Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 2013
Or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from                 to
Commission File Number 000-51333
 
SILICON GRAPHICS INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
32-0047154
 
 
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
46600 Landing Parkway
Fremont, California 94538
(Address of principal executive offices, including zip code)
(510) 933-8300
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x  No  o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer   o
Accelerated filer  x
Non-accelerated filer  o
Smaller reporting company   o
 
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No   x 
As of April 30, 2013, there were 33,821,838 shares of the registrant's common stock outstanding.



Table of Contents


SILICON GRAPHICS INTERNATIONAL CORP.
TABLE OF CONTENTS
 
 
 
Page
PART I
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 



Table of Contents


PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

SILICON GRAPHICS INTERNATIONAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
March 29, 2013
 
March 30, 2012
 
March 29, 2013
 
March 30, 2012
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
Product
$
173,142

 
$
131,290

 
$
413,580

 
$
364,297

Service
44,545

 
47,910

 
132,112

 
147,354

Combined product and service
14,901

 
20,190

 
51,003

 
61,848

Total revenue
232,588

 
199,390

 
596,695

 
573,499

Cost of revenue
 
 
 
 
 
 
 
Product
144,190

 
109,396

 
343,184

 
296,029

Service
26,969

 
25,620

 
79,524

 
80,990

Combined product and service
8,937

 
12,864

 
31,721

 
40,149

Total cost of revenue
180,096

 
147,880

 
454,429

 
417,168

Gross profit
52,492

 
51,510

 
142,266

 
156,331

Operating expenses:
 

 
 
 
 
 
 
Research and development
15,518

 
14,982

 
45,017

 
47,427

Sales and marketing
19,824

 
21,824

 
59,059

 
66,722

General and administrative
14,924

 
16,176

 
41,496

 
47,860

Restructuring
740

 
19

 
5,081

 
129

Total operating expenses
51,006

 
53,001

 
150,653

 
162,138

Income (loss) from operations
1,486

 
(1,491
)
 
(8,387
)
 
(5,807
)
Total other income (expense), net:
 

 
 
 
 
 
 
Interest income (expense), net
(11
)
 
(126
)
 
(278
)
 
(150
)
Other income (expense), net
(359
)
 
913

 
(1,253
)
 
(230
)
Total other income (expense), net
(370
)
 
787

 
(1,531
)
 
(380
)
Income (loss) before income taxes
1,116

 
(704
)
 
(9,918
)
 
(6,187
)
Income tax (benefit) provision
(8,108
)
 
458

 
(11,563
)
 
(112
)
Net income (loss)
$
9,224

 
$
(1,162
)
 
$
1,645

 
$
(6,075
)
 
 
 
 
 
 
 
 
Basic and diluted net income (loss) per share:
 
 
 
`
 
 
 
     Basic
$
0.28

 
$
(0.04
)
 
$
0.05

 
(0.19
)
     Diluted
$
0.27

 
$
(0.04
)
 
$
0.05

 
$
(0.19
)
 
 
 
 
 
 
 
 
Shares used in computing basic and diluted net income (loss) per share
 
 
 
 
 
 
 
     Basic
33,201

 
31,783

 
32,593

 
31,557

     Diluted
34,467

 
31,783

 
33,295

 
31,557

 
 
 
 
 
 
 
 
See accompanying notes.

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SILICON GRAPHICS INTERNATIONAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
March 29, 2013
 
March 30,
2012
 
March 29, 2013
 
March 30, 2012
 
 
 
 
 
 
 
 
Net income (loss)
$
9,224

 
$
(1,162
)
 
$
1,645

 
$
(6,075
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrecognized gain (loss) on defined benefit plans, net of zero tax
44

 
(1
)
 
128

 
(157
)
Foreign currency translation adjustment, net of zero tax
(492
)
 
(1,591
)
 
(705
)
 
(969
)
Total comprehensive income (loss)
$
8,776

 
$
(2,754
)
 
$
1,068

 
$
(7,201
)









































See accompanying notes.



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SILICON GRAPHICS INTERNATIONAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
 
March 29,
2013
 
June 29,
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
149,394

 
$
104,851

Current portion of restricted cash and cash equivalents
670

 
980

Accounts receivable, net of allowance for doubtful accounts of $1,209 and $1,597 as of March 29, 2013 and June 29, 2012, respectively
98,577

 
98,293

Inventories
76,338

 
123,391

Deferred cost of revenue
30,081

 
49,407

Prepaid expenses and other current assets
22,502

 
18,443

Total current assets
377,562

 
395,365

Non-current portion of restricted cash and cash equivalents
2,935

 
3,088

Property and equipment, net
26,027

 
27,404

Intangible assets, net
5,534

 
8,675

Non-current portion of deferred cost of revenue
9,719

 
17,466

Other assets
44,491

 
44,882

Total assets
$
466,268

 
$
496,880

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 
Current liabilities:
 

 
 
Accounts payable
$
55,305

 
$
69,448

Credit facility

 
15,200

Accrued compensation
26,485

 
24,246

Current portion of deferred revenue
112,465

 
124,924

Other current liabilities
54,543

 
48,587

Total current liabilities
248,798

 
282,405

Non-current portion of deferred revenue
55,496

 
64,717

Long-term income taxes payable
11,602

 
20,568

Retirement benefit obligations
11,353

 
11,484

Other non-current liabilities
4,604

 
6,814

Total liabilities
331,853

 
385,988

Commitments and contingencies (Note 21)


 

Stockholders' equity:
 

 
 
Preferred stock, par value $0.001 per share; 12,000 shares authorized; none outstanding

 

Common stock, par value $0.001 per share; 120,000 shares authorized; 34,610 shares and 32,723 shares issued at March 29, 2013 and June 29, 2012, respectively
34

 
33

Additional paid-in capital
507,355

 
484,461

Treasury stock, at cost (779 shares at March 29, 2013 and 749 shares at June 29, 2012)
(5,352
)
 
(4,912
)
Accumulated other comprehensive loss
(2,057
)
 
(1,480
)
Accumulated deficit
(365,565
)
 
(367,210
)
Total stockholders' equity
134,415

 
110,892

Total liabilities and stockholders' equity
$
466,268

 
$
496,880

 
 
 
 

See accompanying notes.

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SILICON GRAPHICS INTERNATIONAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
 
March 29,
2013
 
March 30,
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$
1,645

 
$
(6,075
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 
Depreciation and amortization
10,680

 
11,220

Share-based compensation
7,816

 
7,925

Release of liability for unrecognized tax benefits
(10,306
)
 

Other
1,071

 
664

Changes in operating assets and liabilities:
 

 
 
Accounts receivable
(4,903
)
 
(29,856
)
Inventories
42,047

 
(26,575
)
Deferred cost of revenue
26,118

 
28,389

Prepaid expenses and other assets
(8,000
)
 
(3,585
)
Accounts payable
(12,791
)
 
(6,705
)
Deferred revenue
(16,119
)
 
(28,577
)
Other liabilities
10,375

 
(8,235
)
Net cash provided by (used in) operating activities
47,633

 
(61,410
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 
Purchases of property and equipment
(2,841
)
 
(5,609
)
Other
1,743

 
(2,450
)
Net cash used in investing activities
(1,098
)
 
(8,059
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 
Payment of credit facility
(15,300
)
 

     Proceeds from draw-down

 
15,000

Funding of restricted stock units withheld for taxes
(1,375
)
 
(1,037
)
Purchase of treasury stock
(440
)
 

Proceeds from issuance of common stock upon exercise of stock options
13,010

 
1,841

Proceeds from issuance of common stock under employee stock purchase plan
3,444

 
3,262

Net cash (used in) provided by financing activities
(661
)
 
19,066

Effect of exchange rate changes on cash and cash equivalents
(1,331
)
 
(593
)
Net increase (decrease) in cash and cash equivalents
44,543

 
(50,996
)
Cash and cash equivalents-beginning of period
104,851

 
139,868

Cash and cash equivalents-end of period
$
149,394

 
$
88,872

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF OTHER CASH FLOW INFORMATION:
 

 
 
Income taxes paid
$
1,300

 
$
1,012

 
 
 
 

See accompanying notes.

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SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. DESCRIPTION OF BUSINESS
The principal business of Silicon Graphics International Corp. ("SGI" or the "Company") is the design, manufacture and implementation of highly scalable compute servers, high-capacity storage systems and high-end computing and data management systems. The Company has significant global presence providing products and services either directly or through its distributors and channel partners. In addition to the broad line of mid-range to high-end computing servers, data storage and data center technologies, the Company provides global customer support and professional services related to these products. The Company's products are used by the scientific, technical and business communities to solve challenging data-intensive computing, data management and visualization problems. The vertical markets the Company serves include the federal government, defense and strategic systems, weather and climate, physical sciences, life sciences, energy (including oil and gas), aerospace and automotive, internet, financial services, media and entertainment, and business intelligence and data analytics. The Company's headquarters is located in Fremont, California and its primary manufacturing facility is located in Chippewa Falls, Wisconsin.

2. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the periods presented. These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) applicable to interim financial information. The results for the interim periods are not necessarily indicative of results for the entire year or any future periods. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the fiscal year ended June 29, 2012, which are included in the Company's Annual Report on Form 10-K filed with the SEC on September 10, 2012.
The preparation of unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses as presented in the accompanying unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
Fiscal Year. The Company has a 52 or 53-week fiscal year ending on the last Friday in June. The current fiscal year 2013 will be comprised of 52 weeks and will end on June 28, 2013. Fiscal year 2012 was comprised of 53 weeks and ended on June 29, 2012. When a 53-week year occurs, the Company includes the additional week in the first fiscal quarter. The Company's fiscal quarters generally have 13 weeks ending on the last Friday of the respective period. Accordingly, the first quarter of fiscal year 2012 ended September 30, 2011 was comprised of 14 weeks, while the first quarter of fiscal year 2013 ended September 28, 2012 was comprised of 13 weeks.
In fiscal year 2012, the Company's fiscal quarters ended on September 30, 2011 (first quarter), December 30, 2011 (second quarter), March 30, 2012 (third quarter) and June 29, 2012 (fourth quarter).
In fiscal year 2013, the Company's fiscal quarters end on September 28, 2012 (first quarter), December 28, 2012 (second quarter), March 29, 2013 (third quarter) and June 28, 2013 (fourth quarter).
Principles of Consolidation. The unaudited condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries. All intercompany accounts and transactions have been eliminated.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no changes in the Company's significant accounting policies for the three months ended March 29, 2013 as compared to those disclosed in the Company's Annual Report on Form 10-K for the year ended June 29, 2012.
Recently Issued Accounting Standards.
Comprehensive income. In June 2011, the FASB issued guidance which requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but

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SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. This requirement should be applied retrospectively and is effective for the Company in its first quarter of fiscal year 2013. The adoption of this standard had no effect on the Company's condensed consolidated statements of operations.
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. In February 2013, the FASB issued the guidance for reporting of amounts reclassified out of accumulated other comprehensive income. The revised guidance requires reporting the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about these amounts. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal year 2014, at which time the Company will include the required disclosures. We do not expect a material impact to our consolidated financial statements due to the adoption of this guidance.

4. FINANCIAL INSTRUMENTS AND FAIR VALUE
The Company uses a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the Company's assets (in thousands) that are measured at fair value on a recurring basis which include total cash equivalent as well as the fair value of plan assets for the employee retirement benefit plan. See Note 16 for more information regarding the employee retirement benefit plan.
 
 
March 29, 2013
 
 
Carrying
 
Fair Value Measured Using
Total
 
 
Value
 
Level 1
Level 2
Level 3
Balance
Assets
 
 
 
 
 
 
 
   Money market funds
 
$
20,012

 
$
20,012

$

$

$
20,012

   Investments held by insurance companies
 
6,127

 

6,127


6,127

Total assets measured at fair value
 
$
26,139

 
$
20,012

$
6,127

$

$
26,139


 
 
June 29, 2012
 
 
Carrying
 
Fair Value Measured Using
Total
 
 
Value
 
Level 1
Level 2
Level 3
Balance
Assets
 
 
 
 
 
 
 
U.S treasuries
 
$
5,530

 
$
5,530

$

$

$
5,530

     Investments held by insurance companies
 
6,127

 

6,127


6,127

Total assets measured at fair value
 
$
11,657

 
$
5,530

$
6,127

$

$
11,657

 
 
 
 
 
 
 
 
There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three and nine months ended March 29, 2013 and March 30, 2012. The Company’s cash equivalents, consisting of U.S. treasuries and money market funds, are classified within Level 1 of the fair value hierarchy as they were valued using quoted market prices of the identical underlying securities in active markets.
Level 2 assets include investments that are pooled with other investment held by insurance companies within that general funds for our pension plans. The investments held by the insurance companies are valued by taking the percentage owned by the plan in the underlying net asset value of the insurance company's general fund.

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SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

The fair values of accounts receivable, accounts payable, and accrued liabilities, due within one year approximates their carrying values because of their short-term nature.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
As of March 29, 2013 and June 29, 2012, the Company had no assets or liabilities measured at fair value on a non-recurring basis.

5. INVENTORIES
Inventories consist of the following (in thousands):
 
March 29,
2013
 
June 29,
2012
Finished goods
$
15,701

 
$
47,728

Work in process
17,776

 
22,666

Raw materials
42,861

 
52,997

Total inventories
$
76,338

 
$
123,391


Finished goods include inventory in transit, at customer sites undergoing installation, or testing prior to customer acceptance; such amounts were $6.0 million at March 29, 2013 and $25.7 million at June 29, 2012.


6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following (in thousands):
 
March 29,
2013
 
June 29,
2012
Value-added tax receivable
$
11,721

 
$
9,831

Prepaid taxes
3,743

 
1,555

Deferred income taxes
106

 

Other prepaid and current assets
6,932

 
7,057

Total prepaid expenses and other current assets
$
22,502

 
$
18,443


7. INTANGIBLE ASSETS, NET
Intangible assets by major asset class consist of the following (in thousands):
Intangible Asset Class
 
Weighted
Average
Useful Life
(in Years)
 
At March 29, 2013
Gross
Carrying
Amount 
 
Accumulated
Amortization 
 
Net
Customer relationships
 
5
 
$
6,900

 
$
(5,405
)
 
$
1,495

Purchased technology
 
5
 
7,800

 
(5,745
)
 
2,055

Customer backlog
 
(a)
 
10,540

 
(9,459
)
 
1,081

Trademark/trade name portfolio
 
5
 
3,667

 
(2,894
)
 
773

Patents 
 
2
 
200

 
(200
)
 

Other intangible assets
 
(b)
 
130

 

 
$
130

Total
 
 
 
$
29,237

 
$
(23,703
)
 
$
5,534


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SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Intangible Asset Class
 
Weighted
Average
Useful Life
(in Years)
 
At June 29, 2012
 
 
Gross
Carrying
Amount 
 
Accumulated
Amortization
 
Net
Customer relationships
 
5
 
$
7,245

 
$
(4,407
)
 
$
2,838

Purchased technology
 
5
 
7,800

 
(4,980
)
 
2,820

Customer backlog
 
(a)
 
10,695

 
(9,115
)
 
1,580

Trademark/trade name portfolio
 
5
 
3,738

 
(2,365
)
 
1,373

Patents and other
 
2
 
340

 
(276
)
 
64

Total
 
 
 
$
29,818

 
$
(21,143
)
 
$
8,675

(a) The customer backlog intangible asset is amortized as revenue recognition criteria is met for a particular customer order, reflecting the use of the asset.
(b) Other intangible asset with an indefinite life
Intangible assets amortization expense was $0.9 million and $1.2 million in the three months ended March 29, 2013 and March 30, 2012, respectively. Intangible assets amortization expense was $2.8 million and $4.1 million in the nine months ended March 29, 2013 and March 30, 2012, respectively.
As of March 29, 2013, expected amortization expense for all intangible assets was as follows (in thousands):
 
Fiscal Year
Amortization
Expense
 
2013 (remaining three months)
$
891

 
2014
3,288

 
2015
473

 
2016
393

 
2017 and thereafter
489

 
 
$
5,534


8. OTHER ASSETS
Other assets consist of the following (in thousands):
 
March 29,
2013
 
June 29,
2012
Long-term service inventory
$
15,407

 
$
13,494

Restricted pension plan assets
7,750

 
7,318

Deferred tax assets
15,438

 
15,438

Long-term refundable deposits
3,349

 
3,943

Other assets
2,547

 
4,689

Total other assets
$
44,491

 
$
44,882




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SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

9. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
 
March 29,
2013
 
June 29,
2012
Accrued sales and use tax payable
$
16,068

 
$
10,795

Deferred tax liabilities
15,158

 
15,158

Accrued warranty, current portion
3,643

 
4,054

Accrued professional services fees
5,142

 
5,657

Income taxes payable
371

 
1,740

Accrued restructuring and severance
1,878

 
1,849

Other
12,283

 
9,334

Total other current liabilities
$
54,543

 
$
48,587



10. OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consist of the following (in thousands):
 
March 29,
2013
 
June 29,
2012
Accrued warranty, non-current portion
$
2,653

 
$
3,248

Other
1,951

 
3,566

Total other non-current liabilities
$
4,604

 
$
6,814



11. WARRANTY RESERVE
Activity in the warranty reserve, which is included in other current and non-current liabilities, was as follows (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 29,
2013
 
March 30,
2012
 
March 29,
2013
 
March 30,
2012
Balance at beginning of period
 
$
6,541

 
$
8,036

 
$
7,302

 
$
7,578

Current period accrual
 
1,150

 
1,308

 
3,404

 
4,627

Warranty expenditures charged to accrual
 
(1,154
)
 
(1,341
)
 
(3,554
)
 
(3,751
)
Changes in accrual for pre-existing warranties
 
(241
)
 
(439
)
 
(856
)
 
(890
)
Balance at end of period
 
$
6,296

 
$
7,564

 
$
6,296

 
$
7,564


12. RESTRUCTURING ACTIVITY
On March 16, 2012, the Company's Board of Directors approved a restructuring action to streamline operations and decrease operating expense, reducing approximately 25% of the Company's European workforce and closing certain legal entities and offices in Europe.
In connection with the restructuring action, the Company expects to incur pre-tax cash charges (including charges recorded in fiscal 2012) between $14.0 million and $17.0 million, which consist of pre-tax cash charges between $13.0 million and $16.0 million for employee termination benefits, and up to $1.0 million for the planned office and legal entity closures, which expenses include contract termination costs and other associated costs. The Company expects to recognize the majority

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SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

of the expense associated with the employee termination benefits during fiscal 2013. Total expense incurred in connection with this restructuring plan for the three and nine months ended March 29, 2013 was $0.7 million and $5.1 million, respectively.
The restructuring expense is included in operating expenses in the accompanying condensed consolidated statements of operations. The total restructuring liability was $1.3 million as of March 29, 2013, all of which is classified as current liabilities in the accompanying consolidated balance sheet.
Activity in accrued restructuring for this restructuring action through March 29, 2013 was as follows (in thousands):
 
 
Employee
Terminations
Balance at June 29, 2012
 
$
1,621

Costs incurred
 
1,474

Cash payments
 
(2,377
)
Balance at September 28, 2012
 
718

       Costs incurred
 
2,866

       Cash payments
 
(578
)
Balance at December 28, 2012
 
3,006

       Costs incurred
 
740

       Cash payments
 
(2,418
)
Balance at March 29, 2013
 
$
1,328


13. CREDIT FACILITY
On December 5, 2011, the Company entered into a five-year senior secured credit facility in the aggregate principal amount of $35.0 million. The availability under the credit facility is limited to a borrowing base, subject to meeting certain conditions set forth in the credit facility. The credit facility includes a feature that allows the Company to increase the revolver amount in the first 18 months. The Company exercised this feature, and on May 1, 2012, the revolver amount was increased by $5.0 million to an aggregate principal amount of $40.0 million. On February 25, 2013, the Company amended the agreement and reduced the revolver amount by $15.0 million from an aggregate principal amount of $40.0 million to $25.0 million. The credit facility includes a $10.0 million letter of credit subfacility. See Note 20 "Commitments and Contingencies" for more information regarding the letter of credit.
The availability of the aggregate principal amount under the credit facility will fluctuate, generally monthly, based on eligible domestic accounts receivable and inventory due to a variety of factors including the Company's overall mix of sales and resulting accounts receivable with international and domestic customers, United States governmental agencies and a few individual customer accounts which may result in high concentrations of accounts receivable as compared to the overall level of the Company's accounts receivable. The credit facility contains financial covenants including, under certain conditions, maintaining a minimum fixed charge coverage ratio, as well as other non-financial covenants, including restrictions on declaring and paying dividends, and is secured by substantially all of the Company's assets. The credit facility terminates on December 5, 2016. Borrowings under the credit facility bear interest based on a rate of the Company's choice equal to either: 1) the LIBOR plus a margin of 2.50 percent per annum or 2) the base rate plus a margin of 1.75 percent per annum. The base rate is the greater of (a) the Federal Funds rate plus 0.50 percent, (b) the LIBOR rate plus 1.00 percent or (c) the prime rate of the financial institution. The LIBOR rate and the base rate are determined at the specified date preceding or at the time of the borrowing in accordance with the terms of the credit facility. In addition, unused line fees are payable on the credit facility at rates of 0.40 percent per annum.
In December 2012, the Company made a $15.7 million payment to pay off the outstanding balance on the credit facility, which included $0.4 million of accrued interest. Accordingly, as of March 29, 2013, the Company had no outstanding balance owed on the credit facility. As of March 29, 2013, the maximum amount available to be borrowed under the credit facility was approximately $23.0 million which takes into account a $2.0 million outstanding letter of credit to back the Company's obligation to pay for goods or services to a supplier. The Company was in compliance with all covenants as of March 29, 2013.


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SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

14. SHARE-BASED COMPENSATION
During the three and nine months ended March 29, 2013 and March 30, 2012, the Company granted stock options and restricted stock units to employees and non-employee directors under its 2005 Equity Incentive Plan and issued shares of the Company's common stock to participating employees under its 2005 Employee Stock Purchase Plan. Total share-based compensation expense was as follows (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 29,
2013
 
March 30,
2012
 
March 29,
2013
 
March 30,
2012
Cost of revenue
 
$
391

 
$
368

 
$
1,262

 
$
1,035

Research and development
 
619

 
526

 
1,746

 
1,548

Sales and marketing
 
473

 
458

 
1,282

 
1,258

General and administrative
 
1,326

 
2,264

 
3,526

 
4,084

Total share-based compensation expense
 
$
2,809

 
$
3,616

 
$
7,816

 
$
7,925


Determining Fair Value
The fair value of share-based awards was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the following periods:
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 29,
2013
 
March 30,
2012
 
March 29,
2013
 
March 30,
2012
Option Plans Shares
 
 
 
 
 
 
 
 
Risk-free interest rate
 
0.8
%
 
0.8
%
 
0.7
%
 
1
%
Volatility
 
65.1
%
 
63.8
%
 
66.1
%
 
70.0
%
Weighted average expected life (in years)
 
5.00

 
4.76

 
5.00

 
4.73

Expected dividend yield
 

 

 

 

Weighted average fair value
 
$
5.66

 
$
5.36

 
$
4.83

 
$
7.17

 
 
 
 
 
 
 
 
 
ESPP Plan shares
 
 
 
 
 
 
 
 
Risk-free interest rate
 
0.2
%
 
0.2
%
 
0.2
%
 
0.2
%
Volatility
 
82.6
%
 
76.1
%
 
83.0
%
 
78.4
%
Weighted average expected life (in years)
 
1.25

 
1.25

 
1.25

 
1.25

Expected dividend yield
 

 

 

 

Weighted average fair value
 
$
5.77

 
$
4.37

 
$
4.75

 
$
5.38









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SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Stock Option Activity
A summary of stock option activity for the nine months ended March 29, 2013 was as follows:
 
Options Outstanding
 
Shares
 
Weighted
Average
Exercise
Price 
 
Weighted
Average
Remaining
Contractual term
in years 
 
Aggregate
Intrinsic
Value
 
 
 
 
 
 
 
(in thousands)
Balance at June 29, 2012
3,703,660

 
$
10.79

 
 
 
 
Options granted
154,000

 
8.87

 
 
 
 
Options exercised
(1,215,356
)
 
10.74

 
 
 
 
Options cancelled
(215,661
)
 
12.40

 
 
 
 
Balance at March 29, 2013
2,426,643

 
$
10.55

 
6.96
 
$
9,503

Vested and expected to vest at March 29, 2013
2,271,522

 
$
10.57

 
6.85
 
$
8,818

Exercisable at March 29, 2013
1,472,902

 
$
10.91

 
5.92
 
$
5,827

The total intrinsic value of options exercised in the nine months ended March 29, 2013 and March 30, 2012 was $3.9 million and $1.0 million, respectively. The total fair value of shares vested during the nine months ended March 29, 2013 and March 30, 2012 was $3.2 million and $2.2 million, respectively.
As of March 29, 2013, there was $2.1 million of total unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted average period of 1.14 years.
Restricted Stock Unit Activity
The following table summarizes the Company's activity with respect to restricted stock units (“RSUs”) for the nine months ended March 29, 2013:
 
Number of
Shares 
Balance at June 29, 2012
918,764

Awarded
950,139

Released
(295,118
)
Forfeited
(117,250
)
Balance at March 29, 2013
1,456,535

Vested and expected to vest at March 29, 2013
1,128,162


In August 2012, the Company granted time-based RSUs ("executive time-based RSUs") and performance-based RSUs (“executive PSUs”) to members of the Company's executive management team.  The executive time-based RSUs vest over four years, with 25% vesting after one year and an additional 6.25% vesting quarterly thereafter, subject to the recipient's continuous service through each vesting date. The executive PSUs are eligible to vest upon the achievement of certain financial performance criteria for the Company for fiscal 2013.  If the performance criteria are not met, none of the executive PSUs will vest and will be forfeited.  If the performance criteria are met, 25% of the executive PSUs would vest following the Company's public announcement of financial results for fiscal 2013 and the remaining 75% of the executive PSUs would vest in three annual installments thereafter, subject to the recipient's continued service through each vesting date.  For purposes of reporting and determining the share-based compensation expense, the company estimated that 298,000 PSUs will be awarded as of March 29, 2013.  The Company assesses the achievement of these performance metrics on a quarterly basis. 
As of March 29, 2013, there was $8.7 million of total unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted average period of 2.74 years.

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SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

RSUs are converted into common stock upon vesting. Upon the vesting of RSUs, the Company generally withholds a portion of the shares to cover applicable taxes and decreases the shares issued to the employee by a corresponding value. The withholding tax obligations are based upon the fair market value of the Company’s common stock on the vesting date. The number and the value of the shares withheld for tax purposes are summarized in the table below (in thousands except share amounts):
 
Three Months Ended
 
Nine Months Ended
 
March 29,
2013
 
March 30,
2012
 
March 29,
2013
 
March 30,
2012
RSUs shares withheld for taxes
66,254

 
22,673

 
113,399

 
79,730

RSUs amounts withheld for taxes
$
995

 
$
222

 
$
1,371

 
$
1,040

Employee Stock Purchase Plan
At March 29, 2013, the total unrecognized compensation cost related to rights to purchase the Company's common stock under the employee stock purchase plan ("ESPP") was approximately $1.5 million. This cost will be amortized on a straight-line basis over approximately 1.9 years. The following table shows the shares issued and their respective weighted-average purchase price per share, pursuant to the ESPP, during the three and nine months ended March 29, 2013 and March 30, 2012. Beginning in February 2013, the Company offered this benefit to employees in various international locations. Prior to that, the ESPP was offered primarily to employees located in the U.S.
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
March 29,
2013
 
March 30,
2012
 
March 29, 2013
 
March 30,
2012
 
Shares issued
 
256,972

 
248,785

 
485,707

 
508,132

 
Weighted-average purchase price per share
 
$
6.76

 
$
6.87

 
$
7.09

 
$
6.42

 


15. STOCK REPURCHASE PROGRAM

On January 11, 2013, the Company's board of directors approved a plan for the Company to repurchase shares of its common stock with a market value of up to $15.0 million. The Company's common stock may be repurchased in the open market or through negotiated transactions, including 10b5-1 trading plans that would enable the company to repurchase its shares during periods outside of its normal trading windows. The repurchase program expires December 31, 2014. Purchases will cease if the authorized funds are spent or the program is discontinued. The Company is not obligated to acquire any particular amount of stock, and the program may be suspended or terminated at any time at the company's discretion.

The following table shows the total number of shares repurchased during the period (in thousands, except per share amount):

 
 
Treasury Stock
 
 
 
Number of Shares
 
Amount
 
Average Purchase Price Per Share
 
Balance at June 29, 2012
 
749

 
$
4,912

 
$
6.56

 
Repurchase of Treasury Stock:
 
 
 
 
 
 
 
     Three months ended March 29, 2013
 
30

 
440

 
$14.83
 
Balance at March 29, 2013
 
779

 
$
5,352

 
$
6.87

 
 
 
 
 
 
 
 
 
Amount available to purchase
 
 
 
$
14,560

 
 
 



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SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

16. EARNINGS PER SHARE
Basic net income (loss) per common share is computed by dividing unaudited consolidated net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing consolidated net income (loss) by the weighted average number of common shares outstanding and dilutive common shares outstanding during the period. The dilutive effect of outstanding options and RSUs is reflected in diluted net income per share, but not diluted loss per share, by application of the treasury stock method, which includes consideration of share-based compensation required by accounting principles generally accepted in the U.S.
The following table sets forth the computation of basic and diluted net income (loss) per share for the three and nine months ended March 29, 2013 and March 30, 2012 (in thousands, except per share amount):
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 29,
2013
 
March 30,
2012
 
March 29,
2013
 
March 30,
2012
Numerator:
 
 
 
 
 
 
 
 
Net income (loss)
 
$
9,224

 
$
(1,162
)
 
$
1,645

 
$
(6,075
)
 
 
 
 
 
 
 
 
 
Denominator:
 
 

 
 

 
 
 
 
Weighted-average common shares - basic
 
33,201

 
31,783

 
32,593

 
31,557

   Effect of dilutive potential common shares
 
1,266

 

 
702

 

   Weighted-average common shares - diluted
 
34,467

 
31,783

 
33,295

 
31,557

 
 
 
 
 
 
 
 
 
Basic net income (loss) per share
 
$
0.28

 
$
(0.04
)
 
$
0.05

 
$
(0.19
)
Diluted net income (loss) per share
 
$
0.27

 
$
(0.04
)
 
$
0.05

 
$
(0.19
)
The following potential common shares have been excluded from the basic net income (loss) per share calculations, as their effect would have been anti-dilutive (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
March 29,
2013
 
March 30,
2012
 
March 29, 2013
 
March 30, 2012
 
Options, RSUs, and ESPP
 
2,623

 
4,702

 
3,230

 
4,761

 



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SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

17. RETIREMENT BENEFIT PLAN
Defined Benefit Plans
The Company sponsors defined benefit plans covering certain of its employees in Germany ("German plan") and Japan ("Japan plan").
The net periodic benefit cost of the German and Japan plans were comprised of the following components (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
March 29,
2013
 
March 30,
2012
 
March 29,
2013
 
March 30,
2012
 
Net periodic benefit cost
 
 
 
 
 
 
 
 
 
Service cost
 
$
170

 
$
178

 
$
524

 
$
694

 
Interest expense
 
144

 
155

 
426

 
508

 
Expected return on plan assets
 
(45
)
 
(44
)
 
(138
)
 
(137
)
 
Amortization of actuarial losses
 
44

 

 
129

 

 
Loss on settlement
 

 

 

 
992

 
Gain from curtailment
 

 

 

 
(1,265
)
 
Net periodic benefit cost
 
$
313

 
$
289

 
$
941

 
$
792

 

In October 2011, SGI Japan, Ltd ("SGI Japan"), its employees, and the Japanese Ministry of Health, Labor and Welfare approved an action to change SGI Japan's retirement benefit plan effective October 1, 2011 in accordance with the Defined Benefit Corporate Pension Law and Defined Contribution Corporate Pension Law of 2001 (the "Acts"). SGI Japan shifted a portion of its defined benefit plan to a defined contribution plan and modified the terms of its defined benefit plan in accordance with the Acts. The change in the retirement benefit plan reduced SGI Japan's retirement benefit obligation and resulted in a gain from curtailment of $1.3 million and a loss from settlement of $1.0 million for the nine months ended March 30, 2012.

18. INCOME TAXES
The Company recorded a tax benefit of $8.1 million and $11.6 million for the three and nine months ended March 29, 2013, respectively. The tax benefit primarily was comprised of the reversal of previously recorded unrecognized tax benefits in Canada and Israel, and a refund of provincial taxes in Canada, partially offset by tax liability computed based on the Company’s projected foreign financial results for the year ending June 28, 2013, state taxes, and tax and interest for unrecognized tax benefits. The reversal of the unrecognized tax benefits in Canada and the recording of a provincial refund due to the Company was the result of the conclusion of an income tax audit for fiscal years 1996 to 2004 by the Canada Revenue Agency. The Company also recorded a tax benefit for the abatement of interest granted by the Canada Revenue Agency. The effective tax rate differed from the combined federal and net state statutory income tax rate for the three and nine months ended March 29, 2013 primarily due to the tax rate differential of the Company's foreign operations, utilization of net operating losses, audit settlements and reversals of previously accrued taxes in foreign jurisdictions.
The Company recorded a tax expense of $0.5 million and a tax benefit of $0.1 million for the three and nine months ended March 30, 2012, respectively. The net tax benefit was primarily comprised of tax liability computed based on the Company's foreign projected financial results for the year ending June 29, 2012 offset by the reversals of unrecognized tax benefits including related interest. The effective tax rate differed from the combined federal and net state statutory income tax rate for the three and nine months ended March 30, 2012 primarily due to tax expense incurred by the Company's foreign subsidiaries with operating income, offset by the release of the unrecognized tax benefits due to lapse of statute of limitations, benefits from reversals of previously accrued taxes in foreign jurisdictions and benefit from utilization of net operating losses not previously recognized.
As of March 29, 2013, the Company has provided a partial valuation allowance against its net deferred tax assets. Management continues to evaluate the realizability of deferred tax assets and related valuation allowance. If management's assessment of the deferred tax assets or the corresponding valuation allowance were to change, the Company would record the related adjustment to income during the period in which management makes the determination.

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SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

The Company had approximately $4.8 million of gross unrecognized tax benefit as of March 29, 2013, of which $2.6 million will impact the effective tax rate when recognized. The Company recognizes interest expense and penalties related to the unrecognized tax benefits within income tax expense. As of March 29, 2013, the Company also had approximately $8.6 million of interest and penalties attributable to the gross unrecognized tax benefits.
The income tax audit of fiscal years 1996 to 2004 by the Canadian tax authorities was concluded during the quarter ended March 29, 2013. The Company recorded a tax benefit of approximately $8.4 million and $12.7 million for the three and nine months ended March 29, 2013, comprised primarily of the abatement of interest granted by the Canada Revenue Agency, the reversal of previously recorded unrecognized tax benefits, and a provincial refund due to the Company as a result of the conclusion of the audit. It is reasonably possible that over the next twelve month period, the Company may experience an increase or a decrease in other unrecognized tax benefits.

19. SEGMENT INFORMATION
The Company manages its business primarily on a geographical basis. Accordingly, the Company determined its operating and reporting segments, which are generally based on the location of its sales and service employees generating revenue, to be the Americas, Europe, and Asia-Pacific operations. The Americas segment includes both North and South America. The Europe segment ("EMEA") includes European countries, as well as the Middle East and Africa. The Asia-Pacific segment ("APJ") includes Australia, Japan, and all other Asian countries.
The Company's operating segments are determined based upon several criteria including: the Company's internal organizational structure; the manner in which the Company's operations are managed; the criteria used by the Company's Chief Executive Officer, the Chief Operating Decision Maker (“CODM”), to evaluate segment performance; and the availability of separate financial information. The accounting policies of the various segments are the same as those described in Note 3. Summary of Significant Accounting Policies of this Form 10-Q and in Note 2 of the Consolidated Financial Statements in the Company's fiscal year 2012 Annual Report on Form 10-K.
The Company's CODM evaluates the performance of its operating segments based on revenue and operating profit (loss). Revenues are generally based on the location of its sales and service employees generating revenues. Operating profit (loss) for each segment includes related cost of sales and operating expenses directly attributable to the segment. A significant portion of the segments’ expenses arise from shared services and infrastructure that the Company has historically provided to the segments in order to realize economies of scale and to efficiently use resources. These expenses, collectively called corporate charges, include costs of centralized research and development, legal, accounting, information technology services, treasury and other corporate infrastructure expenses. These corporate charges are allocated to the segments and are reassessed on an annual basis. The allocations have been determined on a basis that the Company considers to be a reasonable reflection of the utilization of services provided to or benefits received by the segments. The Company does not include intercompany transfers between segments for management reporting purposes.

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SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Segment Results
Summary information by operating segment for the three and nine months ended March 29, 2013 and March 30, 2012 is as follows (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
March 29, 2013
 
March 30, 2012
 
March 29, 2013
 
March 30, 2012
 
Total revenue
 
 
 
 
 
 
 
 
 
Americas
 
$
142,215

 
$
128,321

 
$
377,958

 
$
350,434

 
APJ
 
36,314

 
44,660

 
108,483

 
141,639

 
EMEA
 
54,059

 
26,409

 
110,254

 
81,426

 
Total revenue
 
$
232,588

 
$
199,390

 
$
596,695

 
$
573,499

 
 
 
 
 
 
 
 
 
 
 
Product revenue
 
 
 
 
 
 
 
 
 
Americas
 
$
119,341

 
$
107,580

 
$
312,681

 
$
285,065

 
APJ
 
19,854

 
25,253

 
59,280

 
81,144

 
EMEA
 
47,945

 
17,406

 
89,534

 
56,025

 
Total product revenue
 
$
187,140

 
$
150,239

 
$
461,495

 
$
422,234

 
 
 
 
 
 
 
 
 
 
 
Service revenue
 
 
 
 
 
 
 
 
 
Americas
 
$
22,874

 
$
20,741

 
$
65,277

 
$
65,369

 
APJ
 
16,460

 
19,407

 
49,203

 
60,495

 
EMEA
 
6,114

 
9,003

 
20,720

 
25,401

 
Total service revenue
 
$
45,448

 
$
49,151

 
$
135,200

 
$
151,265

 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
 
 
 
 
Americas
 
$
8,374

 
$
(2,083
)
 
$
13,005

 
$
(348
)
 
APJ
 
3,018

 
1,749

 
342

 
3,710

 
EMEA
 
(9,906
)
 
(1,157
)
 
(21,734
)
 
(9,169
)
 
Total operating income (loss)
 
$
1,486

 
$
(1,491
)
 
$
(8,387
)
 
$
(5,807
)
 
The Company derives the results of the business segments directly from its internal management reporting system. The presentation of our revenue for segment information purposes differs from the accompanying unaudited condensed consolidated statements of operations. The segment information is presented on the basis which the Company's CODM evaluates the performance of its operating segments. The combined product and service revenue is allocated to product and service revenue on a contractual basis for segment information purposes.
The Company's assets are located primarily in the United States and are not allocated to any specific region. The Company does not measure the performance of its geographic regions on any asset-based metrics. Therefore, geographic information is presented only for revenue and operating profit (loss).
Customer information
For the three months ended March 29, 2013, two customers from the Americas segment each accounted for approximately 13% of the Company's revenue and various agencies of the United States government, excluding system integrators (collectively, U.S. government), accounted for approximately 26% of the Company's revenue. For the three months ended March 30, 2012, two customer from the Americas segment each accounted for approximately 13% of the Company's revenue.
For the nine months ended March 29, 2013, one customer from the Americas segment accounted for approximately 16% of the Company's revenue and various agencies of the U.S. government, excluding system integrators, accounted for

18

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SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

approximately 18% of the Company's revenue. For the nine months ended March 30, 2012, one customer from the Americas segment accounted for approximately 14% of the Company's revenue.
At March 29, 2013, one customer accounted for approximately 15% of the Company's accounts receivable. At June 29, 2012, one customer accounted for approximately 28% of the Company's accounts receivable.
Geographic Information
International sales to Japan and France both accounted for 10% or more of total revenue, were $66.7 million or 29% for the three months ended March 29, 2013. For the nine months ended March 29, 2013, our international sales to Japan, the only single foreign country which accounted for 10% or more of total revenue, were $83.7 million or 14% of revenues. For the three and nine months ended March 30, 2012, our international sales to Japan, the only single foreign country which accounted for ten percent or more of revenues, were $35.7 million or 18%, and $111.0 million or 19% of revenues, respectively. No other individual foreign country's revenue accounted for 10% or more of revenues in the three and nine months ended March 29, 2013 and March 30, 2012.

20. FINANCIAL GUARANTEES
The Company has issued financial guarantees to cover rent on leased facilities and equipment, to government authorities for value-added tax and other taxes and to various other parties to support payments in advance of future delivery on goods and services. The majority of the Company's financial guarantees have terms of one year or more. The maximum potential obligation under financial guarantees at March 29, 2013 was $3.8 million for which the Company has $3.6 million of assets held as collateral. The full amount of the assets held as collateral are included in short-term and long-term restricted cash and cash equivalents in the accompanying unaudited condensed consolidated balance sheets.


21. COMMITMENTS AND CONTINGENCIES
Letter of Credit
The Company's credit facility includes a $10.0 million letter of credit subfacility. As of March 29, 2013, the Company has $2.0 million of outstanding letter of credit to back the Company's obligation to pay or perform when required to do so pursuant to the requirements of an underlying agreement or the provision of goods or services to a supplier. See Note 13 for more information regarding the credit facility.
Indemnification Agreements
The Company enters into standard indemnification agreements with its customers and certain other business partners in the ordinary course of business. These agreements include provisions for indemnifying the customer against any claim brought by a third party to the extent any such claim alleges that the Company's product infringes a patent, copyright or trademark, or misappropriates a trade secret, of that third party. The agreements generally limit the scope of the available remedies in a variety of industry-standard methods, including, but not limited to, product usage and geography-based limitations, a right to control the defense or settlement of any claim, and a right to replace or modify the infringing products to make them non-infringing. The Company has not incurred significant expenses related to these indemnification agreements and no material claims for such indemnifications were outstanding as of March 29, 2013. As a result, the Company believes the estimated fair value of these indemnification agreements, if any, to be immaterial; accordingly, no liability has been recorded with respect to such indemnifications as of March 29, 2013.
Contingencies
The Company may, from time to time, be involved in legal proceedings and disputes that arise in the normal course of business. These matters include product liability actions, patent infringement actions, contract disputes, domestic and international federal, state and local tax reviews and audits, and other matters. The Company also may be subject to litigation and/or adverse rulings or judgments as a result of certain contractual indemnification obligations. The Company records a provision for a liability when management believes that it is both probable that a liability has been incurred and it can reasonably estimate the amount of the loss. The Company believes it has adequate provisions for any such matters. The Company reviews these provisions at least quarterly and adjusts these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

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SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Third parties in the past have asserted, and may in the future assert, intellectual property infringement claims against the Company, and such future claims, if proven, could require the Company to pay substantial damages or to redesign its existing products or pay fees to obtain cross-license agreements. Litigation may be necessary in the future to enforce or defend the Company's intellectual property rights, to protect the Company's trade secrets or to determine the validity and scope of its proprietary rights or the proprietary rights of others. Any such litigation could result in substantial costs and diversion of management resources, either of which could harm the Company's business, operating results and financial condition. Further, many of the Company's current and potential competitors have the ability to dedicate substantially greater resources to enforcing and defending their intellectual property rights than the Company.
Additionally, from time to time, the Company receives inquiries from regulatory agencies informally requesting information or documentation. There can be no assurance in any given case that such informal review will not lead to further proceedings involving the Company in the future.
The Company is not aware of any pending disputes, including those outlined above, that would be likely to have a material adverse effect, either individually or in the aggregate, on its consolidated financial condition, results of operations or liquidity. However, litigation is subject to inherent uncertainties and costs and unfavorable outcomes could occur. An unfavorable outcome could include the payment of monetary damages, cash or other settlement, or an injunction prohibiting it from selling one or more products. If an unfavorable resolution were to occur, there exists the possibility of a material adverse impact on the Company's consolidated financial condition, results of operations or cash flows of the period in which the resolution occurs or on future periods.
Other Commitments
For a description of significant leases and purchase commitments see Note 24 of the Company's Annual Report on Form 10-K filed with the SEC on September 10, 2012.

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements included or incorporated by reference in this Form 10-Q other than statements of historical fact, are forward-looking statements. Investors can identify these and other forward-looking statements by the use of words such as “estimate,” “may,” “will,” “could,” “anticipate,” “expect,” “intend,” “believe,” “continue” or the negative of such terms, or other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements also include the assumptions underlying or relating to such statements.
Our actual results could differ materially from those projected in the forward-looking statements included herein as a result of a number of factors, risks and uncertainties, including, among others, changes in the anticipated amounts and timing of restructuring charges to be incurred and cost savings expected to be realized from our restructuring actions in Europe, our ability to successfully execute our strategies, the risks discussed in this Part I, Item 2 -"Management's Discussion and Analysis of Financial Condition and Results of Operations,” the risk factors set forth in Part II, Item 1A- "Risk Factors” and elsewhere in this Form 10-Q, the risk factors set forth in our Annual Report on Form 10-K for the year ended June 29, 2012 filed with the Securities and Exchange Commission (the “SEC”) on September 10, 2012 (our “Annual Report”), and the risks detailed from time to time in our future reports filed with the SEC. The information included herein is as of the filing date of this Form 10-Q with the SEC and future events or circumstances could differ materially from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on these forward-looking statements. Unless required by law, we expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent written or oral forward-looking statements attributable to SGI or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Readers are urged to carefully review and consider the various disclosures made in this report and other documents we file from time to time with the SEC to advise interested parties of the risks and factors that may affect our business.
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto in Part I, Item 1 in this Form 10-Q and with our financial statements and notes thereto for the year ended June 29, 2012 contained in our Annual Report.


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Overview
We are a global leader in technical computing. We are focused on helping customers solve their most demanding business and technology challenges by delivering large-scale computing and storage, high-performance compute and storage, and data center solutions. We develop, market, and sell a broad line of low cost, mid-range and high-end computing servers and data storage as well as differentiating software. We sell data center infrastructure products purpose-built for large-scale data center deployments. In addition, we provide global customer support and professional services related to our products. We enable enterprises to meet their computing and storage requirements at a lower total cost of ownership and provide them greater flexibility and scalability. We are also a leading developer of enterprise class, high-performance features for the Linux operating system that provide our customers with a standard Linux operating environment combined with our differentiated yet un-intrusive Linux capabilities that are designed to improve performance, simplify system management, and provide a more robust development environment.
Management has implemented a strategic plan which will drive changes in three major areas. First, we are targeting our investments towards the vertical markets where we can provide the highest value to our customers and differentiate our offerings to gain both market share and margin. Second, we are investing and aligning with key partners in order to provide our customers with integrated solutions in Big Data, storage and scale-up computing. Third, management is focusing on initiatives to improve our operational performance and cost structure. We have ongoing efforts to reduce material and other manufacturing costs. We believe that this strategic plan will help create a strong foundation for our business results in the long-term.
Our revenue mix by geography shows that we continue to have strong international presence with 41.4% and 39.6% of total revenue from sales outside of the U.S. in the three and nine months ended March 29, 2013, respectively. In addition, our customer base continues to expand in various sectors, including the public, cloud and manufacturing sectors.

Results of Operations
Summarized below are the results of our operations for the three and nine months ended March 29, 2013 as compared to the three and nine months ended March 30, 2012.
Financial Highlights
Our total revenue for the three months ended March 29, 2013 was $232.6 million, an increase of $33.2 million or 16.6%, from the comparable period in fiscal year 2012. In addition, revenue increased $23.2 million or 4.0% to $596.7 million in the nine months ended March 29, 2013 from $573.5 million in the nine months ended March 30, 2012. The increase was due primarily as a result of increased product sales n our product sales in our EMEA and Americas segments, where we recognized a number of significant large deals during the quarter. This was slightly offset by decreased service revenue in our EMEA and APJ geographic segments.
Our overall gross margin decreased by 3.2 percentage points from 25.8% in the three months ended March 30, 2012 to 22.6% in the three months ended March 29, 2013. The unfavorable change in the overall gross margin in the three months ended March 29, 2013 was due to unfavorable margins resulting from two significant low margin deals recognized during the third quarter of fiscal 2013. Our overall gross margin decreased by 3.5 percentage points from 27.3% in the nine months ended March 30, 2012 to 23.8% in the nine months ended March 29, 2013. The decrease for the nine months ended March 29, 2013 was also a result of the low margin deals previously discussed as well as a number of similar deals recognized during the first quarter of fiscal 2013 in Japan and EMEA. In addition, we also experienced higher excess and obsolete inventory charges during the first nine months of fiscal 2013. Our service margins declined by 6.5 percentage points and 5.2 percentage points for both the three and nine months ended March 29, 2013, respectively, largely as a result of lower support services revenue as our new products replace our installed base of older generation products which had higher margin support contracts. Typically our service revenue is recognized ratably over the respective service periods.
Our research and development and selling, general and administrative expenses were $50.3 million in the three months ended March 29, 2013 compared to $53.0 million in the prior year comparable quarter. Our research and development and selling, general and administrative expenses was $145.6 million for nine months ended March 29, 2013, a decrease of $16.4 million compared to $162.0 million for the nine months ended March 30, 2012. A primary driver of this decline was the decrease in compensation and related expenses due to reductions in headcount. Total headcount as of March 29, 2013 was 1,437, which reflects a reduction of 125 employees from 1,562 as of March 30, 2012 due to restructuring actions in fiscal 2012 and 2011 attrition. The savings from the headcount reductions more than offset the increases in salaries and wages due to merit increases. We have also been controlling our costs across all functions in order to streamline our operations and reduce operating expenses and have also benefited from lower charges for the amortization of intangible assets as these assets are nearing full amortization.

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We incurred restructuring expense of $0.7 million and $5.1 million in the three and nine months ended March 29, 2013, respectively, as part of the fiscal 2012 restructuring action primarily focused on cost reductions in Europe.
We recognized net income for the three months ended March 29, 2013 of $9.2 million compared to net loss of $1.2 million in the comparable quarter last year. Net income for the nine months ended March 29, 2013 was $1.6 million, compared to a net loss of $6.1 million for the nine months ended March 30, 2012. The $10.4 million increase in our net income for the three months ended March 29, 2013 compared to the comparable quarter last year was mainly driven by the income tax benefit recorded as a result of reversals of unrecognized tax benefits as well as our decreased cost structure. This was partially offset by two significant low margin deals that were recognized during the quarter. The $7.7 million increase in net income from the nine months ended March 30, 2012 was mainly driven by income tax benefit recorded as a result of unrecognized tax benefits, the decrease in our total operating expenses, which was partially offset by low margin deals that were recognized during the first and third quarters of fiscal 2013.
We are continuing to streamline our operations and have tight controls over our spending in order to help achieve our long-term operating target goals.
Revenue, cost of revenue, gross profit and gross margin
Our revenue mix by geography shows that we continue to have a strong international presence with 41.4% and 39.6% of total revenue attributed to international sales in the three and nine months ended March 29, 2013, respectively. In addition, our customer base continues to expand in various sectors, including the public, cloud and manufacturing sectors.
The following table presents revenue by operating segment for the three and nine months ended March 29, 2013 and March 30, 2012 (in thousands except percentages):
 
Three Months Ended
 
Change
 
Nine Months Ended
 
Change
 
March 29, 2013
 
March 30, 2012
 
$
 
%
 
March 29, 2013
 
March 30, 2012
 
$
 
%
Total revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
142,215

 
$
128,321

 
$
13,894

 
10.8%
 
$
377,958

 
$
350,434

 
$
27,524

 
7.9%
APJ
36,314

 
44,660

 
(8,346
)
 
(18.7)%
 
108,483

 
141,639

 
(33,156
)
 
(23.4)%
EMEA
54,059

 
26,409

 
27,650

 
104.7%
 
110,254

 
81,426

 
28,828

 
35.4%
Total revenue
$
232,588

 
$
199,390

 
$
33,198

 
16.6%
 
$
596,695

 
$
573,499

 
$
23,196

 
4.0%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
119,341

 
$
107,580

 
$
11,761

 
10.9%
 
$
312,681

 
$
285,065

 
$
27,616

 
9.7%
APJ
19,854

 
25,253

 
(5,399
)
 
(21.4)%
 
59,280

 
81,144

 
(21,864
)
 
(26.9)%
EMEA
47,945

 
17,406

 
30,539

 
175.5%
 
89,534

 
56,025

 
33,509

 
59.8%
Total product revenue
$
187,140

 
$
150,239

 
$
36,901

 
24.6%
 
$
461,495

 
$
422,234

 
$
39,261

 
9.3%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
22,874

 
$
20,741

 
$
2,133

 
10.3%
 
$
65,277

 
$
65,369

 
$
(92
)
 
(0.1)%
APJ
16,460

 
19,407

 
(2,947
)
 
(15.2)%
 
49,203

 
60,495

 
(11,292
)
 
(18.7)%
EMEA
6,114

 
9,003

 
(2,889
)
 
(32.1)%
 
20,720

 
25,401

 
(4,681
)
 
(18.4)%
Total service revenue
$
45,448

 
$
49,151

 
$
(3,703
)
 
(7.5)%
 
$
135,200

 
$
151,265

 
$
(16,065
)
 
(10.6)%
Revenue. We derive revenue from the sale of products and services directly to end-users as well as through resellers and system integrators. Product revenue is derived from the sale of mid-range to high-end computing servers and data storage systems as well as software. We enter into sales contracts to deliver multiple products and/or services. In accordance with our revenue recognition policy, certain sales contracts are deferred and recognized over the service period. Service revenue is generated from the sale of standard maintenance contracts as well as custom maintenance contracts that are tailored to individual customers' needs. We recognize service revenue ratably over the service periods. Maintenance contracts are typically between one to three years in length and we actively pursue renewals of these contracts. We also generate professional services revenue related to implementation of and training on our products.
We continuously make revisions to our product offerings and improvements of our product's performance and data storage capacity. Accordingly, we are unable to directly compare our products from period to period, and are therefore unable

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to quantify the changes in pricing of our products from period to period. We believe that our on-going revisions to product offerings and product feature improvements help mitigate competitive pricing pressures by shifting the competitive landscape to differentiated value rather than price.
Segment Operating Performance
Americas
Revenue from our Americas segment increased $13.9 million or 10.8% to $142.2 million in the three months ended March 29, 2013 from $128.3 million in the three months ended March 30, 2012. The increase in Americas revenue was driven by higher product revenue as well as an increase in service revenue. Product revenue increased by $11.8 million primarily due to the strength in sales of our scale-out compute solutions, software and third party products. This increase in product revenue was partially offset by a decrease in sales of our scale-up solutions. We also experienced an increase in service revenue of $2.1 million primarily as a result of the sale of standard maintenance contracts as well as custom maintenance contracts that are associated with our customers using new products or replacing their existing installed base of older generation products. The increase in service revenue is primarily due to timing of when services were performed on consulting and product integration services. Our service revenue is typically recognized ratably over the respective service periods. The Americas segment represented 61.1% and 64.4% of the total revenue in the three months ended March 29, 2013 and March 30, 2012, respectively. The Americas segment represented a lower portion of total revenue during the three months ended March 29, 2013, primarily due to the significant increase in the EMEA segment.
Revenue from our Americas segment increased $27.5 million or 7.9% to $378.0 million in the nine months ended March 29, 2013 from $350.4 million in the nine months ended March 30, 2012. The increase in Americas revenue was driven primarily by higher product revenue as well as a decrease in service revenue of $0.1 million. Product revenue increased by $27.6 million primarily due to the strength in sales of our scale-out compute solutions, software and third party products. This increase in product revenue was partially offset by a decrease in sales of our scale-up compute and storage solutions. Our service revenue was $65.3 million in the nine months ended March 29, 2013, or about flat compared to comparable quarter last year. Service revenue will typically fluctuate due to timing of when services were performed on consulting and product integration services. Our service revenue is typically recognized ratably over the respective service periods. The Americas segment represented 63.3% and 61.1% of the total revenue in the nine months ended March 29, 2013 and March 30, 2012, respectively.

APJ
Revenue from our APJ segment decreased $8.3 million or 18.7% to $36.3 million in the three months ended March 29, 2013 from $44.7 million in the three months ended March 30, 2012. The revenue decline in APJ is primarily driven by lower product revenue for our scale-up and scale-out solutions and our third party products which was driven primarily in Japan. Our revenue for the three months ended March 29, 2013 is comprised of $19.9 million from product sales and $16.5 million from services compared to product and service revenue of $25.3 million and $19.4 million, respectively, for the three months ended March 30, 2012. The decrease in service revenue is primarily due to timing of when services were performed on consulting and product integration services as our new products replace our installed base of older generation products. During the three months ended March 30, 2012, we generated a large portion of revenue in Japan for professional services to assist our customers with the implementation of and training of new products. These types of services are typically non-recurring in nature as customers become more accustomed to our next generation products. We are also experiencing a slight deterioration in customer service contracts as existing maintenance contracts are lapsing at a faster rate than we are able to renew or enter into new contracts. The APJ segment represented 15.6% and 22.4% of the total revenue in the three months ended March 29, 2013 and March 30, 2012, respectively.
Revenue from our APJ segment decreased $33.2 million or 23.4% to $108.5 million in the nine months ended March 29, 2013 from $141.6 million in the nine months ended March 30, 2012. The revenue decline in APJ is primarily driven by lower product revenue for our scale-up and software solutions as well as third party products, partially offset by higher revenue generated in our scale-out solutions. Our revenue for the nine months ended March 29, 2013 is comprised of $59.3 million from product sales and $49.2 million from services compared to product and service revenue of $81.1 million and $60.5 million, respectively, for the nine months ended March 30, 2012. The decrease in service revenue is attributable to the timing of professional services provided as well as a slight deterioration in customer service maintenance contracts as discussed above. The APJ segment represented 18.2% and 24.7% of the total revenue in the nine months ended March 29, 2013 and March 30, 2012, respectively.


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EMEA
Revenue from our EMEA segment increased $27.7 million or 104.7% to $54.1 million in the three months ended March 29, 2013 from $26.4 million in the three months ended March 30, 2012. The increase in product revenue of $30.5 million is primarily driven by higher product revenue for our scale-out products as well as increases in our storage and scale-up solutions. This was offset by a slight decrease in service revenue of $2.9 million. The decrease in service revenue is attributable to the timing of professional services provided. We are also experiencing a slight deterioration in our customer service maintenance contracts as existing maintenance contracts are lapsing at a faster rate than we are able to renew or enter into new contracts. These types of services are typically non-recurring in nature as customers become more accustomed to our next generation products. The EMEA segment represented 23.2% and 13.2% of the total revenue in the three months ended March 29, 2013 and March 30, 2012, respectively.
Revenue from our EMEA segment increased $28.8 million or 35.4% to $110.3 million in the nine months ended March 29, 2013 from $81.4 million in the nine months ended March 30, 2012. The increase in revenue is primarily driven by higher products revenue for scale out products of $30.5 million as well as our storage solutions. This was offset by a decrease in service revenue of $4.7 million. The decrease in service revenue is attributable to the timing of professional services provided as well as a slight deterioration in customer service maintenance contracts as discussed above. The EMEA segment represented 18.5% of the total revenue in the nine months ended March 29, 2013 and 14.2% in the nine months ended March 30, 2012, respectively.

Cost of revenue and gross profit
Cost of revenue and gross profit for the three and nine months ended March 29, 2013 and March 30, 2012 were as follows (in thousands except percentages):
 
 
Three Months Ended
 
Change
 
Nine Months Ended
 
Change
 
 
March 29, 2013
 
March 30, 2012
 
$
 
%
 
March 29, 2013
 
March 30, 2012
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of product revenue
 
$
152,523

 
$
121,263

 
$
31,260

 
25.8%
 
$
372,470

 
$
333,347

 
$
39,123

 
11.7%
Cost of service revenue
 
27,573

 
26,617

 
956

 
3.6%
 
81,959

 
83,821

 
(1,862
)
 
(2.2)%
Total cost of revenue
 
$
180,096

 
$
147,880

 
$
32,216

 
21.8%
 
$
454,429

 
$
417,168

 
$
37,261

 
8.9%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product gross profit
 
34,617

 
28,976

 
5,641

 
19.5%
 
89,025

 
88,887

 
138

 
0.2%
Service gross profit
 
17,875

 
22,534

 
(4,659
)
 
(20.7)%
 
53,241

 
67,444

 
(14,203
)
 
(21.1)%
Total gross profit
 
$
52,492

 
$
51,510

 
$
982

 
1.9%
 
$
142,266

 
$
156,331

 
$
(14,065
)
 
(9.0)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product gross margin
 
18.5
%
 
19.3
%
 
 
 
 
 
19.3