwill, to the fair value of the reporting unit. The fair values of the
reporting units are estimated using a combination of the income approach and the market
approach. Under the market approach, we estimate fair value of our reporting units based on
market multiples of revenue or earnings for comparable companies. Under the income approach,
we calculate fair value of a reporting unit based on the present value of estimated future
cash flows. If the fair value of the reporting unit exceeds the carrying value of the net
assets assigned to that unit, goodwill is not impaired and we are not required to perform
further testing. If the carrying value of the net assets assigned to the reporting unit
exceeds the fair value of the reporting unit, then we must perform the second step of the
impairment test in order to determine the implied fair value of the reporting units goodwill.
If the carrying value of a reporting units goodwill exceeds its implied fair value, then we
record an impairment loss equal to the difference. Intangible assets are evaluated for
impairment whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. An asset is considered impaired if its carrying amount
exceeds the future net cash flow the asset is expected to generate. If an asset is considered
to be impaired, the impairment to be recognized is the amount by which the carrying amount of
the asset exceeds its fair value. We assess the recoverability of our intangible assets by
determining whether the unamortized balances are greater than the sum of undiscounted future
net cash flows of the related assets. The amount of impairment, if any, is measured based on
projected discounted future net cash flows. The estimates we have used are consistent with the
plans and estimates that we use to manage our business. If our actual results or the plans and
estimates used in future impairment analyses are lower than the original estimates used to
assess the recoverability of these assets, we could incur additional impairment charges. |
|
|
|
Share-Based Compensation. We recognize share-based compensation expense for all
share-based payment awards including employee stock options, restricted stock units (RSUs),
performance share awards (PSAs), and purchases under our Employee Stock Purchase Plan in
accordance with FASB ASC Topic Compensation Stock Compensation (FASB ASC Topic 718).
Share-based compensation expense for expected-to-vest share-based awards is valued under the
single-option approach and amortized on a straight-line basis, net of estimated forfeitures. |
|
|
|
We utilize the Black-Scholes-Merton (BSM) option-pricing model in order to determine the fair
value of stock options. The BSM model requires various highly subjective assumptions including
volatility, expected option life, and risk-free interest rate. The expected volatility is based on
the implied volatility of market traded options on our common stock, adjusted for other relevant
factors including historical volatility of our common stock over the most recent period
commensurate with the estimated expected life of our stock options. The expected life of an award
is based on historical experience, the terms and conditions of the stock awards granted to
employees, as well as the potential effect from options that have not been exercised at the time.
We determine the fair value of RSUs and PSAs based on the closing market price of our common stock
on the grant date. In addition, we estimate stock compensation expense for our PSAs based on the
vesting criteria and only recognize expense for the portions of such awards for which annual
targets have been set. |
|
|
|
The assumptions used in calculating the fair value of share-based payment awards represent
managements best estimates. These estimates involve inherent uncertainties and the application of
managements judgment. If factors change and we use different assumptions, our share-based
compensation expense could be materially different in the future. In addition, we are required to
estimate the expected forfeiture rate and recognize expense only for |
39
|
|
those expected-to-vest shares. If our actual forfeiture rate is materially different from our
estimate, our recorded share-based compensation expense could be different. |
|
|
Income Taxes. Estimates and judgments occur in the calculation of certain tax
liabilities and in the determination of the recoverability of certain deferred tax assets,
which arise from temporary differences and carryforwards. Deferred tax assets and liabilities
are measured using the currently enacted tax rates that apply to taxable income in effect for
the years in which those tax assets are expected to be realized or settled. We regularly
assess the likelihood that our deferred tax assets will be realized from recoverable income
taxes or recovered from future taxable income based on the realization criteria set forth in
FASB ASC Topic Income Taxes (FASB ASC Topic 740). To the extent that we believe any
amounts are not more likely than not to be realized, we record a valuation allowance to reduce
our deferred tax assets. We believe it is more likely than not that future income from the
reversal of the deferred tax liabilities and forecasted income will be sufficient to fully
recover the remaining deferred tax assets. In the event we determine that all or part of the
net deferred tax assets are not realizable in the future, an adjustment to the valuation
allowance would be charged to earnings in the period such determination is made. Similarly, if
we subsequently realize deferred tax assets that were previously determined to be
unrealizable, the respective valuation allowance would be reversed, resulting in an adjustment
to earnings in the period such determination is made. In addition, the calculation of our tax
liabilities involves dealing with uncertainties in the application of complex tax regulations.
We recognize and measure potential liabilities based our estimate of whether, and the extent
to which, additional taxes will be due. |
|
|
|
Significant judgment is required in determining any valuation allowance recorded against deferred
tax assets. In assessing the need for a valuation allowance, we consider all available evidence,
including past operating results, estimates of future taxable income, and the feasibility of tax
planning strategies. In the event that we change our determination as to the amount of deferred
tax assets that can be realized, we will adjust our valuation allowance with a corresponding
effect to the provision for income taxes in the period in which such determination is made. |
|
|
|
Significant judgment is also required in evaluating our uncertain tax positions under FASB ASC
Topic 740 and determining our provision for income taxes. Although we believe our reserves under
FASB ASC Topic 740 are reasonable, no assurance can be given that the final tax outcome of these
matters will not be different from that which is reflected in our historical income tax provisions
and accruals. We adjust these reserves in light of changing facts and circumstances, such as the
closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome
of these matters is different from the amounts recorded, such differences will affect the
provision for income taxes in the period in which such determination is made as it was during the
first quarter of 2010, when we recorded a non-recurring income tax benefit as a result of a
taxpayer favorable federal appellate court ruling in Xilinx, Inc. v. Commissioner. The provision
for income taxes includes the effect of reserves under FASB ASC Topic 740 and any changes to the
reserves that are considered appropriate, as well as the related net interest and penalties, if
applicable. |
|
|
|
Loss Contingencies. We are subject to the possibility of various loss contingencies
arising in the ordinary course of business. We consider the likelihood of loss or impairment
of an asset, or the incurrence of a liability, as well as our ability to reasonably estimate
the amount of loss, in determining loss contingencies. An estimated loss contingency is
accrued when it is probable that an asset has been impaired or a liability has been incurred
and the amount of loss can be reasonably estimated. We record a charge equal to the minimum
estimated liability for litigation costs or a loss contingency only when both of the following
conditions are met: (i) information available prior to issuance of our consolidated financial
statements indicates that it is probable that an asset had been impaired or a liability had
been incurred at the date of the financial statements and (ii) the range of loss can be
reasonably estimated. We regularly evaluate current information available to us to determine
whether such accruals should be adjusted and whether new accruals are required. |
|
|
|
From time to time, we are involved in disputes, litigation, and other legal actions. We are
aggressively defending our current litigation matters. However, there are many uncertainties
associated with any litigation, and these actions or other third-party claims against us may cause
us to incur costly litigation and/or substantial settlement charges. In addition, the resolution
of any future intellectual property litigation may require us to make royalty payments, which
could adversely affect gross margins in future periods. If any of those events were to occur, our |
40
|
|
business, financial condition, results of operations, and cash flows could be adversely affected.
The actual liability in any such matters may be materially different from our estimates, which
could result in the need to adjust our liability and record additional expenses. For a discussion
of current litigation, please see Note 14, Commitments and Contingencies, under the heading Legal
Proceedings in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of
this Quarterly Report on Form 10-Q. |
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, in the Notes to Condensed Consolidated
Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, for a full
description of recent accounting pronouncements, including the actual and expected dates of
adoption and estimated effects on our consolidated results of operations and financial condition,
which is incorporated herein by reference.
Results of Operations
The following table presents product and service net revenues (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
% Change |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
721.2 |
|
|
$ |
587.9 |
|
|
$ |
133.3 |
|
|
|
23 |
% |
Percentage of net revenues |
|
|
79.0 |
% |
|
|
76.9 |
% |
|
|
|
|
|
|
|
|
Service |
|
|
191.4 |
|
|
|
176.3 |
|
|
|
15.1 |
|
|
|
9 |
% |
Percentage of net revenues |
|
|
21.0 |
% |
|
|
23.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
912.6 |
|
|
$ |
764.2 |
|
|
$ |
148.4 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net product revenues increased in the three months ended March 31, 2010, compared to the same
period in 2009, primarily because of the increase in Infrastructure product sales to service
provider and enterprise customers in the Americas and EMEA regions and SLT product sales to service
provider customers in the Americas region. The increased spending patterns were the result of the
improved macroeconomic environment as compared to the first quarter of 2009. Our net service
revenues increased in the three months ended March 31, 2010, compared to the same period in 2009,
primarily due to strong service contract renewals and an increase in revenues related to resident
engineer services for our enterprise customers in the Americas region.
Infrastructure Segment Revenues
The following table presents net Infrastructure segment revenues and net Infrastructure segment
revenues as a percentage of total net revenues by product and service categories (in millions,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
%Change |
|
Net Infrastructure segment revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure product revenue |
|
$ |
556.1 |
|
|
$ |
454.4 |
|
|
$ |
101.7 |
|
|
|
22 |
% |
Percentage of net revenues |
|
|
60.9 |
% |
|
|
59.4 |
% |
|
|
|
|
|
|
|
|
Infrastructure service revenue |
|
|
122.6 |
|
|
|
112.8 |
|
|
|
9.8 |
|
|
|
9 |
% |
Percentage of net revenues |
|
|
13.5 |
% |
|
|
14.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Infrastructure segment revenues |
|
$ |
678.7 |
|
|
$ |
567.2 |
|
|
$ |
111.5 |
|
|
|
20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net revenues |
|
|
74.4 |
% |
|
|
74.2 |
% |
|
|
|
|
|
|
|
|
Infrastructure Product
For the three months ended March 31, 2010, the increase in Infrastructure product revenue was
primarily attributable to revenue growth from our MX-series routers and EX-series switches,
slightly offset by decreased revenue from our M-series routers. From a geographical and
market perspective, during the three months ended March 31, 2010, we experienced revenue growth in
the enterprise market across all regions and in the service
41
provider market in the Americas and EMEA regions. These increases were partially offset by a
decrease in service provider revenues in the APAC region.
We track Infrastructure chassis revenue units and ports shipped to analyze customer trends and
indicate areas of potential network growth. Most of our Infrastructure product platforms are
modular, with the chassis serving as the base of the platform. Each modular chassis has a certain
number of slots that are available to be populated with components we refer to as modules or
interfaces. The modules are the components through which the platform receives incoming packets of
data from a variety of transmission media. The physical connection between a transmission medium
and a module is referred to as a port. The number of ports on a module varies widely depending on
the functionality and throughput offered by the module. Chassis revenue units represent the number
of chassis on which revenue was recognized during the period. The following table presents
Infrastructure revenue units and ports shipped:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2010 |
|
2009 |
|
Unit Change |
|
% Change |
Infrastructure chassis revenue units (1) |
|
|
2,610 |
|
|
|
2,961 |
|
|
|
(351 |
) |
|
|
(12 |
)% |
Infrastructure ports shipped (1) |
|
|
111,156 |
|
|
|
86,036 |
|
|
|
25,120 |
|
|
|
29 |
% |
|
|
|
(1) |
|
Excludes modular and fixed configuration EX-series Ethernet switching products and
circuit-to-packet products. |
Infrastructure port shipments increased despite the decrease in chassis revenue units in the
three months ended March 31, 2010, compared to the same period in 2009, primarily due to an
increase in the shipments of MX-series products, which generally contain a higher number of ports
per chassis.
Infrastructure Service
A majority of our service revenue is earned from customers that purchase our products and enter
into service contracts for support. The increase in Infrastructure service revenue for the three
months ended March 31, 2010, was primarily driven by the increased revenue from new product sales,
strong service contract renewals, and an increase in revenues related to resident engineer
services. From a geographical and market perspective, the increase in Infrastructure service
revenues was primarily due to an increase in Infrastructure service revenues from the enterprise
market across all regions and the service provider market in the EMEA and APAC regions, partially
offset by a decrease in the Americas service provider market.
SLT Segment Revenues
The following table presents net SLT segment revenues and net SLT segment revenues as a percentage
of total net revenues by product and service categories (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
%Change |
|
Net SLT segment revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SLT product revenue |
|
$ |
165.1 |
|
|
$ |
133.5 |
|
|
$ |
31.6 |
|
|
|
24 |
% |
Percentage of net revenues |
|
|
18.1 |
% |
|
|
17.5 |
% |
|
|
|
|
|
|
|
|
SLT service revenue |
|
|
68.8 |
|
|
|
63.5 |
|
|
|
5.3 |
|
|
|
8 |
% |
Percentage of net revenues |
|
|
7.5 |
% |
|
|
8.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SLT segment revenues |
|
$ |
233.9 |
|
|
$ |
197.0 |
|
|
$ |
36.9 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net revenues |
|
|
25.6 |
% |
|
|
25.8 |
% |
|
|
|
|
|
|
|
|
SLT Product
We experienced an increase in SLT product revenue in the three months ended March 31, 2010,
compared to the same period in 2009, primarily due to an increase in revenue from our SRX service
gateway products partially offset by declines in revenue generated by
older high-end firewall products.
From a geographical and market perspective, the revenue growth we experienced for the three months
ended March 31, 2010, was primarily from the service provider market in the Americas and the
enterprise market in EMEA and APAC regions.
42
The following table presents SLT revenue units recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2010 |
|
2009 |
|
Unit Change |
|
% Change |
SLT revenue units |
|
|
54,508 |
|
|
|
43,522 |
|
|
|
10,986 |
|
|
|
25 |
% |
SLT revenue units increased in the three months ended March 31, 2010, compared to the same period
in 2009, which was commensurate with the year-over-year growth of SLT product revenue.
SLT Service
The increase in SLT service revenue was primarily driven by strong demand for support contracts
attached with new product sales, strong service contract renewals, and an increase in revenues
related to resident engineer services. From a geographical and market perspective, the increase in
SLT service revenues was primarily due to an increase in SLT revenues from the service provider
market across all three regions and the enterprise market in the Americas and EMEA regions.
Net Revenues by Geographic Region
The following table presents the total net revenues by geographic region (in millions, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
% Change |
|
Americas: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
447.0 |
|
|
$ |
314.9 |
|
|
$ |
132.1 |
|
|
|
42 |
% |
Other |
|
|
41.5 |
|
|
|
44.8 |
|
|
|
(3.3 |
) |
|
|
(7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Americas |
|
|
488.5 |
|
|
|
359.7 |
|
|
|
128.8 |
|
|
|
36 |
% |
Percentage of net revenues |
|
|
53.5 |
% |
|
|
47.1 |
% |
|
|
|
|
|
|
|
|
Europe, Middle East, and Africa |
|
|
264.0 |
|
|
|
223.2 |
|
|
|
40.8 |
|
|
|
18 |
% |
Percentage of net revenues |
|
|
29.0 |
% |
|
|
29.2 |
% |
|
|
|
|
|
|
|
|
Asia Pacific: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan |
|
|
62.3 |
|
|
|
79.7 |
|
|
|
(17.4 |
) |
|
|
(22 |
)% |
Other |
|
|
97.8 |
|
|
|
101.6 |
|
|
|
(3.8 |
) |
|
|
(4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Asia Pacific |
|
|
160.1 |
|
|
|
181.3 |
|
|
|
(21.2 |
) |
|
|
(12 |
)% |
Percentage of net revenues |
|
|
17.5 |
% |
|
|
23.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
912.6 |
|
|
$ |
764.2 |
|
|
$ |
148.4 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues in the Americas region increased in absolute dollars and as a percentage of total net
revenues in the three months ended March 31, 2010, compared to the same period in 2009, primarily
due to increased demand in the United States, partially offset by weakness in Canada. In the United
States, net revenues increased in absolute dollars and as a percentage of total net revenue, in the
three months ended March 31, 2010, compared to the same period in 2009, primarily due to increased
product demand from service provider and enterprise customers.
Net revenues in EMEA increased in absolute dollars in the three months ended March 31, 2010,
compared to the same period in 2009, primarily due to increased demand in Germany, U.K., and
Ireland. We experienced revenue increases in the service provider market and to a lesser extent,
the enterprise market. Net revenue in EMEA as a percentage of total net revenues decreased in the
three months ended March 31, 2010, compared to the same period in 2009, primarily due to the
strength of the Americas region.
Net revenues in APAC decreased in absolute dollars and as a percentage of total net revenues in the
three months ended March 31, 2010, compared to the same period in 2009, primarily due to lower
revenue in Japan. The decrease in net revenues from the APAC region was largely driven by reduced
service provider demand, partially offset by an increase in demand from enterprise customers in the
three months ended March 31, 2010, compared to the same period in 2009.
43
Net Revenues by Market and Customer
The following table presents the total net revenues by market (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
%Change |
|
Service Provider |
|
$ |
593.2 |
|
|
$ |
520.5 |
|
|
$ |
72.7 |
|
|
|
14 |
% |
Percentage of net revenues |
|
|
65.0 |
% |
|
|
68.1 |
% |
|
|
|
|
|
|
|
|
Enterprise |
|
|
319.4 |
|
|
|
243.7 |
|
|
|
75.7 |
|
|
|
31 |
% |
Percentage of net revenues |
|
|
35.0 |
% |
|
|
31.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
912.6 |
|
|
$ |
764.2 |
|
|
$ |
148.4 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We sell our high-performance network products and service offerings from both the Infrastructure
and SLT segments to two primary markets service provider and enterprise. The service provider
market includes wireline, wireless, and cable operators, as well as major internet content and
application providers. The enterprise market represents businesses; federal, state and local
governments; and research and education institutions.
Net revenues to the service provider market increased in absolute dollars in the three months ended
March 31, 2010, compared to the same period of 2009, primarily due to our customers increased
investment in new network build-outs and purchases of additional networking capacity to support
network growth. Service provider revenue decreased as a percentage of net revenues in the three
months ended March 31, 2010, compared to the same quarter a year ago, primarily due to the relative
strength in the enterprise market. Net revenues to the enterprise market increased in absolute
dollars and as a percentage of total net revenues in the three months ended March 31, 2010,
compared to the same period in 2009, primarily due to a combination of revenue growth from our
EX-series switching products, which were introduced in the first quarter of 2008 and our continued
focus on the enterprise market.
Verizon accounted for 11.2% and 10.0% of our net revenues for the three months ended March 31,
2010, and 2009, respectively.
Cost of Revenues
The following table presents cost of product and service revenues and the related gross margins (in
millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 (1) |
|
|
$ Change |
|
|
% Change |
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
222.4 |
|
|
$ |
193.1 |
|
|
$ |
29.3 |
|
|
|
15 |
% |
Percentage of net revenues |
|
|
24.4 |
% |
|
|
25.3 |
% |
|
|
|
|
|
|
|
|
Service |
|
|
78.2 |
|
|
|
68.8 |
|
|
|
9.4 |
|
|
|
14 |
% |
Percentage of net revenues |
|
|
8.5 |
% |
|
|
9.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
$ |
300.6 |
|
|
$ |
261.9 |
|
|
$ |
38.7 |
|
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net revenues |
|
|
32.9 |
% |
|
|
34.3 |
% |
|
|
|
|
|
|
|
|
Gross margin: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross margin |
|
$ |
498.8 |
|
|
$ |
394.8 |
|
|
$ |
104.0 |
|
|
|
26 |
% |
Percentage of product revenues |
|
|
69.2 |
% |
|
|
67.2 |
% |
|
|
|
|
|
|
|
|
Service gross margin |
|
|
113.2 |
|
|
|
107.5 |
|
|
|
5.7 |
|
|
|
5 |
% |
Percentage of service revenues |
|
|
59.1 |
% |
|
|
61.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin |
|
$ |
612.0 |
|
|
$ |
502.3 |
|
|
$ |
109.7 |
|
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net revenues |
|
|
67.1 |
% |
|
|
65.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior period information has been reclassified to conform to
the current periods presentation. |
44
The cost of product revenues increased in absolute dollars in the three months ended March 31,
2010, compared to the same period in 2009, primarily due an increase in spending on freight and an
increase in warranty provision. Product gross margin and product gross margin as a percentage of
product revenues increased primarily due to our continued efforts to manage cost and a change in
geographical mix in countries in which we sell our products at higher gross margins. Most of our
manufacturing, repair, and supply chain operations are outsourced to independent contract
manufacturers. Accordingly, most of our cost of revenues consists of payments to our independent
contract manufacturers for standard product costs. As of March 31, 2010, and 2009, we had 251 and
232 employees, respectively, in our manufacturing and operations organization that primarily manage
relationships with our contract manufacturers, manage our supply chain, and monitor and manage
product testing and quality.
The cost of service revenues increased in the three months ended March 31, 2010, compared to the
same period in 2009, primarily due to increased headcount and increased spending on service-related
spares to enhance our response to customer needs. Service-related headcount increased by 8%, to 862
employees in the three months ended March 31, 2010, compared to 796 employees in the same period of
2009. Total personnel-related costs as a percentage of service revenues were approximately 20% in
the three months ended March 31, 2010, compared to 19% in the same period in 2009. The increase in
personnel-related charges as a percentage of service revenues is primarily due to overall growth of
the Company as we expand to meet customer needs. Facilities and information technology (IT)
expenses related to cost of service revenues remained relatively flat in the three months ended
March 31, 2010, compared to the same period in 2009. The decrease in cost of service revenues and
operating expenses, including R&D, sales and marketing, and general and administrative (G&A)
expenses, due to foreign currency fluctuation was approximately 2% and 3% in the three months ended
March 31, 2010, and 2009, respectively.
Service gross margin increased in absolute dollars primarily due to increased service revenues
while service gross margin percentage decreased primarily as a result of higher service costs
driven by increased headcount and higher spares purchases to support the continued growth in the
business.
Facility and IT departmental costs are allocated to costs and operating expense based on usage and
headcount, respectively. Such costs increased by $2.9 million in the three months ended March 31,
2010, compared to the same period in 2009 due to an increase in headcount and the continued
build-out of our domestic and international development and test centers as well as applications to
support our internal operations. Facility and IT related headcount was 318 employees as of March
31, 2010, compared to 247 employees as of March 31, 2009. We expect to continue investment in our
company-wide IT infrastructure.
Operating Expenses
Personnel-related costs, including wages, commissions, bonuses, vacation, benefits, share-based
compensation, and travel, have historically been the primary driver of our operating expenses, and
we expect this trend to continue. We increased our total headcount by 7% to 7,453 employees as of
March 31, 2010, from 6,975 employees as of March 31, 2009, due to increases in almost all of our
organizations. During the first quarter of 2010, our headcount increased by approximately 218
employees compared to the fourth quarter of 2009, primarily due to our effort to grow our business.
The following table presents operating expenses (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 (1) |
|
|
$ Change |
|
|
% Change |
|
Research and development |
|
$ |
207.0 |
|
|
$ |
185.4 |
|
|
$ |
21.6 |
|
|
|
12 |
% |
Sales and marketing |
|
|
192.4 |
|
|
|
187.9 |
|
|
|
4.5 |
|
|
|
2 |
% |
General and administrative |
|
|
43.1 |
|
|
|
39.2 |
|
|
|
3.9 |
|
|
|
10 |
% |
Amortization of purchased intangible assets |
|
|
1.1 |
|
|
|
4.4 |
|
|
|
(3.3 |
) |
|
|
(75 |
)% |
Restructuring charges |
|
|
8.1 |
|
|
|
4.2 |
|
|
|
3.9 |
|
|
|
93 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
451.7 |
|
|
$ |
421.1 |
|
|
$ |
30.6 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
160.3 |
|
|
$ |
81.2 |
|
|
$ |
79.1 |
|
|
|
97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior period information has been reclassified to conform to the current
periods presentation. |
45
The following table highlights our operating expenses as a percentage of net revenues:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2010 |
|
2009 (1) |
Research and development |
|
|
22.7 |
% |
|
|
24.3 |
% |
Sales and marketing |
|
|
21.1 |
% |
|
|
24.5 |
% |
General and administrative |
|
|
4.7 |
% |
|
|
5.1 |
% |
Amortization of purchased intangible assets |
|
|
0.1 |
% |
|
|
0.6 |
% |
Restructuring charges |
|
|
0.9 |
% |
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
49.5 |
% |
|
|
55.1 |
% |
|
|
|
|
|
|
|
|
|
Operating income |
|
|
17.6 |
% |
|
|
10.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior period information has been reclassified to conform to the
current periods presentation. |
R&D expenses increased in the three months ended March 31, 2010, compared to the same period
in 2009, primarily due to strategic initiatives to expand our product portfolio and maintain our
technological advantage over competitors. R&D expenses primarily consist of personnel-related
expenses and other costs related to product development. Personnel-related costs increased
$19.2 million, or 16%, to $136.4 million in the three months ended March 31, 2010, compared to the
same period in 2009, primarily due to an 8% increase in headcount in our engineering organization,
from 3,188 to 3,458 employees, to support continued product innovation. Outside consulting and
other development expense also increased to support our product innovation initiatives.
Additionally, facilities and IT expenses, related to the R&D organization, increased to support
these engineering efforts.
Sales and marketing expenses increased in the three months ended March 31, 2010, compared to the
same period in 2009, primarily due to an increase in personnel-related expenses of $17.4 million.
The increase was primarily due to an increase in commission expense of $5.8 million and bonus
expense of $3.9 million due to higher revenues during the first quarter of 2010, whereas headcount
decreased from 2,164 to 2,152 employees due to restructuring of the sales and marketing
organization throughout 2009 and into the first quarter of 2010. Additionally, facilities and IT
expenses related to the sales and marketing organizations, decreased due to the slight decrease in
worldwide sales and marketing headcount.
G&A expenses increased in the three months ended March 31, 2010, compared to the same period in
2009, primarily due to an increase in personnel-related expenses and outside professional services.
Personnel-related costs increased by $5.7 million in the three months ended March 31, 2010,
compared to the same periods in 2009, primarily due to an 18% increase in headcount in our
worldwide G&A functions, from 348 to 412 employees, in anticipation of future growth in our
business. Outside professional service fees slightly decreased in the three months ended March 31,
2010, compared to the same periods in 2009, due to a decline in legal fees and business process
re-engineering costs. Facilities and IT expenses related to the G&A organization were relatively
flat, in absolute dollars, in the first quarter of 2010, compared to the first quarter of 2009.
Amortization of purchased intangible assets decreased in the three months ended March 31, 2010,
compared to the same period in 2009, due to a decrease in amortization expense of certain purchased
intangible assets that fully amortized in 2009.
We incurred $8.1 million and $4.2 million of restructuring charges in the three months ended March
31, 2010, and 2009, respectively, as a result of the implementation of a restructuring plan as part
of our 2009 cost reduction initiatives (the 2009 Restructuring Plan). For the remainder of 2010,
we do not expect to incur significant charges in connection with the 2009 Restructuring Plan. See
Note 7, Other Financial Information in the Notes to Condensed Consolidated Financial Statements in
Item 1 of Part I of this Quarterly Report on Form 10-Q, for further discussion of restructuring
charges.
46
Net Interest and Other Income, Loss on Equity Investment, and Income Tax (Benefit) Provision
The following table presents net interest and other income, loss on equity investment, and income
tax provision (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2010 |
|
2009 |
|
$ Change |
|
% Change |
Interest and other income, net |
|
$ |
1.5 |
|
|
$ |
2.0 |
|
|
$ |
(0.5 |
) |
|
|
(25 |
)% |
Percentage of net revenues |
|
|
0.1% |
|
|
0.3% |
|
|
|
|
|
|
|
|
Loss on equity investment |
|
|
|
|
|
|
(1.7 |
) |
|
|
1.7 |
|
|
|
N/M |
|
Percentage of net revenues |
|
|
N/M |
|
|
|
(0.2)% |
|
|
|
|
|
|
|
|
Income tax (benefit) provision |
|
|
(2.9 |
) |
|
|
85.9 |
|
|
|
(88.8 |
) |
|
|
(103 |
)% |
Percentage of net revenues |
|
|
(0.3)% |
|
|
11.2% |
|
|
|
|
|
|
|
|
Net interest and other income decreased in the three months ended March 31, 2010, compared to the
same period in 2009, primarily due to lower interest rates and an increase in interest expense from
our customer financing arrangements.
In the three months ended March 31, 2009, we recognized an impairment loss of $1.7 million on our
equity investment for changes in fair value that we deemed were other-than-temporary. We had no
impairment losses in the three months ended March 31, 2010.
We recorded a tax benefit of $2.9 million, or an effective tax benefit rate of 1.8%, and a tax
provision of $85.9 million or an effective tax rate of 105%, for the three months ended March 31,
2010, and 2009, respectively. The effective tax rate for the three months ended March 31, 2010,
differs from the federal statutory rate of 35% primarily due to a $54.1 million income tax benefit
resulting from a realized change in our estimate of unrecognized tax benefits related to
share-based compensation. This change in estimate was a result of the taxpayer favorable ruling by
the U.S. Court of Appeals for the Ninth Circuit (the Court) in Xilinx Inc. v. Commissioner. The
effective tax rate for the three months ended March 31, 2009 differed from the federal statutory
rate of 35% primarily due to a $61.8 million charge which resulted from changes in California
income tax laws enacted during the Companys first quarter of 2009, partially offset by the benefit
of the federal Research and Development credit. The tax rates for the three months ended March 31,
2010 and 2009 were favorably impacted by the benefit of earnings in foreign jurisdictions, which
are subject to lower tax rates.
For a further explanation of our income tax provision, see Note 13, Income Taxes, in Notes to
Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report.
47
Segment Information
For a description of the products and services for each segment, See Note 12, Segments, in Notes to
Condensed Consolidated Financial Statement in Item I of this Form 10-Q.
Financial information for each segment used by management to make financial decisions and allocate
resources is as follows (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009(1) |
|
|
$ Change |
|
|
% Change |
|
Net Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
556.1 |
|
|
$ |
454.4 |
|
|
$ |
101.7 |
|
|
|
22 |
% |
Service |
|
|
122.6 |
|
|
|
112.8 |
|
|
|
9.8 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Infrastructure revenues |
|
|
678.7 |
|
|
|
567.2 |
|
|
|
111.5 |
|
|
|
20 |
% |
Service Layer Technologies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
|
165.1 |
|
|
|
133.5 |
|
|
|
31.6 |
|
|
|
24 |
% |
Service |
|
|
68.8 |
|
|
|
63.5 |
|
|
|
5.3 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Service Layer Technologies revenues |
|
|
233.9 |
|
|
|
197.0 |
|
|
|
36.9 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
912.6 |
|
|
|
764.2 |
|
|
|
148.4 |
|
|
|
19 |
% |
Operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure |
|
|
176.5 |
|
|
|
111.9 |
|
|
|
64.6 |
|
|
|
58 |
% |
Service Layer Technologies |
|
|
35.1 |
|
|
|
13.1 |
|
|
|
22.0 |
|
|
|
168 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total management operating income |
|
|
211.6 |
|
|
|
125.0 |
|
|
|
86.6 |
|
|
|
69 |
% |
Amortization of purchased intangible assets |
|
|
(1.1 |
) |
|
|
(5.7 |
) |
|
|
4.6 |
|
|
|
(81 |
)% |
Share-based compensation expense |
|
|
(40.6 |
) |
|
|
(33.6 |
) |
|
|
(7.0 |
) |
|
|
21 |
% |
Share-based payroll tax expense |
|
|
(1.6 |
) |
|
|
(0.3 |
) |
|
|
(1.3 |
) |
|
|
433 |
% |
Restructuring charges |
|
|
(8.1 |
) |
|
|
(4.2 |
) |
|
|
(3.9 |
) |
|
|
93 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
|
160.2 |
|
|
|
81.2 |
|
|
|
79.0 |
|
|
|
97 |
% |
Interest and other income, net |
|
|
1.5 |
|
|
|
2.0 |
|
|
|
(0.5 |
) |
|
|
(25 |
)% |
Loss on equity investment |
|
|
|
|
|
|
(1.7 |
) |
|
|
1.7 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and noncontrolling interest |
|
$ |
161.7 |
|
|
$ |
81.5 |
|
|
$ |
80.2 |
|
|
|
98 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior period information has been reclassified to conform to
the current periods presentation. |
48
The following table presents financial information for each segment as a percentage of total
net revenues:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009(1) |
|
Net Revenues: |
|
|
|
|
|
|
|
|
Infrastructure: |
|
|
|
|
|
|
|
|
Product |
|
|
60.9 |
% |
|
|
59.4 |
% |
Service |
|
|
13.5 |
% |
|
|
14.8 |
% |
|
|
|
|
|
|
|
Total Infrastructure revenues |
|
|
74.4 |
% |
|
|
74.2 |
% |
Service Layer Technologies: |
|
|
|
|
|
|
|
|
Product |
|
|
18.1 |
% |
|
|
17.5 |
% |
Service |
|
|
7.5 |
% |
|
|
8.3 |
% |
|
|
|
|
|
|
|
Total Service Layer Technologies revenues |
|
|
25.6 |
% |
|
|
25.8 |
% |
|
|
|
|
|
|
|
Total net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
Operating income: |
|
|
|
|
|
|
|
|
Infrastructure |
|
|
19.3 |
% |
|
|
14.7 |
% |
Service Layer Technologies |
|
|
3.9 |
% |
|
|
1.7 |
% |
|
|
|
|
|
|
|
Total management operating income |
|
|
23.2 |
% |
|
|
16.4 |
% |
Amortization of purchased intangible assets |
|
|
(0.1 |
)% |
|
|
(0.8 |
)% |
Share-based compensation expense |
|
|
(4.4 |
)% |
|
|
(4.4 |
)% |
Share-based payroll tax expense |
|
|
(0.2 |
)% |
|
|
|
|
Restructuring charges |
|
|
(0.9 |
)% |
|
|
(0.6 |
)% |
|
|
|
|
|
|
|
Total operating income |
|
|
17.6 |
% |
|
|
10.6 |
% |
Interest and other income, net |
|
|
0.1 |
% |
|
|
0.2 |
% |
Loss on equity investment |
|
|
|
|
|
|
(0.1 |
)% |
|
|
|
|
|
|
|
Income before income taxes and noncontrolling interest |
|
|
17.7 |
% |
|
|
10.7 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior period information has been reclassified to conform to
the current periods presentation. |
Infrastructure Segment
An analysis of the change in revenue for the Infrastructure segment, and the change in units, can
be found above in the section titled Net Revenues.
Infrastructure segment operating income increased in the three months ended March 31, 2010,
compared to the same period in 2009, primarily due to revenue increases discussed in the section
above titled Net Revenues. Infrastructure product gross margin and gross margin percentage
increased in the three months ended March 31, 2010, compared to the same period in 2009, primarily
due to our continued efforts to manage costs and a change in geographic mix that favored higher
margin regions.
In the three months ended March 31, 2010, compared to the same period in 2009, our R&D expense
increased in absolute dollars as we continued our R&D investment efforts to produce innovative
products and expand our Infrastructure product portfolio. Our sales and marketing expenses also
increased in absolute dollars as we amplified our efforts to reach enterprise and service provider
customers. In the three months ended March 31, 2010, compared to the same period in 2009, R&D
expense and sales and marketing expense each decreased as a percentage of Infrastructure net
revenues primarily due to the increase in net revenues. We allocate sales and marketing, G&A, and
facility and IT expenses to the Infrastructure segment generally based upon revenue, usage, and
headcount.
SLT Segment
An analysis of the change in revenue for the SLT segment, and the change in units, can be found
above in the section titled Net Revenues.
SLT segment operating income increased in the three months ended March 31, 2010, compared to the
same period in 2009, primarily due to revenue growth discussed above in the section titled Net
Revenues. SLT product gross margin and gross margin percentage was relatively flat in the three
months ended March 31, 2010, compared to the
49
same period in 2009, primarily due to our cost cutting initiatives, offset by product mix and
pricing. R&D related costs increased in absolute dollars in the three months ended March 31, 2010,
compared to the same period in 2009, primarily due to our continued efforts to expand our product
features and functionality based upon the trends in the marketplace. Additionally, sales and
marketing expenses increased in absolute dollars in the three months ended March 31, 2010, compared
to the same period in 2009, as we increased our efforts to reach enterprise and service provider
customers. In the three months ended March 31, 2010, compared to the same period in 2009, R&D
expense and sales and marketing expense each decreased as a percentage of SLT net revenues
primarily due to the increase in net revenues. We allocate sales and marketing, G&A, as well as
facility and IT expenses to the SLT segment generally based on revenue, usage, and headcount. We
have historically experienced seasonality and fluctuations in the demand for our SLT products,
which may result in greater variations in our quarterly revenue. For example, many companies in our
industry experience adverse seasonal fluctuations in customer spending patterns, particularly in
the first quarter.
Amortization of Purchased Intangible Assets, Share-Based Compensation and Related Payroll Tax
Expense, Restructuring Charges, Net Interest and Other Income, and Loss on Equity Investment.
See Operating Expenses and Net Interest and Other Income, Loss on Equity Investment, and Income
Tax (Benefit) Provision sections above for further discussion.
Key Performance Measures
In addition to the financial metrics included in the condensed consolidated financial statements,
we use the following key performance measures to assess quarterly operating results:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2010 |
|
2009 |
Days sales outstanding (DSO) (a) |
|
|
40 |
|
|
|
43 |
|
Book-to-bill ratio(b) |
|
|
<1 |
|
|
|
>1 |
|
|
|
|
(a) |
|
We calculate DSO at the end of the applicable quarter based on the ratio of ending accounts
receivable, net of allowances, divided by average daily net sales for the preceding 90 days.
DSO decreased in the first quarter of 2010, compared to the first quarter of 2009, primarily
due to the Companys strong cash collection efforts during the quarter. |
|
(b) |
|
Book-to-bill ratio represents the ratio of product orders booked divided by product revenues
during the period. |
Liquidity and Capital Resources
The following sections discuss the effects of changes in our consolidated balance sheet and cash
flows, contractual obligations, and our stock repurchase program on our liquidity and capital
resources.
Overview
Historically, we have funded our business primarily through our operating activities and the
issuance of our common stock. The following table shows our capital resources (in millions, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
% Change |
|
Working capital |
|
$ |
1,741.8 |
|
|
$ |
1,503.2 |
|
|
$ |
238.6 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,723.9 |
|
|
$ |
1,604.7 |
|
|
$ |
119.2 |
|
|
|
7 |
% |
Short-term investments |
|
|
592.7 |
|
|
|
570.5 |
|
|
|
22.2 |
|
|
|
4 |
% |
Long-term investments |
|
|
450.5 |
|
|
|
483.5 |
|
|
|
(33.0 |
) |
|
|
(7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and investments |
|
$ |
2,767.1 |
|
|
$ |
2,658.7 |
|
|
$ |
108.4 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of our working capital are cash and cash equivalents, short-term
investments, and accounts receivable, reduced by accounts payable, income tax payable, accrued
liabilities, and short-term deferred revenue. Working capital increased by $238.6 million in the
three months ended March 31, 2010, primarily due to an increase in cash, cash equivalents, and
short-term investments. The increase in cash and cash equivalents was primarily due to cash
generated from operations and proceeds from common stock issued to employees. An analysis
50
of the increase in cash and cash equivalents can be found below in the section titled Summary of
Cash Flows. The increase in short-term investments, was due to the shift of funds as long term
investments reached maturity with one year or less.
Stock Repurchase Activities
In February 2010, our Board approved an additional stock repurchase program (the 2010 Stock
Repurchase Program), which authorized us to repurchase of up to $1.0 billion of our common stock.
This new authorization is in addition to the stock repurchase program approved by the Board in
March 2008 (the 2008 Stock Repurchase Program), which also enabled us to repurchase up to
$1.0 billion of our common stock.
During the three months ended March 31, 2010, we repurchased approximately 2.8 million shares of
our common stock at an average price of $27.04 per share for an aggregate purchase price of
$74.4 million under the 2008 Stock Repurchase Program and 2010 Stock Repurchase Program. As of
March 31, 2010, these stock repurchase programs had remaining aggregate authorized funds of
$1,244.2 million.
All shares of common stock purchased under our stock repurchase programs have been retired. Future
share repurchases under our stock repurchase programs will be subject to a review of the
circumstances at that time and will be made from time to time in private transactions or open
market purchases as permitted by securities laws and other legal requirements. These programs may
be discontinued at any time.
Summary of Cash Flows
In the three months ended March 31, 2010, cash and cash equivalents increased by $119.2 million.
This increase was the result of cash generated by our operating and financing activities of
$88.5 million and $63.3 million, respectively, partially offset by cash used in our investing
activities of $32.6 million.
Operating Activities
We generated cash from operating activities of $88.5 million in the three months ended March 31,
2010, compared to $163.9 million in the same period of 2009. The decrease of $75.4 million in the
2010 period compared to a year ago was chiefly due to:
|
|
Net income of $164.6 million adjusted by non-cash charges of $42.8 million for the three
months ended March 31, 2010, as compared to net loss of $4.5 million adjusted by non-cash
charges of $118.1 million for the same period in 2009. Net income increased primarily as a
result of the increase in revenues during the quarter and the non-recurring income tax benefit
of $54.1 million we received from a change in estimate of unrecognized tax benefits related to
share-based compensation. The change resulted from the decision in the first quarter of 2010
of the U.S. Court of Appeals for the Ninth Circuit in Xilinx Inc. v. Commissioner. The
non-cash charges primarily related to depreciation and amortization expenses, share-based
compensation, loss on equity investment, excess tax benefits from employee share-based
compensation, and deferred income taxes. |
|
|
Net changes in operating assets and liabilities resulted in cash outflow of $118.9 million
during the three months ended March 31, 2010, compared to cash inflow of $50.2 million for the
same period in 2009. The decrease of $169.1 million was primarily attributable to a decrease
in other accrued litigation due to payments of $169.3 million during the first quarter of
2010. The decrease in accounts payable and accrued compensation was less in the first quarter
of 2010 as compared to the first quarter of 2009, primarily due to the timing of payment to
our suppliers and lower commission and bonus payout in the first quarter of 2010, as compared
to the same period in 2009. |
51
Investing Activities
For the three months ended March 31, 2010, net cash used by investing activities was $32.6 million
compared to $63.3 million of net cash used by investing activities in the three months ended March
31, 2009. The change was primarily due to $12.8 million of proceeds from sales and maturities of
investments, net of purchases in the first quarter of 2009 as compared to $30.0 million of
investment purchases, net of sales and maturities, for the same period a year ago.
Financing Activities
Net cash generated by financing activities was $63.3 million for the three months ended March 31,
2010 compared to $114.7 million used in financing activities during the same period in 2009. In the
three months ended March 31, 2010, we generated cash proceeds of $118.9 million from common stock
issued to employees, compared to cash proceeds of $22.6 million for the same period a year ago.
This increase was partially offset by cash usage of $76.2 million to repurchase our common stock,
as compared to $119.7 million in the same period in 2009. The significant increase in funds from
the common stock issuances, which mostly related to employee stock option exercises, was driven
primarily by the higher stock prices during the quarter ended March 31, 2010, as compared to 2009.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of March 31, 2010.
Contractual Obligations
Our principal commitments primarily consist of obligations outstanding under operating leases,
purchase commitments, tax liabilities, and other contractual obligations.
Our contractual obligations under operating leases primarily relate to our leased facilities under
our non-cancelable operating leases. Rent payments are allocated to costs and operating expenses in
our condensed consolidated statements of operations. We occupy approximately 2.0 million square
feet worldwide under operating leases. The majority of our office space is in North America,
including our corporate headquarters in Sunnyvale, California. Our longest lease expires in
November 2022. As of March 31, 2010, future minimum payments under our non-cancelable operating
leases, net of committed sublease income, were $302.1 million, of which $38.9 million will be paid
over the remaining nine months of 2010.
In order to reduce manufacturing lead times and ensure adequate component supply, contract
manufacturers utilized by us place non-cancelable, non-returnable (NCNR) orders for components
based on our build forecasts. As of March 31, 2010, there were NCNR component orders placed by the
contract manufacturers with a value of $110.8 million. The contract manufacturers use the
components to build products based on our forecasts and on purchase orders that we have received
from customers. Generally, we do not own the components, and title to the products transfers from
the contract manufacturers to us and immediately to our customers upon delivery at a designated
shipment location. If the components remain unused or the products remain unsold for specified
period, we may incur carrying charges or obsolete materials charges for components that the
contract manufacturers purchased to build products to meet our forecast or customer orders. As of
March 31, 2010, we had accrued $28.2 million based on our estimate of such charges.
As of March 31, 2010, we included $97.7 million in current and long-term liabilities in the
condensed consolidated balance sheet for unrecognized tax positions. It is reasonably possible that
we may reach agreement on certain issues and, as a result, the amount of the liability for
unrecognized tax benefits may decrease by approximately $1.5 million within the next 12 months. At
this time, we are unable to make a reasonably reliable estimate of the timing of payments related
to the additional $96.2 million in liabilities due to uncertainties in the timing of tax audit
outcomes.
52
As of March 31, 2010, other contractual obligations primarily consisted of indemnity-related
escrows of $1.3 million, $19.1 million remaining balance for a data center hosting agreement that
requires payments through the end of April 2013, and $7.7 million under a software subscription
agreement that requires payments through the end of January 2011.
Business Acquisition
In April 2010, we announced that we had entered into a definitive agreement to acquire Ankeena
Networks, Inc., a privately-held provider of new media infrastructure technology for a total
consideration of less than $100 million in cash and assumed employee equity awards. The acquisition
of Ankeena Networks was consummated on April 19, 2010.
Liquidity and Capital Resource Requirements
Liquidity and capital resources may be impacted by our operating activities as well as acquisitions
and investments in strategic relationships that we have made or we may make in the future.
Additionally, if we were to repurchase additional shares of our common stock under our stock
repurchase programs, our liquidity may be impacted. As of March 31, 2010, we have over 50% of our
cash and investment balances held outside of the U.S., which may be subject to U.S. taxes if
repatriated.
Based on past performance and current expectations, we believe that our existing cash and cash
equivalents, short-term, and long-term investments, together with cash generated from operations as
well as cash generated from the exercise of employee stock options and purchases under our employee
stock purchase plan will be sufficient to fund our operations and anticipated growth for at least
the next 12 months. We believe our working capital is sufficient to meet our liquidity requirements
for capital expenditures, commitments, and other liquidity requirements associated with our
existing operations during the same period. However, our future liquidity and capital requirements
may vary materially from those now planned depending on many factors, including:
|
|
the overall levels of sales of our products, the mix of product sales, and gross profit
margins; |
|
|
our business, product, capital expenditures and R&D plans; |
|
|
repurchases of our common stock; |
|
|
incurrence and repayment of debt; |
|
|
litigation expenses, settlements, and judgments, or similar items related to resolution of
tax audits; |
|
|
volume price discounts and customer rebates; |
|
|
the levels of accounts receivable that we maintain; |
|
|
acquisitions and/or funding of other businesses, assets, products, or technologies; |
|
|
changes in our compensation policies; |
|
|
capital improvements for new and existing facilities; |
|
|
technological advances; |
|
|
our competitors responses to our products and/or pricing; |
|
|
our relationships with suppliers, partners, and customers; |
|
|
possible future investments in raw material and finished goods inventories;
|
53
|
|
expenses related to future restructuring plans, if any; |
|
|
tax expense associated with share-based awards; |
|
|
issuance of share-based awards and the related payment in cash for withholding taxes in the
current year and possibly during future years; |
|
|
the level of exercises of stock options and stock purchases under our equity incentive plans;
and |
|
|
general economic conditions and specific conditions in our industry and markets, including
the effects of disruptions in global credit and financial markets, international conflicts,
and related uncertainties. |
Factors That May Affect Future Results
A description of the risk factors associated with our business is included under Risk Factors in
Item 1A of Part II of this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We maintain an investment portfolio of various holdings, types, and maturities. The values of our
investments are subject to market price volatility. In addition, as of March 31, 2010, over 50% of
our cash and marketable securities were held in non-U.S. domiciled countries. Our marketable
securities are generally classified as available-for-sale and, consequently, are recorded on our
condensed consolidated balance sheet at fair value with unrealized gains or losses reported as a
separate component of accumulated other comprehensive income (loss).
At any time, a rise in interest rates could have a material adverse impact on the fair value of our
investment portfolio. Conversely, declines in interest rates could have a material impact on
interest income from our investment portfolio. We do not currently hedge these interest rate
exposures. We recognized immaterial gains and losses during the three months ended March 31, 2010,
and 2009, related to the sales of our investments.
Foreign Currency Risk and Foreign Exchange Forward Contracts
Periodically, we use derivatives to hedge against fluctuations in foreign exchange rates. We do not
enter into derivatives for speculative or trading purposes.
We use foreign currency forward contracts to mitigate variability in gains and losses generated
from the re-measurement of certain monetary assets and liabilities denominated in non-functional
currencies. These derivatives are carried at fair value with changes recorded in other income and
expense, net, in the same period as the changes in the fair value from the re-measurement of the
underlying assets and liabilities. These foreign exchange contracts have maturities of
approximately two months.
Our sales and costs of revenues are primarily denominated in U.S. dollars. Our cost of service
revenue and operating expenses are denominated in U.S. dollars as well as other foreign currencies
including the British Pound, the Euro, Indian Rupee, and Japanese Yen. Periodically, we use foreign
currency forward and/or option contracts to hedge certain forecasted foreign currency transactions
relating to cost of service revenue and operating expenses. These derivatives are designated as
cash flow hedges and have maturities of less than one year. The effective portion of the
derivatives gain or loss is initially reported as a component of accumulated other comprehensive
income (loss) and, upon occurrence of the forecasted transaction, is subsequently reclassified into
the line item in the condensed consolidated statements of operations to which the hedged
transaction relates. We record the ineffectiveness of the hedging instruments, which was immaterial
during the three months ended March 31, 2010, and 2009, in other income and expense, net, on our
condensed consolidated statements of operations. The decrease in operating
54
expenses, including cost of service revenue, R&D, sales and marketing, and G&A expenses, due to
foreign currency fluctuations was approximately 2% and 3% in the three months ended March 31, 2010,
and 2009, respectively.
Equity Price Risk
Our portfolio of publicly-traded equity securities is inherently exposed to equity price risk as
the stock market fluctuates. We monitor our publicly-traded equity investments for impairment on a
periodic basis. In the event that the carrying value of a publicly-traded equity investment exceeds
its fair value, and we determine the decline in the value to be other than temporary, we reduce the
carrying value to its current fair value. We do not purchase our publicly-traded equity securities
with the intent to use them for trading or speculative purposes. They are classified as
available-for-sale securities in our condensed consolidated balance sheets. The aggregate fair
value of our marketable equity securities was $5.5 million and $5.4 million as of March 31, 2010,
and December 31, 2009, respectively. Additionally, our non-qualified deferred compensation (NQDC)
plan may also hold publicly-traded securities. Investments under the NQDC plan are considered
trading securities and are reported at fair value on our condensed consolidated balance sheets. As
of March 31, 2010, and December 31, 2009, the total investment under the NQDC plan was $6.1 million
and $4.7 million, respectively. A hypothetical 30% adverse change in the stock prices of our
portfolio of publicly-traded equity securities would result in an immaterial loss.
In addition to publicly-traded equity securities, we have also invested in privately-held
companies. These investments are carried at cost. The aggregate cost of our investments in
privately-held companies was $18.6 million and $13.9 million as of March 31, 2010, and December 31,
2009, respectively.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Attached, as exhibits to this report are certifications of our principal executive officer and
principal financial officer, which are required in accordance with Rule 13a-14 of the Securities
Exchange Act of 1934, as amended (the Exchange Act). This Controls and Procedures section
includes information concerning the controls and related evaluations referred to in the
certifications and it should be read in conjunction with the certifications for a more complete
understanding of the topics presented.
We carried out an evaluation, under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, of the effectiveness of
the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act. Based upon that evaluation, our principal executive officer
and principal financial officer concluded that, as of the end of the period covered in this report,
our disclosure controls and procedures were effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in Securities and Exchange Commission
rules and forms and is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.
Changes in Internal Controls
We have initiated a multi-year implementation to upgrade certain key internal systems and
processes, including our company-wide human resources management system, customer relationship
management (CRM) system, and our enterprise resource planning (ERP) system. This project is the
result of our normal business process to evaluate and upgrade or replace our systems software and
related business processes to support our evolving operational needs. In the first quarter of 2010,
we implemented a major upgrade of our CRM system. There were no changes in our internal control
over financial reporting that occurred during the first quarter of 2010 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
55
Inherent Limitations on Effectiveness of Controls
Our management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
does not expect that our disclosure controls or our internal control over financial reporting will
prevent or detect all error and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control systems objectives
will be met. Our controls and procedures are designed to provide reasonable assurance that our
control systems objective will be met and our CEO and CFO have concluded that our disclosure
controls and procedures are effective at the reasonable assurance level. The design of a control
system must reflect the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that misstatements due to error
or fraud will not occur or that all control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by collusion of two or
more people, or by management override of the controls. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events. Projections of any
evaluation of controls effectiveness to future periods are subject to risks. Over time, controls
may become inadequate because of changes in conditions or deterioration in the degree of compliance
with policies or procedures.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under Legal Proceedings section in Note 14 Commitments and
Contingencies in the Notes to Condensed Consolidated Financial Statements in Item 1 Part I of this
Quarterly Report on Form 10-Q, is incorporated herein by reference.
Item 1A. Risk Factors
Factors That May Affect Future Results
Investments in equity securities of publicly-traded companies involve significant risks. The market
price of our stock has historically reflected a higher multiple of expected future earnings than
many other companies. Accordingly, even small changes in investor expectations for our future
growth and earnings, whether as a result of actual or rumored financial or operating results,
changes in the mix of the products and services sold, acquisitions, industry changes or other
factors, could trigger, and have triggered in the past, significant fluctuations in the market
price of our common stock. Investors in our securities should carefully consider all of the
relevant factors, including, but not limited to, the following factors, that could affect our stock
price.
Our quarterly results are inherently unpredictable and subject to substantial fluctuations, and, as
a result, we may fail to meet the expectations of securities analysts and investors, which could
adversely affect the trading price of our common stock.
Our revenues and operating results may vary significantly from quarter-to-quarter due to a number
of factors, many of which are outside of our control and any of which may cause our stock price to
fluctuate.
The factors that may affect the unpredictability of our quarterly results include, but are not
limited to: limited visibility into customer spending plans, changes in the mix of products and
services sold, changes in geographies in which our products and services are sold, changing market
conditions, including current and potential customer consolidation, competition, customer
concentration, long sales and implementation cycles, regional economic and political conditions,
and seasonality. For example, many companies in our industry experience adverse seasonal
fluctuations in customer spending patterns, particularly in the first and third quarters.
As a result of these risk factors, we believe that quarter-to-quarter comparisons of operating
results are not necessarily a good indication of what our future performance will be. It is likely
that in some future quarters, our
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operating results may be below the expectations of securities analysts or investors, in which case
the price of our common stock may decline. Such a decline could occur, and has occurred in the
past, even when we have met our publicly stated revenues and/or earnings guidance.
Fluctuating economic conditions make it difficult to predict revenues for a particular period and a
shortfall in revenues or increase in costs of production may harm our operating results.
Our revenues depend significantly on general economic conditions and the demand for products in the
markets in which we compete. Economic weakness, customer financial difficulties, and constrained
spending on network expansion have recently resulted, and may in the future result, in decreased
revenues and earnings and could negatively impact our ability to forecast sales and operating
results and our ability to forecast and manage our contract manufacturer relationships. In
addition, recent turmoil in the global financial markets and associated economic weakness, or
recession, particularly in the United States and Europe, as well as turmoil in the geopolitical
environment in many parts of the world, may continue to put pressure on global economic conditions,
which could lead to continued reduced demand for our products and/or higher costs of production.
Economic weakness may also lead to longer collection cycles for payments due from our customers, an
increase in customer bad debt, restructuring initiatives and associated expenses, and impairment of
investments. Furthermore, the recent disruption in worldwide credit markets may adversely impact
the ability of our customers to adequately fund their expected capital expenditures, which could
lead to delays or cancellations of planned purchases of our products or services. In addition, our
operating expenses are largely based on anticipated revenue trends and a high percentage of our
expenses is, and will continue to be, fixed in the short-term.
Uncertainty about future economic conditions makes it difficult to forecast operating results and
to make decisions about future investments. Future or continued economic weakness, failure of our
customers and markets to recover from such weakness, customer financial difficulties, increases in
costs of production, and reductions in spending on network maintenance and expansion could have a
material adverse effect on demand for our products and consequently on our business, financial
condition, and results of operations.
A limited number of our customers comprise a significant portion of our revenues and any decrease
in revenues from these customers could have an adverse effect on our net revenues and operating
results.
A substantial majority of our net revenues depend on sales to a limited number of customers and
distribution partners. For example, Verizon accounted for greater than 10% of our net revenues for
the three months ended March 31, 2010 and March 31, 2009. This customer concentration increases the
risk of quarterly fluctuations in our revenues and operating results. Changes in the business
requirements, vendor selection, or purchasing behavior of our key customers or potential new
customers could significantly decrease sales to such customers. In addition, the recent disruption
in worldwide credit markets may adversely impact the ability of our customers to adequately fund
their expected capital expenditures, which could lead to delays or cancellations of planned
purchases of our products or services. Any of these factors could adversely affect our business,
financial condition, and results of operations.
In addition, in recent years, there has been consolidation in the telecommunications industry (for
example, the acquisitions of AT&T, Inc., MCI, Inc., and BellSouth Corporation) and consolidation
among the large vendors of telecommunications equipment and services (for example, the acquisition
of Redback by Ericsson, the joint venture of NSN, and the acquisition of Foundry Networks by
Brocade). Such consolidation may cause our customers who are involved in these transactions to
suspend or indefinitely reduce their purchases of our products or have other unforeseen
consequences that could harm our business, financial condition, and results of operations.
If we receive Infrastructure product orders late in a quarter, we may be unable to recognize
revenue for these orders in the same period, which could adversely affect our quarterly revenues.
Generally, our Infrastructure products are not stocked by distributors or resellers due to their
cost and complexity and configurations required by our customers, and we generally build such
products as orders are received. If orders for these products are received late in any quarter, we
may not be able to build, ship, and recognize revenue for these orders in the same period, which
could adversely affect our ability to meet our expected revenues for such quarter.
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We face intense competition that could reduce our revenues and adversely affect our financial
results.
Competition is intense in the markets that we address. The infrastructure market has historically
been dominated by Cisco with other companies such as Alcatel-Lucent, Brocade, Ericsson, Extreme
Networks, Hewlett Packard Company, and Huawei providing products to a smaller segment of the
market. In addition, a number of other small public and private companies have products or have
announced plans for new products to address the same challenges and markets that our products
address.
In the SLT market, we face intense competition from a broader group of companies such as
CheckPoint, Cisco, Fortinet, F5 Networks, and Riverbed. In addition, a number of other small public
and private companies have products or have announced plans for new products to address the same
challenges and markets that our products address.
In addition, actual or speculated consolidation among competitors, or the acquisition of our
partners and/or resellers by competitors, can increase the competitive pressures faced by us. In
this regard, Ericsson acquired Redback in 2007 and Brocade acquired Foundry Networks in 2009. A
number of our competitors have substantially greater resources and can offer a wider range of
products and services for the overall network equipment market than we do. If we are unable to
compete successfully against existing and future competitors on the basis of product offerings or
price, we could experience a loss in market share and revenues and/or be required to reduce prices,
which could reduce our gross margins, and which could materially and adversely affect our business,
financial condition, and results of operations.
We rely on value-added resellers, distribution, and original equipment manufacturer partners to
sell our products, and disruptions to, or our failure to effectively develop and manage our
distribution channel and the processes and procedures that support it could adversely affect our
ability to generate revenues from the sale of our products.
Our future success is highly dependent upon establishing and maintaining successful relationships
with a variety of value-added reseller and distribution partners, including our worldwide strategic
partners such as Ericsson, IBM, and NSN. The majority of our revenues are derived through
value-added resellers and distributors, most of which also sell competitors products. Our revenues
depend in part on the performance of these partners. The loss of or reduction in sales to our
value-added resellers or distributors could materially reduce our revenues. For example, in 2006,
one of our largest resellers, Lucent, merged with Alcatel, a competitor of ours. As a result of
becoming a competitor, their resale of our products declined subsequent to the merger, and we
ultimately terminated our reseller agreement. Our competitors may in some cases be effective in
providing incentives to current or potential resellers and distributors to favor their products or
to prevent or reduce sales of our products. If we fail to develop and maintain relationships with
our partners, fail to develop new relationships with value-added resellers and distributors in new
markets, or expand the number of distributors and resellers in existing markets, fail to manage,
train or motivate existing value-added resellers and distributors effectively, or if these partners
are not successful in their sales efforts, sales of our products may decrease, and our business,
financial condition, and results of operations would suffer.
In addition, we recognize a portion of our revenues based on a sell-through model using information
provided by our distributors. If those distributors provide us with inaccurate or untimely
information, the amount or timing of our revenues could be adversely impacted.
Further, in order to develop and expand our distribution channel, we must continue to scale and
improve our processes and procedures that support it, and those processes and procedures may become
increasingly complex and inherently difficult to manage. For example, we recently entered into an
agreement to form a joint venture with NSN to develop and resell joint carrier Ethernet solutions
and entered into OEM agreements with Dell and IBM where they will rebrand and resell our products
as part of their product portfolios. These relationships are complex and require additional
processes and procedures that may be challenging and costly to implement, maintain and manage. Our
failure to successfully manage and develop our distribution channel and the processes and
procedures that support it could adversely affect our ability to generate revenues from the sale of
our products.
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Our ability to process orders and ship products in a timely manner is dependent in part on our
business systems and performance of the systems and processes of third parties such as our contract
manufacturers, suppliers, or other partners, as well as interfaces with the systems of such third
parties. If our systems, the systems and processes of those third parties, or the interfaces
between them experience delays or fail, our business processes and our ability to build and ship
products could be impacted, and our financial results could be harmed.
Some of our business processes depend upon our IT systems, the systems and processes of third
parties, and on interfaces with the systems of third parties. For example, our order entry system
feeds information into the systems of our contract manufacturers, which enable them to build and
ship our products. If those systems fail or are interrupted, our processes may function at a
diminished level or not at all. This could negatively impact our ability to ship products or
otherwise operate our business, and our financial results could be harmed. For example, although it
did not adversely affect our shipments, an earthquake in late December of 2006 disrupted
communications with China, where a significant part of our manufacturing occurs.
We also rely upon the performance of the systems and processes of our contract manufacturers to
build and ship our products. If those systems and processes experience interruption or delay, our
ability to build and ship our products in a timely manner may be harmed. For example, as we have
expanded our contract manufacturing base to China, we have experienced instances where our contract
manufacturer was not able to ship products in the time periods expected by us. If we are not able
to ship our products or if product shipments are delayed, our ability to recognize revenue in a
timely manner for those products would be affected and our financial results could be harmed.
We are currently implementing upgrades to key internal systems and processes, and problems with the
design or implementation of these systems and processes could interfere with our business and
operations.
We have initiated a multi-year project to upgrade certain key internal systems and processes,
including our company-wide human resources management system, our customer relationship management
(CRM) system and enterprise resource planning (ERP) system. We have invested, and will continue
to invest, significant capital and human resources in the design and implementation of these
systems and processes, which may be disruptive to our underlying business. Any disruptions or
delays in the design and implementation of the new systems or processes, particularly any
disruptions or delays that impact our operations, could adversely affect our ability to process
customer orders, ship products, provide service and support to our customers, bill and track our
customers, fulfill contractual obligations, record and transfer information in a timely and
accurate manner, file SEC reports in a timely manner, or otherwise run our business. Even if we do
not encounter these adverse effects, the design and implementation of these new systems and
processes may be much more costly than we anticipated. If we are unable to successfully design and
implement these new systems and processes as planned, or if the implementation of these systems and
processes is more costly than anticipated, our business, financial condition, and results of
operations could be negatively impacted.
Governmental regulations affecting the import or export of products could negatively affect our
revenues.
The United States and various foreign governments have imposed controls, export license
requirements, and restrictions on the import or export of some technologies, especially encryption
technology. In addition, from time to time, governmental agencies have proposed additional
regulation of encryption technology, such as requiring the escrow and governmental recovery of
private encryption keys. Governmental regulation of encryption technology and regulation of imports
or exports, or our failure to obtain required import or export approval for our products, could
harm our international and domestic sales and adversely affect our revenues. In addition, failure
to comply with such regulations could result in penalties, costs, and restrictions on export
privileges.
We expect gross margin to vary over time, and our recent level of product gross margin may not be
sustainable.
Our product gross margins will vary from quarter-to-quarter, and the recent level of gross margins
may not be sustainable and may be adversely affected in the future by numerous factors, including
product mix shifts, increased price competition in one or more of the markets in which we compete,
increases in material or labor costs, excess product component or obsolescence charges from our
contract manufacturers, increased costs due to changes in component pricing or charges incurred due
to component holding periods if our forecasts do not accurately
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anticipate product demand, warranty related issues, or our introduction of new products or entry
into new markets with different pricing and cost structures.
If we do not successfully anticipate market needs and opportunities, and develop products and
product enhancements that meet those needs and opportunities, or if those products are not made
available in a timely manner or do not gain market acceptance, we may not be able to compete
effectively and our ability to generate revenues will suffer.
We cannot guarantee that we will be able to anticipate future market needs and opportunities or be
able to develop new products or product enhancements to meet such needs or opportunities in a
timely manner or at all. If we fail to anticipate market requirements or fail to develop and
introduce new products or product enhancements to meet those needs in a timely manner, such failure
could substantially decrease or delay market acceptance and sales of our present and future
products, which would significantly harm our business, financial condition, and results of
operations. Even if we are able to anticipate, develop, and commercially introduce new products and
enhancements, there can be no assurance that new products or enhancements will achieve widespread
market acceptance.
For example, in 2008, we announced new products designed to address the Ethernet switching market,
a market in which we had not had a historical presence. In addition, in 2009, we announced plans to
develop and introduce new data center products with our Project Stratus and mobility solutions with
our Project Falcon. If these or other new products do not gain market acceptance at a sufficient
rate of growth, our ability to meet future financial targets may be adversely affected. In
addition, if we fail to achieve market acceptance deliver new or announced products to the market
in a timely manner, it could adversely affect the market acceptance of those products and harm our
competitive position and our business and financial results.
Changes in effective tax rates or adverse outcomes resulting from examination of our income or
other tax returns could adversely affect our results.
Our future effective tax rates could be subject to volatility or adversely affected by: earnings
being lower than anticipated in countries where we have lower statutory rates and higher than
anticipated earnings in countries where we have higher statutory rates; changes in the valuation of
our deferred tax assets and liabilities; expiration of or lapses in the R&D tax credit laws;
transfer pricing adjustments related to certain acquisitions including the license of acquired
intangibles under our intercompany R&D cost sharing arrangement; tax effects of share-based
compensation; costs related to intercompany restructurings; or changes in tax laws, regulations,
accounting principles, or interpretations thereof. In addition, we are subject to the continuous
examination of our income tax returns by the Internal Revenue Service (IRS) and other tax
authorities. We regularly assess the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for income taxes. There can be no assurance
that the outcomes from these continuous examinations will not have an adverse effect on our
business, financial condition, and results of operations.
For example, in 2009, we received a proposed adjustment from the IRS claiming that we owe
additional taxes, plus interest and possible penalties, for the 2004 tax year based on a transfer
pricing transaction related to the license of acquired intangibles under an intercompany R&D cost
sharing arrangement. As a result of the proposed adjustment, the incremental tax liability would be
approximately $807 million excluding interest and penalties. We strongly believe the IRS position
with regard to this matter is inconsistent with applicable tax laws and existing Treasury
regulations, and that our previously reported income tax provision for the year in question is
appropriate. However, there can be no assurance that this matter will be resolved in our favor.
Regardless of whether this matter is resolved in our favor, the final resolution of this matter
could be expensive and time-consuming to defend and/or settle. While we believe we have provided
adequately for this matter, there is a possibility that an adverse outcome of the matter could have
a material effect on our results of operations and financial condition.
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If we fail to accurately predict our manufacturing requirements, we could incur additional costs or
experience manufacturing delays, which would harm our business.
We provide demand forecasts to our contract manufacturers and the manufacturers order components
and plan capacity based on these forecasts. If we overestimate our requirements, our contract
manufacturers may assess charges, or we may have liabilities for excess inventory, each of which
could negatively affect our gross margins. Conversely, because lead times for required materials
and components vary significantly and depend on factors such as the specific supplier, contract
terms, and the demand for each component at a given time, if we underestimate our requirements, our
contract manufacturers may have inadequate time, materials, and/or components required to produce
our products, which could increase costs or could delay or interrupt manufacturing of our products
and result in delays in shipments and deferral or loss of revenues.
We are dependent on sole source and limited source suppliers for several key components, which
makes us susceptible to shortages or price fluctuations in our supply chain, and we may face
increased challenges in supply chain management in the future.
During periods of high demand for electronic products, component shortages are possible, and the
predictability of the availability of such components may be limited. Any future growth in our
business and the economy is likely to create greater pressures on us and our suppliers to
accurately project overall component demand and to establish optimal component levels. If shortages
or delays persist, the price of these components may increase, or the components may not be
available at all. We may not be able to secure enough components at reasonable prices or of
acceptable quality to build new products in a timely manner, and our revenues and gross margins
could suffer until other sources can be developed. For example, from time to time, including the
first quarter of 2008, we have experienced component shortages that resulted in delays of product
shipments. We currently purchase numerous key components, including ASICs, from single or limited
sources. The development of alternate sources for those components is time-consuming, difficult,
and costly. In addition, the lead times associated with certain components are lengthy and preclude
rapid changes in quantities and delivery schedules. In the event of a component shortage or supply
interruption from these suppliers, we may not be able to develop alternate or second sources in a
timely manner. If, as a result, we are unable to buy these components in quantities sufficient to
meet our requirements on a timely basis, we will not be able to deliver product to our customers,
which would seriously affect present and future sales, which would, in turn, adversely affect our
business, financial condition, and results of operations.
In addition, the development, licensing, or acquisition of new products in the future may increase
the complexity of supply chain management. Failure to effectively manage the supply of key
components and products would adversely affect our business.
We are dependent on contract manufacturers with whom we do not have long-term supply contracts, and
changes to those relationships, expected or unexpected, may result in delays or disruptions that
could cause us to lose revenues and damage our customer relationships.
We depend on independent contract manufacturers (each of which is a third-party manufacturer for
numerous companies) to manufacture our products. Although we have contracts with our contract
manufacturers, those contracts do not require them to manufacture our products on a long-term basis
in any specific quantity or at any specific price. In addition, it is time-consuming and costly to
qualify and implement additional contract manufacturer relationships. Therefore, if we fail to
effectively manage our contract manufacturer relationships or if one or more of them experiences
delays, disruptions, or quality control problems in our manufacturing operations, or if we had to
change or add additional contract manufacturers or contract manufacturing sites, our ability to
ship products to our customers could be delayed. Also, the addition of manufacturing locations or
contract manufacturers would increase the complexity of our supply chain management. Moreover, an
increasing portion of our manufacturing is performed in China and other countries and is therefore
subject to risks associated with doing business in other countries. Each of these factors could
adversely affect our business, financial condition, and results of operations.
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Telecommunications companies and other large companies generally require more onerous terms and
conditions of their vendors. As we seek to sell more products to such customers, we may be required
to agree to terms and conditions that could have an adverse effect on our business or ability to
recognize revenues.
Telecommunications service provider companies and other large companies, because of their size,
generally have greater purchasing power and, accordingly, have requested and received more
favorable terms, which often translate into more onerous terms and conditions for their vendors. As
we seek to sell more products to this class of customer, we may be required to agree to such terms
and conditions, which may include terms that affect the timing of our ability to recognize revenue
and have an adverse effect on our business, financial condition, and results of operations.
Consolidation among such large customers can further increase their buying power and ability to
require onerous terms.
For example, many customers in this class have purchased products from other vendors who promised
but failed to deliver certain functionality and/or had products that caused problems or outages in
the networks of these customers. As a result, this class of customers may request additional
features from us and require substantial penalties for failure to deliver such features or may
require substantial penalties for any network outages that may be caused by our products. These
additional requests and penalties, if we are required to agree to them, require us to defer revenue
recognition from such sales, which may negatively affect our business, financial condition, and
results of operations.
We adopted Accounting Standards Update (ASU) No. 2009-13 Multiple-Deliverable Revenue
Arrangements (ASU 2009-13) and ASU No. 2009-14, Certain Revenue Arrangements That Include
Software Elements (ASU 2009-14) on a prospective basis as of the beginning of fiscal 2010 for
new and materially modified arrangements originating after December 31, 2009. Under these new
rules, we allocate revenue to each element of a multiple element arrangement based on a selling
price hierarchy. The selling price for a deliverable is based on its vendor-specific objective
evidence (VSOE) if available, third party evidence (TPE) if VSOE is not available, or estimated
selling price if neither VSOE nor TPE is available. We allocate each separable element of an
arrangement to the total arrangement consideration. While the new standards allow us to recognize
revenue related to elements that have been delivered, we are required to defer revenue allocated to
undelivered elements as of the balance sheet date.
For multiple element arrangements entered into prior to the first quarter of 2010, our accounting
policies require VSOE of fair value of the undelivered elements to separate the components and to
account for elements of the arrangement separately. However, customers may require terms and
conditions that make it more difficult or impossible for us to maintain VSOE of fair value for the
undelivered elements to a similar group of customers, the result of which could cause us to defer
the entire arrangement fees for a similar group of customers (product, maintenance, professional
services, etc.) and recognize revenue only when the last element is delivered, or if the only
undelivered element is maintenance revenue, we would recognize revenue ratably over the contractual
maintenance period, which is generally one year, but could be substantially longer.
Our ability to develop, market, and sell products could be harmed if we are unable to retain or
hire key personnel.
Our future success depends upon our ability to recruit and retain the services of executive,
engineering, sales and marketing, and support personnel. The supply of highly qualified
individuals, in particular engineers in very specialized technical areas, or sales people
specializing in the service provider and enterprise markets, is limited and competition for such
individuals is intense. None of our officers or key employees is bound by an employment agreement
for any specific term. The loss of the services of any of our key employees, the inability to
attract or retain personnel in the future or delays in hiring required personnel, particularly
engineers and sales people, and the complexity and time involved in replacing or training new
employees, could delay the development and introduction of new products, and negatively impact our
ability to market, sell, or support our products.
In addition, we rely upon equity compensation to help recruit, retain and motivate our employees.
At our 2010 annual meeting of stockholders, to be on May 12, 2010, we have asked our stockholders to
authorize additional shares for grant under our 2006 Equity Incentive Plan (the 2006 Plan), which
is the only plan under which we currently grant stock options, restricted stock units and
performance shares to our employees. If more shares are not authorized by our stockholders for
grant under the 2006 Plan, we will be significantly limited in our ability to grant
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equity awards to recruit new employees or to compensate existing employees, which would put us at a
significant disadvantage to other companies that compete for workers in high technology industries
such as ours. Accordingly, our ability to hire, retain, and motivate current and prospective
employees would be harmed, the result of which could negatively impact our business operations.
We are a party to lawsuits, which are costly to defend and, if determined adversely to us, could
require us to pay damages or prevent us from taking certain actions, any or all of which could harm
our business, financial condition, and results of operations.
We and certain of our current and former officers and current and former members of our Board of
Directors are subject to various lawsuits. For example, we are a party to a number of patent
infringement and other lawsuits. In addition, we have been served with lawsuits related to certain
matters related to securities, a description of which can be found in Note 14, Commitments and
Contingencies, in Notes to Condensed Consolidated Financial Statements of this Quarterly Report on
Form 10-Q, under the heading Legal Proceedings. There can be no assurance that these or any
actions that have been or may be brought against us will be resolved in our favor or that tentative
settlements will become final. Regardless of whether they are resolved in our favor, these lawsuits
are, and any future lawsuits to which we may become a party will likely be, expensive and
time-consuming to defend, settle, and/or resolve. Such costs of defense, as well as any losses
resulting from these claims or settlement of these claims, could significantly increase our
expenses and could harm our business, financial condition, and results of operations.
Litigation or claims regarding intellectual property rights may be time-consuming, expensive and
require a significant amount of resources to prosecute, defend, or make our products
non-infringing.
Third parties have asserted and may in the future assert claims or initiate litigation related to
patent, copyright, trademark, and other intellectual property rights to technologies and related
standards that are relevant to our products. The asserted claims and/or initiated litigation may
include claims against us or our manufacturers, suppliers, or customers, alleging infringement of
their proprietary rights with respect to our products. Regardless of the merit of these claims,
they have been and can be time-consuming, result in costly litigation, and may require us to
develop non-infringing technologies or enter into license agreements. Furthermore, because of the
potential for high awards of damages or injunctive relief that are not necessarily predictable,
even arguably unmeritorious claims may be settled for significant amounts of money. If any
infringement or other intellectual property claim made against us by any third party is successful,
if we are required to settle litigation for significant amounts of money, or if we fail to develop
non-infringing technology or license required proprietary rights on commercially reasonable terms
and conditions, our business, financial condition, and results of operations could be materially
and adversely affected.
Our success depends upon our ability to effectively plan and manage our resources and restructure
our business through rapidly fluctuating economic and market conditions.
Our ability to successfully offer our products and services in a rapidly evolving market requires
an effective planning, forecasting, and management process to enable us to effectively scale and
adjust our business in response to fluctuating market opportunities and conditions. In periods of
market expansion, we have increased investment in our business by, for example, increasing
headcount and increasing our investment in R&D and other parts of our business. Conversely, during
2009, in response to downward trending industry and market conditions, we restructured our
business, rebalanced our workforce, and reduced our real estate portfolio. Many of our expenses,
such as real estate expenses, cannot be rapidly or easily adjusted because of fluctuations in our
business or numbers of employees. Moreover, rapid changes in the size of our workforce could
adversely affect the ability to develop and deliver products and services as planned or impair our
ability to realize our current or future business objectives.
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The long sales and implementation cycles for our products, as well as our expectation that some
customers will sporadically place large orders with short lead times, may cause our revenues and
operating results to vary significantly from quarter-to-quarter.
A customers decision to purchase certain of our products involves a significant commitment of its
resources and a lengthy evaluation and product qualification process. As a result, the sales cycle
may be lengthy. In particular, customers making critical decisions regarding the design and
implementation of large network deployments may engage in very lengthy procurement processes that
may delay or impact expected future orders. Throughout the sales cycle, we may spend considerable
time educating and providing information to prospective customers regarding the use and benefits of
our products. Even after making the decision to purchase, customers may deploy our products slowly
and deliberately. Timing of deployment can vary widely and depends on the skill set of the
customer, the size of the network deployment, the complexity of the customers network environment,
and the degree of hardware and operating system configuration necessary to deploy the products.
Customers with large networks usually expand their networks in large increments on a periodic
basis. Accordingly, we may receive purchase orders for significant dollar amounts on an irregular
basis. These long cycles, as well as our expectation that customers will tend to sporadically place
large orders with short lead times, may cause revenues and operating results to vary significantly
and unexpectedly from quarter-to-quarter.
We sell our products to customers that use those products to build networks and IP infrastructure,
and if the demand for network and IP systems does not continue to grow, then our business,
financial condition, and results of operations could be adversely affected.
A substantial portion of our business and revenues depends on the growth of secure IP
infrastructure and on the deployment of our products by customers that depend on the continued
growth of IP services. As a result of changes in the economy and capital spending or the building
of network capacity in excess of demand, all of which have in the past particularly affected
telecommunications service providers, spending on IP infrastructure can vary, which could have a
material adverse effect on our business, financial condition, and results of operations. In
addition, a number of our existing customers are evaluating the build out of their next generation
networks. During the decision-making period when the customers are determining the design of those
networks and the selection of the equipment they will use in those networks, such customers may
greatly reduce or suspend their spending on secure IP infrastructure. Such delays in purchases can
make it more difficult to predict revenues from such customers, can cause fluctuations in the level
of spending by these customers and, even where our products are ultimately selected, can have a
material adverse effect on our business, financial condition, and results of operations.
A breach of network security could harm public perception of our security products, which could
cause us to lose revenues.
If an actual or perceived breach of network security occurs in our network or in the network of a
customer of our security products, regardless of whether the breach is attributable to our
products, the market perception of the effectiveness of our products could be harmed. This could
cause us to lose current and potential end-customers or cause us to lose current and potential
value-added resellers and distributors. Because the techniques used by computer hackers to access
or sabotage networks change frequently and generally are not recognized until launched against a
target, we may be unable to anticipate these techniques.
We are subject to risks arising from our international operations, which may adversely affect our
business and results of operations.
We derive a majority of our revenues from our international operations, and we plan to continue
expanding our business in international markets in the future. We conduct significant sales and
customer support operations directly and indirectly through our distributors and value-added
resellers in countries throughout the world and depend on the operations of our contract
manufacturers and suppliers that are located inside and outside of the United States. In addition,
our R&D and our general and administrative operations are conducted in the United States as well as
other countries.
As a result of our international operations, we are affected by economic, regulatory, social, and
political conditions
64
in foreign countries, including changes in general IT spending, the imposition of government
controls, changes or limitations in trade protection laws, other regulatory requirements, which may
affect our ability to import or export our products from various countries, service provider and
government spending patterns affected by political considerations, unfavorable changes in tax
treaties or laws, natural disasters, epidemic disease, labor unrest, earnings expatriation
restrictions, misappropriation of intellectual property, military actions, acts of terrorism,
political and social unrest and difficulties in staffing and managing international operations. In
particular, in some countries, we may experience reduced intellectual property protection. Any or
all of these factors could have a material adverse impact on our business, financial condition, and
results of operations.
Moreover, local laws and customs in many countries differ significantly from those in the United
States. In many foreign countries, particularly in those with developing economies, it is common
for others to engage in business practices that are prohibited by our internal policies and
procedures or United States regulations applicable to us. Although we implement policies and
procedures designed to ensure compliance with these laws and policies, there can be no assurance
that none of our employees, contractors, and agents will take actions in violation of such policies
and procedures. Violations of laws or key control policies by our employees, contractors, or agents
could result in financial reporting problems, fines, penalties, or prohibition on the importation
or exportation of our products and could have a material adverse effect on our business.
We are exposed to fluctuations in currency exchange rates, which could negatively affect our
financial condition and results of operations.
Because a majority of our business is conducted outside the United States, we face exposure to
adverse movements in non-U.S. currency exchange rates. These exposures may change over time as
business practices evolve and could have a material adverse impact on our financial condition and
results of operations.
The majority of our revenues and expenses are transacted in U.S. Dollars. We also have some
transactions that are denominated in foreign currencies, primarily the British Pound, the Euro,
Indian Rupee, and Japanese Yen related to our sales and service operations outside of the United
States. An increase in the value of the U.S. Dollar could increase the real cost to our customers
of our products in those markets outside the United States in which we sell in U.S. Dollars, and a
weakened U.S. Dollar could increase the cost of local operating expenses and procurement of raw
materials to the extent we must purchase components in foreign currencies.
Currently, we hedge only those currency exposures associated with certain assets and liabilities
denominated in nonfunctional currencies and periodically will hedge anticipated foreign currency
cash flows. The hedging activities undertaken by us are intended to offset the impact of currency
fluctuations on certain nonfunctional currency assets and liabilities. However, no amount of
hedging can be effective against all circumstances, including long-term declines in the value of
the U.S. Dollar. If our attempts to hedge against these risks are not successful, or if long-term
declines in the value of the U.S. Dollar persist, our financial condition and results of operations
could be adversely impacted.
If we fail to adequately evolve our financial and managerial control and reporting systems and
processes, our ability to manage and grow our business will be negatively affected.
Our ability to successfully offer our products and implement our business plan in a rapidly
evolving market depends upon an effective planning and management process. We will need to continue
to improve our financial and managerial control and our reporting systems and procedures in order
to manage our business effectively in the future. If we fail to continue to implement improved
systems and processes, our ability to manage our business, financial condition, and results of
operations may be negatively affected.
65
Our products are highly technical and if they contain undetected errors, our business could be
adversely affected, and we may need to defend lawsuits or pay damages in connection with any
alleged or actual failure of our products and services.
Our products are highly technical and complex, are critical to the operation of many networks, and,
in the case of our security products, provide and monitor network security and may protect valuable
information. Our products have contained and may contain one or more undetected errors, defects, or
security vulnerabilities. Some errors in our products may only be discovered after a product has
been installed and used by end-customers. Any errors, defects, or security vulnerabilities
discovered in our products after commercial release could result in loss of revenues or delay in
revenue recognition, loss of customers, loss of future business, and increased service and warranty
cost, any of which could adversely affect our business, financial condition, and results of
operations. In addition, in the event an error, defect, or vulnerability is attributable to a
component supplied by a third-party vendor, we may not be able to recover from the vendor all of
the costs of remediation that we may incur. In addition, we could face claims for product
liability, tort, or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and
may divert managements attention. In addition, if our business liability insurance coverage is
inadequate, or future coverage is unavailable on acceptable terms or at all, our financial
condition and results of operations could be harmed.
If our products do not interoperate with our customers networks, installations will be delayed or
cancelled and could harm our business.
Our products are designed to interface with our customers existing networks, each of which have
different specifications and utilize multiple protocol standards and products from other vendors.
Many of our customers networks contain multiple generations of products that have been added over
time as these networks have grown and evolved. Our products must interoperate with many or all of
the products within these networks as well as future products in order to meet our customers
requirements. If we find errors in the existing software or defects in the hardware used in our
customers networks, we may need to modify our software or hardware to fix or overcome these errors
so that our products will interoperate and scale with the existing software and hardware, which
could be costly and could negatively affect our business, financial condition, and results of
operations. In addition, if our products do not interoperate with those of our customers networks,
demand for our products could be adversely affected or orders for our products could be cancelled.
This could hurt our operating results, damage our reputation, and seriously harm our business and
prospects.
Integration of acquisitions could disrupt our business and harm our financial condition and stock
price and may dilute the ownership of our stockholders.
We have made, and may continue to make, acquisitions in order to enhance our business. For example,
in April 2010, we acquired Ankeena Networks, and in 2005, we completed the acquisitions of five
other privately-held companies. Acquisitions involve numerous risks, including problems combining
the purchased operations, technologies or products, unanticipated costs, diversion of managements
attention from our core businesses, adverse effects on existing business relationships with
suppliers and customers, risks associated with entering markets in which we have no or limited
prior experience, and potential loss of key employees. There can be no assurance that we will be
able to integrate successfully any businesses, products, technologies, or personnel that we might
acquire. The integration of businesses that we may acquire is likely to be, a complex,
time-consuming, and expensive process. Acquisitions may also require us to issue common stock or
assume equity awards that dilute the ownership of our current stockholders, assume liabilities,
record goodwill and amortizable intangible assets that will be subject to impairment testing on a
regular basis and potential periodic impairment charges, incur amortization expenses related to
certain intangible assets, and incur large and immediate write-offs and restructuring and other
related expenses, all of which could harm our financial condition and results of operations.
In addition, if we fail in any acquisition integration efforts and are unable to efficiently
operate as a combined organization utilizing common information and communication systems,
operating procedures, financial controls, and human resources practices, our business, financial
condition, and results of operations may be adversely affected.
66
Our products incorporate and rely upon licensed third-party technology, and if licenses of
third-party technology do not continue to be available to us or become very expensive, our revenues
and ability to develop and introduce new products could be adversely affected.
We integrate licensed third-party technology into certain of our products. From time to time, we
may be required to license additional technology from third-parties to develop new products or
product enhancements. Third-party licenses may not be available or continue to be available to us
on commercially reasonable terms. Our inability to maintain or re-license any third-party licenses
required in our products or our inability to obtain third-party licenses necessary to develop new
products and product enhancements, could require us to obtain substitute technology of lower
quality or performance standards or at a greater cost, any of which could harm our business,
financial condition, and results of operations.
Matters related to the investigation into our historical stock option granting practices and the
restatement of our financial statements have resulted in litigation and regulatory proceedings, and
may result in additional litigation or other possible government actions.
Our historical stock option granting practices and the restatement of our consolidated financial
statements have exposed us to risks such as litigation, regulatory proceedings, and government
enforcement actions. For more information regarding our current litigation and related inquiries,
please see Note 14, Commitments and Contingencies, in Notes to Condensed Consolidated Financial
Statements under the heading Legal Proceedings as well as the other risk factors related to
litigation set forth in this section. We have provided the results of our internal review and
independent investigation to the SEC and the United States Attorneys Office for the Northern
District of California, and in that regard, we have responded to formal and informal requests for
documents and additional information. In August 2007, we announced that we entered into a
settlement agreement with the SEC in connection with our historical stock option granting practices
in which we consented to a permanent injunction against any future violations of the antifraud,
reporting, books-and-records and internal control provisions of the federal securities laws. This
settlement concluded the SECs formal investigation of the Company with respect to this matter. In
addition, while we believe that we have made appropriate judgments in determining the correct
measurement dates for our stock option grants, the SEC may disagree with the manner in which we
accounted for and reported, or did not report, the corresponding financial impact. We are also
subject to civil litigation related to the stock option matters. In February 2010, we entered into
an agreement in principle to settle the class action litigation claims related to our historical
stock option granting practices. Under the proposed settlement, which is subject to the final
approval of the court, the claims against us and our officers and directors will be dismissed with
prejudice and released in exchange for a $169.0 million cash payment by us. No assurance can be
given regarding the outcomes from litigation or other possible government actions. The resolution
of these matters will be time-consuming, expensive, and may distract management from the conduct of
our business and the related costs of defense, as well as any losses resulting from these claims or
final settlement of these claims, could significantly increase our expenses and could harm our
business, financial condition, and results of operations.
Our financial condition and results of operations could suffer if there is an additional impairment
of goodwill or other intangible assets with indefinite lives.
We are required to test annually and review on an interim basis, our goodwill and intangible assets
with indefinite lives, including the goodwill associated with past acquisitions and any future
acquisitions, to determine if impairment has occurred. If such assets are deemed impaired, an
impairment loss equal to the amount by which the carrying amount exceeds the fair value of the
assets would be recognized. This would result in incremental expenses for that quarter, which would
reduce any earnings or increase any loss for the period in which the impairment was determined to
have occurred. For example, such impairment could occur if the market value of our common stock
falls below certain levels for a sustained period, or if the portions of our business related to
companies we have acquired fail to grow at expected rates or decline. In the second quarter of
2006, our impairment evaluation resulted in a reduction of $1,280.0 million to the carrying value
of goodwill on our balance sheet for the SLT operating segment, primarily due to the decline in our
market capitalization that occurred over a period of approximately nine months prior to the
impairment review and, to a lesser extent, a decrease in the forecasted future cash flows used in
the income approach. Recently, economic weakness contributed to extreme price and volume
fluctuations in global stock markets that reduced the market price of many technology company
stocks, including ours. Future declines in
67
our stock price, as well as any marked decline in our level of revenues or gross margins, increase
the risk that goodwill and intangible assets may become impaired in future periods. We cannot
accurately predict the amount and timing of any impairment of assets.
While we believe that we currently have adequate internal control over financial reporting, we are
exposed to risks from legislation requiring companies to evaluate those internal controls.
Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our
independent auditors to attest to, the effectiveness of our internal control over financial
reporting. We have an ongoing program to perform the system and process evaluation and testing
necessary to comply with these requirements. We have and will continue to incur significant
expenses and devote management resources to Section 404 compliance on an ongoing basis. In the
event that our CEO, CFO, or independent registered public accounting firm determine in the future
that, our internal controls over financial reporting are not effective as defined under Section
404, investor perceptions may be adversely affected and could cause a decline in the market price
of our stock.
Regulation of the telecommunications industry could harm our operating results and future
prospects.
The telecommunications industry is highly regulated, and our business and financial condition could
be adversely affected by changes in the regulations relating to the telecommunications industry.
Currently, there are few laws or regulations that apply directly to access to or commerce on IP
networks. We could be adversely affected by regulation of IP networks and commerce in any country
where we operate. Such regulations could address matters such as voice over the Internet or using
IP, encryption technology, and access charges for service providers. In addition, regulations have
been adopted with respect to environmental matters, such as the Waste Electrical and Electronic
Equipment (WEEE) Directive, Restriction of Hazardous Substances (RoHS), and Registration,
Evaluation, Authorization, and Restriction of Chemicals (REACH) regulations adopted by the
European Union, as well as regulations prohibiting government entities from purchasing security
products that do not meet specified local certification criteria. Similar regulations are in effect
or under consideration in other jurisdictions where we do business. Compliance with such
regulations may be costly and time-consuming for us and our suppliers and partners. The adoption
and implementation of such regulations could decrease demand for our products, and at the same time
could increase the cost of building and selling our products as well as impact our ability to ship
products into affected areas and recognize revenue in a timely manner, which could have a material
adverse effect on our business, financial condition, and results of operations.
The investment of our cash balance and our investments in government and corporate debt securities
are subject to risks, which may cause losses and affect the liquidity of these investments.
At March 31, 2010, we had $1,723.9 million in cash and cash equivalents and $1,043.2 million in
short- and long-term investments. We have invested these amounts primarily in U.S. government
securities, government-sponsored enterprise obligations, foreign government debt securities,
corporate notes and bonds, commercial paper, and money market funds meeting certain criteria.
Certain of these investments are subject to general credit, liquidity, market, and interest rate
risks, which may be exacerbated by U.S. sub-prime mortgage defaults that have affected various
sectors of the financial markets and caused credit and liquidity issues at many financial
institutions. These market risks associated with our investment portfolio may have a negative
adverse effect on our liquidity, financial condition, and results of operations.
Uninsured losses could harm our operating results.
We self-insure against many business risks and expenses, such as intellectual property litigation
and our medical benefit programs, where we believe we can adequately self-insure against the
anticipated exposure and risk or where insurance is either not deemed cost-effective or is not
available. We also maintain a program of insurance coverage for various types of property,
casualty, and other risks. We place our insurance coverage with various carriers in numerous
jurisdictions. The types and amounts of insurance that we obtain vary from time to time and from
location to location, depending on availability, cost, and our decisions with respect to risk
retention. The policies are subject to deductibles, policy limits, and exclusions that result in
our retention of a level of risk on a self-insurance basis. Losses not covered by insurance could
be substantial and unpredictable and could adversely affect our financial
condition and results of operations.
68
|
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. |
There were no unregistered sales of equity securities during the period covered by this report.
(c) Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Shares |
|
|
Maximum Dollar |
|
|
|
|
|
|
|
|
|
|
|
Purchased as |
|
|
Value of Shares |
|
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
|
that May Yet Be |
|
|
|
Total Number |
|
|
Average |
|
|
Announced |
|
|
Purchased |
|
|
|
of Shares |
|
|
Price Paid |
|
|
Plans or |
|
|
Under the Plans or |
|
Period |
|
Purchased (2) |
|
|
per Share (2) |
|
|
Programs (1) |
|
|
Programs (1) |
|
January 1 January 31, 2010 |
|
|
1,456,123 |
|
|
$ |
26.55 |
|
|
|
1,455,241 |
|
|
$ |
279,953,893 |
|
February 1 February 28, 2010 |
|
|
715,358 |
|
|
|
25.61 |
|
|
|
647,920 |
|
|
|
1,263,333,076 |
|
March 1 March 31, 2010 |
|
|
651,589 |
|
|
|
29.52 |
|
|
|
647,920 |
|
|
|
1,244,205,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,823,070 |
|
|
$ |
27.00 |
|
|
|
2,751,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In March 2008, the Companys Board of Directors (the Board) approved a stock repurchase
program (the 2008 Stock Repurchase Program), which authorized the Company to purchase up to
$1.0 billion of the Companys common stock. In February 2010, the Board approved an additional
stock repurchase program (the 2010 Stock Repurchase Program), which authorized the Company
to purchase up to an additional $1.0 billion of the Companys common stock. During the three
months ended March 31, 2010, the Company repurchased and retired 2,751,081 shares of common
stock at an average price of $27.04 per share under the 2008 Stock Repurchase Program. All
shares of common stock that have been repurchased under the Companys stock repurchase
programs have been retired. Future share repurchases under the Companys stock repurchase
programs will be subject to a review of the circumstances in place at that time and will be
made from time to time in private transactions or open market purchases as permitted by
securities laws and other legal requirements. These programs may be discontinued at any time. |
|
(2) |
|
Amounts include repurchases under the Companys 2008 Stock Repurchase Program and repurchases
of the Companys common stock from its employees in connection with net issuance of shares to
satisfy the employee tax withholding obligations for the vesting of certain restricted stock
units and performance share awards. All shares of common stock that have been repurchased
under the Companys stock repurchase programs and from its employees in connection with net
issuances have been retired. Future share repurchases under the Companys stock repurchase
programs will be subject to a review of the circumstances in place at that time and will be
made from time to time in private transactions or open market purchases as permitted by
securities laws and other legal requirements. These programs may be discontinued at any time. |
69
Item 6. Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
3.1
|
|
Juniper Networks, Inc. Amended and Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to the Companys Annual Report on Form 10-K filed with the Securities and Exchange Commission
on March 27, 2001) |
|
|
|
3.2
|
|
Amended and Restated Bylaws of Juniper Networks, Inc. (incorporated by reference to Exhibit 3.1 to the
Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on November 24,
2008) |
|
|
|
10.1
|
|
Description of 2010 Annual Incentive Plan (incorporated by reference to Item 5.02 of the Companys
Current Report on Form 8-K filed with the Securities and Exchange Commission on February 8, 2010) |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
101
|
|
The following materials from Juniper Network Inc.s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2010, formatted in XBRL (Extensible Business Reporting Language):
(i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, and
(iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to
Condensed Consolidated Financial Statements, tagged as blocks of text |
|
|
|
101.INS
|
|
XBRL Instance Document |
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document |
70
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant had duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
Juniper Networks, Inc.
|
|
May 5, 2010 |
By: |
/s/ Robyn M. Denholm
|
|
|
|
Robyn M. Denholm |
|
|
|
Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer and Principal Financial Officer) |
|
|
|
|
|
|
|
|
|
|
May 5, 2010 |
By: |
/s/ Gene Zamiska
|
|
|
|
Gene Zamiska |
|
|
|
Vice President, Finance and Corporate Controller
(Duly Authorized Officer and Principal Accounting Officer) |
|
71
Exhibit Index
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
3.1
|
|
Juniper Networks, Inc. Amended and Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to the Companys Annual Report on Form 10-K filed with the Securities and Exchange Commission
on March 27, 2001) |
|
|
|
3.2
|
|
Amended and Restated Bylaws of Juniper Networks, Inc. (incorporated by reference to Exhibit 3.1 to the
Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on November 24,
2008) |
|
|
|
10.1
|
|
Description of 2010 Annual Incentive Plan (incorporated by reference to Item 5.02 of the Companys
Current Report on Form 8-K filed with the Securities and Exchange Commission on February 8, 2010) |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
101
|
|
The following materials from Juniper Network Inc.s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2010, formatted in XBRL (Extensible Business Reporting Language):
(i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, and
(iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to
Condensed Consolidated Financial Statements, tagged as blocks of text |
|
|
|
101.INS
|
|
XBRL Instance Document |
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document |
72