JUNIPER NETWORKS INC, 10-Q filed on 8/7/2009
Quarterly Report
Document and Company Information (USD $)
In Millions, except Share data in Thousands
Aug. 3, 2009
6 Months Ended
Jun. 30, 2009
Jun. 30, 2008
Document and Company Information [Abstract]
 
 
 
Entity Registrant Name
 
JUNIPER NETWORKS, INC. 
 
Entity Central Index Key
 
0001043604 
 
Document Type
 
10-Q 
 
Document Period End Date
 
06/30/2009 
 
Amendment Flag
 
FALSE 
 
Current Fiscal Year End Date
 
12/31 
 
Entity Well-known Seasoned Issuer
 
No 
 
Entity Voluntary Filers
 
No 
 
Entity Current Reporting Status
 
Yes 
 
Entity Filer Category
 
Large Accelerated Filer 
 
Entity Public Float
 
 
$ 8,883 
Entity Common Stock, Shares Outstanding
524,215 
 
 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data
3 Months Ended
Jun. 30, 2009
6 Months Ended
Jun. 30, 2009
3 Months Ended
Jun. 30, 2008
6 Months Ended
Jun. 30, 2008
Net revenues:
 
 
 
 
Product
$ 606,959 
$ 1,194,822 
$ 723,917 
$ 1,398,131 
Service
179,404 
355,724 
155,117 
303,790 
Total net revenues
786,363 
1,550,546 
879,034 
1,701,921 
Cost of revenues:
 
 
 
 
Product
207,576 
400,637 
215,134 
406,925 
Service
78,385 
153,836 
74,147 
147,192 
Total cost of revenues
285,961 
554,473 
289,281 
554,117 
Gross margin
500,402 
996,073 
589,753 
1,147,804 
Operating expenses:
 
 
 
 
Research and development
183,894 
369,294 
186,357 
357,003 
Sales and marketing
170,575 
351,818 
190,338 
376,286 
General and administrative
39,175 
78,386 
35,609 
69,243 
Amortization of purchased intangible assets
3,539 
7,929 
7,999 
33,128 
Restructuring charges
7,529 
11,758 
Other charges
9,000 
9,000 
Total operating expenses
404,712 
819,185 
429,303 
844,660 
Operating income
95,690 
176,888 
160,450 
303,144 
Interest and other income, net
2,898 
4,848 
13,187 
30,777 
Loss on minority equity investments
(1,625)
(3,311)
(1,499)
(1,499)
Income before income taxes
96,963 
178,425 
172,138 
332,422 
Provision for income taxes
82,194 
168,116 
51,728 
101,657 
Net income
14,769 
10,309 
120,410 
230,765 
Net income per share:
 
 
 
 
Basic
0.03 
0.02 
0.23 
0.44 
Diluted
0.03 
0.22 
0.41 
Shares used in computing net income per share:
 
 
 
 
Basic
523,105 
523,754 
528,963 
526,435 
Diluted
532,850 
531,624 
559,328 
561,566 
Condensed Consolidated Balance Sheets (USD $)
In Thousands
Jun. 30, 2009
Dec. 31, 2008
ASSETS
 
 
Current assets:
 
 
Cash and cash equivalents
$ 1,554,151 
$ 2,019,084 
Short-term investments
423,955 
172,896 
Accounts receivable, net of allowances
429,130 
429,970 
Deferred tax assets, net
138,326 
145,230 
Prepaid expenses and other current assets
49,587 
49,026 
Total current assets
2,595,149 
2,816,206 
Property and equipment, net
448,296 
436,433 
Long-term investments
420,498 
101,415 
Restricted cash
44,704 
43,442 
Purchased intangible assets, net
18,594 
28,861 
Goodwill
3,658,602 
3,658,602 
Long-term deferred tax assets, net
8,695 
71,079 
Other long-term assets
31,224 
31,303 
Total assets
7,225,762 
7,187,341 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
Current liabilities:
 
 
Accounts payable
236,529 
249,854 
Accrued compensation
149,697 
160,471 
Accrued warranty
35,771 
40,090 
Deferred revenue
495,966 
459,749 
Income taxes payable
35,672 
33,047 
Other accrued liabilities
108,210 
113,399 
Total current liabilities
1,061,845 
1,056,610 
Long-term deferred revenue
152,622 
130,514 
Long-term income tax payable
161,050 
78,164 
Other long-term liabilities
33,416 
20,648 
Commitments and Contingencies
 
 
Stockholders' Equity [Abstract]
 
 
Convertible preferred stock, $0.00001 par value; 10,000 shares authorized; none issued and outstanding
Common stock, $0.00001 par value; 1,000,000 shares authorized; 522,682 shares and 526,752 shares issued and outstanding at June 30, 2009, and December 31, 2008, respectively
Additional paid-in capital
8,881,808 
8,811,497 
Accumulated other comprehensive loss
(521)
(4,245)
Accumulated deficit
(3,064,463)
(2,905,852)
Total stockholders' equity
5,816,829 
5,901,405 
Total liabilities and stockholders' equity
$ 7,225,762 
$ 7,187,341 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Share data in Thousands, except Per Share data
Jun. 30, 2009
Dec. 31, 2008
Convertible preferred stock, par value
$ 0.00001 
$ 0.00001 
Convertible preferred stock, shares authorized
10,000 
10,000 
Convertible preferred stock, shares issued
Convertible preferred stock, shares outstanding
Common stock, par value
0.00001 
0.00001 
Common stock, shares authorized
1,000,000 
1,000,000 
Common stock, shares issued
522,682 
526,752 
Common stock, shares outstanding
522,682 
526,752 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands
6 Months Ended
Jun. 30,
2009
2008
Cash flows from operating activities:
 
 
Net income
$ 10,309 
$ 230,765 
Adjustments to reconcile net income to net cash from operating activities:
 
 
Depreciation and amortization
75,355 
95,764 
Stock-based compensation
67,091 
50,073 
Loss on minority equity investments
3,311 
1,499 
Change in excess tax benefit from employee stock option plans
7,197 
(6,224)
Deferred income taxes
69,288 
(9,411)
Other non-cash charges
772 
Changes in operating assets and liabilities:
 
 
Accounts receivable, net
840 
(44,032)
Prepaid expenses and other assets
(6,116)
2,181 
Accounts payable
(10,488)
9,445 
Accrued compensation
(10,774)
(2,659)
Income tax payable
37,412 
39,222 
Other accrued liabilities
10,796 
8,506 
Deferred revenue
58,325 
79,543 
Net cash provided by operating activities
312,546 
455,444 
Cash flows from investing activities:
 
 
Purchases of property and equipment, net
(79,424)
(80,847)
Purchases of available-for-sale investments
(811,449)
(214,625)
Proceeds from sales of available-for-sale investments
109,820 
47,107 
Proceeds from maturities of available-for-sale investments
137,050 
157,324 
Changes in restricted cash
(1,275)
(2,565)
Minority equity investments
(1,191)
(2,000)
Net cash used in investing activities
(646,469)
(95,606)
Cash flows from financing activities:
 
 
Proceeds from issuance of common stock
50,678 
77,095 
Purchases and retirement of common stock
(169,370)
(121,275)
Net (payments) proceeds from customer financing arrangements
(5,121)
2,689 
Redemption of convertible debt
(276)
Changes in excess tax benefit from employee stock option plans
(7,197)
6,224 
Net cash used in financing activities
(131,010)
(35,543)
Net (decrease) increase in cash and cash equivalents
(464,933)
324,295 
Cash and cash equivalents at beginning of period
2,019,084 
1,716,110 
Cash and cash equivalents at end of period
1,554,151 
2,040,405 
Supplemental disclosure of non-cash investing and financing activities:
 
 
Common stock issued in connection with conversion of the Senior Notes
$ 0 
$ 399,153 
Basis of Presentation
Basis of Presentation
Note 1. Basis of Presentation
The unaudited Condensed Consolidated Financial Statements of Juniper Networks, Inc. (“Juniper Networks” or the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information as well as the instructions to Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. The results of operations for the three and six months ended June 30, 2009, are not necessarily indicative of the results that may be expected for the year ending December 31, 2009, or any future period. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” “Quantitative and Qualitative Disclosures About Market Risk” and the Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Note 2. Summary of Significant Accounting Policies
Recent Accounting Pronouncements
In May 2009, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 165, Subsequent Events (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, SFAS 165 sets forth: (a) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (b) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (c) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 is effective for interim or annual reporting periods ending after June 15, 2009. The Company’s adoption of SFAS 165 during the second quarter of 2009 did not affect the Company’s consolidated results of operations or financial condition.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets — An Amendment of FASB Statement No. 140 (“SFAS 166”), which amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”) to eliminate the concept of the qualifying special-purpose entity (“QSPE”) from SFAS 140, removes the exception from applying FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (“FIN 46R”) to QSPE, changes the requirements for derecognizing financial assets, and requires additional disclosures. SFAS 166 is effective for each entity’s first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. SFAS 166 must be applied to transfers of financial assets occurring on or after the effective date. Earlier application of SFAS 166 is prohibited. Accordingly, the Company’s transfers of financial assets will be recorded and disclosed following existing GAAP until January 1, 2010. The impact of SFAS 166 on the Company’s consolidated results of operations or financial condition will depend upon the level of activity of financial asset transfers that the Company may consummate after the effective date.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”), which amends FIN 46R. FIN 46R was amended by SFAS 167 because of the elimination of the QSPE concept in SFAS 166. SFAS 167 amends the provisions on determining whether an entity is a variable interest entity and would require consolidation, as well as requires additional disclosures. SFAS 167 is effective for each entity’s first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application of SFAS 167 is prohibited. Accordingly, the Company will adopt SFAS 167 on January 1, 2010. The impact of SFAS 167 on the Company’s consolidated results of operations or financial condition will depend upon its involvement with variable interest entities after the adoption date.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement 162 (“SFAS 168”). SFAS 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, and establishes the FASB Accounting Standards Codification (“Codification”) as the single source of authoritative accounting principles to be applied to financial statements of nongovernmental entities in conformity with U.S. GAAP. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company does not expect its implementation of SFAS 168 to affect its consolidated results of operations or financial condition.
In April 2009, the FASB issued FASB Staff Position (“FSP”) Financial Accounting Standard (“FAS”) 107-1 and Accounting Principles Board Opinion (“APB”) 28-1, Interim Disclosure about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”). This FSP amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, which requires disclosures about the fair value of financial instruments for interim reporting periods of publicly-traded companies as well as annual financial statements and amends APB No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. The provisions of FSP FAS 107-1 and APB 28-1 are effective for interim and annual reporting periods ending after June 15, 2009. The Company’s adoption of FSP FAS 107-1 and APB 28-1 during the second quarter of 2009 did not affect the Company’s consolidated results of operations or financial condition.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP FAS 115-2 and FAS 124-2”), which amends SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and SFAS No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations. This FSP amends the accounting and disclosure requirements to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities. The provisions of FSP FAS 115-2 and FAS 124-2 are effective for interim and annual reporting periods ending after June 15, 2009. The Company’s adoption of FSP FAS 115-2 and FAS 124-2 during the second quarter of 2009 did not affect the Company’s consolidated results of operations or financial condition.
In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP 157-4”), which amends SFAS No. 157, Fair Value Measurements (“SFAS 157”) to provide additional guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased. In addition, this FSP includes guidance on identifying circumstances that indicate a transaction is not orderly. The provisions of FSP 157-4 are effective for interim and annual reporting periods ending after June 15, 2009. The Company’s adoption of FSP FAS 157-4 during the second quarter of 2009 did not affect the Company’s consolidated results of operations or financial condition.
Net Income per Share
Net Income per Share
Note 3. Net Income per Share
Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for that period. Diluted net income per share is computed giving effect to all dilutive potential common shares that were outstanding during the period on a weighted average basis. Dilutive potential common shares consist of shares issuable upon conversion of senior notes, if any, common shares issuable upon exercise of stock options, vesting of restricted stock units (“RSUs”), and vesting of performance shares.
The following table presents the calculation of basic and diluted net income per share (in millions, except per share amounts):
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2009     2008     2009     2008  
Numerator:
                               
Net income
  $ 14.8     $ 120.4     $ 10.3     $ 230.8  
 
                       
Denominator:
                               
Weighted-average shares used to compute basic net income per share
    523.1       529.0       523.8       526.4  
Effect of dilutive securities:
                               
Shares issuable upon conversion of the Senior Notes
          15.6             17.8  
Employee stock awards
    9.8       14.7       7.8       17.4  
 
                       
Weighted average shares used to compute diluted net income per share
    532.9       559.3       531.6       561.6  
 
                       
Net income per share:
                               
Basic
  $ 0.03     $ 0.23     $ 0.02     $ 0.44  
 
                       
Diluted
  $ 0.03     $ 0.22     $ 0.02     $ 0.41  
 
                       
Employee stock awards for approximately 43.5 million shares and 60.5 million shares of the Company’s common stock in the three and six months ended June 30, 2009, respectively, were outstanding, but were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive. For the three and six months ended June 30, 2008, approximately 22.9 million shares and 18.7 million shares of the Company’s common stock equivalents, respectively, were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.
Cash, Cash Equivalents, and Investments
Cash, Cash Equivalents, and Investments
Note 4. Cash, Cash Equivalents, and Investments
The following table summarizes the Company’s cash, cash equivalents, and investments (in millions):
                 
    As of  
    June 30,     December 31,  
    2009     2008  
Cash and cash equivalents:
               
Cash
  $ 287.6     $ 285.9  
Time deposits
    124.5       125.1  
 
           
Total cash
    412.1       411.0  
Cash equivalents:
               
U.S. government securities
    70.2       141.8  
Government-sponsored enterprise obligations
    23.6       94.8  
Foreign government debt securities
    16.0        
Commercial paper
    132.2       90.4  
Money market funds
    900.1       1,281.1  
 
           
Total cash equivalents
    1,142.1       1,608.1  
 
           
Total cash and cash equivalents
    1,554.2       2,019.1  
 
           
 
               
Investments:
               
Fixed income securities:
               
U.S. government securities
    193.4       86.7  
Government sponsored-enterprise obligations
    276.9       71.9  
Foreign government debt securities
    47.5        
Commercial paper
    33.0        
Corporate debt securities
    284.7       110.3  
 
           
Total fixed income securities
    835.5       268.9  
Publicly-traded equity securities
    8.9       5.4  
 
           
Total investments
  $ 844.4     $ 274.3  
 
           
 
               
Reported as:
               
Short-term investments
  $ 423.9     $ 172.9  
Long-term investments
    420.5       101.4  
 
           
Total
  $ 844.4     $ 274.3  
 
           
         
    Fair Value As  
    of June 30, 2009  
Due within one year
  $ 415.0  
Due between one and five years
    420.5  
 
     
Total fixed income securities
    835.5  
Publicly-traded equity securities
    8.9  
 
     
Total investments
  $ 844.4  
 
     
Summary of Investments
The following table summarizes unrealized gains and losses related to our investments designated as trading or available-for-sale, as of June 30, 2009, (in millions):
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Estimated Fair  
    Cost     Gains     Losses     Value  
Fixed income securities:
                               
U.S. government securities
  $ 193.4     $     $     $ 193.4  
Government-sponsored enterprise obligations
    275.6       1.3             276.9  
Foreign government debt securities
    47.4       0.1             47.5  
Corporate debt securities
    316.7       1.2       (0.2 )     317.7  
 
                       
Total fixed income securities
    833.1       2.6       (0.2 )     835.5  
Publicly-traded equity securities
    8.6       0.3             8.9  
 
                       
Total
  $ 841.7     $ 2.9     $ (0.2 )   $ 844.4  
 
                       
 
                               
Reported as:
                               
Short-term investments
  $ 423.0     $ 0.9     $     $ 423.9  
Long-term investments
    418.7       2.0       (0.2 )     420.5  
 
                       
Total
  $ 841.7     $ 2.9     $ (0.2 )   $ 844.4  
 
                       
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Estimated Fair  
    Cost     Gains     Losses     Value  
Due within one year
  $ 414.4     $ 0.6     $     $ 415.0  
Due between one and five years
    418.7       2.0       (0.2 )     420.5  
 
                       
Total fixed income securities
  $ 833.1     $ 2.6     $ (0.2 )   $ 835.5  
Publicly-traded equity securities
    8.6       0.3             8.9  
 
                       
Total investments
  $ 841.7     $ 2.9     $ (0.2 )   $ 844.4  
 
                       
As of June 30, 2009, the Company had approximately 32 investments that were in an unrealized loss position. As of December 31, 2008, the Company had approximately 26 investments that were in an unrealized loss position. The gross unrealized losses related to these investments were due to changes in interest rates. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Given that the Company has the ability and intent to hold each of these investments until a recovery of the fair values, which may be maturity, the Company did not consider these investments to be other-than-temporarily impaired as of June 30, 2009, and December 31, 2008. The Company reviews its investments to identify and evaluate investments that have an indication of possible impairment. The Company aggregated its investments by category and length of time the securities have been in a continuous unrealized loss position.
The following table presents the Company’s investments in an unrealized loss position as of June 30, 2009, (in millions):
                                                 
    Less than 12 Months     12 Months or Greater     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Loss     Fair Value     Loss     Fair Value     Loss  
Corporate debt securities
  $ 124.8     $ (0.2 )   $     $     $ 124.8     $ (0.2 )
 
                                   
The following table summarizes unrealized gains and losses related to our investments designated as trading or available-for-sale, as of December 31, 2008, (in millions):
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Estimated Fair  
    Cost     Gains     Losses     Value  
Fixed income securities:
                               
U.S. government securities
  $ 86.6     $ 0.1     $     $ 86.7  
Government-sponsored enterprise obligations
    70.4       1.6       (0.1 )     71.9  
Corporate debt securities
    110.4       0.4       (0.5 )     110.3  
 
                       
Total fixed income securities
    267.4       2.1       (0.6 )     268.9  
Publicly-traded equity securities
    5.4                   5.4  
 
                       
Total
  $ 272.8     $ 2.1     $ (0.6 )   $ 274.3  
 
                       
 
                               
Reported as:
                               
Short-term investments
  $ 172.5     $ 0.6     $ (0.2 )   $ 172.9  
Long-term investments
    100.3       1.5       (0.4 )     101.4  
 
                       
Total
  $ 272.8     $ 2.1     $ (0.6 )   $ 274.3  
 
                       
Minority Equity Investments
The Company’s minority equity investments in privately-held companies are carried at cost as the Company does not have a controlling interest and does not have the ability to exercise significant influence over these companies. The Company adjusts its minority equity investments for any impairment if the fair value exceeds the carrying value of the respective assets.
As of June 30, 2009, and December 31, 2008, the carrying values of the Company’s minority equity investments in privately-held companies of $11.1 million and $14.2 million, respectively, were included in other long-term assets in the condensed consolidated balance sheets. Due to events and circumstances that significantly affected the fair value of two of its minority equity investments, which are normally carried at cost, the Company measured the fair value of these minority equity investments using an analysis of the financial condition and near-term prospects of the investees, including recent financing activities and their capital structure. As a result, during the three and six months ended June 30, 2009, the Company recognized a loss of $1.6 million and $3.3 million, respectively, due to the impairment of its minority equity investments in privately-held companies that the Company judged to be other than temporary. The Company invested $2.2 million and $2.0 million in privately-held companies during the six months ended June 30, 2009, and 2008, respectively. In addition, during the six months ended June 30, 2009, the Company had a minority equity investment of $2.0 million in a privately-held company that was acquired by a publicly-traded company.
Fair Value Measurements
Fair Value Measurements
Note 5. Fair Value Measurements
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 assumes that the transaction to sell the asset or transfer the liability occurs in the principal or most advantageous market for the asset or liability and establishes that the fair value of an asset or liability shall be determined based on the assumptions that market participants would use in pricing the asset or liability.
Fair Value Hierarchy
The Company determines the fair values of its financial instruments based on the fair value hierarchy established in SFAS 157, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. The fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value:
Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3 — Inputs are unobservable inputs based on the Company’s assumptions.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables provide the assets and liabilities, if any, measured at fair value on a recurring basis (in millions):
                                 
    Fair Value Measurements at June 30, 2009, Using  
    Quoted Prices in     Significant Other     Significant Other        
    Active Markets     Observable     Unobservable        
    For Identical     Remaining     Remaining        
    Assets     Inputs     Inputs     Total  
    (Level 1)     (Level 2)     (Level 3)          
Assets measured at fair value:
                               
U.S. government securities
  $ 37.7     $ 227.5     $     $ 265.2  
Government sponsored enterprise obligations
    271.6       28.9             300.5  
Foreign government debt securities
          63.5             63.5  
Corporate debt securities
          284.7             284.7  
Commercial paper
          165.2             165.2  
Money market funds
    940.2                   940.2  
Publicly-traded securities
    8.9                   8.9  
Derivative asset
          2.0             2.0  
 
                       
Total
  $ 1,258.4     $ 771.8     $     $ 2,030.2  
 
                       
                                 
    Fair Value Measurements at December 31, 2008, Using  
    Quoted Prices in     Significant Other     Significant Other        
    Active Markets     Observable     Unobservable        
    For Identical     Remaining     Remaining        
    Assets     Inputs     Inputs     Total  
    (Level 1)     (Level 2)     (Level 3)          
Assets measured at fair value:
                               
U.S. government securities
  $ 26.3     $ 202.2     $     $ 228.5  
Government sponsored enterprise obligations
    71.9       94.8             166.7  
Corporate debt securities
          110.3             110.3  
Commercial paper
          90.4             90.4  
Money market funds
    1,281.1                   1,281.1  
Publicly-traded securities
    5.4                   5.4  
Derivative asset
          2.6             2.6  
 
                       
Total
  $ 1,384.7     $ 500.3     $     $ 1,885.0  
 
                       
Assets measured at fair value on a recurring basis were presented on the Company’s condensed consolidated balance sheets as follows (in millions):
                                 
    Fair Value Measurements at June 30, 2009, Using  
    Quoted Prices in     Significant Other     Significant Other        
    Active Markets     Observable     Unobservable        
    For Identical     Remaining     Remaining        
    Assets     Inputs     Inputs     Total  
    (Level 1)     (Level 2)     (Level 3)          
Reported as:
                               
Cash equivalents
  $ 900.1     $ 242.0     $     $ 1,142.1  
Short-term investments
    185.9       238.0             423.9  
Long-term investments
    132.3       288.2             420.5  
Prepaid expenses and other assets
    40.1       3.6             43.7  
 
                       
Total
  $ 1,258.4     $ 771.8     $     $ 2,030.2  
 
                       
                                 
    Fair Value Measurements at December 31, 2008, Using  
    Quoted Prices in     Significant Other     Significant Other        
    Active Markets     Observable     Unobservable        
    For Identical     Remaining     Remaining        
    Assets     Inputs     Inputs     Total  
    (Level 1)     (Level 2)     (Level 3)          
Reported as:
                               
Cash equivalents
  $ 1,281.1     $ 327.0     $     $ 1,608.1  
Short-term investments
    57.1       115.8             172.9  
Long-term investments
    46.5       54.9             101.4  
Prepaid expenses and other current assets
          2.6             2.6  
 
                       
Total
  $ 1,384.7     $ 500.3     $     $ 1,885.0  
 
                       
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following table presents the Company’s assets and liabilities, if any, that were measured at fair value on a nonrecurring basis and the impairment charges recorded to loss on minority equity investments (in millions):
                                                 
    Fair Value Measurements Using  
                                    Impairment     Impairment  
                                    Charges for     Charges for  
            Quoted Prices in     Significant Other     Significant Other     the Three     the Six  
            Active Markets     Observable     Unobservable     Months     Months  
    Fair Value as of     For Identical     Remaining     Remaining     Ended     Ended  
Description:   June 30, 2009     Assets     Inputs     Inputs     June 30, 2009     June 30, 2009  
            (Level 1)     (Level 2)     (Level 3)                  
Minority equity investments
  $ 1.7     $     $     $ 1.7     $ (1.6 )   $ (3.3 )
 
                                   
Total measured at fair value
  $ 1.7     $     $     $ 1.7     $ (1.6 )   $ (3.3 )
 
                                   
The following table presents the Company’s Level 3 asset activities during the three and six months ended June 30, 2009, (in millions):
                 
    Minority Equity Investments  
    Three Months     Six Months  
Description:   Ended June 30,     Ended June 30,  
    2009     2009  
Beginning balance
  $ 1.2     $  
Transfers in to Level 3
    2.1       5.0  
Total loss recognized in statements of operations
    (1.6 )     (3.3 )
 
           
Ending balance
  $ 1.7     $ 1.7  
 
           
Due to events and circumstances that significantly affected the fair value of two of its minority equity investments, which are normally carried at cost, the Company measured the fair value of these minority equity investments using an analysis of the financial condition and near-term prospects of the investees, including recent financing activities and their capital structure. As a result, the Company recognized an impairment loss of $1.6 million and $3.3 million during the three and six months ended June 30, 2009, respectively, and classified the investments as a Level 3 asset due to the absence of quoted market prices and inherent lack of liquidity.
Goodwill and Purchased Intangible Assets
Goodwill and Purchased Intangible Assets
Note 6. Goodwill and Purchased Intangible Assets
Goodwill
The following table presents goodwill by segment as of June 30, 2009, (in millions):
         
Segments   June 30, 2009  
Infrastructure
  $ 1,500.5  
Service Layer Technologies
    2,158.1  
 
     
Total
  $ 3,658.6  
 
     
There were no changes to goodwill during the three and six months ended June 30, 2009.
Purchased Intangible Assets
The following table presents the Company’s purchased intangible assets with definite lives (in millions):
                         
            Accumulated        
    Gross     Amortization     Net  
As of June 30, 2009:
                       
Technologies and patents
  $ 380.0     $ (373.0 )   $ 7.0  
Other
    68.9       (57.3 )     11.6  
 
                 
Total
  $ 448.9     $ (430.3 )   $ 18.6  
 
                 
 
                       
As of December 31, 2008:
                       
Technologies and patents
  $ 379.6     $ (365.4 )   $ 14.2  
Other
    68.9       (54.3 )     14.6  
 
                 
Total
  $ 448.5     $ (419.7 )   $ 28.8  
 
                 
Amortization of purchased intangible assets of $4.9 million and $9.4 million were included in operating expenses and cost of product revenues for the three months ended June 30, 2009, and 2008, respectively, and $10.6 million and $30.9 million were included in operating expenses and cost of product revenues for the six months ended June 30, 2009, and 2008, respectively. In addition, during the six months ended June 30, 2008, the Company recorded an impairment charge of $5.0 million, included in its amortization of purchased intangible assets, due to the phase out of its DX products. There was no impairment charge with respect to the purchased intangible assets in the three and six months ended June 30, 2009.
The estimated future amortization expense of purchased intangible assets with definite lives for future periods is as follows (in millions):
         
Years Ending December 31,   Amount  
2009 (remaining six months)
  $ 4.8  
2010
    4.0  
2011
    2.1  
2012
    1.2  
2013
    1.1  
Thereafter
    5.4  
 
     
Total
  $ 18.6  
 
     
Other Financial Information
Other Financial Information
Note 7. Other Financial Information
Restricted Cash
As of June 30, 2009, and December 31, 2008, restricted cash was $44.7 million and $43.4 million, respectively, which consisted of escrow accounts required by certain acquisitions completed in 2005, the India Gratuity Trust, which covers statutory severance obligations in the event of termination of the Company’s India employees who have provided five or more years of continuous service, and the Directors & Officers (“D&O”) indemnification trust.
Warranties
The Company provides for the estimated cost of product warranties at the time revenue is recognized. This provision is reported as accrued warranty within current liabilities on the Company’s condensed consolidated balance sheets. Changes in the Company’s warranty reserve were as follows (in millions):
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2009     2008     2009     2008  
Beginning balance
  $ 37.5     $ 41.3     $ 40.1     $ 37.5  
Provisions made during the period, net
    8.8       7.0       18.6       12.2  
Change in estimate
    (1.2 )           (3.3 )      
Actual costs incurred during the period
    (9.3 )     (6.5 )     (19.6 )     (7.9 )
 
                       
Ending balance
  $ 35.8     $ 41.8     $ 35.8     $ 41.8  
 
                       
Deferred Revenue
Details of the Company’s deferred revenue were as follows (in millions):
                 
    As of  
    June 30,     December 31,  
    2009     2008  
Deferred product revenue:
               
Deferred gross product revenue
  $ 305.9     $ 268.0  
Deferred cost of product revenue
    (128.3 )     (110.0 )
 
           
Deferred product revenue, net
    177.6       158.0  
Deferred service revenue
    471.0       432.3  
 
           
Total
  $ 648.6     $ 590.3  
 
           
Reported as:
               
Current
  $ 496.0     $ 459.8  
Long-term
    152.6       130.5  
 
           
Total
  $ 648.6     $ 590.3  
 
           
Restructuring Liabilities
During the first half of 2009, the Company implemented a restructuring plan (the “2009 Restructuring Plan”) in an effort to better align its business operations with the current market and macroeconomic conditions. The restructuring plan included a restructuring of certain business functions that resulted in a reduction of workforce and facilities. The Company recorded $7.5 million and $11.8 million in restructuring charges during the three and six months ended June 30, 2009, associated with the 2009 Restructuring Plan. The Company paid $0.7 million and $3.2 million for severance related charges associated with the 2009 Restructuring Plan during the three and six months ended June 30, 2009. During the three and six months ended June 30, 2008, the Company incurred no restructuring charges and paid an immaterial amount associated with past restructuring plans. As of June 30, 2009, the restructuring liability was $6.8 million.
Restructuring charges were based on the Company’s restructuring plans that were committed to by management. Any changes in the estimates of executing the approved plans will be reflected in the Company’s results of operations.
Other Charges
In the three and six months ended June 30, 2008, the Company accrued $9.0 million as other charges for the settlement of its derivative lawsuits. The Company did not record any amounts as other charges in the three and six months ended June 30, 2009.
Interest and Other Income, Net
Interest and other income, net, consist of the following (in millions):
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2009     2008     2009     2008  
Interest income and expense, net
  $ 1.6     $ 13.5     $ 3.7     $ 31.8  
Other income and expense, net
    1.3       (0.3 )     1.1       (1.0 )
 
                       
Total interest and other income, net
  $ 2.9     $ 13.2     $ 4.8     $ 30.8  
 
                       
Interest income and expense, net, primarily includes interest income from the Company’s cash, cash equivalents, and investments as well as interest expense from customer financing arrangements. Other income and expense, net, primarily includes foreign exchange gains and losses and other miscellaneous expenses such as bank fees.
Financing Arrangements
Financing Arrangements
Note 8. Financing Arrangements
The Company has customer financing arrangements to sell its accounts receivable to a major third-party financing provider. The program does not, and is not intended to, affect the timing of revenue recognition because the Company only recognizes revenue upon sell-through. Under the financing arrangements, proceeds from the financing provider are due to the Company 30 days from the sale of the receivable. In these transactions with the financing provider, the Company has surrendered control over the transferred assets. The accounts receivable have been isolated from the Company and put beyond the reach of creditors, even in the event of bankruptcy. The Company does not maintain effective control over the transferred assets through obligations or rights to redeem, transfer, or repurchase the receivables after they have been transferred.
Pursuant to the receivable financing arrangements for the sale of receivables, the Company sold net receivables of $81.1 million and $108.2 million during the three months ended June 30, 2009, and 2008, respectively, and $172.3 million and $167.0 million during the six months ended June 30, 2009, and 2008, respectively. During the three months ended June 30, 2009, and 2008, the Company received cash proceeds of $80.2 million and $77.8 million, respectively, and $175.7 million and $132.1 million during the six months ended June 30, 2009, and 2008, respectively, from the financing provider. The amount owed by the financing provider recorded as accounts receivable on the Company’s condensed consolidated balance sheets as of June 30, 2009, and December 31, 2008, was $66.7 million and $73.9 million, respectively.
The portion of the receivable financed that has not been recognized as revenue is accounted for as a financing pursuant to FASB Emerging Issues Task Force Issue 88-18, Sales of Future Revenues. As of June 30, 2009, and December 31, 2008, the estimated amounts of cash received from the financing provider that has not been recognized as revenue were $27.9 million and $33.0 million, respectively.
Derivative Instruments
Derivative Instruments
Note 9. Derivative Instruments
The Company accounts for derivative instruments under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). The Company uses derivatives partially to offset its market exposure to fluctuations in certain foreign currencies. The Company does not enter into derivatives for speculative or trading purposes.
Cash Flow Hedges
The Company uses foreign currency forward or option contracts to hedge certain forecasted foreign currency transactions relating to cost of services and operating expenses. The derivatives are intended to protect the U.S. Dollar equivalent of the Company’s planned cost of services and operating expenses denominated in foreign currencies. These derivatives are designated as cash flow hedges under SFAS 133. Execution of these cash flow hedge derivatives typically occurs every month with maturities of less than one year. The effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss), and upon occurrence of the forecasted transaction, is subsequently reclassified into the cost of services or operating expense line item to which the hedged transaction relates. The Company records any ineffectiveness of the hedging instruments, which was immaterial during the three and six months ended June 30, 2009, and the comparable periods in 2008 in interest and other income, net on its condensed consolidated statements of operations. Cash flows from such hedges are classified as operating activities. All amounts within other comprehensive income (loss) are expected to be reclassified into income within the next 12 months.
Non-Designated Hedges
The Company also uses foreign currency forward contracts to mitigate variability in gains and losses generated from the re-measurement of certain monetary assets and liabilities denominated in foreign currencies. These hedges do not qualify for special hedge accounting treatment under SFAS 133. These derivatives are carried at fair value with changes recorded in interest and other income, net. Changes in the fair value of these derivatives are largely offset by re-measurement of the underlying assets and liabilities. Cash flows from such derivatives are classified as operating activities. The derivatives have maturities of approximately two months.
The following table summarizes the total fair value of the Company’s derivative instruments as of June 30, 2009, (in millions):
                                 
    Asset Derivatives     Liability Derivatives  
    Balance Sheet     Fair     Balance Sheet     Fair  
    Location     Value     Location     Value  
Derivatives designated as hedging instruments under SFAS 133:
                               
Foreign exchange forward contracts
  Other current assets     $ 2.2     Other current liabilities     $ 0.3  
 
                           
Total derivatives designated as hedging instruments under SFAS 133
          $ 2.2             $ 0.3  
 
                           
The Company has no non-designated derivatives under SFAS 133 as of June 30, 2009.
The following represents the Company’s top three outstanding derivative positions by currency as of June 30, 2009, (in millions):
                         
    Buy   Buy   Buy
Foreign currency forward contracts:
  EUR   GBP   INR
 
                       
Notional amount of foreign currency
    32.7       11.9       1,427.7  
U.S dollar equivalent
  $ 44.7     $ 18.6     $28.8  
Weighted average maturity
  2 months   2 months   2 months
The effective portion of the Company’s derivative instruments on its condensed consolidated statements of operations during the three and six months ended June 30, 2009, was as follows (in millions):
                                         
    Three Months Ended June 30, 2009     Six Months Ended June 30, 2009  
            Location of                   Location of      
            Gain   Gain             Loss   Loss  
            Reclassified   Reclassified             Reclassified   Reclassified  
            from   from             from   from  
            Accumulated   Accumulated             Accumulated   Accumulated  
    Gain     Other   Other     Loss     Other   Other  
    Recognized in     Comprehensive   Comprehensive     Recognized in     Comprehensive   Comprehensive  
    Accumulated     Loss to   Loss to     Accumulated     Loss to   Loss to  
    Other     Statements of   Statements of     Other     Statements of   Statements of  
    Comprehensive     Operations   Operations     Comprehensive     Operations   Operations  
    Loss (Effective     (Effective   (Effective     Loss (Effective     (Effective   (Effective  
    Portion)     Portions)   Portion)     Portion)     Portions)   Portion)  
Foreign exchange forward contracts
  $ 5.1     Operating expense   $ 1.0     $ (0.7 )   Operating expense   $ (1.7 )
 
                               
Total
  $ 5.1         $ 1.0     $ (0.7 )       $ (1.7 )
 
                               
The ineffective portion of the Company’s derivative instruments on its condensed consolidated statements of operations was immaterial during the three and six months ended June 30, 2009.
Gains on the Company’s non-designated derivative instruments recognized in its condensed consolidated statements of operations during the three and six months ended June 30, 2009, was as follows (in millions):
                         
            Three Months     Six Months  
            Ended June 30,     Ended June 30,  
            2009     2009  
    Location of Gain in     Gain Recognized     Gain Recognized  
    Statements of     in Statements of     in Statements of  
    Operations     Operations     Operations  
Derivatives not designated as hedging instruments under SFAS 133:
                       
Foreign exchange forward contracts
  Other income, net   $ 3.8     $ 3.2  
 
                   
Total
          $ 3.8     $ 3.2  
 
                   
Stockholders Equity
Stockholders' Equity
Note 10. Stockholders’ Equity
Stock Repurchase Activities
In March 2008, the Company’s Board of Directors (the “Board”) approved a stock repurchase program (the “2008 Stock Repurchase Program”), which authorized the Company to purchase up to $1.0 billion of its common stock. Under this program, the Company repurchased approximately 2.2 million shares of its common stock, at an average price of $22.73 per share for a total purchase price of $49.5 million in the three months ended June 30, 2009, and approximately 9.7 million shares of its common stock at an average price of $17.52 per share for a total purchase price of $169.2 million in the six months ended June 30, 2009. As of June 30, 2009, the Company has repurchased and retired approximately 19.4 million shares of common stock under the 2008 Stock Repurchase Program and the program had remaining authorized funds of $602.9 million.
All shares of common stock purchased under the 2008 Stock Repurchase Program have been retired. Future share repurchases under the Company’s 2008 Stock Repurchase Program will be subject to a review of the circumstances in place at that time and will be made from time to time in private transactions or open market purchases as permitted by securities laws and other legal requirements. This program may be discontinued at any time.
Comprehensive Income
Comprehensive income consists of the following (in millions):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
Net income
  $ 14.8     $ 120.4     $ 10.3     $ 230.8  
Change in net unrealized gains (losses) on investments, net of tax of nil
    6.2       (3.9 )     2.6       (3.4 )
Change in foreign currency translation adjustment, net of tax of nil
    11.6       (1.6 )     1.1       0.9  
 
                       
Total comprehensive income
  $ 32.6     $ 114.9     $ 14.0     $ 228.3  
 
                       
Accumulated Deficit
The following table summarizes the activity in the Company’s accumulated deficit account (in millions):
         
    Six Months  
    Ended  
    June 30, 2009  
Balance, December 31, 2008
  $ (2,905.8 )
Retirement of common stock
    (168.9 )
Net income
    10.3  
 
     
Balance, June 30, 2009
  $ (3,064.4 )
 
     
Employee Benefit Plans
Employee Benefit Plans
Note 11. Employee Benefit Plans
Stock Option Plans
2006 Equity Incentive Plan
On May 18, 2006, the Company’s stockholders adopted the Company’s 2006 Equity Incentive Plan (the “2006 Plan”) to enable the granting of incentive stock options, nonstatutory stock options, RSUs, restricted stock, stock appreciation rights, performance shares, performance units, deferred stock units, and dividend equivalents to the employees and consultants of the Company. The 2006 Plan also provides for automatic, non-discretionary awards of nonstatutory stock options and RSUs to the Company’s non-employee members of the Board.
The maximum aggregate number of shares authorized under the 2006 Plan is 64,500,000 shares of common stock, plus the addition of any shares subject to outstanding options under the Company’s Amended and Restated 1996 Stock Plan (the “1996 Plan”) and the Company’s 2000 Nonstatutory Stock Option Plan (the “2000 Plan”) that expire unexercised after May 18, 2006, up to a maximum of 75,000,000 additional shares of common stock.
Options granted under the 2006 Plan have a maximum term of seven years from the grant date, and generally vest and become exercisable over a four-year period. Subject to the terms of change of control severance agreements, and except for a limited number of shares allowed under the 2006 Plan, restricted stock, performance shares, RSUs, or deferred stock units that vest solely based on continuing employment or provision of services will vest in full no earlier than the three-year anniversary of the grant date, or in the event vesting is based on factors other than continued future provision of services, such awards will vest in full no earlier than the one-year anniversary of the grant date.
The 2006 Plan provides each non-employee director an automatic grant of an option to purchase 50,000 shares of common stock on the date such individual first becomes a director, whether through election by the stockholders of the Company or appointment by the Board to fill a vacancy (the “First Option”). In addition, at each of the Company’s annual stockholder meetings: (i) each non-employee director who was a non-employee director on the date of the prior year’s annual stockholder meeting shall be automatically granted RSUs for a number of shares equal to the Annual Value (as defined below), and (ii) each non-employee director who was not a non-employee director on the date of the prior year’s annual stockholder meeting shall receive a RSU award for a number of shares determined by multiplying the Annual Value by a fraction, the numerator of which is the number of days since the non-employee director received their First Option, and the denominator of which is 365, rounded down to the nearest whole share. Each RSU award specified in (i) and (ii) are referred to herein as an “Annual Award.” The Annual Value means the number of RSUs equal to $125,000 divided by the average daily closing price of the Company’s common stock over the six month period ending on the last day of the fiscal year preceding the date of grant (for example, the period from July 1, 2008 — December 31, 2008 for Annual Awards granted in May 2009). The First Option vests monthly over approximately three years from the grant date subject to the non-employee director’s continuous service on the Board. The Annual Award shall vest approximately one year from the grant date subject to the non-employee director’s continuous service on the Board. Under the 2006 Plan, options granted to non-employee directors have a maximum term of seven years.
2000 Nonstatutory Stock Option Plan
In July 2000, the Board adopted the 2000 Plan. The 2000 Plan provided for the granting of nonstatutory stock options to employees, directors and consultants. Options granted under the 2000 Plan generally become exercisable over a four-year period beginning on the date of grant and have a maximum term of ten years. The Company had authorized 90,901,437 shares of common stock for issuance under the 2000 Plan. Effective May 18, 2006, additional equity awards under the 2000 Plan were discontinued and new equity awards are being granted under the 2006 Plan. Remaining authorized shares under the 2000 Plan that were not subject to outstanding awards as of May 18, 2006, were canceled on May 18, 2006. The 2000 Plan will remain in effect as to outstanding equity awards granted under the plan prior to May 18, 2006.
Amended and Restated 1996 Stock Plan
The 1996 Plan provided for the granting of incentive stock options to employees and nonstatutory stock options to employees, directors, and consultants. On November 3, 2005, the Board adopted an amendment to the 1996 Plan to add the ability to issue RSUs under the 1996 Plan. Options granted under the 1996 Plan generally become exercisable over a four-year period beginning on the date of grant and have a maximum term of ten years. The Company had authorized 164,623,039 shares of common stock for issuance under the 1996 Plan. Effective May 18, 2006, additional equity awards under the 1996 Plan were discontinued and new equity awards are being granted under the 2006 Plan. Remaining authorized shares under the 1996 Plan that were not subject to outstanding awards as of May 18, 2006 were canceled on May 18, 2006. The 1996 Plan will remain in effect as to outstanding equity awards granted under the plan prior to May 18, 2006.
Plans Assumed Upon Acquisition
In connection with past acquisitions, the Company assumed options and restricted stock under the stock plans of the acquired companies. The Company exchanged those options and restricted stock for Juniper Networks’ options and restricted stock and, in the case of the options, authorized the appropriate number of shares of common stock for issuance pursuant to those options. As of June 30, 2009, there were approximately 2.4 million common shares subject to outstanding awards under plans assumed through past acquisitions. There was no restricted stock subject to repurchase as of June 30, 2009, and December 31, 2008. There were no restricted stock repurchases during the three and six months ended June 30, 2009, and 2008.
Stock Option Activities
A summary of the Company’s stock option activity and related information as of and for the six months ended June 30, 2009, is set forth in the following table:
                                 
                    Weighted    
            Weighted   Average    
            Average   Remaining    
    Number of   Exercise   Contractual   Aggregate
    Shares   Price   Term   Intrinsic Value
    (In thousands)   (In dollars)   (In years)   (In thousands)
Balance at January 1, 2009
    73,637     $ 21.24                  
Options granted
    7,593       15.43                  
Options canceled
    (1,178 )     21.94                  
Options exercised
    (2,867 )     11.31                  
Options expired
    (941 )     22.69                  
 
                               
Balance at June 30, 2009
    76,244     $ 21.28       4.7     $ 345,253  
 
                               
 
                               
As of June 30, 2009:
                               
Vested or expected-to-vest options
    67,624     $ 21.36       4.6     $ 308,332  
Exercisable options
    48,578       21.76       4.0       222,599  
In the three and six months ended June 30, 2009, the Company granted stock options covering approximately 0.5 million and 7.6 million shares of common stock, respectively, under the 2006 Plan. Total fair value of options vested for the three and six months ended June 30, 2009, was $18.6 million and $43.6 million, respectively.
Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $23.60 as of June 30, 2009, and the exercise price multiplied by the number of related options. The pre-tax intrinsic value of options exercised, representing the difference between the fair market value of the Company’s common stock on the date of the exercise and the exercise price of each option, was $20.3 million and $27.2 million for the three and six months ended June 30, 2009, respectively.
Restricted Stock Units and Performance Share Awards Activities
RSUs generally vest over a period of three to five years from the date of grant and performance share awards generally vest from 2009 through 2012 provided that certain annual performance targets and other vesting criteria are met. Until vested, RSUs and performance share awards do not have the voting rights of common stock and the shares underlying the awards are not considered issued and outstanding. The following table summarizes information about the Company’s RSUs and performance share awards as of and for the six months ended June 30, 2009:
                                 
    Outstanding RSUs and Performance Share Awards
                    Weighted    
            Weighted   Average    
            Average   Remaining    
    Number of   Grant-Date   Contractual   Aggregate
    Shares   Fair Value   Term   Intrinsic Value
    (In thousands)   (In dollars)   (In years)   (In thousands)
Balance at January 1, 2009
    6,692     $ 24.59                  
RSUs and performance share awards granted
    3,607       15.30                  
RSUs and performance share awards vested
    (1,127 )     20.33                  
RSUs and performance share awards canceled
    (488 )     23.79                  
 
                               
Balance at June 30, 2009
    8,684     $ 21.34       1.9     $ 204,935  
 
                               
 
                               
As of June 30, 2009:
                               
Vested and expected-to-vest RSUs and performance share awards
    5,651     $ 21.41       1.8     $ 133,369  
In the three months ended June 30, 2009, the Company granted RSUs and performance share awards covering approximately 0.1 million and 0.1 million shares of common stock, respectively, under the 2006 Plan. In the six months ended June 30, 2009, the Company granted RSUs and performance share awards covering approximately 1.4 million and 2.2 million shares of common stock, respectively, under the 2006 Plan. During the three and six months ended June 30, 2009, RSUs and performance share awards covering approximately 0.1 million and 1.1 million shares of common stock, respectively, vested.
Employee Stock Purchase Plan
In April 1999, the Board of Directors approved the adoption of the Juniper Networks 1999 Employee Stock Purchase Plan (the “1999 Purchase Plan”). The 1999 Purchase Plan permits eligible employees to acquire shares of the Company’s common stock through periodic payroll deductions of up to 10% of base compensation. Each employee may purchase no more than 6,000 shares in any twelve-month period, and in no event may an employee purchase more than $25,000 worth of stock, determined at the fair market value of the shares at the time such option is granted, in one calendar year. The 1999 Purchase Plan is implemented in a series of offering periods, each six months in duration, or a shorter period as determined by the Board. The price at which the common stock may be purchased is 85% of the lesser of the fair market value of the Company’s common stock on the first or last trading day of the applicable offering period. Employees purchased approximately 1.6 million shares of common stock through the 1999 Purchase Plan at an average price of $12.04 per share in the six months ended June 30, 2009. Employees purchased approximately 0.7 million shares of common stock through the 1999 Purchase Plan at an average price of $23.08 per share in the six months ended June 30, 2008. Effective February 1, 2009, immediately following the conclusion of the offering period ended January 30, 2009, the 1999 Purchase Plan was discontinued, and no shares remained available for future issuance under such plan.
In May 2008, the Company’s stockholders approved the adoption of the Juniper Networks 2008 Employee Stock Purchase Plan (the “2008 Purchase Plan”). The 2008 Purchase Plan replaced the 1999 Purchase Plan, which terminated immediately following the conclusion of the offering period ended January 30, 2009. The Board has reserved an aggregate of 12,000,000 shares of the Company’s common stock for issuance under the 2008 Purchase Plan. The 2008 Purchase Plan is generally similar to the 1999 Purchase Plan, except that under the 2008 Purchase Plan, the Company’s stockholders must approve any increases to the number of shares reserved for issuance. The first offering period of the 2008 Purchase Plan commenced on the first trading day after February 1, 2009.
Shares Available for Grant
The following table presents the total number of shares available for grant under the 2006 Plan as of June 30, 2009:
         
    Number of
    Shares (in
    thousands)
Balance at January 1, 2009
    28,589  
RSUs and performance share awards granted (1)
    (7,575 )
Options granted
    (7,593 )
RSUs canceled (1)
    965  
Options canceled (2)
    1,178  
Options expired (2)
    930  
 
       
Balance at June 30, 2009
    16,494  
 
       
 
(1)   RSUs and performance share awards with a per share or unit purchase price lower than 100% of the fair market value of the Company’s common stock on the day of the grant under the 2006 Plan are counted against shares authorized under the plan as two and one-tenth shares of common stock for each share subject to such award.
 
(2)   Canceled or expired options under the 1996 Plan and the 2000 Plan and the stock plans of the acquired companies are no longer available for future grant under such plans.
Common Stock Reserved for Future Issuance
As of June 30, 2009, the Company had reserved an aggregate of approximately 113.4 million shares of common stock for future issuance under its stock option plans and the 2008 Purchase Plan.
Stock-Based Compensation Expense
SFAS No. 123(R), Share-Based Payment (“SFAS 123(R)”) requires the use of a valuation technique, such as an option-pricing model, to calculate the fair value of stock option awards and common shares issues under the 1999 and 2008 Purchase Plans. The Company has elected to use the Black-Scholes-Merton (“BSM”) option-pricing model, which incorporates various assumptions including volatility, risk-free interest rate, expected life, and dividend yield. The expected volatility is based on the implied volatility of market-traded options on the Company’s common stock, adjusted for other relevant factors including historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options. The expected life of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees, as well as the potential effect from options that had not been exercised at the time.
In 2007, the government of India implemented a new fringe benefit tax that applies to equity awards granted to India taxpayers. This fringe benefit tax is payable by the issuer of the equity awards; however, the law allows an issuer to recover from individual award holders the fringe benefit taxes the issuer paid on their applicable equity awards. Beginning in January 2008, the Company amended its equity award agreements for future grants made to its employees in India to provide for the Company to be reimbursed for fringe benefit taxes paid in relation to applicable equity awards. The Company has elected to use a BSM option-pricing model that incorporates a Monte Carlo simulation to calculate the fair value of stock-based awards issued under the amended equity award agreements.
The assumptions used and the resulting estimates of fair value for employee stock options during the three and six months ended June 30, 2009, and 2008, were:
                                 
    Three Months Ended June 30,   Six Months Ended June 30,
    2009   2008   2009   2008
Employee Stock Options:
                               
Volatility factor
    49% - 52 %     43% - 46 %     49% - 58 %     43% - 48 %
Risk-free interest rate
    0.5% - 2.9 %     1.7% - 4.0 %     0.4% -2.9 %     1.7% - 4.4 %
Expected life (years)
    4.3 - 5.8       3.6 - 5.7       4.3 - 5.8       3.6 - 5.7  
Dividend yield
                       
Fair value per share
  $ 7.54 - $10.49     $ 8.32 - $10.60     $ 6.02 - $10.49     $ 8.32 - $10.88  
The assumptions used and the resulting estimates of weighted average fair value per share under the employee stock purchase plan during the three and six months ended June 30, 2009, and 2008, were:
                                 
    Three Months Ended June 30,   Six Months Ended June 30,
    2009   2008   2009   2008
Employee Stock Purchase Plan:
                               
Volatility factor
    58 %     48 %     58 %     48 %
Risk-free interest rate
    0.4 %     2.2 %     0.4 %     2.2 %
Expected life (years)
    0.5       0.5       0.5       0.5  
Dividend yield
                       
Weighted-average fair value per share
  $ 4.51     $ 7.83     $ 4.51     $ 7.83  
The Company expenses the cost of the RSUs, which is determined to be the fair market value of the shares of the Company’s common stock at the date of grant, ratably over the period during which the restrictions lapse. In addition, the Company estimates stock compensation expense for its performance share awards based on the vesting criteria and only recognized expense for the portions of such awards for which annual targets have been set. The weighted average fair value per share of RSUs and performance share awards granted during these periods were:
                                 
    Three Months Ended June 30,   Six Months Ended June 30,
    2009   2008   2009   2008
Weighted-average fair value per share:
                               
RSUs
  $ 22.66     $ 24.79     $ 15.56     $ 25.24  
Performance share awards
  $ 18.42     $ 24.48     $ 15.12     $ 25.10  
The Company’s stock-based compensation expense associated with stock options, employee stock purchases, RSUs, and performance share awards is recorded in the following cost and expense categories for the three and six months ended June 30, 2009, and 2008, (in millions):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
Cost of revenues — Product
  $ 0.9     $ 0.7     $ 1.9     $ 1.5  
Cost of revenues — Service
    2.8       2.2       5.6       4.6  
Research and development
    15.0       12.0       29.7       22.2  
Sales and marketing
    10.3       9.1       20.2       15.8  
General and administrative
    4.5       3.3       9.7       6.0  
 
                       
Total
  $ 33.5     $ 27.3     $ 67.1     $ 50.1  
 
                       
During the three and six months ended June 30, 2009, the Company recorded stock-based compensation expense related to employee stock options in the amount of $20.7 million and $39.5 million, respectively, and during the three and six months ended June 30, 2008, the Company recorded stock-based compensation expense related to employee stock options in the amount of $15.1 million and $27.4 million, respectively. As of June 30, 2009, approximately $151.3 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock options will be recognized over a weighted average period of approximately 2.8 years.
During the three and six months ended June 30, 2009, the Company recorded stock-based compensation expense related to its employee stock purchase plans in the amount of $3.6 million and $7.6 million, respectively, and during the three and six months ended June 30, 2008, the Company recorded stock-based compensation expense related to its employee stock purchase plans in the amount of $3.1 million and $6.6 million, respectively.
The Company recognized stock compensation expense of $9.2 million and $20.0 million for the three and six months ended June 30, 2009, and $9.1 million $16.1 million for the three and six months ended June 30, 2008, respectively, in connection with RSUs and performance share awards. As of June 30, 2009, approximately $66.2 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested RSUs and non-vested performance share awards will be recognized over a weighted-average period of approximately 2.6 years.
401(k) Plan
Juniper Networks maintains a savings and retirement plan qualified under Section 401(k) of the Internal Revenue Code of 1986, as amended. Employees meeting the eligibility requirement, as defined, may contribute up to the statutory limits of the year. The Company has matched employee contributions since January 1, 2001. Effective January 1, 2007, the Company matches 25% of all eligible employee contributions up to an annual maximum of $3,750. All matching contributions vest immediately. In the three and six months ended June 30, 2009, the Company’s matching contributions to the plan totaled $3.2 million and $7.0 million, respectively. In the three and six months ended June 30, 2008, the Company’s matching contributions to the plan totaled $3.1 million and $6.5 million, respectively.
Deferred Compensation Plan
In July 2008, the Company formed a non-qualified deferred compensation plan (“NQDC”) plan, which is an unfunded and unsecured deferred compensation arrangement. Under the NQDC plan, officers and other senior employees may elect to defer a portion of their compensation and contribute such amounts to one or more investment funds. The plan assets are included within investments and offsetting obligations are included within accrued compensation on the condensed consolidated balance sheet. The investments are considered trading securities and are reported at fair value. The realized and unrealized holding gains and losses related to these investments, as well as the offsetting compensation expense are recorded in the consolidated results of operations. The deferred compensation liability under this plan was approximately $3.3 million and $1.0 million as of June 30, 2009, and December 31, 2008, respectively.
Segments
Segments
Note 12. Segments
The Company’s chief operating decision maker (“CODM”) allocates resources and assesses performance based on financial information by the Company’s business groups. The Company’s operations are organized into two reportable segments: Infrastructure and Service Layer Technologies (“SLT”). The Infrastructure segment includes products from the E-, M-, MX-, and T-series router product families, EX-series switching products, as well as the circuit-to-packet products. The SLT segment consists primarily of Firewall virtual private network (“Firewall”) systems and appliances, dynamic services gateways, secure sockets layer virtual private network (“SSL”) appliances, intrusion detection and prevention appliances (“IDP”), the J-series router product family and wide area network (“WAN”) optimization platforms.
The primary financial measure used by the CODM in assessing performance of the segments is segment operating income, which includes certain cost of revenues, research and development expenses, sales and marketing expenses, and general and administrative expenses. In the three and six months ended June 30, 2009, and 2008, the CODM did not allocate certain miscellaneous expenses to its segments even though such expenses were included in the Company’s management operating income.
For arrangements with both Infrastructure and SLT products and services, revenue is attributed to the segment based on the underlying purchase order, contract, or sell-through report. Direct costs and operating expenses, such as standard costs, research and development and product marketing expenses, are generally applied to each segment. Indirect costs, such as manufacturing overhead and other cost of revenues, are allocated based on standard costs. Indirect operating expenses, such as sales, marketing, business development, and general and administrative expenses are generally allocated to each segment based on factors including headcount, usage, and revenue. The CODM does not allocate stock-based compensation, amortization of purchased intangible assets, restructuring and impairment charges, gains or losses on equity investments, other net income and expense, income taxes, as well as certain other charges to the segments.
The following table summarizes financial information for each segment used by the CODM (in millions):
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2009     2008     2009     2008  
Net revenues:
                               
Infrastructure:
                               
Product
  $ 469.9     $ 575.9     $ 924.2     $ 1,104.6  
Service
    114.1       96.5       226.9       189.7  
 
                       
Total Infrastructure revenues
    584.0       672.4       1,151.1       1,294.3  
Service Layer Technologies:
                               
Product
    137.1       148.0       270.6       293.5  
Service
    65.3       58.6       128.8       114.1  
 
                       
Total Service Layer Technologies revenues
    202.4       206.6       399.4       407.6  
 
                       
Total net revenues
    786.4       879.0       1,550.5       1,701.9  
Operating income:
                               
Infrastructure
    119.9       195.1       231.8       386.6  
Service Layer Technologies
    22.2       12.3       35.3       18.5  
 
                       
Total segment operating income
    142.1       207.4       267.1       405.1  
Other corporate (1)
                      (4.7 )
 
                       
Total management operating income
    142.1       207.4       267.1       400.4  
Amortization of purchased intangible assets
    (5.0 )     (9.4 )     (10.7 )     (35.9 )
Stock-based compensation expense
    (33.5 )     (27.3 )     (67.1 )     (50.1 )
Stock-based payroll tax expense
    (0.4 )     (1.2 )     (0.7 )     (2.3 )
Restructuring charges
    (7.5 )           (11.7 )      
Other charges
          (9.0 )           (9.0 )
 
                       
Total operating income
    95.7       160.5       176.9       303.1  
Interest and other income, net
    2.9       13.1       4.8       30.8  
Loss on minority equity investments
    (1.6 )     (1.5 )     (3.3 )     (1.5 )
 
                       
Income before income taxes
  $ 97.0     $ 172.1     $ 178.4     $ 332.4  
 
                       
 
(1)   Other corporate charges include severance and related costs associated with workforce-rebalancing activities, which are not included in business segment results.
Depreciation expense allocated to the Infrastructure segment was $22.9 million and $45.0 million in the three and six months ended June 30, 2009, respectively, and $21.4 million and $41.6 million in the three and six months ended June 30, 2008, respectively. The depreciation expense allocated to the SLT segment was $10.0 million and $19.7 million in the three and six months ended June 30, 2009, respectively, and $9.6 million and $18.3 million in the three and six months ended June 30, 2008, respectively.
The Company attributes revenues to geographic region based on the customer’s ship-to location. The following table shows net revenues by geographic region (in millions):
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2009     2008     2009     2008  
Americas:
                               
United States
  $ 350.3     $ 324.6     $ 665.0     $ 714.0  
Other
    40.6       64.0       85.5       92.6  
 
                       
Total Americas
    390.9       388.6       750.5       806.6  
Europe, Middle East and Africa
    232.0       285.6       455.2       525.7  
Asia Pacific
    163.5       204.8       344.8       369.6  
 
                       
Total
  $ 786.4     $ 879.0     $ 1,550.5     $ 1,701.9  
 
                       
During the three and six months ended June 30, 2009, no single customer accounted for greater than 10.0% or more of the Company’s net revenues. Nokia — Siemens Networks B.V. (“NSN”) accounted for 10.4% of the Company’s net revenues for the three months ended June 30, 2008, and no single customer accounted for 10.0% or more of the Company’s net revenues for the six months ended June 30, 2008.
The Company tracks assets by physical location. The majority of the Company’s assets, including property and equipment, were attributable to its U.S. operations as of June 30, 2009, and December 31, 2008. Although management reviews asset information on a corporate level and allocates depreciation expense by segment, the CODM does not review asset information on a segment basis.
Income Taxes
Income Taxes
Note 13. Income Taxes
The Company recorded tax provisions of $82.2 million and $51.7 million for the three months ended June 30, 2009, and 2008, or effective tax rates of 85% and 30%, respectively. The Company recorded tax provisions of $168.1 million and $101.7 million for the six months ended June 30, 2009, and 2008, or effective tax rates of 94% and 31%, respectively. The effective tax rate for the three months ended June 30, 2009, differs from the federal statutory rate of 35% and the rate for the same period in 2008 primarily due to a $52.1 million income tax charge resulting from a change in the Company’s estimate of unrecognized tax benefits related to share-based compensation. This change in estimate was a result of the decision by the U.S. Court of Appeals for the Ninth Circuit (“the Court”) in Xilinx Inc. v. Commissioner discussed below. The effective tax rate for the six months ended June 30, 2009, differs from the federal statutory rate of 35% and the rate for the same period in 2008, primarily due to two income tax charges: the $52.1 million related to the Court’s decision; and $61.8 million recorded in the three months ended March 31, 2009, which resulted from changes in California income tax laws that were enacted during the Company’s first quarter of 2009. The effective rate impact from these charges was partially offset by the federal Research and Development (“R&D”) credit and the benefit of earnings in foreign jurisdictions, which are subject to lower tax rates during the three and six months ended June 30, 2009. The effective tax rate for the three and six months ended June 30, 2008, differed from the federal statutory rate of 35% primarily due to the benefit of earnings in foreign jurisdictions, which are subject to lower tax rates.
On May 27, 2009, the Court’s decision in Xilinx v. Commissioner overturned a 2005 U.S. Tax Court ruling. While Juniper Networks, Inc. was not a named party to the case, the Court’s decision impacts a tax position of the Company for certain years prior to fiscal 2004. The Court’s decision changes the tax treatment for determining the allocable transfer price of share-based compensation expenses related to a company’s intangible development costs as the Court held that related parties must share stock option costs. In light of the Court’s decision, the Company changed its estimate of the tax benefit recognized under its prior tax position and has determined that it is not more likely than not that such benefit will be sustained. The case is subject to further appeal and any changes in the Court’s findings could impact the Company’s gross unrecognized tax benefits.
The gross unrecognized tax benefits increased by approximately $74.1 million for the six months ended June 30, 2009, of which $24.5 million, if recognized, would affect the effective tax rate. Interest and penalties accrued for the six months ended June 30, 2009, were approximately $8.4 million. Approximately $75.9 million of the increase, including interest and penalties, occurred during the three months ended June 30, 2009, and is related to the Court’s decision referenced above.
The Company is currently under examination by the Internal Revenue Service (“IRS”) for the 2004 tax year, the Indian tax authorities for the 2004 tax year, and has received an inquiry from the Hong Kong tax authorities for the 2002 through 2006 tax years. Additionally, the Company has not reached a final resolution with the IRS on an adjustment it proposed for the 1999 and 2000 tax years. The Company is not aware of any other examination by taxing authorities in any other major jurisdictions in which it files income tax returns as of June 30, 2009.
In 2008, as part of the on-going 2004 IRS audit, the Company received a proposed adjustment related to the Company’s business credit carry-forwards, which if agreed, would reduce its business credit carry-forwards. As part of this same audit, in July 2009 the Company received a proposed adjustment related to the license of acquired intangibles under an intercompany R&D cost sharing arrangement. In March 2009, the Company received an assessment from the Hong Kong tax authorities specifically related to an inquiry of the 2002 tax year. In December 2008, the Company received a proposed adjustment from the Indian tax authorities related to the 2004 tax year. The Company is pursuing all available administrative procedures relative to these matters. The Company believes that it has adequately provided for any reasonably foreseeable outcomes related to these proposed adjustments and the ultimate resolution of these matters is unlikely to have a material effect on its consolidated financial condition or results of operations; however there is still a possibility that an adverse outcome of these matters could have a material effect on its financial condition and results of operations. For more information, please see Note 14 — Commitments and Contingencies under the heading “IRS Notices of Proposed Adjustments.”
The Company does not expect complete resolution of any IRS, or other audits in significant foreign or state jurisdictions within the next 12 months. However, it is reasonably possible that the Company may reach agreement with certain issues and as a result, the amount of the liability for unrecognized tax benefits may decrease by approximately $12.8 million within the next 12 months.
Commitments and Contingencies
Commitments and Contingencies
Note 14. Commitments and Contingencies
Commitments
The following table summarizes the Company’s principal contractual obligations as of June 30, 2009, (in millions):
                                                                 
    Total     2009     2010     2011     2012     2013     Thereafter     Other  
Operating leases
  $ 195.0     $ 26.7     $ 51.4     $ 43.7     $ 37.1     $ 20.6     $ 15.5     $  
Sublease rental income
    (0.9 )     (0.3 )     (0.6 )                              
Purchase commitments
    89.2       89.2                                      
Tax liabilities
    161.1                                           161.1  
Other contractual obligations
    51.1       12.8       17.3       13.5       5.6       1.9              
 
                                               
Total
  $ 495.5     $ 128.4     $ 68.1     $ 57.2     $ 42.7     $ 22.5     $ 15.5     $ 161.1  
 
                                               
Operating Leases
Juniper Networks leases its facilities under operating leases that expire at various times, the longest of which expires in January 2017. Future minimum payments under the non-cancelable operating leases, net of committed sublease income, totaled $194.1 million as of June 30, 2009. Rent expense for the three months ended June 30, 2009, and 2008 was $14.3 million and $14.7 million, respectively, and $28.3 million and $28.9 million for the six months ended June 30, 2009, and 2008, respectively.
Purchase Commitments
In order to reduce manufacturing lead times and ensure adequate component supply, contract manufacturers utilized by the Company place non-cancelable, non-returnable (“NCNR”) orders for components based on the Company’s build forecasts. As of June 30, 2009, there were NCNR component orders placed by the contract manufacturers with a value of $89.2 million. The contract manufacturers use the components to build products based on the Company’s forecasts and on purchase orders the Company has received from customers. Generally, the Company does not own the components and title to the products transfers from the contract manufacturers to the Company and immediately to the Company’s customers upon delivery at a designated shipment location. If the components remain unused or the products remain unsold for specified period, the Company may incur carrying charges or obsolete materials charges for components that the contract manufacturers purchased to build products to meet the Company’s forecast or customer orders. As of June 30, 2009, the Company had accrued $32.0 million based on its estimate of such charges.
Tax Liabilities
As of June 30, 2009, the Company had $161.1 million included in long-term liabilities in the condensed consolidated balance sheet for unrecognized tax positions. At this time, the Company is unable to make a reasonably reliable estimate of the timing of payments related to the additional $161.1 million in liability due to uncertainties in the timing of tax audit outcomes.
Other Contractual Obligations
As of June 30, 2009, other contractual obligations consisted primarily of an indemnity-related escrow amount of $2.3 million, a five-year $36.4 million data center hosting agreement, a three-year $22.7 million software subscription, and a joint development agreement with a third-party for development of network-related technology, which requires quarterly payments of $3.5 million through January 2010. The Company records the payment as research and development expense in its condensed consolidated statements of operations until the technology under development has reached technological feasibility. Pursuant to the joint development agreement, in exchange for each party’s respective contributions to the development effort as well as the consideration payable by the Company, each party will obtain a license to the technology that result from the development for use in certain of their respective product lines. As of June 30, 2009, $23.1 million remained unpaid under the data center hosting agreement with the remaining commitment expected to be paid through the end of April 2013 and $15.3 million remained unpaid under the software subscription agreement with the remaining commitment expected to be paid through the end of January 2011.
Guarantees
The Company enters into agreements with customers that contain indemnification provisions relating to potential situations where claims could be alleged that the Company’s products infringe the intellectual property rights of a third party. Other guarantees or indemnification arrangements include guarantees of product and service performance, guarantees related to third-party customer financing arrangements, and standby letters of credit for certain lease facilities. As of June 30, 2009, the Company had $34.2 million in guarantees and standby letters of credit and has recorded a liability of $15.9 million related to a third-party customer financing guarantee. As of December 31, 2008, the Company had not recorded a liability related to its guarantees and indemnification arrangements.
Legal Proceedings
The Company is subject to legal claims and litigation arising in the ordinary course of business, such as employment or intellectual property claims, including the matters described below. The outcome of any such matters is currently not determinable. Although the Company does not expect that any such legal claims or litigation will ultimately have a material adverse effect on its consolidated financial condition or results of operations, an adverse result in one or more of such matters could negatively affect the Company’s consolidated financial results in the period in which they occur.
Federal Securities Class Action
On July 14, 2006 and August 29, 2006, two purported class actions were filed in the Northern District of California against the Company and certain of the Company’s current and former officers and directors. On November 20, 2006, the Court consolidated the two actions as In re Juniper Networks, Inc. Securities Litigation, No. C06-04327-JW, and appointed the New York City Pension Funds as lead plaintiffs. The lead plaintiffs filed a Consolidated Class Action Complaint on January 12, 2007, and filed an Amended Consolidated Class Action Complaint on April 9, 2007. The Amended Consolidated Complaint alleges that the defendants violated federal securities laws by manipulating stock option grant dates to coincide with low stock prices and issuing false and misleading statements including, among others, incorrect financial statements due to the improper accounting of stock option grants. The Amended Consolidated Complaint asserts claims for violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 on behalf of all persons who purchased or otherwise acquired Juniper Networks’ publicly- traded securities from July 12, 2001, through and including August 10, 2006. On June 7, 2007, the defendants filed a motion to dismiss certain of the claims, and a hearing was held on September 10, 2007. On March 31, 2008, the Court issued an order granting in part and denying in part the defendants’ motion to dismiss. The order dismissed with prejudice plaintiffs’ section 10(b) claim to the extent it was based on challenged statements made before July 14, 2001. The order also dismissed, with leave to amend, plaintiffs’ section 10(b) claim against Pradeep Sindhu. The order upheld all of plaintiffs’ remaining claims. The plaintiffs did not amend their complaint. The defendants filed their answer on June 23, 2008. On March 2, 2009, the plaintiffs filed a motion seeking class certification for a modified plaintiff class of all persons who purchased or otherwise acquired Juniper Networks’ publicly-traded securities from July 11, 2003, through August 10, 2006. The defendants filed their opposition to the motion for class certification on June 1, 2009. Plaintiffs’ reply in support of the motion for class certification is due on August 7, 2009.
Calamore Proxy Statement Action
On March 28, 2007, an action titled Jeanne M. Calamore v. Juniper Networks, Inc., et al., No. C-07-1772-JW, was filed by Jeanne M. Calamore in the Northern District of California against the Company and certain of the Company’s current and former officers and directors. The complaint alleges that the proxy statement for the Company’s 2006 Annual Meeting of Stockholders contained various false and misleading statements in that it failed to disclose stock option backdating information. As a result, the plaintiff seeks preliminary and permanent injunctive relief with respect to the Company’s 2006 Equity Incentive Plan, including seeking to invalidate the plan and all equity awards granted and grantable thereunder. On May 21, 2007, the Company filed a motion to dismiss and the plaintiff filed a motion for preliminary injunction. On July 19, 2007, the Court issued an order denying the plaintiff’s motion for a preliminary injunction and dismissing the complaint in its entirety with leave to amend. The plaintiff filed an amended complaint on August 27, 2007, and the defendants filed a motion to dismiss on October 9, 2007. On August 13, 2008, the Court issued an order granting the defendants’ motion to dismiss with prejudice, and entered final judgment in favor of defendants. On September 9, 2008, the plaintiff filed a Notice of Appeal in the United States Court of Appeals for the Ninth Circuit. The plaintiff filed her opening appellate brief on January 26, 2009, and defendants filed their answering brief on March 11, 2009. The plaintiff filed her reply brief on April 24, 2009. No decision has been issued yet by the Court of Appeals.
IPO Allocation Case
In December 2001, a class action complaint was filed in the United States District Court for the Southern District of New York against the Goldman Sachs Group, Inc., Credit Suisse First Boston Corporation, FleetBoston Robertson Stephens, Inc., Royal Bank of Canada (Dain Rauscher Wessels), SG Cowen Securities Corporation, UBS Warburg LLC (Warburg Dillon Read LLC), Chase (Hambrecht & Quist LLC), J.P. Morgan Chase & Co., Lehman Brothers, Inc., Salomon Smith Barney, Inc., Merrill Lynch, Pierce, Fenner & Smith, Incorporated (collectively, the “Underwriters”), Juniper Networks and certain of Juniper Networks’ officers. This action was brought on behalf of purchasers of the Company’s common stock in its initial public offering in June 1999 and the Company’s secondary offering in September 1999.
Specifically, among other things, this complaint alleged that the prospectus pursuant to which shares of common stock were sold in the Company’s initial public offering and the Company’s subsequent secondary offering contained certain false and misleading statements or omissions regarding the practices of the Underwriters with respect to their allocation of shares of common stock in these offerings and their receipt of commissions from customers related to such allocations. Various plaintiffs have filed actions asserting similar allegations concerning the initial public offerings of approximately 300 other issuers. These various cases pending in the Southern District of New York have been coordinated for pretrial proceedings as In re Initial Public Offering Securities Litigation, 21 MC 92. In April 2002, the plaintiffs filed a consolidated amended complaint in the action against the Company, alleging violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. The defendants in the coordinated proceeding filed motions to dismiss. In October 2002, the Company’s officers were dismissed from the case without prejudice pursuant to a stipulation. On February 19, 2003, the Court granted in part and denied in part the motion to dismiss, but declined to dismiss the claims against the Company.
In June 2004, a stipulation of settlement and release of claims against the issuer defendants, including the Company, was submitted to the Court for approval. On August 31, 2005, the Court preliminarily approved the settlement. In December 2006, the Appellate Court overturned the certification of classes in the six test cases that were selected by the underwriter defendants and plaintiffs in the coordinated proceedings (the action involving the Company is not one of the six test cases). Because class certification was a condition of the settlement, it was unlikely that the settlement would receive final Court approval. On June 25, 2007, the Court entered an order terminating the proposed settlement based upon a stipulation among the parties to the settlement. The plaintiffs have filed amended master allegations and amended complaints in the six focus cases. On March 26, 2008, the Court largely denied the defendants’ motion to dismiss the amended complaints in the six test cases.
The parties have reached a global settlement of the litigation. Under the settlement, which remains subject to final Court approval, the insurers would pay the full amount of the settlement share allocated to the Company, and the Company would bear no financial liability. The Company, as well as the officer and director defendants who were previously dismissed from the action pursuant to tolling agreements, would receive complete dismissals from the case. On June 9, 2009, the Court entered an order granting preliminary approval of the settlement. It is uncertain whether the settlement will receive final Court approval.
16(b) Demand
On October 3, 2007, a purported Juniper Networks shareholder filed a complaint for violation of Section 16(b) of the Securities Exchange Act of 1934, which prohibits short-swing trading, against the Company’s IPO underwriters. The complaint, Vanessa Simmonds v. The Goldman Sachs Group, et al., Case No. C07-015777, in District Court for the Western District of Washington, seeks the recovery of short-swing profits. The Company is named as a nominal defendant. No recovery is sought from the Company in this matter.
Menlo Equities
In December 2008, Menlo Equities Development Company II, LLC (“Menlo Equities”) initiated in an arbitration proceeding against the Company. Menlo Equities and the Company are members of Menlo/Juniper Networks LLC and are parties to an Operating Agreement and a Development Services Agreement relating to certain real estate in Sunnyvale, California purchased in 2000. The dispute relates to whether the Company would be obligated to pay Menlo Equities certain fees under the agreements, if and when the real estate is developed or sold. Menlo Equities has asserted that it is entitled to immediate payment of damages of approximately $29.0 million plus attorney’s fees as a result of a repudiation and breach of the agreements. The Company denies Menlo Equities’ allegations. An arbitration hearing was conducted in June 2009 and the decision of the arbitrator is expected in August 2009.
IRS Notices of Proposed Adjustments
In 2007, the IRS opened an examination of the Company’s U.S. federal income tax and employment tax returns for the 2004 fiscal year. Subsequently, the IRS extended their examination of the Company’s employment tax returns to include fiscal years 2005 and 2006. As of June 30, 2009, the IRS has not yet concluded its examinations of these returns. In September 2008, as part of its on-going audit of the U.S. federal income tax return, the IRS issued a Notice of Proposed Adjustment (“NOPA”) regarding the Company’s business credits. The Company is considering its response to the proposed adjustment. The Company believes that it has adequately provided for any reasonably foreseeable outcome related to this proposed adjustment and the ultimate resolution of this matter is unlikely to have a material effect on the Company’s consolidated financial condition and results of operations.
In July 2009, the Company received a NOPA from the IRS claiming that the Company owes additional taxes, plus interest and possible penalties, for the 2004 tax year based on a transfer pricing transaction related to the license of acquired intangibles under an intercompany R&D cost sharing arrangement. The asserted changes to the Company’s 2004 tax year would impact the Company’s income tax liabilities in tax years subsequent to 2003. As a result of the NOPA, the estimated incremental tax liability would be approximately $807.0 million, excluding interest and penalties. The Company intends to file a protest to the proposed deficiency with the IRS, which will cause the matter to be referred to the Appeals Division of the IRS. The Company strongly believes the IRS’ position with regard to this matter is inconsistent with applicable tax laws and existing Treasury regulations, and that its previously reported income tax provision for the year in question is appropriate. However, there can be no assurance that this matter will be resolved in the Company’s favor. Regardless of whether this matter is resolved in the Company’s favor, the final resolution of this matter could be expensive and time-consuming to defend and/or settle. While the Company believes it has provided adequately for this matter, there is still a possibility that an adverse outcome of the matter could have a material effect on its results of operations and financial condition.
The Company has not reached a final resolution with the IRS on an adjustment the IRS proposed for the 1999 and 2000 tax years. The Company is also under routine examination by certain state and non-U.S. tax authorities. The Company believes that it has adequately provided for any reasonably foreseeable outcome related to these audits.
Subsequent Event
Subsequent Event
Note 15. Subsequent Event
Stock Repurchases
Subsequent to June 30, 2009, through the filing of this report, the Company repurchased and retired approximately 1.7 million shares of its common stock for approximately $40.9 million under its 2008 Stock Repurchase program at an average purchase price of $24.43 per share. The Company’s 2008 Stock Repurchase Program had remaining authorized funds of $562.0 million as of the report filing date. Purchases under the Company’s 2008 Stock Repurchase Program are subject to a review of the circumstances in place at the time and will be made from time to time as permitted by securities laws and other legal requirements. This program may be discontinued at any time.