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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 8-K
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CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): September 25, 2007
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Red Hat, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
000-26281 06-1364380
(Commission File Number) (IRS Employer Identification No.)
1801 Varsity Drive, Raleigh, North Carolina 27606
(Address of Principal Executive Offices) (Zip Code)
(919) 754-3700
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
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Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
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Item 2.02. Results of Operations and Financial Condition
On September 25, 2007, Red Hat, Inc. announced its financial results for
the quarter ended August 31, 2007. The full text of the press release issued in
connection with the announcement is furnished as Exhibit 99.1 to this Current
Report on Form 8-K.
We disclosed non-GAAP financial information in the press release for the
three months and six months ended August 31, 2007 and August 31, 2006. These
non-GAAP disclosures include a reconciliation of GAAP net income to adjusted net
income and a reconciliation of GAAP cash flows from operating activities to
non-GAAP adjusted cash flows from operating activities based on:
o the impact of non-cash share-based compensation expense under Statement of
Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment
("SFAS 123R");
o the impact of GAAP income tax expense, which includes an estimated annual
effective tax rate versus our estimated annual effective cash-basis tax
rate; and
o the impact of cash flow characterization of excess tax benefits from
share-based arrangements under SFAS 123R.
These non-GAAP disclosures should not be used as a substitute for our GAAP
results, but rather read in conjunction with our GAAP results. The non-GAAP
financial measures we disclosed and the methods we used to calculate non-GAAP
results are not in accordance with GAAP and may be materially different from the
non-GAAP measures and methods used by other companies.
Prior to March 1, 2006, we accounted for share-based compensation pursuant
to the provisions of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and accordingly no compensation expense was recorded
for stock options or other share-based awards to employees and non-employee
directors that were granted with an exercise price equal to or above the market
value per share of our common stock on the grant date. For awards granted with
an exercise price less than the market value of our stock on the grant date, the
award's intrinsic value was recorded as deferred compensation and reported as a
separate component of stockholders' equity. This deferred compensation was
amortized to compensation expense over the vesting period of the award.
Effective March 1, 2006, we adopted the fair value recognition provisions
of SFAS 123R, using the modified prospective transition method. Compensation
costs recognized in the three months and six months ended August 31, 2007 and
August 31, 2006 include compensation costs based on the grant date fair value of
the share-based awards. The fair values have been estimated using the
Black-Scholes-Merton option-pricing model. In accordance with the provisions of
the modified prospective transition method, results for prior periods have not
been restated. Our reconciliation includes GAAP non-cash, share-based
compensation expense of $8.6 million and $17.0 million for the three months and
six months ended August 31, 2007 and $8.3 million and $15.9 million for the
three months and six months ended August 31, 2006, respectively, versus the
non-GAAP exclusion of such expense.
We excluded GAAP share-based compensation expense for the purpose of
calculating non-GAAP adjusted net income and non-GAAP adjusted net income per
share because it is a non-cash expense, and management believes that by
excluding such expense we provide an alternative and useful measure of operating
performance. Management also believes that non-GAAP measures of profitability
that exclude share-based compensation expense are used by a number of financial
analysts in the software industry to compare current performance to prior
periods and to forecast future performance.
During the three months and six months ended August 31, 2007, we recorded
GAAP income tax expense of $12.1 million and $22.9 million, respectively, which
reflected an estimated annual effective tax rate of 40%. We currently have
approximately $359.0 million of tax net operating loss carryforwards ("NOL")
available, subject to restrictions, to offset future taxable income, resulting
in an estimated annual effective cash-basis tax rate of approximately 5% for the
foreseeable future. For this reason, in our non-GAAP presentation, we have
adjusted the GAAP income tax expense for these periods to reflect the estimated
annual effective cash-basis tax rate, resulting in non-GAAP adjusted income tax
expense for the three months and six months ended August 31, 2007 of $1.9
million and $3.7 million, respectively. In our reconciliation, the recorded GAAP
income tax expense of $6.5 million and $14.6 million for the three months and
six months ended August 31, 2006, was adjusted to reflect our estimated annual
effective cash-basis tax rate of 5%, resulting in non-GAAP adjusted income tax
expense of $1.3 million and $2.8 million for these periods.
Our adoption of SFAS 123R also impacts the comparability of our cash flows
from operating activities for periods subsequent to our adoption of SFAS 123R
with our cash flows from operating activities for prior periods. SFAS 123R
requires that the portion of income tax benefits resulting from tax deductions
in excess of a share-based award's original grant date fair value, the "excess
tax benefits", be presented as a source of cash flows from financing activities.
Prior to our adoption of SFAS 123R, under the provisions of APB 25 we would have
presented these excess tax benefits from the exercise of share-based awards as a
source of cash flows from operating activities.
In the three months and six months ended August 31, 2007, we recognized
$14.5 million and $27.1 million, respectively, of cash tax benefits resulting
from tax deductions in excess of the share-based award's original grant date
fair value. For improved comparability with prior periods, we have added these
excess cash tax benefits to GAAP cash flows from operating activities of $49.2
million and $88.9 million for the three months and six months ended August 31,
2007, resulting in non-GAAP adjusted cash flows from operating activities of
$63.7 million and $116.0 million, respectively, for these periods. In our
reconciliation, the recorded GAAP cash flows from operating activities of $43.9
million and $96.3 million for the three months and six months ended August 31,
2006, was adjusted to reflect the addition of recognized excess cash tax
benefits of $0.7 million and $2.9 million, respectively, resulting in non-GAAP
adjusted cash flows from operating activities of $44.6 million and $99.1 million
for these periods.
Management believes that these adjusted non-GAAP results, when read in
conjunction with the GAAP results, offer a useful view of our business
performance in that they provide a more consistent means of comparing
performance to prior periods in light of the prospective-only application of
SFAS 123R in March 2006 (under the modified prospective transition method) and
due to the availability of our tax NOL position to substantially offset cash
costs of our GAAP effective tax rates for the foreseeable future. Management
also uses non-GAAP measures as a component of its regular internal reporting to
evaluate performance of the business and compare it to prior performance, to
make operating decisions, including internal budgeting and the calculation of
incentive compensation, and to forecast future performance. Our disclosure of
non-GAAP financial measures allows investors to evaluate the Company's
performance using the same methodology and information as that used by
management.
The information furnished pursuant to Item 2.02 of this Form 8-K, including
Exhibit 99.1 referenced herein, shall not be deemed "filed" for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") or otherwise subject to the liabilities of that section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act of 1933,
as amended, or the Exchange Act, except as expressly set forth by specific
reference in such a filing.
Item 8.01. Other Events
On September 25, 2007, the Company announced that its Board of Directors
had authorized a continuation of the Company's common stock and convertible
debenture repurchase program. Under the program, the Company is authorized to
repurchase up to an aggregate of $250 million of the Company's common stock, par
value $.0001 per share ("Common Stock"), and up to $75 million of its 0.5%
Convertible Senior Debentures due 2024 ("Debentures") from time to time on the
open market or in privately negotiated transactions, as applicable. As extended,
the program will expire on the earlier of (i) October 31, 2008, or (ii) a
determination by the Board of Directors, the Chief Executive Officer or the
Chief Financial Officer to discontinue the program. As of September 25, 2007,
the full amount authorized is available for the repurchase of Common Stock and
Debentures under the program. The full text of the press release issued in
connection with the announcement of the repurchase program is furnished as
Exhibit 99.1 to this Current Report on Form 8-K.
Item 9.01. Financial Statements and Exhibits
(d) Exhibits
99.1 Press Release dated September 25, 2007.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: September 25, 2007 RED HAT, INC.
By: /s/ Charles E. Peters, Jr.
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Name: Charles E. Peters, Jr.
Title: Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description
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99.1 Press Release dated September 25, 2007