Document And Entity Information
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Document And Entity Information
3 Months Ended
Dec. 31, 2012
Feb. 01, 2013
Document And Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Dec. 31, 2012  
Document Fiscal Year Focus 2013  
Document Fiscal Period Focus Q1  
Entity Registrant Name F5 NETWORKS INC  
Entity Central Index Key 0001048695  
Current Fiscal Year End Date --09-30  
Entity Filer Category Large Accelerated Filer  
Entity Common Stock, Shares Outstanding   78,590,957

Consolidated Balance Sheets
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Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2012
Sep. 30, 2012
ASSETS    
Cash and cash equivalents $ 184,563 $ 211,181
Short-term investments 333,174 320,970
Accounts receivable, net of allowances of $3,309 and $3,254 209,078 185,172
Inventories 18,723 17,410
Deferred tax assets 10,335 10,362
Other current assets 35,916 30,986
Total current assets 791,789 776,081
Property and equipment, net 62,026 59,604
Long-term investments 771,300 662,803
Deferred tax assets 36,234 35,478
Goodwill 348,239 348,239
Other assets, net 28,064 28,996
Total assets 2,037,652 1,911,201
LIABILITIES AND SHAREHOLDERS' EQUITY    
Accounts payable 32,221 27,026
Accrued liabilities 117,413 86,409
Deferred revenue 379,944 352,594
Total current liabilities 529,578 466,029
Other long-term liabilities 21,163 21,078
Deferred revenue, long-term 100,612 94,694
Total long-term liabilities 121,775 115,772
Commitments and contingencies (Note 5)      
Shareholders' equity    
Preferred stock, no par value; 10,000 shares authorized, no shares outstanding      
Common stock, no par value; 200,000 shares authorized, 78,574 and 78,715 shares issued and outstanding 315,039 326,922
Accumulated other comprehensive loss (4,540) (3,829)
Retained earnings 1,075,800 1,006,307
Total shareholders' equity 1,386,299 1,329,400
Total liabilities and shareholders' equity $ 2,037,652 $ 1,911,201

Consolidated Balance Sheets (Parenthetical)
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Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2012
Sep. 30, 2012
Consolidated Balance Sheets [Abstract]    
Accounts receivable, allowances $ 3,309 $ 3,254
Preferred stock, par value $ 0.00 $ 0.00
Preferred stock, shares authorized 10,000,000 10,000,000
Preferred stock, shares outstanding 0 0
Common stock, par value $ 0.00 $ 0.00
Common stock, shares authorized 200,000,000 200,000,000
Common stock, shares issued 78,574,000 78,715,000
Common stock, shares outstanding 78,574,000 78,715,000

Consolidated Income Statements
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Consolidated Income Statements (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Net revenues    
Products $ 204,712 $ 196,554
Services 160,739 125,878
Total 365,451 322,432
Cost of net revenues    
Products 31,792 33,200
Services 29,093 22,406
Total 60,885 55,606
Gross profit 304,566 266,826
Operating expenses    
Sales and marketing 122,268 106,238
Research and development 48,541 39,122
General and administrative 24,673 21,677
Total 195,482 167,037
Income from operations 109,084 99,789
Other income, net 1,550 1,861
Income before income taxes 110,634 101,650
Provision for income taxes 41,141 35,158
Net income $ 69,493 $ 66,492
Net income per share - basic $ 0.88 $ 0.84
Weighted average shares - basic 78,789 79,272
Net income per share - diluted $ 0.88 $ 0.83
Weighted average shares - diluted 79,278 79,822

Consolidated Statements Of Comprehensive Income
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Consolidated Statements Of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Consolidated Statements Of Comprehensive Income [Abstract]    
Net income $ 69,493 $ 66,492
Other comprehensive income:    
Foreign currency translation adjustment (257) (263)
Unrealized loss on securities, net of tax (453) (87)
Total other comprehensive income (710) (350)
Comprehensive income $ 68,783 $ 66,142

Consolidated Statements Of Cash Flows
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Consolidated Statements Of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Operating activities    
Net income $ 69,493 $ 66,492
Adjustments to reconcile net income to net cash provided by operating activities:    
Realized loss on disposition of assets and investments 26 579
Stock-based compensation 26,710 22,123
Provisions for doubtful accounts and sales returns 349 415
Depreciation and amortization 9,934 5,822
Deferred income taxes (1,265) (598)
Changes in operating assets and liabilities:    
Accounts receivable (24,256) (22,601)
Inventories (1,313) (344)
Other current assets (4,979) (3,879)
Other assets 428 562
Accounts payable and accrued liabilities 36,411 26,576
Deferred revenue 33,268 36,732
Net cash provided by operating activities 144,806 131,879
Investing activities    
Purchases of investments (313,114) (262,499)
Maturities of investments 165,193 199,102
Sales of investments 23,020 1,886
Increase in restricted cash (728) (3)
Purchases of property and equipment (7,788) (5,857)
Net cash used in investing activities (133,417) (67,371)
Financing activities    
Excess tax benefit from stock-based compensation 503 1,399
Proceeds from the exercise of stock options and purchases of stock under employee stock purchase plan 11,583 9,577
Repurchase of common stock (50,000) (34,473)
Net cash used in financing activities (37,914) (23,497)
Net (decrease) increase in cash and cash equivalents (26,525) 41,011
Effect of exchange rate changes on cash and cash equivalents (93) (307)
Cash and cash equivalents, beginning of period 211,181 216,784
Cash and cash equivalents, end of period $ 184,563 $ 257,488

Summary Of Significant Accounting Policies
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Summary Of Significant Accounting Policies
3 Months Ended
Dec. 31, 2012
Summary Of Significant Accounting Policies [Abstract]  
Summary Of Significant Accounting Policies

1. Summary of Significant Accounting Policies

 

Description of Business

 

F5 Networks, Inc. (the “Company”) provides products and services to help companies manage their Internet Protocol (IP) traffic and file storage infrastructure efficiently and securely. The Company’s application delivery networking products improve the performance, availability and security of applications on Internet-based networks. Internet traffic between network-based applications and clients passes through these devices where the content is inspected to ensure that it is safe and modified as necessary to ensure that it is delivered securely and in a way that optimizes the performance of both the network and the applications. The Company’s storage virtualization products simplify and reduce the cost of managing files and file storage devices, and ensure fast, secure, easy access to files for users and applications. With the purchase of Traffix Communication Systems Ltd. (Traffix Systems) in February 2012, the Company acquired a line of Diameter signaling products that enable full connectivity, enhanced scalability, and comprehensive control for telecommunications operators. These products enable operators to control their signaling networks effectively in the migration to next-generation networks and in future expansion of their subscriber bases and service portfolios. The Company also offers a broad range of services that include consulting, training, maintenance and other technical support services.

 

Basis of Presentation

 

The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for their fair statement in conformity with accounting principles generally accepted in the United States of America. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012.

 

Certain prior year amounts, specifically relating to cash flows in connection with the disposition of investments, have been reclassified from sales of investments to maturities of investments to conform to the current year presentation in the Consolidated Statement of Cash Flows. There was no change to the net cash used in investing activities as a result of this reclassification. This reclassification did not affect total revenue, operating income or net income.

 

Revenue Recognition

 

The Company sells products through distributors, resellers, and directly to end users. Revenue is recognized provided that all of the following criteria have been met:

 

     Persuasive evidence of an arrangement exists. Evidence of an arrangement generally consists of a purchase order issued pursuant to the terms and conditions of a distributor, reseller or end user agreement.

 

     Delivery has occurred. The Company uses shipping or related documents, or written evidence of customer acceptance, when applicable, to verify delivery or completion of any performance terms.

 

     The sales price is fixed or determinable. The Company assesses whether the sales price is fixed or determinable based on payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.

 

     Collectability is reasonably assured. The Company assesses collectability primarily based on the creditworthiness of the customer as determined by credit checks and related analysis, as well as the Customer’s payment history.

 

Revenue from the sale of products is generally recognized when the product has been shipped and the customer is obligated to pay for the product. When rights of return are present and the Company cannot estimate returns,  revenue is recognized when such rights of return lapse. In certain regions where the Company does not have the ability to reasonably estimate returns, the Company defers revenue on sales to its distributors until information is received from the channel partner indicating that the product has been sold to the end-user customer. Payment terms to domestic customers are generally net 30 days to net 45 days. Payment terms to international customers range from net 30 days to net 120 days based on normal and customary trade practices in the individual markets. The Company offers extended payment terms to certain customers, in which case, revenue is recognized when payments are due.

 

Revenues for post-contract customer support (PCS) are recognized on a straight-line basis over the service contract term. PCS includes a limited period of telephone support updates, repair or replacement of any failed product or component that fails during the term of the agreement, bug fixes and rights to upgrades, when and if available. Consulting services are customarily billed at fixed hourly rates, plus out-of-pocket expenses, and revenues are recognized when the consulting has been completed. Training revenue is recognized when the training has been completed.

 

The majority of the Company’s products are hardware appliances which contain software essential to the overall functionality of the products. Hardware appliances are generally sold with PCS and on occasion, with consulting and/or training services. Arrangement consideration in such multiple element transactions  is allocated to each element based on a fair value hierarchy, where the selling price for an element is based on vendor specific objective evidence (VSOE), if available, third-party evidence (TPE), if available and VSOE is not available; or the best estimate of selling price (BESP), if neither VSOE or TPE is available.

 

For sales of nonessential and stand-alone software, the Company allocates revenue for arrangements with multiple elements based on software revenue recognition guidance. Software revenue recognition guidance requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of those elements. The fair value of an element must be based on VSOE. Where fair value of delivered elements is not available, revenue is recognized on the “residual method” based on the fair value of undelivered elements. If evidence of fair value of one or more undelivered elements does not exist, all revenue is deferred and recognized at the earlier of the delivery of those elements or the establishment of fair value of the remaining undelivered elements.

 

The Company establishes VSOE for its products, PCS, consulting and training services based on the sales price charged for each element when sold separately. The sales price is discounted from the applicable list price based on various factors including the type of customer, volume of sales, geographic region and program level. The Company’s list prices are generally not fair value as discounts may be given based on the factors enumerated above. The Company uses historical sales transactions to determine whether VSOE can be established for each of the elements. In most instances, VSOE of fair value is the sales price of actual standalone (unbundled) transactions within the past 12 month period, when a substantial majority of transactions are priced within a narrow range, which the Company has determined to be plus or minus 15% of the median sales price.

 

The Company believes that the VSOE of fair value of training and consulting services is represented by the billable rate per hour, based on the rates charged to customers when they purchase standalone training or consulting services. The price of consulting services is not based on the type of customer, volume of sales, geographic region or program level.

 

The Company is typically not able to determine TPE for its products or services. TPE is determined based on competitor prices for similar elements when sold separately. Generally, the Company’s go-to-market strategy differs from that of other competitive products or services in its markets and the Company’s offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine the selling prices on a stand-alone basis of similar products offered by its competitors.

 

When the Company is unable to establish selling price using VSOE or TPE, the Company uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company is generally not able to establish VSOE for non-software product sales. Instead, the Company has been able to establish BESP through the list price, less a discount deemed appropriate to maintain a reasonable gross margin. Management regularly reviews the gross margin information. Non-software product BESP is determined through the Company’s review of historical sales transactions within the past 12 month period. Additional factors considered in determining an appropriate BESP include, but are not limited to, cost of products, pricing practices, geographies, customer classes, and distribution channels.

 

The Company regularly validates the VSOE of fair value and BESP for elements in its multiple element arrangements. The Company accounts for taxes collected from customers and remitted to governmental authorities on a net basis and excluded from revenues.

 

Goodwill

 

Goodwill represents the excess purchase price over the estimated fair value of net assets acquired as of the acquisition date. The Company tests goodwill for impairment on an annual basis and between annual tests when impairment indicators are identified, and goodwill is written down when impaired. Goodwill was recorded in connection with the acquisition of Traffix Systems in fiscal year 2012, Acopia Networks, Inc. in fiscal year 2007, Swan Labs, Inc. in fiscal year 2006, MagniFire Websystems, Inc. in fiscal year 2004 and uRoam, Inc. in fiscal year 2003. The Company performs its annual goodwill impairment test during the second fiscal quarter.

 

In September 2011, the FASB approved changes to the goodwill impairment guidance which are intended to reduce the cost and complexity of the annual impairment test. The changes provide entities the option to perform a qualitative assessment to determine whether further impairment testing is necessary. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e. greater than 50% chance) that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required.

 

The revised guidance includes examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity’s operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price on either an absolute basis or relative to peers.

 

The changes are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, earlier adoption is permitted. The Company opted to early adopt this guidance for its annual goodwill impairment test performed in the second quarter of fiscal 2012.

 

If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the provisions of authoritative guidance require that the Company perform a two-step impairment test on goodwill. The first step of the test identifies whether potential impairment may have occurred, while the second step of the test measures the amount of the impairment, if any. Impairment is recognized when the carrying amount of goodwill exceeds its fair value. For its annual goodwill impairment analysis, the Company operates under one reporting unit and determines the fair value of its reporting unit based on the Company’s enterprise value. In March 2012, the Company completed a qualitative assessment of potential impairment indicators and concluded that it was more-likely-than-not that the fair value of its reporting unit exceeded its carrying amount. The Company also considered potential impairment indicators at December 31, 2012 and noted no indicators of impairment.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation using the straight-line attribution method for recognizing compensation expense. The Company recognized $26.7 million and $22.1 million of stock-based compensation expense for the three months ended December 31, 2012 and 2011, respectively. As of December 31, 2012, there was $138.3 million of total unrecognized stock-based compensation cost, the majority of which will be recognized over the next two years. Going forward, stock-based compensation expenses may increase as the Company issues additional equity-based awards to continue to attract and retain key employees.

 

The Company issues incentive awards to its employees through stock-based compensation consisting of restricted stock units (RSUs). The value of RSUs is determined using the fair value method, which in this case, is based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant. 

 

The Company recognizes compensation expense for only the portion of restricted stock units that are expected to vest. Therefore, the Company applies estimated forfeiture rates that are derived from historical employee termination behavior. Based on historical differences with forfeitures of stock-based awards granted to the Company’s executive officers and Board of Directors versus grants awarded to all other employees, the Company has developed separate forfeiture expectations for these two groups. The Company’s estimated forfeiture rate in the first quarter of fiscal year 2013 is 5.3% for grants awarded to the Company’s executive officers and Board of Directors, and 7.6% for grants awarded to all other employees. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.

 

In November 2012, the Company granted 290,415 RSUs to certain current executive officers as part of the annual equity awards program. Fifty percent of the aggregate number of RSUs vest in equal quarterly increments over four years, until such portion of the grant is fully vested on November 1, 2016. One-eighth of the RSU grant, or a portion thereof, is subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal year 2013. In each case, 50% of the quarterly performance stock grant is based on achieving at least 80% of the quarterly revenue goal and the other 50% is based on achieving at least 80% of the quarterly EBITDA goal. The quarterly performance stock grant is paid linearly above 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement threshold and 100% over-achievement threshold. The remaining 37.5% of this annual equity awards RSU grant shall be subject to quarterly performance based vesting for fiscal years 2014, 2015 and 2016 (12.5% in each period). The Compensation Committee of the Board of Directors will set applicable performance targets and vesting formulas for each of these periods.

 

In November 2011, as part of the annual review of executive compensation by the Compensation Committee of the Board of Directors and a change in the grant date for the Company’s annual equity awards program for the executive officers from August 1 to November 1, the Company granted 82,968 RSUs to certain current executive officers. Fifty percent of the aggregate number of RSUs vest in equal quarterly increments over three years, until such portion of the grant is fully vested on November 1, 2014. One-sixth of the RSU grant, or a portion thereof, was subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal year 2012. In each case, 50% of the quarterly performance stock grant is based on achieving at least 80% of the quarterly revenue goal and the other 50% is based on achieving at least 80% of the quarterly EBITDA goal. The quarterly performance stock grant is paid linearly above 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement threshold and 100% over-achievement threshold. The remaining 33.33% of this annual equity awards RSU grant shall be subject to quarterly performance based vesting for fiscal years 2013 and 2014 (16.66% in each period). The Compensation Committee of the Board of Directors will set applicable performance targets and vesting formulas for each of these periods.

 

In August 2011, the Company granted 170,390 RSUs to certain current executive officers as part of the annual equity awards program. Fifty percent of the aggregate number of RSUs granted as part of the annual equity awards program vest in equal quarterly increments over three years, until such portion of the grant is fully vested on August 1, 2014. One-sixth of the annual equity awards RSU grant, or a portion thereof, was subject to the Company achieving specified quarterly revenue and EBITDA goals during the period beginning in the fourth quarter of fiscal year 2011 through the third quarter of fiscal year 2012. In each case, 50% of the quarterly performance stock grant is based on achieving at least 80% of the quarterly revenue goal and the other 50% is based on achieving at least 80% of the quarterly EBITDA goal. The quarterly performance stock grant is paid linearly above 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement threshold and 100% over-achievement threshold. The remaining 33.33% of this annual equity awards RSU grant shall be subject to performance based vesting for each of the four quarter periods beginning with the fourth quarters of fiscal years 2012 and 2013 (16.66% in each period). The Compensation Committee of the Board of Directors will set applicable performance targets and vesting formulas for each of these periods.

 

In August 2010, the Company granted 181,334 and 83,000 RSUs to certain current executive officers as part of the annual equity and retention awards programs, respectively. Fifty percent of the aggregate number of RSUs granted as part of the annual equity awards program vest in equal quarterly increments over three years, until such portion of the grant is fully vested on August 1, 2013. One-sixth of the annual equity awards RSU grant, or a portion thereof, was subject to the Company achieving specified quarterly revenue and EBITDA goals during the period beginning in the fourth quarter of fiscal year 2010 through the third quarter of fiscal year 2011. In each case, 50% of the quarterly performance stock grant is based on achieving at least 80% of the quarterly revenue goal and the other 50% is based on achieving at least 80% of the quarterly EBITDA goal. The quarterly performance stock grant is paid linearly above 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement threshold and 100% over-achievement threshold. The remaining 33.33% of this annual equity awards RSU grant shall be subject to performance based vesting for each of the four quarter periods beginning with the fourth quarters of fiscal years 2011 and 2012 (16.66% in each period). The Compensation Committee of the Board of Directors will set applicable performance targets and vesting formulas for each of these periods. All RSUs granted as part of the retention awards program fully vest on August 1, 2013.

 

The Company recognizes compensation costs for awards with performance conditions when it concludes it is probable that the performance condition will be achieved. The Company reassesses the probability of vesting at each balance sheet date and adjusts compensation costs based on the probability assessment.

 

Common Stock Repurchase

 

On October 25, 2011, the Company announced that its Board of Directors authorized an additional $200 million for its common stock share repurchase program. This new authorization is incremental to the existing $400 million program, initially approved in October 2010 and expanded in August 2011. Acquisitions for the share repurchase programs will be made from time to time in private transactions or open market purchases as permitted by securities laws and other legal requirements. The programs can be terminated at any time. As of February 1, 2013, the Company had repurchased and retired 9,763,717 shares at an average price of $68.73 per share and the Company had $128.5 million remaining to purchase shares as part of its repurchase programs.

 

Earnings Per Share

 

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. The Company’s nonvested restricted stock awards and restricted stock units do not have nonforfeitable rights to dividends or dividend equivalents.

 

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

December 31,

 

 

2012

 

2011

Numerator

 

 

 

 

 

 

Net income

 

$

69,493 

 

$

66,492 

Denominator

 

 

 

 

 

 

Weighted average shares outstanding — basic

 

 

78,789 

 

 

79,272 

Dilutive effect of common shares from stock options and restricted stock units

 

 

489 

 

 

550 

Weighted average shares outstanding — diluted

 

 

79,278 

 

 

79,822 

Basic net income per share

 

$

0.88 

 

$

0.84 

Diluted net income per share

 

$

0.88 

 

$

0.83 

 

 

An immaterial amount of common shares potentially issuable from stock options for the three months ended December 31, 2012 and 2011, are excluded from the calculation of diluted earnings per share because the exercise price was greater than the average market price of common stock for the respective period.

 

Comprehensive Income

 

Comprehensive income includes certain changes in equity that are excluded from net income. Specifically, unrealized gains (losses) on securities and foreign currency translation adjustments are included in accumulated other comprehensive loss.

 

 

Recent Accounting Pronouncements

 

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income, Presentation of Comprehensive Income (ASU 2011-05), which eliminates the option of presenting other comprehensive income as part of the statement of changes in stockholders’ equity and instead requires the entity to present other comprehensive income as either a single statement of comprehensive income combined with net income or as two separate but continuous statements. The amendments in this standard are to be applied retrospectively and are effective for fiscal years, and interim periods within those years beginning after December 15, 2011. The Company adopted ASU 2011-05 in the first quarter of fiscal 2013. Although the new guidance amends the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under existing guidance.

 

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12), which defers the changes in ASU 2011-05 that relate to the presentation of reclassification adjustments to other comprehensive income. No other requirements in ASU 2011-05 are affected by this deferral. Similar to ASU 2011-05, the Company adopted ASU 2011-12 in the first quarter of fiscal 2013. The adoption of ASU 2011-12 did not have an impact on the Company’s consolidated financial statements.

   


Summary Of Significant Accounting Policies (Policy)
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Summary Of Significant Accounting Policies (Policy)
3 Months Ended
Dec. 31, 2012
Summary Of Significant Accounting Policies [Abstract]  
Description Of Business

Description of Business

 

F5 Networks, Inc. (the “Company”) provides products and services to help companies manage their Internet Protocol (IP) traffic and file storage infrastructure efficiently and securely. The Company’s application delivery networking products improve the performance, availability and security of applications on Internet-based networks. Internet traffic between network-based applications and clients passes through these devices where the content is inspected to ensure that it is safe and modified as necessary to ensure that it is delivered securely and in a way that optimizes the performance of both the network and the applications. The Company’s storage virtualization products simplify and reduce the cost of managing files and file storage devices, and ensure fast, secure, easy access to files for users and applications. With the purchase of Traffix Communication Systems Ltd. (Traffix Systems) in February 2012, the Company acquired a line of Diameter signaling products that enable full connectivity, enhanced scalability, and comprehensive control for telecommunications operators. These products enable operators to control their signaling networks effectively in the migration to next-generation networks and in future expansion of their subscriber bases and service portfolios. The Company also offers a broad range of services that include consulting, training, maintenance and other technical support services.

Basis Of Presentation

Basis of Presentation

 

The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for their fair statement in conformity with accounting principles generally accepted in the United States of America. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012.

 

Certain prior year amounts, specifically relating to cash flows in connection with the disposition of investments, have been reclassified from sales of investments to maturities of investments to conform to the current year presentation in the Consolidated Statement of Cash Flows. There was no change to the net cash used in investing activities as a result of this reclassification. This reclassification did not affect total revenue, operating income or net income.

 

Revenue Recognition

Revenue Recognition

 

The Company sells products through distributors, resellers, and directly to end users. Revenue is recognized provided that all of the following criteria have been met:

 

     Persuasive evidence of an arrangement exists. Evidence of an arrangement generally consists of a purchase order issued pursuant to the terms and conditions of a distributor, reseller or end user agreement.

 

     Delivery has occurred. The Company uses shipping or related documents, or written evidence of customer acceptance, when applicable, to verify delivery or completion of any performance terms.

 

     The sales price is fixed or determinable. The Company assesses whether the sales price is fixed or determinable based on payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.

 

     Collectability is reasonably assured. The Company assesses collectability primarily based on the creditworthiness of the customer as determined by credit checks and related analysis, as well as the Customer’s payment history.

 

Revenue from the sale of products is generally recognized when the product has been shipped and the customer is obligated to pay for the product. When rights of return are present and the Company cannot estimate returns,  revenue is recognized when such rights of return lapse. In certain regions where the Company does not have the ability to reasonably estimate returns, the Company defers revenue on sales to its distributors until information is received from the channel partner indicating that the product has been sold to the end-user customer. Payment terms to domestic customers are generally net 30 days to net 45 days. Payment terms to international customers range from net 30 days to net 120 days based on normal and customary trade practices in the individual markets. The Company offers extended payment terms to certain customers, in which case, revenue is recognized when payments are due.

 

Revenues for post-contract customer support (PCS) are recognized on a straight-line basis over the service contract term. PCS includes a limited period of telephone support updates, repair or replacement of any failed product or component that fails during the term of the agreement, bug fixes and rights to upgrades, when and if available. Consulting services are customarily billed at fixed hourly rates, plus out-of-pocket expenses, and revenues are recognized when the consulting has been completed. Training revenue is recognized when the training has been completed.

 

The majority of the Company’s products are hardware appliances which contain software essential to the overall functionality of the products. Hardware appliances are generally sold with PCS and on occasion, with consulting and/or training services. Arrangement consideration in such multiple element transactions  is allocated to each element based on a fair value hierarchy, where the selling price for an element is based on vendor specific objective evidence (VSOE), if available, third-party evidence (TPE), if available and VSOE is not available; or the best estimate of selling price (BESP), if neither VSOE or TPE is available.

 

For sales of nonessential and stand-alone software, the Company allocates revenue for arrangements with multiple elements based on software revenue recognition guidance. Software revenue recognition guidance requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of those elements. The fair value of an element must be based on VSOE. Where fair value of delivered elements is not available, revenue is recognized on the “residual method” based on the fair value of undelivered elements. If evidence of fair value of one or more undelivered elements does not exist, all revenue is deferred and recognized at the earlier of the delivery of those elements or the establishment of fair value of the remaining undelivered elements.

 

The Company establishes VSOE for its products, PCS, consulting and training services based on the sales price charged for each element when sold separately. The sales price is discounted from the applicable list price based on various factors including the type of customer, volume of sales, geographic region and program level. The Company’s list prices are generally not fair value as discounts may be given based on the factors enumerated above. The Company uses historical sales transactions to determine whether VSOE can be established for each of the elements. In most instances, VSOE of fair value is the sales price of actual standalone (unbundled) transactions within the past 12 month period, when a substantial majority of transactions are priced within a narrow range, which the Company has determined to be plus or minus 15% of the median sales price.

 

The Company believes that the VSOE of fair value of training and consulting services is represented by the billable rate per hour, based on the rates charged to customers when they purchase standalone training or consulting services. The price of consulting services is not based on the type of customer, volume of sales, geographic region or program level.

 

The Company is typically not able to determine TPE for its products or services. TPE is determined based on competitor prices for similar elements when sold separately. Generally, the Company’s go-to-market strategy differs from that of other competitive products or services in its markets and the Company’s offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine the selling prices on a stand-alone basis of similar products offered by its competitors.

 

When the Company is unable to establish selling price using VSOE or TPE, the Company uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company is generally not able to establish VSOE for non-software product sales. Instead, the Company has been able to establish BESP through the list price, less a discount deemed appropriate to maintain a reasonable gross margin. Management regularly reviews the gross margin information. Non-software product BESP is determined through the Company’s review of historical sales transactions within the past 12 month period. Additional factors considered in determining an appropriate BESP include, but are not limited to, cost of products, pricing practices, geographies, customer classes, and distribution channels.

 

The Company regularly validates the VSOE of fair value and BESP for elements in its multiple element arrangements. The Company accounts for taxes collected from customers and remitted to governmental authorities on a net basis and excluded from revenues.

 

Goodwill

Goodwill

 

Goodwill represents the excess purchase price over the estimated fair value of net assets acquired as of the acquisition date. The Company tests goodwill for impairment on an annual basis and between annual tests when impairment indicators are identified, and goodwill is written down when impaired. Goodwill was recorded in connection with the acquisition of Traffix Systems in fiscal year 2012, Acopia Networks, Inc. in fiscal year 2007, Swan Labs, Inc. in fiscal year 2006, MagniFire Websystems, Inc. in fiscal year 2004 and uRoam, Inc. in fiscal year 2003. The Company performs its annual goodwill impairment test during the second fiscal quarter.

 

In September 2011, the FASB approved changes to the goodwill impairment guidance which are intended to reduce the cost and complexity of the annual impairment test. The changes provide entities the option to perform a qualitative assessment to determine whether further impairment testing is necessary. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e. greater than 50% chance) that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required.

 

The revised guidance includes examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity’s operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price on either an absolute basis or relative to peers.

 

The changes are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, earlier adoption is permitted. The Company opted to early adopt this guidance for its annual goodwill impairment test performed in the second quarter of fiscal 2012.

 

If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the provisions of authoritative guidance require that the Company perform a two-step impairment test on goodwill. The first step of the test identifies whether potential impairment may have occurred, while the second step of the test measures the amount of the impairment, if any. Impairment is recognized when the carrying amount of goodwill exceeds its fair value. For its annual goodwill impairment analysis, the Company operates under one reporting unit and determines the fair value of its reporting unit based on the Company’s enterprise value. In March 2012, the Company completed a qualitative assessment of potential impairment indicators and concluded that it was more-likely-than-not that the fair value of its reporting unit exceeded its carrying amount. The Company also considered potential impairment indicators at December 31, 2012 and noted no indicators of impairment.

Stock-Based Compensation

Stock-Based Compensation

 

The Company accounts for stock-based compensation using the straight-line attribution method for recognizing compensation expense. The Company recognized $26.7 million and $22.1 million of stock-based compensation expense for the three months ended December 31, 2012 and 2011, respectively. As of December 31, 2012, there was $138.3 million of total unrecognized stock-based compensation cost, the majority of which will be recognized over the next two years. Going forward, stock-based compensation expenses may increase as the Company issues additional equity-based awards to continue to attract and retain key employees.

 

The Company issues incentive awards to its employees through stock-based compensation consisting of restricted stock units (RSUs). The value of RSUs is determined using the fair value method, which in this case, is based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant. 

 

The Company recognizes compensation expense for only the portion of restricted stock units that are expected to vest. Therefore, the Company applies estimated forfeiture rates that are derived from historical employee termination behavior. Based on historical differences with forfeitures of stock-based awards granted to the Company’s executive officers and Board of Directors versus grants awarded to all other employees, the Company has developed separate forfeiture expectations for these two groups. The Company’s estimated forfeiture rate in the first quarter of fiscal year 2013 is 5.3% for grants awarded to the Company’s executive officers and Board of Directors, and 7.6% for grants awarded to all other employees. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.

 

In November 2012, the Company granted 290,415 RSUs to certain current executive officers as part of the annual equity awards program. Fifty percent of the aggregate number of RSUs vest in equal quarterly increments over four years, until such portion of the grant is fully vested on November 1, 2016. One-eighth of the RSU grant, or a portion thereof, is subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal year 2013. In each case, 50% of the quarterly performance stock grant is based on achieving at least 80% of the quarterly revenue goal and the other 50% is based on achieving at least 80% of the quarterly EBITDA goal. The quarterly performance stock grant is paid linearly above 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement threshold and 100% over-achievement threshold. The remaining 37.5% of this annual equity awards RSU grant shall be subject to quarterly performance based vesting for fiscal years 2014, 2015 and 2016 (12.5% in each period). The Compensation Committee of the Board of Directors will set applicable performance targets and vesting formulas for each of these periods.

 

In November 2011, as part of the annual review of executive compensation by the Compensation Committee of the Board of Directors and a change in the grant date for the Company’s annual equity awards program for the executive officers from August 1 to November 1, the Company granted 82,968 RSUs to certain current executive officers. Fifty percent of the aggregate number of RSUs vest in equal quarterly increments over three years, until such portion of the grant is fully vested on November 1, 2014. One-sixth of the RSU grant, or a portion thereof, was subject to the Company achieving specified quarterly revenue and EBITDA goals during fiscal year 2012. In each case, 50% of the quarterly performance stock grant is based on achieving at least 80% of the quarterly revenue goal and the other 50% is based on achieving at least 80% of the quarterly EBITDA goal. The quarterly performance stock grant is paid linearly above 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement threshold and 100% over-achievement threshold. The remaining 33.33% of this annual equity awards RSU grant shall be subject to quarterly performance based vesting for fiscal years 2013 and 2014 (16.66% in each period). The Compensation Committee of the Board of Directors will set applicable performance targets and vesting formulas for each of these periods.

 

In August 2011, the Company granted 170,390 RSUs to certain current executive officers as part of the annual equity awards program. Fifty percent of the aggregate number of RSUs granted as part of the annual equity awards program vest in equal quarterly increments over three years, until such portion of the grant is fully vested on August 1, 2014. One-sixth of the annual equity awards RSU grant, or a portion thereof, was subject to the Company achieving specified quarterly revenue and EBITDA goals during the period beginning in the fourth quarter of fiscal year 2011 through the third quarter of fiscal year 2012. In each case, 50% of the quarterly performance stock grant is based on achieving at least 80% of the quarterly revenue goal and the other 50% is based on achieving at least 80% of the quarterly EBITDA goal. The quarterly performance stock grant is paid linearly above 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement threshold and 100% over-achievement threshold. The remaining 33.33% of this annual equity awards RSU grant shall be subject to performance based vesting for each of the four quarter periods beginning with the fourth quarters of fiscal years 2012 and 2013 (16.66% in each period). The Compensation Committee of the Board of Directors will set applicable performance targets and vesting formulas for each of these periods.

 

In August 2010, the Company granted 181,334 and 83,000 RSUs to certain current executive officers as part of the annual equity and retention awards programs, respectively. Fifty percent of the aggregate number of RSUs granted as part of the annual equity awards program vest in equal quarterly increments over three years, until such portion of the grant is fully vested on August 1, 2013. One-sixth of the annual equity awards RSU grant, or a portion thereof, was subject to the Company achieving specified quarterly revenue and EBITDA goals during the period beginning in the fourth quarter of fiscal year 2010 through the third quarter of fiscal year 2011. In each case, 50% of the quarterly performance stock grant is based on achieving at least 80% of the quarterly revenue goal and the other 50% is based on achieving at least 80% of the quarterly EBITDA goal. The quarterly performance stock grant is paid linearly above 80% of the targeted goals. At least 100% of both goals must be attained in order for the quarterly performance stock grant to be awarded over 100%. Each goal is evaluated individually and subject to the 80% achievement threshold and 100% over-achievement threshold. The remaining 33.33% of this annual equity awards RSU grant shall be subject to performance based vesting for each of the four quarter periods beginning with the fourth quarters of fiscal years 2011 and 2012 (16.66% in each period). The Compensation Committee of the Board of Directors will set applicable performance targets and vesting formulas for each of these periods. All RSUs granted as part of the retention awards program fully vest on August 1, 2013.

 

The Company recognizes compensation costs for awards with performance conditions when it concludes it is probable that the performance condition will be achieved. The Company reassesses the probability of vesting at each balance sheet date and adjusts compensation costs based on the probability assessment.

Common Stock Repurchase

Common Stock Repurchase

 

On October 25, 2011, the Company announced that its Board of Directors authorized an additional $200 million for its common stock share repurchase program. This new authorization is incremental to the existing $400 million program, initially approved in October 2010 and expanded in August 2011. Acquisitions for the share repurchase programs will be made from time to time in private transactions or open market purchases as permitted by securities laws and other legal requirements. The programs can be terminated at any time. As of February 1, 2013, the Company had repurchased and retired 9,763,717 shares at an average price of $68.73 per share and the Company had $128.5 million remaining to purchase shares as part of its repurchase programs.

Earnings Per Share

Earnings Per Share

 

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. The Company’s nonvested restricted stock awards and restricted stock units do not have nonforfeitable rights to dividends or dividend equivalents.

 

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

December 31,

 

 

2012

 

2011

Numerator

 

 

 

 

 

 

Net income

 

$

69,493 

 

$

66,492 

Denominator

 

 

 

 

 

 

Weighted average shares outstanding — basic

 

 

78,789 

 

 

79,272 

Dilutive effect of common shares from stock options and restricted stock units

 

 

489 

 

 

550 

Weighted average shares outstanding — diluted

 

 

79,278 

 

 

79,822 

Basic net income per share

 

$

0.88 

 

$

0.84 

Diluted net income per share

 

$

0.88 

 

$

0.83 

 

 

An immaterial amount of common shares potentially issuable from stock options for the three months ended December 31, 2012 and 2011, are excluded from the calculation of diluted earnings per share because the exercise price was greater than the average market price of common stock for the respective period.

 

Comprehensive Income

Comprehensive Income

 

Comprehensive income includes certain changes in equity that are excluded from net income. Specifically, unrealized gains (losses) on securities and foreign currency translation adjustments are included in accumulated other comprehensive loss.

 

 

Recent Accounting Pronouncements

Recent Accounting Pronouncements

 

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income, Presentation of Comprehensive Income (ASU 2011-05), which eliminates the option of presenting other comprehensive income as part of the statement of changes in stockholders’ equity and instead requires the entity to present other comprehensive income as either a single statement of comprehensive income combined with net income or as two separate but continuous statements. The amendments in this standard are to be applied retrospectively and are effective for fiscal years, and interim periods within those years beginning after December 15, 2011. The Company adopted ASU 2011-05 in the first quarter of fiscal 2013. Although the new guidance amends the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under existing guidance.

 

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12), which defers the changes in ASU 2011-05 that relate to the presentation of reclassification adjustments to other comprehensive income. No other requirements in ASU 2011-05 are affected by this deferral. Similar to ASU 2011-05, the Company adopted ASU 2011-12 in the first quarter of fiscal 2013. The adoption of ASU 2011-12 did not have an impact on the Company’s consolidated financial statements.


Summary Of Significant Accounting Policies (Tables)
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Summary Of Significant Accounting Policies (Tables)
3 Months Ended
Dec. 31, 2012
Summary Of Significant Accounting Policies [Abstract]  
Schedule Of Computation Of Basic And Diluted Net Income Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

December 31,

 

 

2012

 

2011

Numerator

 

 

 

 

 

 

Net income

 

$

69,493 

 

$

66,492 

Denominator

 

 

 

 

 

 

Weighted average shares outstanding — basic

 

 

78,789 

 

 

79,272 

Dilutive effect of common shares from stock options and restricted stock units

 

 

489 

 

 

550 

Weighted average shares outstanding — diluted

 

 

79,278 

 

 

79,822 

Basic net income per share

 

$

0.88 

 

$

0.84 

Diluted net income per share

 

$

0.88 

 

$

0.83 

 


Summary Of Significant Accounting Policies (Narrative) (Details)
v0.0.0.0
Summary Of Significant Accounting Policies (Narrative) (Details) (USD $)
In Millions, except Share data, unless otherwise specified
3 Months Ended 28 Months Ended 1 Months Ended 3 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Feb. 01, 2013
Nov. 30, 2012
Annual Equity Program [Member]
Nov. 30, 2011
Annual Equity Program [Member]
Aug. 31, 2011
Annual Equity Program [Member]
Aug. 31, 2010
Annual Equity Program [Member]
Aug. 31, 2010
Retention Awards Program [Member]
Dec. 31, 2012
Executive Officers And Board Of Directors [Member]
Dec. 31, 2012
Other Employees [Member]
Dec. 31, 2012
October 25, 2011 Program [Member]
Dec. 31, 2012
Minimum [Member]
Dec. 31, 2012
Maximum [Member]
Schedule Of Summary Of Significant Accounting Policies [Line Items]                          
Domestic accounts receivable terms of payment, in days                       30 days 45 days
International accounts receivable terms of payment, in days                       30 days 120 days
Range of VSOE to median sales price 15.00%                        
Share-based compensation expense $ 26.7 $ 22.1                      
Unrecognized stock-based compensation cost 138.3                        
Unrecognized stock-based compensation cost, period for recognition 2 years                        
Approved RSUs to employees and executive officers pursuant to the Company's annual equity awards program       290,415 82,968 170,390 181,334 83,000          
Rate for grant awarded                 5.30% 7.60%      
Percentage of the aggregate number of RSUs granted that vest in equal quarterly increments       50.00% 50.00% 50.00% 50.00%            
Portion of RSU grant subject to Company achieving specified quarterly revenue and EBITDA goals       0.125 0.16667 0.16667 0.16667            
Annual equity awards program vesting period, years       4 years 3 years 3 years 3 years            
Percentage of quarterly performance stock grant based on achieving quarterly revenue goal       50.00% 50.00% 50.00% 50.00%            
Percentage of quarterly revenue goal to be achieved for performance stock grant       80.00% 80.00% 80.00% 80.00%            
Percentage of quarterly performance stock grant based on achieving EBITDA goal       50.00% 50.00% 50.00% 50.00%            
Percentage of achievement threshold to which the goals are entitled       80.00% 80.00% 80.00% 80.00%            
Threshold percentage of targeted goals above which quarterly performance stock grant is paid linearly       80.00% 80.00% 80.00% 80.00%            
Percentage of over-achievement threshold to which the goals are entitled       100.00% 100.00% 100.00% 100.00%            
Percentage of annual equity awards RSU grant subject to performance based vesting       37.50% 33.33% 33.33% 33.33%            
Percentage of annual equity awards RSU grant subject to performance based vesting in each period       12.50% 16.66% 16.66% 16.66%            
Stock repurchase program, authorized amount 400                   200    
Shares repurchased and retired     9,763,717                    
Average price of shares repurchased     $ 68.73                    
Stock repurchase program, remaining authorized amount to repurchase shares     $ 128.5                    

Summary Of Significant Accounting Policies (Schedule Of Computation Of Basic And Diluted Net Income Per Share) (Details)
v0.0.0.0
Summary Of Significant Accounting Policies (Schedule Of Computation Of Basic And Diluted Net Income Per Share) (Details) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Summary Of Significant Accounting Policies [Abstract]    
Net income $ 69,493 $ 66,492
Weighted average shares outstanding - basic 78,789 79,272
Dilutive effect of common shares from stock options and restricted stock units 489 550
Weighted average shares outstanding - diluted 79,278 79,822
Basic net income per share $ 0.88 $ 0.84
Diluted net income per share $ 0.88 $ 0.83

Fair Value Measurements
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Fair Value Measurements
3 Months Ended
Dec. 31, 2012
Fair Value Measurements [Abstract]  
Fair Value Measurements

2. Fair Value Measurements

 

In accordance with the authoritative guidance on fair value measurements and disclosure under GAAP, the Company determines fair value using a fair value hierarchy that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity, and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances and expands disclosure about fair value measurements.

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date, essentially the exit price.

 

The levels of fair value hierarchy are:

 

Level 1: Quoted prices in active markets for identical assets and liabilities at the measurement date that the Company has the ability to access.

 

Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Unobservable inputs for which there is little or no market data available. These inputs reflect management’s assumptions of what market participants would use in pricing the asset or liability.

 

Level 1 investments are valued based on quoted market prices in active markets and include the Company’s cash equivalent investments. Level 2 investments, which include investments that are valued based on quoted prices in markets that are not active, broker or dealer quotations, actual trade data, benchmark yields or alternative pricing sources with reasonable levels of price transparency, include the Company’s certificates of deposit, corporate bonds and notes, municipal bonds and notes, U.S. government securities and U.S. government agency securities. Fair values for the Company’s level 2 investments are based on similar assets without applying significant judgments. In addition, all of the Company’s level 2 investments have a sufficient level of trading volume to demonstrate that the fair values used are appropriate for these investments.

 

A financial instrument’s level within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. The Company considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

 

The Company’s financial assets measured at fair value on a recurring basis subject to the disclosure requirements at December 31, 2012, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

Quoted Prices in

 

Significant

 

Significant

 

 

 

 

 

Active Markets for

 

Other Observable

 

Unobservable

 

Fair Value at

 

 

Identical Securities

 

Inputs

 

Inputs

 

December 31,

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

2012

Cash equivalents

 

$

20,459 

 

$

 

$

 

$

20,459 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities — certificates of deposit

 

 

 

 

3,515 

 

 

 

 

3,515 

Available-for-sale securities — corporate bonds and notes

 

 

 

 

194,238 

 

 

 

 

194,238 

Available-for-sale securities — municipal bonds and notes

 

 

 

 

62,379 

 

 

 

 

62,379 

Available-for-sale securities — U.S. government agency securities

 

 

 

 

73,042 

 

 

 

 

73,042 

Long-term investments

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities — corporate bonds and notes

 

 

 

 

292,964 

 

 

 

 

292,964 

Available-for-sale securities — municipal bonds and notes

 

 

 

 

22,022 

 

 

 

 

22,022 

Available-for-sale securities — U.S. government securities

 

 

 

 

4,994 

 

 

 

 

4,994 

Available-for-sale securities — U.S. government agency securities

 

 

 

 

446,720 

 

 

 

 

446,720 

Available-for-sale securities — auction rate securities

 

 

 

 

 

 

4,600 

 

 

4,600 

Total

 

$

20,459 

 

$

1,099,874 

 

$

4,600 

 

$

1,124,933 

 

 

 

 

The Company’s financial assets measured at fair value on a recurring basis subject to the disclosure requirements at September 30, 2012, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

Quoted Prices in

 

Significant

 

Significant

 

 

 

 

 

Active Markets for

 

Other Observable

 

Unobservable

 

Fair Value at

 

 

Identical Securities

 

Inputs

 

Inputs

 

September 30,

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

2012

Cash equivalents

 

$

35,658 

 

$

 

$

 

$

35,658 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities — certificates of deposit

 

 

 

 

3,533 

 

 

 

 

3,533 

Available-for-sale securities — corporate bonds and notes

 

 

 

 

193,990 

 

 

 

 

193,990 

Available-for-sale securities — municipal bonds and notes

 

 

 

 

63,422 

 

 

 

 

 

63,422 

Available-for-sale securities — U.S. government agency securities

 

 

 

 

60,025 

 

 

 

 

60,025 

Long-term investments

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities — corporate bonds and notes

 

 

 

 

229,441 

 

 

 

 

229,441 

Available-for-sale securities — municipal bonds and notes

 

 

 

 

30,307 

 

 

 

 

30,307 

Available-for-sale securities — U.S. government securities

 

 

 

 

4,995 

 

 

 

 

4,995 

Available-for-sale securities — U.S. government agency securities

 

 

 

 

393,310 

 

 

 

 

393,310 

Available-for-sale securities — auction rate securities

 

 

 

 

 

 

4,750 

 

 

4,750 

Total

 

$

35,658 

 

$

979,023 

 

$

4,750 

 

$

1,019,431 

 

 

Due to the auction failures of the Company’s auction rate securities (ARS) that began in the second quarter of fiscal year 2008, there are still no quoted prices in active markets for similar assets as of December 31, 2012. Therefore, the Company has classified its ARS as level 3 financial assets. The following table provides a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3) (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

December 31,

 

 

2012

 

2011

Balance, beginning of period

 

$

4,750 

 

$

13,010 

Total (losses) gains realized or unrealized:

 

 

 

 

 

 

Included in other comprehensive income

 

 

(150)

 

 

54 

Balance, end of period

 

$

4,600 

 

$

13,064 

Unrealized (losses) gains attributable to assets still held as of end of period

 

 

(150)

 

 

54 

 

 

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable or there is limited market activity such that the determination of fair value requires significant judgment or estimation. Level 3 investment securities primarily include certain ARS for which there was a decrease in the observation of market pricing. At December  31, 2012, the values of these securities were estimated primarily using discounted cash flow analysis that incorporated transaction details such as contractual terms, maturity, timing and amount of future cash flows, as well as assumptions about liquidity and credit valuation adjustments of marketplace participants at December  31, 2012. Significant fluctuations in any of these inputs in isolation would result in changes in the fair value of the Company’s ARS.

 

The Company uses the fair value hierarchy for financial assets and liabilities. The Company’s non-financial assets and liabilities, which include goodwill, intangible assets, and long-lived assets, are not required to be carried at fair value on a recurring basis. These non-financial assets and liabilities are measured at fair value on a non-recurring basis when there is an indicator of impairment, and they are recorded at fair value only when impairment is recognized. The Company reviews goodwill and intangible assets for impairment annually, during the second quarter of each fiscal year, or as circumstances indicate the possibility of impairment. The Company monitors the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate its carrying amount may not be recoverable. During the three months ended December 31, 2012, the Company did not recognize any impairment charges related to goodwill, intangible assets, or long-lived assets.  

   


Fair Value Measurements (Tables)
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Fair Value Measurements (Tables)
3 Months Ended
Dec. 31, 2012
Fair Value Measurements [Abstract]  
Schedule Of Financial Assets Measured At Fair Value On A Recurring Basis

The Company’s financial assets measured at fair value on a recurring basis subject to the disclosure requirements at December 31, 2012, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

Quoted Prices in

 

Significant

 

Significant

 

 

 

 

 

Active Markets for

 

Other Observable

 

Unobservable

 

Fair Value at

 

 

Identical Securities

 

Inputs

 

Inputs

 

December 31,

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

2012

Cash equivalents

 

$

20,459 

 

$

 

$

 

$

20,459 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities — certificates of deposit

 

 

 

 

3,515 

 

 

 

 

3,515 

Available-for-sale securities — corporate bonds and notes

 

 

 

 

194,238 

 

 

 

 

194,238 

Available-for-sale securities — municipal bonds and notes

 

 

 

 

62,379