NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Silicon Graphics International Corp. ("SGI" or the "Company," "we," "us" or "our") is a global leader in high-performance solutions for compute, data analytics and data management. The Company is focused on helping customers solve their most demanding business and technology challenges by delivering high performance computing, data management and data analytics solutions that accelerate time to discovery, innovation and profitability.
The Company develops, markets and sells a broad line of low cost, mid-range and high-end scale-out and scale-up servers, differentiating software and designed-to-order solutions for large-scale deployments, coupled with global support and highly experienced professional services. SGI solutions are designed to deliver high impact results with lower total cost of ownership and to achieve industry-leading speed, scale and efficiency.
The Company's solutions are utilized by scientific, business and government communities to fulfill highly compute intensive application needs in petascale and exascale environments. Delivering industry-leading computing power and fast and efficient data movement, both within the computing system and to and from large-scale data storage and data management installations, SGI systems enable customers to access, analyze, transform, manage and visualize information in real and near real-time. The vertical markets the Company serves include the federal government, defense and strategic systems, weather and climate, physical and life sciences, energy (including oil and gas), aerospace, automotive manufacturing, internet, financial services, education and research institutions and media and entertainment. The Company's headquarters is located in Milpitas, California and its sole manufacturing facility is located in Chippewa Falls, Wisconsin.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation.
The consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the periods presented.
Fiscal Year-End.
The Company has a
52
or
53
-week fiscal year ending on the last Friday in June. Fiscal years
2016
,
2015
, and
2014
were all comprised of
52
weeks and ended on
June 24, 2016
("fiscal 2016"),
June 26, 2015
("fiscal 2015"), and
June 27, 2014
("fiscal 2014'), respectively. Fiscal year 2017 will be comprised of 53 weeks and will be ended on June 30, 2017.
Principles of Consolidation.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All inter-company balances and transactions have been eliminated.
Estimates and Assumptions.
The preparation of consolidated financial statements in accordance with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses as presented in the consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the Company in the future, actual results may be different from the estimates.
Revenue Recognition
.
The Company enters into sales contracts to deliver multiple products and/or services. A typical multiple-element arrangement includes product (which consist of hardware and software essential to the functionality of the hardware), customer support services and professional services. The Company also sells software products that are not essential to the functionality of the hardware as part of certain multiple-element arrangements. In addition to selling multiple-element arrangements, the Company also sells certain products and services on a stand-alone basis.
Product revenue.
The Company recognizes revenue from sales of products, primarily hardware, when persuasive evidence of an arrangement exists, shipment has occurred and title has transferred, the sales price is fixed or determinable and collection of the resulting receivable is reasonably assured. In arrangements where a formal acceptance of products or services is required by the customer, revenue is recognized upon meeting such acceptance criteria.
Service revenue.
Service revenue includes customer support services, primarily hardware maintenance services and professional services. Hardware maintenance services is deferred and recognized over the contractual period or as services are rendered to the customer. Professional services, which include consulting services and product integration services, are offered under time and material or fixed fee-based contracts or as part of multiple-element arrangements. Professional services revenue is recognized as services are completed.
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Multiple-element arrangements.
The Company's multiple-element arrangements include products, customer support services and/or professional services. Certain multiple-element arrangements include software products integrated with the hardware (“Hardware Appliance”) and the Company provides unspecified software updates and enhancements to the software through its service contracts. For arrangements which do not include Hardware Appliances, the Company recognizes revenue from the sale of products without regard to the completion of services as product sales are not dependent on services to be functional.
Pursuant to the guidance of ASU 2009-13, when a sales arrangement contains multiple elements, such as products, software, customer support services and/or professional services, the Company allocates revenue to each element based on the selling price hierarchy. The standard establishes a hierarchy of evidence to determine the stand-alone selling price of a deliverable based on vendor-specific objective evidence ("VSOE"), third-party evidence ("TPE") and the best estimate of selling price ("BESP"). If VSOE is available, it would be used to determine the selling price of a deliverable. If VSOE is not available, the entity would determine whether TPE is available. If so, TPE must be used to determine the selling price. If TPE is not available, then the BESP would be used. In multiple element arrangements where software is essential to the functionality of the products, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is then recognized as one unit of accounting using the guidance for recognizing software revenue.
The Company evaluates each deliverable in an arrangement to determine whether they represent separate units of accounting. The delivered item constitutes a separate unit of accounting when it has standalone value and there are no customer-negotiated refunds or return rights for the delivered elements. The Company's Hardware Appliances are sold on a stand-alone basis and customers are able to sell the Hardware Appliances to other buyers; accordingly, the Company has concluded that its Hardware Appliances have stand-alone value. Allocation of the consideration is determined at arrangement inception on the basis of each unit's relative selling price. The Company limits the amount of revenue recognition for delivered product elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or refund privileges.
The Company has not consistently established VSOE of fair value of any of its products or services. In addition, the Company has not established TPE as there are no similar or interchangeable competitor products or services in standalone sales to similarly situated customers. Therefore, revenue from these multiple-element arrangements is allocated based on the BESP. The objective of BESP is to determine the price at which the Company would transact a sale if a product or service were sold on a stand-alone basis. The Company determines BESP for product or service by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific market factors, profit objectives and pricing practices.
Shipping and Handling Costs.
Shipping and handling costs are classified as a component of cost of revenue. Invoices to customers for shipping and handling costs are recorded as revenue.
Research and Development.
Costs related to research, design and development of Company products are charged to research and development expense as incurred. Software development costs are required to be capitalized when a product’s technological feasibility has been established through the date the product is available for general release to customers. The Company has not capitalized any software development costs, as technological feasibility is generally not established until a working model is completed, at which time substantially all development is complete.
Advertising.
Advertising costs are expensed as incurred and included in sales and marketing expenses in the Consolidated Statements of Operations. Advertising expenses were immaterial in fiscal
2016, 2015 and 2014
.
Share-Based Compensation.
The Company uses the fair value method of accounting for share-based compensation arrangements. Share-based compensation arrangements currently include stock options granted, restricted shares issued (“RSAs”), restricted stock unit awards granted (“RSUs”), time-based RSUs and performance-based RSUs (“executive PSUs”) and purchases of common stock by the Company’s employees under the employee stock purchase plan ("ESPP"). The fair values of stock options and ESPP awards are estimated using the Black-Scholes option-pricing model. The fair value of RSU awards is determined based on the fair value of the stock on the date of grant, other than the executive PSU awards, which include a targeted shareholder return as a performance metric, whose value is determined using a Monte Carlo simulation model. The estimated fair value of stock options, RSUs and PSUs is expensed on a straight-line basis over the vesting term of the grant. Compensation expense for purchases under the ESPP is recognized based on the estimated fair value of the common stock during each offering period and the percentage of the purchase discount.
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Share-based compensation expense for stock options, RSUs, PSUs and ESPP awards has been reduced for estimated forfeitures so that compensation expense is based on options, RSUs, PSUs and ESPP awards that are ultimately expected to vest. The Company’s estimated annual forfeiture rates are based on its historical forfeiture experience.
Restructuring Expense.
The Company recognizes restructuring expense resulting from significant reductions in headcount, excess manufacturing or administrative facilities that the Company plans to close, or consolidate and from other exit activities. In connection with exit activities, the Company records restructuring charges for employee termination costs, long-lived asset impairments, costs related to leased facilities abandoned or subleased and other exit-related costs. These charges are incurred pursuant to formal plans developed and approved by management. The recognition of restructuring expense requires management to make judgments and estimates regarding the nature, timing and amount of costs associated with the planned exit activity, including estimating sublease income and the fair value, less selling costs of property and equipment to be disposed of. Estimates of future liabilities may change, requiring the Company to record additional restructuring expense or to reduce the amount of liabilities previously recorded. At the end of each reporting period, the Company evaluates the remaining accrued balances to ensure their adequacy, that no excess accruals are retained and that the utilization of the provisions is for the intended purpose in accordance with developed exit plans. In the event circumstances change and the provision is no longer required, the provision is reversed. There were no significant reversals or long-lived asset impairments related to our restructuring actions in any periods presented.
Foreign Currency Transactions.
The functional currency of the Company's foreign subsidiaries is the U.S. dollar, except for its Japanese subsidiary. Accordingly, all monetary assets and liabilities and revenue and expenses of the foreign subsidiaries, except for the Japanese subsidiary, are remeasured into U.S. dollars at the exchange rates in effect at the reporting date. Nonmonetary assets and liabilities are remeasured at historical rates. The foreign currency gains and losses are included as a component of other income (expense), net in the accompanying consolidated statements of operations.
The Company uses the Japanese yen as the functional currency for its Japanese subsidiary. Assets and liabilities of the Japanese subsidiary with Japanese yen are translated to U.S. dollars using exchange rates in effect at the balance sheet dates. Revenue and expenses are translated at average exchange rates in effect during the period. Translation adjustments are included in stockholders' equity in the accompanying consolidated balance sheet as a component of accumulated other comprehensive (loss) income.
Comprehensive (Loss) Income.
Comprehensive (loss) income consists of two components, net loss and other comprehensive (loss) income. Other comprehensive (loss) income refers to revenue, expenses, gains and losses that under generally accepted accounting principles are recorded as an element of shareholders’ equity but are excluded from net loss.
Fair Value of Financial Instruments.
The Company measures its financial instruments in its consolidated financial statements at fair value. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements. When available, the Company uses quoted market prices to measure fair value (Level 1). If market prices are not available, fair value measurement is based upon models that use primarily market-based or independently-sourced market parameters (Level 2). If market observable inputs for model-based valuation techniques are not available, the Company makes judgments about assumptions market participants would use in estimating the fair value of the financial instrument (Level 3).
Derivative Instruments.
Derivatives that are not designated as hedges are adjusted to fair value through earnings. If the derivative is designated as a cash flow hedge, the effective portion of the contracts’ gains and losses resulting from changes in fair value is recognized in accumulated other comprehensive income. Amounts associated with cash flow hedges are reclassified and recognized in income when the forecasted transaction occurs or it becomes probable the forecasted transaction will not occur. The ineffective portion of the hedge is recognized in earnings immediately.
As a result of the Company's significant international operations, the Company is subject to risks associated with fluctuating exchange rates. The Company uses derivative financial instruments, principally foreign currency exchange forward contracts, to attempt to minimize the impact of exchange rate movements on our subsidiaries’ and consolidated balance sheets and operating results. Factors that could have an impact on the effectiveness of our hedging program include the accuracy of forecasts and the volatility of foreign currency markets. These programs reduce, but do not entirely eliminate, the impact of currency exchange movements. The maturities of these instruments are generally less than one year.
Cash and Cash Equivalents
.
The Company classifies highly liquid investments with remaining contractual maturity at date of purchase of three months or less as cash equivalents. Cash equivalents consist primarily of money market funds. Due to the short-term nature and liquidity of these financial instruments, the carrying values of these assets approximate fair value.
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted Cash.
S
hort-term and long-term restricted cash consist primarily of cash deposits with banks. The cash deposits are pledged as collateral for various guarantees issued to cover rent on leased facilities and equipment, to government authorities for value-added tax (“VAT”) and other taxes and certain vendors to support payments in advance of delivery of goods and services. The deposits are classified as short-term or long-term depending on the nature of the period of guarantee.
Accounts Receivable.
Accounts receivable are recorded at the invoiced amount and do not bear interest. Accounts receivable have been reduced by an estimated allowance for doubtful accounts, which is management’s best estimate of the amount of probable credit losses in existing accounts receivable. Among other factors, management determines the allowance based on customer specific experience.
Concentration of Credit Risk.
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash and accounts receivable. The Company maintains cash and cash equivalents with high credit quality financial institutions. The Company derives a significant portion of its revenue from a limited number of individual customers spread globally. The Company also derives revenue from several large customers in different industries and geographies. If the financial condition or results of operations of any one of the large customers deteriorates substantially, the Company’s operating results could be adversely affected. The Company generally does not require collateral and maintains reserves for probable credit losses on customer accounts.
Inventories.
Inventories are stated at the lower of standard cost or market: standard cost, approximates cost determined on a first-in, first-out basis. The Company assesses the value of inventory on a quarterly basis based upon estimates about future demand and actual usage. To the extent that the Company determines that it is holding excess or obsolete inventory, it writes down the value of its inventory to its net realizable value. Such write downs are reflected in cost of revenue. If the inventory value is written down to its net realizable value and subsequently there is an increased demand for the inventory at a higher value, the increased value of the inventory is not realized until the inventory is sold either as a component of a system or as separate inventory.
In addition, the Company records a liability for firm, noncancelable and unconditional purchase commitments with contract manufacturers and suppliers for quantities in excess of future demand forecasts consistent with the Company's valuation of excess and obsolete inventory.
The Company maintains a long-term service inventory of parts to support maintenance arrangements. The long-term service inventory is valued based on assumptions about product life cycles, historical usage, current production status and installed base and is periodically tested for impairment. The long-term service inventory is included in other assets in the accompanying consolidated balance sheets.
Sales and Value Added Taxes.
The Company collects various types of taxes from its customers that are assessed by governmental authorities, which are imposed on and concurrent with revenue-producing transactions. Such taxes are recorded on a net basis and are not included in revenue in the accompanying consolidated statements of operations.
Property and Equipment.
Property and equipment is stated at cost, net of accumulated depreciation and amortization. Equipment includes Company-built inventory used as demonstration equipment. Equipment and capitalized software are depreciated on a straight-line basis over their estimated useful lives, generally
two
to
seven
years. Buildings are depreciated on a straight-line basis over their estimated useful life, generally
24
to
40
years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the respective assets, or the original lease term.
Repairs and maintenance are charged to expense as incurred and significant improvements and betterments that substantially enhance the life of an asset are capitalized.
Impairment of Long-lived Assets.
The Company reviews the carrying values of long-lived assets other than goodwill for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by a comparison of the carrying amount of the assets to the estimated undiscounted future cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value.
Intangible Assets.
Intangible assets with finite lives consist of customer relationships, customer backlog, purchased technology, trademarks and trade names acquired in business combinations. Intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is computed using the straight-line method over the estimated useful lives of the respective assets, generally
two
to
five
years, except for the customer backlog intangible asset, which is amortized as acceptance is received for a particular customer order, reflecting the use of the asset. Amortization expense is primarily recognized within cost of revenue and sales and marketing on the consolidated statement of operations.
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill Impairment.
The Company reviews goodwill for impairment annually during the fourth quarter of our fiscal year and whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. The more likely than not threshold is defined as having a likelihood of more than 50%. If, after assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary and goodwill is considered to be unimpaired. However, if, based on the qualitative assessment, the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company will proceed with performing the two-step process.
In step one, the Company determines the fair value of each reporting unit and compares it to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. However, if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform step two of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference.
The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. The Company estimates the expected future cash flows by reporting unit and then compare the carrying value including goodwill to the discounted future cash flows. This analysis requires judgment with respect to many factors, including future cash flows, changes in technology, the continued success of product lines and future volume and revenue and expense growth rates. If the estimate of future operating results changes, or if there are changes to other assumptions, the estimate of the fair value could change significantly. Such change could result in impairment charges in future periods, which could have a material impact on the Company's results of operations and financial position.
Warranty Reserve
.
The warranty period for the Company’s products is generally
one
to
three
years. Estimated future warranty costs are expensed as a cost of revenue. The warranty accrual is based upon historical experience and is affected by actual product failure rates, material usage and service delivery costs incurred in correcting the product failure. The Company periodically assesses the adequacy of the warranty reserve and adjusts the amount as considered necessary. The short-term portion of the warranty reserve is included in other current liabilities and the long-term portion of the warranty reserve is recorded in non-current liabilities on the accompanying consolidated balance sheets.
Deferred Revenue and Deferred Cost of Revenue.
Deferred revenue is recorded when products or services provided are invoiced prior to completion of the related performance obligations and is recognized as revenue ratably over the PCS period. The Company more broadly requires advance and milestone payments for certain larger projects that would otherwise involve a significant lag between payments to our vendors and final acceptance of our products. These advance and milestone payments are recorded as deferred revenue and are recognized when all revenue recognition criteria have been met. Deferred revenue also includes revenue deferred for arrangements which include hardware appliances or arrangements where the undelivered element is PCS for arrangements that were entered into prior to the fiscal 2011 adoption of ASU 2009-13 and ASU 2009-14.
Deferred cost of revenue primarily consists of product costs related to revenue deferred in accordance with the Company’s revenue recognition policy. Deferred revenue and associated deferred cost of revenue, expected to be realized within
one
year are classified as current liabilities and current assets, respectively, on the accompanying consolidated balance sheets.
Retirement Benefit Obligations.
The Company recognizes the overfunded or underfunded status of a defined benefit pension or postretirement plan as an asset or liability in the accompanying consolidated balance sheets. Changes in the funded status are recognized through accumulated other comprehensive loss, a component of stockholder’s equity, in the year in which the changes occur.
Income Taxes.
The Company computes income taxes using the asset and liability method, under which deferred income taxes are provided for temporary differences between financial reporting basis and tax basis of assets and liabilities and operating loss and tax credit carry forwards. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. Deferred tax assets and liabilities are measured using enacted statutory tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled.
The Company is subject to audits and examinations of tax returns by tax authorities in various jurisdictions, including the Internal Revenue Service. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of the provision for income taxes.
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recently Issued Accounting Standards
.
Improvement to Employee Share-Based Payment Accounting.
In March 2016, the Financial Accounting Standards Board ("FASB") issued guidance to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flow. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016 including interim periods within those annual periods. Early adoption of this guidance is permitted in any interim or annual period. If any entity adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period and must elect to early adopt all the amendments in the same period. The new guidance is effective for the Company beginning in fiscal 2018. The Company is evaluating the timing and the impact of adopting this guidance on its consolidated financial statements and disclosures.
Accounting Standard Update, Leases, (Topic 842).
In February 2016, the FASB issued guidance which amends the existing accounting standards for leases. Consistent with existing guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification. Under the new guidance, a lessee will be required to recognize right-of-use assets and lease liabilities on the balance sheet. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2018 including interim periods within those fiscal years. Early adoption of this guidance is permitted. The new guidance is effective for the Company beginning in fiscal 2020. The Company is evaluating the timing and the impact of adopting this guidance on its consolidated financial statements and disclosures.
Simplifying the Presentation of Deferred Income Taxes.
In November 2015, the FASB issued guidance to simplify the presentation of the deferred income taxes. The amendments in this update apply to all entities that present a classified statement of financial position and require that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, for public entities. Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. The guidance will be effective for the Company in fiscal 2018. The Company adopted this guidance effective June 24, 2016 on a prospective basis. Adoption of this guidance resulted in an immaterial reclassification of our net current deferred tax asset to the net non-current deferred tax asset in our consolidated balance sheet as of June 24, 2016. No prior periods were retrospectively adjusted.
Simplifying the Measurement of Inventory.
In July 2015, the FASB issued guidance to simplify the accounting for inventory and to more closely align their guidance with international accounting standards. The amendments in this update apply to companies which use inventory valuation methods other than last in, first-out and the retail inventory method to change the way that they subsequently measure the value of inventory on their balance sheet. Under the new guidance, inventory should be valued at the lower of cost and net realizable value rather than the lower of cost and market. The amendments in this update are effective for fiscal years beginning after December 15, 2016, and for interim periods beginning after December 15, 2017. This guidance will be effective for the Company in fiscal 2018. The Company does not expect this guidance to have an impact on its consolidated financial statements upon adoption, as the new guidance aligns with the Company's current practice.
Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets.
In April 2015, the FASB issued guidance which permits the entity with a fiscal year-end that does not coincide with a month-end, to measure defined benefit plan assets and obligations using the month-end that is closest to the entity's fiscal year-end and apply that practical expedient consistently from year to year for all plans. The amendments in ASU 2015-04 are effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. This guidance will be effective for the Company in fiscal 2017. The Company is currently evaluating the effects, if any, which the adoption of this guidance will have on the Company’s consolidated financial statements.
Revenue from Contracts with Customers.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early application not permitted. This guidance will be effective for the Company in fiscal 2019. The Company is evaluating the timing and the impact of adopting this guidance on its consolidated financial statements and disclosures.
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. FINANCIAL INSTRUMENTS AND FAIR VALUE
The Company measures its assets and liabilities at fair value based upon the expected exit price, representing the amount that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value reflects the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model.
The Company uses a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
|
|
•
|
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
|
|
|
•
|
Level 2 - Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
|
|
|
•
|
Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
|
The Company’s assessment of the hierarchy level of the assets or liabilities measured at fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and views an inactive market as one in which there are a few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, the Company or the counterparty’s non-performance risk is considered in determining the fair values of liabilities and assets, respectively.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company's assets that are measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 24, 2016
|
|
|
Carrying
|
|
Fair Value Measured Using
|
Total
|
|
|
Value
|
|
Level 1
|
Level 2
|
Level 3
|
Balance
|
Assets
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
130
|
|
|
$
|
130
|
|
$
|
—
|
|
$
|
—
|
|
$
|
130
|
|
Pension investments held by insurance companies - German Plan
|
|
2,281
|
|
|
—
|
|
2,281
|
|
—
|
|
2,281
|
|
Pension investments held by insurance companies - Japan Plan
|
|
3,231
|
|
|
—
|
|
3,231
|
|
—
|
|
3,231
|
|
Derivative assets
|
|
398
|
|
|
—
|
|
398
|
|
—
|
|
398
|
|
Total assets measured at fair value
|
|
$
|
6,040
|
|
|
$
|
130
|
|
$
|
5,910
|
|
$
|
—
|
|
$
|
6,040
|
|
Derivative liabilities
|
|
$
|
4,476
|
|
|
$
|
—
|
|
$
|
4,476
|
|
$
|
—
|
|
$
|
4,476
|
|
Total liabilities measured at fair value
|
|
$
|
4,476
|
|
|
$
|
—
|
|
$
|
4,476
|
|
$
|
—
|
|
$
|
4,476
|
|
|
|
|
|
|
|
|
|
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2015
|
|
|
Carrying
|
|
Fair Value Measured Using
|
Total
|
|
|
Value
|
|
Level 1
|
Level 2
|
Level 3
|
Balance
|
Assets
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
130
|
|
|
$
|
130
|
|
$
|
—
|
|
$
|
—
|
|
$
|
130
|
|
Pension investments held by insurance companies - German Plan
|
|
2,222
|
|
|
—
|
|
2,222
|
|
—
|
|
2,222
|
|
Pension investments held by insurance companies - Japan Plan
|
|
2,539
|
|
|
—
|
|
2,539
|
|
—
|
|
2,539
|
|
Derivative assets
|
|
6,467
|
|
|
—
|
|
6,467
|
|
—
|
|
6,467
|
|
Total assets measured at fair value
|
|
$
|
11,358
|
|
|
$
|
130
|
|
$
|
11,228
|
|
$
|
—
|
|
$
|
11,358
|
|
Derivative liabilities
|
|
$
|
5,443
|
|
|
—
|
|
5,443
|
|
—
|
|
$
|
5,443
|
|
Total liabilities measured at fair value
|
|
$
|
5,443
|
|
|
$
|
—
|
|
$
|
5,443
|
|
$
|
—
|
|
$
|
5,443
|
|
|
|
|
|
|
|
|
|
There were
no
transfers between Level 1 and Level 2 of the fair value hierarchy during both fiscal
2016
and fiscal
2015
. The Company's cash equivalents, consisting primarily of money market funds, are classified within Level 1 of the fair value hierarchy as they were valued using quoted market prices of the identical underlying securities in active markets.
Level 2 assets include investments that are pooled with other investments held by insurance companies within their general funds for our pension plans. The investments held by the insurance companies are valued by taking the percentage owned by the plan in the underlying net asset value of the insurance company's general fund. The valuation of the underlying net assets of the insurance company's general fund is based on quoted market prices of the investments in active markets or for quoted market prices in active markets of similar assets. The market inputs used to value these instruments generally consist of market yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Pricing sources include industry standard data providers, security master files from large financial institutions and other third party sources. Our derivative financial instruments are classified within Level 2, as there is not an active market for each hedge contract, but the inputs used to calculate the value of the instruments are tied to active markets.
The fair values of accounts receivable, accounts payable, accrued liabilities and borrowings under short-term credit lines due within
one year
approximates their carrying values because of their short-term nature. The fair value of our Term Loan was approximately
$60.2 million
and
$70.6 million
as
June 24, 2016
and
June 26, 2015
, respectively and are classified within Level 2 of the fair value hierarchy. Other non-current assets include life insurance contracts related to our pension plans: these life insurance contracts are carried at cash surrender values, which due to their ability to be converted to cash at that amount, approximate their fair values.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
The Company does
no
t have any assets or liabilities measured at fair value on a non-recurring basis as of
June 24, 2016
. The Company measured its intangible assets at fair value on a non-recurring basis as of
June 26, 2015
.
4. DIVESTITURE OF MINESET, INC.
On February 5, 2016, the "Closing Date," the Company consummated a stock purchase agreement to sell
100%
of the issued and outstanding shares of MineSet, Inc. ("MineSet"), a wholly-owned subsidiary, to ESI Group for approximately
$4.7 million
in cash. In connection with this transaction, the Company transferred all assets and liabilities related to the MineSet business to ESI Group as of the closing date. The Company recognized a gain of
$4.4 million
for the sale of this asset, net of all related costs.
5. DERIVATIVES
The Company is exposed to foreign currency exchange rate fluctuations in the normal course of our business. As part of the Company's risk management strategy, the Company uses derivative instruments, primarily forward contracts to hedge economic exposures resulting from changes in foreign currency exchange rates.
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash Flow Hedges
The Company implemented a cash flow hedging strategy to protect anticipated non-functional currency revenue and expenses. The Company uses forward contracts designated as cash flow hedges to hedge a portion of future forecasted non-U.S. Dollar ("USD") cash flows. In general, these foreign exchange contracts, carried at fair value, have maturities between
one
and
twelve
months. As of
June 24, 2016
, the Company has
13
open hedges in an aggregate notional amount in USD equivalent to approximately
$69.8 million
. The Company hedges the Euro, British pound, Japanese yen, and the Australian dollar. These derivative instruments are designated and qualify as cash flow hedges under the criteria prescribed in the authoritative guidance. All amounts related to gains / losses on designated hedges, currently in accumulated other comprehensive income ("AOCI") are expected to be reclassified into earnings over the next
12
months.
For derivative instruments that are designated and qualify as cash flow hedges under Accounting Standards Codification ("ASC") No. 815-
Derivatives and Hedging
, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive loss and reclassified into earnings into the same financial statement line as the item being hedged. SGI assesses the prospective and retrospective effectiveness of its hedge programs using statistical analysis. The Company uses the spot-to-spot method to measure ineffectiveness in the hedge relationship. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net. For derivative instruments that are not designated as hedging instruments under ASC No. 815 or that have been de-designated following recognition of the hedge item, gains and losses are recognized in other income (expense), net.
Balance Sheet Hedges
Additionally, the Company enters into foreign exchange contracts to hedge monetary assets and liabilities that are denominated in currencies other than the functional currency of our subsidiaries. These foreign exchange contracts are carried at fair value and do not qualify for hedge accounting treatment and are not designated as hedging instruments. Changes in fair value of these derivatives are recognized in other income (expense), net in the consolidated statement of operations, in the current period, along with the offsetting foreign currency gain or loss on the underlying assets or liabilities. As of
June 24, 2016
, the Company has
7
open non-designated hedges in an aggregate USD-equivalent notional amount totaling approximately
$11.2 million
.
The before tax effect of derivative instruments for foreign exchange contracts designated as hedging instruments and non-designated hedging instruments in our consolidated statement of operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
Location
|
|
June 24,
2016
|
|
June 26,
2015
|
|
June 27,
2014
|
Designated Derivatives
|
|
|
|
|
|
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
Foreign exchange contracts (Effective portion)
|
Amount recognized in AOCI
|
|
$
|
(2,724
|
)
|
|
$
|
462
|
|
|
$
|
(1,738
|
)
|
Foreign exchange contracts (Effective portion)
|
Net revenues
|
|
(103
|
)
|
|
1,590
|
|
|
(2,539
|
)
|
Foreign exchange contracts (Effective portion)
|
Cost of goods sold
|
|
(572
|
)
|
|
—
|
|
|
—
|
|
Foreign exchange contracts (Effective portion)
|
Operating expenses
|
|
—
|
|
|
(807
|
)
|
|
888
|
|
Foreign exchange contracts (Effective portion)
|
Other income (expense), net
|
|
(387
|
)
|
|
(138
|
)
|
|
115
|
|
Total
|
|
|
$
|
(3,786
|
)
|
|
$
|
1,107
|
|
|
$
|
(3,274
|
)
|
Non-designated Derivatives
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other income (expense), net
|
|
$
|
(2,082
|
)
|
|
$
|
1,778
|
|
|
$
|
(1,431
|
)
|
Total
|
|
|
$
|
(2,082
|
)
|
|
$
|
1,778
|
|
|
$
|
(1,431
|
)
|
The Company's use of derivative instruments exposes it to non-performance risk to the extent that the counterparties may be unable to meet the terms of the agreement. The Company does, however, seek to mitigate such risks by limiting its counterparties to major financial institutions, which are selected based on their credit ratings and other factors. The Company has established policies and procedures for mitigating non-performance risk that include establishing counterparty credit limits, monitoring credit exposures and continually assessing the creditworthiness of counterparties. Therefore the Company does not consider counterparty non-performance risk a material risk at this time.
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A number of the Company's derivative agreements contain threshold limits to the net liability position with counterparties and are dependent on the Company's corporate credit rating determined by the major credit rating agencies. The counterparties to the derivative instruments may request collateralization, in accordance with derivative agreements, on derivative instruments in net liability positions.
The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liabilities position as of
June 24, 2016
, was
$4.1 million
. The credit-risk-related contingent features underlying these agreements had not been triggered as of
June 24, 2016
.
Derivative instruments are subject to master netting arrangements and are disclosed gross in the statement of financial position. The gross fair values and location of derivative instruments included in the consolidated statement of financial position as of
June 24, 2016
and
June 26, 2015
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Derivative Assets
|
|
Gross Amount Offset In the Statement of Financial Position
|
|
Gross Amounts Not Offset in the Statement of Financial Position
|
|
|
Gross Amount of Recognized Assets
|
Gross Amount Offset in the Statement of Financial Position
|
Net Amounts of Assets Presented in the Statement of Financial Position
|
Financial Instruments
|
Cash Collateral Received
|
Net Amount
|
As of June 24, 2016
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
Foreign currency forward contracts
|
$
|
398
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(398
|
)
|
$
|
—
|
|
$
|
—
|
|
Total
|
$
|
398
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(398
|
)
|
$
|
—
|
|
$
|
—
|
|
As of June 26, 2015
|
|
|
|
|
|
|
Derivatives
|
$
|
6,467
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(5,443
|
)
|
$
|
—
|
|
$
|
1,024
|
|
Foreign currency forward contracts
|
$
|
6,467
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(5,443
|
)
|
$
|
—
|
|
$
|
1,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Derivative Liabilities
|
|
Gross Amount Offset In the Statement of Financial Position
|
|
Gross Amounts Not Offset in the Statement of Financial Position
|
|
|
Gross Amount of Recognized Liabilities
|
Gross Amount Offset in the Statement of Financial Position
|
Net Amounts of Liabilities Presented in the Statement of Financial Position
|
Financial Instruments
|
Cash Collateral Pledged
|
Net Amount
|
As of June 24, 2016
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
Foreign currency forward contracts
|
$
|
(4,476
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
398
|
|
$
|
—
|
|
$
|
(4,078
|
)
|
Total
|
$
|
(4,476
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
398
|
|
$
|
—
|
|
$
|
(4,078
|
)
|
As of June 26, 2015
|
|
|
|
|
|
|
Derivatives
|
$
|
(5,443
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
5,443
|
|
$
|
—
|
|
$
|
—
|
|
Foreign currency forward contracts
|
$
|
(5,443
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
5,443
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The gross fair value and location of derivative instruments held in the consolidated statement of financial position as of
June 24, 2016
and
June 26, 2015
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivative Instruments
|
Asset Derivatives
|
|
Liability Derivatives
|
Location
|
|
June 24,
2016
|
|
June 26,
2015
|
|
Location
|
|
June 24,
2016
|
|
June 26,
2015
|
|
Designated Derivatives:
|
Foreign exchange contracts
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
Other current assets
|
|
$
|
1
|
|
|
$
|
167
|
|
|
Other current liabilities
|
|
$
|
2,516
|
|
|
$
|
628
|
|
Non- designated Derivatives:
|
Foreign exchange contracts
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
Other current assets
|
|
397
|
|
|
6,300
|
|
|
Other current liabilities
|
|
1,960
|
|
|
4,815
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
$
|
398
|
|
|
$
|
6,467
|
|
|
|
|
$
|
4,476
|
|
|
$
|
5,443
|
|
See Statement of Comprehensive Loss and Note 3 for more information regarding derivatives.
6. INVENTORIES
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 24,
2016
|
|
June 26,
2015
|
Finished goods
|
|
$
|
3,901
|
|
|
$
|
36,772
|
|
Work in process
|
|
29,753
|
|
|
25,562
|
|
Raw materials
|
|
22,257
|
|
|
20,498
|
|
Total inventories
|
|
$
|
55,911
|
|
|
$
|
82,832
|
|
Finished goods include inventory at customer sites undergoing installation testing prior to customer acceptance; such amounts were
$1.4 million
at
June 24, 2016
and
$30.2 million
at
June 26, 2015
.
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 24,
2016
|
|
June 26,
2015
|
Value-added tax receivable
|
|
$
|
5,603
|
|
|
$
|
5,179
|
|
Derivatives (see Note 5)
|
|
398
|
|
|
6,467
|
|
Prepaid taxes
|
|
179
|
|
|
178
|
|
Prepaid expenses
|
|
3,036
|
|
|
4,221
|
|
Other assets
|
|
2,482
|
|
|
1,502
|
|
Total prepaid expenses and other current assets
|
|
$
|
11,698
|
|
|
$
|
17,547
|
|
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
|
|
June 24,
2016
|
|
June 26,
2015
|
Land
|
|
N/A
|
|
$
|
768
|
|
|
$
|
768
|
|
Building
|
|
24-40
|
|
16,186
|
|
|
14,004
|
|
Computer equipment and software
|
|
2-6
|
|
50,152
|
|
|
44,497
|
|
Manufacturing equipment
|
|
2-7
|
|
5,899
|
|
|
7,002
|
|
Leasehold improvements
|
|
2-10
|
|
12,661
|
|
|
12,601
|
|
Furniture and fixtures
|
|
2-7
|
|
1,653
|
|
|
1,578
|
|
Vehicles
|
|
5
|
|
20
|
|
|
40
|
|
Construction in progress
|
|
N/A
|
|
1,486
|
|
|
4,620
|
|
|
|
|
|
88,825
|
|
|
85,110
|
|
Less accumulated depreciation and amortization
|
|
|
|
(48,299
|
)
|
|
(46,630
|
)
|
Total property and equipment, net
|
|
|
|
$
|
40,526
|
|
|
$
|
38,480
|
|
Depreciation and amortization expense of property and equipment for fiscal
2016, 2015 and 2014
was
$10.4 million
,
$10.6 million
and
$10.7 million
, respectively.
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. GOODWILL AND INTANGIBLE ASSETS, NET
The goodwill balances and the movements in fiscal
2016
and
2015
for each of our reportable segments are shown in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
Service
|
|
Total
|
Goodwill as of June 27, 2014
|
|
$
|
7,508
|
|
|
$
|
1,076
|
|
|
$
|
8,584
|
|
Goodwill arising from acquisitions
|
|
—
|
|
|
—
|
|
|
—
|
|
Goodwill as of June 26, 2015
|
|
$
|
7,508
|
|
|
$
|
1,076
|
|
|
$
|
8,584
|
|
Goodwill arising from acquisitions
|
|
—
|
|
|
—
|
|
|
—
|
|
Goodwill as of June 24, 2016
|
|
$
|
7,508
|
|
|
$
|
1,076
|
|
|
$
|
8,584
|
|
Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit's carrying amount, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using the income approach that uses discounted cash flows. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss.
The Company reviews goodwill for impairment annually in the fourth quarter of its fiscal year, or more frequently if impairment indicators arise. At the end of the first quarter of fiscal 2016 there was a substantial decline in the market capitalization of the Company from the end of fiscal 2015. Based on this impairment indicator, the Company performed a formal impairment analysis of the carrying value of goodwill as of September 25, 2015. As part of the its analysis, the Company reconciled the computed fair values of our reporting units to its overall market capitalization and concluded that the computed fair value of each of its reporting units was well in excess of the net book value, and accordingly no impairment existed as of September 25, 2015. The Company also performed its annual impairment in the fourth quarter of fiscal 2016. Based on the Company's annual assessment, no impairment was recorded as of
June 24, 2016
. The Company will continue to evaluate goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Based on the Company's annual assessment no impairment was recorded for fiscal
2016, 2015 and 2014
.
Intangible assets by major asset class consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Asset Class
|
|
Weighted
Average
Useful Life
(in Years)
|
|
June 24, 2016
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization and Impairment
|
|
Net
|
Customer relationships
|
|
5
|
|
$
|
7,300
|
|
|
$
|
(7,300
|
)
|
|
$
|
—
|
|
Purchased technology
|
|
5
|
|
12,200
|
|
|
(12,200
|
)
|
|
—
|
|
Customer backlog
|
|
(a)
|
|
10,540
|
|
|
(10,481
|
)
|
|
59
|
|
Trademark/trade name portfolio
|
|
5
|
|
3,767
|
|
|
(3,767
|
)
|
|
—
|
|
Patents and other
|
|
(b)
|
|
1,967
|
|
|
—
|
|
|
1,967
|
|
Total
|
|
|
|
$
|
35,774
|
|
|
$
|
(33,748
|
)
|
|
$
|
2,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Asset Class
|
|
Weighted
Average
Useful Life
(in Years)
|
|
June 26, 2015
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization and Impairment
|
|
Net
|
Customer relationships
|
|
5
|
|
$
|
7,300
|
|
|
$
|
(7,300
|
)
|
|
$
|
—
|
|
Purchased technology
|
|
5
|
|
12,200
|
|
|
(11,600
|
)
|
|
600
|
|
Customer backlog
|
|
(a)
|
|
10,540
|
|
|
(10,388
|
)
|
|
152
|
|
Trademark/ trade name portfolio
|
|
5
|
|
3,767
|
|
|
(3,767
|
)
|
|
—
|
|
Patents and other
|
|
(b)
|
|
2,097
|
|
|
(130
|
)
|
|
1,967
|
|
Total
|
|
|
|
$
|
35,904
|
|
|
$
|
(33,185
|
)
|
|
$
|
2,719
|
|
|
|
(a)
|
The customer backlog intangible asset is amortized as all revenue recognition criteria is accomplished for a particular customer order, reflecting the use of the asset.
|
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(b)
|
Includes in-process Research and Development for which amortization has not commenced.
|
Intangible assets amortization expense was
$0.7 million
,
$0.6 million
and
$3.8 million
in fiscal
2016, 2015 and 2014
, respectively.
The Company reviews the carrying values of long-lived assets for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by a comparison of the carrying amount of the assets to the estimated undiscounted future cash flows expected to be generated by the assets.
As a result of a decision made in the fourth quarter of fiscal 2014 to stop investment in certain next generation FileTek products, the Company determined that intangible assets related to the product development of these next generation products were impaired. The Company recorded an impairment charge of
$2.9 million
in fiscal 2014, which was recorded as a cost of revenue. During the second quarter of fiscal 2015, the Company decided to cease selling and supporting these products acquired as part of the FileTek acquisition and determined that the remaining intangible assets related to this acquisition were impaired. The Company recorded an impairment charge of
$1.1 million
in fiscal 2015, impacting cost of revenue by
$0.8 million
and sales expense by
$0.3 million
.
In addition, during the fourth quarter of fiscal 2015, the Company recorded a
$0.1 million
impairment charge impacting cost of revenue for in-process Research and Development as the Company no longer plans to utilize the asset for future product development.
No
impairment of intangible assets was recorded in fiscal 2016.
As of
June 24, 2016
, expected amortization expense for all intangible assets, excluding amounts related to in-process research and development for which amortization has not commenced, is as follows (in thousands):
|
|
|
|
|
|
Fiscal Year
|
|
Amortization
Expense
|
2017
|
|
$
|
59
|
|
Total amortization
|
|
$
|
59
|
|
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. OTHER NON-CURRENT ASSETS
Other assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 24,
2016
|
|
June 26,
2015
|
Long-term service inventory
|
|
$
|
15,489
|
|
|
$
|
16,015
|
|
Restricted pension plan assets (see Note 21)
|
|
6,841
|
|
|
6,726
|
|
Deferred tax assets
|
|
1,488
|
|
|
758
|
|
Long-term refundable deposits
|
|
1,990
|
|
|
1,763
|
|
Other assets
|
|
2,415
|
|
|
634
|
|
Total other assets
|
|
$
|
28,223
|
|
|
$
|
25,896
|
|
11. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 24,
2016
|
|
June 26,
2015
|
Accrued sales and use tax payable
|
|
$
|
8,919
|
|
|
$
|
8,670
|
|
Accrued professional services fees
|
|
2,736
|
|
|
3,597
|
|
Accrued warranty, current portion (see Note 13)
|
|
3,377
|
|
|
3,402
|
|
Accrued interest payables
|
|
1,403
|
|
|
1,159
|
|
Accrued restructuring and severance
|
|
435
|
|
|
2,239
|
|
Derivatives (see Note 5)
|
|
4,476
|
|
|
5,443
|
|
Other
|
|
6,259
|
|
|
8,670
|
|
Total other current liabilities
|
|
$
|
27,605
|
|
|
$
|
33,180
|
|
12. OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 24,
2016
|
|
June 26,
2015
|
Accrued warranty, non-current portion (see Note 13)
|
|
$
|
1,684
|
|
|
$
|
1,374
|
|
Deferred rent
|
|
4,940
|
|
|
5,526
|
|
Other
|
|
1,194
|
|
|
971
|
|
Total other non-current liabilities
|
|
$
|
7,818
|
|
|
$
|
7,871
|
|
13. WARRANTY RESERVE
Activity in the warranty reserve, which is included in other current and non-current liabilities, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 24,
2016
|
|
June 26,
2015
|
Balance at beginning of period
|
|
$
|
4,776
|
|
|
$
|
6,044
|
|
Current period accrual
|
|
3,688
|
|
|
3,033
|
|
Warranty expenditures charged to accrual
|
|
(3,727
|
)
|
|
(4,363
|
)
|
Changes in accrual for pre-existing warranties
|
|
324
|
|
|
62
|
|
Balance at end of period
|
|
$
|
5,061
|
|
|
$
|
4,776
|
|
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. RESTRUCTURING AND SEVERANCE ACTIVITY
Fiscal 2012 Restructuring Action
On March 16, 2012, the Company's Board of Directors approved a restructuring action to reduce approximately
25%
of the Company's European workforce and close certain legal entities and offices in Europe. The Company implemented restructuring actions to streamline operations and reduce operating expenses. This restructuring action was complete as of December 26, 2014.
Total expense for all restructuring actions was
$0.1 million
and
$1.3 million
for fiscal 2015 and 2014, respectively. There was no restructuring expense during fiscal 2016. The restructuring expense is included in operating expenses in the accompanying consolidated statement of operations. As of
June 24, 2016
, there was
no
restructuring liability balance remaining for this restructuring action.
Total cumulative expense incurred in connection with this restructuring plan was
$12.7 million
.
Severance Activity
During fiscal
2016
and 2015, the Company incurred approximately
$2.6 million
and
$6.2 million
of severance charges, respectively, associated with planned cost reductions primarily in Germany, Japan, and the U.S. During fiscal
2014
, the Company incurred approximately
$11.1 million
of severance charges, associated with planned cost reductions primarily in the U.S. and Japan. As of
June 24, 2016
, the remaining liability for these cost reduction programs was approximately
$0.4 million
.
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. SHORT-TERM DEBT
Term Loan
As of
June 24, 2016
, the Company's short-term debt includes the current portion of the outstanding net balance of
$57.2 million
Term Loan with Morgan Stanley Senior Funding, Inc. and Tennenbaum Capital Partners, LLC of
$0.5 million
net of unamortized debt issuance costs of
$1.1 million
.
Japan Loans
During fiscal 2015, the Company entered into unsecured unguaranteed loans with various Japanese banks ("Japan Loans") amounting to
300 million
yen or
$2.5 million
at TIBOR (Tokyo Interbank Offered Rate) plus
1.0%
per annum. During fiscal 2016, the Company entered into two new loans at rates ranging from TIBOR plus
1.0%
to
1.75%
per annum, for an aggregate total of
250 million
yen or approximately
$2.1 million
and repaid a total of
275 million
yen amounting to approximately
$2.4 million
toward the loans. As of June 24, 2016, approximately
$2.1 million
was classified as short-term debt.
The Company also entered into a four year Private Placement Bond from Mizuho Bank (“Japan Private Placement Bond”) for
500 million
yen or
$4.4 million
at
0.8%
per annum. As of June 24, 2016, approximately
$1.2 million
was classified as short-term debt.
See Note 16, Long-term Debt, for more information about the Term Loan and Japan Loans.
16. LONG-TERM DEBT
Term Loan
On
January 27, 2015
, the Company entered into a credit agreement (the "Term Loan") among the Company, certain lenders and Morgan Stanley Senior Funding, Inc., as administrative and collateral agent and lead arranger. The Term Loan provided an aggregate principal amount of
$70.0 million
with a term of
three and a half years
, bearing interest at the LIBO Rate (as defined in the Credit Agreement), subject to a
1.0%
minimum, plus
9.0%
per annum. The Term Loan provided
$66.2 million
of cash, net of borrowing and debt issuance costs of approximately
$3.8 million
, which was used to pay off the prior credit facility and provide cash and cash equivalents to fund working capital requirements, capital expenditures and operations. The Company was in compliance with all covenants under the Term Loan, as of
June 24, 2016
.
Pursuant to the Term Loan, certain wholly-owned domestic subsidiaries of the Company (the “Guarantors”) have guaranteed the obligations of the Company under the Term Loan. The Term Loan and related loan documents replaced the Company’s prior Credit Agreement dated December 5, 2011, by and among the Company, certain lenders party thereto, and Wells Fargo Capital Finance, LLC, as administrative agent (as amended from time to time, the “Prior Credit Facility”). All commitments under the Prior Credit Facility were terminated and all borrowings thereunder were repaid, effective January 27, 2015. The remaining obligations of Company and guarantor party to the Prior Credit Facility and related loan documents are limited to certain remaining contingent indemnification obligations under such facility. See Note 17, Credit Facility, for more information about the Prior Credit Facility.
The Term Loan and related loan documents contain covenants that limit the ability of the Company and certain of its subsidiaries, among other things, to:
|
|
•
|
issue any preferred stock;
|
|
|
•
|
incur or guarantee indebtedness;
|
|
|
•
|
create, incur, assume, or permit liens to exist;
|
|
|
•
|
consummate asset sales, acquisitions or mergers;
|
|
|
•
|
pay dividends or repurchase stock;
|
|
|
•
|
enter into transactions with affiliates; or
|
|
|
•
|
enter into or permit certain type of agreements to exist.
|
The Term Loan also requires compliance with a minimum adjusted current ratio and a
$10.0 million
minimum unrestricted cash balance, calculated as set forth in the Term Loan.
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Term Loan contains customary events of default, including:
|
|
•
|
failure to make required payments;
|
|
|
•
|
material breaches of representations and warranties;
|
|
|
•
|
failure to comply with certain agreements or covenants;
|
|
|
•
|
failure to pay, or default under, certain other indebtedness;
|
|
|
•
|
certain events of bankruptcy and insolvency;
|
|
|
•
|
failure to pay certain judgments; and
|
The Company may not prepay the loan during the first year and may only prepay the loan during the second year at a premium. After such time, the Company may prepay the loan without penalty.
During fiscal 2016, we made
$10.1 million
total cash payments to Morgan Stanley Senior Funding, Inc. and Tennenbaum Capital Partners, LLC, reducing the Term Loan's outstanding balance to
$59.4 million
.
As of
June 24, 2016
, the Company had an outstanding principal balance of which was classified as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan
|
|
|
Long-Term
|
|
Short-Term
|
|
Total
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Principal amount
|
|
$
|
57,907
|
|
|
$
|
1,533
|
|
|
$
|
59,440
|
|
Less unamortized debt issuance costs
|
|
(1,158
|
)
|
|
(1,075
|
)
|
|
(2,233
|
)
|
|
|
$
|
56,749
|
|
|
$
|
458
|
|
|
$
|
57,207
|
|
Japan Loans
During fiscal 2015, the Company entered into unsecured unguaranteed loans with various Japanese banks amounting to
300 million
yen or
$2.5 million
at TIBOR plus
1.0%
per annum. During fiscal 2016, the Company entered into two new loans at the rate ranging from TIBOR plus
1.0%
to
1.75%
per annum, for an aggregate total of
250 million
yen or approximately
$2.1 million
and repaid a total of
275 million
yen amounting to approximately
$2.4 million
toward the loans. As of June 24, 2016, approximately
$0.5 million
was classified as long-term debt.
The Company also entered into a four year Private Placement Bond from Mizuho Bank (“Japan Private Placement Bond”) for
500 million
yen or
$4.4 million
at
0.8%
per annum. As of June 24, 2016, approximately
$3.5 million
, net of unamortized debt issuance costs of
$0.1 million
was classified as long-term debt as of
June 24, 2016
.
17. CREDIT FACILITY
On
December 5, 2011
, the Company entered into a
five
-year senior secured credit facility in the aggregate principal amount of
$25.0 million
, as amended. The credit facility included a
$10.0 million
letter of credit subfacility.
During the second quarter of fiscal 2015, the Company drew down
$15.0 million
from the December 2011 credit facility bearing interest at
5.0%
based on a base rate of
3.25%
as of December 26, 2014 plus a margin of
1.75%
. The Company paid off the
$15.0 million
outstanding balance on the December 2011 credit facility with the net proceeds received from the Term Loan and terminated the December 2011 agreement in January 2015.
18. SHARE-BASED COMPENSATION
The Company’s Board of Directors adopted the Company's 2014 Omnibus Incentive Plan ("2014 Plan") in October 2014. The 2014 Plan supersedes all prior plans and any remaining shares outstanding from the previous equity plans were transferred to the 2014 Plan. The 2014 plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock unit awards, and other forms of equity compensation, or collectively, stock awards, all of which may be granted to employees, including officers, non-employee directors and consultants. Incentive stock options may be granted only to employees. All other awards may be granted to employees, including officers and to non-employee directors and consultants. In 2014, the Company has initially reserved
2,500,000
shares of the Company’s common stock for the
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
issuance of awards under the 2014 Plan, plus the number of any shares that may be subject to options granted under the Company’s existing plans that expire or otherwise terminate after the date of such Board approval without being exercised. In February 2016, the number of shares authorized for issuance under the 2014 Plan was increased by
1,200,000
. As of
June 24, 2016
, the aggregate number of shares of common stock available for grant under the 2014 Plan was
2,476,931
shares.
In 2005, the Company’s Board of Directors adopted and its stockholders approved the Company’s 2005 Employee Stock Purchase Plan (“2005 ESPP Plan”). As of
June 24, 2016
, the aggregate number of shares of common stock available for grant under this plan is
1,340,017
shares. During fiscal 2014 and 2015 the number of shares authorized for issuance under this Plan was increased by
365,263
shares and
2,000,000
shares, respectively. During fiscal 2016, there was no increase in shares for this Plan. Subsequent to the year end, the 2005 ESPP Plan was terminated.
Stock awards expire
ten
years from the date of grant, or such shorter period specified in the award agreement. The awards vest over a period of time as determine by the board of directors, generally over
four
years from the date the award is granted. The Company issues new shares of its common stock upon exercise of stock options, issuance of restricted stock units (“RSU”) and issuance of shares purchased under its 2005 ESPP Plan. Common stock to be issued for grants of RSUs are not issued until the RSU vests and do not have rights to vote or receive dividends.
The Company granted restricted stock units to employees under its equity incentive plans and issued shares of the Company's common stock to participating employees under its employee stock purchase plan during fiscal
2016, 2015 and 2014
. Stock options were not granted during these respective periods.
Determining Fair Value
The fair value of certain share-based awards is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
June 24,
2016
|
|
June 26,
2015
|
|
June 27,
2014
|
|
|
|
|
|
|
|
ESPP Plan shares
|
|
|
|
|
|
|
Risk-free interest rate
|
|
0.5
|
%
|
|
0.2
|
%
|
|
0.2
|
%
|
Volatility
|
|
63.8
|
%
|
|
49.1
|
%
|
|
56.7
|
%
|
Weighted average expected life (in years)
|
|
1.25
|
|
|
1.25
|
|
|
1.25
|
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Weighted average grant date fair value
|
|
$2.09
|
|
$3.23
|
|
$5.59
|
The computation of expected life is based on an analysis of the Company's historical exercise and post-vesting forfeiture experience. The expected volatility is based on the historical volatility for the Company. The interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term. As share-based compensation expense recognized in the accompanying consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimated.
Share-Based Compensation Expense
Total share-based compensation expense is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
June 24,
2016
|
|
June 26,
2015
|
|
June 27,
2014
|
Cost of revenue
|
|
$
|
1,622
|
|
|
$
|
1,962
|
|
|
$
|
1,676
|
|
Research and development
|
|
2,132
|
|
|
2,318
|
|
|
2,072
|
|
Sales and marketing
|
|
1,675
|
|
|
2,771
|
|
|
2,598
|
|
General and administrative
|
|
6,608
|
|
|
7,498
|
|
|
5,633
|
|
Total share-based compensation expense
|
|
$
|
12,037
|
|
|
$
|
14,549
|
|
|
$
|
11,979
|
|
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock Option Activity
The following table summarizes the Company’s stock option activity for fiscal
2016, 2015 and 2014
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual term
in years
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
(in thousands)
|
Balance at June 28, 2013
|
|
2,281,401
|
|
|
$
|
10.56
|
|
|
|
|
|
Options granted
|
|
—
|
|
|
—
|
|
|
|
|
|
Options exercised
|
|
(492,825
|
)
|
|
7.83
|
|
|
|
|
|
Options cancelled
|
|
(180,140
|
)
|
|
18.32
|
|
|
|
|
|
Balance at June 27, 2014
|
|
1,608,436
|
|
|
10.53
|
|
|
|
|
|
Options granted
|
|
—
|
|
|
—
|
|
|
|
|
|
Options exercised
|
|
(69,471
|
)
|
|
5.80
|
|
|
|
|
|
Options cancelled
|
|
(152,395
|
)
|
|
13.75
|
|
|
|
|
|
Balance at June 26, 2015
|
|
1,386,570
|
|
|
10.41
|
|
|
|
|
|
Options granted
|
|
—
|
|
|
—
|
|
|
|
|
|
Options exercised
|
|
(26,877
|
)
|
|
5.34
|
|
|
|
|
|
Options cancelled
|
|
(230,790
|
)
|
|
13.87
|
|
|
|
|
|
Balance at June 24, 2016
|
|
1,128,903
|
|
|
$
|
9.82
|
|
|
3.88
|
|
$
|
—
|
|
Vested and expected to vest at June 24, 2016
|
|
1,128,902
|
|
|
$
|
9.82
|
|
|
3.88
|
|
$
|
—
|
|
Exercisable at June 24, 2016
|
|
1,128,402
|
|
|
$
|
9.82
|
|
|
3.88
|
|
$
|
—
|
|
The total intrinsic value of options exercised in fiscal 2016 was immaterial. The total intrinsic value of options exercised in fiscal 2015 and 2014 was
$0.2 million
and
$3.9 million
, respectively. The total fair value of shares vested during fiscal
2016, 2015 and 2014
was
$1.5 million
,
$1.5 million
and
$2.5 million
, respectively.
As of
June 24, 2016
, the total compensation costs related to stock options has been fully recognized.
The following table summarizes information about stock options outstanding under all option plans as of
June 24, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Exercise Price Range
|
|
Number of
Outstanding
Options
|
|
Weighted Average
Remaining
Contractual Life
(In Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number of
Options
Exercisable
|
|
Weighted
Average
Exercise
Price
|
$ 5.07 - $ 5.07
|
|
13,235
|
|
|
2.93
|
|
$
|
5.07
|
|
|
13,235
|
|
|
$
|
5.07
|
|
5.34 - 5.34
|
|
138,217
|
|
|
3.13
|
|
5.34
|
|
|
138,217
|
|
|
5.34
|
|
5.60 - 6.58
|
|
131,972
|
|
|
2.33
|
|
5.83
|
|
|
131,555
|
|
|
5.83
|
|
6.69 - 7.99
|
|
159,720
|
|
|
2.90
|
|
7.78
|
|
|
159,636
|
|
|
7.79
|
|
8.98 - 9.68
|
|
97,500
|
|
|
3.29
|
|
9.06
|
|
|
97,500
|
|
|
9.06
|
|
9.78 - 9.78
|
|
212,396
|
|
|
5.68
|
|
9.78
|
|
|
212,396
|
|
|
9.78
|
|
9.82 - 11.69
|
|
153,950
|
|
|
5.99
|
|
11.06
|
|
|
153,950
|
|
|
11.06
|
|
11.83 - 14.68
|
|
49,913
|
|
|
1.77
|
|
13.47
|
|
|
49,913
|
|
|
13.47
|
|
14.69 - 14.69
|
|
130,000
|
|
|
4.18
|
|
14.69
|
|
|
130,000
|
|
|
14.69
|
|
17.34 - 33.07
|
|
42,000
|
|
|
1.35
|
|
24.42
|
|
|
42,000
|
|
|
24.42
|
|
5.07 - 33.07
|
|
1,128,903
|
|
|
3.88
|
|
$
|
9.82
|
|
|
1,128,402
|
|
|
$
|
9.82
|
|
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted Stock Activity
The following table summarizes the Company’s RSU activity for fiscal
2016, 2015 and 2014
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
(in thousands)
|
Balance at June 28, 2013
|
|
1,337,767
|
|
|
$
|
10.27
|
|
|
|
|
|
Awarded
|
|
1,237,967
|
|
|
14.41
|
|
|
|
|
|
Released
|
|
(558,481
|
)
|
|
12.17
|
|
|
|
|
|
Forfeited
|
|
(320,430
|
)
|
|
11.98
|
|
|
|
|
|
Balance at June 27, 2014
|
|
1,696,823
|
|
|
12.67
|
|
|
|
|
|
Awarded
|
|
1,273,510
|
|
|
9.44
|
|
|
|
|
|
Released
|
|
(804,420
|
)
|
|
8.90
|
|
|
|
|
|
Forfeited
|
|
(459,840
|
)
|
|
12.82
|
|
|
|
|
|
Balance at June 26, 2015
|
|
1,706,073
|
|
|
10.81
|
|
|
|
|
|
Awarded
|
|
1,495,901
|
|
|
5.16
|
|
|
|
|
|
Released
|
|
(997,453
|
)
|
|
9.77
|
|
|
|
|
|
Forfeited
|
|
(279,437
|
)
|
|
8.25
|
|
|
|
|
|
Balance at June 24, 2016
|
|
1,925,084
|
|
|
$
|
7.30
|
|
|
1.21
|
|
$
|
9,626
|
|
Vested and expected to vest at June 24, 2016
|
|
1,514,695
|
|
|
$
|
7.37
|
|
|
1.05
|
|
$
|
7,577
|
|
In August 2014, the Company granted time-based RSUs ("2014 executive RSUs") and performance-based RSUs (“2014 executive PSUs”) to members of the Company's executive management team. The 2014 executive RSUs vest quarterly over
four
years, subject to the recipient's continuous service through each vesting date. The 2014 executive PSUs initially vest as to
one-fourth
of their amount so long as (a) the Company’s total stockholder return meets the median total stockholder return ("TSR") of its peer group (
50%
weighting), and (b) the Company’s financial results meet targets established by the Board for certain product sales and bookings for fiscal 2015 (
two
goals with
25%
weighting each). The 2014 executive PSUs may be increased or decreased depending on the level of attainment by the Company of the performance metrics established by the Board. Achievement of the aforementioned performance criteria will result in an initial vesting of
one-fourth
of the awards determined in accordance with a vesting matrix. At attainment of
75%
or below, total vesting will be at
50%
. At
100%
attainment, total vesting will be at
125%
. At
125%
attainment or above, vesting will be at
150%
. If the conditions for initial vesting of the 2014 executive PSUs are met, the remaining portion of the 2014 executive PSUs will vest in
twelve
equal, successive quarterly installments over an additional
three
years, subject to continued service through each vesting date.
The Company estimated the fair value of its 2014 executive PSUs using a Monte Carlo simulation model with the assumptions discussed above. The 2014 executive PSUs are recognized as compensation costs over the requisite service period, if rendered, even if the TSR threshold is never satisfied. The performance targets were achieved at
75%
or below, resulting in
50%
of the original PSU grant vesting over
four
years.
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In August 2015, the Company granted time-based RSUs ("2015 executive RSUs") and performance-based RSUs (“2015 executive PSUs”) to members of the Company's executive management team. Generally, the 2015 executive RSUs begin immediate, quarterly vesting over a period of
four
years. The 2015 executive PSUs initially vest as to
one-fourth
of their amount on the day following Compensation Committee review of Company goal attainment for the fiscal year ending June 24, 2016. The 2015 executive PSU grants may be increased or decreased depending on the level of attainment by the Company of the performance metrics established by the Compensation Committee. The shares of common stock subject to these awards will be earned based on the performance as measured against the following metrics related to (i) total stockholder return (
50%
weighting) and (ii)
two
strategic objectives related to revenue and gross margin (
50%
weighting). Achievement of the aforementioned performance criteria results in a vesting percentage determined in accordance with a payout matrix. At attainment of below
75%
, PSU vesting would be
0%
. At
75%
attainment, vesting would be
50%
. At
100%
attainment, vesting would be
100%
. Attainment at
125%
and above would result in
150%
vesting. If the conditions for initial vesting of the PSUs are met, the remaining portion of the PSU grant would vest in
twelve
equal, successive quarterly installments over an additional
three
years, subject to continued service through each vesting date. The Company estimated the fair value of its 2015 executive PSUs using a Monte Carlo simulation model with the assumptions discussed above. The performance targets were achieved at
89%
, resulting in
78%
of the original PSU grant vesting over
four
years.
As of
June 24, 2016
, there was
$3.7 million
of total unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted average period of
1.22
years.
RSUs are converted into common stock upon vesting. Upon the vesting of restricted stock, the Company primarily uses the net share settlement approach, which withholds a portion of the shares to cover the applicable taxes and decreases the shares issued to the employee by a corresponding value. The withholding tax obligations were based upon the fair market value of the Company’s common stock on the vesting date. The number and the value of the shares netted for employee taxes are summarized in the table below (in thousands except share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
June 24,
2016
|
|
June 26,
2015
|
|
June 27,
2014
|
RSUs shares withheld for taxes
|
|
340,284
|
|
|
278,733
|
|
|
214,304
|
|
RSUs amounts withheld for taxes
|
|
$
|
1,673
|
|
|
$
|
2,482
|
|
|
$
|
2,671
|
|
Employee Stock Purchase Plan
At
June 24, 2016
, the total compensation cost related to options to purchase the Company’s common stock under the 2005 ESPP Plan not yet recognized was approximately
$1.2 million
. This cost will be amortized on a straight-line basis over approximately
1.6
years. The following table shows the shares issued and their respective weighted-average purchase price per share during fiscal
2016, 2015 and 2014
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
June 24,
2016
|
|
June 26,
2015
|
|
June 27,
2014
|
Shares issued
|
|
795,208
|
|
|
457,125
|
|
|
540,448
|
|
Weighted-average purchase price per share
|
|
$
|
4.34
|
|
|
$
|
7.58
|
|
|
$
|
7.92
|
|
19. STOCKHOLDERS’ EQUITY
Stock Repurchase
The Company's common stock may be repurchased in the open market or through negotiated transactions, including 10b5-1 trading plans that would enable the Company to repurchase its shares during periods outside of its normal trading windows. In January 2013, the Company's board of directors approved a plan for the Company to repurchase shares of its common stock with a market value of up to
$15.0 million
. In November 2013, the Company announced an increase in the authorized repurchased amount to
$30.0 million
and in November 2014, the Company announced that it had extended its repurchase program through December 31, 2015. This purchase program expired as of December 31, 2015. The Company was not obligated to acquire any particular amount of stock, and the program could have been suspended or terminated at any time at the Company's discretion. Since the inception of the repurchase plan in January 2013, the Company repurchased approximately
1,566,000
shares of its common stock for approximately
$18.0 million
.
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
These repurchases are reflected in our balance sheet as treasury stock and are available for future issuance. There were no shares repurchased during fiscal 2016. The following table shows the total number of shares repurchased during fiscal 2015 (in thousands, except per share amount):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock
|
|
|
Number of Shares
|
|
Amount
|
|
Average Purchase Price per Share
|
Cumulative balance at June 27, 2014
|
|
1,844
|
|
|
$
|
18,677
|
|
|
$
|
10.13
|
|
Repurchase of Treasury Stock:
|
|
|
|
|
|
|
Twelve months ended June 26, 2015
|
|
471
|
|
|
4,222
|
|
|
$
|
8.96
|
|
Cumulative balance at June 26, 2015
|
|
2,315
|
|
|
$
|
22,899
|
|
|
$
|
9.89
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss
The following table summarizes the components of accumulated other comprehensive loss as of
June 24, 2016
,
June 26, 2015
and
June 27, 2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 24,
2016
|
|
June 26,
2015
|
|
June 27,
2014
|
Cumulative translation adjustment
|
|
$
|
(502
|
)
|
|
$
|
(3,080
|
)
|
|
$
|
(608
|
)
|
Unrealized loss on cash flow hedges
|
|
(2,457
|
)
|
|
(408
|
)
|
|
(87
|
)
|
Loss on pension assets
|
|
(3,278
|
)
|
|
(1,781
|
)
|
|
(3,193
|
)
|
Accumulated other comprehensive loss
|
|
$
|
(6,237
|
)
|
|
$
|
(5,269
|
)
|
|
$
|
(3,888
|
)
|
There are no related tax effects of these components of accumulated other comprehensive loss.
20. EARNINGS PER SHARE
Basic and diluted net income (loss) per common share is computed by dividing consolidated net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing consolidated net income (loss) by the weighted average number of common shares outstanding and dilutive common shares equivalent shares outstanding during the period. For fiscal
2016, 2015 and 2014
, the effect of outstanding options and RSUs were anti-dilutive to loss per share and were therefore excluded from the calculation of diluted loss per share.
The dilutive effect of outstanding options and RSUs is reflected in diluted net income per share, but not diluted loss per share, by application of the treasury stock method. As the Company had a net loss in fiscal
2016, 2015 and 2014
, basic and diluted net loss per share are the same for these fiscal years.
The following table sets forth the computation of basic and diluted net loss per share for fiscal
2016, 2015 and 2014
(in thousands, except per share amount):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
June 24,
2016
|
|
June 26,
2015
|
|
June 27,
2014
|
Numerator:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,178
|
)
|
|
$
|
(39,145
|
)
|
|
$
|
(52,814
|
)
|
Denominator:
|
|
|
|
|
|
|
Weighted-average common shares used in computing basic and diluted net loss per share
|
|
35,745
|
|
|
34,559
|
|
|
34,260
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.31
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(1.54
|
)
|
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth potential shares of common stock, which are excluded from the calculation of diluted net loss per share, as the result would be anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
June 24,
2016
|
|
June 26,
2015
|
|
June 27,
2014
|
Options, RSUs and ESPP
|
|
3,127
|
|
|
3,785
|
|
|
3,442
|
|
21. RETIREMENT BENEFIT PLANS
Defined Benefit Plans
The Company sponsors defined benefit plans covering certain of its international employees in Germany and Japan.
Pension benefits associated with these plans generally are based on each participant's years of service, compensation and age at retirement or termination. The Company funds these pension plans in amounts sufficient to meet the minimum requirements of the local laws and regulations. Additional funding may be provided as deemed appropriate.
German Plan
Employees who joined the Company prior to May 2009 were eligible for the German defined benefit plan. The German plan is managed by an insurance company and the insurance company makes investment decisions with the guidelines set by the German regulation. The plan assets are invested as part of the insurance company’s general fund and the Company does not have control over the target allocation or visibility of the investment strategies of these investments.
Japan Plan
The Japan plan is managed by an insurance company and the insurance company makes investment decisions with the guidelines set by the Japanese regulation. The plan assets are invested as part of the insurance company's general fund and the Company does not have control over the target allocation or visibility of the investment strategies of these investments.
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Following is a reconciliation of the projected benefit obligation and the fair value of plan assets as of
June 24, 2016
and
June 26, 2015
for both the German and Japan plans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany Plan
|
|
Japan Plan
|
|
Total
|
|
|
Fiscal Year Ended
|
|
Fiscal Year Ended
|
|
Fiscal Year Ended
|
|
|
June 24,
2016
|
|
June 26,
2015
|
|
June 24,
2016
|
|
June 26,
2015
|
|
June 24,
2016
|
|
June 26,
2015
|
Projected Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, beginning of year
|
|
$
|
10,672
|
|
|
$
|
14,417
|
|
|
$
|
3,705
|
|
|
$
|
4,485
|
|
|
$
|
14,377
|
|
|
$
|
18,902
|
|
Service cost
|
|
10
|
|
|
48
|
|
|
310
|
|
|
330
|
|
|
320
|
|
|
378
|
|
Interest cost
|
|
252
|
|
|
376
|
|
|
43
|
|
|
48
|
|
|
295
|
|
|
424
|
|
Actuarial (losses) gain
|
|
1,088
|
|
|
(1,224
|
)
|
|
357
|
|
|
(65
|
)
|
|
1,445
|
|
|
(1,289
|
)
|
Benefits paid
|
|
(358
|
)
|
|
(375
|
)
|
|
(237
|
)
|
|
(293
|
)
|
|
(595
|
)
|
|
(668
|
)
|
Foreign exchange rate changes
|
|
83
|
|
|
(2,570
|
)
|
|
742
|
|
|
(800
|
)
|
|
825
|
|
|
(3,370
|
)
|
Benefit obligation, ending of year
|
|
$
|
11,747
|
|
|
$
|
10,672
|
|
|
$
|
4,920
|
|
|
$
|
3,705
|
|
|
$
|
16,667
|
|
|
$
|
14,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year
|
|
$
|
2,222
|
|
|
$
|
2,706
|
|
|
$
|
2,539
|
|
|
$
|
2,918
|
|
|
$
|
4,761
|
|
|
$
|
5,624
|
|
Expected return on plan assets
|
|
68
|
|
|
75
|
|
|
81
|
|
|
78
|
|
|
149
|
|
|
153
|
|
Participant contributions
|
|
1
|
|
|
2
|
|
|
381
|
|
|
408
|
|
|
382
|
|
|
410
|
|
Actuarial losses
|
|
(33
|
)
|
|
(33
|
)
|
|
(62
|
)
|
|
(56
|
)
|
|
(95
|
)
|
|
(89
|
)
|
Benefit payments
|
|
(68
|
)
|
|
(70
|
)
|
|
(202
|
)
|
|
(280
|
)
|
|
(270
|
)
|
|
(350
|
)
|
Foreign exchange rate changes
|
|
91
|
|
|
(458
|
)
|
|
494
|
|
|
(529
|
)
|
|
585
|
|
|
(987
|
)
|
Fair value of plan assets, ending of year
|
|
$
|
2,281
|
|
|
$
|
2,222
|
|
|
$
|
3,231
|
|
|
$
|
2,539
|
|
|
$
|
5,512
|
|
|
$
|
4,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underfunded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
11,747
|
|
|
$
|
10,672
|
|
|
$
|
4,920
|
|
|
$
|
3,705
|
|
|
$
|
16,667
|
|
|
$
|
14,377
|
|
Fair value of plan assets
|
|
2,281
|
|
|
2,222
|
|
|
3,231
|
|
|
2,539
|
|
|
5,512
|
|
|
4,761
|
|
Underfunded status of plan
|
|
$
|
9,466
|
|
|
$
|
8,450
|
|
|
$
|
1,689
|
|
|
$
|
1,166
|
|
|
$
|
11,155
|
|
|
$
|
9,616
|
|
The Company has life insurance policies with cash surrender values that have been earmarked by the Company to partly cover the underfunded status of the German plan. As of
June 24, 2016
, the cash surrender values of the life insurance plans amounted to
$7.1 million
(
$0.3 million
is included in prepaid expenses and other current assets and
$6.8 million
is included in other non-current assets in the accompanying consolidated balance sheets). As of
June 26, 2015
, the cash surrender values of the life insurance plans amounted to
$7.0 million
(
$0.3 million
is included in prepaid expenses and other current assets and
$6.7 million
is included in other non-current assets in the accompanying consolidated balance sheets). See Note 3, Financial Instruments and Fair Value, for additional information regarding the determination of fair value of the pension plan assets.
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the amounts recognized on the consolidated balance sheets as of
June 24, 2016
and
June 26, 2015
for both the German and Japan plans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
German Plan
|
|
Japan Plan
|
|
Total
|
|
|
June 24,
2016
|
June 26,
2015
|
|
June 24,
2016
|
June 26,
2015
|
|
June 24,
2016
|
June 26,
2015
|
Amounts recognized in the consolidated balance sheets
|
|
|
|
|
|
|
Accrued benefit cost
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
287
|
|
$
|
286
|
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
287
|
|
$
|
286
|
|
Non-current liabilities
|
|
$
|
9,179
|
|
$
|
8,164
|
|
|
$
|
1,689
|
|
$
|
1,166
|
|
|
$
|
10,868
|
|
$
|
9,330
|
|
Amounts recognized in accumulated other comprehensive loss
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
(2,522
|
)
|
$
|
(1,494
|
)
|
|
$
|
(756
|
)
|
$
|
(287
|
)
|
|
$
|
(3,278
|
)
|
$
|
(1,781
|
)
|
The following table summarizes the amounts recorded to other comprehensive (loss) income, net of zero tax during fiscal
2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
June 24,
2016
|
|
June 26,
2015
|
Amounts recognized in other comprehensive (loss) income
|
|
|
|
|
Net actuarial gain (loss) - German Plan
|
|
$
|
(1,028
|
)
|
|
$
|
1,454
|
|
Net actuarial loss - Japan Plan
|
|
(469
|
)
|
|
(42
|
)
|
Total recognized in other comprehensive (loss) income
|
|
$
|
(1,497
|
)
|
|
$
|
1,412
|
|
The Company expects to recognize less than
$0.1 million
of amortization from accumulated other comprehensive (loss) income into net periodic benefit cost during fiscal 2017.
The following table summarizes the amounts related to the pension plan with accumulated benefit obligation in excess of plan assets at
June 24, 2016
and
June 26, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
German Plan
|
|
Japan Plan
|
|
Total
|
|
|
June 24,
2016
|
June 26,
2015
|
|
June 24,
2016
|
June 26,
2015
|
|
June 24,
2016
|
June 26,
2015
|
Projected benefit obligation
|
|
$
|
11,747
|
|
$
|
10,672
|
|
|
$
|
4,920
|
|
$
|
3,705
|
|
|
$
|
16,667
|
|
$
|
14,377
|
|
Accumulated benefit obligation
|
|
$
|
11,747
|
|
$
|
10,672
|
|
|
$
|
4,337
|
|
$
|
3,231
|
|
|
$
|
16,084
|
|
$
|
13,903
|
|
Fair value of plan assets
|
|
$
|
2,281
|
|
$
|
2,222
|
|
|
$
|
3,231
|
|
$
|
2,539
|
|
|
$
|
5,512
|
|
$
|
4,761
|
|
The Company carries the interest and service cost of the plan. Actuarial gains and losses are amortized over the expected life of the plan.
Weighted average assumptions used to determine benefit obligations for the German and Japan plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
German Plan
|
|
Japan Plan
|
|
|
June 24,
2016
|
June 26,
2015
|
|
June 24,
2016
|
June 26,
2015
|
Assumptions used to determine benefits obligations:
|
|
|
|
|
|
|
Discount rate
|
|
1.5% - 2.0%
|
1.6% - 2.5%
|
|
0.3%
|
1.1
|
%
|
Rate of compensation increase
|
|
0.0%
|
0.0%
|
|
3.5%
|
3.2
|
%
|
Assumptions used to determine net periodic benefit cost:
|
|
|
|
|
|
|
Discount rate
|
|
1.6% - 2.5%
|
3.0% - 3.2%
|
|
1.1%
|
1.2
|
%
|
Expected long-term rate of return on plan assets
|
|
3.0% - 4.1%
|
3.0% - 4.1%
|
|
3.0%
|
3.0
|
%
|
Rate of compensation increase
|
|
0.0%
|
0.0% - 1.0%
|
|
3.2%
|
5.7
|
%
|
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The discount rate reflects the current rate at which the Company believes associated liabilities could be effectively settled at the end of the year. The Company sets its rate to reflect the yield of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits.
Expected long-term rate of return on assets assumptions for the German plan is determined using the projected long-term rate of return estimated by the insurance company for its general fund. Expected long-term rate of return on assets assumptions for the Japan plan is determined by SGI Japan in consideration of the portfolio of SGI Japan's pension plan and projected long-term rate of return based on the Japanese market.
The net periodic benefit cost of the German and Japan plans was comprised of the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
German Plan
|
Japan Plan
|
|
Total
|
|
|
Fiscal Year Ended
|
Fiscal Year Ended
|
|
Fiscal Year Ended
|
|
|
June 24,
2016
|
June 26,
2015
|
June 27,
2014
|
|
June 24,
2016
|
June 26,
2015
|
June 27,
2014
|
|
June 24,
2016
|
June 26,
2015
|
June 27,
2014
|
Net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
10
|
|
$
|
48
|
|
$
|
47
|
|
|
$
|
310
|
|
$
|
330
|
|
$
|
384
|
|
|
$
|
320
|
|
$
|
378
|
|
$
|
431
|
|
Interest expense
|
|
252
|
|
376
|
|
470
|
|
|
43
|
|
48
|
|
78
|
|
|
295
|
|
424
|
|
548
|
|
Expected return on plan assets
|
|
(68
|
)
|
(75
|
)
|
(91
|
)
|
|
(81
|
)
|
(78
|
)
|
(85
|
)
|
|
(149
|
)
|
(153
|
)
|
(176
|
)
|
Amortization on actuarial losses
|
|
18
|
|
257
|
|
128
|
|
|
—
|
|
—
|
|
—
|
|
|
18
|
|
257
|
|
128
|
|
Net periodic benefit cost
|
|
$
|
212
|
|
$
|
606
|
|
$
|
554
|
|
|
$
|
272
|
|
$
|
300
|
|
$
|
377
|
|
|
$
|
484
|
|
$
|
906
|
|
$
|
931
|
|
The Company does not expect to make any contributions to the German plan during the next fiscal year as contributions are not required by funding regulations or laws and the cash surrender value of the life insurance plan earmarked by the Company substantially covers the under-funded status of the German plan.
The Company expects to make contributions to the Japan plan of approximately
$0.4 million
during fiscal 2017.
Future Employee Benefit Payments
The following table provides the estimated pension payments that are payable from the plans to participants (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future
Payments
|
Fiscal Year
|
|
Germany
|
Japan
|
Total
|
2017
|
|
$
|
383
|
|
$
|
161
|
|
$
|
544
|
|
2018
|
|
539
|
|
168
|
|
707
|
|
2019
|
|
712
|
|
183
|
|
895
|
|
2020
|
|
562
|
|
180
|
|
742
|
|
2021
|
|
561
|
|
221
|
|
782
|
|
Following five years
|
|
3,163
|
|
1,561
|
|
4,724
|
|
Total
|
|
$
|
5,920
|
|
$
|
2,474
|
|
$
|
8,394
|
|
Defined Contribution Plan
The Company's U.S. employees are eligible to participate in the Company's qualified defined contribution plan under section 401(k) of the Internal Revenue Code. The plan provides for voluntary salary reduction contributions up to the maximum allowed under Internal Revenue Service rules. Under the terms of the plan, the Company may provide a discretionary matching contribution at the discretion of its management or the Company can make annual contributions to the plan at the discretion of the Board of Directors. The Company contributed
$2.1 million
,
$2.6 million
and
$2.8 million
during fiscal
2016, 2015 and 2014
, respectively.
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
22. INCOME TAXES
The provision (benefit) for income taxes for fiscal years
2016, 2015 and 2014
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
June 24, 2016
|
|
June 26,
2015
|
|
June 27,
2014
|
Federal:
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
|
|
165
|
|
|
288
|
|
|
—
|
|
|
|
165
|
|
|
288
|
|
|
—
|
|
State:
|
|
|
|
|
|
|
Current
|
|
44
|
|
|
227
|
|
|
205
|
|
Deferred
|
|
7
|
|
|
12
|
|
|
—
|
|
|
|
51
|
|
|
239
|
|
|
205
|
|
Foreign:
|
|
|
|
|
|
|
Current
|
|
(185
|
)
|
|
(198
|
)
|
|
(3
|
)
|
Deferred
|
|
(657
|
)
|
|
111
|
|
|
(190
|
)
|
|
|
(842
|
)
|
|
(87
|
)
|
|
(193
|
)
|
Income tax provision (benefit)
|
|
$
|
(626
|
)
|
|
$
|
440
|
|
|
$
|
12
|
|
The components of loss before income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
June 24,
2016
|
|
June 26,
2015
|
|
June 27,
2014
|
Domestic sources
|
|
$
|
(17,616
|
)
|
|
$
|
(32,473
|
)
|
|
$
|
(58,790
|
)
|
Foreign sources
|
|
5,812
|
|
|
(6,232
|
)
|
|
5,988
|
|
Total
|
|
$
|
(11,804
|
)
|
|
$
|
(38,705
|
)
|
|
$
|
(52,802
|
)
|
Deferred tax assets and liabilities reflect the effects of tax losses, credits and the future income tax effects of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted statutory tax rates that are realized the years in which those temporary differences are estimated to be recovered or settled.
As of
June 24, 2016
and
June 26, 2015
, the significant components of the Company’s deferred tax assets and liabilities were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
June 24, 2016
|
|
June 26, 2015
|
Deferred tax assets:
|
|
|
|
|
Net operating losses and tax credit carry forwards
|
|
$
|
133,072
|
|
|
$
|
120,604
|
|
Deferred revenue
|
|
11,102
|
|
|
24,272
|
|
Stock based compensation
|
|
9,180
|
|
|
9,711
|
|
Intangible and fixed assets
|
|
2,081
|
|
|
8,909
|
|
Accruals and reserves
|
|
8,977
|
|
|
5,971
|
|
Other
|
|
936
|
|
|
2,674
|
|
Total deferred tax assets
|
|
165,348
|
|
|
172,141
|
|
Less valuation allowance
|
|
(164,331
|
)
|
|
(171,609
|
)
|
Net deferred tax assets
|
|
$
|
1,017
|
|
|
$
|
532
|
|
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The valuation allowance against the Company's deferred tax assets decreased from
$171.6 million
as of
June 26, 2015
to
$164.3 million
as of
June 24, 2016
. The decrease was primarily due to current year utilization of foreign deferred tax assets. The net deferred tax asset as of
June 24, 2016
is attributable to deferred tax assets of certain foreign subsidiaries which the Company believes are more likely than not to be realized offset by deferred tax liabilities related to amortization of acquired intangibles. The majority of deferred tax assets are subject to a full valuation allowance as they are more likely than not unrealizable based on all available positive and negative evidence including our history of operating results and uncertainty of predicting future income.
As of
June 24, 2016
, the Company has federal, state, Japan and other foreign net operating loss carryforwards of
$232.9 million
,
$152.7 million
,
$58.4 million
, and
$52.3 million
, respectively. If not utilized, the net operating loss carryforwards will begin to expire in fiscal 2017 for state, foreign, and Japan and fiscal 2028 for federal. Substantially all of the Japan net operating losses of
$58.4 million
will expire by fiscal 2018.
As a result of a cumulative ownership change of greater than 50% that occurred in January 2010, the Company's ability to utilize federal and state net operating loss and credit carryforwards is subject to an annual limitation as defined by sections 382 and 383 of the Internal Revenue Code. The Company anticipates that all net operating loss carryforwards will become available prior to expiration if there are no subsequent events that produce a greater restriction on the net operating losses.
Tax attributes related to stock option windfall deductions are not recorded until the deductions result in a reduction of cash taxes payable. The amount of the Company's unrealized federal and state net operating losses relating to stock options deductions as of
June 24, 2016
was
$10.3 million
. The benefit of these net operating losses will be recorded to additional paid-in capital if and when the Company realizes a reduction of cash taxes payable.
As of
June 24, 2016
, the Company has federal and state Research and Development tax credits of
$8.6 million
and
$8.6 million
, respectively and
$4.8 million
of foreign investment tax credits. If not utilized, the federal and foreign tax credits will begin to expire in fiscal 2027 and 2019, respectively. The state tax credits do not expire.
The Company's policy with respect to its undistributed foreign earnings is to consider those earnings to be indefinitely reinvested or repatriated tax-free and, accordingly, no related provision for income or withholding taxes have been provided. Upon distribution of those earnings in the form of dividends or otherwise, the Company may be subject to both income taxes and withholding taxes in the U.S. and various foreign countries. At
June 24, 2016
, the Company did not record deferred tax liabilities of
$11.9 million
on approximately
$34.1 million
of earnings that are deemed to be permanently reinvested overseas or to be repatriated tax free.
A reconciliation of the statutory federal income tax rate for fiscal
2016, 2015 and 2014
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
June 24,
2016
|
|
June 26,
2015
|
|
June 27,
2014
|
Federal statutory rate provision
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State taxes, net of federal tax benefit
|
|
(1.1
|
)
|
|
(0.6
|
)
|
|
(0.2
|
)
|
Foreign rate differential
|
|
15.2
|
|
|
(6.4
|
)
|
|
2.3
|
|
Stock based compensation
|
|
(6.8
|
)
|
|
(2.5
|
)
|
|
0.1
|
|
Valuation allowance - US
|
|
(39.5
|
)
|
|
(27.4
|
)
|
|
(38.3
|
)
|
Valuation allowance - Foreign
|
|
5.6
|
|
|
(0.3
|
)
|
|
0.4
|
|
Unrecognized tax benefits
|
|
4.7
|
|
|
1.1
|
|
|
(0.1
|
)
|
Foreign tax refunds
|
|
—
|
|
|
0.5
|
|
|
2.6
|
|
Federal research credits
|
|
6.7
|
|
|
1.2
|
|
|
0.7
|
|
Foreign dividend
|
|
(9.3
|
)
|
|
(0.2
|
)
|
|
(0.2
|
)
|
Other
|
|
(5.2
|
)%
|
|
(1.6
|
)%
|
|
(2.3
|
)%
|
Effective tax rate
|
|
5.3
|
%
|
|
(1.2
|
)%
|
|
—
|
%
|
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the unrecognized tax benefits (excluding interest and penalties) from
June 28, 2013
through
June 24, 2016
are as follows (in thousands):
|
|
|
|
|
Balance at June 28, 2013
|
$
|
4,987
|
|
Increase to current year positions
|
344
|
|
Increase to prior year positions
|
910
|
|
Decrease due to lapse of statute of limitations
|
(270
|
)
|
Balance at June 27, 2014
|
5,971
|
|
Increase to current year positions
|
329
|
|
Increase to prior year positions
|
480
|
|
Decrease due to lapse of statute of limitations
|
(388
|
)
|
Decrease of unrecognized tax benefits related to settlements
|
(97
|
)
|
Balance at June 26, 2015
|
6,295
|
|
Increase to current year positions
|
286
|
|
Decrease to prior year positions
|
(530
|
)
|
Decrease due to lapse of statute of limitations
|
(795
|
)
|
Balance at June 24, 2016
|
$
|
5,256
|
|
At
June 24, 2016
, the Company had approximately
$5.3 million
of gross unrecognized tax benefits of which
$1.3 million
, if recognized, will impact the effective tax rate. The Company does not expect that the total unrecognized tax benefits will significantly increase or decrease in the next
12
months.
The Company classifies interest expense and penalties related to unrecognized tax benefits as components of income tax expense. As of
June 24, 2016
, the Company has accrued interest and penalties of approximately
$6.7 million
and
$0.2 million
, respectively, on the Company’s consolidated balance sheet.
During fiscal
2016
, the Company recognized an
insignificant amount
for interest and a benefit of
$0.3 million
related to penalties, resulting from reversals of unrecognized tax benefits and current year additions as recorded in the consolidated statement of operations.
The Company’s U.S. federal tax returns for 2009 and prior years are no longer subject to examination. The Company’s state tax returns for years prior to 2009 are not subject to examination.
The Company’s foreign subsidiaries file income tax returns in the countries in which they have operations. Generally, these countries have statute of limitations ranging from
3
to
7
years. Tax years still open to examination by foreign tax authorities range from 2009 through 2015.
It is reasonably possible that over the next twelve-month period the Company may experience an increase or decrease in its unrecognized tax benefits. However, it is not possible to estimate either the estimated amount or the range of any increase or decrease at this time.
The Company early adopted ASU 2015-17 effective June 24, 2016 on a prospective basis. Adoption of this ASU resulted in an immaterial reclassification of our net current deferred tax asset to the net non-current deferred tax asset in its consolidated balance sheet as of June 24, 2016. No prior periods were retrospectively adjusted.
23. SEGMENT INFORMATION
The Company manages its business primarily as three operating segments, HPC, HPDA and Service. The Company has aggregated the HPC and HPDA operating segments into one reportable Product segment as the HPDA operating segment has not met the quantitative threshold to be reported as a separate reportable segment. As such, the Company reports
two
reportable segments, Product and Service. The Company's operating segments are determined based upon several criteria including: the Company's internal organizational structure; the manner in which the Company's operations are managed; the criteria used by the Company's Chief Operating Officer, the Chief Operating Decision Maker (“CODM”), to evaluate segment performance; and the Company's availability of separate financial information.
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A description of the Company's
two
reportable segments is as follows:
Product—
The Product segment is comprised of SGI's compute and storage solutions, which include products from both our HPC and HPDA operating segments. Compute solutions include scale-out computing, scale-up computing, software and cloud/web solutions. Compute solutions also include integrated third-party hardware and software products that SGI sells to provide a single source solution for its customers. SGI's compute solutions are designed to minimize the number and complexity of interconnects for power and data transfer to improve reliability, speed of implementation and serviceability. Storage solutions include both hardware and software offerings to address virtually every type of data storage and management requirement. Products range from entry-level disk arrays to complex storage systems, with innovative technology and hardware. SGI's storage solutions are designed to provide extreme scale, broad flexibility to minimize the cost to store data.
Service—
The Service segment is comprised of customer service support and professional services. SGI's customer support organization provides ongoing maintenance and technical support for its products and some third-party products, as well as contracted maintenance services, hardware deployment services (install and de-install), time and materials-based services and spare parts. SGI's professional services organization provides value added services associated with technology consulting, project management and customer education, all of which help its customers realize the full value of their information technology investments.
In fiscal 2014, the Company previously managed its business primarily as three separate business units: Compute, Storage, and Service. In fiscal 2015, the Company combined the Compute and Storage business units into a single Product business unit. All periods presented conform to the current reportable segment structure.
The Company's CODM evaluates the performance of its operating segments based on revenue and operating profit (loss). Revenues are generally allocated based on the type of products and service provided to its customers. Operating profit (loss) for each segment includes related cost of sales and operating expenses directly attributable to the segment. A portion of the segments' expenses arise from shared services and infrastructure that the Company provides to the segments in order to realize economies of scale and to efficiently use resources. These expenses, collectively called corporate charges, include costs of centralized research and development and other corporate infrastructure expenses. The corporate charges that are directly attributable to the segments are allocated and are reassessed on a periodic basis. The allocations have been determined on a basis that the Company considers to be a reasonable reflection of the utilization of services provided to or benefits received by the segments. The profitability of each of the segments is measured after excluding share-based compensation expenses, amortization and impairment of intangibles, restructuring charges, manufacturing transition costs, general and administration charges, other unallocated corporate charges and other items as noted in the reconciliation below as management does not include this information in its measurement of the performance of the operating segments.
Segment Results
The following table presents revenue and operating profit (loss) for the Company’s segments for fiscal
2016, 2015 and 2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
June 24, 2016
|
|
June 26, 2015
|
|
June 27, 2014
|
Total net revenue
|
|
|
|
|
|
|
Product
|
|
$
|
394,844
|
|
|
$
|
376,294
|
|
|
$
|
374,565
|
|
Service
|
|
138,086
|
|
|
144,965
|
|
|
155,381
|
|
Total net revenue
|
|
$
|
532,930
|
|
|
$
|
521,259
|
|
|
$
|
529,946
|
|
|
|
|
|
|
|
|
Operating profit from reportable segments
|
|
|
|
|
|
|
Product
|
|
$
|
29,885
|
|
|
$
|
10,578
|
|
|
$
|
(146
|
)
|
Service
|
|
53,585
|
|
|
57,513
|
|
|
60,412
|
|
Total operating profit from reportable segments (1)
|
|
$
|
83,470
|
|
|
$
|
68,091
|
|
|
$
|
60,266
|
|
(1) The profitability of each of the segments is measured after excluding unallocated corporate charges, restructuring and severance, amortization and impairment of intangibles, share-based compensation expenses, manufacturing transition and termination costs and other items as noted in the reconciliation below.
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table reconciles segment results to our total company results from operations before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
June 24,
2016
|
|
June 26,
2015
|
|
June 27,
2014
|
|
|
(in thousands)
|
Total reportable segments' operating profit
|
|
$
|
83,470
|
|
|
$
|
68,091
|
|
|
$
|
60,266
|
|
All other corporate charges:
|
|
|
|
|
|
|
Unallocated operating expenses
|
|
73,943
|
|
|
75,815
|
|
|
73,357
|
|
Gain on sale of assets
|
|
(4,425
|
)
|
|
—
|
|
|
—
|
|
Restructuring and severance
|
|
2,560
|
|
|
6,314
|
|
|
12,222
|
|
Amortization and impairment of intangibles
|
|
662
|
|
|
1,854
|
|
|
6,748
|
|
Share-based compensation
|
|
12,037
|
|
|
14,549
|
|
|
11,979
|
|
Manufacturing transition / termination costs
|
|
—
|
|
|
—
|
|
|
2,199
|
|
Excess and obsolescence inventory charges
|
|
—
|
|
|
—
|
|
|
5,424
|
|
Other
|
|
(195
|
)
|
|
3,648
|
|
|
3,184
|
|
Total all other corporate charges
|
|
84,582
|
|
|
102,180
|
|
|
115,113
|
|
Loss from operations, as reported
|
|
$
|
(1,112
|
)
|
|
$
|
(34,089
|
)
|
|
$
|
(54,847
|
)
|
The Company derives the results of the business segments directly from its internal management reporting system. The segment information is presented on the basis which the Company's CODM evaluates the performance of its operating segments. The combined product and service revenue is allocated to product and service revenue on a contractual basis for segment information purposes.
The Company's assets are located primarily in the United States and are not allocated to any specific business segment. The Company does not measure the performance of its business segments on any asset-based metrics. Therefore, reportable segment information is presented only for revenue and operating profit (loss).
Customer Information
A significant portion of the Company's revenue was generated from a limited number of customers. For the year ended
June 24, 2016
,
one
customer represented 10 percent or more of the Company's total net revenue. Various agencies of the United States government, excluding system integrators (collectively, U.S. government), accounted for approximately
25%
of the Company's revenue. For the year ended June 26, 2015,
two
customers represented 10 percent or more of the Company's total net revenue. Various agencies of the United States government, excluding system integrators (collectively, U.S. government), accounted for approximately
21%
of the Company's revenue and another customer accounted for approximately
12%
of the Company's revenue.
At
June 24, 2016
,
two
customers accounted for
32%
of the Company's accounts receivable. At
June 26, 2015
,
four
customer accounted for
56%
of the Company's accounts receivable.
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Geographic Information
The following table presents revenue by geographic region for fiscal
2016, 2015 and 2014
(in thousands except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
June 24,
2016
|
|
June 26,
2015
|
|
June 27,
2014
|
|
|
|
|
|
|
|
Americas
|
|
$
|
295,518
|
|
|
$
|
323,785
|
|
|
$
|
277,536
|
|
As a percent of total net revenue
|
|
55.5
|
%
|
|
62.1
|
%
|
|
52.4
|
%
|
EMEA
|
|
107,439
|
|
|
73,311
|
|
|
116,071
|
|
As a percent of total net revenue
|
|
20.1
|
%
|
|
14.1
|
%
|
|
21.9
|
%
|
APJ
|
|
129,973
|
|
|
124,163
|
|
|
136,339
|
|
As a percent of total net revenue
|
|
24.4
|
%
|
|
23.8
|
%
|
|
25.7
|
%
|
Total revenue
|
|
$
|
532,930
|
|
|
$
|
521,259
|
|
|
$
|
529,946
|
|
Americas includes both North and South America. EMEA includes European countries. APJ includes Australia, Japan and all other Asian countries.
International sales to Japan, the only foreign country which accounted for
ten
percent or more of revenue, was
$112.4 million
for fiscal
2016
or
21%
of revenue,
$92.2 million
for fiscal
2015
or
18%
of revenue and
$108.3 million
or
20%
of revenue for fiscal
2014
.
Approximately
98%
and
97%
of the Company’s property and equipment was located in the United States as of
June 24, 2016
and
June 26, 2015
, respectively. The Company's property was not material in any individual foreign country.
24. FINANCIAL GUARANTEES
The Company has issued financial guarantees to cover rent on leased facilities and equipment, to government authorities for VAT and other taxes and to various other parties to support payments in advance of future delivery on goods and services. The majority of the Company’s financial guarantees have terms of
one
year or more. The maximum potential obligation under financial guarantees at
June 24, 2016
was
$3.6 million
for which the Company has
$3.5 million
of assets held as collateral. The full amount of the assets held as collateral are included in short-term and long-term restricted cash in the consolidated balance sheets.
25. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain real and personal property under non-cancelable operating leases. The Company leases its facilities and office buildings under operating leases that expire at various dates through December 2023. Certain leases also contain escalation and renewal option clauses calling for increased rents. Where a lease contains an escalation clause or a concession such as a rent holiday, rent expense is recognized using the straight line method over the term of the lease.
Future minimum lease payments under operating leases are as follows (in thousands):
|
|
|
|
|
|
Fiscal Year
|
|
Amount
|
2017
|
|
$
|
6,220
|
|
2018
|
|
5,306
|
|
2019
|
|
4,233
|
|
2020
|
|
3,167
|
|
2021
|
|
3,312
|
|
Thereafter
|
|
6,400
|
|
Total
|
|
$
|
28,638
|
|
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Rent expense for fiscal
2016, 2015 and 2014
was approximately
$4.4 million
,
$5.7 million
and
$7.4 million
, respectively.
Purchase Commitments
In connection with supplier agreements, the Company has purchase obligations that include agreements to purchase certain units of inventory and non-inventory items through 2018. These purchase obligations that are enforceable and legally binding on the Company specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions and the approximate timing of the transaction.
As of
June 24, 2016
, these non-cancelable purchase commitments were approximately
$17.8 million
, of which
$12.5 million
are due in the next
12
months.
Indemnification Agreements
The Company enters into standard indemnification agreements with its customers and certain other business partners in the ordinary course of business. These agreements include provisions for indemnifying the customer against any claim brought by a third party to the extent any such claim alleges that the Company’s product infringes a patent, copyright or trademark, or misappropriates a trade secret, of that third-party. The agreements generally limit the scope of the available remedies in a variety of industry-standard methods, including, but not limited to, product usage and geography-based limitations, a right to control the defense or settlement of any claim and a right to replace or modify the infringing products to make them non-infringing. The Company has not incurred significant expenses related to these indemnification agreements and no material claims for such indemnifications were outstanding as of
June 24, 2016
. As a result, the Company believes the estimated fair value of these indemnification agreements, if any, to be immaterial; accordingly, no liability has been recorded with respect to such indemnifications as of
June 24, 2016
.
Letter of Credit Arrangements
As of
June 24, 2016
, the Company has a
$2.0 million
outstanding letter of credit with Wells Fargo Bank to back the Company's obligation to pay or perform when required to do so pursuant to the requirements of an underlying agreement or the provision of goods or services to a supplier. This outstanding letter of credit is secured by restricted cash that is reflected on our balance sheet.
Contingencies
The Company may, from time to time, be involved in legal proceedings and disputes that arise in the normal course of business. These matters include product liability actions, securities and stockholder matters, patent infringement actions, contract disputes, domestic and international federal, state and local tax reviews and audits and other matters. The Company also may be subject to litigation and/or adverse rulings or judgments as a result of certain contractual indemnification obligations. The Company records a provision for a liability when management believes that it is both probable that a liability has been incurred and it can reasonably estimate the amount of the loss. The Company believes it has adequate provisions for any such matters. The Company reviews these provisions at least quarterly and adjusts these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.
Third parties in the past have asserted and may in the future assert, intellectual property infringement claims against the Company, and such future claims, if proven, could require the Company to pay substantial damages or to redesign its existing products or pay fees to obtain cross-license agreements. Litigation may be necessary in the future to enforce or defend the Company's intellectual property rights, to protect the Company's trade secrets or to determine the validity and scope of its proprietary rights or the proprietary rights of others. Any such litigation could result in substantial costs and diversion of management resources, either of which could harm the Company's business, operating results and financial condition. Further, many of the Company's current and potential competitors have the ability to dedicate substantially greater resources to enforcing and defending their intellectual property rights than the Company.
Additionally, from time to time, the Company receives inquiries from regulatory agencies informally requesting information or documentation. There can be no assurance in any given case that such informal review will not lead to further proceedings involving the Company in the future.
The Company is not aware of any pending disputes, including those outlined above, that would be likely to have a material adverse effect, either individually or in the aggregate, on its consolidated financial condition, results of operations or liquidity. However, litigation is subject to inherent uncertainties and costs and unfavorable outcomes could occur. An unfavorable outcome could include the payment of monetary damages, cash or other settlement, or an injunction prohibiting it from selling one or more products. If an unfavorable resolution were to occur, there exists the possibility of a material adverse
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
impact on the Company's consolidated financial condition, results of operations or cash flows of the period in which the resolution occurs or on future periods.
Litigation Related to Our Proposed Acquisition by HPE
Subsequent to the Company's fiscal year end, on August 29, 2016, a stockholder class action complaint was filed in Santa Clara Superior Court on behalf of a putative class of SGI stockholders and naming as defendants SGI’s Board of Directors, SGI, HPE, and Acquisition Sub:
Kierkla v. SGI,
as the result of the Company's
signing a definitive agreement to be acquired by Hewlett Packard Enterprise Company ("HPE"). Also, see note 27 "Subsequent Events". The complaint generally alleges that, in connection with the proposed acquisition of SGI by HPE, the individual director defendants breached their fiduciary duties to SGI’s stockholders by, among other things, purportedly failing to take steps to maximize the value of SGI to SGI’s stockholders and agreeing to allegedly preclusive deal protection devices in the Merger Agreement. The complaints further allege that HPE, Acquisition Sub, and/or SGI aided and abetted the individual defendants in the alleged breaches of their fiduciary duties. The complaints seek, among other things, an order enjoining the defendants from consummating the proposed transaction, in the event that the proposed transaction is consummated, an order rescinding it and setting it aside or awarding rescissory damages, an order directing defendants to account to the class for damages allegedly sustained, and attorneys’ fees and costs. The Company intends to take all necessary steps to vigorously defend itself and any directors and/or officers named in the lawsuit as defendants. SGI has not booked an accrual relating to any of these matters at this time, as amounts are not probable or estimable.
26. CONTRACT MANUFACTURING TRANSITION
In July 2013, the Company selected Jabil Circuit, Inc. ("Jabil") as its primary global manufacturing services and supply chain management provider. The transition to Jabil was expected to be implemented as a “manage in place” model, which would utilize existing SGI facilities and personnel. On November 18, 2013, the Company signed an asset purchase agreement with Jabil, whereby Jabil would purchase SGI’s primary manufacturing facility, located in Chippewa Falls, Wisconsin and certain other manufacturing assets for
$6.3 million
in cash.
The total carrying of these assets held for sale were written down to their fair value of
$6.3 million
, resulting in an impairment charge of
$0.9 million
recorded in general and administrative expenses in the second quarter of fiscal 2014.
SGI also expected that approximately
120
of its manufacturing personnel in Chippewa Falls would transfer to Jabil. During the second quarter of fiscal 2014, the Company accrued approximately
$0.7 million
of compensation costs associated with the transfer of these employees as part of the agreement with Jabil, which was recorded within cost of revenue.
During the fourth quarter of fiscal 2014, the Company reevaluated its outsourcing model given lower than anticipated volumes of Company product sales. On August 4, 2014, the Company terminated the planned manage-in-place outsourcing structure and the asset purchase agreement referenced above. The Company paid approximately
$0.6 million
to Jabil for certain assets that were purchased for the manage-in-place model as well as for costs associated with streamlining the manufacturing process. In addition, SGI reversed the
$0.7 million
accrual previously booked for compensation costs associated with the proposed employee transfer discussed above.
27. SUBSEQUENT EVENTS
Definitive Agreement to be acquired by Hewlett Packard Enterprise Company
On
August 11, 2016
the Company announced that it has signed a definitive agreement to be acquired by Hewlett Packard Enterprise Company ("HPE") for
$7.75
per share in cash, a transaction valued at approximately
$275 million
, net of cash and debt. HPE and SGI believe that by combining complementary product portfolios and go-to-market approaches they will be able to strengthen the leading position and financial performance of the combined business. The transaction is expected to close in the second or third quarter of the Company's fiscal year 2017 (November 1, 2016 - January 31, 2017), subject to regulatory and stockholders approvals and other customary closing conditions. Also see Note 25, "Commitments and Contingencies".
28. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of quarterly results of operations for fiscal
2016
and
2015
(in thousands, except per share amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
June 24,
2016
|
|
March 25,
2016
|
|
December 25,
2015
|
|
September 25,
2015
|
Revenue
|
|
$
|
122,714
|
|
|
$
|
132,083
|
|
|
$
|
151,826
|
|
|
$
|
126,307
|
|
Gross profit
|
|
$
|
37,488
|
|
|
$
|
37,768
|
|
|
$
|
40,825
|
|
|
$
|
28,464
|
|
Net income (loss)
|
|
$
|
134
|
|
|
$
|
739
|
|
|
$
|
(479
|
)
|
|
$
|
(11,572
|
)
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share:
|
|
$
|
0.00
|
|
|
$
|
0.02
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.33
|
)
|
Diluted net income (loss) per share:
|
|
$
|
0.00
|
|
|
$
|
0.02
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.33
|
)
|
Shares used in the calculation of net income (loss) per share:
|
|
|
|
|
|
|
|
|
Shares used in the calculation of basic net income (loss) per share:
|
|
36,319
|
|
|
35,954
|
|
|
35,531
|
|
|
35,174
|
|
Shares used in the calculation of diluted net income (loss) per share:
|
|
37,379
|
|
|
37,028
|
|
|
35,531
|
|
|
35,174
|
|
SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
June 26,
2015
|
|
March 27,
2015
|
|
December 26,
2014
|
|
September 26,
2014
|
Revenue
|
|
$
|
152,904
|
|
|
$
|
118,504
|
|
|
$
|
138,150
|
|
|
$
|
111,701
|
|
Gross profit
|
|
$
|
31,798
|
|
|
$
|
33,659
|
|
|
$
|
36,809
|
|
|
$
|
32,372
|
|
Net loss
|
|
$
|
(9,612
|
)
|
|
$
|
(8,762
|
)
|
|
$
|
(10,438
|
)
|
|
$
|
(10,333
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share:
|
|
$
|
(0.28
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.30
|
)
|
Shares used in the calculation of basic and diluted net loss per share:
|
|
34,839
|
|
|
34,586
|
|
|
34,375
|
|
|
34,420
|
|