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): June 27, 2007
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 June 27, 2007, Red Hat, Inc. announced its financial results for the
quarter ended May 31, 2007. The full text of the press release issued in
connection with the announcement is furnished as Exhibit 99.1 to this Current
Report on Form 8-K.
We disclosed non-GAAP financial information in the press release for
the three months ended May 31, 2007 and May 31, 2006. These non-GAAP disclosures
include a reconciliation of GAAP net income to adjusted net income and a
reconciliation of GAAP cash flows from operating activities to non-GAAP adjusted
cash flows from operating activities based on:
o the impact of non-cash share-based compensation expense under
Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment ("SFAS 123R");
o the impact of GAAP income tax expense, which includes an estimated
annual effective tax rate versus our estimated annual effective
cash-basis tax rate; and
o the impact of cash flow characterization of excess tax benefits from
share-based arrangements under SFAS 123R.
These non-GAAP disclosures should not be used as a substitute for our GAAP
results, but rather read in conjunction with our GAAP results. The non-GAAP
financial measures we disclosed and the methods we used to calculate non-GAAP
results are not in accordance with GAAP and may be materially different from the
non-GAAP measures and methods used by other companies.
Prior to March 1, 2006, we accounted for share-based compensation
pursuant to the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and accordingly no compensation
expense was recorded for stock options or other share-based awards to employees
and non-employee directors that were granted with an exercise price equal to or
above the market value per share of our common stock on the grant date. For
awards granted with an exercise price less than the market value of our stock on
the grant date, the award's intrinsic value was recorded as deferred
compensation and reported as a separate component of stockholders' equity. This
deferred compensation was amortized to compensation expense over the vesting
period of the award.
Effective March 1, 2006, we adopted the fair value recognition
provisions of SFAS 123R, using the modified prospective transition method.
Compensation costs recognized in the three months ended May 31, 2007 include
compensation costs based on the grant date fair value of the share-based awards.
The fair values have been estimated using the Black-Scholes-Merton
option-pricing model. In accordance with the provisions of the modified
prospective transition method, results for prior periods have not been restated.
Our reconciliation includes GAAP non-cash, share-based compensation expense of
$8.4 million and $7.6 million for the three months ended May 31, 2007 and May
31, 2006, respectively versus the non-GAAP exclusion of such expense.
We excluded GAAP share-based compensation expense for the purpose of
calculating non-GAAP adjusted net income and non-GAAP adjusted net income per
share because it is a non-cash expense, and management believes that by
excluding such expense we provide an alternative and useful measure of operating
performance. Management also believes that non-GAAP measures of profitability
that exclude share-based compensation expense are used by a number of financial
analysts in the software industry to compare current performance to prior
periods and to forecast future performance.
During the three months ended May 31, 2007, we recorded GAAP income tax
expense of $10.8 million, which reflected an estimated annual effective tax rate
of 40%. We currently have approximately $450 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 this period to
reflect the estimated annual effective cash-basis tax rate, resulting in
non-GAAP adjusted income tax expense for the three months ended May 31, 2007 of
$1.8 million. In our reconciliation, the recorded GAAP income tax expense of
$8.0 million for the three months ended May 31, 2006 was adjusted to reflect our
estimated annual effective cash-basis tax rate of 5%, resulting in non-GAAP
adjusted income tax expense of $1.5 million for that period.
Our adoption of SFAS 123R also impacts the comparability of our cash
flows from operating activities for periods subsequent to our adoption of SFAS
123R with our cash flows from operating activities for prior periods. SFAS 123R
requires that the portion of income tax benefits resulting from tax deductions
in excess of a share-based award's original grant date fair value, the "excess
tax benefits", be presented as a source of cash flows from financing activities.
Prior to our adoption of SFAS 123R, under the provisions of APB 25 we would have
presented these excess tax benefits from the exercise of share-based awards as a
source of cash flows from operating activities.
In the three months ended May 31, 2007, we recognized $12.6 million of
cash tax benefits resulting from tax deductions in excess of the share-based
award's original grant date fair value. For improved comparability with prior
periods, we have added these excess cash tax benefits to GAAP cash flows from
operating activities, resulting in non-GAAP adjusted cash flows from operating
activities of $52.3 million for the three months ended May 31, 2007.
Management believes that these adjusted non-GAAP results, when read in
conjunction with the GAAP results, offer a useful view of our business
performance in that they provide a more consistent means of comparing
performance to prior periods in light of the prospective-only application of
SFAS 123R in March 2006 (under the modified prospective transition method) and
due to the availability of our tax NOL position to substantially offset cash
costs of our GAAP effective tax rates for the foreseeable future. Management
also uses non-GAAP measures as a component of its regular internal reporting to
evaluate performance of the business and compare it to prior performance, to
make operating decisions, including internal budgeting and the calculation of
incentive compensation, and to forecast future performance. Our disclosure of
non-GAAP financial measures allows investors to evaluate the Company's
performance using the same methodology and information as that used by
management.
The information furnished pursuant to Item 2.02 of this Form 8-K,
including Exhibit 99.1 referenced herein, shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") or otherwise subject to the liabilities of that section, nor
shall it be deemed incorporated by reference in any filing under the Securities
Act of 1933, as amended, or the Exchange Act, except as expressly set forth by
specific reference in such a filing.
Item 9.01 Financial Statements and Exhibits
(d) Exhibits
99.1 Press Release dated June 27, 2007.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RED HAT, INC.
Date: June 27, 2007 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 June 27, 2007