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Form DEFA14A BROCADE COMMUNICATIONS

November 21, 2016 5:10 PM EST



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 8-K
 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): November 21, 2016
 
brcdlogo.jpg
Brocade Communications Systems, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
000-25601
 
77-0409517
(State or other jurisdiction
of incorporation)
 
(Commission
File Number)
 
(I.R.S. Employer
Identification Number)
130 Holger Way
San Jose, CA 95134-1376
(Address, including zip code, of principal executive offices)
(408) 333-8000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
x
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))






Item 2.02 Results of Operations and Financial Condition.
On November 21, 2016, Brocade Communications Systems, Inc. (the “Company”) issued a press release regarding financial results for the fourth fiscal quarter and fiscal year ended October 29, 2016. A copy of the press release is attached as Exhibit 99.1 and the information in Exhibit 99.1 is incorporated herein by reference.
The information in this Item 2.02 and in Exhibit 99.1 attached to this Current Report on Form 8-K shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits.

Exhibit
Number
Description of Document
99.1
Press release, dated November 21, 2016, regarding financial results of Brocade Communications Systems, Inc. for the fourth fiscal quarter and fiscal year ended October 29, 2016.






SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
 
 
BROCADE COMMUNICATIONS SYSTEMS, INC.
 
 
 
 
 
 
 
 
Date:
November 21, 2016
 
 
 
By:
 
/s/ Daniel W. Fairfax
 
 
 
 
 
 
 
Daniel W. Fairfax
 
 
 
 
 
 
 
Senior Vice President and Chief Financial Officer




Exhibit 99.1
BROCADE CONTACTS
 
 
Public Relations
Ed Graczyk
Tel: 408-333-1836
Investor Relations
Michael Iburg
Tel: 408-333-0233
brcdlogo.jpg
Brocade Reports Fourth Quarter and Fiscal 2016 Earnings

SAN JOSE, Calif., November 21, 2016 — Brocade® (NASDAQ: BRCD) today reported financial results for its fourth quarter and full fiscal year 2016 ended October 29, 2016. Brocade reported fourth quarter revenue of $657 million, an increase of 12% year-over-year and 11% quarter-over-quarter. Revenue for fiscal year 2016 was $2,346 million, up 4% year-over-year. GAAP diluted earnings per share (EPS) was $0.16 for the fourth quarter and $0.51 for fiscal year 2016, down 19% and down 35% year-over-year, respectively. Non-GAAP diluted EPS was $0.33 for the fourth quarter and $1.04 for fiscal year 2016, up 27% and up 3% year-over-year, respectively.
“Fiscal 2016 was a year of significant accomplishment,” said Lloyd Carney, CEO. “We delivered record revenue and expanded our market reach to address critical requirements at the network edge through our acquisition of Ruckus Wireless. In addition, we provided our customers with significant innovations across our product portfolio, including Gen 6 Fibre Channel, data center automation, Ruckus Cloud Wi-Fi, and next-generation data center routing. With a range of new IP Networking solutions expected to launch in the first quarter of fiscal 2017, we continue to advance our roadmap and help our customers transform their networks for digital business.”
Quarterly Key Financial Metrics: (1) 
 
Q4 2016
 
Q3 2016
 
Q4 2015
 
Q4 2016 vs. Q3 2016
 
Q4 2016 vs. Q4 2015
Revenue
$
657
M
 
$
591
M
 
$
589
M
 
11
%
 
12
%
GAAP EPS—diluted
$
0.16

 
$
0.02

 
$
0.20

 
575
%
 
(19
%)
Non-GAAP EPS—diluted
$
0.33

 
$
0.21

 
$
0.26

 
54
%
 
27
%
GAAP gross margin
63.9
%
 
60.4
%
 
67.0
%
 
3.5 pts

 
(3.1) pts

Non-GAAP gross margin
68.2
%
 
66.5
%
 
67.9
%
 
1.7 pts

 
0.3 pts

GAAP operating margin
12.6
%
 
3.5
%
 
20.2
%
 
9.1 pts

 
(7.6) pts

Non-GAAP operating margin
24.4
%
 
19.5
%
 
25.0
%
 
4.9 pts

 
(0.6) pts

(1) Full fiscal year financial metrics are detailed in the financial statements and schedules presented below.
Please see important note of explanation about the use of non-GAAP financial measures below, including a detailed reconciliation between GAAP and non-GAAP information in the tables included herein.
Highlights:
Revenue for both the fourth quarter and the full fiscal year was positively impacted by $14.4 million, or 2.2% and 0.6%, respectively, due to a change in channel revenue recognition methodology implemented in the fourth quarter as described under “Financial Highlights and Additional Financial Information” below.
Q4 2016 SAN product revenue was $303 million, down 7% year-over-year and up 8% quarter-over-quarter. The Q4 year-over-year revenue decline was due to an 18% decrease in director sales and a 13% decrease in embedded switch sales, partially offset by a 7% increase in fixed-configuration switch sales. For fiscal year 2016, SAN product revenue was $1,229 million, down 6% year-over-year, primarily due to certain partner business transitions and a challenging storage spending environment, leading to lower director and embedded switch sales.
Q4 2016 IP Networking product revenue was $256 million, up 51% year-over-year and up 22% quarter-over-quarter. The Q4 year-over-year increase was primarily driven by the inclusion of $96 million of Ruckus Wireless product revenue, following the acquisition in fiscal Q3 2016. This was partially offset by lower service provider sales and lower sales into the education market. For fiscal year 2016, IP Networking product revenue was $730 million, up 21% year-over-year, primarily due to the inclusion of five months of revenue from Ruckus Wireless, partially offset by lower service provider and U.S. federal sales.

Page 1 of 15


In fiscal year 2016, Brocade’s full-year GAAP gross margin was 64.6%, down 290 basis points from fiscal year 2015. The gross margin decline was primarily due to a shift in product mix primarily from SAN to IP Networking, and the purchase accounting adjustment to inventory related to the Ruckus Wireless acquisition. Fiscal 2016 full-year GAAP operating margin was 13.1%, down 870 basis points, primarily due to lower gross margins, higher acquisition-related costs, and higher operating expenses primarily associated with Ruckus Wireless. GAAP diluted EPS in fiscal year 2016 was $0.51, down 35% from the prior year, due primarily to acquisition-related costs and higher operating expenses associated with Ruckus Wireless, partially offset by a favorable jurisdictional mix of earnings resulting in a lower effective tax rate.
In fiscal year 2016, Brocade’s full-year non-GAAP gross margin was 67.9%, down 50 basis points from fiscal year 2015. The non-GAAP gross margin decline was primarily due to a shift in product mix primarily from SAN to IP Networking. Fiscal 2016 full-year non-GAAP operating margin was 23.1%, down 320 basis points, primarily due to lower gross margin and higher operating expenses resulting from the acquisition of Ruckus Wireless. Non-GAAP diluted EPS in fiscal year 2016 was $1.04, up 3% from the prior year, due primarily to higher revenue and a favorable jurisdictional mix of earnings resulting in a lower effective tax rate, partially offset by higher operating expenses.

Board Declares Dividend
The Brocade Board of Directors has declared a quarterly cash dividend of $0.055 per share of the Company’s common stock. The dividend payment will be made on January 4, 2017 to shareholders of record at the close of market on December 12, 2016.

On November 2, 2016, Brocade announced that it had entered into a definitive agreement under which Brocade would be acquired by Broadcom Limited. In light of the pending acquisition, Brocade will not provide fiscal Q1 2017 guidance and will not hold a conference call to discuss these financial results.
Other Q4 2016 product, customer, and partner announcements are available at http://newsroom.brocade.com/.
Brocade (www.brocade.com)
130 Holger Way, San Jose, CA 95134
T. 408.333.8000 F. 408.333.8101


Page 2 of 15


Financial Highlights and Additional Financial Information
Prior to fiscal Q4 2016, Brocade recognized revenue from sales to distributors on a “sell-through” basis after the distributor resold Brocade’s products to its end customers. Due to improvements made to Brocade’s systems and processes for capturing channel sales data, Brocade is now able to reliably estimate rebates, discounts, and sales returns. As a result, beginning in the fourth quarter of fiscal year 2016, Brocade began recognizing revenue to distributors on a “sell-in” basis at the time of shipment to the distributor. Accordingly, during the fourth quarter of fiscal year 2016, Brocade recorded corresponding adjustments to recognize revenue that would have been deferred under our previous revenue recognition model. The net effect was a $14.4 million increase in revenue, of which $6.3 million was attributable to the Ruckus Wireless business, $7.7 million was attributable to the remainder of the IP Networking business, and $0.4 million was attributable to the SAN business, and a $4.0 million increase in cost of revenues. These adjustments resulted in a net increase in GAAP and non-GAAP operating income of $10.4 million, representing a $0.02 increase in Q4 2016 fully diluted GAAP and non-GAAP EPS.
 
Q4 2016
 
Q3 2016
 
Q4 2015
Routes to market as a % of total net revenues:
 
 
 
 
 
OEM revenues
58
%
 
54
%
 
62
%
Channel/Direct revenues
42
%
 
46
%
 
38
%
 
 
 
 
 
 
10% or greater customer revenues
12
%
 
23
%
 
29
%
Geographic split as a % of total net revenues (1):
 
 
 
 
 
Domestic revenues
47
%
 
52
%
 
54
%
International revenues
53
%
 
48
%
 
46
%
Segment split as a % of total net revenues:
 
 
 
 
 
SAN product revenues
46
%
 
48
%
 
55
%
IP Networking product revenues
39
%
 
35
%
 
29
%
Global Services revenues
15
%
 
17
%
 
16
%
 
 
 
 
 
 
SAN business revenues (2)
54
%
 
57
%
 
65
%
IP Networking business revenues (2)
46
%
 
43
%
 
35
%
Additional information:
Q4 2016
 
Q3 2016
 
Q4 2015
GAAP net income attributable to Brocade
$
67
M
 
$
10
M
 
$
84
M
Non-GAAP net income attributable to Brocade
$
134
M
 
$
92
M
 
$
108
M
GAAP operating income
$
83
M
 
$
21
M
 
$
119
M
Non-GAAP operating income
$
160
M
 
$
115
M
 
$
147
M
GAAP effective tax rate
1.6
%
 
(20.8
)%
 
23.6
%
Non-GAAP effective tax rate
10.3
%
 
14.2
 %
 
24.2
%
Cash and cash equivalents
$
1,257
M
 
$
1,153
M
 
$
1,441
M
Capital expenditures
$
17
M
 
$
17
M
 
$
16
M
Cash provided by operations
$
159
M
 
$
28
M
 
$
180
M
Days sales outstanding
39 days
 
43 days
 
36 days
Employees at end of period
5,960
 
5,948
 
4,640
SAN port shipments
0.9
M
 
0.9
M
 
1.0
M
Share repurchases
$

 
$
660.7
M
 
$
31.1
M
Please see important note of explanation about the use of non-GAAP financial measures below, including a detailed reconciliation between GAAP and non-GAAP information in the tables included herein.
(1)
Revenues are attributed to geographic areas based on product delivery location. Since some OEM partners take delivery of Brocade products domestically and then ship internationally to their end users, the percentage of international revenues based on end-user location would likely be higher.
(2)
SAN and IP Networking business revenues include hardware and software product, support, and services revenues.

Page 3 of 15


Non-GAAP Financial Measures
To supplement financial information presented on a GAAP basis, Brocade provides information presented on a non-GAAP basis. These non-GAAP financial measures include non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating margin, non-GAAP operating income, non-GAAP tax rate, non-GAAP net income, and non-GAAP EPS. These non-GAAP financial measures are not computed in accordance with, or as an alternative to, financial information presented on a GAAP basis. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP measures. The most directly comparable GAAP information and a reconciliation between the GAAP and non-GAAP amounts is provided in the tables at the end of this press release.

Management believes that the non-GAAP financial measures used in this press release allow management to gain a better understanding of Brocade’s comparative operating performance, both from period to period and relative to its competitors. These non-GAAP financial measures also help with the determination of Brocade’s baseline performance before gains, losses or charges that are considered by management to be outside of ongoing operating results. Accordingly, management uses these non-GAAP financial measures for planning and forecasting of future periods and in making decisions regarding operations and the allocation of resources.
Management believes these non-GAAP financial measures, when read in conjunction with Brocade’s GAAP financials, provide useful information to investors by offering:
the ability to make more meaningful period-to-period comparisons of Brocade’s ongoing operating results;

the ability to make more meaningful comparisons of Brocade’s operating performance relative to its competitors;

the ability to better identify trends in Brocade’s underlying business and to perform related trend analyses; and

a better understanding of how management plans and measures Brocade’s underlying business.

In determining non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating margin, non-GAAP operating income, non-GAAP tax rate, non-GAAP net income and non-GAAP EPS, management excludes certain gains or losses and benefits or costs that are the result of events that arise outside the ordinary course of Brocade’s continuing operations. Management believes that it is appropriate to evaluate Brocade’s operating performance by excluding those items that are not indicative of ongoing operating results or limit comparability. Such items include, but are not limited to: (i) impact to cost of revenues from purchase accounting adjustments to inventory; (ii) call premium cost and write-off of debt discount and debt issuance costs related to lenders that did not participate in Brocade’s debt refinancings; (iii) acquisition and integration costs; and (iv) restructuring and other related benefits.

Management also excludes the following non-cash charges in determining non-GAAP financial measures: (i) stock-based compensation expense; (ii) amortization of purchased intangible assets; and (iii) non-cash interest expense related to the convertible debt.

Management believes that the exclusion of stock-based compensation allows for more accurate comparisons of Brocade’s operating results to Brocade’s peer companies because of the varying use of valuation methodologies and subjective assumptions and the variety of award types. In addition, the exclusion of the expense associated with the amortization of acquisition-related intangible assets is appropriate because a significant portion of the purchase price for acquisitions may be allocated to intangible assets that have short lives, and the exclusion of amortization expense allows comparisons of operating results that are consistent over time for Brocade’s newly acquired and long-held businesses. In connection with the convertible debt, under the relevant accounting guidance, a non-cash interest expense is recognized for the convertible debt as an imputed interest expense for the conversion feature. Management believes excluding the non-cash interest expense related to the convertible debt from its non-GAAP financial measures is useful for investors because the expense does not represent a cash outflow in the respective reporting periods and is not indicative of ongoing operating performance.

Finally, management believes that it is appropriate to exclude the tax effects of the items noted above and (i) tax charges and benefits related to unusual or infrequent intercompany transactions; (ii) tax charges or benefits that are a result of the implementation of infrequent restructuring plans; and (iii) tax charges resulting from the integration of intellectual property assets from acquisitions. Management believes that the exclusion of these items from its non-GAAP tax provision provides a more meaningful measure of Brocade’s operational performance of non-GAAP net income and non-GAAP EPS.


Page 4 of 15


Limitations: These non-GAAP financial measures have limitations because they do not include all items of income and expense that impact the company. In addition, these non-GAAP financial measures may not be comparable to similar measurements reported by other companies. Management compensates for these limitations by relying primarily on its GAAP results and using non-GAAP financial measures only supplementally. Management also provides robust and detailed reconciliations of each non-GAAP financial measure to its most directly comparable GAAP measure, and management encourages investors to review carefully those reconciliations.
Additional Information and Where to Find It
This communication is being made in respect of the proposed transaction involving Brocade Communications Systems, Inc. (“Brocade”) and Broadcom Limited (“Broadcom”). In connection with the proposed transaction, Brocade intends to file relevant materials with the Securities and Exchange Commission (the “SEC”), including a preliminary proxy statement on Schedule 14A. Promptly after filing its definitive proxy statement with the SEC, Brocade will mail the definitive proxy statement and a proxy card to each stockholder of Brocade entitled to vote at the special meeting relating to the proposed transaction. INVESTORS AND SECURITY HOLDERS OF BROCADE ARE URGED TO READ THESE MATERIALS (INCLUDING ANY AMENDMENTS OR SUPPLEMENTS THERETO) AND ANY OTHER RELEVANT DOCUMENTS IN CONNECTION WITH THE PROPOSED TRANSACTION THAT BROCADE WILL FILE WITH THE SEC WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT BROCADE AND THE PROPOSED TRANSACTION. The definitive proxy statement, the preliminary proxy statement and other relevant materials in connection with the proposed transaction (when they become available), and any other documents filed by Brocade with the SEC, may be obtained free of charge at the SEC’s website (http://www.sec.gov) or at Brocade’s website (http://www.brcd.com) or by contacting Brocade’s Investor Relations at (408) 333-6208 or [email protected].

Participants in the Solicitation
Brocade and its directors and executive officers may be deemed to be participants in the solicitation of proxies from Brocade’s stockholders with respect to the proposed transaction. Information about Brocade’s directors and executive officers and their ownership of Brocade’s common stock is set forth in Brocade’s proxy statement on Schedule 14A filed with the SEC on February 25, 2016, and Brocade’s Annual Report on Form 10-K for the fiscal year ended October 31, 2015, which was filed on December 22, 2015. Information regarding the identity of the potential participants, and their direct or indirect interests in the proposed transaction, by security holdings or otherwise, will be set forth in the proxy statement and other materials to be filed with the SEC in connection with the proposed transaction.

Forward-Looking Statements
This press release contains forward-looking statements including, but not limited to, statements regarding Brocade’s financial results, goals, plans, strategy, business outlook and prospects. These statements are based on current expectations as of the date of this presentation and involve a number of risks, uncertainties and assumptions that may cause actual results to differ significantly. The risks, uncertainties and assumptions include, but are not limited to: the effect on Brocade of increasing market competition and changes in the industry; Brocade’s ability to execute on its sales strategy and plans for future operations; the impact on Brocade of macroeconomic trends and events and changes in IT spending levels; Brocade’s ability to introduce and achieve market acceptance of new products and support offerings on a timely basis; risks associated with Brocade’s international operations; and integration and other risks associated with acquisitions, divestitures and strategic investments. The risks, uncertainties and assumptions also include, but are not limited to: the risk that the proposed acquisition by Broadcom may not be completed in a timely manner or at all, which may adversely affect Brocade’s business and the price of the common stock of Brocade; the failure to satisfy any of the conditions to the consummation of the proposed transaction, including the adoption of the merger agreement by the stockholders of Brocade and the receipt of certain governmental and regulatory approvals; the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement; the effect of the announcement or pendency of the proposed transaction on Brocade’s business relationships, operating results and business generally; risks that the proposed transaction disrupts current plans and operations and the potential difficulties in employee retention as a result of the proposed transaction; risks related to diverting management’s attention from Brocade’s ongoing business operations; the outcome of any legal proceedings that may be instituted against us related to the merger agreement or the proposed transaction; and unexpected costs, charges or expenses resulting from the proposed transaction. Certain of these and other risks are set forth in more detail in Brocade’s Form 10-Q for the fiscal quarter ended July 30, 2016, and in Brocade’s Annual Report on Form 10-K for the fiscal year ended October 31, 2015. Brocade expressly assumes no obligation to update any such forward-looking statements whether as the result of new developments or otherwise.

Page 5 of 15


About Brocade
Brocade (NASDAQ: BRCD) networking solutions help the world’s leading organizations turn their networks into platforms for business innovation. With solutions spanning public and private data centers to the network edge, Brocade is leading the industry in its transition to the New IP network infrastructures required for today’s era of digital business. (www.brocade.com)

Brocade and the B-wing symbol are registered trademarks of Brocade Communications Systems, Inc., in the United States and many other countries. Other brands, products, or service names mentioned herein may be trademarks of Brocade or others. Additional information about Brocade’s trademarks is available at: http://www.brocade.com/en/legal/brocade-Legal-intellectual-property/brocade-legal-trademarks.html.

© 2016 Brocade Communications Systems, Inc. All Rights Reserved.


Page 6 of 15


BROCADE COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three Months Ended
 
For the Year Ended
 
October 29,
2016
 
October 31,
2015
 
October 29,
2016
 
October 31,
2015
 
(In thousands, except per share amounts)
Net revenues:
 
 
 
 
 
 
 
Product
$
559,241

 
$
494,720

 
$
1,959,596

 
$
1,902,401

Service
98,058

 
94,107

 
386,014

 
361,059

Total net revenues
657,299

 
588,827

 
2,345,610

 
2,263,460

Cost of revenues:
 
 
 
 
 
 
 
Product
192,364

 
155,734

 
657,161

 
587,515

Service
44,621

 
38,816

 
172,110

 
147,872

Total cost of revenues
236,985

 
194,550

 
829,271

 
735,387

Gross margin
420,314

 
394,277

 
1,516,339

 
1,528,073

Operating expenses:
 
 
 
 
 
 
 
Research and development
115,720

 
94,547

 
413,236

 
356,720

Sales and marketing
172,660

 
157,031

 
641,403

 
585,230

General and administrative
32,447

 
21,808

 
110,627

 
87,623

Amortization of intangible assets
8,359

 
902

 
15,661

 
2,556

Acquisition and integration costs
8,297

 
809

 
28,922

 
3,942

Restructuring and other related benefits
(37
)
 
(41
)
 
(603
)
 
(678
)
Total operating expenses
337,446

 
275,056

 
1,209,246

 
1,035,393

Income from operations
82,868

 
119,221

 
307,093

 
492,680

Interest expense
(16,045
)
 
(9,824
)
 
(49,327
)
 
(55,578
)
Interest and other income, net
955

 
1,095

 
4,272

 
1,949

Income before income tax
67,778

 
110,492

 
262,038

 
439,051

Income tax expense
1,077

 
26,104

 
48,111

 
98,689

Net income
$
66,701

 
$
84,388

 
$
213,927

 
$
340,362

Less: Net income attributable to noncontrolling interest
(112
)
 

 
(112
)
 

Net income attributable to Brocade Communications Systems, Inc.
$
66,589

 
$
84,388

 
$
213,815

 
$
340,362

Net income per share—basic attributable to Brocade Communications Systems, Inc. stockholders
$
0.17

 
$
0.20

 
$
0.52

 
$
0.81

Net income per share—diluted attributable to Brocade Communications Systems, Inc. stockholders
$
0.16

 
$
0.20

 
$
0.51

 
$
0.79

Shares used in per share calculation—basic
401,103

 
414,769

 
409,058

 
420,331

Shares used in per share calculation—diluted
410,123

 
422,315

 
417,093

 
430,556

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.055

 
$
0.045

 
$
0.20

 
$
0.16


Page 7 of 15


BROCADE COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended
 
For the Year Ended
 
October 29,
2016
 
October 31,
2015
 
October 29,
2016
 
October 31,
2015
 
(In thousands)
Net income
$
66,701

 
$
84,388

 
$
213,927

 
$
340,362

Other comprehensive income and loss, net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
 
 
Change in unrealized gains and losses
(918
)
 
(1,055
)
 
(1,953
)
 
(3,387
)
Net gains and losses reclassified into earnings
790

 
1,211

 
2,621

 
3,755

Net unrealized gains (losses) on cash flow hedges
(128
)
 
156

 
668

 
368

Foreign currency translation adjustments
(1,319
)
 
(775
)
 
(3,079
)
 
(6,556
)
Total other comprehensive loss
(1,447
)
 
(619
)
 
(2,411
)
 
(6,188
)
Total comprehensive income
65,254

 
83,769

 
211,516

 
334,174

Less: Net income attributable to noncontrolling interest
(112
)
 

 
(112
)
 

Less: Total other comprehensive loss attributable to noncontrolling interest
35

 

 
35

 

Total comprehensive income attributable to Brocade Communications Systems, Inc.
$
65,177

 
$
83,769

 
$
211,439

 
$
334,174



Page 8 of 15


BROCADE COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
October 29, 2016
 
October 31, 2015
 
(In thousands, except par value)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,257,075

 
$
1,440,882

Accounts receivable, net of allowances for doubtful accounts of $3,660 and $1,838 as of October 29, 2016, and October 31, 2015, respectively
284,344

 
235,883

Inventories
69,355

 
40,524

Deferred tax assets

 
78,675

Prepaid expenses and other current assets
64,401

 
56,235

Total current assets
1,675,175

 
1,852,199

Property and equipment, net
455,326

 
439,224

Goodwill
2,295,184

 
1,617,161

Core/developed technology intangible assets, net
248,938

 
30,925

Other intangible assets, net
200,840

 
44,698

Non-current deferred tax assets
8,114

 
813

Other assets
53,777

 
51,133

Total assets
$
4,937,354

 
$
4,036,153

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
128,685

 
$
98,143

Accrued employee compensation
154,165

 
142,075

Deferred revenue
221,940

 
244,622

Current portion of long-term debt
76,692

 
298

Other accrued liabilities
113,170

 
77,226

Total current liabilities
694,652

 
562,364

Long-term debt, net of current portion
1,502,063

 
793,779

Non-current deferred revenue
90,051

 
72,065

Non-current income tax liability
102,100

 
47,010

Non-current deferred tax liabilities

 
24,024

Other non-current liabilities
5,370

 
3,376

Total liabilities
2,394,236

 
1,502,618

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

 

Common stock, $0.001 par value, 800,000 shares authorized:
 
 
 
Issued and outstanding: 401,748 and 413,923 shares as of October 29, 2016, and October 31, 2015, respectively
402

 
414

Additional paid-in capital
1,512,273

 
1,632,984

Accumulated other comprehensive loss
(27,413
)
 
(25,002
)
Retained earnings
1,055,194

 
925,139

Total Brocade stockholders’ equity
2,540,456

 
2,533,535

Noncontrolling interest
$
2,662

 
$

Total stockholders’ equity
$
2,543,118

 
$
2,533,535

Total liabilities and stockholders’ equity
$
4,937,354

 
$
4,036,153


Page 9 of 15


BROCADE COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
For the Year Ended
 
October 29,
2016
 
October 31,
2015
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
213,927

 
$
340,362

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Excess tax benefits from stock-based compensation
(7,182
)
 
(48,943
)
Depreciation and amortization
124,346

 
84,807

Loss on disposal of property and equipment
607

 
3,163

Amortization of debt issuance costs and debt discount
18,875

 
13,715

Write-off of debt discount and debt issuance costs related to lenders that did not participate in refinancing

 
4,808

Net gain on sale of investments
(122
)
 

Provision for doubtful accounts receivable and sales allowances
2,234

 
5,173

Non-cash purchase accounting adjustments to inventory
30,565

 

Non-cash stock-based compensation expense
126,335

 
88,528

Changes in assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
(9,355
)
 
(15,989
)
Inventories
3,638

 
(1,805
)
Prepaid expenses and other assets
12,827

 
(15,844
)
Deferred tax assets
(6,108
)
 
234

Accounts payable
15,819

 
107

Accrued employee compensation
(43,687
)
 
(59,703
)
Deferred revenue
(27,984
)
 
1,345

Other accrued liabilities
(40,904
)
 
50,366

Restructuring liabilities
(1,434
)
 
(2,825
)
Net cash provided by operating activities
412,397

 
447,499

Cash flows from investing activities:
 
 
 
Purchases of non-marketable equity and debt investments
(2,410
)
 
(2,150
)
Proceeds from sale of non-marketable equity investments

 
1,489

Proceeds from maturities and sale of short-term investments
150,323

 

Purchases of property and equipment
(77,049
)
 
(68,743
)
Purchase of intangible assets

 
(7,750
)
Net cash paid in connection with acquisitions
(564,888
)
 
(95,452
)
Proceeds from collection of note receivable
250

 
250

Net cash used in investing activities
(493,774
)
 
(172,356
)

Page 10 of 15


BROCADE COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—Continued
(Unaudited)
 
For the Year Ended
 
October 29,
2016
 
October 31,
2015
 
(In thousands)
Cash flows from financing activities:
 
 
 
Payment of principal related to senior secured notes

 
(300,000
)
Payment of principal related to the term loan
(20,000
)
 

Payment of debt issuance costs
(1,154
)
 
(1,718
)
Payment of principal related to capital leases
(298
)
 
(1,818
)
Common stock repurchases
(841,562
)
 
(343,686
)
Proceeds from issuance of common stock
49,491

 
51,376

Payment of cash dividends to stockholders
(83,760
)
 
(67,470
)
Proceeds from term loan
787,255

 

Proceeds from convertible notes

 
565,656

Purchase of convertible note hedge

 
(86,135
)
Proceeds from issuance of warrants

 
51,175

Proceeds from noncontrolling interest
2,550

 

Excess tax benefits from stock-based compensation
7,182

 
48,943

Net cash used in financing activities
(100,296
)
 
(83,677
)
Effect of exchange rate fluctuations on cash and cash equivalents
(2,134
)
 
(5,601
)
Net increase (decrease) in cash and cash equivalents
(183,807
)
 
185,865

Cash and cash equivalents, beginning of year
1,440,882

 
1,255,017

Cash and cash equivalents, end of year
$
1,257,075

 
$
1,440,882


Page 11 of 15


BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP FINANCIAL MEASURES
(Unaudited)
 
Three Months Ended
 
October 29,
2016
 
July 30,
2016
 
October 31,
2015
 
(In thousands, except per share amounts)
Non-GAAP adjustments
 
 
 
 
 
Stock-based compensation expense included in cost of revenues
$
4,481

 
$
5,965

 
$
3,189

Amortization of intangible assets expense included in cost of revenues
13,518

 
8,922

 
2,598

Purchase accounting adjustment to inventory
9,790

 
20,775

 

Total gross margin impact from non-GAAP adjustments
27,789

 
35,662

 
5,787

 
 
 
 
 
 
Stock-based compensation expense included in research and development
9,493

 
9,206

 
5,475

Stock-based compensation expense included in sales and marketing
13,471

 
17,756

 
10,689

Stock-based compensation expense included in general and administrative
10,085

 
11,716

 
4,581

Amortization of intangible assets expense included in operating expenses
8,359

 
5,498

 
902

Acquisition and integration costs
8,297

 
14,868

 
809

Restructuring and other related benefits
(37
)
 

 
(41
)
Total operating income impact from non-GAAP adjustments
77,457

 
94,706

 
28,202

 
 
 
 
 
 
Convertible debt interest
3,919

 
3,871

 
3,730

Effects of certain intercompany transactions on the tax provision
6,759

 
7,436

 

Income tax effect of non-GAAP adjustments
(21,104
)
 
(24,506
)
 
(8,363
)
Total net income impact from non-GAAP adjustments
$
67,031

 
$
81,507

 
$
23,569

 
 
 
 
 
 
Gross margin reconciliation
 
 
 
 
 
GAAP gross margin
$
420,314

 
$
356,899

 
$
394,277

Total gross margin impact from non-GAAP adjustments
27,789

 
35,662

 
5,787

Non-GAAP gross margin
$
448,103

 
$
392,561

 
$
400,064

GAAP gross margin, as a percent of total net revenues
63.9
%
 
60.4
 %
 
67.0
%
Non-GAAP gross margin, as a percent of total net revenues
68.2
%
 
66.5
 %
 
67.9
%
 
 
 
 
 
 
Operating income reconciliation
 
 
 
 
 
GAAP operating income
$
82,868

 
$
20,594

 
$
119,221

Total operating income impact from non-GAAP adjustments
77,457

 
94,706

 
28,202

Non-GAAP operating income
$
160,325

 
$
115,300

 
$
147,423

GAAP operating income, as a percent of total net revenues
12.6
%
 
3.5
 %
 
20.2
%
Non-GAAP operating income, as a percent of total net revenues
24.4
%
 
19.5
 %
 
25.0
%
BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP FINANCIAL MEASURES—Continued
(Unaudited)
 
Three Months Ended
 
October 29,
2016
 
July 30,
2016
 
October 31,
2015
 
(In thousands, except per share amounts)
Net income and net income per share attributable to Brocade reconciliation
 
 
 
 
 
Net income attributable to Brocade on a GAAP basis
$
66,589

 
$
10,495

 
$
84,388

Total net income impact from non-GAAP adjustments
67,031

 
81,507

 
23,569

Non-GAAP net income attributable to Brocade
$
133,620

 
$
92,002

 
$
107,957

 
 
 
 
 
 
GAAP net income per share—basic attributable to Brocade
$
0.17

 
$
0.02

 
$
0.20

Total impact on net income per share—basic from non-GAAP adjustments
0.16

 
0.20

 
0.06

Non-GAAP net income per share—basic attributable to Brocade
$
0.33

 
$
0.22

 
$
0.26

 
 
 
 
 
 
GAAP net income per share—diluted attributable to Brocade
$
0.16

 
$
0.02

 
$
0.20

Total impact on net income per share—diluted from non-GAAP adjustments
0.17

 
0.19

 
0.06

Non-GAAP net income per share—diluted attributable to Brocade
$
0.33

 
$
0.21

 
$
0.26

 
 
 
 
 
 
Shares used in non-GAAP per share calculation—basic
401,103

 
426,671

 
414,769

Shares used in non-GAAP per share calculation—diluted
410,123

 
434,416

 
422,315

 
 
 
 
 
 
Effective tax rate reconciliation
 
 
 
 
 
GAAP income before income tax
$
67,778

 
$
8,689

 
$
110,492

Total operating income impact from non-GAAP adjustments
77,457

 
94,706

 
28,202

Convertible debt interest
3,919

 
3,871

 
3,730

Non-GAAP income before income tax
$
149,154

 
$
107,266

 
$
142,424

 
 
 
 
 
 
GAAP income tax expense (benefit)
$
1,077

 
$
(1,806
)
 
$
26,104

Effects of certain intercompany transactions on the tax provision
(6,759
)
 
(7,436
)
 

Income tax effect of non-GAAP adjustments
21,104

 
24,506

 
8,363

Non-GAAP income tax expense
$
15,422

 
$
15,264

 
$
34,467

 
 
 
 
 
 
GAAP income before income tax
$
67,778

 
$
8,689

 
$
110,492

GAAP income tax expense (benefit)
$
1,077

 
$
(1,806
)
 
$
26,104

GAAP effective tax rate
1.6
%
 
(20.8
)%
 
23.6
%
 
 
 
 
 
 
Non-GAAP income before income tax
$
149,154

 
$
107,266

 
$
142,424

Non-GAAP Income tax expense
$
15,422

 
$
15,264

 
$
34,467

Non-GAAP effective tax rate
10.3
%
 
14.2
 %
 
24.2
%


Page 12 of 15


BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP FINANCIAL MEASURES
(Unaudited)
 
For the Year Ended
 
October 29,
2016
 
October 31,
2015
 
(In thousands, except per share amounts)
Non-GAAP adjustments
 
 
 
Stock-based compensation expense included in cost of revenues
$
16,882

 
$
12,946

Amortization of intangible assets expense included in cost of revenues
28,787

 
7,641

Purchase accounting adjustment to inventory
30,565

 

Total gross margin impact from non-GAAP adjustments
76,234

 
20,587

 
 
 
 
Stock-based compensation expense included in research and development
29,298

 
18,714

Stock-based compensation expense included in sales and marketing
53,357

 
38,340

Stock-based compensation expense included in general and administrative
31,469

 
18,528

Amortization of intangible assets expense included in operating expenses
15,661

 
2,556

Acquisition and integration costs
28,922

 
3,942

Restructuring and other related benefits
(603
)
 
(678
)
Total operating income impact from non-GAAP adjustments
234,338

 
101,989

 
 
 
 
Call premium cost and write-off of debt discount and debt issuance costs related to lenders that did not participate in refinancing

 
15,122

Convertible debt interest
15,390

 
11,731

Effects of certain intercompany transactions on the tax provision
27,865

 

Income tax effect of non-GAAP adjustments
(57,709
)
 
(33,179
)
Total net income impact from non-GAAP adjustments
$
219,884

 
$
95,663

 
 
 
 
Gross margin reconciliation
 
 
 
GAAP gross margin
$
1,516,339

 
$
1,528,073

Total gross margin impact from non-GAAP adjustments
76,234

 
20,587

Non-GAAP gross margin
$
1,592,573

 
$
1,548,660

GAAP gross margin, as a percent of total net revenues
64.6
%
 
67.5
%
Non-GAAP gross margin, as a percent of total net revenues
67.9
%
 
68.4
%
 
 
 
 
Operating income reconciliation
 
 
 
GAAP operating income
$
307,093

 
$
492,680

Total operating income impact from non-GAAP adjustments
234,338

 
101,989

Non-GAAP operating income
$
541,431

 
$
594,669

GAAP operating income, as a percent of total net revenues
13.1
%
 
21.8
%
Non-GAAP operating income, as a percent of total net revenues
23.1
%
 
26.3
%

Page 13 of 15


BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP FINANCIAL MEASURES—Continued
(Unaudited)
 
For the Year Ended
 
October 29,
2016
 
October 31,
2015
 
(In thousands, except per share amounts)
Net income and net income per share attributable to Brocade reconciliation
 
 
 
Net income attributable to Brocade on a GAAP basis
$
213,815

 
$
340,362

Total net income impact from non-GAAP adjustments
219,884

 
95,663

Non-GAAP net income attributable to Brocade
$
433,699

 
$
436,025

 
 
 
 
GAAP net income per share—basic attributable to Brocade
$
0.52

 
$
0.81

Total impact on net income per share—basic from non-GAAP adjustments
0.54

 
0.23

Non-GAAP net income per share—basic attributable to Brocade
$
1.06

 
$
1.04

 
 
 
 
GAAP net income per share—diluted attributable to Brocade
$
0.51

 
$
0.79

Total impact on net income per share—diluted from non-GAAP adjustments
0.53

 
0.22

Non-GAAP net income per share—diluted attributable to Brocade
$
1.04

 
$
1.01

 
 
 
 
Shares used in non-GAAP per share calculation—basic
409,058

 
420,331

Shares used in non-GAAP per share calculation—diluted
417,093

 
430,556

 
 
 
 
Effective tax rate reconciliation
 
 
 
GAAP income before income tax
$
262,038

 
$
439,051

Total operating income impact from non-GAAP adjustments
234,338

 
101,989

Call premium cost and write-off of debt discount and debt issuance costs related to lenders that did not participate in refinancing

 
15,122

Convertible debt interest
15,390

 
11,731

Non-GAAP income before income tax
$
511,766

 
$
567,893

 
 
 
 
GAAP income tax expense
$
48,111

 
$
98,689

Effects of certain intercompany transactions on the tax provision
(27,865
)
 

Income tax effect of non-GAAP adjustments
57,709

 
33,179

Non-GAAP income tax expense
$
77,955

 
$
131,868

 
 
 
 
GAAP income before income tax
$
262,038

 
$
439,051

GAAP income tax expense
$
48,111

 
$
98,689

GAAP effective tax rate
18.4
%
 
22.5
%
 
 
 
 
Non-GAAP income before income tax
$
511,766

 
$
567,893

Non-GAAP Income tax expense
$
77,955

 
$
131,868

Non-GAAP effective tax rate
15.2
%
 
23.2
%


Page 14 of 15


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