Basis Of Presentation

9 Months Ended

Jul. 30, 2011

Basis Of Presentation

Basis Of Presentation

1. Basis of Presentation

Brocade Communications Systems, Inc. ("Brocade" or the "Company") has prepared the accompanying Condensed Consolidated Financial Statements as of July 30, 2011 and for the three and nine months ended July 30, 2011 and July 31, 2010, without audit, pursuant to the rules and regulations of the United States ("U.S.") Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. The October 30, 2010 Condensed Consolidated Balance Sheet was derived from the Company's audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended October 30, 2010.

In the opinion of management, all adjustments (which include only normal recurring adjustments, except as otherwise indicated) necessary to present a fair statement of financial position as of July 30, 2011, results of operations for the three and nine months ended July 30, 2011 and July 31, 2010, and cash flows for the nine months ended July 30, 2011 and July 31, 2010, have been made. The results of operations for the three and nine months ended July 30, 2011 are not necessarily indicative of the operating results for the full fiscal year or any future period.

          The Company's fiscal year is the 52 or 53 weeks 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. Both fiscal years 2011 and 2010 are 52-week fiscal years. The Company's next 53-week fiscal year will be fiscal year 2014 and the Company's next 14-week quarter will be in the second quarter of fiscal year 2014. The Condensed Consolidated Financial Statements include the accounts of Brocade and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated

Use of Estimates in Preparation of Condensed Consolidated Financial Statements

The preparation of condensed consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and judgments that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, revenue recognition, sales allowances and programs, allowance for doubtful accounts, stock-based compensation, purchase price allocations, warranty obligations, inventory valuation and purchase commitments, restructuring costs, facilities lease losses, impairment of goodwill and intangible assets, litigation, income taxes and investments. Actual results may differ materially from these estimates.

Reclassification

           During fiscal year 2010, we reviewed our cost classification, primarily related to our system engineer ("SE") costs that were previously classified within cost of revenues. The SE's primary role has migrated over time from assisting with customer support to primarily performing pre-sales activity to generate future business, which was enabled by the growth of our support organization, such that in 2010 the majority of the SE's time was spent on pre-sales activity. As a result of this change, we reclassified the SE costs within our Consolidated Statements of Income starting in fiscal year 2010. These costs are now presented within sales and marketing expenses, as opposed to cost of revenues. The three and nine months ended July 31, 2010 reflect the reclassification of $33.7 million and $97.6 million, respectively, of SE costs from cost of revenues to sales and marketing expenses. These reclassifications did not impact revenues, income from operations, net income or earnings per share for 2010.

Correction of Immaterial Error

The Company's prior period financial results, including the three and nine months ending July 31, 2010 and six months ending April 30, 2011, have been adjusted to reflect an immaterial correction. During the third fiscal quarter of 2011, the Company identified an error in its accounting for certain sales discounts that impacted multiple prior periods and that had accumulated to an amount of $14.0 million. The Company concluded that the error was not material to any of its prior period financial statements under the applicable guidance for accounting changes and error corrections. The correction resulted in immaterial changes to sales discounts and allowances which affected net revenues during the fiscal years prior to 2009 and including 2009 and 2010 and the six months ended April 30, 2011, resulting in an overstatement of net revenues in some periods and an understatement in other periods. Although the error was and continues to be immaterial to prior periods, because of the impact of the cumulative out-of-period correction in the third fiscal quarter of 2011, the Company applied the guidance for accounting changes and error corrections and revised its prior period financial statements presented.

As a result of the revisions, net revenues were increased by $0.7 million for the three months ended July 31, 2010, and decreased by $1.5 million and $1.8 million for the nine months ended July 31, 2010 and six months ended April 30, 2011, respectively. Net current assets and stockholders' equity were decreased by $8.6 million, net of tax effect, as of October 30, 2010. Additionally, after tax effects, net income increased by $0.6 million for the three months ended July 31, 2010, and decreased by $1.1 million and $1.8 million for the nine months ended July 31, 2010 and six months ended April 30, 2011, respectively.