The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q. The information in this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements include statements related to: our business and strategy, trends affecting our business and financial results, international expansion plans, direct and indirect sales plans and strategies, growth of our revenue, costs and expenses (including sales and marketing expenses), gross margins, our share repurchase program, our acquisitions, the effect of fluctuations in exchange rates and our hedging activities on our financial results, our effective tax rate and our liquidity and capital requirements. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. For example, words such as "may," "will," "could," "would,""should," "estimates," "predicts," "potential," "continue," "strategy," "believes," "anticipates," "plans," "expects," "intends" and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those discussed elsewhere in this Form 10-Q in the section titled "Risk Factors" and the risks discussed in our other
SECfilings. We disclaim any obligation to publicly release any revisions or updates to the forward-looking statements after the date of this Form 10-Q.
We were founded on
May 23, 2002and are a leader in application performance infrastructure. Riverbed enables organizations to embrace location-independent computing through the Riverbed Application Performance Platform, a set of integrated solutions that give companies the flexibility to host applications and data in the locations that best serve the business while ensuring the flawless delivery of those applications to better leverage global resources, radically reduce the cost of running their business, and maximize employee productivity. Riverbed's solutions dramatically improve application performance, reduce IT costs, and substantially increase business agility. We have two product lines: •Application Acceleration product line, which includes our wide area network (WAN) optimization products, including Steelhead and SteelFusion (formerly Granite), our Stingray virtual application delivery controllers (ADCs), and our Whitewater cloud storage delivery products; and •Performance Management product line, which includes our application-aware network performance management (NPM), application performance management (APM), network engineering, operations and planning (NEOP), and network simulation and modeling products. The Performance Management product line combines our former Cascade products and the products acquired from OPNET Technologies, Inc.(OPNET). We are headquartered in San Francisco, California. Our personnel are located throughout the U.S. and in more than 35 countries worldwide. We expect to continue to add personnel in the U.S. and internationally to provide additional geographic sales, research and development, general and administrative and technical support coverage. The Riverbed Strategy Our goal is to develop solutions that are widely recognized as the preeminent performance and efficiency standard for organizations of all sizes and geographies. Key elements of our strategy include: • Enhance our customers' performance - Riverbed is the performance company.
Our vision is to provide the most complete platform for location
independent computing to ensure flawless application performance and the
best user experience. This will allow customers to turn distance and location into competitive advantage by letting business objectives - not technical constraints - drive where and how applications and data are
hosted and delivered for optimal business performance. Our vision focuses
on the intersection of applications, networks, and storage, and brings
customers a single, unified view of performance in their distributed
• Maintain and extend our technological advantages - We believe that we
offer the broadest ability to enable rapid and reliable access to
applications and data for our customers. We intend to enhance our
position as a leader and innovator in the WAN optimization, branch
converged infrastructure, application delivery controller and performance
management markets. We also intend to continue to sell new capabilities,
such as our solutions oriented toward cloud environments, into our
installed base and to new customers. Continuing investments in research
and development are critical to maintaining our technological advantage.
Table of Contents
• Transform from a single-product to platform company - We have introduced
enhancements to our product capabilities in order to address our
customers' size and application requirements. We have also introduced new
products to extend our market and utilize our technology platform to extend our capabilities. • Extend our technology partner ecosystem - We work with a broad and diverse ecosystem of partners to extend the value of our platform and
deliver a range of implementation, integration and value added services.
We have enhanced our product capabilities via integration of and interoperability with partner technologies. • Increase market awareness - To generate increased demand for our products, we will continue to market the effectiveness of our comprehensive IT performance solutions.
• Scale our sales force and distribution channels - We sell our products
directly through our sales force and indirectly through channel partners.
We intend to leverage, innovate and grow our sales force and our indirect
channels to extend our geographic reach and market penetration.
• Enhance and extend our support and services capabilities - On an ongoing
basis, we plan to enhance and extend our support and services
capabilities to continue to support our growing global customer base. For
site for customers. Major Trends Affecting Our Financial Results Company Outlook We believe that our current value proposition, which enables customers to improve the performance of their applications and access to their data across WANs by integrating performance acceleration and performance management solutions, while also offering the ability to simplify IT infrastructure and realize significant capital and operating cost savings, should allow us to continue to grow our business. Our product revenue growth rate will depend significantly on continued growth in the WAN optimization, storage delivery, APM, NPM, and ADC markets, our ability to continue to attract new customers in those markets and our ability to generate additional sales from existing customers. Our growth in support and services revenue is dependent upon increasing the number of products under support contracts, which is dependent on both growing our installed base of customers and renewing existing support contracts. Our future profitability and rate of growth will be directly affected by the continued acceptance of our products in the marketplace, as well as the timing and size of orders, product mix, average selling prices and costs of our products and general economic conditions. Our ability to achieve profitability in the future will also be affected by the extent to which we must incur additional expenses to expand our sales, support, marketing, development, and general and administrative capabilities to grow our business. The largest component of our expenses is typically personnel costs. Personnel costs consist of salaries, benefits and incentive compensation for our employees, including commissions for sales personnel and stock-based compensation. Revenue Our revenue has grown rapidly since we began shipping products in
May 2004, increasing from $2.6 millionin 2004 to $1.0 billion dollarsin 2013. Revenue grew by 8% in the three months ended March 31, 2014to $265.4 millionfrom $246.1 millionin the three months ended March 31, 2013. We believe that our revenue growth is a positive sign that our products, support and services have a significant value proposition to our customers and that the markets that we compete in are still expanding. Costs and Expenses Operating expenses consist of sales and marketing, research and development, general and administrative expenses, and acquisition-related costs. Personnel-related costs, including stock-based compensation, are the most significant components of each of these expense categories. The timing and number of additional hires has and could materially affect our operating expenses, both in dollar amount and as a percentage of revenue, in any particular period. Stock-based Compensation Expense Stock-based compensation expense and related payroll taxes were $22.0 millionand $24.9 millionin the three months ended March 31, 2014and 2013, respectively. We expect to incur increasing stock-based compensation expense as we expect stock-based compensation to continue to play an important part in the overall compensation structure for our employees.
Our operating results may be affected by seasonal buying patterns. Historically, we have experienced a stronger seasonal revenue cycle in the fourth fiscal quarter and lowest in our first fiscal quarter.
Table of Contents
Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. We believe that the estimates and judgments that we make and upon which we rely are reasonable based upon information available to us at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, our condensed consolidated financial statements could be adversely affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: revenue recognition, accounting for business combinations, stock-based compensation, accounting for income taxes, and inventory valuation. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our year ended
December 31, 2013for a more complete discussion of our critical accounting policies and estimates including revenue recognition, accounting for business combinations including the fair value measurement of contingent consideration, goodwill, intangible assets and impairment assessments, stock-based compensation, accounting for income taxes, and inventory valuation. Our critical accounting policies have been discussed with the Audit Committee of the Board of Directors. We believe there have been no material changes to our critical accounting policies and estimates during the three months ended March 31, 2014, compared to those discussed in our Form 10-K for the year ended December 31, 2013. 21
Table of Contents Results of Operations Revenue We derive our revenue from sales of our appliances and software licenses and from support and services. Product revenue primarily consists of revenue from sales of our Application Acceleration and Performance Management products and is typically recognized upon delivery. Support revenue provides customers the right to receive unspecified software product upgrades, maintenance releases issued when-and-if-available during the support period, hardware repair, and access to technical support personnel. Support revenue is recognized ratably over the contractual period, which is typically one to three years. Service revenue includes professional services and training and is recognized as the services are performed. Three months ended March 31, (in thousands) 2014 2013 Total Revenue
$ 265,416 $ 246,139Total Revenue by Type: Product $ 150,161 $ 148,040Support and services $ 115,255 $ 98,099% Revenue by Type: Product 57 % 60 % Support and services 43 % 40 % Total Revenue by Geography: United States $ 152,962 $ 150,597Other Americas $ 7,856 $ 7,545Americas $ 160,818 $ 158,142Europe, Middle East and Africa $ 69,030 $ 57,834Asia Pacific $ 35,568 $ 30,163% Revenue by Geography: United States 58 % 61 % Other Americas 3 % 3 % Americas 61 % 64 % Europe, Middle East and Africa 26 % 23 % Asia Pacific 13 % 13 % Total Revenue by Product Line: Application Acceleration $ 204,456 $ 184,962Performance Management $ 60,960 $ 61,177% Revenue by Product Line: Application Acceleration 77 % 75 % Performance Management 23 % 25 % Total Revenue by Sales Channel: Direct $ 31,400 $ 48,969Indirect $ 234,016 $ 197,170% Revenue by Sales Channel: Direct 12 % 20 % Indirect 88 % 80 % Quarter Ended March 31, 2014Compared to the Quarter Ended March 31, 2013: Revenue increased by 7.8% in the three months ended March 31, 2014as compared to the prior year period. Product revenue increased by 1.4% in the three months ended March 31, 2014, as compared to the three months ended March 31, 2013, which was primarily due to an increase in unit volume. As of March 31, 2014, our products have been sold to over 25,000 customers, compared to over 23,000 customers as of March 31, 2013. 22
Table of Contents
Substantially all of our customers purchase support when they purchase our products. Support and services revenue increased 17.5% in the three months ended
March 31, 2014, as compared to the same period in the prior year due primarily to growth in our customer base. Support and services revenue as a percentage of total revenues increased over the prior year due primarily to growth in our customer base. As our customer base grows, we expect our revenue generated from support and services to increase. In the three months ended March 31, 2014, we derived 88% of our revenue from indirect channels compared to 80% for the three months ended March 31, 2013. The increase in revenue from indirect channels is primarily due to the conversion of the customers acquired from OPNET to relationships with our channel partners. We expect indirect channel revenue to continue to represent a substantial majority of our revenue. We generated 42% of our revenue in the three months ended March 31, 2014from international locations, compared to 39% in the three months ended March 31, 2013. The increase in international revenue as a percent of total revenue was due primarily to a higher proportion of European-based sales. We continue to expand into international locations and introduce our products in new markets and expect international revenue to increase in dollar amount over time. Cost of Revenue and Gross Margin Cost of product revenue consists of the personnel costs of manufacturing management, costs of the appliance hardware, manufacturing, shipping and logistics costs, expenses for inventory obsolescence, warranty obligations, and amortization of acquisition-related intangibles. We utilize third parties to assist in the design and manufacture of our appliance hardware, embed our proprietary software on our appliance hardware and perform shipping logistics. Cost of support and service revenue consists of personnel costs of technical support and professional services personnel, spare parts, and logistics services. As we expand internationally and into other sectors, we may incur additional costs to conform our products to comply with local laws or local product specifications. In addition, as we expand internationally, we will continue to hire additional technical support personnel to support our growing international customer base. Our gross margin has been and will continue to be affected by a variety of factors, including the mix and average selling prices of our products, new product introductions and enhancements, the cost of our appliance hardware, expenses for inventory obsolescence and warranty obligations, cost of support and service personnel, and the mix of distribution channels through which our products are sold. Three months ended March 31, (in thousands) 2014 2013 Cost of revenue: Cost of product $ 38,281 $ 40,900Cost of support and services 31,631 28,042 Total cost of revenue $ 69,912 $ 68,942Gross profit: $ 195,504 $ 177,197Gross margin for product: 75 % 72 %
Gross margin for support and services 73 % 71 % Total gross margin
74 % 72 % Quarter Ended
March 31, 2014Compared to the Quarter Ended March 31, 2013: The total cost of product revenue decreased $2.6 million, or 6.4%, in the three months ended March 31, 2014compared to the three months ended March 31, 2013, due primarily to a decrease in product costs of $0.5 millionand a decrease in the amortization of acquisition-related intangible assets of $0.8 million. Cost of support and services revenue increased $3.6 million, or 12.8%, due primarily to increased logistics and spare parts costs and higher headcount and payroll related costs to support the growth in installed base. Gross margin increased to 74% in the three months ended March 31, 2014as compared to 72% in the three months ended March 31, 2013. Product gross margin increased to 75% in the three months ended March 31, 2014from 72% in the three months ended March 31, 2013primarily as a result of a decrease in amortization of the acquisition-related intangible assets. 23
Table of Contents
Gross margins for support and services increased to 73% in the three months ended
March 31, 2014from 71% in the three months ended March 31, 2013. Gross margin for support and services was positively impacted by the growth in support revenue due to an increased installed base. Additionally, the gross margin in the first quarter of 2013 was impacted by the reduction to service revenue related to the fair value adjustment to the deferred support revenue as required by the business combination accounting for the OPNET acquisition. Sales and Marketing Expenses Sales and marketing expenses represent the largest component of our operating expenses and include personnel costs, sales commissions, marketing programs and facilities costs. Marketing programs are intended to generate revenue from new and existing customers, and are expensed as incurred. We plan to continue to make investments in sales and marketing with the intent to add new customers and increase penetration within our existing customer base by further leveraging sales personnel worldwide, expanding our domestic and international sales and marketing activities, increasing channel penetration, building brand awareness and sponsoring additional marketing events. We expect future sales and marketing expenses to increase and continue to be our most significant operating expense. Generally, sales personnel are not immediately productive and sales and marketing expenses do not immediately result in increased revenue. Hiring additional sales personnel reduces short-term operating margin until the sales personnel become productive and generate revenue. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance. Three months ended March 31, ($ in thousands) 2014 2013
Sales and marketing expenses
43 % 47 % Quarter Ended
March 31, 2014Compared to the Quarter Ended March 31, 2013: Sales and marketing expenses decreased by $1.0 million, or 0.8%, in the three months ended March 31, 2014compared to the three months ended March 31, 2013, primarily due to decreases in amortization of the intangibles acquired in the OPNET acquisition of $3.5 million, offset by increases in information technology and facilities of $1.0 millionand increases in marketing-related programs and travel of $0.5 million. Research and Development Expenses Research and development (R&D) expenses primarily include personnel costs and facilities costs. We expense R&D costs as incurred. We are devoting substantial resources to the continued development of additional functionality for existing products and the development of new products. We intend to continue to invest significantly in our R&D efforts because we believe they are essential to maintaining our competitive position. Three months ended March 31, ($ in thousands) 2014 2013
Research and development expenses
19 % 20 % Quarter Ended
March 31, 2014Compared to the Quarter Ended March 31, 2013: R&D expenses increased by $1.7 million, or 3.4%, in the three months ended March 31, 2014compared to the three months ended March 31, 2013, primarily due to increases in facility expenses of $1.0 million. 24
Table of Contents
General and Administrative Expenses General and administrative (G&A) expenses consist primarily of compensation for personnel and facilities costs related to our executive, finance, human resources, information technology and legal organizations, and fees for professional services. Professional services include legal, audit and information technology consulting costs. Three months ended March 31, ($ in thousands) 2014 2013
General and administrative expenses
7 % 8 % Quarter Ended
March 31, 2014Compared to the Quarter Ended March 31, 2013: G&A expenses were flat in the three months ended March 31, 2014compared to the three months ended March 31, 2013, primarily due to a decrease in personnel costs of $2.2 millionas a result of our workforce rationalization from the OPNET acquisition, offset by increases in outside services related to litigation of $1.3 millionand increases in professional service fees related to non-routine corporate governance and shareholder matters of $0.5 million. The increase in litigation expenses was primarily due to the defense of our intellectual property. Acquisition-Related Costs Acquisition-related costs include transaction costs and integration costs. Transaction costs include advisory, legal and other professional fees directly associated with concluding an acquisition. Integration related costs include integration project management consulting, acquired employee retention bonuses, one-time termination benefits, facility exit costs and other non-recurring, or redundant costs to integrate an acquired company into Riverbed's systems and operations. We expect to continue to incur integration costs primarily associated with our facilities rationalization and sales force integration plans, but expect the ongoing costs to be lower than in prior quarters. The following table summarizes the acquisition-related costs, including transaction costs and integration-related costs in the periods presented: Three months ended March 31, (in thousands) 2014 2013 Acquisition-related costs $ 2,668 $ 4,136Quarter Ended March 31, 2014Compared to Quarter Ended March 31, 2013: During the three months ended March 31, 2014, we recorded acquisition-related costs of $2.7 million, primarily related to integration-related costs associated with our acquisition of OPNET. We expect to continue to incur integration costs primarily associated with our facilities rationalization and sales force integration plans, but expect the ongoing costs to be lower than in prior quarters. Interest and Other Expense, Net Interest and other expense, net, consists primarily of interest income on our cash and marketable securities, interest expense, and foreign currency exchange gains or losses. Three months ended March 31, (in thousands) 2014 2013 Interest income $ 243 $ 204Interest expense (2,857 ) (6,280 )
Foreign exchange gains (losses) and other (99 ) (288 ) Total interest and other expense, net
March 31, 2014Compared to the Quarter Ended March 31, 2013: Interest and other expense, net, decreased in the three months ended March 31, 2014compared to the three months ended March 31, 2013, primarily due to the decrease in interest expense resulting from the refinancing of our borrowings in the fourth quarter of 2013, which decreased our rate of interest. 25
Table of Contents
Provision for (Benefit from) Income Taxes Our provision for (benefit from) income taxes is based on our estimated annual effective tax rate, adjusted for discrete tax items recorded in the period. The provision for (benefit from) income taxes for the three months ended
March 31, 2014, and 2013 was $2.3 millionand $(9.0) million, respectively. Our provision for (benefit from) income taxes consists of federal, foreign, and state income taxes. Our effective tax rate was 41.3% and 52.6% for the three months ended March 31, 2014, and 2013, respectively. For the three months ended March 31, 2014, our effective tax rate differs from the federal statutory rate due to state taxes and significant permanent differences. Significant permanent differences included taxes in foreign jurisdictions with a tax rate different than the U.S. federal statutory rate, nondeductible stock-based compensation expense, tax charges related to our intercompany transfer of intellectual property rights, and the domestic production activities deduction. Our effective tax rate for the three months ended March 31, 2013, differed from the federal statutory rate due to state taxes and significant permanent differences. Significant permanent differences included taxes in foreign jurisdictions with a tax rate different than the U.S. federal statutory rate, nondeductible stock-based compensation expense, tax charges related to our intercompany transfer of intellectual property rights, the domestic production activities deduction, and the federal R&D tax credit. The federal R&D tax credit was retroactively reinstated and extended to December 31, 2013during the first quarter of 2013. As a result of the reinstatement, we recorded a discrete tax benefit of $4.3 millionrelated to 2012 in the first quarter of 2013. The tax rate for the three months ended March 31, 2014, differs from the tax rate for the three months ended March 31, 2013due to less favorable forecasted geographic mix of earnings between jurisdictions, higher non-deductible stock-based compensation expense, and the loss of tax benefits attributable to the expiration of the federal R&D tax credit as of December 31, 2013, which had not been renewed as of March 31, 2014. Our effective tax rate in 2014 and in future periods may fluctuate on a quarterly basis. The effective tax rate could be affected by the geographic distribution of our worldwide earnings or losses, our stock-based compensation expense, changes in the valuation of our deferred tax assets, changes in actual results versus our estimates, or changes in tax laws, regulations, accounting principles, or interpretations thereof. We record a valuation allowance to reduce our deferred tax assets to the amount we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we have considered our historical levels of income and expectations of future taxable income. In determining future taxable income, we make assumptions to forecast federal, state and international operating income, the reversal of temporary differences, and the implementation of any feasible and prudent tax planning strategies. The assumptions require significant judgment regarding the forecasts of taxable income, and are consistent with our forecasts used to manage our business. We are subject to income tax in the U.S. as well as numerous state and foreign jurisdictions. We are no longer subject to federal examinations for years before 2009. With the exception of several states, we are no longer subject to state and local income tax examinations for years before 2010, although carryforward attributes that were generated prior to 2010 may still be adjusted upon examination by the California Franchise Tax Board if the attributes either have been or will be used in a future period. In addition, we file tax returns in multiple foreign taxing jurisdictions. In our most significant foreign jurisdictions, the UKand Singapore, the open tax years range from 2009 to 2012.
Liquidity and Capital Resources
March 31, December 31, (in thousands) 2014 2013 Working capital
$ 285,252 $ 268,303
Cash and cash equivalents
Three months ended March 31, (in thousands) 2014 2013
Cash provided by operating activities
Table of Contents
Cash and Cash Equivalents Cash and cash equivalents consist of money market mutual funds, government-sponsored enterprise obligations, treasury bills, commercial paper, corporate bonds and notes, and other money market securities with remaining maturities at date of purchase of 90 days or less. Short and long-term investments consist of certificates of deposit, government-sponsored enterprise obligations, municipal bonds, treasury bills, commercial paper, and corporate bonds and notes. The fair value of investments is determined as the exit price in the principal market in which we would transact. The fair value of our investments has not materially fluctuated from historical cost. The accumulated unrealized losses, net of tax, on investments recognized in Accumulated other comprehensive income (loss) in our stockholders' equity as of
March 31, 2014are not significant. Cash and cash equivalents, short-term investments and long-term investments as of March 31, 2014were $559.7 million, an increase of $27.6 millionas compared to December 31, 2013. Restricted cash primarily represents collateralized letters of credit for the security deposits in connection with lease agreements for our facilities. Current restricted cash, which is included in the Prepaid expenses and other current assets in the condensed consolidated balance sheets, totaled $3.1 millionand $3.3 millionat March 31, 2014and December 31, 2013, respectively. Long-term restricted cash totaled $9.1 millionat March 31, 2014and at December 31, 2013, respectively, and was included in Other assets in the condensed consolidated balance sheets. We have significant international operations. Our sales contracts are principally denominated in U.S. dollars and therefore changes in foreign exchange rates have not materially affected our cash flows from operations. As we fund our international operations, our cash and cash equivalents are affected by changes in exchange rates. To date, the foreign currency effect on our cash and cash equivalents has not been significant. Cash Provided by Operating Activities Our largest source of operating cash flows is cash collections from our customers. Our primary uses of cash from operating activities are for personnel related expenditures, product costs, outside services, and rent payments. Our cash flows from operating activities will continue to be affected principally by the extent to which we grow our revenue and spend on hiring personnel in order to grow our business. The timing of hiring sales personnel in particular affects cash flows as there is a lag between the hiring of sales personnel and the generation of revenue and related cash flows from their sales efforts. Cash provided by operating activities was $45.4 millionin the three months ended March 31, 2014, an increase of $2.1 millioncompared to $43.3 millionin the three months ended March 31, 2013. Cash provided from the statement of operations for the three months ended March 31, 2014, after adjustments for certain non-cash income items, including depreciation and amortization, stock-based compensation expense, excess tax benefits from employee stock plans and deferred taxes was $46.6 million, an increase of $1.5 millionfrom the prior year period. The increase in cash provided from the statement of operations was primarily due to lower interest expense on borrowings. Cash used in operating activities associated with changes in operating assets and liabilities in the three months ended March 31, 2014was $1.2 million, a decrease of $0.6 millionfrom the prior year period. Cash Used in Investing Activities Cash used in investing activities primarily relate to purchases of investments, net of sales and maturities, capital expenditures, and acquisitions. Cash used in investing activities was $6.4 millionin the three months ended March 31, 2014, a $26.9 millionincrease in cash used compared to $33.3 millionof cash used in investing activities in the three months ended March 31, 2013. The decrease in cash used in investing activities is substantially attributable to reduced purchases of investment securities of $38.0 millionas well as reduced cash paid for acquisitions of $1.0 millionfor the three months ended March 31, 2014as compared to the prior year period, which was offset by increased capital expenditures of $10.0 millionand increased proceeds from the sale and maturities of investment securities of $2.1 million. Cash Used in Financing Activities Cash used in financing activities in the three months ended March 31, 2014totaled $1.8 millionand consisted of cash used to pay down long-term borrowings of $3.8 millionand cash used to repurchase shares of $25.0 million, which was offset by cash provided from the proceeds from the issuance of common stock under employee stock plans of $25.0 millionand excess tax benefit from employee stock plans of $1.9 million. 27
Table of Contents
We believe that our net proceeds from operations, together with our cash and investments balance at
March 31, 2014, will be sufficient to fund our projected operating requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing and extent of expansion into new territories, the timing of introductions of new products and enhancements to existing products, and the continuing market acceptance of our products. In December 2013, we entered into a new credit agreement and related security and other agreements for a $600.0 millioncredit facility (the 2013 Credit Facility) that includes a $300.0 millionsenior secured term loan facility and a $300.0 millionsenior secured revolving loan facility. The 2013 Credit Facility has a five year term and has an initial interest rate for both the term loan and revolving loan of LIBORplus 175 basis points. In the fourth quarter 2013, we drew down $300.0 millionon the term loans, and $225.0 millionunder the revolving credit facility. The terms of the 2013 Credit Facility require us to make scheduled quarterly payments on the term loan of 1.25% of the original principal amount in the first two years, or $3.8 millionper quarter, increasing to 2.50% thereafter, with the balance due on December 20, 2018. Refer to Contractual Obligations, below, for the minimum payment requirements. This quarterly payment provision will result in the use of an increased portion of our cash flows from operations to pay principal payments on our credit facilities (limiting our flexibility in planning for, or reacting to, changes in our business and industry) making the payments unavailable for operations, working capital, capital expenditures, expansion, acquisitions, or other purposes. On March 4, 2014, the Board of Directors announced a $250.0 millionincrease to the Share Repurchase Program (the Program). The maximum dollar value of shares of common stock that remain available for purchase under the Program is $362.7 million. The share repurchases were financed by available cash balances and cash from operations. In the future, we may enter into other arrangements for potential investments in, or acquisitions of, complementary businesses, services or technologies, which could require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.
Contractual Obligations The following is a summary of our contractual obligations as of
Remaining nine Total months of 2014 2015 2016 2017 2018 Thereafter (in thousands) Contractual Obligations Principal payments on borrowings
$ 521,250 $ 11,250 $ 15,000 $ 30,000 $ 30,000 $ 435,000$ - Interest payments on borrowings (1) 73,030 7,931 11,238 15,376 19,006 19,479 - Operating leases 215,562 17,646 28,585 27,105 25,157 23,411 93,658 Purchase obligations (2) 8,143 8,120 17 6 - - - Total contractual obligations $ 817,985 $ 44,947 $ 54,840 $ 72,487 $ 74,163 $ 477,890 $ 93,658(1) Assumes an interest rate of 2.0% over the term of the loan (see Note 9 -
Borrowings in the Notes to Condensed Consolidated Financial Statements).
The actual interest rate is a variable rate of interest based on
(with no floor) plus an applicable margin (varying from 1.25% to 2.00%).
(2) Represents amounts associated with agreements that are enforceable,
legally binding and specify terms, including: fixed or minimum quantities
to be purchased; fixed, minimum or variable price provisions; and the approximate timing of payment. Obligations under contracts that we can
cancel without a significant penalty are not included in the table above.
March 31, 2014, we had $55.6 millionof unrecognized tax benefits, including interest and penalties, related to uncertain tax positions. Because of the high degree of uncertainty regarding the settlement of these liabilities, we are unable to estimate the years in which future cash outflows may occur. As a result, this amount is not included in the table above. 28
Table of Contents
Off-Balance Sheet Arrangements At
March 31, 2014and December 31, 2013, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes, nor did we have any undisclosed material transactions or commitments involving related persons or entities.
Recent Accounting Pronouncements See Note 2 - Recent Accounting Pronouncements in the Notes to Condensed Consolidated Financial Statements for recent accounting pronouncements that could have an effect on us.
Table of Contents