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TMCNet:  BROCADE COMMUNICATIONS SYSTEMS INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

[December 16, 2013]

BROCADE COMMUNICATIONS SYSTEMS INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K. This section and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can also be identified by words such as "anticipates," "expects," "believes," "plans," "predicts," and similar terms. Forward-looking statements are not guarantees of future performance and our actual results 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 the subsection entitled "Risk Factors" above.


Overview We are a leading supplier of networking equipment and software for businesses and organizations of many types and sizes, including global enterprises that use our products and services as part of their communications infrastructure, and service providers such as telecommunication firms, cable operators and mobile carriers who use our products and services as part of their production operations. Our business model is focused on two key markets: our Storage Area Networking ("SAN") business, where we offer Fibre Channel ("FC") SAN backbones, directors, fixed form factor switches and embedded switches, host bus adapters ("HBAs") and server virtualization solutions, and our Internet Protocol ("IP") Networking business, where we offer modular and stackable solutions, IP routers, Ethernet switches, Ethernet fabrics, converged adapters, as well as application delivery, security and wireless solutions. We also provide product-related customer support and services.

We expect growth opportunities in the SAN market to be driven by key customer Information Technology ("IT") initiatives such as server virtualization, enterprise mobility, data center consolidation, migration to higher performance technologies, such as solid state storage and cloud computing initiatives. Our IP Networking business strategies are intended to increase new customer accounts and expand our market share through product innovation, such as our Ethernet fabric products, and the development of and expansion of our routes to market.

The success of Ethernet fabrics, in particular, will depend on customers recognizing the benefits of upgrading their data center networks to fabric-based networking architectures, and our future success in this area would be negatively impacted if this technological transition does not occur at the anticipated rate or at all. We plan to continue to support our SAN and IP Networking growth plans by continuous innovation, leveraging the strategic investments we have made in our core businesses, developing emerging technologies, new product introductions, and enhancing our existing partnerships and forming new ones through our various distribution channels.

We announced in the second quarter of fiscal year 2013 that we were making certain changes in our strategic direction by focusing on key technology segments, as well as investing in data center and public sector market opportunities. As part of this change in focus, we reduced cost of revenues and other operating expenses by $100 million on an annualized basis when comparing the fourth quarter to the first quarter of fiscal year 2013. We achieved our targeted cost reduction opportunities ahead of our previously announced schedule by focusing on the optimization of discretionary spending and rebalancing personnel resources. This change in focus will also result in a rebalancing of resources away from certain non-key areas of our business and may impact our ability to generate revenue from certain products, markets, geographies and customers, and may lower our revenue, in the near term, by $80 million to $100 million on an annualized basis.

We continue to face multiple challenges, including aggressive price discounting from competitors, new product introductions from competitors, rapid adoption of new technologies by customers, uncertainty in the worldwide macroeconomic climate and its impact on IT spending patterns globally, as well as uncertain federal government spending in the United States and the budget-related government shutdown. We are also cautious about the stability and health of certain international markets, including China and Europe, and current global and country-specific dynamics, including inflationary risks in China and the continuing sovereign debt risk, particularly in Europe. These factors may impact our business and that of our partners. While the diversification of our business model helps mitigate the effect of some of these challenges and we expect IT spending levels to generally rise in the long term, it is difficult to offset short-term reductions in IT spending, which may adversely affect our financial results and stock price.

We expect the number of SAN and IP Networking products we ship to fluctuate depending on the demand for our existing and recently introduced products, sales support for our products from our distribution and resale partners, as well as the timing of product transitions by our original equipment manufacturer ("OEM") partners. The average selling prices per port for our SAN and IP Networking products have typically declined over time, unless impacted favorably by a new product introduction or mix, and will likely decline in the future.

27-------------------------------------------------------------------------------- Table of Contents Our plans for our operating cash flows are to provide liquidity for operations, to repurchase our stock to reduce the dilutive effects of our equity award programs and, from time to time, we may also opportunistically repurchase our stock under our previously announced stock repurchase programs. In addition, we may use our operating cash flows to strengthen our networking portfolios through acquisitions and strategic investments.

Results of Operations We report our fiscal year on a 52/53-week period ending on the last Saturday in October. As is customary for companies that use the 52/53-week convention, every fifth year contains a 53-week year. Fiscal years 2013, 2012 and 2011 were 52-week fiscal years. Our next 53-week fiscal year will be fiscal year 2014, and our next 14-week quarter will be in the second quarter of fiscal year 2014.

Our results of operations for the years ended October 26, 2013, October 27, 2012, and October 29, 2011, are reported in this discussion and analysis as a percentage of total net revenues, except for gross margin with respect to each segment, which is indicated as a percentage of the respective segment net revenues.

Revenues. Our revenues are derived primarily from sales of our SAN and IP Networking products, and support and services related to these products, which we call Global Services.

Our total net revenues are summarized as follows (in thousands, except percentages): Fiscal Year Ended October 26, % of Net October 27, % of Net Increase/ % 2013 Revenues 2012 Revenues (Decrease) Change SAN Products $ 1,318,509 59.3 % $ 1,356,099 60.6 % $ (37,590 ) (2.8 )% IP Networking Products 552,058 24.8 % 534,757 23.9 % 17,301 3.2 % Global Services 352,297 15.9 % 346,914 15.5 % 5,383 1.6 % Total net revenues $ 2,222,864 100.0 % $ 2,237,770 100.0 % $ (14,906 ) (0.7 )% Fiscal Year Ended October 27, % of Net October 29, % of Net Increase/ % 2012 Revenues 2011 Revenues (Decrease) Change SAN Products $ 1,356,099 60.6 % $ 1,237,994 57.6 % $ 118,105 9.5 % IP Networking Products 534,757 23.9 % 551,820 25.7 % (17,063 ) (3.1 )% Global Services 346,914 15.5 % 357,628 16.7 % (10,714 ) (3.0 )% Total net revenues $ 2,237,770 100.0 % $ 2,147,442 100.0 % $ 90,328 4.2 % The decrease in total net revenues for the fiscal year ended October 26, 2013, compared with the fiscal year ended October 27, 2012, reflects lower sales of our SAN products, partially offset by higher sales of our IP Networking products and Global Services offerings, as further described below: • The decrease in SAN product revenues was caused by a decrease in director and server product revenues due to weaker demand from our OEMs and weaker end-user demand in the high-end storage array market in fiscal year 2013.

We continue to maintain a positive view of the long-term SAN market despite a soft storage market in the near term. The decrease in SAN product revenues was partially offset by the continued strong growth in sales of our Gen 5 Fibre Channel products. Our average selling price per port increased by 1.3% during the fiscal year ended October 26, 2013, which was offset by the 4.0% decrease in the number of ports shipped during the same period, resulting in lower SAN product revenues in fiscal year 2013; • The increase in IP Networking product revenues primarily reflects higher revenues from our IP routing and application delivery products. Based on our analysis of the information we collect in our sales management system, we estimate that revenues from our service provider and enterprise end customers have increased for the fiscal year ended October 26, 2013, compared with the fiscal year ended October 27, 2012, while revenues from our U.S. federal government end customers have decreased due to the current challenging federal budget environment and the budget-related government shutdown, which caused a delay in the orders for some funded projects. As the percentage of our IP Networking products being sold through two-tier distribution has increased, it has become increasingly difficult to quantify our revenues by end customer, and, therefore, these results are based solely on our estimates; and 28-------------------------------------------------------------------------------- Table of Contents • The increase in Global Services revenues was primarily attributable to an increase in the sales of initial support contracts and renewal support contracts for our IP Networking products, partially offset by a decrease in professional services revenues.

The increase in total net revenues for the fiscal year ended October 27, 2012, compared with the fiscal year ended October 29, 2011, reflects higher sales of our SAN products, partially offset by lower revenues from our IP Networking products and Global Services offerings, as further described below: • The increase in SAN product revenues was driven by a shift in mix to our high-end, higher bandwidth director and switch products, including strong growth in sales of our Gen 5 Fibre Channel products. The number of ports shipped during the fiscal year ended October 27, 2012, increased by 3.5%, and average selling price per port increased by 5.7%; • The decrease in IP Networking product revenues reflects lower revenues from our IP routing and application delivery products while Ethernet switching product revenue was flat year-over-year. As more of our IP Networking products are being sold through our two-tier distribution channel, it has become increasingly difficult to consistently identify the customer split of our end users. Based on our analysis of the information we collect in our sales management system, we estimate that revenues from our enterprise customers decreased, partially offset by an increase in revenues from both service provider and U.S. federal government customers.

Our IP Networking business was impacted by slower enterprise customer spending and the competitive enterprise environment. In addition, enterprise product revenue decreased in part due to our transition to a two-tier distribution channel model. This transition resulted in lower average selling prices through the distribution channel, which was not compensated by an increase in distribution channel sales volumes; and • The decrease in Global Services revenues was primarily attributed to the sale of Strategic Business Systems, Inc. ("SBS"), a wholly-owned subsidiary, in September 2011, partially offset by an increase in IP Networking support revenues.

Our total net revenues by geographical area are summarized as follows (in thousands, except percentages): Fiscal Year Ended October 26, % of Net October 27, % of Net Increase/ % 2013 Revenues 2012 Revenues (Decrease) Change United States $ 1,351,242 60.8 % $ 1,414,390 63.2 % $ (63,148 ) (4.5 )% Europe, the Middle East and Africa (1) 552,734 24.9 % 493,979 22.1 % 58,755 11.9 % Asia Pacific 181,461 8.1 % 186,244 8.3 % (4,783 ) (2.6 )% Japan 97,259 4.4 % 99,887 4.5 % (2,628 ) (2.6 )% Canada, Central and South America 40,168 1.8 % 43,270 1.9 % (3,102 ) (7.2 )% Total net revenues $ 2,222,864 100.0 % $ 2,237,770 100.0 % $ (14,906 ) (0.7 )% Fiscal Year Ended October 27, % of Net October 29, % of Net Increase/ % 2012 Revenues 2011 Revenues (Decrease) Change United States $ 1,414,390 63.2 % $ 1,313,302 61.2 % $ 101,088 7.7 % Europe, the Middle East and Africa (1) 493,979 22.1 % 502,999 23.4 % (9,020 ) (1.8 )% Asia Pacific 186,244 8.3 % 212,636 9.9 % (26,392 ) (12.4 )% Japan 99,887 4.5 % 75,542 3.5 % 24,345 32.2 % Canada, Central and South America 43,270 1.9 % 42,963 2.0 % 307 0.7 % Total net revenues $ 2,237,770 100.0 % $ 2,147,442 100.0 % $ 90,328 4.2 % (1) Includes net revenues of $339.1 million, $259.2 million and $257.5 million for the fiscal years ended October 26, 2013, October 27, 2012, and October 29, 2011, respectively, relating to the Netherlands.

Revenues are attributed to geographic areas based on where our products are shipped. However, certain OEM partners take possession of our products domestically and then distribute these products to their international customers. Because we account for all of those OEM revenues as domestic revenues, we cannot be certain of the extent to which our domestic and international revenue mix is impacted by the practices of our OEM partners, but end-user location data indicate that international revenues comprise a larger percentage of our total net revenues than the attributed revenues above may indicate.

29-------------------------------------------------------------------------------- Table of Contents International revenues for the fiscal year ended October 26, 2013, increased as a percentage of total net revenues compared to the prior year primarily due to a shift in the mix of SAN product sales to certain of our OEM partners from the United States region to the Europe, Middle East and Africa regions relative to total net revenues. International revenues for the fiscal year ended October 27, 2012, decreased as a percentage of total net revenues compared to the prior year primarily due to higher revenues from our SAN product sales to U.S. OEM partners, which strengthened U.S. revenues, as well as lower product sales in EMEA due to a weak macroeconomic environment.

A significant portion of our revenues are concentrated among a relatively small number of OEM customers. For the fiscal years ended October 26, 2013, October 27, 2012, and October 29, 2011, the same three customers each represented 10% or more of our total net revenues for a combined total of 46% (EMC Corporation ("EMC") with 18%, Hewlett-Packard Company ("HP") with 12% and International Business Machines Corporation ("IBM") with 16%), 47% (EMC with 16%, HP with 13% and IBM with 18%) and 43% (EMC with 15%, HP with 13% and IBM with 15%), respectively, of our total net revenues. We expect that a significant portion of our future revenues will continue to come from sales of products to a relatively small number of OEM partners and to the U.S. federal government and its individual agencies through our distributors and resellers. Therefore, the loss of, or a significant decrease in the level of sales to, or a change in the ordering pattern of any one of, these customers could seriously harm our financial condition and results of operations.

Gross margin. Gross margin as stated below is indicated as a percentage of the respective segment net revenues, except for total gross margin, which is stated as a percentage of total net revenues.

Gross margin is summarized as follows (in thousands, except percentages): Fiscal Year Ended October 26, % of Net October 27, % of Net Increase/ % Points 2013 Revenues 2012 Revenues (Decrease) Change SAN Products $ 963,121 73.0 % $ 993,491 73.3 % $ (30,370 ) (0.3 )% IP Networking Products 249,084 45.1 % 207,509 38.8 % 41,575 6.3 % Global Services 196,674 55.8 % 182,019 52.5 % 14,655 3.3 % Total gross margin $ 1,408,879 63.4 % $ 1,383,019 61.8 % $ 25,860 1.6 % Fiscal Year Ended October 27, % of Net October 29, % of Net Increase/ % Points 2012 Revenues 2011 Revenues (Decrease) Change SAN Products $ 993,491 73.3 % $ 881,981 71.2 % $ 111,510 2.1 % IP Networking Products 207,509 38.8 % 230,637 41.8 % (23,128 ) (3.0 )% Global Services 182,019 52.5 % 170,916 47.8 % 11,103 4.7 % Total gross margin $ 1,383,019 61.8 % $ 1,283,534 59.8 % $ 99,485 2.0 % For the fiscal year ended October 26, 2013, compared with the fiscal year ended October 27, 2012, total gross margin increased in absolute dollars and as a percentage of total net revenues due to a combination of factors for our SAN products, IP Networking products and Global Services offerings, as further described below.

Gross margin percentage by reportable segment increased or decreased for the fiscal year ended October 26, 2013, compared with the fiscal year ended October 27, 2012, primarily due to the following factors (the percentages below reflect the impact on gross margin): • SAN gross margins relative to net revenues decreased due to a 1.4% increase in manufacturing overhead costs relative to net revenues primarily due to a decrease in our ports shipped versus our fixed overhead costs, partially offset by a 0.5% decrease in amortization of SAN-related intangible assets and a 0.4% decrease in discrete period costs, in each case, relative to net revenues; • IP Networking gross margins relative to net revenues increased primarily due to a 2.8% decrease in product costs, which is primarily due to a more favorable mix of IP Networking products, a 2.2% decrease in manufacturing overhead costs, and a 1.7% decrease in discrete period costs, which is primarily due to lower inventory revaluation and decreased warranty expense, in each case, relative to net revenues. These decreases were partially offset by the costs associated with certain Foundry pre-acquisition litigation, which caused a 0.6% increase in costs, relative to net revenues; and 30-------------------------------------------------------------------------------- Table of Contents • Global Services gross margins relative to net revenues increased primarily due to a 3.4% decrease in service and support costs relative to net revenues, primarily due to a decrease in period costs related to improved utilization of service inventory assets within our spares depot, as well as decreases in legal, IT and facilities expenses.

For the fiscal year ended October 27, 2012, compared with the fiscal year ended October 29, 2011, total gross margin increased in absolute dollars and percentage primarily due to an increase in margins on SAN products and Global Services offerings, and a favorable product mix resulting from a year-over-year increase in the relative percentage of SAN products sold, which yield higher gross margins. This was partially offset by a decrease in margins on IP Networking products.

Gross margin percentage by reportable segment increased or decreased for the fiscal year ended October 27, 2012, compared with the fiscal year ended October 29, 2011, primarily due to the following factors (the percentages below reflect the impact on gross margin): • SAN gross margins relative to net revenues increased due to a 1.1% decrease in product costs relative to net revenues. Additionally, amortization of SAN-related intangible assets decreased by 0.9% relative to net revenues; • IP Networking gross margins relative to net revenues decreased due to a 4.3% increase in manufacturing costs, as well as a 1.1% increase in product costs relative to net revenues, which is primarily due to the impact of a decrease in average selling prices and an unfavorable mix due to an increase in the percentage of sales of our fixed form products, which yield lower gross margins. These increases were partially offset by a 2.6% decrease in other costs relative to net revenues, primarily by a decrease in inventory excess and obsolescence charges and warranty expense; and • Global Services gross margins relative to net revenues increased due to a 4.7% decrease in service and support costs relative to net revenues, primarily from decreased headcount as a result of the sale of SBS.

Research and development expenses. Research and development ("R&D") expenses consist primarily of compensation and related expenses for personnel engaged in engineering and R&D activities, fees paid to consultants and outside service providers, engineering expenses, which primarily consist of nonrecurring engineering charges and prototyping expenses related to the design, development, testing and enhancement of our products, depreciation related to engineering and test equipment, and expenses related to legal, IT, facilities and other shared functions.

R&D expenses are summarized as follows (in thousands, except percentages): October 26, 2013 October 27, 2012 % of Net % of Net Increase/ % Research and development expense: Expense Revenues Expense Revenues (Decrease) Change Fiscal year ended $ 378,521 17.0 % $ 363,090 16.2 % $ 15,431 4.2 % October 27, 2012 October 29, 2011 % of Net % of Net Increase/ % Expense Revenues Expense Revenues (Decrease) Change Fiscal year ended $ 363,090 16.2 % $ 354,401 16.5 % $ 8,689 2.5 % R&D expenses increased for the fiscal year ended October 26, 2013, compared with the fiscal year ended October 27, 2012, due to the following (in thousands): Increase/ (Decrease) Salaries and other compensation $ 17,199 Depreciation and amortization expense 3,171 Engineering equipment expense 2,055 Various individually insignificant items 125 The increase in R&D expenses was partially offset by a decrease in the following: Expenses related to legal, IT, facilities and other shared functions (7,119 ) Total change $ 15,431 31-------------------------------------------------------------------------------- Table of Contents Salaries and other compensation increased primarily due to an increase in salaries and incentive compensation for employees added from the Vyatta, Inc.

("Vyatta") acquisition, as well as merit-based increases in salaries and headcount growth related to other Brocade personnel. Depreciation and amortization expense increased due to additional equipment acquired for use in our engineering laboratories. In addition, engineering equipment expense increased primarily due to a physical write-off of scrapped equipment in fiscal year 2013. Expenses related to legal, IT, facilities and other shared functions allocated to research and development activities decreased primarily due to lower legal expenses due to recent litigation settlements, and lower IT expenses as part of our spending reduction plan.

R&D expenses increased for the fiscal year ended October 27, 2012, compared with the fiscal year ended October 29, 2011, due to the following (in thousands): Increase/ (Decrease) Salaries and other compensation $ 6,999 Outside services expense 4,143 Depreciation and amortization expense 1,905 Engineering expense 1,187 The increase in R&D expenses was partially offset by decreases in the following: Engineering equipment expense (3,615 ) Stock-based compensation expense (1,007 ) Various individually insignificant items (923 ) Total change $ 8,689 Salaries and other compensation increased primarily due to an increase in our variable compensation due to improved financial results during fiscal year 2012.

Outside services expense increased primarily due to increased certification and technical publication expenses as we penetrated new markets and fulfilled additional U.S. federal government customer testing requirements. In addition, depreciation and amortization expense increased due to additional depreciation expenses related to equipment for our laboratories. These increases were partially offset by the decrease in engineering equipment expense mainly due to reduced spending on equipment for product testing. In addition, stock-based compensation expense decreased mainly because of fewer grants of restricted stock units in fiscal year 2012 and forfeiture-related expense adjustments due to employee terminations.

Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries, commissions and related expenses for personnel engaged in sales and marketing functions, costs associated with promotional and marketing programs, travel and entertainment expenses, and expenses related to legal, IT, facilities and other shared functions.

Sales and marketing expenses are summarized as follows (in thousands, except percentages): October 26, 2013 October 27, 2012 % of Net % of Net Increase/ % Sales and marketing expense: Expense Revenues Expense Revenues (Decrease) Change Fiscal year ended $ 567,637 25.5 % $ 608,502 27.2 % $ (40,865 ) (6.7 )% October 27, 2012 October 29, 2011 % of Net % of Net Increase/ % Expense Revenues Expense Revenues (Decrease) Change Fiscal year ended $ 608,502 27.2 % $ 608,513 28.3 % $ (11 ) - % 32-------------------------------------------------------------------------------- Table of Contents Sales and marketing expenses decreased for the fiscal year ended October 26, 2013, compared with the fiscal year ended October 27, 2012, due to the following (in thousands): Increase/ (Decrease) Salaries and other compensation $ (16,780 ) Outside services and other marketing expense (10,419 ) Expenses related to legal, IT, facilities and other shared functions (9,925 ) Stock-based compensation expense (3,833 ) The decrease in sales and marketing expenses was partially offset by an increase in the following: Various individually insignificant items 92 Total change $ (40,865 ) Salaries and other compensation decreased primarily due to decreased headcount, which also resulted in lower variable compensation and commissions. Outside services and other marketing expense decreased primarily due to less spending on conferences and trade shows, as well as on advertising, in fiscal year 2013.

Expenses related to legal, IT, facilities and other shared functions allocated to sales and marketing activities decreased primarily due to lower legal expenses due to recent litigation settlements, and to a lesser extent, lower IT and facilities expenses as part of our spending reduction plan. Stock-based compensation expense decreased primarily due to a decline in the grant date per-unit fair values of restricted stock units granted to employees in recent quarters, as well as due to certain executive departures in fiscal year 2013.

The decline in grant date per-unit fair values was primarily due to lower average grant date stock prices for the restricted stock units amortized during fiscal year 2013 as compared to the restricted stock units amortized during fiscal year 2012 (see Note 12, "Stock-Based Compensation," of the Notes to Consolidated Financial Statements).

Sales and marketing expenses remained flat for the fiscal year ended October 27, 2012, compared with the fiscal year ended October 29, 2011, due to the following (in thousands): Increase/ (Decrease) Salaries and other compensation $ (9,958 ) Stock-based compensation expense (2,810 ) Outside services expense (1,443 ) Sales office facilities expense (1,094 ) Travel and entertainment expense (961 ) Various individually insignificant items (460 ) The decrease in sales and marketing expenses was offset by increases in the following: Marketing expense 9,714 Expenses related to legal, IT, facilities and other shared functions 7,001 Total change $ (11 ) Salaries and other compensation decreased primarily due to a reduction in variable compensation mainly attributable to lower sales commissions and lower headcount. Stock-based compensation expense decreased primarily due to fewer grants of restricted stock units in fiscal year 2012 and forfeiture-related expense adjustments due to employee terminations. Outside services expense decreased primarily due to a decrease in the use of outside consultants for business development and operational projects in fiscal year 2012. Sales office facilities expense decreased due to lower headcount and office consolidation.

Travel and entertainment expense decreased due to lower headcount and lower spending due to cost control initiatives. These decreases were offset by an increase in marketing expense primarily due to our marketing awareness campaigns and various other marketing activities. In addition, expenses related to legal, IT, facilities and other shared functions increased primarily due to an increase in legal expenses allocated to sales and marketing.

General and administrative expenses. General and administrative ("G&A") expenses consist primarily of compensation and related expenses for corporate management, finance and accounting, human resources, legal, IT, facilities and investor relations, as well as recruiting expenses, professional fees, and other corporate expenses.

33-------------------------------------------------------------------------------- Table of Contents G&A expenses are summarized as follows (in thousands, except percentages): October 26, 2013 October 27, 2012 General and administrative % of Net % of Net Increase/ % expense: Expense Revenues Expense Revenues (Decrease) Change Fiscal year ended $ 74,518 3.4 % $ 74,583 3.3 % $ (65 ) (0.1 )% October 27, 2012 October 29, 2011 % of Net % of Net Increase/ % Expense Revenues Expense Revenues (Decrease) Change Fiscal year ended $ 74,583 3.3 % $ 69,506 3.2 % $ 5,077 7.3 % G&A expenses remained flat for the fiscal year ended October 26, 2013, compared with the fiscal year ended October 27, 2012, due to the following (in thousands): Increase/ (Decrease) Outside services expense $ (3,804 ) Various individually insignificant items (418 ) The decrease in G&A expenses was offset by increases in the following: Salaries and other compensation 2,517 Stock-based compensation expense 1,640 Total change $ (65 ) Expense associated with outside services decreased primarily due to lower legal expense resulting from the settlement of litigation matters during fiscal year 2013, as well as decreased costs with respect to IT and finance-related projects as part of our spending reduction plan. Salaries and other compensation increased primarily due to an increase in salaries and incentive compensation for employees added from the Vyatta acquisition, as well as merit-based increases in salaries and headcount growth related to other Brocade personnel, and severance and recruiting costs related to the transition to a new Chief Executive Officer. Stock-based compensation expense increased mainly because of more grants of restricted stock units since fiscal year 2012, as well as due to incremental expense resulting from higher contributions for the ESPP purchase period that closed in the third fiscal quarter of 2013 as compared to the contributions for the purchase period that closed in the third fiscal quarter of 2012 (see Note 12, "Stock-Based Compensation," of the Notes to Consolidated Financial Statements).

G&A expenses increased for the fiscal year ended October 27, 2012, compared with the fiscal year ended October 29, 2011, due to the following (in thousands): Increase/ (Decrease) Outside services expense $ 6,408 Salaries and other compensation 6,007 The increase in G&A expenses was partially offset by decreases in the following: Facilities expense (2,675 ) Stock-based compensation expense (1,917 ) Equipment and furniture expense (1,888 ) Various individually insignificant items (858 ) Total change $ 5,077 Outside services expense increased primarily due to increased costs for our ongoing litigation matters. Salaries and other compensation increased due to merit increases in salaries and increased severance costs in fiscal year 2012, as well as an increase in our variable compensation due to improved financial results during fiscal year 2012. These increases were partially offset by a decrease in various facilities expense, stock-based compensation expense and spending on equipment and furniture.

34-------------------------------------------------------------------------------- Table of Contents Amortization of intangible assets. Amortization of intangible assets is summarized as follows (in thousands, except percentages): October 26, 2013 October 27, 2012 Amortization of intangible % of Net % of Net Increase/ % assets: Expense Revenues Expense Revenues (Decrease) Change Fiscal year ended $ 54,256 2.4 % $ 59,204 2.6 % $ (4,948 ) (8.4 )% October 27, 2012 October 29, 2011 % of Net % of Net Increase/ % Expense Revenues Expense Revenues (Decrease) Change Fiscal year ended $ 59,204 2.6 % $ 60,713 2.8 % $ (1,509 ) (2.5 )% The decrease in amortization of intangible assets for the fiscal year ended October 26, 2013, compared with the fiscal year ended October 27, 2012, as well as for the fiscal year ended October 27, 2012, compared with the fiscal year ended October 29, 2011, was primarily due to the full amortization of certain of our intangible assets, partially offset by the additional amortization of the Vyatta intangible assets acquired in the first fiscal quarter of 2013.

Intangible assets are recorded based on estimates of fair value at the time of the acquisition and identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives (see Note 4, "Goodwill and Intangible Assets," of the Notes to Consolidated Financial Statements).

Restructuring and other costs (recoveries). Restructuring and other costs (recoveries) are summarized as follows (in thousands, except percentages): October 26, 2013 October 27, 2012 Restructuring and other % of Net % of Net Increase/ % costs (recoveries): Expense Revenues Recovery Revenues (Decrease) Change Fiscal year ended $ 25,464 1.1 % $ (89 ) - % $ 25,553 * October 27, 2012 October 29, 2011 % of Net % of Net Increase/ % Recovery Revenues Expense Revenues (Decrease) ChangeFiscal year ended $ (89 ) - % $ 125 - % $ (214 ) (171.2 )% * Not meaningful Restructuring and other charges for the fiscal year ended October 26, 2013, were primarily due to $20.4 million of severance and benefits related to a reduction in workforce, $4.0 million related to contract terminations and other charges, and $1.1 million related to estimated lease loss reserve and related costs recorded during the fiscal year ended October 26, 2013 (see Note 5, "Restructuring and Other Charges," of the Notes to Consolidated Financial Statements).

In May 2013, we announced that we were making certain changes in our strategic direction by focusing on key technology segments, as well as investing in data center and public sector market opportunities. As a result, during the fiscal year ended October 26, 2013, we reevaluated our business model to restructure certain business operations, reorganize certain business units, and reduce our operating expense structure.

As a result of the completion of our restructuring plan and other related spending changes, our cost of revenues and other operating expenses have been reduced by at least $100 million on an annualized basis relative to cost of revenues and other operating expenses incurred during the first quarter of fiscal year 2013. We anticipate that these savings will carry over into the future periods, however, actual savings realized may differ if our assumptions are incorrect or if other unanticipated events occur. Savings may also be offset, or additional expenses incurred, if, and when, we make additional investments in labor, materials or capital in our business in the future, or if we decide to strengthen our networking portfolios through acquisitions and strategic investments.

This change in focus will also result in a rebalancing of resources away from certain non-key areas of our business and may impact our ability to generate revenue from certain products, markets, geographies and customers, and may lower our revenue, in the near term, by $80.0 million to $100.0 million on an annualized basis.

We did not incur any restructuring costs during the fiscal years ended October 27, 2012, and October 29, 2011. In addition, other costs (recoveries) were immaterial for the fiscal years ended October 27, 2012, and October 29, 2011.

35-------------------------------------------------------------------------------- Table of Contents Loss on sale of subsidiary. We did not incur any loss on sale of subsidiary during the fiscal years ended October 26, 2013, and October 27, 2012. During the fiscal year ended October 29, 2011, a loss of $12.8 million was recorded in connection with the sale of SBS, consisting primarily of loss on disposal of goodwill of $1.7 million and write-down of intangible assets of $11.1 million (see Note 13, "Loss on Sale of Subsidiary," of the Notes to Consolidated Financial Statements).

Interest income. Interest income was immaterial for the fiscal years ended October 26, 2013, October 27, 2012, and October 29, 2011.

Other income (loss), net. Other income (loss), net, are summarized as follows (in thousands, except percentages): October 26, 2013 October 27, 2012 % of Net % of Net Increase/ % Other income (loss), net: Income Revenues Loss Revenues (Decrease) Change Fiscal year ended $ 75,835 3.4 % $ (1,499 ) (0.1 )% $ 77,334 * October 27, 2012 October 29, 2011 % of Net % of Net Increase/ % Loss Revenues Loss Revenues (Decrease) Change Fiscal year ended $ (1,499 ) (0.1 )% $ (851 ) - % $ (648 ) 76.1 % * Not meaningful For the fiscal year ended October 26, 2013, compared with the fiscal year ended October 27, 2012, the increase in other income (loss), net, was primarily due to the nonrecurring gain of $76.8 million in the fiscal year ended October 26, 2013, resulting from the litigation settlement with A10 Networks, Inc.

(additionally, see Note 14, "Other Income (Loss), net," of the Notes to Consolidated Financial Statements).

Other income (loss), net, was immaterial for the fiscal years ended October 27, 2012, and October 29, 2011.

Interest expense. Interest expense primarily represents the interest cost associated with our term loan, senior secured notes and senior unsecured notes (see Note 8, "Borrowings," of the Notes to Consolidated Financial Statements).

Interest expense is summarized as follows (in thousands, except percentages): October 26, 2013 October 27, 2012 % of Net % of Net (Increase)/ % Interest expense: Expense Revenues Expense Revenues Decrease Change Fiscal year ended $ (55,261 ) (2.5 )% $ (52,488 ) (2.3 )% $ (2,773 ) 5.3 % October 27, 2012 October 29, 2011 % of Net % of Net (Increase)/ % Expense Revenues Expense Revenues Decrease Change Fiscal year ended $ (52,488 ) (2.3 )% $ (97,838 ) (4.6 )% $ 45,350 (46.4 )% Interest expense increased for the fiscal year ended October 26, 2013, compared with the fiscal year ended October 27, 2012, primarily due to the $15.3 million expense that we recorded in the first quarter of fiscal year 2013, for the call premium, debt issuance costs and original issue discount relating to the redemption of the 6.625% senior secured notes due 2018 (the "2018 Notes"), in accordance with the applicable accounting guidance for debt modification and extinguishment, and for interest cost accounting (additionally, see Note 8, "Borrowings," of the Notes to Consolidated Financial Statements).

This increase was partially offset by the decrease in interest expense resulting from the term loan facility being fully paid off in the fourth quarter of fiscal year 2012, as well as due to the refinancing of the 2018 Notes. In January 2013, we issued $300.0 million in aggregate principal amount of 4.625% Senior Notes due 2023 (the "2023 Notes") in a private placement (the "Offering"). The proceeds from the Offering, together with cash on hand, were used on February 21, 2013, to redeem all of the outstanding 2018 Notes, which had a higher interest rate. The transactions are described further below in "Liquidity and Capital Resources." Interest expense decreased for the fiscal year ended October 27, 2012, compared with the fiscal year ended October 29, 2011, as a result of a reduction in the principal amount of our outstanding debt and refinancing our term debt credit agreement in June 2011. In addition, as a result of the June 2011 refinancing, in accordance with the applicable accounting guidance for debt modification and extinguishment, we recorded an expense of $25.5 million of debt issuance costs and original issue discount relating to the portion of the term loan that was extinguished.

36-------------------------------------------------------------------------------- Table of Contents Income tax expense. Income tax expense and the effective tax rates are summarized as follows (in thousands, except effective tax rates): Fiscal Year Ended October 26, October 27, October 29, 2013 2012 2011 Income tax expense $ 121,838 $ 29,220 $ 28,818 Effective tax rate 36.9 % 13.0 % 36.3 % In general, our provision for income taxes differs from the tax computed at the U.S. federal statutory income tax rate due to state taxes, the effect of non-U.S. operations, non-deductible stock-based compensation expense and adjustments to unrecognized tax benefits (additionally, see Note 15, "Income Taxes," of the Notes to Consolidated Financial Statements).

The effective tax rate in fiscal year 2013 is higher than the 35% U.S. Federal statutory rate. The tax provision in fiscal year 2013 was impacted by a detriment to reduce previously recognized California deferred tax assets as a result of a change in California tax law, partially offset by discrete benefits from reserve releases resulting from audit settlements and expiring statutes of limitations, and an increase in the Federal research and development tax credit that was reinstated on January 2, 2013, for two years, and made retroactive to January 1, 2012.

The effective tax rate in fiscal year 2012 is lower than the 35% U.S. Federal statutory rate primarily due to earnings in our subsidiaries outside of the U.S.

in jurisdictions where our effective tax rate is lower than in the United States. Earnings of our subsidiaries outside of the U.S. primarily relate to our European and Asia Pacific businesses, which are headquartered in Switzerland and Singapore, respectively. The income tax expense recorded for the fiscal year ended October 27, 2012, includes discrete benefits from net reserve releases related to settling tax audits and from expiring statutes of limitations, and a lower benefit from the federal research and development tax credit which expired on December 31, 2011, and, therefore, was not applicable in calendar year 2012.

We recorded an income tax expense for the fiscal year ended October 29, 2011, primarily due to cash repatriated from our foreign subsidiary and foreign tax expenses, partially offset by discrete benefits from the retroactive reinstatement of the Federal research and development tax credit provision, reserve releases of settled tax audits and the expiration of certain statutes of limitations.

Based on the fiscal year 2014 financial forecast, we expect our effective tax rate in fiscal year 2014 to be lower than fiscal year 2013. Factors such as the mix of IP Networking versus SAN products and domestic versus international profits affect our tax expense. As estimates and judgments are used to project such domestic and international earnings, the impact to our tax provision could vary if the current planning or assumptions change. Our income tax provision could change from either effects of changing tax laws and regulations or differences in international revenues and earnings from those historically achieved, a factor largely influenced by the buying behavior of our OEM and channel partners. In addition, we do not forecast discrete events, such as settlement of tax audits with governmental authorities due to their inherent uncertainty. Such settlements have in the past and could in the future materially impact our tax expense. Given that the tax rate is affected by several different factors, it is not possible to estimate our future tax rate with a high degree of certainty.

The Internal Revenue Service (the "IRS") and other tax authorities regularly examine our income tax returns. The IRS is currently examining our federal tax returns for fiscal years 2009 and 2010. In addition, we are in negotiations with foreign tax authorities to obtain correlative relief on transfer pricing adjustments previously settled with the IRS. We believe that our reserves for unrecognized tax benefits are adequate for all open tax years. The timing of income tax examinations, as well as the amounts and timing of related settlements, if any, are highly uncertain. We believe that, before the end of fiscal year 2014, it is reasonably possible that either certain audits will conclude or the statutes of limitations relating to certain income tax examination periods will expire, or both. After we reach settlement with the tax authorities, we expect to record a corresponding adjustment to our unrecognized tax benefits. Taking into consideration the inherent uncertainty as to settlement terms, the timing of payments and the impact of such settlements on other uncertain tax positions, we estimate the range of potential decreases in underlying uncertain tax positions is between $0 and $4 million in the next twelve months. For additional discussion, see Note 15, "Income Taxes," of the Notes to Consolidated Financial Statements.

We believe that sufficient positive evidence exists from historical operations and projections of taxable income in future years to conclude that it is more likely than not that we will realize our deferred tax assets, except for California deferred tax assets and our capital loss carryforwards. Accordingly, we apply a valuation allowance to the California deferred tax assets due to the recent change in California law and to capital loss carryforwards due to the limited carryforward periods of these tax assets.

37-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources October 26, October 27, Increase/ 2013 2012 (Decrease) (in thousands) Cash and cash equivalents $ 986,997 $ 713,226 $ 273,771 Percentage of total assets 27 % 20 % We use cash generated by operations as our primary source of liquidity. We expect that cash provided by operating activities will fluctuate in future periods as a result of a number of factors, including fluctuations in our revenues, the timing of product shipments during the quarter, accounts receivable collections, inventory and supply chain management, and the timing and amount of tax, and other payments or receipts. For additional discussion, see Part I, Item 1A. Risk Factors of this Form 10-K.

In January 2013, we issued $300.0 million of the 2023 Notes in the Offering. On January 22, 2013, we called the 2018 Notes for redemption. On February 21, 2013, we used the net proceeds from the Offering, together with cash on hand, to redeem all of our outstanding 2018 Notes, including the payment of the applicable premium and expenses associated with the redemption, and the interest on the 2018 Notes up to the date of redemption (see Note 8, "Borrowings," of the Notes to Consolidated Financial Statements).

Based on past performance and current expectations, we believe that internally generated cash flows and cash on hand will be generally sufficient to support business operations, capital expenditures, contractual obligations, and other liquidity requirements associated with our operations for at least the next twelve months. Also, we have up to $125.0 million available under our revolving credit facility, and we can factor up to an aggregate amount of $50.0 million of our trade receivables under our factoring facility to provide additional liquidity. There are no other transactions, arrangements, or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity of, availability of, or our requirements for capital resources.

Our existing cash and cash equivalents totaled $987.0 million as of October 26, 2013. Of this amount, approximately 59% was held by our foreign subsidiaries. We do not currently anticipate a need of these funds held by our foreign subsidiaries for our domestic operations and our intent is to permanently reinvest such funds outside of the United States. Under current tax laws and regulations, if these funds are distributed to the U.S. in the form of dividends or otherwise, we may be subject to additional U.S. income taxes and foreign withholding taxes.

Financial Condition Cash and cash equivalents as of October 26, 2013, increased by $273.8 million over the balance as of October 27, 2012, primarily due to the cash generated from operations, proceeds from the issuance of our common stock in connection with employee participation in our equity compensation plans, and the collection of the convertible note receivable from A10, partially offset by the cash used for the acquisition of Vyatta, purchases of property and equipment and the repurchase of outstanding shares of our common stock.

For the fiscal year ended October 26, 2013, we generated $451.0 million in cash from operating activities, which was higher than our net income for the same period, primarily as a result of adjustments to net income for non-cash items related to depreciation and amortization, tax charges and stock-based compensation expense.

Net cash used in investing activities for the fiscal year ended October 26, 2013, totaled $27.0 million and was primarily the result of $52.4 million in purchases of property and equipment and $44.6 million in the acquisition of Vyatta, partially offset by $70.0 million received from A10 for the payment of the convertible note receivable.

Net cash used in financing activities for the fiscal year ended October 26, 2013, totaled $149.4 million and was primarily the result of stock repurchases of $240.0 million, partially offset by proceeds from the issuance of common stock from ESPP purchases and stock option exercises of $93.8 million. For the fiscal year ended October 26, 2013, we repurchased approximately 41.2 million shares of our stock.

A majority of our accounts receivable balance is derived from sales to our OEM partners. As of October 26, 2013, four customers individually accounted for 18%, 12%, 11% and 11% of total accounts receivable, for a combined total of 52% of total accounts receivable. As of October 27, 2012, three customers individually accounted for 16%, 12% and 10% of total accounts receivable, for a combined total of 38% of total accounts receivable. We perform ongoing credit evaluations of our customers and generally do not require collateral or security interests on accounts receivable balances. We have established reserves for credit losses, sales allowances, and other allowances. While we have not experienced material credit losses in any of the periods presented, there can be no assurance that we will not experience material credit losses in the future.

38-------------------------------------------------------------------------------- Table of Contents Accounts receivable days sales outstanding, which is a measure of the average number of days that a company takes to collect revenue after a sale has been made, for the year ended October 26, 2013, was 41 days, up from 38 days for the year ended October 27, 2012, primarily due to better sales linearity in 2012.

Net proceeds from the issuance of common stock in connection with employee participation in our equity compensation plans have historically been a significant component of our liquidity. The extent to which we receive proceeds from these plans can increase or decrease based upon changes in the market price of our common stock, from the amount of awards granted to employees and from the types of awards that are granted to employees. As a result, our cash flow resulting from the issuance of common stock in connection with employee participation in equity compensation plans will vary.

Fiscal Year 2013 Compared to Fiscal Year 2012 Operating Activities. Cash provided by operating activities is net income adjusted for certain non-cash items and changes in certain assets and liabilities.

Net cash provided by operating activities decreased by $139.8 million primarily due to increased payments with respect to accrued employee incentive compensation and accounts payable, and decreased accounts receivable collections, partially offset by a reduction of inventory balance. Fiscal year 2013 includes an annual payout of the employee incentive compensation for fiscal year 2012, as well as a semi-annual payout for the first half of fiscal year 2013. Fiscal year 2012 only includes a semi-annual payout of the employee incentive compensation for the second half of fiscal year 2011.

Investing Activities. Net cash used in investing activities decreased by $44.8 million. The decrease was primarily due to cash received from A10 for the payment of the convertible note receivable during the fourth quarter of fiscal year 2013, as well as lower capital expenditures during fiscal year 2013, which more than offset the $44.6 million of cash used for the acquisition of Vyatta during the first quarter of fiscal year 2013.

Financing Activities. Net cash used in financing activities decreased by $68.7 million. The decrease was primarily due to no principal payments toward the term loan during the fiscal year 2013, as this was fully paid off in the fourth quarter of fiscal year 2012. However, repurchases of our Company's stock increased in fiscal year 2013, and we received lower proceeds from the issuance of common stock during fiscal year 2013.

Fiscal Year 2012 Compared to Fiscal Year 2011 Operating Activities. Net cash provided by operating activities increased by $141.6 million for the fiscal year ended October 27, 2012, compared with the fiscal year ended October 29, 2011. The increase was primarily due to an increase in net income during fiscal year 2012 and decreased payments with respect to accrued employee compensation.

Investing Activities. Net cash used in investing activities decreased by $19.5 million for the fiscal year ended October 27, 2012, compared with the fiscal year ended October 29, 2011. The decrease was primarily due to lower purchases of property and equipment.

Financing Activities. Net cash used in financing activities decreased by $59.0 million for the fiscal year ended October 27, 2012, compared with the fiscal year ended October 29, 2011. The decrease was primarily due to lower repurchases of our Company's stock during fiscal year 2012.

Liquidity Manufacturing and Purchase Commitments. We have manufacturing arrangements with contract manufacturers under which we provide twelve-month product forecasts and place purchase orders in advance of the scheduled delivery of products to our customers. Our purchase commitments reserve reflects our estimate of purchase commitments we do not expect to use in normal operations within the next twelve months, in accordance with our policy (see Note 9, "Commitments and Contingencies," of the Notes to Consolidated Financial Statements).

Income Taxes. We accrue U.S. income taxes on the earnings of our foreign subsidiaries unless the earnings are considered indefinitely reinvested outside of the U.S. We intend to reinvest current and accumulated earnings of our foreign subsidiaries for expansion of our business operations outside the U.S.

for an indefinite period of time.

The IRS and other tax authorities regularly examine our income tax returns (see Note 15, "Income Taxes," of the Notes to Consolidated Financial Statements). We believe we have adequate reserves for all open tax years.

Senior Secured Credit Facility. In October 2008, we entered into a credit agreement for (i) a five-year $1,100.0 million term loan facility and (ii) a five-year $125.0 million revolving credit facility, which includes a $25.0 million swing line loan sub-facility and a $25.0 million letter of credit sub-facility (the "Senior Secured Credit Facility"). The credit agreement was subsequently amended in January 2010, June 2011, and October 2013 to, among other things, provide us with greater operating 39-------------------------------------------------------------------------------- Table of Contents flexibility, reduce interest rates on the term loan facility, reduce interest rates and fees on the revolving credit facility and extend the maturity date of the revolving credit facility to April 7, 2014 (see Note 8, "Borrowings," of the Notes to Consolidated Financial Statements).

We prepaid the term loan in full, and there were no principal amounts or commitments outstanding under the term loan facility as of either October 26, 2013, or October 27, 2012. We have the following amount available for borrowing under the Senior Secured Credit Facility for ongoing working capital and other general corporate purposes, if needed, as of October 26, 2013 (in thousands): Original Amount October 26, 2013 Available Used Available Revolving credit facility $ 125,000 $ - $ 125,000 Senior Secured Notes. In January 2010, we issued $300.0 million in aggregate principal amount of senior secured notes due 2018 (the "2018 Notes") and $300.0 million in aggregate principal amount of senior secured notes due 2020 (the "2020 Notes" and together with the 2018 Notes, the "Senior Secured Notes") (see Note 8, "Borrowings," of the Notes to Consolidated Financial Statements). We used the proceeds to pay down a substantial portion of the outstanding term loan, and retire the convertible subordinated debt due on February 15, 2010, which had been assumed in connection with our acquisition of McDATA Corporation ("McDATA"). The 2018 Notes were redeemed in the second quarter of fiscal year 2013 as described further below.

Senior Unsecured Notes. In January 2013, we issued $300.0 million in aggregate principal amount of the 2023 Notes. We used the proceeds and cash on hand to redeem all of the outstanding 2018 Notes in the second quarter of fiscal year 2013 as described in Note 8, "Borrowings," of the Notes to Condensed Consolidated Financial Statements.

Trade Receivables Factoring Facility. We have an agreement with a financial institution to sell certain of our trade receivables from customers with limited, non-credit-related recourse provisions. The sale of receivables eliminates our credit exposure in relation to these receivables. No trade receivables were sold under our factoring facility during the fiscal years ended October 26, 2013, and October 27, 2012.

Under the terms of the factoring agreement, the total and available amounts of the factoring facility as of October 26, 2013, were $50.0 million.

Covenant Compliance Senior Unsecured Notes covenants. The 2023 Notes were issued pursuant to an Indenture, dated as of January 22, 2013, among the Company, the subsidiary guarantors named therein and Wells Fargo Bank, National Association, as trustee (the "2023 Indenture"). The 2023 Indenture contains covenants that, among other things, restrict the ability of the Company and its subsidiaries to: • Incur certain liens and enter into certain sale leaseback transactions; • Create, assume, incur or guarantee additional indebtedness of the Company's subsidiaries without such subsidiary guaranteeing the 2023 Notes on a pari passu basis; and • Consolidate or merge with, or convey, transfer or lease all or substantially all of the Company's or its subsidiaries' assets.

These covenants are subject to a number of other limitations and exceptions set forth in the indenture. The Company was in compliance with all applicable covenants of the 2023 Indenture as of October 26, 2013.

40-------------------------------------------------------------------------------- Table of Contents Senior Secured Notes covenants. The 2020 Notes and the 2018 Notes were issued pursuant to two separate indentures (the "2020 Indenture" and the "2018 Indenture," respectively), each dated as of January 20, 2010, among the Company, the subsidiary guarantors named therein and Wells Fargo Bank, National Association, as trustee. The 2020 Indenture contains covenants that, among other things, restrict the ability of the Company and its restricted subsidiaries to: • Pay dividends, make investments or make other restricted payments; • Incur additional indebtedness; • Sell assets; • Enter into transactions with affiliates; • Incur liens; • Permit consensual encumbrances or restrictions on the Company's restricted subsidiaries' ability to pay dividends or make certain other payments to the Company; • Consolidate, merge, sell or otherwise dispose of all or substantially all of the Company's or its restricted subsidiaries' assets; and • Designate subsidiaries as unrestricted.

These covenants are subject to a number of limitations and exceptions set forth in the indenture. The Company was in compliance with all applicable covenants of the 2020 Indenture as of October 26, 2013. The 2018 Indenture was discharged as of January 22, 2013 (see Note 8, "Borrowings," of the Notes to Consolidated Financial Statements). Prior to discharge, the 2018 Indenture contained substantially similar covenants and events of default to those in the 2020 Indenture. The Company was in compliance with all applicable covenants of the 2018 Indenture as of the date of discharge.

The 2020 Indenture provides for customary events of default, including, but not limited to, cross defaults to specified other debt of the Company and its subsidiaries. In the case of an event of default arising from specified events of bankruptcy or insolvency, all outstanding senior secured notes will become due and payable immediately without further action or notice. If any other event of default under the 2020 Indenture occurs or is continuing, the applicable trustee or holders of at least 25% in aggregate principal amount of the then outstanding 2020 Notes, as applicable, may declare all of the 2020 Notes to be due and payable immediately.

Senior Secured Credit Facility covenants. The credit agreement governing the Senior Secured Credit Facility contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on liens, indebtedness, investments, fundamental changes, dispositions, capital expenditures, prepayment of other indebtedness, redemption or repurchase of subordinated indebtedness, share repurchases, dividends and other distributions.

The credit agreement contains financial covenants that require the Company to maintain a minimum consolidated fixed charge coverage ratio and a maximum consolidated leverage ratio, each as defined in the credit agreement and described further below. The credit agreement also includes customary events of default, including cross-defaults on the Company's material indebtedness and change of control. The Company was in compliance with all applicable Senior Secured Credit Facility's covenants as of October 26, 2013.

Consolidated Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), as defined in the credit agreement, is used to determine the Company's compliance with certain covenants in the Senior Secured Credit Facility. Consolidated EBITDA is defined as: • Consolidated net income; Plus: • Consolidated interest charges; • Provision for federal, state, local and foreign income taxes; • Depreciation and amortization expense; • Fees, costs and expenses incurred on or prior to the closing date of the Foundry acquisition in connection with the acquisition and the financing thereof; 41-------------------------------------------------------------------------------- Table of Contents • Any cash restructuring charges and integration costs in connection with the Foundry acquisition, in an aggregate amount not to exceed $75.0 million; • Approved non-cash restructuring charges incurred in connection with the Foundry acquisition and the financing thereof; • Other non-recurring expenses reducing consolidated net income which do not represent a cash item in such period or future periods; • Any non-cash stock-based compensation expense; and • Legal fees associated with the indemnification obligations for the benefit of former officers and directors in connection with Brocade's historical stock option litigation; Minus: • Federal, state, local and foreign income tax credits; and • All non-cash items increasing consolidated net income.

The financial covenants imposed under the Senior Secured Credit Facility are described below.

Consolidated Fixed Charge Coverage Ratio. Consolidated fixed charge coverage ratio means, at any date of determination, the ratio of (a) (i) consolidated EBITDA (excluding interest expense, if any, attributable to a campus sale-leaseback), plus (ii) rentals payable under leases of real property, less (iii) the aggregate amount of all capital expenditures to (b) consolidated fixed charges; provided that, for purposes of calculating the consolidated fixed charge coverage ratio for any period ending prior to the first anniversary of the closing date, consolidated interest charges shall be an amount equal to actual consolidated interest charges from the closing date through the date of determination multiplied by a fraction, the numerator of which is 365 and the denominator of which is the number of days from the closing date through the date of determination. Under the terms of the credit agreement, the Company is required to maintain a minimum fixed charge coverage ratio of at least 1.75:1.

Consolidated fixed charges, as defined in the credit agreement, is comprised of the following: • Consolidated interest charges; Plus: • Regularly scheduled principal payments or redemptions or similar acquisitions for value of outstanding debt for borrowed money, but excluding any such payments to the extent refinanced through the incurrence of additional indebtedness; • Rentals payable under leases of real property; • Restricted payments; and • Federal, state, local and foreign income taxes paid in cash.

Consolidated Leverage Ratio. Consolidated leverage ratio means, as of any date of determination, the ratio of (a) consolidated funded indebtedness as of such date to (b) consolidated EBITDA for the measurement period ending on such date.

Under the terms of the credit agreement, the Company may not permit the consolidated leverage ratio at any time to exceed 3:1.

42-------------------------------------------------------------------------------- Table of Contents Contractual Obligations The following table summarizes our contractual obligations, including interest expense, and commitments as of October 26, 2013 (in thousands): Less than More than Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years Contractual Obligations: Senior secured notes due 2020 (1) $ 428,906 $ 20,625 $ 41,250 $ 41,250 $ 325,781 Senior unsecured notes due 2023 (1) 427,924 13,875 27,750 27,750 358,549 Non-cancellable operating leases (2) 70,255 22,253 32,353 9,773 5,876 Non-cancellable capital lease 4,870 3,215 1,655 - - Purchase commitments, gross (3) 191,082 191,082 - - - Total contractual obligations $ 1,123,037 $ 251,050 $ 103,008 $ 78,773 $ 690,206 Other Commitments: Standby letters of credit $ 220 n/a n/a n/a n/a Unrecognized tax benefits and related accrued interest (4) $ 114,767 n/a n/a n/a n/a (1) Amount reflects total anticipated cash payments, including anticipated interest payments.

(2) Amount excludes contractual sublease income of $22.7 million, which consists of $7.1 million to be received in less than one year, $14.4 million to be received in one to three years, and $1.2 million to be received in three to five years.

(3) Amount reflects total gross purchase commitments under our manufacturing arrangements with a third-party contract manufacturer. Of this amount, we have accrued $4.4 million for estimated purchase commitments that we do not expect to use in normal operations within the next twelve months, in accordance with our policy.

(4) As of October 26, 2013, we had a gross liability for unrecognized tax benefits of $112.5 million and a net accrual for the payment of related interest and penalties of $2.3 million.

Share Repurchase Program. As of October 26, 2013, our Board of Directors had authorized, since the inception of the program in August 2004, a total of $2.0 billion for the repurchase of our common stock. The purchases may be made, from time to time, in the open market or by privately negotiated transactions, and are funded from available working capital. The number of shares to be purchased and the timing of purchases are based on the level of our cash balances, general business and market conditions, our debt covenants, the trading price of our common stock and other factors, including alternative investment opportunities.

For the fiscal year ended October 26, 2013, we repurchased 41.2 million shares for an aggregate purchase price of $240.0 million. Approximately $1.0 billion remained authorized for future repurchases under this program as of October 26, 2013. Subsequent to October 26, 2013, and through the date of the filing of this Annual Report on Form 10-K, we repurchased 8.1 million shares of our common stock for an aggregate purchase price of $65.1 million. We are subject to certain covenants relating to our borrowings that may potentially restrict the amount of our Company's shares that we can repurchase. As of October 26, 2013, we were in compliance with all covenants.

Off-Balance Sheet Arrangements As part of our ongoing business, we do not participate in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As of October 26, 2013, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Securities and Exchange Commission ("SEC") Regulation S-K.

43-------------------------------------------------------------------------------- Table of Contents Critical Accounting Estimates Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate, on an ongoing basis, our estimates and judgments, including, but not limited to, those related to sales allowances and programs, bad debts, stock-based compensation, commissions, allocation of purchase price of acquisitions, excess inventory and purchase commitments, restructuring costs, facilities lease losses, impairment of goodwill and other indefinite-lived intangible assets, litigation, uncertain tax positions and investments. We base our estimates on historical experience and 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 that are not readily apparent from other sources. Actual results may differ from these estimates.

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results that we report in our Consolidated Financial Statements. We believe the following critical accounting policies, among others, require significant estimates and judgments used in the preparation of our consolidated financial statements.

Revenue recognition. Our multiple-element product offerings include networking hardware with embedded software products and support, which are considered separate units of accounting. For certain of our products, software and non-software components function together to deliver the tangible products' essential functionality. We allocate revenue to each element in a multiple-element arrangement based upon their relative selling price. When applying the relative selling price method, we determine the selling price for each deliverable using vendor-specific objective evidence ("VSOE") of selling price, if it exists, or third-party evidence ("TPE") of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, we use our best estimate of selling price for that deliverable. Revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for each element.

We determine VSOE based on our normal pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range. For post-contract customer support, we consider stated renewal rates in determining VSOE.

In most instances, we are not able to establish VSOE for all deliverables in an arrangement with multiple elements. This may be due to infrequently selling each element separately, not pricing products within a narrow range, or only having a limited sales history. When VSOE cannot be established, we attempt to establish a selling price for each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our competitors, and our offerings contain a significant level of customization and differentiation such that the comparable pricing of products with similar functionality cannot be obtained.

Furthermore, we are unable to reliably determine what similar competitor products' selling prices are on a stand-alone basis. Therefore, we are typically not able to determine TPE.

When we are unable to establish selling price using VSOE or TPE, we use estimated selling price ("ESP") in our allocation of the arrangement consideration. The objective of ESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. ESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly-customized offerings.

We determine ESP for a product by considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives and pricing practices. The determination of ESP is made through consultation with and formal approval by our management, taking into consideration the go-to-market strategy. If circumstances related to our estimates for revenue recognition change, our allocation of revenue to each element in a multiple-element arrangement may also change.

Stock-based compensation. We grant stock options for shares in the Company's common stock, restricted stock units and other types of equity compensation awards to our employees and directors under various equity compensation plans.

For additional discussion, see Note 12, "Stock-Based Compensation," of the Notes to Consolidated Financial Statements.

The compensation expense for stock-based awards is adjusted for an estimated impact of forfeitures and is recognized over the vesting period of the award under a graded or straight-line vesting method. In addition, we record stock-based compensation expense in connection with shares issued under our employee stock purchase plan using the graded vesting method over the twenty-four month offering period.

44-------------------------------------------------------------------------------- Table of Contents We use the Black-Scholes option pricing model to determine the fair value of stock options granted when the measurement date is certain. We also use the Black-Scholes option pricing model to determine the fair value of the option component of employee stock purchase plan shares. The determination of the fair value of stock-based awards using the option pricing model is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the expected term of the awards, projected and actual employee stock option exercise behaviors, risk-free interest rates, estimated forfeitures and expected dividend yields.

We estimate the expected term of stock options granted by calculating the average term from our historical stock option exercise experience. We have never declared or paid any cash dividends, and therefore we use an expected dividend yield of zero in the option pricing model. We are required to estimate forfeitures at the time of the grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. We use implied volatilities from traded options of the Company's common stock and historical volatilities of the Company's common stock to estimate volatility over the expected term of the awards.

The assumptions used in calculating the fair value of stock-based awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

Acquisitions-purchase price allocation. We allocate the purchase price of an acquired business to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the acquisition date. The excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets, if any, is recorded as goodwill. We estimate the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques. We adjust the preliminary purchase price allocation, as necessary, typically up to one year after the acquisition closing date as we obtain more information regarding asset valuations and liabilities assumed. For additional discussion, see Note 3, "Acquisition," of the Notes to Consolidated Financial Statements.

Inventory valuation and purchase commitment liabilities. We write down inventory and record purchase commitment liabilities for estimated excess and obsolete inventory equal to the difference between the cost of inventory and the estimated fair value based upon forecast of future product demand, product transition cycles and market conditions. Any significant unanticipated changes in demand or technological development could have a significant impact on the value of our inventory and purchase commitments and our reported results. If actual market conditions are less favorable than those projected, additional inventory write-downs, purchase commitment liabilities and charges against earnings may be required.

Restructuring costs. We monitor and regularly evaluate our organizational structure and associated operating expenses. Depending on events and circumstances, we may decide to take additional actions to reduce future operating costs as our business requirements evolve. In determining restructuring charges, we analyze our future operating requirements, including the required headcount by business functions and facility space requirements.

Our restructuring costs and any resulting accruals involve significant estimates made by management using the best information available at the time the estimates are made. In recording severance accruals, we record a liability when all of the following conditions have been met: employees' rights to receive compensation for future absences is attributable to employees' services already rendered; the obligation relates to rights that vest or accumulate; payment of the compensation is probable; and the amount can be reasonably estimated. In recording facilities lease loss accruals, we make various assumptions, including the time period over which the facilities are expected to be vacant, expected sublease terms, expected sublease rates, expected future operating costs, and expected future use of the facilities. Our estimates involve a number of risks and uncertainties, some of which are beyond our control, including future real estate market conditions and our ability to successfully enter into subleases or lease termination agreements with terms as favorable as those assumed when arriving at our estimates. We regularly evaluate a number of factors to determine the appropriateness and reasonableness of our restructuring accruals, including the various assumptions noted above. If actual results differ significantly from our estimates, we may be required to adjust our restructuring accruals in the future.

Impairment of goodwill and other indefinite-lived intangible assets. Goodwill and other indefinite-lived intangible assets are generated as a result of business combinations. Our indefinite-lived assets are comprised of acquired in-process research and development ("IPRD") and goodwill.

IPRD impairment testing. IPRD is an intangible asset accounted as an indefinite-lived asset until the completion or abandonment of the associated research and development effort. During the development period, we conduct our IPRD impairment test annually, as of the first day of the second fiscal quarter, and whenever events or changes in facts and circumstances indicate that it is more likely than not that IPRD is impaired. Events that might indicate impairment include, but are not limited to, adverse cost factors, deteriorating financial performance, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on us and our customer base, and/or other relevant events such as changes in management, key personnel, litigations, or customers. Our ongoing consideration of all these factors could result in IPRD impairment charges in the future, which could adversely affect our net income.

45-------------------------------------------------------------------------------- Table of Contents We performed our annual development period's IPRD impairment test using measurement data as of the first day of the second fiscal quarter of 2013.

During the test, we first assessed qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of our IPRD asset is less than its carrying amount. After assessing the totality of events and circumstances, we determined that it was not more likely than not that the fair values of our IPRD assets were less than their carrying amounts and no further testing was required.

Goodwill impairment testing. We conduct our goodwill impairment test annually, as of the first day of the second fiscal quarter, and whenever events or changes in facts and circumstances indicate that the fair value of the reporting unit may be less than its carrying amount. Events that might indicate impairment include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base, material negative changes in relationships with significant customers, and/or a significant decline in our stock price for a sustained period. Our ongoing consideration of all these factors could result in goodwill impairment charges in the future, which could adversely affect our net income.

We use the income approach, the market approach, or a combination thereof, in testing goodwill for impairment for each reporting unit, which we have determined to be at the operating segment level. The reporting units are determined by the components of our operating segments that constitute a business for which both (i) discrete financial information is available and (ii) segment management regularly reviews the operating results of that component. Our four reporting units are: Storage Area Networking ("SAN") Products; Ethernet Switching & Internet Protocol ("IP") Routing, which includes Open Systems Interconnection Reference Model ("OSI") Layer 2-3 products; Application Delivery Products ("ADP"), which includes OSI Layer 4-7 products; and Global Services.

The first step tests for potential impairment by comparing the fair value of reporting units with reporting units' net asset values. If the fair value of the reporting unit exceeds the carrying value of the reporting unit's net assets, then goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is below the reporting unit's carrying value, then the second step is required to measure the amount of potential impairment. The second step requires an assignment of the reporting unit's fair value to the reporting unit's assets and liabilities, using the initial acquisition accounting guidance in Accounting Standards Codification ("ASC") 805 Business Combinations, to determine the implied fair value of the reporting unit's goodwill. The implied fair value of the reporting unit's goodwill is then compared with the carrying amount of the reporting unit's goodwill to determine the goodwill impairment loss to be recognized, if any. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, we record an impairment loss equal to the difference.

To determine the reporting unit's fair values, we use the income approach, the market approach, or a combination thereof. The income approach provides an estimate of fair value based on discounted expected future cash flows. The market approach provides an estimate of the fair value of our four reporting units using various prices or market multiples applied to the reporting unit's operating results and then applying an appropriate control premium.

Determining the fair value of a reporting unit or an intangible asset is judgmental in nature and involves the use of significant estimates and assumptions. We based our fair value estimates on assumptions we believe to be reasonable, but inherently uncertain. Estimates and assumptions with respect to the determination of the fair value of our reporting units using the income approach include, among other inputs: • The Company's operating forecasts; • Revenue growth rates; and • Risk-commensurate discount rates and costs of capital.

Our estimates of revenues and costs are based on historical data, various internal estimates and a variety of external sources, and are developed as part of our regular long-range planning process. The control premium used in market or combined approaches is determined by considering control premiums offered as part of acquisitions that have occurred in a reporting unit's comparable market segments.

Consistent with prior years, we performed our annual goodwill impairment test using measurement data as of the first day of the second fiscal quarter of 2013.

During our fiscal year 2013 annual goodwill impairment test, under the first step, we used a combination of approaches to estimate reporting units' fair values. We believe that at the time of impairment testing performed in the second fiscal quarter of 2013, the income approach and the market approach were equally representative of a reporting unit's fair value.

46-------------------------------------------------------------------------------- Table of Contents Based on the results of our step-one analysis, we believe that all our reporting units pass the step-one test and no further testing is required. However, because some of the inherent assumptions and estimates used in determining the fair value of these reportable segments are outside the control of management, changes in these underlying assumptions can adversely impact fair value. The sensitivity analysis below quantifies the impact of key assumptions on certain reporting units' fair value estimates. The principal key assumptions impacting our estimates were (i) discount rates and (ii) DCF terminal value multipliers.

As the discount rates ultimately reflect the risk of achieving reporting units' revenue and cash flow projections, we determined that a separate sensitivity analysis for changes in revenue and cash flow projections is not meaningful or useful.

The estimated fair value of the Ethernet Switching & IP Routing reporting unit exceeded its carrying value by approximately $91 million and the ADP reporting unit exceeded its carrying value by approximately $15 million. The respective fair values of our remaining reporting units exceeded carrying value by significant amounts and were not subject to the sensitivity analysis presented below.

The following table summarizes the approximate impact that a change in principal key assumptions would have on the estimated fair value of the Ethernet Switching & IP Routing reporting unit, leaving all other assumptions unchanged: Approximate Excess of Impact on Fair Fair Value over Value Carrying Value Change (In millions) (In millions) Discount rate ±1% $ (27) - 28 $ 64 - 119DCF terminal value multiplier ±0.5x $ (40) - 40 $ 51 - 131 The following table summarizes the approximate impact that a change in principal key assumptions would have on the estimated fair value of the ADP reporting unit, leaving all other assumptions unchanged: Approximate Excess of Impact on Fair Fair Value over Value Carrying Value Change (In millions) (In millions) Discount rate ±1% $ (4) - 4 $ 11 - 19DCF terminal value multiplier ±0.5x $ (4) - 4 $ 11 - 19 Accounting for income taxes. The determination of our tax provision is subject to estimates and judgments due to operations in multiple tax jurisdictions inside and outside the United States. Sales to our international customers are principally taxed at rates that are lower than the United States statutory rates. The ability to maintain our current effective tax rate is contingent upon existing tax laws in both the United States and in the respective countries in which our international subsidiaries are located. Future changes in domestic or international tax laws could affect the continued realization of the tax benefits we are currently receiving and expect to receive from international sales. In addition, an increase in the percentage of our total revenue from international customers, or in the mix of international revenue among particular tax jurisdictions, could change our overall effective tax rate. We intend to reinvest current and remaining accumulated earnings of our foreign subsidiaries for expansion of our business operations outside the United States for an indefinite period of time. These earnings could become subject to United States federal and state income taxes and foreign withholding taxes, as applicable, should they be either deemed or actually remitted from our international subsidiaries to the United States. In addition, we evaluate the expected realization of our deferred tax assets and assess the need for a valuation allowance on a quarterly basis. As of October 26, 2013, our net deferred tax asset balance was $99.6 million. We believe that sufficient positive evidence exists from historical operations and projections of U.S. taxable income in future years to conclude that it is more likely than not that we would realize our deferred tax assets, except for California deferred tax assets and capital loss carryforwards. Historical operations showed that we have cumulative profits for the prior twelve quarters ended October 26, 2013. We only apply a valuation allowance to the California deferred tax assets due to the recent change in California law and to capital loss carryforwards due to the limited carryforward periods and the character of such tax attributes. In the event future income by jurisdiction is less than what is currently projected, we may be required to apply a valuation allowance to these deferred tax assets in jurisdictions for which realization is no longer determined to be more likely than not.

Accounting for uncertain tax benefits. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. We apply a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Recognition of a tax position is determined when it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation process. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority. The threshold and measurement attribute requires significant judgment by management.

Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operations.

47-------------------------------------------------------------------------------- Table of Contents Recent Accounting Pronouncements For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Note 2, "Summary of Significant Accounting Policies," of the Notes to Consolidated Financial Statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk In the normal course of business, we are exposed to market risks related to changes in interest rates, foreign currency exchange rates and equity prices that could impact our financial position and results of operations. Our risk management strategy with respect to these three market risks may include the use of derivative financial instruments. We use derivative contracts only to manage existing underlying exposures of the Company. Accordingly, we do not use derivative contracts for speculative purposes. Our risks and risk management strategy are outlined below. Actual gains and losses in the future may differ materially from the sensitivity analysis presented below based on changes in the timing and amount of interest rates and our actual exposures and hedges.

Interest Rate Risk Our exposure to market risk due to changes in the general level of United States interest rates relates primarily to our cash equivalents. Our cash and cash equivalents are primarily maintained at seven major financial institutions. The primary objective of our investment activities is the preservation of principal while maximizing investment income and minimizing risk.

The Company did not have any material investments as of October 26, 2013, that are sensitive to changes in interest rates.

Foreign Currency Exchange Rate Risk We are exposed to foreign currency exchange rate risk inherent in conducting business globally in numerous currencies. We are primarily exposed to foreign currency fluctuations related to operating expenses denominated in currencies other than the U.S. dollar, of which the most significant to our operations for fiscal year 2013 were the Chinese yuan, the euro, the Japanese yen, the Indian rupee, the British pound, the Singapore dollar and the Swiss franc. As such, we benefit from a stronger U.S. dollar and may be adversely affected by a weaker U.S. dollar relative to the foreign currency. We use foreign currency forward and option contracts designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in our forecasted operating expenses denominated in currencies other than the U.S. dollar. We recognize the gains and losses on foreign currency forward contracts in the same period as the remeasurement losses and gains of the related foreign currency denominated exposures.

We also may enter into other non-designated derivatives that consist primarily of forward contracts to minimize the risk associated with the foreign exchange effects of revaluing monetary assets and liabilities. Monetary assets and liabilities denominated in foreign currencies and any associated outstanding forward contracts are marked-to-market with realized and unrealized gains and losses included in earnings.

Alternatively, we may choose not to hedge the foreign currency risk associated with our foreign currency exposures if we believe such exposure acts as a natural foreign currency hedge for other offsetting amounts denominated in the same currency or if the currency is difficult or too expensive to hedge. As of October 26, 2013, we held $124.1 million in cash flow derivative instruments.

The maximum length of time over which we are hedged as of October 26, 2013, is through October 8, 2014.

We have performed a sensitivity analysis as of October 26, 2013, using a modeling technique that measures the change in the fair values arising from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates relative to the U.S. dollar, with all other variables held constant. The analysis covers all of our foreign currency contracts offset by the underlying exposures. The foreign currency exchange rates we used were based on market rates in effect on October 26, 2013. The sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would not result in a material foreign exchange loss as of October 26, 2013.

48-------------------------------------------------------------------------------- Table of Contents Equity Price Risk We had no investments in publicly traded equity securities as of October 26, 2013. The aggregate cost of our equity investments in non-publicly traded companies was $7.7 million as of October 26, 2013. We monitor our equity investments for impairment on a periodic basis. In the event that the carrying value of the equity investment exceeds its fair value, and we determine the decline in value to be other-than-temporary, we reduce the carrying value to its current fair value. Generally, we do not attempt to reduce or eliminate our market exposure on these equity securities. We do not purchase our equity securities with the intent to use them for speculative purposes.

Our common stock is quoted on the NASDAQ Global Select Market under the symbol "BRCD." On October 25, 2013, the last business day of our fourth fiscal quarter of 2013, the last reported sale price of our common stock on the NASDAQ Global Select Market was $7.83 per-share.

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