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JUNIPER NETWORKS INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
This Annual Report on Form 10-K ("Report"), including the "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
contains forward-looking statements regarding future events and the future
results of Juniper Networks, Inc. ("we," "us," or the "Company") that are based
on our current expectations, estimates, forecasts, and projections about our
business, our results of operations, the industry in which we operate and the
beliefs and assumptions of our management. Words such as "expects,"
"anticipates," "targets," "goals," "projects," "would," "could," "intends,"
"plans," "believes," "seeks," "estimates," variations of such words, and similar
expressions are intended to identify such forward-looking statements.
Forward-looking statements by their nature address matters that are, to
different degrees, uncertain, and 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 I and elsewhere, and in other reports we file with the SEC.
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 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, Significant Accounting Policies,
in Notes to Consolidated Financial Statements in Item 8 of Part II of this
Report, and our "Critical Accounting Policies and Estimates" section included in
this "Management's Discussion and Analysis of Financial Condition and Results of
Operations." Actual results may differ from these estimates under different
assumptions or conditions.
To aid in understanding our operating results for the periods covered by this
Report, we have provided an executive overview and a summary of the business and
market environment. These sections should be read in conjunction with the more
detailed discussion and analysis of our consolidated financial condition and
results of operations in this Item 7, our "Risk Factors" section included in
Item 1A of Part I, and our Consolidated Financial Statements and notes thereto
included in Item 8 of Part II of this Report.
Business and Market Environment
At Juniper Networks, we design, develop, and sell products and services that
together provide our customers with a high-performance network infrastructure
built on simplicity, security, openness, and scale. 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. Our core competencies in hardware
systems, silicon design, network architecture, and our open cross-network
software platform are helping customers achieve superior performance, greater
choice and flexibility, while reducing overall total cost of ownership.
We do business in three geographic regions: Americas, EMEA, and APAC. Beginning
in the first quarter of 2012, we aligned our organizational structure to focus
on our platform and software strategy, which resulted in two business segments
organized principally by product families: PSD and SSD. Our PSD segment
primarily offers scalable routing and switching products that are used in
service provider, enterprise, and public sector networks to control and direct
network traffic between data centers, core, edge, aggregation, campus, WANs,
branch, and consumer and business devices. Our SSD segment offers software
solutions focused on network security and network services applications for both
service providers and enterprise customers. Both segments offer worldwide
services, including technical support and professional services, as well as
educational and training programs to our customers.
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We remain focused on a common vision for the new network and we believe that the
organizational structure we have in place will effectively drive our innovative
portfolio and support our customers' next-generation network requirements.
Together, our high-performance product and service offerings help our customers
to convert legacy networks that provide commoditized services into more valuable
assets that provide differentiation, value, increased performance, reliability,
and security to end-users. We remain dedicated to uncovering new ideas and
innovations that will serve the exponentially increasing demands of the
networked world, and we will endeavor to continue to build solutions that center
on simplification, automation, and open innovation.
During 2012, we saw moderate growth in some of our primary markets. We continued
to experience an uncertain global macroeconomic environment in which our
customers exercised care and conservatism in their investment prioritization and
project deployments. We expect that our customers will continue to remain
cautious with their capital spending in the near term. We also continued to
experience declining product gross margins and pricing pressures from our
competitors. We believe our product gross margins may continue to decline in the
future, offset by operational improvements and cost efficiencies. Nevertheless,
we are focused on executing our strategy to address the market trends of mobile
Internet and cloud computing and we continue to see positive long-term
fundamentals for high-performance networking.
We continue to invest in innovation and strengthening our product portfolio,
which resulted in new product offerings during 2012, including a smaller version
of our QFabric solutions, the latest QFX3000-M QFabric System, T4000 Core
Routers, PTX Series Packet Transport switches. Additionally, we experienced new
customer wins contributing to the growth in the EX Series, MX Series, and SRX
Series. We launched the new ACX Series router with support for both Ethernet
access/aggregation and MPLS, which extends network intelligence closer to the
subscriber and features an open, standards-based management system with software
development kit ("SDK")-enabled programmability to enable rapid third-party
innovation. We also announced new products and features in our Simply Connected
portfolio, including SRX Series Services Gateways and WLA Series Wireless LAN
Access Points, which simplify and secure mobile device access to enterprise
networks. Furthermore, we acquired Mykonos Web Security Software, in February
2012 to complement our network security applications portfolio.
Additionally, we announced innovative products to enable service providers to
rapidly deliver and expand new consumer and business services. These products
include our MX2020 and MX2010 3D Universal Edge Routers and new JunosV App
Engine, which enable service providers to transform the network edge into a
platform for rapid service deployment. We also launched the Junos Content Encore
with MX Application Services Modular Line Card, which enables the delivery of
premium content services over broadband connections across multiple device
types. Furthermore, we announced a technology partnership with Riverbed
Technology, Inc. ("Riverbed") that provides us with new capabilities for
application delivery control, in exchange for Juniper providing WAN acceleration
technology to Riverbed, along with promoting Riverbed as its WAN optimization
provider of choice going forward.
Throughout 2012, we focused on improved operational execution, continued
innovation, and prudent capital allocation. We continue to believe that the
underlying trends driving network investment around the cloud and mobility are
intact and remain strong. During 2012, we also initiated a variety of actions to
ensure we are positioned for the future, resulting in a restructuring plan (the
"2012 Restructuring Plan") to bring our cost structure more in line with our
desired long-term financial and strategic model. The 2012 Restructuring Plan
consists of workforce reductions, facility consolidations or closures, and
supply chain and procurement efficiencies. In connection with the 2012
Restructuring Plan, we recorded costs of $40.4 million for workforce reductions,
facility consolidations or closures, and other charges during 2012. We also
recorded certain inventory charges, intangible asset impairment charges, and
contract termination costs of $52.9 million. We expect to incur charges related
to the 2012 Restructuring Plan through the end of fiscal 2013. We continue to
anticipate that our restructuring and cost reduction activities will result in
approximately $150.0 million in cost reduction savings, primarily in operating
expenses, and to a lesser extent, in both product and service cost of revenues
for the full year 2013, in comparison to our 2012 full year levels. See Note 9,
Restructuring and Other Charges, in Notes to Consolidated Financial Statements
in Item 8 of Part II of this Report, for further discussion of our restructuring
activities.
On January 24, 2013, we communicated the following five principles that provide
insight on our operating plans for 2013:
• We expect the macroeconomic environment to remain uncertain;
• We expect overall modest growth in the markets we serve;
• We expect to take share in routing and switching and stabilize our share
in enterprise security;
• We expect to expand 2013 operating margins over 2012; and
• We expect to continue to generate strong cash flows and prudently allocate
capital.
These five principles are based on our management's plans, assumptions, and
expectations as of the date of this Report. Although we believe we have been
prudent in our plans, expectations, and assumptions, should known or unknown
risks or uncertainties materialize or should underlying assumptions prove
inaccurate, actual results could vary materially.
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Financial Results and Key Performance Metrics Overview
The following table provides an overview of our key financial metrics for the
years ended December 31, 2012, 2011, and 2010 (in millions, except per share
amounts, percentages, day sales outstanding, and book-to-bill):
As of and for the Years Ended December 31,
2012 2011 2010 2012 vs. 2011 2011 vs. 2010
$ Change % Change $ Change % Change
Net revenues $ 4,365.4 $ 4,448.7 $ 4,093.3 $ (83.3 ) (2)% $ 355.4 9%
Gross Margin $ 2,708.8 $ 2,868.6 $ 2,741.8 $ (159.8 )
(6)% $ 126.8 5%
Percentage of net
revenues 62.1 % 64.5 % 67.0 %
Operating income $ 308.1 $ 618.5 $ 767.6 $ (310.4 ) (50)% $ (149.1 ) (19)%
Percentage of net
revenues 7.1 % 13.9 % 18.8 %
Net income
attributable to
Juniper Networks $ 186.5 $ 425.1 $ 618.4 $ (238.6 ) (56)% $ (193.3 ) (31)%
Percentage of net
revenues 4.3 % 9.6 % 15.1 %
Net income per share
attributable to
Juniper Networks
common
stockholders:
Basic $ 0.36 $ 0.80 $ 1.18 $ (0.44 ) (55)% $ (0.38 ) (32)%
Diluted $ 0.35 $ 0.79 $ 1.15 $ (0.44 ) (56)% $ (0.36 ) (31)%
Operating cash flows $ 642.4 $ 986.7 $ 812.3 $ (344.3 ) (35)% $ 174.4 21%
Deferred revenue $ 923.4 $ 967.0 $ 884.4 $ (43.6 ) (5)% $ 82.6 9%
Day sales outstanding
("DSO") (*) 35 46 45 (11 ) (24)% 1 2%
Book-to-bill (*) >1 1 >1
________________________________
(*) DSO and book-to-bill are for the fourth quarter ended 2012, 2011, and 2010.
• Net Revenues: Our net revenue decreased in our EMEA and APAC regions,
offset by an increase in the Americas region in 2012, compared to 2011. By
market, we experienced declines in both service provider and enterprise
markets in 2012, compared to 2011. The year-over-year decrease in our net
revenues during 2012 was primarily due to a decline in sales of our core
and edge legacy routing products and firewall products, partially offset
by increases in our service revenue, switching products, and high-end SRX
products.
• Gross Margin: Our gross margin as a percentage of revenues decreased in
2012, compared to 2011, due to lower product margin from $44.3 million in
inventory charges related to component inventory held in excess of
forecasted demand and an intangible asset impairment charge of $16.1
million, and to a lesser extent, due to an increase in the size and number
of strategic contracts with lower margins, and a shift in product mix to
lower margin products. This decrease was partially offset by an increase
in service margin.
• Operating Income: Our operating income as a percentage of revenues
decreased in 2012, compared to 2011, primarily due to slower revenue growth relative to our sales and marketing and research and development
expense, as we continue to invest in our innovative portfolio and bring
new products to market. In addition, restructuring and other associated
charges of $99.7 million were recorded in 2012, related to workforce
reduction activities, facility closures, asset impairment charges, and
contract terminations.
• Net Income Attributable to Juniper Networks and Net Income Per Share
Attributable to Juniper Networks Common Stockholders: The decrease in net
income attributable to Juniper Networks in 2012, compared to 2011,
reflects the lower operating income discussed above.
• Operating Cash Flows: Operating cash flows decreased in 2012, compared to
2011, primarily due to lower net income, higher taxes paid, timing of
payments to our vendors, and a decrease in deferred revenue, offset by
collections of our outstanding receivables.
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• Deferred Revenue: Total deferred revenue decreased $43.6 million to $923.4
million as of December 31, 2012, compared to $967.0 million as of
December 31, 2011, due to a decline in deferred service revenue, partially
offset by an increase in deferred product revenue.
• DSO: DSO is calculated as the ratio of ending accounts receivable, net of
allowances, divided by average daily net sales for the preceding 90 days.
DSO for the quarter ended December 31, 2012 decreased by 11 days, or 24%
compared to the quarter ended December 31, 2011. The decrease was
primarily due to shipment linearity, resulting in a greater proportion of
the periods shipments converted to cash by the end of the period and an
increase in collections on our outstanding receivables.
• Book-to-Bill: Book-to-bill represents the ratio of product orders booked
divided by product revenues during the respective period. Book-to-bill was
greater than one for the quarter ended December 31, 2012 and one for the
quarter ended December 31, 2011.
• Stock Repurchase Plan Activity: Under our stock repurchase program, we
repurchased approximately 35.8 million shares of our common stock at an
average price of $18.05 per share for an aggregate purchase price of
$645.6 million during the year ended December 31, 2012.
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 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,
Significant Accounting Policies, in Notes to Consolidated Financial Statements
in Item 8 of Part II of this Report, describes the significant accounting
policies and methods used in the preparation of the 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
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.
• Inventory Valuation and Contract Manufacturer Liabilities. Inventory
consists primarily of component parts to be used in the manufacturing
process and is stated at lower of average cost or market. A provision is
recorded when inventory is determined to be in excess of anticipated
demand or obsolete, to adjust inventory to its estimated realizable value.
In determining the provision, we also consider estimated recovery rates
based on the nature of the inventory. As of December 31, 2012 and 2011,
our inventory balances were $62.5 million and $69.1 million, respectively.
We establish a liability for non-cancelable, non-returnable purchase commitments
with our contract manufacturers for carrying charges, quantities in excess of
our demand forecasts, or obsolete material charges for components purchased by
the contract manufacturers to meet our demand forecasts or customer orders. We
also take estimated recoveries of aged inventory into consideration when
determining the liability. As of December 31, 2012 and 2011, our contract
manufacturer liabilities were $27.7 million and $14.8 million, respectively.
Significant judgment is used in establishing our forecasts of future demand,
recovery rates based on the nature and age of inventory, and obsolete material
exposures. If the actual component usage and product demand are significantly
lower than forecast, which may be caused by factors within and outside of our
control, or if there were a higher incidence of inventory obsolescence because
of rapidly changing technology and our customer requirements, we may be required
to increase our inventory write-downs and contract manufacturer liabilities,
which could have an adverse impact on our gross margins and profitability. We
regularly evaluate our exposure for inventory write-downs and adequacy of our
contract manufacturer liabilities. Inventory and 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.
• Goodwill and Other Long-Lived Assets. We make significant estimates,
assumptions, and judgments when valuing goodwill and other intangible
assets in connection with the initial purchase price allocation of an
acquired entity, as well as when evaluating impairment of goodwill and
other intangible assets on an ongoing basis. These estimates are based
upon a number of factors, including historical experience, market conditions, and information obtained from the management of the acquired
company. Critical estimates in valuing certain intangible assets include,
but are not limited to, historical and projected customer retention rates,
anticipated growth in revenue from the acquired customer
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and product base, and the expected use of the acquired assets. These factors are
also considered in determining the useful life of the acquired intangible
assets. The amounts and useful lives assigned to identified intangible assets
impacts the amount and timing of future amortization expense.
The value of our goodwill and intangible assets could be impacted by future
adverse changes such as, but not limited to: (a) a significant adverse change in
legal factors or in the business climate; (b) a substantial decline in our
market capitalization, (c) an adverse action or assessment by a regulator; (d)
unanticipated competition; (e) loss of key personnel; (f) a more likely-than-not
expectation of sale or disposal of a reporting unit or a significant portion
thereof; (g) a realignment of our resources or restructuring of our existing
businesses in response to changes to industry and market conditions; (h) testing
for recoverability of a significant asset group within a reporting unit; or (i)
higher discount rate used in the impairment analysis as impacted by an increase
in interest rates.
We evaluate goodwill on an annual basis as of November 1st or more frequently if
we believe impairment indicators exist. Goodwill is tested for impairment at the
reporting unit level, which is one level below our operating segment level, by
comparing the reporting unit's carrying value, including goodwill, to the fair
value of the reporting unit. The fair values of the reporting units are
estimated using significant judgment based on a combination of the income and
the market approaches. Under the income approach, we estimate fair value of a
reporting unit based on the present value of forecasted future cash flows that
the reporting unit is expected to generate over its remaining life. Under the
market approach, we estimate fair value of our reporting units based on an
analysis that compares the value of the reporting units to values of
publicly-traded companies in similar lines of business. If the fair value of the
reporting unit does not exceed the carrying value of the net assets assigned to
the reporting unit, then we perform the second step of the impairment test in
order to determine the implied fair value of the reporting unit's goodwill. When
the carrying value of a reporting unit's goodwill exceeds its implied fair
value, we record an impairment loss equal to the difference. Determining the
fair value of a reporting unit is highly judgmental in nature and involves the
use of significant estimates and assumptions. These estimates and assumptions
include revenue growth rates and operating margins used to calculate projected
future cash flows, operating trends, risk-adjusted discount rates, future
economic and market conditions and determination of appropriate market
comparables. We base our fair value estimates on assumptions we believe to be
reasonable but that are unpredictable and inherently uncertain. Actual future
results may differ from those estimates. In addition, we make certain judgments
and assumptions in allocated shared assets and liabilities to determine the
carrying values for each of our reporting units. As of December 31, 2012,
goodwill recorded for our PSD segment and SSD segment was $1,866.3 million and
$2,191.5 million, respectively. The fair value of our reporting units, in
particular SSD, are sensitive to events or changes in circumstances, such as
adverse changes in operating results or macro-economic conditions, changes in
management's business strategy, or declines in our stock price. A hypothetical
5% decrease in the estimated fair value of our reporting units would result in
the fair value of our SSD segment to be above its carrying value by
approximately 1% and the fair value of our PSD segment to be in excess of its
carrying value by approximately 80%. See Item 1A of Part I, "Risk Factors," for
more information.
We evaluate long-lived assets, such as property, plant and equipment, and
purchased intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. Such events or changes in circumstances include, but are not
limited to, a significant decrease in the fair value of the underlying asset or
asset group, a significant decrease in the benefits realized from the acquired
assets, difficulty and delays in integrating the business or a significant
change in the operations of the acquired assets or use of an asset. A long-lived
asset is considered impaired if its carrying amount exceeds the estimated future
undiscounted cash flows the asset or asset group is expected to generate. If a
long-lived asset is considered to be impaired, the impairment to be recognized
is the amount by which the carrying amount of the asset exceeds the fair value
of the asset or asset group.
• Warranty Reserves. 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 use judgment and estimates when
determining warranty costs as part of our cost of sales based on associated material costs, labor costs for trouble-shooting and repair,
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, if actual product
failure rates, use of materials, or service delivery costs differ from
estimates, additional warranty costs may be incurred, which could reduce
gross margin. As of December 31, 2012 and 2011, our warranty reserves were
$29.7 million and $28.3 million, respectively.
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• Revenue recognition. Revenue is recognized when all of the following
criteria have been met: (1) persuasive evidence of an arrangement exists,
(2) delivery has occurred, (3) sales price is fixed or determinable, and
(4) collectability is reasonably assured. We enter into contracts to sell our products and services, and while some of our sales agreements contain
standard terms and conditions, there are agreements that contain multiple
elements or non-standard terms and conditions. As a result, significant
contract interpretation may be required to determine the appropriate
accounting, including whether the deliverables specified in a multiple
element arrangement should be treated as separate units of accounting for
revenue recognition purposes, and, if so, how the price should be
allocated among the elements and when to recognize revenue for each
element. Changes in the allocation of the sales price between elements may
impact the timing of revenue recognition but will not change the total
revenue recognized on the contract.
Under our revenue recognition policies, 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 establish VSOE of selling price using the
price charged for a deliverable when sold separately. TPE of selling price is
established by evaluating largely interchangeable competitor products or
services in stand-alone sales to similarly situated customers. ESP is
established considering internal factors such as margin objectives, pricing
practices and controls, customer segment pricing strategies and product life
cycle. Consideration is also given to market conditions such as industry pricing
strategies and technology life cycles. When determining ESP, we apply management
judgment to establish margin objectives and pricing strategies and to evaluate
market conditions and product life cycles. We do not use TPE as we do not
consider our products to be similar or interchangeable to our competitors'
products in standalone sales to similarly situated customers. Revenue from
maintenance service contracts is deferred and recognized ratably over the
contractual support period, which is generally one to three years. We applied
ESP to the majority of our product revenue and VSOE to our service revenue in
2012, 2011, and 2010.
• Share-Based Compensation. We recognize share-based compensation expense
for all share-based payment awards including stock options, RSUs, RSAs,
PSAs, and purchases under our Employee Stock Purchase Plan ("ESPP") based
on each award's fair value on the grant date.
We utilize the Black-Scholes-Merton ("BSM") option-pricing model in order to
determine the fair value of stock options and ESPP. The BSM model requires
various highly subjective assumptions including volatility, expected award 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. We
determine the fair value of RSUs, RSAs and PSAs based on the closing market
price of our common stock on the date of grant. In addition, we use significant
judgment in estimating share-based compensation expense for our PSAs based on
the vesting criteria and only recognize expense for the portions in which annual
targets have been set.
The assumptions used in calculating the fair value of share-based payment awards
represent management's best estimates. These estimates involve inherent
uncertainties and the application of management's judgment. If factors change
and different assumptions are used, our share-based compensation expense could
be materially different in the future. Additionally, we are required to estimate
the expected forfeiture rate based on historical experience, as well as
judgment, and recognize expense only for those expected-to-vest shares. If our
actual forfeiture rate is materially different from our estimate, our recorded
share-based compensation expense could be different.
• Income Taxes. We are subject to income taxes in the United States and
numerous foreign jurisdictions. Significant judgment is required in
evaluating our uncertain tax positions and determining our provision for
income taxes. Although we believe our reserves 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 that the amounts recorded, such differences
will affect the provision for income taxes in the period in which such
determination is made.
Significant judgment is also 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 impact to the provision for income taxes in the period in
which such determination is made.
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Our provision for income taxes is subject to volatility and could be adversely
affected by earnings being lower than anticipated in countries that have lower
tax rates and higher than anticipated in countries that have higher tax rates;
by changes in the valuation of our deferred tax assets and liabilities; by
expiration of or lapses in the R&D tax credit laws; by transfer pricing
adjustments, including the effect of acquisitions on our intercompany R&D
cost-sharing arrangement and legal structure; by tax effects of nondeductible
compensation; by tax costs related to intercompany realignments; by changes in
accounting principles; or by changes in tax laws and regulations, including
possible U.S. changes to the taxation of earnings of our foreign subsidiaries,
the deductibility of expenses attributable to foreign income, or the foreign tax
credit rules. Significant judgment is required to determine the recognition and
measurement attributes prescribed in the accounting guidance for uncertainty in
income taxes. The accounting guidance for uncertainty in income taxes applies to
all income tax positions, including the potential recovery of previously paid
taxes, which if settled unfavorably could adversely affect our provision for
income taxes or additional paid-in capital. 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 operating
results and financial condition.
• Loss Contingencies. We use significant judgment and assumptions to
estimate the likelihood of loss or impairment of an asset, or the
incurrence of a liability, 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.
Recent Accounting Pronouncements
See Note 2, Significant Accounting Policies, in Notes to the Consolidated
Financial Statements in Item 8 of Part II of this Report, for a full description
of recent accounting pronouncements, including the expected dates of adoption
and estimated effects on financial condition and results of operations, which is
incorporated herein by reference.
Results of Operations
The following table presents product and service (in millions, except
percentages):
Years Ended December 31,
2012 2011 2010 2012 vs. 2011 2011 vs. 2010
$ Change % Change $ Change % Change
Product $ 3,262.1 $ 3,478.3 $ 3,258.7 $ (216.2 ) (6)% $ 219.6 7%
Percentage of net
revenues 74.7 % 78.2 % 79.6 %
Service 1,103.3 970.4 834.6 132.9 14% 135.8 16%
Percentage of net
revenues 25.3 % 21.8 % 20.4 %
Total net revenues $ 4,365.4 $ 4,448.7 $ 4,093.3 $ (83.3 )
(2)% $ 355.4 9%
The decrease in product revenues in 2012, compared to 2011, was primarily due to
a decline in sales of our core and edge legacy routing and firewall products,
partially offset by an increase in our switching and high-end SRX products. Our
2012 revenues reflect initial sales from the introduction of our T4000, PTX and
ACX routing products. The increase in service revenues in 2012 was primarily
driven by strong contract renewals compared to 2011 for certain edge routing,
switching and security products.
The increase in product revenues in 2011, compared to 2010, was primarily due to
an increase in sales of our edge routing and switching products, partially
offset by decreases in core routing and high-end firewall products. Our 2011
revenues reflect initial sales from the introduction of our QFabric solution.
The increase in service revenues in 2011, compared to 2010, was primarily
attributable to sales and contract renewals for certain edge routing, switching,
and security products.
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Net Revenues by Market and Customer
The following table presents net revenues by market (in millions, except
percentages):
Years Ended December 31,
2012 2011 2010 2012 vs. 2011 2011 vs. 2010
$ Change % Change $ Change % Change
Service Provider $ 2,811.2 $ 2,833.0 $ 2,631.5 $ (21.8 ) (1 )% $ 201.5 8%
Percentage of net
revenues 64.4 % 63.7 % 64.3 %
Enterprise 1,554.2 1,615.7 1,461.8 (61.5 ) (4 )% 153.9 11%
Percentage of net
revenues 35.6 % 36.3 % 35.7 %
Total net revenues $ 4,365.4 $ 4,448.7 $ 4,093.3 $ (83.3 )
(2 )% $ 355.4 9%
We sell our high-performance network products and service offerings from both
our PSD and SSD segments to two primary markets: service provider and
enterprise. Determination of which market a particular revenue transaction
relates to is based primarily upon the customer's industrial classification
code, but may also include subjective factors such as the intended use of the
product. The service provider market generally includes wireline, wireless, and
cable operators, as well as major Internet content and application providers,
including those that provide social networking and search engine services. The
enterprise market generally comprises businesses; federal, state, and local
governments; and research and education institutions.
Net revenues from sales to the service provider market decreased in 2012,
compared to 2011, primarily due to reduced routing purchases by some of our
international and content service providers, partially offset by strong growth
from Tier 1 carrier service providers in the Americas. Net revenues from sales
to the service provider market increased in 2011, compared to 2010, across all
of our geographic regions, specifically in the Americas and EMEA. The increase
was largely attributable to customers' adoption of our routing and switching
products.
Net revenues generated from the enterprise market decreased in 2012, compared to
2011, primarily due to lower revenue in federal and financial services, offset
by our expanding presence in APAC and EMEA. Net revenues generated from the
enterprise market increased in 2011 compared to 2010 across all three geographic
regions. The increase, reflecting demand for both routing and switching
products, was driven by the value proposition we offer to customers as well the
expansion of our presence in the global enterprise market.
In 2012 and 2010, Verizon Communications, Inc. accounted for 10.3% and 10.4% of
our net revenues, respectively. In 2011, no single customer accounted for
greater than 10% of our net revenues
Net Revenues by Geographic Region
The following table presents net revenues by geographic region (in millions,
except percentages):
Years Ended December 31,
2012 2011 2010 2012 vs. 2011 2011 vs. 2010
$ Change % Change $ Change % Change
Americas:
United States $ 2,067.5 $ 2,015.8 $ 1,890.1 $ 51.7 3% $ 125.7 7%
Other 218.4 222.2 205.5 (3.8 ) (2)% 16.7 8%
Total Americas 2,285.9 2,238.0 2,095.6 47.9
2% 142.4 7%
Percentage of net
revenues 52.4 % 50.3 % 51.2 %
EMEA 1,266.3 1,339.8 1,189.3 (73.5 ) (5)% 150.5 13%
Percentage of net
revenues 29.0 % 30.1 % 29.1 %
APAC 813.2 870.9 808.4 (57.7 ) (7)% 62.5 8%
Percentage of net
revenues 18.6 % 19.6 % 19.7 %Total net revenues $ 4,365.4 $ 4,448.7 $ 4,093.3 $ (83.3 )
(2)% $ 355.4 9%
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Net revenues in the Americas increased in 2012, compared to 2011, primarily due
to increased sales in the United States to certain service providers, offset by
a decline in the enterprise market particularly among federal and financial
services customers. Net revenues in the Americas increased in 2011, compared to
2010, primarily due to increased sales in the United States attributable to the
demand for our routing and switching products and services from enterprise and
service provider customers.
Net revenues in EMEA decreased in 2012, compared to 2011, primarily due to
decreased sales in Western and Southern Europe as a result of the challenging
economic climate in those areas. The decrease was partially offset by increased
revenues in the Middle East and from a top service provider in Eastern Europe,
across a broad range of our product portfolio. The increase in net revenues in
EMEA in 2011, compared to 2010, was driven by service provider and enterprise
demand for our routing and switching products and related services, in both the
service provider and enterprise markets. The increases were largely attributable
to Sweden, Eastern Europe, and the Netherlands. In addition, we recognized the
first revenue from a top service provider in Eastern Europe, across a broad
range of our product portfolio.
Net revenues in APAC decreased in 2012, compared to 2011, primarily due to a
decrease in sales to a certain service provider customer in Japan, following a
large product deployment that occurred in 2011. This decrease was partially
offset by growth in China in the enterprise market. Net revenues in APAC
increased in 2011, compared to 2010, due to the increase in revenues from both
service provider and enterprise markets. Net revenues also increased in
Southeast Asia and Australia in 2011, compared to 2010, partially offset by
continued weakness in Japan and a deferral of some demand in China.
Gross Margins
The following table presents gross margins (in millions, except percentages):
Years Ended December 31,
2012 2011 2010 2012 vs. 2011 2011 vs. 2010
$ Change % Change $ Change % Change
Product gross margin $ 2,058.1 $ 2,323.0 $ 2,257.8 $ (264.9 ) (11)% $ 65.2 3%
Percentage of product
revenues 63.1 % 66.8 % 69.3 %
Service gross margin 650.7 545.6 484.0 105.1 19% 61.6 13%
Percentage of service
revenues 59.0 % 56.2 % 58.0 %
Total gross margin $ 2,708.8 $ 2,868.6 $ 2,741.8 $ (159.8 ) (6)% $ 126.8 5%
Percentage of net
revenues 62.1 % 64.5 % 67.0 %
Product gross margin percentage decreased in 2012, compared to 2011, primarily
due to a $44.3 million inventory charge related to component inventory held in
excess of forecasted demand and to an intangible asset impairment charge of
$16.1 million related to our 2012 restructuring activities as discussed in
Note 8, Other Financial Information, and Note 7, Goodwill and Purchased
Intangible Assets, in Notes to Consolidated Financial Statements in Item 8 of
Part II of this Report. To a lesser extent, the decrease was due to an increase
in the size and number of strategic contracts with lower margins and to a shift
in product mix to lower margin products. Product gross margin percentage
decreased in 2011, compared to 2010, primarily due to a lower proportion of
router revenue, a shift in the geographic mix of revenue from the Americas, and
increased fixed overhead and inventory-related costs. From 2010 through 2012,
our product gross margins have declined. We expect this trend to continue into
2013, due to a shift in product mix and pricing pressures offset in part by
innovation and cost efficiencies.
Service gross margin percentage increased in 2012, compared to 2011, primarily
due to higher service revenues, combined with a continuing focus on operational
improvements and cost efficiencies. Service gross margin percentage decreased in
2011, compared to 2010, primarily due to a growth in headcount for service and
support resources for our expanded product portfolio. We expect service gross
margins to remain relatively stable in 2013.
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Operating Expenses
The following table presents operating expenses (in millions, except
percentages):
Years Ended December 31,
2012 2011 2010 2012 vs. 2011 2011 vs. 2010
$ Change % Change $ Change % Change
Research and
development $ 1,101.6 $ 1,026.8 $ 917.9 $ 74.8 7% $ 108.9 12%
Percentage of net
revenues 25.2 % 23.1 % 22.4 %
Sales and marketing 1,042.0 1,001.1 857.1 40.9
4% 144.0 17%
Percentage of net
revenues 23.9 % 22.5 % 20.9 %
General and
administrative 203.6 179.1 177.9 24.5 14% 1.2 1%
Percentage of net
revenues 4.7 % 4.0 % 4.3 %
Amortization of
purchased
intangible assets 4.7 5.4 4.2 (0.7 ) (13)% 1.2 29%
Percentage of net
revenues 0.1 % 0.1 % 0.1 %
Restructuring and
other charges 46.8 30.6 10.8 16.2 53% 19.8 183%
Percentage of net
revenues 1.1 % 0.7 % 0.3 %
Acquisition-related
charges 2.0 7.1 6.3 (5.1 ) (72)% 0.8 13%
Percentage of net
revenues - % 0.2 % 0.2 %
Total operating
expenses $ 2,400.7 $ 2,250.1 $ 1,974.2 $ 150.6 7% $ 275.9 14%
Percentage of net
revenues 55.0 % 50.6 % 48.2 %
Our operating expenses have historically been driven by personnel-related costs,
including wages, commissions, bonuses, vacation, benefits, share-based
compensation, and travel, and we expect this trend to continue. Facility and
information technology ("IT") departmental costs are allocated to other
departments based on usage and headcount. Facility and IT related headcount was
368, 375, 388, as of December 31, 2012, 2011, and 2010, respectively. We had a
total of 9,234, 9,129, and 8,772 employees as of December 31, 2012, 2011, and
2010, respectively. The year-over-year increase in total operating expenses in
2012 was primarily driven by an increase in personnel-related costs of $81.2
million, primarily from salaries, benefits, higher variable compensation and
share-based compensation, offset by lower commissions, and headcount growth, and
an increase in engineering program costs of $12.2 million.
R&D expense increased in 2012, compared to 2011, primarily due to an increase in
engineering program costs driven by new product initiatives in the first half of
the year in addition to higher variable compensation. Our R&D headcount
decreased by 1% as of December 31, 2012, to 4,081 compared to 4,138 as of
December 31, 2011, as a result of our restructuring activities in the second
half of 2012. R&D expense increased in 2011, compared to 2010, primarily due to
an increase in personnel-related expenses. Also contributing to the increase was
higher consulting, facilities, and IT costs associated with our R&D projects to
support our new product initiatives, including the data center, mobility, and
core solutions. This increase was partially offset by lower variable
compensation in 2011.
Sales and marketing expense increased slightly in 2012, compared to 2011,
primarily due to an increase in personnel-related expenses from a 4% increase in
headcount from 2,568 employees as of December 31, 2011 to 2,680 employees as of
December 31, 2012, as well as higher demo costs associated with bringing new
products to market. These increases were partially offset by lower commissions
and a decrease in outside services. Sales and marketing expense increased in
2011, compared to 2010, primarily due to an increase in personnel-related
expenses. Also contributing to the increase in 2011 was an increase in
commission expense driven by higher revenues and an increase in outside services
incurred to support our sales and marketing activities.
General and administrative ("G&A") expense increased in 2012, compared to 2011,
primarily due to an increase in outside professional services, which consists of
legal and consulting fees to support our finance-related initiatives, including
our ERP implementation. G&A headcount increased 5% from 463 as of December 31,
2011 to 486 as of December 31, 2012. G&A expense was relatively flat in 2011,
compared to 2010, as costs associated with the G&A headcount growth of 3%, from
449 at December 31, 2010 to 463 at December 31, 2011, were largely offset by
lower variable compensation.
Amortization of purchased intangible assets decreased in 2012, compared to 2011,
as certain purchased intangible assets reached the end of their amortization
period during 2011, partially offset by the addition of purchased intangible
assets from
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acquisitions completed during 2012. Amortization of purchased intangible assets
increased in 2011 compared to 2010, due to the addition of purchased intangible
assets from acquisitions during 2011 and 2010.
Restructuring and other charges increased in 2012, compared to 2011, due to a
restructuring plan (the "2012 Restructuring Plan") initiated in the third
quarter of 2012 to bring our cost structure in line with our desired long-term
financial and strategic model. We also incurred charges related to a
restructuring plan (the "2011 Restructuring Plan") implemented in the third
quarter of 2011 to align our business operations with macroeconomic and other
market conditions. During 2012, we incurred $46.8 million of restructuring and
other charges related to our restructuring plans primarily for workforce
reductions and facility closures. Restructuring and other charges increased in
2011, compared to 2010, primarily due to $15.3 million of charges related to
workforce reductions and $13.5 million in other charges primarily related to the
impairment of an abandoned in-process internal use software project.
Acquisition-related charges decreased during 2012, compared to 2011, due to a
lower number and size of acquisitions completed in 2012 compared to both 2011
and the fourth quarter of 2010. In 2011 and 2010, we recorded $7.1 million and
$6.3 million, respectively, in direct and indirect acquisition-related costs
such as financial advisory, legal, due diligence, and integration costs from
acquisitions completed in 2011 and 2010. See Note 3, Business Combinations, in
the Notes to Consolidated Financial Statements in Item 8 of Part II of this
Report, for further discussion of these acquisitions.
Share-Based Compensation
Share-based compensation expense associated with stock options, ESPP, RSUs,
RSAs, and PSAs was recorded in the following cost and expense categories (in
millions, except percentages):
Years Ended December 31,
2012 2011 2010 2012 vs. 2011 2011 vs. 2010
$ Change % Change $ Change % Change
Cost of revenues -
Product $ 4.6 $ 4.6 $ 4.4 $ - -% $ 0.2 5%
Cost of revenues -
Service 17.0 15.7 13.5 1.3 8% 2.2 16%
Research and
development 109.1 97.7 78.5 11.4 12% 19.2 24%
Sales and marketing 81.6 70.9 54.9 10.7 15% 16.0 29%
General and
administrative 31.1 33.3 30.7 (2.2 ) (7)% 2.6 8%
Total $ 243.4 $ 222.2 $ 182.0 $ 21.2 10% $ 40.2 22%
Share-based compensation expense increased in 2012, compared to 2011, primarily
due to a higher number of RSU awards granted as well as a change in standard
vesting terms from four years to three years for those RSU awards granted in
2012. This increase was partially offset by a decrease in stock options grants
valued at a lower fair value and a decrease in expense associated with PSAs due
to lower achievement of performance targets. Share-based compensation expense
increased in 2011, compared to 2010, primarily due to the increase in awards
granted driven by headcount growth and higher fair value of equity awards
attributable to the increase in the market value of our common stock for those
awards.
Other (Expense) Income, Net and Income Tax Provision
The following table presents other (expense) income, net and income tax
provision (in millions, except percentages):
Years Ended December 31,
2012 2011 2010 2012 vs. 2011 2011 vs. 2010
$ Change % Change $ Change % Change
Interest income $ 11.0 $ 9.7 $ 10.5 $ 1.3 13 % $ (0.8 ) (8)%
Interest expense (52.9 ) (49.5 ) (8.7 ) (3.4 ) 7 % (40.8 ) 469%
Other 25.3 (7.0 ) 8.8 32.3 (461 )% (15.8 ) (180)%
Total other
(expense)
income, net $ (16.6 ) $ (46.8 ) $ 10.6 $ 30.2 (65 )% $ (57.4 ) (542)%
Percentage of net
revenues (0.4 )% (1.1 )% 0.3 %
Income tax
provision $ 105.0 $ 146.7 $ 158.8 $ (41.7 ) (28 )% $ (12.1 ) (8)%Effective tax rate 36.0 % 25.7 % 20.4 %
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Interest income primarily includes interest income from our cash, cash
equivalents, and investments. Interest income increased in 2012, compared to
2011, primarily due to a higher balance of long-term investments yielding higher
interest. Interest income decreased in 2011, compared to 2010, primarily due to
a lower balance of long-term investments yielding lower interest. Interest
expense primarily consists of interest from our long-term debt and customer
financing arrangements. Interest expense increased in 2012, compared to 2011,
primarily due to the issuance of $1.0 billion of our senior notes (the "Notes")
near the end of the first quarter of 2011 and related interest expense of $40.0
million, net of capitalized interest. Interest expense increased in 2011,
compared to 2010, primarily due to $37.7 million of interest expense, net of
capitalized interest, on the Notes. See Note 10, Long-Term Debt and Financing,
in the Notes to Consolidated Financial Statements in Item 8 of Part II of this
Report for further discussion of the Notes. Other typically consists of
investment and foreign exchange gains and losses and other non-operational
income and expense items. In 2012, we recognized gains of $45.5 million,
including a gain of $14.7 million from the acquisition of our privately-held
investment in Contrail, and impairment losses of $20.0 million included in
other, related to our privately-held investments. In 2011, Other included
certain legal expenses unrelated to current or recent operations of
approximately $7.0 million. In 2010, we recognized a total gain of $8.7 million
within Other, primarily due to acquisitions of our privately-held investments in
Ankeena and Altor.
Our effective tax rates were 36.0%, 25.7%, 20.4% in 2012, 2011, and 2010,
respectively. The effective rate for 2012 is substantially similar to the
federal statutory rate of 35%. The effective rate for 2012 does not reflect the
benefit of the federal R&D credit which expired on December 31, 2011. On January
2, 2013, the President signed into law the American Taxpayer Relief Act of 2012,
which retroactively extended the federal R&D credit for two years through
December 31, 2013. As a result we expect to record a favorable benefit of
approximately$17.0 million to $19.0 million in the first quarter of 2013 from
the retroactive renewal of the 2012 federal R&D credit.
The increase in the overall effective tax rate for 2012 compared to 2011 and
2010 was primarily due to the effect of changes in foreign earnings, the
expiration of R&D credit on December 31, 2011 and a $54.1 million income tax
benefit in 2010 resulting from a change in our estimate of unrecognized tax
benefits due to the taxpayer favorable ruling by the U.S. Court of Appeals for
the Ninth Circuit in Xilinx Inc. v. Commissioner related to share-based
compensation.
The effective tax rates for 2011 and 2010, differed from the federal statutory
rate of 35% primarily due to the federal R&D credit, the benefit of earnings in
foreign jurisdictions, which are subject to lower tax rates and the change in
our estimate of unrecognized tax benefits as noted above.
For a complete reconciliation of our effective tax rate to the U.S. federal
statutory rate of 35% and further explanation of our income tax provision, see
Note 14, Income Taxes, in Notes to Consolidated Financial Statements in Item 8
of Part II of this Report.
Segment Information
For a description of the products and services for each segment, see Item 1
Business, in Part I of this Report. A description of the measures included in
segment contribution margin can also be found in Note 13, Segment Information,
in Notes to the Consolidated Financial Statements in Item 8 of Part II of this
Report. Select segment financial data for each of the three years in the period
ended December 31, 2012 was as follows:
Platform Systems Division Segment
(in millions, except percentages)
Years Ended December 31,
2012 2011 2010 2012 vs. 2011 2011 vs. 2010
$ Change % Change $ Change % Change
PSD product
revenues:
Routing $ 1,946.8 $ 2,166.0 $ 2,034.7 $ (219.2 ) (10)% $ 131.3 6%
Switching 554.8 495.8 377.7 59.0 12% 118.1 31%
Security/Other 182.5 213.2 211.1 (30.7 ) (14)% 2.1 1%
Total PSD product
revenues 2,684.1 2,875.0 2,623.5 (190.9 ) (7)% 251.5 10%
PSD service
revenues 834.3 713.3 603.3 121.0 17% 110.0 18%Total PSD revenues $ 3,518.4 $ 3,588.3 $ 3,226.8 $ (69.9 )
(2)% $ 361.5 11%
PSD contribution
margin (*) $ 1,409.4 $ 1,586.2 $ 1,477.9 $ (176.8 ) (11)% $ 108.3 7%
Percentage of PSD
revenues 40.1 % 44.2 % 45.8 %
_______________________________
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(*) A reconciliation of contribution margin to income before taxes and
noncontrolling interest can be found in Note 13, Segments, in Notes to
Consolidated Financial Statement in Item 8 of this Report.
PSD product revenues decreased in 2012, compared to 2011, due to the decline in
sales of our core and edge legacy routing and branch firewall products. The
decline in sales was primarily attributable to lower spending by international
customers and by content service provider customers in Americas, partially
offset by an increase in sales of our switching products.
A majority of our service revenues are earned from customers that purchase our
products and enter into contracts for support services. PSD service revenues
increased in 2012, compared to 2011, primarily due to strong contract renewals
for support services.
PSD contribution margin as a percent of PSD revenues decreased in 2012, compared
to 2011, primarily due to a decline in revenues. The decrease was also
attributable to a shift in product mix to lower margin products and out of
period adjustments related to prototype development costs that were recorded in
the third quarter of 2012, which increased R&D expense by $11.5 million. The
decrease in contribution margin was partially offset by reduced costs as a
result of a continuing focus on operational improvements and cost efficiencies.
PSD product revenues increased in 2011, compared to 2010, primarily due to
growth in the enterprise and service provider markets across all regions. The
increased demand for our routing and switching products was primarily driven by
growing network demand attributable to increased reliance on digital devices
connected to the network and, to a lesser extent, on the improved macroeconomic
environment. PSD service revenues increased in 2011, compared to 2010, primarily
due to strong contract renewals for support services.
PSD contribution margin as a percentage of PSD revenues decreased in 2011,
compared to 2010, due to higher R&D spend to support our product portfolio at a
higher rate than our revenue return.
Software Solutions Division Segment
(in millions, except percentages)
Years Ended December 31,
2012 2011 2010 2012 vs. 2011 2011 vs. 2010
$ Change % Change $ Change % Change
SSD product
revenues:
Security/Other $ 493.3 $ 490.6 $ 539.4 $ 2.7 1% $ (48.8 ) (9)%
Routing 84.7 112.7 95.8 (28.0 ) (25)% 16.9 18%
Total SSD product
revenues 578.0 603.3 635.2 (25.3 ) (4)% (31.9 ) (5)%
SSD service
revenues 269.0 257.1 231.3 11.9 5% 25.8 11%
Total SSD revenues $ 847.0 $ 860.4 $ 866.5 $ (13.4 ) (2)% $ (6.1 ) (1)%
SSD contribution
margin (*) $ 340.6 $ 345.0 $ 405.0 $ (4.4 ) (1)% $ (60.0 ) (15)%
Percentage of SSD
revenues 40.2 % 40.1 % 46.7 %
_______________________________
(*) A reconciliation of contribution margin to income before taxes and
noncontrolling interest can be found in Note 13, Segments, in Notes to
Consolidated Financial Statement in Item 8 of this Report.
SSD product revenues decreased in 2012, compared to 2011, primarily due to a
decline in the sales of our legacy high-end firewall products and routing
services products, partially offset by an increase in sales of our high-end SRX
products. SSD service revenues increased in 2012, compared to 2011, primarily
driven by strong contract renewals for support services.
SSD contribution margin as a percentage of SSD revenues remained relatively
stable in 2012, compared to 2011, due to a shift in product mix to lower margin
products offset by reduced costs as a result of our continued focus on
operational improvements and cost efficiencies.
SSD product revenues decreased slightly in 2011, compared to 2010, primarily due
to a decline in sales of our high-end firewall products, offset by increases in
routing services products. SSD service revenues increased in 2011, compared to
2010, primarily due to increased revenue from new service contracts and strong
contract renewals for support services.
SSD contribution margin as a percentage of SSD revenues in 2011, compared to
2010, decreased primarily due to a shift in the product mix toward lower margin
products.
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Liquidity and Capital Resources
Historically, we have funded our business primarily through our operating
activities and the issuance of our common stock, and more recently, the issuance
of the Notes. The following table shows our capital resources (in millions,
except percentages):
As of December 31,
2012 2011 $ Change % Change
Working capital $ 2,178.7 $ 2,973.0 $ (794.3 ) (27 )%
Cash and cash equivalents $ 2,407.8 $ 2,910.4 $ (502.6 ) (17 )%
Short-term investments 441.5 641.3 (199.8 ) (31 )%
Long-term investments 988.1 740.7 247.4 33 %
Total cash, cash equivalents, and
investments 3,837.4 4,292.4 (455.0 ) (11 )%
Long-term debt 999.2 999.0 0.2 - %
Net cash, cash equivalents, and
investments $ 2,838.2 $ 3,293.4 $ (455.2 ) (14 )%
The significant components of our working capital are cash and cash equivalents,
short-term investments, and accounts receivable, reduced by accounts payable,
accrued liabilities, and short-term deferred revenue. Working capital decreased
by $794.3 million in the year ended December 31, 2012, primarily due to a higher
cash and cash equivalent balance at December 31, 2011 as a result of the
issuance of the Notes in March 2011 and a decrease in accounts receivables,
offset by decreases in accounts payable and short-term deferred revenue.
Summary of Cash Flows
As of December 31, 2012, our cash and cash equivalents decreased by $502.6
million from December 31, 2011. This decrease was mainly the result of cash used
in our investing and financing activities of $596.7 million and $548.3 million,
respectively, offset by $642.4 million generated from operating activities.
Operating Activities
Net cash provided by operating activities was $642.4 million, $986.7 million,
and $812.3 million, for 2012, 2011, and 2010, respectively. Cash flows from
operations decreased by $344.3 million in 2012, compared to 2011, primarily due
to lower consolidated net income, higher taxes paid, timing of payments to our
vendors, and a decrease in deferred revenue, offset by the timing of collections
on our outstanding receivables.
Cash flows from operations increased by $174.4 million in 2011, compared to
2010, primarily due to the one-time litigation settlement payment of $169.3
million in 2010 which did not occur in 2011. The increase was partially offset
by lower consolidated net income in 2011.
Investing Activities
Net cash used in investing activities was $596.7 million, $707.2 million, and
$532.7 million, in 2012, 2011, and 2010, respectively. The decrease in net cash
used in investing activities in 2012, compared to 2011, was primarily due to
fewer purchases of investments, offset by higher spending on asset purchases,
property and equipment, and acquisitions. During 2011, we invested the proceeds
from the issuance of the Notes in available-for-sale securities and purchased
property and equipment for the phased campus build-out of our corporate
headquarters in Sunnyvale, CA. We expect our capital expenditures to decrease in
2013 as we complete our phased campus build-out.
Financing Activities
Net cash used in financing activities was $548.3 million and $72.4 million in
2012 and 2010, respectively, and net cash generated from financing activities
was $819.0 million in 2011. The change from 2011 to 2012 was primarily due to
the issuance of the Notes in 2011 and an increase in purchases and retirement of
common stock and fewer proceeds from employee stock option exercises in 2012. We
generated additional cash from financing activities in 2011 compared to 2010
primarily due to the issuance of the Notes, partially offset by the repurchase
of our outstanding common stock. For further discussion of our long-term debt,
see Note 10, Long-Term Debt and Financing, in Notes to Consolidated Financial
Statements in Item 8 of Part II of this Report.
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Stock Repurchase Activities
In June 2012, our Board of Directors (the "Board") approved a stock repurchase
program (the "2012 Stock Repurchase Program"), which authorized us to repurchase
up to $1.0 billion of our common stock. The 2012 Stock Repurchase Program was in
addition to the stock repurchase program approved by the Board in February 2010
(the "2010 Stock Repurchase Program"), which authorized us to repurchase up to
$1.0 billion of our common stock. The 2010 Stock Repurchase Program
authorization was in addition to the stock repurchase program approved by the
Board in March 2008, which also enabled us to repurchase up to $1.0 billion of
our common stock.
We repurchased and retired approximately 35.8 million shares of our common stock
at an average price of $18.05 per share for an aggregate purchase price of
$645.6 million during the year ended December 31, 2012, under our Stock
Repurchase Programs. As of December 31, 2012, there were $568.2 million
authorized funds remaining under our Stock Repurchase Programs. We expect to
continue to calibrate our buybacks in future quarters with market conditions at
the time.
Restructuring
As of December 31, 2012, we accrued total restructuring charges of approximately
$18.2 million related to our 2012 and 2011 Restructuring Plans, of which
approximately $10.6 million related to severance costs that are expected to be
paid through the third quarter of fiscal 2013. The remaining $7.6 million in
facilities-related and other charges are expected to be paid through March 2018.
During 2012, we made payments related to our restructuring plans totaling
approximately $33.1 million for severance costs, facility closures, and contract
terminations.
Deferred Revenue
Deferred product revenue represents unrecognized revenue related to shipments to
distributors that have not sold through to end-users, undelivered product
commitments, and other shipments that have not met all revenue recognition
criteria. Deferred product revenue is recorded net of the related costs of
product revenue. Deferred service revenue represents customer payments made in
advance for services, which include technical support, hardware and software
maintenance, professional services, and training.
The following table summarizes our deferred product and service revenues (in
millions):
As of December 31,
2012 2011
Deferred product revenue:
Undelivered product commitments and other product deferrals $ 256.9 $ 288.1
Distributor inventory and other sell-through items 138.4 134.0
Deferred gross product revenue 395.3 422.1
Deferred cost of product revenue (99.4 ) (136.9 )
Deferred product revenue, net 295.9 285.2
Deferred service revenue 627.5 681.8
Total $ 923.4 $ 967.0
Total deferred revenue decreased $43.6 million to $923.4 million as of
December 31, 2012, compared to $967.0 million as of December 31, 2011. This is
due to a decline in deferred service revenue driven by timing of revenue
recognition, partially offset by an increase in net deferred product revenue.
Off-Balance Sheet Arrangements
As of December 31, 2012 and 2011, we did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. It is not our business
practice to enter into off-balance sheet arrangements. However, in the normal
course of business, we enter into contracts consisting of guarantees of product
and service performance, guarantees related to third-party customer-financing
arrangements, customs and duties guarantees, and standby letters of credit for
certain lease facilities. See Note 16, Commitments and Contingencies, in Notes
to Consolidated Financial Statements in Item 8 of Part II of this Report for
additional information regarding our guarantees.
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Contractual Obligations
Our principal commitments consist of obligations outstanding under operating
leases, purchase commitments, debt, and other contractual obligations. See Note
16, Commitments and Contingencies, in Notes to Consolidated Financial Statements
in Item 8 of Part II of this Report for additional information regarding our
contractual commitments. The following table summarizes our principal
contractual obligations as of December 31, 2012 and the effect such obligations
are expected to have on our liquidity and cash flow in future periods (in
millions):
Payments Due by Period
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
Operating leases $ 266.1 $ 53.5 $ 82.9 $ 52.8 $ 76.9
Purchase commitments 158.6 158.6 - - -
Long-term debt 1,000.0 - - 300.0 700.0
Interest payment on long-term debt 826.2 46.9 93.8 79.5 606.0
Other contractual obligations 179.3 172.2 7.1 - -
Total $ 2,430.2 $ 431.2 $ 183.8 $ 432.3 $ 1,382.9
Operating Leases
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 Consolidated Statements of
Operations. We occupy approximately 2.6 million square feet worldwide under
operating leases. The majority of our office space is in North America,
including our corporate headquarters in Sunnyvale, California. Our longest lease
expires on November 30, 2022.
Purchase Commitments
In order to reduce manufacturing lead times and ensure adequate component
supply, our contract manufacturers place non-cancelable, non-returnable ("NCNR")
orders for components based on our build forecasts. The contract manufacturers
use the components to build products based on our forecasts and on purchase
orders we have received from our customers. Generally, we do not own the
components and title to the product transfers from the contract manufacturers to
us and immediately to our customers upon delivery at a designated shipment
location. If the components go unused or the products go unsold for specified
periods of time, we may incur carrying charges or obsolete materials charges for
components that our contract manufacturers purchased to build products to meet
our forecast or customer orders. As of December 31, 2012, we had accrued $27.7
million based on our estimate of such charges. Total purchase commitments as of
December 31, 2012, consisted of $158.6 million of NCNR orders.
Long-Term Debt and Interest Payment on Long-Term Debt
In March 2011, we issued $300.0 million aggregate principal amount of 3.10%
senior notes due 2016 (the "2016 notes"), $300.0 million aggregate principal
amount of 4.60% senior notes due 2021 (the "2021 notes"), and $400.0 million
aggregate principal amount of 5.95% senior notes due 2041 (the "2041 notes" and,
together with the 2016 notes and the 2021 notes the "Notes"). Interest on the
Notes is payable in cash semiannually. We may redeem the Notes, at any time in
whole or from time to time in part, subject to a make-whole premium, and, in the
event of a change in control, the holders of the Notes may require us to
repurchase for cash all or part of the Notes at a purchase price equal to 101%
of the aggregate principle amount, plus accrued and unpaid interest, if any. The
indenture that governs the Notes also contains various covenants, including
limitations on our ability to incur liens or enter into sale-leaseback
transactions over certain dollar thresholds. As of December 31, 2012, we were in
compliance with all of our debt covenants. Based on our current outlook, we
expect to be in compliance with our debt covenants over the next twelve months.
Other Contractual Obligations
Other contractual obligations primarily consisted of $124.2 million in
indemnity-related and service related escrows, required by certain acquisitions
completed in 2005, 2010, 2011, and 2012 and $55.1 million in campus build-out
obligations.
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Tax Liabilities
In addition to the table above, tax liabilities include $112.4 million of
long-term liabilities in the Consolidated Balance Sheets for unrecognized tax
positions. At this time, we are unable to make a reasonably reliable estimate of
the timing of payments related to this amount due to uncertainties in the timing
of tax audit outcomes.
Guarantees
We have entered into agreements with customers that contain indemnification
provisions relating to potential situations where claims could be alleged that
our products infringe the intellectual property rights of a third-party. We also
have financial guarantees consisting of guarantees of product and service
performance, guarantees related to third-party customer-financing arrangements,
customs and duties guarantees, and standby letters of credit for certain lease
facilities. As of December 31, 2012 and 2011, we had $12.6 million and $19.9
million, respectively, in bank guarantees and standby letters of credit related
to these financial guarantees.
Legal Proceedings
See Note 16, Commitments and Contingencies, in Notes to Consolidated Financial
Statements in Item 8 of Part II of this Report, for additional information on
liabilities that may arise from litigation and contingencies.
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 Program, our
liquidity may be impacted. As of December 31, 2012, 57% of our cash and
investment balances are held outside of the U.S., which may be subject to U.S.
taxes if repatriated.
In August 2010, we filed a $1.5 billion shelf registration with the SEC. In
March 2011, we issued notes in the amount of $1.0 billion under the shelf
registration statement. Therefore, while we have no current plans to do so, we
may issue up to $500 million in additional securities under the shelf
registration statement. The shelf registration is intended to give us
flexibility to take advantage of financing opportunities as needed or deemed
desirable in light of market conditions. Any additional offerings of securities
under the shelf registration statement will be made pursuant to a prospectus.
We have been focused on managing our annual equity usage as a percentage of the
common stock outstanding to align with peer group competitive levels and have
made changes in recent years to reduce the number of shares underlying the
equity awards we grant. Our intention for fiscal year 2012 was to target the
number of shares underlying equity awards granted on an annual basis at 2.75% or
less of our common stock outstanding on a pure share basis (where each option,
RSU, RSA or PSA granted is counted as one share, with PSAs counted at their
target amount). Based upon shares underlying our grants to date of options,
RSUs, and PSAs, we achieved the goal for 2012. In fiscal year 2012, as a result
of stock price weakness we increased our repurchase activity, and expect to
continue to calibrate our buybacks in future quarters with market conditions at
the time. We have also managed our equity compensation programs to reduce the
overall number of shares subject to outstanding awards over the past two years.
Notably, we have reduced the use of stock options in our equity compensation
programs. The total number of common shares subject to our outstanding awards in
connection with Juniper plans was 54.2 million, 58.2 million, and 63.5 million
shares as of December 31, 2012, 2011, and 2010, respectively, reflecting a
consecutive decline for the three years ended December 31, 2012.
Based on past performance and current expectations, we believe that our existing
cash and cash equivalents, short-term, and long-term investments (which includes
the proceeds of the issuance of the notes), together with cash generated from
operations as well as cash generated from the exercise of 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 twelve months. We
believe our working capital is sufficient to meet our liquidity requirements for
capital expenditures, commitments, and other liquidity requirements associated
with our existing operations during the same period. However, our future
liquidity and capital requirements may vary materially from those now planned
depending on many factors, including:
• level and mix of our product, sales, and gross profit margins;
• our business, product, capital expenditures and R&D plans;
• repurchases of our common stock;
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• incurrence and repayment of debt and related interest obligations;
• litigation expenses, settlements, and judgments, or similar items related
to resolution of tax audits;
• volume price discounts and customer rebates;
• accounts receivable levels that we maintain;
• acquisitions and/or funding of other businesses, assets, products, or
technologies;
• changes in our compensation policies;
• capital improvements for new and existing facilities;
• technological advances;
• our competitors' responses to our products and/or pricing;
• our relationships with supplies, partners, and customers;
• possible future investments in raw material and finished goods inventories;
• expenses related to future restructuring plans, if any;
• tax expense associated with share-based awards;
• issuance of share-based awards and the related payment in cash for
withholding taxes in the current year and possibly during future years;
• level of exercises of stock options and stock purchases under our equity incentive plans; and
• general economic conditions and specific conditions in our industry and
markets, including the effects of disruptions in global credit and
financial markets, international conflicts, and related uncertainties.
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