UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): December 21, 2006
Red Hat, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware
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(State or Other Jurisdiction of Incorporation)
000-26281 06-1364380
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(Commission File Number) (IRS Employer Identification No.)
1801 Varsity Drive, Raleigh, North Carolina 27606
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(Address of Principal Executive Offices) (Zip Code)
(919) 754-3700
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(Registrant's Telephone Number, Including Area Code)
Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
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))
Item 2.02. Results of Operations and Financial Condition
On December 21, 2006, Red Hat, Inc. announced its financial results for the
quarter ended November 30, 2006. 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 nine months ended November 30, 2006 and November 30, 2005.
These non-GAAP disclosures include a reconciliation of GAAP net income to
adjusted net income and a reconciliation of GAAP cash flow from operating
activities to non-GAAP adjusted cash flow from operating activities based on:
o the impact of share-based compensation expense under Statement of
Financial Accounting Standards No. 123 (Revised 2004), Share-Based
Payment ("SFAS 123R") versus share-based compensation expense under
Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25");
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.
Prior to March 1, 2006, we accounted for share-based compensation pursuant
to the provisions of APB 25, 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 nine months ended November 30, 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 share-based compensation expense of $8.5
million and $24.4 million for the three and nine months ended November 30, 2006,
respectively versus non-GAAP, or what would have been reported had we continued
reporting share-based compensation expense under the provisions of APB 25, of
$0.6 million and $1.9 million, respectively.
During the three months and nine months ended November 30, 2006, we
recorded GAAP income tax expense of $8.6 million and $23.2 million,
respectively, which reflected an estimated annual effective tax rate of 37%. We
currently have approximately $411 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 nine months ended
November 30, 2006 of $1.6 million and $4.3 million respectively. Likewise, the
recorded GAAP income tax expense of $0.7 million and $3.9 million for the three
months and nine months ended November 30, 2005 was adjusted to reflect our
estimated annual effective cash-basis tax rate of 5%, resulting in non-GAAP
adjusted income tax expense of $1.2 million and $2.8 million for those
respective periods.
Our adoption of SFAS 123R also impacts the comparability of our current
year cash flows from operating activities with our prior year cash flows from
operating activities. 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 and nine months ended November 30, 2006, we recognized $2.4
million and $5.2 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 year-over-year comparability purposes only, we have added these
excess cash tax benefits to GAAP cash flows from operating activities resulting
in non-GAAP adjusted cash flows from operating activities of $62.0 million and
$161.2 million for the three and nine months ended November 30, 2006.
Management believes that the 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.
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 9.01 Financial Statements and Exhibits
(d) Exhibits
99.1 Press Release dated December 21, 2006.
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.
RED HAT, INC.
Date: December 21, 2006 By: /s/ Charles E. Peters, Jr.
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Charles E. Peters, Jr.
Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description
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99.1 Press Release dated December 21, 2006