SEC Company Response from QUANTUM (QMCO) — Feb 28, 2006
QUANTUM CORP /DE/ (QMCO) (CIK 0000709283)
Date: Feb. 28, 2006 · CIK: 0000709283 · Accession: 0000709283-06-000013
AI Filing Summary & Sentiment
Reasoning
Referenced dates: January 25, 2006
Letter
Correspondence
February 28, 2006
Via EDGAR
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Attn:
Brad Skinner
Mark Kronforst
Stathis Kouninis
Re:
Quantum Corporation
Review of Form 10-K for the fiscal year ended March 31, 2005
and Form 8-K filed October 27, 2005
File No. 1-13449
Ladies and Gentlemen:
Quantum Corporation (the "Company") submits this letter in response to comments from the Staff of the Securities and Exchange Commission (the "Staff") received by letter dated January 25, 2006 relating to the Company's Form 10-K for the fiscal year ended March 31, 2005, filed June 8, 2005, and Form 8-K filed on October 27, 2005.
In this letter, we have recited the comments from the Staff in italicized, bold type and have followed each comment with the Company's response.
10-K for the Fiscal Year Ended March 31, 2005
Item 7, MD&A of Financial Condition and Results of Operations
Critical Accounting Policies, page 17
1.
We have read your response to our prior comment number 1 and believe that disclosures regarding how accurate your estimates related to warranties and contingent tax accruals have been in the past, how much these estimates have changed, and whether these estimates are reasonably likely to change in the future should be provided within the critical accounting policies section. We believe this will allow readers to gain an understanding of the relevant accounting policies and related estimates and evaluate those policies and estimates within the context provided by the required quantitative information. Please revise your disclosures to ensure your critical accounting policies section is complete.
Response:
We will revise our disclosure related to warranties in future filings as follows:
We estimate future failure rates based upon both historical product failure data and anticipated future failure rates. Similarly, we estimate future costs of repair based upon both historical data and anticipated future costs. The Company uses a model and exercises considerable judgment in determining the underlying estimates. While our judgment requires an element of subjectivity for all of our products (for example, historical rates of return are not completely indicative of future return rates and we must therefore exercise judgment with respect to future deviations from our historical return rate), our judgment is subject to a greater degree of subjectivity with respect to newly introduced products because of the lack of past experience with those products upon which to base our estimates. We recently introduced a number of new products, of which we are in the early stages of volume shipment and we are experiencing improved quality on our existing products which both influence failure rates. When actual failure rates differ significantly from our estimates, we record the impact of these unforeseen costs or cost reductions in subsequent periods and update our assumptions and forecasting models accordingly. As our new products mature and we continue to experience improved quality on our existing products, we are able to improve our estimates with respect to these products. Therefore, it is reasonably likely that we will have to update our assumptions for failure rates (and, therefore, warranty expense liability) in the future, particularly given that we recently introduced a number of new products of which we are in the early stages of volume shipment.
Similarly, we are in the process of consolidating and outsourcing manufacturing repair sites, which affect the future costs of repair. Our expected costs associated with this outsourcing initiative consist of outsourcing product repairs to third parties, with whom we negotiate on-going outsourcing arrangements, as well as transition costs from-in house repair to outsourcing. If the actual costs were to differ significantly from our estimates, we would record the impact of these unforeseen costs or cost reductions in subsequent periods. For example, as disclosed in Note 9 “Accrued Warranty and Indemnifications” to the Condensed Consolidated Financial Statements, we recorded adjustments to warranties issued in the prior fiscal year as additional information impacting the calculation of warranty provision subsequently became available.
We will revise our disclosures related to contingent tax accruals in future filings as follows:
Quantum believes that, based on current applicable tax laws, it has provided adequate amounts and recorded liabilities for probable and estimable tax adjustments that may be proposed by various taxing authorities in the U.S., state, and foreign jurisdictions. These estimated liabilities are recorded on a quarterly basis and estimates are revised based upon new information that was not available at the time of prior estimates. Our estimates have in the past been subject to change and we expect that some of our estimates will be subject to change in the future. While our estimated liabilities are recorded based upon existing tax laws, events may occur in the future that indicate payments of these amounts will be less than estimated, in which event reversals of these liabilities would create tax benefits that we would recognize in the periods when we determine that the liabilities have been reduced. Conversely, events may occur in the future that indicate that payments of these amounts will be greater than estimated, in which event we would record tax charges and additional liabilities. For example, we may in the future decide to negotiate with tax authorities regarding our tax liability in a particular jurisdiction, which could result in a different outcome than our expected liability. In addition, the regulatory audit statute of limitations for a particular jurisdiction may expire without Quantum becoming subject to an audit by that jurisdiction or an audit may occur but result in a smaller tax liability than we had estimated, and we would no longer be required to incur any or all of the liability for that audit, as the case may be. For example, in the third quarter of fiscal year 2005, we reversed $15.6 million of contingent tax accruals related to a more favorable than expected outcome of the IRS audit of the fiscal years ending March 31, 1997, 1998, and 1999.
Revenue recognition, page 50
2.
Please revise your revenue recognition disclosures to explain your process for recognizing royalty revenues. Explain that you substantiate delivery through obtaining periodic, timely unit reports from licensees that include quantity of units sold to end users that are subject to royalties. In addition, clarify how you determine the amount of revenue to record using the royalty agreements.
Response:
We will revise our revenue recognition disclosures in our future filings as follows:
Quantum licenses certain intellectual property to third party manufacturers under arrangements that are represented by master contracts, allowing these third party manufacturers to manufacture and sell certain of our products. As consideration for licensing the intellectual property, the licensees pay us a per-unit royalty for sales of their products that incorporate the licensed technology. On a periodic basis, the licensees provide us with unit reports that include the quantity of units sold to end users subject to royalties. We recognize revenue based on the unit reports, which are provided to us in a timely fashion. The unit report substantiates that the delivery has occurred. Royalty revenue is measured by multiplying the units sold as reflected in the unit reports by the royalty per unit in accordance with the royalty agreements. Royalty payments are made on a per unit basis at a stipulated per unit amount.
GAAP to Non-GAAP Reconciliation of Consolidated Statements of Operations, pages 79 through 82
3.
Please explain to us why you believe labeling restructuring items as “special” is sufficiently different than labeling items as “non-recurring,” “infrequent,” or “unusual” as contemplated by Item 10(e)(1)(ii)(B).
Response:
Historically, the Company has categorized restructuring charges as “special charges”. Special charges are non-recurring, infrequent and unusual items. As noted under response 4 below, over the past several years, the Company has considered restructuring charges to be non-recurring and the charges have been historically excluded from non-GAAP results. The special charges in our past filings derive from a series of distinct and unique events during a period of transition for the Company. These events include, but are not limited to, the disposition of HDD, the sale of the NAS business, the outsourcing of manufacturing and repair operations, consolidations of operations to support our QSD and QSS business segments and integration of operations as a result of the acquisition of Benchmark and Certance. However, the Company is nearing the end of a significant transition and does not expect to exclude restructuring charges from non-GAAP financial measures beyond FQ4 ’06.
4.
We have read your response to prior comment number 6 and note that you have not proposed any additional disclosures related to your non-GAAP information. Question 9 of the FAQ indicates that presenting a non-GAAP financial measure that eliminates recurring charges will depend on all the facts and circumstances. If there is a past pattern of the charges, no articulated demonstration that such charges will not continue, and no other unusual reason that you can substantiate to identify the special nature of the charge, it would be difficult for you to meet the burden of disclosing why the non-GAAP financial measure is useful to investors. Similarly, Question 8 of the FAQ indicates that, while there is no per se prohibition against removing a recurring item, you must meet the burden of demonstrating the usefulness of any measure that excludes recurring items, especially if the non-GAAP measure is used to evaluate performance. Such measures more likely would be permissible if you reasonably believe that the financial impact of the item will disappear or become immaterial within a near-term finite period. In addition, we believe more robust disclosures are required in both your filed and furnished documents that contain non-GAAP information, including:
•
Why the adjustments are necessary in evaluating your overall financial and operating performance and why the excluded items should not be considered. For example, it remains unclear to us why recurring restructuring activities that appear to be critical to the ongoing performance of your business should be ignored in assessing your performance;
•
The material limitations associated with the use of the non-GAAP financial measures; and
•
The manner in which management compensates for the limitations when using the non-GAAP measures.
Please note that we believe your disclosures should provide detailed information regarding each non-GAAP measure and each exclusion from the GAAP information. In addition, you should specifically define any references to items such as “overall financial performance,” “operating performance” and “core operating performance” as companies and investors may differ as to what these terms represent and how each should be determined.
Response:
In addition to GAAP results, management has found, and has been told by investors, that the supplemental non-GAAP financial measures have been particularly useful in assessing the Company’s performance over the last few years because of significant transitions that have occurred. The Company has taken steps to return to profitability following the sale of the HDD business and decline in revenues including restructuring activities related to various acquisitions and divestitures and changes in Quantum’s manufacturing and repair activities. The financial impact of these restructuring activities is large relative to Quantum’s quarterly financial performance and by excluding these charges, which are non-recurring in nature, it allows management and investors to better understand the Company’s business during a time of significant transition. Management has communicated to investors in quarterly press releases and earnings calls that the Company has experienced significant transitions over the last few years, however these transition activities are nearing completion and Quantum does not expect to continue to exclude restructuring charges from non-GAAP financial measures beyond FQ4 ’06.
With our FQ3 ’06 press release, the Company provided detailed information regarding each non-GAAP measure and plans to continue to do so in future furnished and filed documents when non-GAAP measures are shown. Please see the press release in Exhibit A. Additionally, the Company has excluded references to multiple terms such as “overall financial performance”, “core operating performance”, and “operating performance” in order to clarify the financial terms used. Beginning in FQ1 ’07, the Company will exclude stock compensation expense and amortization of intangibles from its non-GAAP results; all other financial results will be included in both the GAAP and non-GAAP financials results.
We hope that you will find the foregoing responsive to the Staff's comments. If you have any further questions or comments, please direct these to me at 408-944-6500. In addition, we would request that you provide a facsimile of any additional comments that you may have to my attention at 408-944-6501. Thank you for your assistance.
Sincerely,
/s/ EDWARD J. HAYES, JR.
Show Raw Text
CORRESP
1
filename1.htm
Correspondence
February 28, 2006
Via EDGAR
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Attn:
Brad Skinner
Mark Kronforst
Stathis Kouninis
Re:
Quantum Corporation
Review of Form 10-K for the fiscal year ended March 31, 2005
and Form 8-K filed October 27, 2005
File No. 1-13449
Ladies and Gentlemen:
Quantum Corporation (the "Company") submits this letter in response to comments from the Staff of the Securities and Exchange Commission (the "Staff") received by letter dated January 25, 2006
relating to the Company's Form 10-K for the fiscal year ended March 31, 2005, filed June 8, 2005, and Form 8-K filed on October 27, 2005.
In this letter, we have recited the comments from the Staff in italicized, bold type and have followed each comment with the Company's response.
10-K for the Fiscal Year Ended March 31, 2005
Item 7, MD&A of Financial Condition and Results of Operations
Critical Accounting Policies, page 17
1.
We have read your response to our prior comment number 1 and believe that disclosures regarding how accurate your estimates related to warranties and contingent tax accruals have been in the past, how much these estimates have changed, and whether these
estimates are reasonably likely to change in the future should be provided within the critical accounting policies section. We believe this will allow readers to gain an understanding of the relevant accounting policies and related estimates and evaluate those
policies and estimates within the context provided by the required quantitative information. Please revise your disclosures to ensure your critical accounting policies section is complete.
Response:
We will revise our disclosure related to warranties in future filings as follows:
We estimate future failure rates based upon both historical product failure data and anticipated future failure rates. Similarly, we estimate future costs of repair based upon both historical data and anticipated future costs. The Company uses a model and
exercises considerable judgment in determining the underlying estimates. While our judgment requires an element of subjectivity for all of our products (for example, historical rates of return are not completely indicative of future return rates and we must
therefore exercise judgment with respect to future deviations from our historical return rate), our judgment is subject to a greater degree of subjectivity with respect to newly introduced products because of the lack of past experience with those products upon which
to base our estimates. We recently introduced a number of new products, of which we are in the early stages of volume shipment and we are experiencing improved quality on our existing products which both influence failure rates. When actual failure
rates differ significantly from our estimates, we record the impact of these unforeseen costs or cost reductions in subsequent periods and update our assumptions and forecasting models accordingly. As our new products mature and we continue to experience
improved quality on our existing products, we are able to improve our estimates with respect to these products. Therefore, it is reasonably likely that we will have to update our assumptions for failure rates (and, therefore, warranty expense liability) in the
future, particularly given that we recently introduced a number of new products of which we are in the early stages of volume shipment.
Similarly, we are in the process of consolidating and outsourcing manufacturing repair sites, which affect the future costs of repair. Our expected costs associated with this outsourcing initiative consist of outsourcing product repairs to third parties,
with whom we negotiate on-going outsourcing arrangements, as well as transition costs from-in house repair to outsourcing. If the actual costs were to differ significantly from our estimates, we would record the impact of these unforeseen costs or cost
reductions in subsequent periods. For example, as disclosed in Note 9 “Accrued Warranty and Indemnifications” to the Condensed Consolidated Financial Statements, we recorded adjustments to warranties issued in the prior fiscal year as
additional information impacting the calculation of warranty provision subsequently became available.
We will revise our disclosures related to contingent tax accruals in future filings as follows:
Quantum believes that, based on current applicable tax laws, it has provided adequate amounts and recorded liabilities for probable and estimable tax adjustments that may be proposed by various taxing authorities in the U.S., state, and foreign
jurisdictions. These estimated liabilities are recorded on a quarterly basis and estimates are revised based upon new information that was not available at the time of prior estimates. Our estimates have in the past been subject to change and we expect
that some of our estimates will be subject to change in the future. While our estimated liabilities are recorded based upon existing tax laws, events may occur in the future that indicate payments of these amounts will be less than estimated, in which event
reversals of these liabilities would create tax benefits that we would recognize in the periods when we determine that the liabilities have been reduced. Conversely, events may occur in the future that indicate that payments of these amounts will be greater
than estimated, in which event we would record tax charges and additional liabilities. For example, we may in the future decide to negotiate with tax authorities regarding our tax liability in a particular jurisdiction, which could result in a different outcome
than our expected liability. In addition, the regulatory audit statute of limitations for a particular jurisdiction may expire without Quantum becoming subject to an audit by that jurisdiction or an audit may occur but result in a smaller tax liability than we
had estimated, and we would no longer be required to incur any or all of the liability for that audit, as the case may be. For example, in the third quarter of fiscal year 2005, we reversed $15.6 million of contingent tax accruals related to a more favorable than
expected outcome of the IRS audit of the fiscal years ending March 31, 1997, 1998, and 1999.
Revenue recognition, page 50
2.
Please revise your revenue recognition disclosures to explain your process for recognizing royalty revenues. Explain that you substantiate delivery through obtaining periodic, timely unit reports from licensees that include quantity of units sold to
end users that are subject to royalties. In addition, clarify how you determine the amount of revenue to record using the royalty agreements.
Response:
We will revise our revenue recognition disclosures in our future filings as follows:
Quantum licenses certain intellectual property to third party manufacturers under arrangements that are represented by master contracts, allowing these third party manufacturers
to manufacture and sell certain of our products. As consideration for licensing the intellectual property, the licensees pay us a per-unit royalty for sales of their products
that incorporate the licensed technology. On a periodic basis, the licensees provide us with unit reports that include the quantity of units sold to end users subject to
royalties. We recognize revenue based on the unit reports, which are provided to us in a timely fashion. The unit report substantiates that the delivery has occurred. Royalty revenue is measured by multiplying the units sold as reflected in the unit reports by the royalty per unit in accordance with the royalty agreements. Royalty payments are made on a per unit basis at a stipulated per unit amount.
GAAP to Non-GAAP Reconciliation of Consolidated Statements of Operations, pages 79 through 82
3.
Please explain to us why you believe labeling restructuring items as “special” is sufficiently different than labeling items as “non-recurring,” “infrequent,” or “unusual” as contemplated by Item
10(e)(1)(ii)(B).
Response:
Historically, the Company has categorized restructuring charges as “special charges”. Special charges are non-recurring, infrequent and unusual items. As noted under response 4 below, over the past
several years, the Company has considered restructuring charges to be non-recurring and the charges have been historically excluded from non-GAAP results. The special charges in our past filings
derive from a series of distinct and unique events during a period of transition for the Company. These events include, but are not limited to, the disposition of HDD, the sale of the NAS business, the outsourcing of manufacturing and repair operations,
consolidations of operations to support our QSD and QSS business segments and integration of operations as a result of the acquisition of Benchmark and Certance. However, the Company is nearing the end of a significant transition and does not expect to exclude
restructuring charges from non-GAAP financial measures beyond FQ4 ’06.
4.
We have read your response to prior comment number 6 and note that you have not proposed any additional disclosures related to your non-GAAP information. Question 9 of the FAQ indicates that presenting a non-GAAP financial measure that eliminates
recurring charges will depend on all the facts and circumstances. If there is a past pattern of the charges, no articulated demonstration that such charges will not continue, and no other unusual reason that you can substantiate to identify the special nature
of the charge, it would be difficult for you to meet the burden of disclosing why the non-GAAP financial measure is useful to investors. Similarly, Question 8 of the FAQ indicates that, while there is no per se prohibition against removing a recurring item, you
must meet the burden of demonstrating the usefulness of any measure that excludes recurring items, especially if the non-GAAP measure is used to evaluate performance. Such measures more likely would be permissible if you reasonably believe that the financial
impact of the item will disappear or become immaterial within a near-term finite period. In addition, we believe more robust disclosures are required in both your filed and furnished documents that contain non-GAAP information, including:
•
Why the adjustments are necessary in evaluating your overall financial and operating performance and why the excluded items should not be considered. For example, it remains unclear to us why recurring restructuring activities that appear to be
critical to the ongoing performance of your business should be ignored in assessing your performance;
•
The material limitations associated with the use of the non-GAAP financial measures; and
•
The manner in which management compensates for the limitations when using the non-GAAP measures.
Please note that we believe your disclosures should provide detailed information regarding each non-GAAP measure and each exclusion from the GAAP information. In addition, you should specifically define any references to items such as “overall
financial performance,” “operating performance” and “core operating performance” as companies and investors may differ as to what these terms represent and how each should be determined.
Response:
In addition to GAAP results, management has found, and has been told by investors, that the supplemental non-GAAP financial measures have been particularly useful in assessing the Company’s
performance over the last few years because of significant transitions that have occurred. The Company has taken steps to return to profitability following the sale of the HDD business and decline in revenues including restructuring
activities related to various acquisitions and divestitures and changes in Quantum’s manufacturing and repair activities. The financial impact of these restructuring activities is large relative to Quantum’s quarterly financial
performance and by excluding these charges, which are non-recurring in nature, it allows management and investors to better understand the Company’s business during a time of significant transition. Management
has communicated to investors in quarterly press releases and earnings calls that the Company has experienced significant transitions over the last few years, however these transition activities are nearing completion and Quantum does not expect to continue to
exclude restructuring charges from non-GAAP financial measures beyond FQ4 ’06.
With our FQ3 ’06 press release, the Company provided detailed information regarding each non-GAAP measure and plans to continue to do so in future furnished and filed documents when non-GAAP measures are shown. Please see the
press release in Exhibit A. Additionally, the Company has excluded references to multiple terms such as “overall financial performance”, “core operating performance”, and “operating performance” in order to clarify the
financial terms used. Beginning in FQ1 ’07, the Company will exclude stock compensation expense and amortization of intangibles from its non-GAAP results; all other financial results will be included in both the GAAP and non-GAAP financials results.
We hope that you will find the foregoing responsive to the Staff's comments. If you have any further questions or comments, please direct these to me at 408-944-6500. In addition, we would request that you provide a
facsimile of any additional comments that you may have to my attention at 408-944-6501. Thank you for your assistance.
Sincerely,
/s/ EDWARD J. HAYES, JR.
Edward J. Hayes, Jr.
Executive Vice President, Finance and
Chief Financial Officer
Quantum Corporation
Exhibit A Press release, dated January 31, 2006.
QUANTUM CORPORATION INCREASES REVENUE AND GENERATES PROFIT IN FISCAL THIRD QUARTER
Delivers Improved Sequential Performance in Revenue, Gross Margins, Operating Expenses and Net Income
SAN JOSE, Calif., Jan. 31, 2006 - Quantum Corp. (NYSE:DSS), a global leader in storage, today announced that revenue for its fiscal third quarter (FQ3’06), ended Dec. 26, 2005, was $218 million, up 8 percent over the same quarter last year
(FQ3’05). While the year-over-year increase mainly reflected the contribution from Quantum’s acquisition of Certance in January 2005, revenue also grew 7 percent sequentially. Quantum had a small GAAP profit of $819 thousand, or breakeven on a per diluted
share basis. This was down from the 8-cent per diluted share profit in the comparable quarter last year, largely because of a one-time $12.1 million tax benefit in that quarter, but represented a solid improvement over the 7-cent per diluted share loss in the second
quarter of fiscal year 2006 (FQ2’06).
In FQ3’06, the company had $11.7 million in non-GAAP net income, its highest level in four years, and non-GAAP earnings per diluted share of 6 cents. This was up 1 cent per diluted share from FQ3’05 and 5 cents per diluted share sequentially. (For a
reconciliation of GAAP to non-GAAP figures, please see the accompanying tables under the section on “Use of Non-GAAP Financial Measures.”)
“In the December quarter, we managed through some continuing transition challenges to achieve the significant improvement in our financial performance that we’ve said we expected in the second half of our fiscal year,” said Rick Belluzzo,
chairman and CEO of Quantum. “Revenue, gross margins and earnings per share were all solidly higher than in the first two quarters, and we continued to manage expenses. In addition, our non-GAAP net income was the highest it’s been since 2001, reflecting
all the work we’ve done to strengthen our operational foundation, integrate Certance and successfully execute on this year’s series of exciting new product introductions.”
The GAAP and non-GAAP gross margin rates in FQ3’06 were 29 percent and 31 percent, re