NetApp
NetApp, Inc. (Form: 10-Q, Received: 08/29/2017 16:09:31)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 28, 2017

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 000-27130

NetApp, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

77-0307520

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

495 East Java Drive,

Sunnyvale, California 94089

(Address of principal executive offices, including zip code)

(408) 822-6000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes       No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes       No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of August 16, 2017, there were 269,757,582 shares of the registrant’s common stock, $0.001 par value, outstanding.

 

 

 

 

 


TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

Item 1

  

Condensed Consolidated Financial Statements (Unaudited)

  

3

 

  

Condensed Consolidated Balance Sheets as of July 28, 2017 and April 28, 2017

  

3

 

  

Condensed Consolidated Statements of Operations for the Three Months Ended July 28, 2017 and July 29, 2016

  

4

 

  

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended July 28, 2017 and July 29, 2016

  

5

 

  

Condensed Consolidated Statements of Cash Flows for the Three Months Ended July 28, 2017 and July 29, 2016

  

6

 

  

Notes to Condensed Consolidated Financial Statements

  

7

Item 2

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

22

Item 3

  

Quantitative and Qualitative Disclosures About Market Risk

  

35

Item 4

  

Controls and Procedures

  

36

 

 

 

PART II — OTHER INFORMATION

  

 

 

 

 

 

 

Item 1

  

Legal Proceedings

  

37

Item 1A

  

Risk Factors

  

37

Item 2

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

47

Item 3

  

Defaults upon Senior Securities

  

47

Item 4

  

Mine Safety Disclosures

  

47

Item 5

  

Other Information

  

47

Item 6

  

Exhibits

  

47

SIGNATURE

  

48

 

 

TRADEMARKS

© 2017 NetApp, Inc. All Rights Reserved. No portions of this document may be reproduced without prior written consent of NetApp, Inc. NetApp, the NetApp logo, and the marks listed at http://www.netapp.com/TM are trademarks of NetApp, Inc. Other company and product names may be trademarks of their respective owners.

 

 

 

2


P ART I — FINANCIAL INFORMATION

 

 

Item 1. Condensed Consolidated Financial Statements (Unaudited)

NETAPP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except par value)

(Unaudited)

 

 

 

July 28,

2017

 

 

April 28,

2017

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,951

 

 

$

2,444

 

Short-term investments

 

 

2,370

 

 

 

2,477

 

Accounts receivable

 

 

518

 

 

 

731

 

Inventories

 

 

143

 

 

 

163

 

Other current assets

 

 

316

 

 

 

383

 

Total current assets

 

 

6,298

 

 

 

6,198

 

Property and equipment, net

 

 

799

 

 

 

799

 

Goodwill

 

 

1,701

 

 

 

1,684

 

Other intangible assets, net

 

 

124

 

 

 

131

 

Other non-current assets

 

 

677

 

 

 

681

 

Total assets

 

$

9,599

 

 

$

9,493

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

289

 

 

$

347

 

Accrued expenses

 

 

653

 

 

 

782

 

Commercial paper notes

 

 

894

 

 

 

500

 

Current portion of long-term debt

 

 

749

 

 

 

749

 

Short-term deferred revenue and financed unearned services revenue

 

 

1,702

 

 

 

1,744

 

Total current liabilities

 

 

4,287

 

 

 

4,122

 

Long-term debt

 

 

745

 

 

 

744

 

Other long-term liabilities

 

 

250

 

 

 

249

 

Long-term deferred revenue and financed unearned services revenue

 

 

1,549

 

 

 

1,598

 

Total liabilities

 

 

6,831

 

 

 

6,713

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 16)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock and additional paid-in capital, $0.001 par value; 270 and 269 shares issued and outstanding as of July 28, 2017 and April 28, 2017, respectively

 

 

2,771

 

 

 

2,769

 

Retained earnings

 

 

10

 

 

 

40

 

Accumulated other comprehensive loss

 

 

(13

)

 

 

(29

)

Total stockholders' equity

 

 

2,768

 

 

 

2,780

 

Total liabilities and stockholders' equity

 

$

9,599

 

 

$

9,493

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

3


NETAPP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

July 28,

2017

 

 

July 29,

2016

 

Revenues:

 

 

 

 

 

 

 

 

Product

 

$

723

 

 

$

660

 

Software maintenance

 

 

234

 

 

 

241

 

Hardware maintenance and other services

 

 

368

 

 

 

393

 

Net revenues

 

 

1,325

 

 

 

1,294

 

Cost of revenues:

 

 

 

 

 

 

 

 

Cost of product

 

 

371

 

 

 

359

 

Cost of software maintenance

 

 

7

 

 

 

8

 

Cost of hardware maintenance and other services

 

 

113

 

 

 

130

 

Total cost of revenues

 

 

491

 

 

 

497

 

Gross profit

 

 

834

 

 

 

797

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

 

425

 

 

 

429

 

Research and development

 

 

193

 

 

 

207

 

General and administrative

 

 

68

 

 

 

68

 

Total operating expenses

 

 

686

 

 

 

704

 

Income from operations

 

 

148

 

 

 

93

 

Other income (expense), net

 

 

5

 

 

 

(1

)

Income before income taxes

 

 

153

 

 

 

92

 

Provision for income taxes

 

 

17

 

 

 

28

 

Net income

 

$

136

 

 

$

64

 

Net income per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.50

 

 

$

0.23

 

Diluted

 

$

0.49

 

 

$

0.23

 

Shares used in net income per share calculations:

 

 

 

 

 

 

 

 

Basic

 

 

270

 

 

 

279

 

Diluted

 

 

278

 

 

 

282

 

Cash dividends declared per share

 

$

0.20

 

 

$

0.19

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

4


NETAPP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

 

.

 

Three Months Ended

 

 

 

July 28,

2017

 

 

July 29,

2016

 

Net income

 

$

136

 

 

$

64

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

10

 

 

 

(6

)

Unrealized gains on available-for-sale securities:

 

 

 

 

 

 

 

 

Unrealized holding gains arising during the period

 

 

6

 

 

 

3

 

Unrealized gains on cash flow hedges:

 

 

 

 

 

 

 

 

Unrealized holding gains arising during the period

 

 

 

 

 

3

 

Other comprehensive income (loss)

 

 

16

 

 

 

 

Comprehensive income

 

$

152

 

 

$

64

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

5


NETAPP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

July 28,

2017

 

 

July 29,

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

136

 

 

$

64

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

51

 

 

 

60

 

Stock-based compensation

 

 

48

 

 

 

52

 

Deferred income taxes

 

 

2

 

 

 

19

 

Other items, net

 

 

5

 

 

 

(7

)

Changes in assets and liabilities, net of acquisition of business:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

218

 

 

 

311

 

Inventories

 

 

20

 

 

 

17

 

Other operating assets

 

 

71

 

 

 

32

 

Accounts payable

 

 

(58

)

 

 

(30

)

Accrued expenses

 

 

(135

)

 

 

(198

)

Deferred revenue and financed unearned services revenue

 

 

(107

)

 

 

(83

)

Other operating liabilities

 

 

(1

)

 

 

(9

)

Net cash provided by operating activities

 

 

250

 

 

 

228

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(275

)

 

 

(285

)

Maturities, sales and collections of investments

 

 

387

 

 

 

598

 

Purchases of property and equipment

 

 

(36

)

 

 

(36

)

Acquisition of business, net of cash acquired

 

 

(24

)

 

 

 

Other investing activities, net

 

 

5

 

 

 

(1

)

Net cash provided by investing activities

 

 

57

 

 

 

276

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock under employee stock

   award plans

 

 

48

 

 

 

42

 

Payments for taxes related to net share settlement of stock awards

 

 

(57

)

 

 

(33

)

Repurchase of common stock

 

 

(150

)

 

 

(175

)

Proceeds from issuance of commercial paper notes, net

 

 

394

 

 

 

 

Repayment of short-term loan

 

 

 

 

 

(850

)

Dividends paid

 

 

(54

)

 

 

(53

)

Other financing activities, net

 

 

 

 

 

(2

)

Net cash provided by (used in) financing activities

 

 

181

 

 

 

(1,071

)

Effect of exchange rate changes on cash and cash equivalents

 

 

19

 

 

 

(7

)

Net increase (decrease) in cash and cash equivalents

 

 

507

 

 

 

(574

)

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Beginning of period

 

 

2,444

 

 

 

2,868

 

End of period

 

$

2,951

 

 

$

2,294

 

See accompanying notes to condensed consolidated financial statements.

 

 

6


NETAPP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. Description of Business and Significant Accounting Policies

NetApp, Inc. (we, us, or the Company) provides global organizations the ability to manage and share their data across on-premises, private and public clouds. Together with our partners, we provide a full range of enterprise-class software, systems and services solutions that customers use to modernize their infrastructures, build next generation data centers and harness the power of hybrid clouds.

Basis of Presentation and Preparation

Our fiscal year is reported on a 52- or 53-week year ending on the last Friday in April. An additional week is included in the first fiscal quarter approximately every six years to realign fiscal months with calendar months. Fiscal years 2018 and 2017, ending on April 27, 2018, and April 28, 2017, respectively, are each 52-week years, with 13 weeks in each of their quarters.

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company, and reflect all adjustments, consisting only of normal recurring adjustments, that are, in the opinion of management, necessary for the fair presentation of our financial position, results of operations, comprehensive income and cash flows for the interim periods presented. The statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, these statements do not include all information and footnotes required by GAAP for annual consolidated financial statements, and should be read in conjunction with our audited consolidated financial statements as of and for the fiscal year ended April 28, 2017 contained in our Annual Report on Form 10-K. The results of operations for the three months ended July 28, 2017 are not necessarily indicative of the operating results to be expected for the full fiscal year or future operating periods.

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates include, but are not limited to, revenue recognition, reserves and allowances; inventory valuation and purchase order accruals; valuation of goodwill and intangibles; restructuring reserves; product warranties; employee compensation and benefit accruals; stock-based compensation; loss contingencies; valuation of investment securities; income taxes and fair value measurements. Actual results could differ materially from those estimates.

There have been no significant changes in our significant accounting policies as of and for the three months ended July 28, 2017, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended April 28, 2017.

 

2. Recent Accounting Standards Not Yet Effective

Revenue from Contracts with Customers

In May 2014, the FASB issued an accounting standards update related to the recognition and reporting of revenue that establishes a comprehensive new revenue recognition model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. The guidance allows for the use of either the full or modified retrospective transition method. We expect to adopt this new standard, as amended, on its effective date in the first quarter of fiscal 2019.

Preliminarily, we plan to adopt the standard using the full retrospective method to restate each prior reporting period presented. Our ability to adopt this standard using the full retrospective method is dependent upon system readiness, for both revenue and commissions, and the completion of the analysis of information necessary to restate prior period financial statements and disclosures. We are continuing to assess the impact of this standard on our financial position, results of operations and related disclosures and have not yet determined whether the effect will be material. We do not expect that the adoption of this standard will have a material impact on our operating cash flows. Additionally, as we continue to assess the new standard along with industry trends and additional interpretive guidance, we may adjust our implementation plan accordingly.

 

We believe that the new standard will impact our following policies and disclosures:

 

removal of the current limitation on contingent revenue for multiple element arrangements, such as that related to the delivery of additional items or meeting other specified performance conditions, may result in revenue being recognized earlier;

7


 

estimation of variable consideration for arrangements with contract terms such as rights of return, potential penalties and acceptance clauses;

 

required disclosures, including information about the transaction price allocated to remaining performance obligations and expected timing of revenue recognition; and

 

accounting for deferred commissions, including costs that qualify for deferral and the amortization period.

We do not expect that the new standard will result in substantive changes in our deliverables or the amounts of revenue allocated between multiple deliverables, with the exception of contingent revenue discussed above.

Leases

In February 2016, the FASB issued an accounting standards update on financial reporting for leasing arrangements, including requiring lessees to recognize an operating lease with a term greater than one year on their balance sheets as a right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. This new standard will be effective for us in our first quarter of fiscal 2020, although early adoption is permitted. Upon adoption, lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently in the assessment phase to determine the adoption methodology and are evaluating the impact of this new standard on our consolidated financial statements and disclosures. We expect that most of our operating lease commitments will be subject to the new standard and recognized as lease liabilities and right-of-use assets upon adoption, which will increase the total assets and total liabilities we report.

Credit Losses on Financial Instruments

In June 2016, the FASB issued an accounting standards update on the measurement of credit losses on financial instruments. The standard introduces a new model for measuring and recognizing credit losses on financial instruments, requiring financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. It also requires that credit losses be recorded through an allowance for credit losses. This new standard will be effective for us in our first quarter of fiscal 2021, although early adoption is permitted. Upon adoption, companies must apply a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings, though a prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Based on the composition of our investment portfolio, current market conditions, and historical credit loss activity, the adoption of this standard is not expected to have a material impact on our consolidated financial statements.

Income Taxes on Intra-Entity Transfers of Assets

In October 2016, the FASB issued an accounting standards update that requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This amends current GAAP which prohibits recognition of current and deferred income taxes for all types of intra-entity asset transfers until the asset has been sold to an outside party. This new standard will be effective for us in our first quarter of fiscal 2019, although early adoption is permitted. Upon adoption, companies must apply a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. We are currently evaluating the impact of this new standard on our consolidated financial statements.

Derecognition of Non-Financial Assets

In February 2017, the FASB issued an accounting standards update that amends guidance on how entities account for the derecognition of a nonfinancial asset or an in substance nonfinancial asset that is not a business. The guidance allows for the use of either the full or modified retrospective transition method. This new standard will be effective for us in our first quarter of fiscal 2019, although early adoption is permitted. We are currently evaluating the impact of this new standard on our consolidated financial statements.

Although there are several other new accounting pronouncements issued or proposed by the FASB that we have adopted or will adopt, as applicable, we do not believe any of these accounting pronouncements has had or will have a material impact on our consolidated financial position, operating results or disclosures.

 

 

8


3. Statements of Cash Flows Additional Information

Non-cash investing activities and supplemental cash flow information are as follows (in millions):

 

 

 

Three Months Ended

 

 

 

July 28,

2017

 

 

July 29,

2016

 

Non-cash Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures incurred but not paid

 

$

18

 

 

$

38

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

Income taxes paid, net of refunds

 

$

22

 

 

$

62

 

Interest paid

 

$

21

 

 

$

23

 

 

4. Business Combination

On June 15, 2017, we acquired all of the outstanding shares of Plexistor Ltd., a privately-held provider of software defined memory architecture based in Israel, for $24 million in cash, of which we allocated $6 million to developed technology, $17 million to goodwill, and the remainder to other assets.

 

 

5. Goodwill and Purchased Intangible Assets, Net

Goodwill activity is summarized as follows (in millions):

 

Balance as of April 28, 2017

 

$

1,684

 

Additions

 

 

17

 

Balance as of July 28, 2017

 

$

1,701

 

Purchased intangible assets, net are summarized below (in millions):

 

 

 

July 28, 2017

 

 

April 28, 2017

 

 

 

Gross

 

 

Accumulated

 

 

Net

 

 

Gross

 

 

Accumulated

 

 

Net

 

 

 

Assets

 

 

Amortization

 

 

Assets

 

 

Assets

 

 

Amortization

 

 

Assets

 

Developed technology

 

$

154

 

 

$

(52

)

 

$

102

 

 

$

148

 

 

$

(44

)

 

$

104

 

Customer contracts/relationships

 

 

43

 

 

 

(23

)

 

 

20

 

 

 

43

 

 

 

(19

)

 

 

24

 

Other purchased intangibles

 

 

9

 

 

 

(7

)

 

 

2

 

 

 

9

 

 

 

(6

)

 

 

3

 

Total purchased intangible assets

 

$

206

 

 

$

(82

)

 

$

124

 

 

$

200

 

 

$

(69

)

 

$

131

 

Amortization expense for purchased intangible assets is summarized below (in millions):

 

 

 

Three Months Ended

 

 

Statements of

 

 

July 28,

2017

 

 

July 29,

2016

 

 

Operations

Classification

Developed technology

 

$

8

 

 

$

6

 

 

Cost of revenues

Customer contracts/relationships

 

 

4

 

 

 

4

 

 

Operating expenses

Other purchased intangibles

 

 

1

 

 

 

1

 

 

Operating expenses

Total

 

$

13

 

 

$

11

 

 

 

As of July 28, 2017, future amortization expense related to purchased intangible assets is as follows (in millions):

 

Fiscal Year

 

Amount

 

Remainder of 2018

 

$

38

 

2019

 

 

44

 

2020

 

 

27

 

2021

 

 

15

 

Total

 

$

124

 

 

 

9


6 . Balance Sheet Details

Cash and cash equivalents (in millions):

 

 

 

July 28,

2017

 

 

April 28,

2017

 

Cash

 

$

2,630

 

 

$

2,275

 

Cash equivalents

 

 

321

 

 

 

169

 

Cash and cash equivalents

 

$

2,951

 

 

$

2,444

 

 

Inventories (in millions):

 

 

 

July 28,

2017

 

 

April 28,

2017

 

Purchased components

 

$

59

 

 

$

28

 

Finished goods

 

 

84

 

 

 

135

 

Inventories

 

$

143

 

 

$

163

 

 

Property and equipment, net (in millions):

 

 

 

July 28,

2017

 

 

April 28,

2017

 

Land

 

$

132

 

 

$

132

 

Buildings and improvements

 

 

643

 

 

 

612

 

Leasehold improvements

 

 

95

 

 

 

93

 

Computer, production, engineering and other equipment

 

 

751

 

 

 

741

 

Computer software

 

 

352

 

 

 

353

 

Furniture and fixtures

 

 

94

 

 

 

90

 

Construction-in-progress

 

 

2

 

 

 

26

 

 

 

 

2,069

 

 

 

2,047

 

Accumulated depreciation and amortization

 

 

(1,270

)

 

 

(1,248

)

Property and equipment, net

 

$

799

 

 

$

799

 

 

We have classified certain land and buildings previously reported as property and equipment as assets held-for-sale. The book value of these assets is $118 million and is included in other current assets in the condensed consolidated balance sheets.

 

Other non-current assets (in millions):

 

 

 

July 28,

2017

 

 

April 28,

2017

 

Deferred tax assets

 

$

523

 

 

$

525

 

Other assets

 

 

154

 

 

 

156

 

Other non-current assets

 

$

677

 

 

$

681

 

 

Accrued expenses (in millions):

 

 

 

July 28,

2017

 

 

April 28,

2017

 

Accrued compensation and benefits

 

$

240

 

 

$

340

 

Sale-leaseback financing obligations

 

 

130

 

 

 

130

 

Product warranty liabilities

 

 

29

 

 

 

33

 

Other current liabilities

 

 

254

 

 

 

279

 

Accrued expenses

 

$

653

 

 

$

782

 

 

10


Product warranty liabilities:

Equipment and software systems sales include a standard product warranty. The following tables summarize the activity related to product warranty liabilities and their balances as reported in our condensed consolidated balance sheets (in millions):

 

 

 

Three Months Ended

 

 

 

July 28,

2017

 

 

July 29,

2016

 

Balance at beginning of period

 

$

50

 

 

$

70

 

Expense accrued during the period

 

 

1

 

 

 

4

 

Warranty costs incurred

 

 

(7

)

 

 

(13

)

Balance at end of period

 

$

44

 

 

$

61

 

 

 

 

July 28,

2017

 

 

April 28,

2017

 

Accrued expenses

 

$

29

 

 

$

33

 

Other long-term liabilities

 

 

15

 

 

 

17

 

Total warranty liabilities

 

$

44

 

 

$

50

 

 

Warranty expense accrued during the period includes amounts accrued for systems at the time of shipment, adjustments for changes in estimated costs for warranties on systems shipped in the period and changes in estimated costs for warranties on systems shipped in prior periods.

 

Deferred revenue and financed unearned services revenue (in millions):

 

 

 

July 28,

2017

 

 

April 28,

2017

 

Deferred product revenue

 

$

123

 

 

$

124

 

Deferred services revenue

 

 

2,942

 

 

 

2,999

 

Financed unearned services revenue

 

 

186

 

 

 

219

 

Total

 

$

3,251

 

 

$

3,342

 

 

 

 

 

 

 

 

 

 

Reported as:

 

 

 

 

 

 

 

 

Short-term

 

$

1,702

 

 

$

1,744

 

Long-term

 

 

1,549

 

 

 

1,598

 

Total

 

$

3,251

 

 

$

3,342

 

 

Deferred product revenue represents unrecognized revenue related to undelivered product commitments and other product deliveries that have not met all revenue recognition criteria. Deferred services revenue represents customer payments made in advance for services, which include software and hardware maintenance contracts and other services. Financed unearned services revenue represents undelivered services for which cash has been received under certain third-party financing arrangements. See Note 16 for additional information related to these arrangements.

 

7. Other income (expense), net

Other income (expense), net consists of the following (in millions):

 

 

 

Three Months Ended

 

 

 

July 28,

2017

 

 

July 29,

2016

 

Interest income

 

$

16

 

 

$

11

 

Interest expense

 

 

(13

)

 

 

(15

)

Other income, net

 

 

2

 

 

 

3

 

Total other income (expense), net

 

$

5

 

 

$

(1

)

 

 

11


8 . Financial Instruments and Fair Value Measurements

The accounting guidance for fair value measurements provides a framework for measuring fair value on either a recurring or nonrecurring basis, whereby the inputs used in valuation techniques are assigned a hierarchical level. The following are the three levels of inputs to measure fair value:

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2: Inputs that reflect quoted prices for identical assets or liabilities in less active markets; quoted prices for similar assets or liabilities in active markets; benchmark yields, reported trades, broker/dealer quotes, inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3: Unobservable inputs that reflect our own assumptions incorporated in valuation techniques used to measure fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

We consider 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 consider an inactive market to be one in which there are infrequent or 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, our own or the counterparty’s non-performance risk is considered in measuring the fair values of liabilities and assets, respectively.

Investments

The following is a summary of our investments (in millions):

 

 

 

July 28, 2017

 

 

April 28, 2017

 

 

 

Cost or

 

 

 

 

 

Estimated

 

 

Cost or

 

 

 

 

 

Estimated

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Fair

 

 

Amortized

 

 

Gross Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Corporate bonds

 

$

1,600

 

 

$

8

 

 

$

(1

)

 

$

1,607

 

 

$

1,535

 

 

$

3

 

 

$

(2

)

 

$

1,536

 

U.S. Treasury and government debt

   securities

 

 

557

 

 

 

 

 

 

(2

)

 

 

555

 

 

 

629

 

 

 

1

 

 

 

(2

)

 

 

628

 

Foreign government debt securities

 

 

21

 

 

 

 

 

 

 

 

 

21

 

 

 

21

 

 

 

 

 

 

 

 

 

21

 

Commercial paper

 

 

409

 

 

 

 

 

 

 

 

 

409

 

 

 

362

 

 

 

 

 

 

 

 

 

362

 

Certificates of deposit

 

 

99

 

 

 

 

 

 

 

 

 

99

 

 

 

99

 

 

 

 

 

 

 

 

 

99

 

Mutual funds

 

 

32

 

 

 

 

 

 

 

 

 

32

 

 

 

31

 

 

 

 

 

 

 

 

 

31

 

Total debt and equity securities

 

$

2,718

 

 

$

8

 

 

$

(3

)

 

$

2,723

 

 

$

2,677

 

 

$

4

 

 

$

(4

)

 

$

2,677

 

 

As of July 28, 2017 and April 28, 2017, gross unrealized losses related to individual securities were not significant.

The following table presents the contractual maturities of our debt investments as of July 28, 2017 (in millions):

 

 

 

Amortized Cost

 

 

Fair Value

 

Due in one year or less

 

$

1,227

 

 

$

1,226

 

Due after one year through five years

 

 

1,157

 

 

 

1,159

 

Due after five years through ten years

 

 

297

 

 

 

301

 

Due after ten years

 

 

5

 

 

 

5

 

 

 

$

2,686

 

 

$

2,691

 

Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.

12


Fair Value of Financial Instruments

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis (in millions):

 

 

 

July 28, 2017

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

Cash

 

$

2,630

 

 

$

2,630

 

 

$

 

Corporate bonds

 

 

1,607

 

 

 

 

 

 

1,607

 

U.S. Treasury and government debt securities

 

 

555

 

 

 

216

 

 

 

339

 

Foreign government debt securities

 

 

21

 

 

 

 

 

 

21

 

Commercial paper

 

 

409

 

 

 

 

 

 

409

 

Certificates of deposit

 

 

99

 

 

 

 

 

 

99

 

Total cash, cash equivalents and short-term investments

 

$

5,321

 

 

$

2,846

 

 

$

2,475

 

Other items:

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds (1)

 

$

6

 

 

$