This section and other parts of this Form 10-Q contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements also can be identified by words such as "future," "anticipates," "believes," "estimates," "expects," "intends," "will," "would," "could," "can," "may," and similar terms. Forward-looking statements are not guarantees of future performance and the actual results ofNetApp, Inc. ("we," "us," or the "Company") may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A of this Form 10-Q under the heading "Risk Factors," which are incorporated herein by reference. The following discussion should be read in conjunction with our consolidated financial statements as of and for the fiscal year endedApril 30, 2021 , and the notes thereto, contained in our Annual Report on Form 10-K, and the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law. 28
--------------------------------------------------------------------------------
Overview Our Company NetApp is a global cloud-led, data-centric software company that gives organizations the freedom to put data to work in the applications that elevate their business. We help our customers get the most out of their data with industry-leading cloud data services, storage systems, and software. Throughout our history, we have kept our focus on one thing - the data, continuously improving how data are managed, stored, analyzed, protected, and moved. Our strategy has been shaped around helping our customers embrace the full potential of new technologies - from the rise of the internet, to helping large enterprise customers in vertical markets, to bringing new systems to market. Today, we are focused on unlocking the best of cloud. As our products and solutions portfolios evolve, market dynamics change, and management continues to assess our largest opportunities, we periodically change how we manage our business. As of the end of our first quarter of fiscal 2022, our Chief Operating Decision Maker (CODM), who is our Chief Executive Officer, realigned internal reporting and began using financial information for components of our business, organized based on category of product/solution, to evaluate performance and allocate resources. This resulted in the creation of two reportable segments for financial reporting purposes: Public Cloud and Hybrid Cloud. Our CODM measures the performance of each segment based on segment revenue and segment gross profit. Public Cloud offers a portfolio of products delivered primarily as-a-service, including related support, and made available on the world's leading clouds. This portfolio includes storage services, cloud automation and optimization services, and cloud infrastructure monitoring services. Hybrid Cloud offers a portfolio of storage and data management solutions that help customers build and integrate on-premises and private cloud environments. This portfolio is designed to operate with public clouds to unlock the potential of hybrid, multi-cloud operations. Hybrid Cloud is composed of software, hardware, and related support, as well as professional and other services.
COVID-19
The novel coronavirus, or COVID-19, pandemic and efforts to control its spread have significantly curtailed the movement of people, goods and services worldwide, including in most or all of the regions in which we sell our products and services and conduct our business operations. We have taken precautionary measures intended to minimize the risk of the virus to our employees, our customers, and the communities in which we operate. SinceMarch 2020 , the vast majority of our employees have been working remotely and we have limited business travel. During the first six months of fiscal 2022, due to the macroeconomic uncertainty caused by COVID-19, we continue to observe certain customers delaying purchases of our products and services, while other customers accelerate or place new orders to address the demands of remote working and digital business. We also experienced certain logistical challenges in delivering our products and services to customers in certain regions, and minor supply chain constraints. Given uncertainties that exist in the broader technology supply chain, we have begun to invest in inventory and certain longer-term commitments to help mitigate the risk of supply shortages. If supply chain challenges continue it could result in an increase in our cost of revenues. The magnitude and duration of the disruption to our business, and impact to our operational and financial performance, caused by COVID-19 pandemic remain uncertain. Refer to Part II, Item 1A. - Risk Factors for the significant risks we have identified as a result of the COVID-19 pandemic.
Stock Repurchase and Dividend Activity
During the first six months of fiscal 2022, we repurchased 2.7 million shares of our common stock at an average price of$84.88 per share, for an aggregate of$225 million . We also declared aggregate cash dividends of$1.00 per share in that period, for which we paid$224 million .
Restructuring Event
During the first six months of fiscal 2022, we executed a restructuring plan and recognized expenses totaling$29 million , of which$7 million were recorded in the second quarter of fiscal 2022, consisting primarily of lease termination fees, office relocation costs, and employee severance-related costs. 29
--------------------------------------------------------------------------------
Results of Operations
Our fiscal year is reported as a 52- or 53-week year that ends on the last Friday in April. Fiscal year 2022, ending onApril 29, 2022 , is a 52-week year, with 13 weeks in each of its quarters. Fiscal year 2021, which ended onApril 30, 2021 was a 53-week year, with 14 weeks included in its first quarter and 13 weeks in each subsequent quarter. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company's fiscal years ended in April and the associated quarters, months and periods of those fiscal years.
The following table sets forth certain condensed consolidated statements of income data as a percentage of net revenues for the periods indicated:
Three Months Ended Six Months Ended October 29, October 30, October 29, October 30, 2021 2020 2021 2020 Net revenues: Product 52 % 53 % 51 % 51 % Services 48 47 49 49 Net revenues 100 100 100 100 Cost of revenues: Cost of product 24 25 23 25 Cost of services 9 9 9 9 Gross profit 68 66 68 66 Operating expenses: Sales and marketing 30 31 30 32 Research and development 14 15 14 16 General and administrative 5 5 5 5 Restructuring charges - 3 1 2 Acquisition-related expense - - - - Total operating expenses 49 53 50 55 Income from operations 19 13 18 12 Other expense, net (1 ) - (1 ) (1 ) Income before income taxes 18 12 17 10 Provision for income taxes 4 3 3 2 Net income 14 % 10 % 14 % 8 %
Percentages may not add due to rounding
Discussion and Analysis of Results of Operations
Net Revenues (in millions, except percentages):
Three Months Ended Six Months Ended October 29, October 30, October 29, October 30, 2021 2020 % Change 2021 2020 % Change Net revenues$ 1,566 $ 1,416 11 %$ 3,024 $ 2,719 11 % The increase in net revenues for the second quarter and first six months of fiscal 2022 compared to the corresponding periods of fiscal 2021 was due to an increase in both product revenues and services revenues. Product revenues as a percentage of net revenues decreased by approximately one percentage point and remained relatively flat in the second quarter and first six months of fiscal 2022, respectively, compared to the corresponding periods of fiscal 2021.
Product Revenues (in millions, except percentages):
Three Months Ended Six Months Ended October 29, October 30, October 29, October 30, 2021 2020 % Change 2021 2020 % Change Product revenues $ 814 $ 749 9 %$ 1,544 $ 1,376 12 % Hardware (Non-GAAP) 339 332 2 % 655 648 1 % Software (Non-GAAP) 475 417 14 % 889 728 22 % Hybrid Cloud 30
-------------------------------------------------------------------------------- Product revenues are derived through the sale of our Hybrid Cloud solutions and consist of sales of configured all-flash array and hybrid systems, which are bundled hardware and software products, as well as add-on flash, disk and/or hybrid storage and related OS, NetApp HCI, StorageGrid, OEM products and add-on optional software. In order to provide visibility into the value created by our software innovation and R&D investment, we disclose the software and hardware components of our product revenues. Software product revenue includes the OS software and optional add-on software solutions attached to our systems across our entire product set, while hardware product revenues include the non-software component of our systems across the entire set. Because our revenue recognition policy under GAAP defines a configured storage system, inclusive of the operating system software essential to its functionality, as a single performance obligation, the hardware and software components of our product revenues are considered non-GAAP measures. The hardware and software components of our product revenues are derived from an estimated fair value allocation of the transaction price of our contracts with customers, down to the level of the product hardware and software components. This allocation is primarily based on the contractual prices at which NetApp has historically billed customers for such respective components. Total product revenues increased in the second quarter and first six months of fiscal 2022 compared to the corresponding periods of the prior year, primarily driven by an increase in sales of all-flash array systems. Revenues from the hardware component of product revenues represented 42% of product revenues in both the second quarter and first six months of fiscal 2022, compared to 44% and 47% of product revenues in the corresponding periods of the prior year. The software component of product revenues represented 58% of product revenues in both the second quarter and first six months of fiscal 2022, compared to 56% and 53% of product revenues in the corresponding periods of the prior year. The increase in the software component percentage of product revenues in the second quarter and first six months of fiscal 2022 is primarily due to the mix of systems sold, including a higher mix of all-flash array systems, which contain a higher proportion of software components than other Hybrid Cloud products.
Services Revenues (in millions, except percentages):
Three Months Ended Six Months Ended October 29, October 30, October 29, October 30, 2021 2020 % Change 2021 2020 % Change Services revenues $ 752 $ 667 13 %$ 1,480 $ 1,343 10 % Support 590 553 7 % 1,168 1,130 3 % Professional and other services 75 67 12 % 146 135 8 % Public cloud 87 47 85 % 166 78 113 % Hybrid Cloud Hybrid Cloud services revenues are derived from the sale of: (1) support, which includes both hardware and software support contracts (the latter of which entitle customers to receive unspecified product upgrades and enhancements, bug fixes and patch releases), and (2) professional and other services, which include customer education and training. Support revenues increased in the second quarter and first six months of fiscal 2022 compared to the corresponding periods of the prior year, despite an extra week in the first quarter of fiscal 2021 that contributed approximately$40 million of revenues in that period. The increases are primarily due to an increase in our installed base and a higher mix of all-flash systems (which carry a higher support dollar content than our other products) in the current year. Professional and other services revenues increased in the second quarter and first six months of fiscal 2022 compared to the corresponding periods of the prior year primarily due to an increase in demand from increased product sales.
Public Cloud
Public Cloud revenues are derived from the sale of public cloud offerings primarily delivered as-a-service, which include storage services, cloud automation and optimization services, and cloud infrastructure monitoring services.
Public Cloud revenues increased in the second quarter and first six months of fiscal 2022 compared to the corresponding periods of the prior year primarily due to strong customer demand for NetApp's diversified cloud offerings, coupled with overall growth in the cloud market. The first six months of fiscal 2022 also benefitted from the acquisition ofSpot, Inc. late in the first quarter of fiscal 2021. Cost of Revenues
Our cost of revenues consists of:
31 -------------------------------------------------------------------------------- (1) cost of product revenues, composed of (a) cost of Hybrid Cloud product revenues, which includes the costs of manufacturing and shipping our products, inventory write-downs, and warranty costs, and (b) unallocated cost of product revenues, which includes stock-based compensation and amortization of intangibles, and; (2) cost of services revenues, composed of (a) cost of support revenues, which includes the costs of providing support activities for hardware and software support, global support partnership programs, and third party royalty costs, (b) cost of professional and other services revenues, (c) cost of public cloud revenues, constituting the cost of providing our Public Cloud offerings which includes depreciation and amortization expense and third party datacenter fees, and (d) unallocated cost of services revenues, which includes stock-based compensation and amortization of intangibles.
Cost of Product Revenues (in millions, except percentages):
Three Months Ended Six Months Ended October 29, October 30, October 29, October 30, 2021 2020 % Change 2021 2020 % Change Cost of product revenues $ 372 $ 360 3 % $ 701 $ 676 4 % Hybrid Cloud 369 352 5 % 695 657 6 % Unallocated 3 8 (63 )% 6 19 (68 )% Hybrid Cloud Cost of Hybrid Cloud product revenues represented 46% and 45% of product revenues for the second quarter and first six months of fiscal 2022, respectively, compared to 48% and 49% for the corresponding periods of fiscal 2021. Materials costs represented 92% and 91% of cost of Hybrid Cloud product revenues for the second quarter and first six months of fiscal 2022, respectively, compared to 89% and 88% in the corresponding periods of fiscal 2021. Materials costs increased by approximately$22 million and$39 million in the second quarter and first six months of fiscal 2022 compared to the corresponding periods of the prior year, reflecting the increases in product revenues in the current year periods and the mix of systems sold in the respective periods. Hybrid Cloud product gross margins increased by approximately two percentage points and three percentage points in the second quarter and first six months of fiscal 2022, respectively, compared to the corresponding periods of the prior year. The increases are primarily due to the mix of systems sold, including a higher mix of all-flash array systems which have higher margins than hybrid systems.
Unallocated
Unallocated cost of product revenues decreased in the second quarter and first six months of fiscal 2022 compared to the corresponding periods of the prior year due to certain intangible assets becoming fully amortized in the second half of fiscal 2021.
Cost of Services Revenues (in millions, except percentages):
Three Months Ended Six Months Ended October 29, October 30, October 29, October 30, 2021 2020 % Change 2021 2020 % Change Cost of services revenues $ 135 $ 123 10 % $ 265 $ 238 11 % Support 48 50 (4 )% 96 101 (5 )% Professional and other services 54 50 8 % 105 98 7 % Public cloud 25 16 56 % 48 29 66 % Unallocated 8 7 14 % 16 10 60 % Hybrid Cloud Cost of Hybrid Cloud services revenues, which are composed of the costs of support and professional and other services, was relatively flat in the second quarter and first six months of fiscal 2022 compared to the corresponding periods of fiscal 2021. Cost of Hybrid Cloud services revenues represented 15% of Hybrid Cloud services revenues in the second quarter and first six months of fiscal 2022 and 16% of Hybrid Cloud services revenues in the corresponding periods of the prior year. Hybrid Cloud support gross margins increased by one percentage point each in the second quarter and first six months of fiscal 2022 compared to the corresponding periods of the prior year due to growth in support revenues achieved with a consistent cost base. Hybrid Cloud professional services gross margins increased by three percentage points and one percentage point in the second quarter and first six months of fiscal 2022 compared to the corresponding periods of the prior year. 32
--------------------------------------------------------------------------------
Public Cloud
Cost of Public Cloud revenues increased in the second quarter and first six months of fiscal 2022 compared to the corresponding periods of fiscal 2021 reflecting the increase in Public Cloud revenues. Public Cloud gross margins increased by five percentage points and eight percentage points in the second quarter and first six months of fiscal 2022, respectively, compared to the corresponding periods of fiscal 2021, reflecting efficiencies from scaling our Public Cloud segment. Unallocated Unallocated cost of services revenues was relatively flat in the second quarter of fiscal 2022 compared to the second quarter of fiscal 2021, while it increased in the first six months of fiscal 2022 compared to the corresponding period of fiscal 2021 due to our acquisition ofSpot, Inc. in the first quarter of fiscal 2021 which resulted in higher amortization expense for certain intangible assets. Operating Expenses
Sales and Marketing, Research and Development and General and Administrative Expenses
Sales and marketing, research and development, and general and administrative expenses for the second quarter and first six months of fiscal 2022 totaled$757 million , or 48% of net revenues, and$1,484 million , or 49% of net revenues, respectively, reflecting a decrease of two percentage points and four percentage points, respectively, compared to the corresponding periods of fiscal 2021.
Compensation costs represent the largest component of operating expenses. Included in compensation costs are salaries, benefits, other compensation-related costs, stock-based compensation expense and employee incentive compensation plan costs.
Total compensation costs included in operating expenses increased by
Total compensation costs included in operating expenses increased by$17 million , or 2%, in the first six months of fiscal 2022 compared to the corresponding period of the prior year, primarily due to higher salaries and stock-based compensation expenses. Total compensation costs for the first six months of fiscal 2021 includes the impact of an additional week in the first quarter of fiscal 2021.
Sales and Marketing (in millions, except percentages):
Three Months Ended Six Months Ended October 29, October 30, October 29, October 30, 2021 2020 % Change 2021 2020 % Change
Sales and marketing expenses $ 465 $ 432
8 % $ 916 $ 861 6 % Sales and marketing expenses consist primarily of compensation costs, commissions, outside services, facilities and information technology (IT) costs, advertising and marketing promotional expense and travel and entertainment expense. Changes in sales and marketing expense consisted of the following (in percentage points of the total change): Three Months Ended Six Months Ended Fiscal 2022 to Fiscal 2022 to Fiscal 2021 Fiscal 2021 Compensation costs 6 3 Commissions 2 2 Advertising and marketing promotional expense - 1 Total change 8 6 The increase in compensation costs for the second quarter and first six months of fiscal 2022 compared to the corresponding periods of the prior year reflected an increase in average headcount of approximately 4% and 5%, respectively. The expansion of our sales and marketing teams are expected to support our ability to execute on key market opportunities.
The increase in commissions expense for the second quarter and first six months of fiscal 2022 is primarily due to higher performance against sales goals.
Advertising and marketing promotional expense increased in the first six months of fiscal 2022 compared to the corresponding period of the prior year, primarily due to higher spending levels on certain projects executed during the first quarter of fiscal 2022. 33
--------------------------------------------------------------------------------
Research and Development (in millions, except percentages):
Three Months Ended Six Months Ended October 29, October 30, October 29, October 30, 2021 2020 % Change 2021 2020 % Change
Research and development expenses $ 216 $ 212
2 % $ 426 $ 445 (4 )% Research and development expenses consist primarily of compensation costs, facilities and IT costs, depreciation, equipment and software-related costs, prototypes, non-recurring engineering charges and other outside services costs. Changes in research and development expense consisted of the following (in percentage points of the total change): Three Months Ended Six Months Ended Fiscal 2022 to Fiscal 2021 Fiscal 2022 to Fiscal 2021 Compensation costs 4 (4 ) Other (2 ) - Total change 2 (4 ) The increase in compensation costs for the second quarter of fiscal 2022 compared to the corresponding period in the prior year was primarily attributable to higher incentive compensation expense as a result of stronger company achievement against financial targets. The decrease in compensation costs for the six months of fiscal 2022 compared to the corresponding period in the prior year was attributable to a decrease in average headcount of 5%, primarily resulting from the restructuring plans we implemented in fiscal 2020 which were completed during the first half of fiscal 2021.
General and Administrative (in millions, except percentages):
Three Months Ended Six Months Ended October 29, October 30, October 29, October 30, 2021 2020 % Change 2021 2020 % Change
General and administrative expenses $ 76 $ 67
13 % $ 142 $ 128 11 % General and administrative expenses consist primarily of compensation costs, professional and corporate legal fees, outside services and facilities and IT support costs. Changes in general and administrative expense consisted of the following (in percentage points of the total change): Three Months Ended Six Months Ended Fiscal 2022 to Fiscal Fiscal 2022 to 2021 Fiscal 2021 Compensation costs 10 4 Professional and legal fees and outside services 8 7 Litigation settlement (7 ) (4 ) Facilities and IT support costs 1 1 Other 1 3 Total change 13 11 The increase in compensation costs in the second quarter and first six months of fiscal 2022 compared to the corresponding periods of the prior year was primarily attributable to higher stock-based compensation expense. The increase in professional and legal fees and outside services expense in the second quarter and first six months of fiscal 2022 was primarily due to higher spending on business transformation projects and an increase in legal fees. During the second quarter of fiscal 2021, we incurred a litigation settlement charge of approximately$5 million .
Restructuring Charges (in millions, except percentages):
Three Months Ended Six Months Ended October 29, October 30, October 29, October 30, 2021 2020 % Change 2021 2020 % Change Restructuring charges $ 7 $ 37 NM $ 29 $ 42 NM NM - Not Meaningful
In the second quarter and first six months of fiscal 2022, we recognized
34
--------------------------------------------------------------------------------
Acquisition-related Expense (in millions, except percentages):
Three Months Ended Six Months Ended October 29, October 30, October 29, October 30, 2021 2020 % Change 2021 2020 % Change Acquisition-related expense $ 1 $ 3 NM $ 2 $ 11 NM NM - Not Meaningful
In the first six months of fiscal 2022, we incurred
Other Expense, Net (in millions, except percentages)
The components of other expense, net were as follows:
Three Months Ended Six Months Ended October 29, October 30, October 29, October 30, 2021 2020 % Change 2021 2020 % Change Interest income $ 1 $ 2 (50 )% $ 3 $ 5 (40 )% Interest expense (18 ) (18 ) - % (36 ) (36 ) - % Other income (expense), net 3 9 (67 )% 7 (8 ) (188 )% Total $ (14 ) $ (7 ) 100 % $ (26 ) $ (39 ) (33 )% Interest income decreased in the second quarter and first six months of fiscal 2022 compared to the corresponding periods of the prior year due to both a reduction in the size of our investment portfolio and lower yields earned on the investments. Interest expense remained flat in the second quarter and first six months of fiscal 2022 compared to the corresponding periods of fiscal 2021. The differences in other income (expense), net for the second quarter and first six months of fiscal 2022 as compared to the corresponding periods of the prior year are partially due to foreign exchange gains and losses year-over-year. In the first six months of fiscal 2021, other income (expense), net includes a$14 million loss recognized from the extinguishment of our Senior Notes dueJune 2021 .
Provision for Income Taxes (in millions, except percentages):
Three Months Ended Six Months Ended October 29, October 30, October 29, October 30, 2021 2020 % Change 2021 2020 % Change Provision for income taxes $ 56 $ 38 47 % $ 91 $ 65 40 % Our effective tax rate for the second quarter of fiscal 2022 was 20.0% compared to 21.7% for the second quarter of fiscal 2021. Our effective tax rate for the first six months of fiscal 2022 was 17.6% compared to 23.3% for the first six months of fiscal 2021. Our effective tax rates reflect the impact of a significant amount of our earnings being taxed in foreign jurisdictions at rates below theU.S. statutory tax rate. Our effective tax rate for the second quarter and first six months of fiscal 2022 decreased compared to the corresponding periods of the prior year due to discrete tax benefits for lapses of statute of limitations as well as increased benefits related to stock-based compensation. Additionally, the corresponding periods of the prior year included tax charges for the integration of acquired companies. As ofOctober 29, 2021 , we had$214 million of gross unrecognized tax benefits. Inclusive of penalties, interest and certain income tax benefits,$110 million would affect our provision for income taxes if recognized. Net unrecognized tax benefits of$111 million have been recorded in other long-term liabilities. We continue to monitor the progress of ongoing discussions with tax authorities and the impact, if any, of the expected expiration of the statute of limitations in various taxing jurisdictions. We engage in continuous discussion and negotiation with taxing authorities regarding tax matters in multiple jurisdictions. We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude, certain statutes of limitations will lapse, or both. As a result of uncertainties regarding tax audits and their possible outcomes, an estimate of the range of possible impacts to unrecognized tax benefits in the next twelve months cannot be made at this time. 35
--------------------------------------------------------------------------------
Liquidity, Capital Resources and Cash Requirements
October 29 ,April 30 , (In millions, except percentages) 2021
2021
Cash, cash equivalents and short-term investments
$ 2,650 $ 2,650
The following is a summary of our cash flow activities:
Six Months Ended October 29, October 30, (In millions) 2021 2020 Net cash provided by operating activities $ 540 $ 401 Net cash used in investing activities (85 ) (321 ) Net cash (used in) provided by financing activities (461 )
746
Effect of exchange rate changes on cash, cash equivalents and restricted cash (13 ) 44 Net change in cash, cash equivalents and restricted cash $ (19 ) $ 870 Cash Flows As ofOctober 29, 2021 , our cash, cash equivalents and short-term investments were$4.5 billion , which represents a decrease of$48 million for the first six months of fiscal 2022. During the first six months of fiscal 2022, we generated$540 million of cash from operating activities, offset by$224 million used for the payment of dividends,$225 million used to repurchase shares of our common stock,$97 million in purchases of property and equipment, and$14 million , net of cash acquired, used for the acquisition of a privately-held company. Net working capital was$2.5 billion as ofOctober 29, 2021 , approximately flat when compared toApril 30, 2021 .
Cash Flows from Operating Activities
During the first six months of fiscal 2022, we generated cash from operating activities of$540 million , reflecting net income of$426 million , adjusted by non-cash depreciation and amortization of$92 million and non-cash stock-based compensation expense of$115 million , compared to$401 million of cash generated from operating activities during the first six months of fiscal 2021.
Significant changes in assets and liabilities in the first six months of fiscal 2022 included the following:
? Accounts receivable decreased$292 million , reflecting more favorable shipping linearity and seasonally lower billings for the first six months of fiscal 2022 compared to the last six months of fiscal 2021. ? Accrued expenses decreased by$206 million , primarily due to employee compensation payouts related to fiscal year 2021 commissions and incentive compensation plans. ? Deferred revenue and financed unearned services revenue decreased by$97 million , primarily due to a decrease in deferred software and hardware maintenance contract revenues reflecting the seasonality of maintenance contract renewal activities. ? Long-term taxes payables decreased by$65 million , primarily due to reclassification of transition taxes associated withU.S. tax reform from long-term taxes payable to current taxes payable. We expect that cash provided by operating activities may materially fluctuate in future periods due to various factors, including fluctuations in our operating results, shipment linearity, accounts receivable collections performance, inventory and supply chain management, vendor payment initiatives, tax benefits or charges from stock-based compensation, and the timing and amount of compensation and other payments.
Cash Flows from Investing Activities
During the first six months of fiscal 2022, we generated$26 million from maturities of investments, net of purchases, and paid$97 million for capital expenditures, while during the same period of fiscal 2021, we generated$107 million from maturities and sales of investments, net of purchases, and paid$92 million for capital expenditures. Additionally, during the first six months of fiscal 2022, we paid$14 million , net of cash acquired for a privately-held company, as compared to$350 million , net of cash acquired that we paid for two privately-held companies in the first six months of fiscal 2021. 36
--------------------------------------------------------------------------------
Cash Flows from Financing Activities
During the first six months of fiscal 2022, cash flows used in financing activities totaled$461 million and include$225 million for the repurchase of approximately three million shares of common stock and$224 million for the payment of dividends. During the first six months of fiscal 2021, cash flows provided by financing activities totaled$746 million , and were primarily due to net cash proceeds of$2.0 billion from the issuance of Senior Notes, partially offset by the use of$513 million for the extinguishment of Senior Notes dueJune 2021 and$420 million for the net repayment of commercial paper notes with original maturities of three months or less,$214 million for the payment of dividends, and$176 million for the repayment of commercial paper notes with original maturities of greater than three months. Key factors that could affect our cash flows include changes in our revenue mix and profitability, our ability to effectively manage our working capital, in particular, accounts receivable, accounts payable and inventories, the timing and amount of stock repurchases and payment of cash dividends, the impact of foreign exchange rate changes, our ability to effectively integrate acquired products, businesses and technologies and the timing of repayments of our debt. Based on past performance and our current business outlook, we believe that our sources of liquidity, including cash generated from operations, and our ability to access capital markets and committed credit lines will satisfy our working capital needs, capital expenditures, investment requirements, stock repurchases, cash dividends, contractual obligations, commitments, principal and interest payments on our debt and other liquidity requirements associated with operations and meet our cash requirements for at least the next 12 months. However, in the event our liquidity is insufficient, we may be required to curtail spending and implement additional cost saving measures and restructuring actions or enter into new financing arrangements. We cannot be certain that we will continue to generate cash flows at or above current levels or that we will be able to obtain additional financing, if necessary, on satisfactory terms, if at all. For further discussion of factors that could affect our cash flows and liquidity requirements, including the impact of the COVID-19 pandemic, see Part II, Item 1A. Risk Factors. Liquidity
Our principal sources of liquidity as of
Cash, cash equivalents and short-term investments consisted of the following (in millions): October 29, April 30, 2021 2021 Cash and cash equivalents$ 4,509 $ 4,529 Short-term investments 39 67 Total$ 4,548 $ 4,596 As ofOctober 29, 2021 andApril 30, 2021 ,$1.7 billion and$2.5 billion , respectively, of cash, cash equivalents and short-term investments were held by various foreign subsidiaries and were generally based inU.S. dollar-denominated holdings, while$2.8 billion and$2.1 billion , respectively, were available in theU.S. Our principal liquidity requirements are primarily to meet our working capital needs, support ongoing business activities, fund research and development, meet capital expenditure needs, invest in critical or complementary technologies through asset purchases and/or business acquisitions, service interest and principal payments on our debt, fund our stock repurchase program, and pay dividends, as and if declared. In the ordinary course of business, we engage in periodic reviews of opportunities to invest in or acquire companies or units in companies to expand our total addressable market, leverage technological synergies and establish new streams of revenue, particularly in our Public Cloud segment. The principal objectives of our investment policy are the preservation of principal and maintenance of liquidity. We attempt to mitigate default risk by investing in high-quality investment grade securities, limiting the time to maturity and monitoring the counter-parties and underlying obligors closely. We believe our cash equivalents and short-term investments are liquid and accessible. We are not aware of any significant deterioration in the fair value of our cash equivalents or investments from the values reported as ofOctober 29, 2021 . Our investment portfolio has been and will continue to be exposed to market risk due to trends in the credit and capital markets. We continue to closely monitor current economic and market events to minimize the market risk of our investment portfolio. We routinely monitor our financial exposure to both sovereign and non-sovereign borrowers and counterparties. We utilize a variety of planning and financing strategies in an effort to ensure our worldwide cash is available when and where it is needed. We also have an automatic shelf registration statement on file with theSecurities and Exchange Commission (SEC). We may in the future offer an additional unspecified amount of debt, equity and other securities. 37
--------------------------------------------------------------------------------
Senior Notes
The following table summarizes the principal amount of our Senior Notes as of
3.25% Senior Notes Due December 2022$ 250 3.30% Senior Notes Due September 2024 400 1.875% Senior Notes Due June 2025 750 2.375% Senior Notes Due June 2027 550 2.70% Senior Notes Due June 2030 700 Total$ 2,650 Interest on the Senior Notes is payable semi-annually. For further information on the underlying terms, see Note 7 - Financing Arrangements of the Notes to Condensed Consolidated Financial Statements.
Commercial Paper Program and Credit Facility
We have a commercial paper program (the Program), under which we may issue unsecured commercial paper notes. Amounts available under the Program may be borrowed, repaid and re-borrowed, with the aggregate face or principal amount of the notes outstanding under the Program at any time not to exceed$1.0 billion . The maturities of the notes can vary but may not exceed 397 days from the date of issue. The notes are sold under customary terms in the commercial paper market and may be issued at a discount from par or, alternatively, may be sold at par and bear interest at rates dictated by market conditions at the time of their issuance. The proceeds from the issuance of the notes are used for general corporate purposes. No commercial paper notes were outstanding as ofOctober 29, 2021 . In connection with the Program, we have a senior unsecured credit agreement with a syndicated group of lenders. The credit agreement, which was amended onJanuary 22, 2021 , provides for a$1.0 billion revolving unsecured credit facility, with a sublimit of$50 million available for the issuance of letters of credit on our behalf. The credit facility matures onJanuary 22, 2026 , with an option for us to extend the maturity date for two additional 1-year periods, subject to certain conditions. The proceeds of the loans may be used by us for general corporate purposes and as liquidity support for our existing commercial paper program. As ofOctober 29, 2021 , we were compliant with all associated covenants in the agreement. No amounts were drawn against this credit facility during any of the periods presented.
Capital Expenditure Requirements
We expect to fund our capital expenditures, including our commitments related to facilities, equipment, operating leases and internal-use software development projects over the next few years through existing cash, cash equivalents, investments and cash generated from operations. The timing and amount of our capital requirements cannot be precisely determined and will depend on a number of factors, including future demand for products, changes in the network storage industry, hiring plans and our decisions related to the financing of our facilities and equipment requirements. We anticipate capital expenditures for the remainder of fiscal 2022 to be between$100 million and$150 million .
Dividends and Stock Repurchase Program
On
As ofOctober 29, 2021 , our Board of Directors has authorized the repurchase of up to$14.1 billion of our common stock under our stock repurchase program. Under this program, we may purchase shares of our outstanding common stock through solicited or unsolicited transactions in the open market, in privately negotiated transactions, through accelerated share repurchase programs, pursuant to a Rule 10b5-1 plan or in such other manner as deemed appropriate by our management. The stock repurchase program may be suspended or discontinued at any time. Since theMay 13, 2003 inception of this program throughOctober 29, 2021 , we repurchased a total of 343 million shares of our common stock at an average price of$39.37 per share, for an aggregate purchase price of$13.5 billion . As ofOctober 29, 2021 , the remaining authorized amount for stock repurchases under this program was$0.6 billion .
Purchase Commitments
In the ordinary course of business, we make commitments to third-party contract manufacturers and component suppliers to manage manufacturer lead times and meet product forecasts, and to other parties, to purchase various key components used in the manufacture of our products. In addition, we have open purchase orders and contractual obligations associated with our ordinary course of business for which we have not yet received goods or services. These off-balance sheet purchase commitments totaled$1,053 million atOctober 29, 2021 . 38
--------------------------------------------------------------------------------
Financing Guarantees
While most of our arrangements for sales include short-term payment terms, from time to time we provide long-term financing to creditworthy customers. We have generally sold receivables financed through these arrangements on a non-recourse basis to third party financing institutions within 10 days of the contracts' dates of execution, and we classify the proceeds from these sales as cash flows from operating activities in our condensed consolidated statements of cash flows. We account for the sales of these receivables as "true sales" as defined in the accounting standards on transfers of financial assets, as we are considered to have surrendered control of these financing receivables. We sold$38 million and$26 million of receivables during the first six months of fiscal 2022 and fiscal 2021, respectively. In addition, we enter into arrangements with leasing companies for the sale of our hardware systems products. These leasing companies, in turn, lease our products to end-users. The leasing companies generally have no recourse to us in the event of default by the end-user. Some of the leasing arrangements described above have been financed on a recourse basis through third-party financing institutions. Under the terms of recourse leases, which are generally three years or less, we remain liable for the aggregate unpaid remaining lease payments to the third-party leasing companies in the event of end-user customer default. These arrangements are generally collateralized by a security interest in the underlying assets. As ofOctober 29, 2021 andApril 30, 2021 , the aggregate amount by which such contingencies exceeded the associated liabilities was not significant. To date, we have not experienced significant losses under our lease financing programs or other financing arrangements. We have entered into service contracts with certain of our end-user customers that are supported by third-party financing arrangements. If a service contract is terminated as a result of our non-performance under the contract or our failure to comply with the terms of the financing arrangement, we could, under certain circumstances, be required to acquire certain assets related to the service contract or to pay the aggregate unpaid payments under such arrangements. As ofOctober 29, 2021 , we have not been required to make any payments under these arrangements, and we believe the likelihood of having to acquire a material amount of assets or make payments under these arrangements is remote. The portion of the financial arrangement that represents unearned services revenue is included in deferred revenue and financed unearned services revenue in our condensed consolidated balance sheets.
Legal Contingencies
We are subject to various legal proceedings and claims which arise in the normal course of business. See further details on such matters in Note 15 - Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America , which require management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses, and the disclosure of contingent assets and liabilities. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We believe that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates and such differences may be material. Management's estimates include, as applicable, the anticipated impacts of the COVID-19 pandemic. The summary of our significant accounting policies is included under Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of our fiscal 2021 Form 10-K. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. There have been no material changes to the critical accounting policies and estimates as filed in such report. 39
--------------------------------------------------------------------------------
© Edgar Online, source