What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-02 compared with 2022-05-03 · 88 added, 80 removed, 142 unchanged (54% of the section changed)

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For example, sales to our end customers Microsoft and Meta Platforms in fiscal 2019 collectively represented 40% of our total revenue, whereas sales to our end customer Microsoft in fiscal 2020 and 2021 amounted to 21.5% and 15.0% of our revenues, respectively, with our end customer Meta Platforms representing less than 10% of our revenues in both fiscal 2020 and 2021.

While we experienced some decline in overall revenue in 2020, the decline in revenue from these large end customers in 2021 was more than offset by stronger sales to our enterprise and other cloud and service provider customers.

In addition, we typically provide pricing discounts to large end customers, which may result in lower margins for the period in which such sales occur.

This variability in customer concentration has been linked to the timing of new product deployments and spending cycles with these customers, and we expect their contributions to return to more elevated levels during fiscal 2022.

We expect customer concentration with these large end customers to be cyclical and linked to new product introductions and customer investment cycles.

Furthermore, we typically provide pricing discounts to large end customers, which may result in lower margins for the period in which such sales occur.

We believe that cloud computing represents a fundamental shift from traditional legacy network architectures.

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We must also continue to develop market-leading products and features that address the needs of our existing and new customers, and increase sales in the enterprise data center switching, and campus workspace markets.

We intend to continue expanding our sales force and marketing activities in key geographies, as well as our relationships with channel, technology and system-level partners in order

to reach new end customers more effectively, increase sales to existing customers, and provide services and support.

We intend to continue expanding our sales force and marketing activities in key geographies, as well as our relationships with channel, technology and system-level partners in order to reach new end customers more effectively, increase sales to existing customers, and provide services and support.

In addition, we intend to continue to invest in our research and development organization to enhance the functionality of our existing cloud networking platform, introduce new products and features, and build upon our technology leadership.

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We and our fulfillment partners then perform labeling, final configuration, quality assurance testing and shipment to our customers.

COVID-19 Update

The global coronavirus ("COVID-19") pandemic and the subsequent recovery in demand, coupled with lower COVID-19 period capital investments and reduced labor supply has led to, among other things, manufacturing disruptions, supply chain shortages, increased component and supply chain costs, increased lead times, extended demand planning horizons and increased purchase commitments, all of which have impacted our business operations.

We continue to monitor and evaluate developments as the situation evolves, and have prioritized the safety of our employees throughout this period.

Our offices across the globe have reopened with employees returning on a voluntary basis.

Macroeconomic Update

Global economic and business activities continue to face widespread macroeconomic uncertainties, including supply chain and labor shortages, inflation and monetary supply shifts, recession risks, the ongoing global coronavirus ("COVID-19") pandemic, and potential disruptions from the Russia-Ukraine conflict.

Our manufacturing and supply chain operations continue to experience significant constraints, with component shortages, increased component and supply chain costs and delays broadly impacting the industry as a whole.

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We have extended our demand planning horizon, increased our purchase commitments and expect to continue to invest in working capital to address delays in component sourcing and the risk of future supply chain disruptions, but we cannot be certain that such delays or disruptions will not occur.

In addition, inflation pressure in our supply chain and scarcity of some materials needed to build our products have increased our cost of revenue and may negatively impact our gross margin.

Although the overall economy continues to recover, several issues including inflation risk, supply chain bottlenecks and COVID-19 variants have and may continue to impact the pace of the recovery.

The extent of the impact of COVID-19 on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments including the duration and spread of the pandemic and related mitigation efforts, and the impact on our customers, partners, employees, contract manufacturers and supply chain, all of which are uncertain and cannot be predicted.

However, any continued or renewed disruption in manufacturing and supply resulting from the COVID-19 pandemic or related containment measures could negatively impact our business.

We also believe that any extended or renewed COVID-19 related economic disruption could have a negative impact on demand from our customers in future periods.

In addition, inflation pressure in our supply chain and scarcity of some materials needed to build our products have increased our cost of revenue and have impacted, and may continue to negatively impact our gross margin.

While we continue to experience strong overall demand from customers, we believe ongoing supply disruptions combined with other supply chain related constraints, could impact our ability to fulfill this increased demand and as a result could negatively impact our business in future periods.

In addition, although our business has experienced limited disruption as a result of the Russia-Ukraine conflict, continued escalation of the conflict may negatively impact the global economy and our future operating results and financial condition.

Management continues to actively monitor the impact of these macroeconomic factors on the Company's financial condition, liquidity, operations, suppliers, industry, and workforce.

The extent of the impact of these factors on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, the impact on our customers, partners, employees, contract manufacturers and supply chain, all of which are uncertain and cannot be predicted;

however, any continued or renewed disruption in manufacturing and supply resulting from these factors could negatively impact our business.

We also believe that any extended or renewed economic disruptions or deterioration in the global economy could have a negative impact on demand from our customers in future periods.

Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and trends.

Results of Operations

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Three and Six Months Ended June 30, 2022 Compared to Three and Six Months Ended June 30, 2021

Revenue, Cost of Revenue and Gross Margin (in thousands, except percentages)

Three Months Ended March 31,

2022 2021 Change in

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 Change in 2022 2021 Change in

$ $ $ % $ $ $ %

Product $ 885,806 $ 566,467 $ 319,339 56.4 % $ 1,610,524 $ 1,105,612 $ 504,912 45.7 %

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Revenue by Geography (in thousands, except percentages)

Three Months Ended March 31,

2022 % of Total 2021 % of Total

Three Months Ended June 30, Six Months Ended June 30,

2022 % of Total 2021 % of Total 2022 % of Total 2021 % of Total

Americas $ 845,055 80.4 % $ 514,149 72.7 % $ 1,509,432 78.3 % $ 1,016,021 73.9 %

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Product revenue primarily consists of sales of our switching and routing products, and software licenses.

Service revenue is primarily derived from sales of PCS contracts, which is typically purchased in conjunction with our products, and subsequent renewals of those contracts.

Service revenue is primarily derived from sales of PCS contracts, which are typically purchased in conjunction with our products, and subsequent renewals of those contracts.

We expect our revenue may vary from period to period based on, among other things, the timing, size, and complexity of orders, especially with respect to our large end customers.

Product revenue increased $185.6 million, or 34.4%, for the three months ended March 31, 2022 compared to the same period in 2021.

The increase was primarily driven by increased demand for our switching and routing products from our existing customers, with strong contributions from across our customer base.

In addition, we added new customers in the period, as we continued to expand our presence in the enterprise market.

Service revenue increased $23.9 million, or 18.6%, in the three months ended March 31, 2022, compared to the same period in 2021, as a result of continued growth in initial and renewal PCS contracts as our customer installed base has continued to expand.

International revenues decreased slightly from 24.8% of total revenue in the three months ended March 31, 2021 to 24.3% of total revenues in the three months ended March 31, 2022, which was primarily due to reduced purchases from large global customers in the Asia-Pacific region.

Product revenue increased $319.3 million, or 56.4%, and $504.9 million, or 45.7%, for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.

These increases reflect strong demand for our switching and routing platforms from across our customer base, including healthy contributions from our large cloud customers.

Supply chain constraints continued to impact our revenue performance in these periods and while changes in product deferred revenue impacted the timing of revenue recognition on a quarterly basis, it was not a net contributor to revenue growth for the six-month period ended June 30, 2022.

In addition, service revenue increased $25.2 million, or 17.9%, and $49.2 million, or 18.3%, in the three and six months ended June 30, 2022, compared to the same periods in 2021, as a result of continued growth in initial and renewal support contracts as our customer installed base has continued to expand.

International revenues represented 19.6% and 21.7% of total revenues in the three and six months ended June 30, 2022, respectively, decreasing from 27.3% and 26.1% for the same periods in the prior year, which was primarily driven by increased purchases from large global customers in our Americas region.

We continued to experience competitive pricing pressure on our products and services.

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Cost of service revenue primarily consists of personnel and other costs associated with our global customer support and services organizations.

Cost of revenue increased $80.9 million, or 33.4% for the three months ended March 31, 2022 compared to the same period in 2021, which was primarily driven by a corresponding increase in product and service revenues, coupled with an increase in supply chain costs due to increased production capacity, component and other supply chain costs and higher volumes.

Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of

factors, including pricing pressure on our products and services due to competition, the mix of sales to large end customers who generally receive lower pricing, the mix of products sold, manufacturing-related costs, including costs associated with supply chain sourcing activities, merchant silicon costs, and excess/obsolete inventory write-downs, including charges for excess/obsolete component inventory held by our contract manufacturers.

Cost of revenue increased $155.5 million, or 61.4%, and $236.4 million, or 47.7%, for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.

These increases were primarily driven by a corresponding

increase in product and service revenues, combined with an increase in material and logistics costs to mitigate supply chain constraints and to meet customer demand.

Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including pricing pressure on our products and services due to competition, the mix of sales to large end customers who generally receive lower pricing, the mix of products sold, manufacturing-related costs, including costs associated with supply chain sourcing activities, merchant silicon costs, and excess/obsolete inventory write-downs, including charges for excess/obsolete component inventory held by our contract manufacturers.

We expect our gross margin to fluctuate over time, depending on the factors described above.

Gross margin decreased from 63.7% to 63.1% for the three months ended March 31, 2022 compared to the same period in 2021.

The decrease was primarily driven by higher supply chain costs, which were partly offset by improved product margins due to a reduced proportion of our sales to larger end customers who generally receive larger discounts.

Gross margin decreased from 64.2% to 61.2% for the three months ended June 30, 2022, and decreased from 64.0% to 62.1% for the six months ended June 30, 2022, compared to the same periods in 2021.

The decrease in each period was primarily driven by an increased proportion of our sales to larger end customers who generally receive larger discounts and, increased material and logistics costs to mitigate supply chain constraints, partly offset by the impact of fixed overhead costs on a higher revenue base.

Operating Expenses (in thousands, except percentages)

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Personnel costs also include stock-based compensation and travel expenses.

Three Months Ended March 31,

2022 2021 Change in

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 Change in 2022 2021 Change in

$ $ $ % $ $ $ %

Operating expenses:

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We expect our research and development expenses to increase in absolute dollars as we continue to invest in software development in order to expand the capabilities of our cloud networking platform, introduce new products and features, and continue to invest in our technology.

Research and development expenses increased $39.5 million, or 29.8%, in the three months ended March 31, 2022 compared to the same period in 2021.

The increase in the three months ended March 31, 2022 was primarily due to a $21.4 million increase in new product introduction costs, including third party engineering and other product development costs, and an $8.9 million increase in personnel costs driven by headcount growth.

Research and development expenses increased $34.9 million, or 24.3%, and $74.4 million, or 27.0%, in the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.

The increases were primarily driven by an increase in personnel costs of $16.4 million and $25.3 million for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021 due to headcount growth.

In addition, new product introduction costs increased by $10.7 million and $32.0 million for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.

Sales and marketing

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We expect our sales and marketing expenses to increase in absolute dollars as we continue to expand our sales and marketing efforts worldwide.

Sales and marketing expenses increased $9.7 million, or 13.7%, for the three months ended March 31, 2022 compared to the same period in 2021.

The increase in the three months ended March 31, 2022 included $11.0 million in personnel-related costs mostly driven by an increase in headcount and sales incentive compensation.

Sales and marketing expenses increased $8.7 million, or 12.4%, and $18.5 million, or 13.0%, for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021, which was primarily caused by increased personnel costs driven by headcount growth.

General and administrative

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Our professional services costs are primarily related to external legal, accounting and tax services.

General and administrative expenses increased $7.6 million, or 49.4%, in the three months ended March 31, 2022 compared to the same period in 2021.

The increase for the three months ended March 31, 2022 was primarily related to $5.3 million in personnel-related costs, which primarily consisted of increased stock-based compensation expenses.

Other Income, Net (in thousands, except percentages)

Other income, net consists primarily of interest income from our cash, cash equivalents and marketable securities, gains and losses on our equity investments in privately-held companies and marketable securities, and foreign currency

transaction gains and losses.

We expect other income, net may fluctuate in the future as a result of the re-measurement of our equity investments upon the occurrence of observable price changes and/or impairments, changes in interest rates or returns on our cash and cash equivalents and marketable securities, and foreign currency exchange rate fluctuations.

Three Months Ended March 31,

2022 2021 Change in

Other income, net:

General and administrative expenses increased $2.0 million, or 9.5%, and $9.6 million, or 26.5%, in the three and six months ended June 30, 2022 compared to the same periods in 2021.

The increase in the three and six months ended June 30, 2022 included increased legal and professional fees, primarily driven by acquisitions during the first half of 2022.

The increase in the six months ended June 30, 2022 was also driven by an increase in personnel costs, including stock-based compensation.

Other Income (Expense), Net (in thousands, except percentages)

Other income (expense), net consists primarily of interest income from our cash, cash equivalents and marketable securities, gains and losses on our equity investments in privately-held companies and marketable securities, and foreign currency transaction gains and losses.

We expect other income (expense), net may fluctuate in the future as a result of the re-measurement of our equity investments upon the occurrence of observable price changes and/or impairments, changes in interest rates or returns on our cash and cash equivalents and marketable securities, and foreign currency exchange rate fluctuations.

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 Change in 2022 2021 Change in

$ $ $ % $ $ $ %

Other income (expense), net:

Interest income $ 4,427 $ 1,872 $ 2,555 136.5 % $ 6,855 $ 3,917 $ 2,938 75.0 %

Unrealized gain on equity investments 28,497 — 28,497 100.0

Unrealized gain (loss) on equity investments (5,084) — (5,084) 100.0 % 23,413 — 23,413 100.0

Other income (expense), net 124 (153) 277 181.0 679 (623) 1,302 (209.0)

Total other income, net $ 31,480 $ 1,575 $ 29,905 1,898.7 %

The increase in other income, net was driven by a $28.5 million unrealized gain on our equity investments.

For additional information, refer to Note 2 – Fair Value Measurement and Investments in the notes to the condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Total other income (expense), net $ (533) $ 1,719 $ (2,252) (131.0) % $ 30,947 $ 3,294 $ 27,653 839.5 %

The movements in other income (expense), net, during the three and six months ended June 30, 2022 as compared to the same periods in 2021 were primarily driven by the movements of the stock prices of our publicly-traded equity investment after its initial public offering in January 2022.

In addition, our interest income has increased as we gradually replace lower-coupon-rate fixed-income marketable debt securities upon maturity with those with higher coupon rates.

We expect our interest income to continue to increase for the remainder of 2022 as a result of higher interest rates.

Provision for Income Taxes (in thousands, except percentages)

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Our tax expense to date consists of federal, state and foreign current and deferred income taxes.

Three Months Ended March 31,

2022 2021 Change in

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 Change in 2022 2021 Change in

$ $ $ % $ $ $ %

Income before income taxes $ 362,320 $ 221,084 $ 141,236 63.9 % $ 671,787 $ 428,951 $ 242,836 56.6 %

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Effective tax rate 17.4 % 10.9 % 14.9 % 12.1 %

For the three months ended March 31, 2022 and 2021, we recorded a provision of $37.2 million and $27.5 million for income taxes, respectively.

The increase in income taxes was primarily due to an overall increase in pre-tax income, combined with a favorable change in jurisdictional mix in earnings in the three months ended March 31, 2022, as compared to the same period in 2021.

The increase in the effective tax rates in the three and six months ended June 30, 2022, as compared to the same periods in 2021, was primarily due to a decrease in the proportion of tax benefits attributable to stock-based compensation versus total pre-tax income.

Liquidity and Capital Resources

Our principal sources of liquidity are cash, cash equivalents, marketable securities, and cash generated from operations.

As of March 31, 2022, our total balance of cash, cash equivalents and marketable securities was approximately $3.4 billion, of which approximately $600.1 million was held outside of the U.S.

As of June 30, 2022, our total balance of cash, cash equivalents and marketable securities was approximately $2.9 billion, of which approximately $381.3 million was held outside the U.S.

in our foreign subsidiaries.

Our cash, cash equivalents and marketable securities are held for general business purpose including the funding of working capital.

Our marketable securities investment portfolio is primarily invested in highly-rated securities, with the primary objective of minimizing the potential risk of principal loss.

Our cash, cash equivalents and marketable securities are held for general business purposes, including the funding of working capital.

The investment portfolio of our marketable securities is primarily invested in highly-rated securities, with the primary objective of minimizing the potential risk of principal loss.

We plan to continue to invest for long-term growth.

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Cash Flows (in thousands)

Three Months Ended March 31,

Six Months Ended June 30,

Cash provided by operating activities $ 318,235 $ 518,041

Cash used in investing activities (72,615) (217,949)

Cash provided by (used in) investing activities 172,959 (436,082)

Cash used in financing activities (615,699) (80,824)

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Cash Flows from Operating Activities

During the three months ended March 31, 2022, cash provided by operating activities was $217.1 million, primarily from net income of $272.3 million, reduced by non-cash adjustments to net income of $35.4 million, and a net increase of $19.7 million in working capital requirements.

Cash outflows from the increase in working capital requirements primarily consisted of a $131.9 million increase in accounts receivables due to increased product and service billings, a $108.0 million increase in prepaid and other current assets primarily driven by increased inventory deposits to our contract manufacturers and product deferred cost of sales driven by higher product revenue deferrals, and a $43.5 million increase in inventory to help mitigate the impact of supply chain disruptions.

These operating cash outflows were largely offset by a $187.2 million increase in deferred revenue reflecting ongoing growth from PCS contracts, and increased product deferred revenue related to contracts with acceptance terms, and a $107.0 million increase in income taxes payable due to timing of payments, the impact of IRC Section 174 and an increase in pre-tax income.

During the three months ended March 31, 2021, cash provided by operating activities was $254.7 million, primarily from net income of $180.4 million and non-cash adjustments to net income of $61.3 million driven by stock-based compensation and depreciation and amortization, and a net decrease of $13.0 million in working capital requirements.

Cash inflows from the decrease in working capital requirements primarily consisted of a $69.2 million increase in product and service deferred revenue driven by contacts with acceptance terms and continued growth in PCS contracts, which was largely offset by cash outflows that consisted of a $20.8 million decrease in accrued liabilities, including the payment of corporate bonuses, a $15.3 million increase in prepaid expenses including increased deferred product cost of revenue, and a $10.4 million decrease in income taxes payables.

During the six months ended June 30, 2022, cash provided by operating activities was $318.2 million, primarily from net income of $571.4 million and non-cash adjustments to net income of $19.8 million driven by stock-based compensation and depreciation and amortization, and partly offset by a net increase of $272.9 million in working capital requirements.

The increase in working capital requirements primarily consisted of a $202.1 million increase in inventory and a $158.1 million increase in prepaid expenses and other current assets, which reflected increased inventory purchases and inventory deposits to contract manufacturers to mitigate supply chain constraints and meet customer demand.

The increase in other current assets also reflected increased deferred product cost of sales due to a corresponding increase in deferred product revenue, as well as an increase in contract assets and other miscellaneous receivables.

In addition, accounts receivable increased by $64.3 million due to increased product and service billings.

These operating cash outflows were partially offset by a $91.2 million increase in product and service deferred revenue driven by customer contracts with acceptance terms and PCS contracts, a $71.2 million increase in accounts payable, and a $10.8 million increase in income tax payables.

During the six months ended June 30, 2021, cash provided by operating activities was $518.0 million, primarily from net income of $377.3 million and non-cash adjustments to net income of $125.2 million driven by stock-based compensation and depreciation and amortization, and a net decrease of $15.5 million in working capital requirements.

The decrease in working capital requirements primarily consisted of a $95.3 million increase in product and service deferred revenue driven by customer contracts with acceptance terms and growth in PCS contracts, a $25.3 million decrease in accounts receivable due to strong collections, and a $20.0 million increase in accrued liabilities due to additional supply chain related obligations.

These cash inflows were partially offset by a $63.5 million increase in inventory and a $44.4 million increase in prepaid expenses primarily due to prepaid income taxes and deferred product cost of revenue.

Cash Flows from Investing Activities

During the three months ended March 31, 2022, cash used in investing activities was $72.6 million, primarily consisting of purchases of available-for-sale securities of $412.6 million, a business acquisition of $37.6 million, purchases of non-marketable equity investments of $11.7 million, and purchases of property and equipment of $14.9 million, partially offset by proceeds from maturities of marketable securities of $404.2 million.

During the three months ended March 31, 2021, cash used in investing activities was $217.9 million, primarily consisting of purchases of available-for-sale securities of $590.5 million, and purchases of property and equipment of $5.1 million, partially offset by proceeds from maturities of marketable securities of $379.6 million.

During the six months ended June 30, 2022, cash provided by investing activities was $173.0 million, consisting of proceeds from maturities of marketable securities of $829.7 million and proceeds from sale of marketable securities of $165.7 million, which was used to fund the business acquisitions and to repurchase our common stock.

These amounts were partially offset by purchases of available-for-sale securities of $642.0 million, and purchases of property and equipment of $23.7 million.

During the six months ended June 30, 2021, cash used in investing activities was $436.1 million, consisting of purchases of available-for-sale securities of $1,241.7 million, and purchases of property and equipment of $9.6 million, partially offset by proceeds from maturities of marketable securities of $819.8 million.

Cash Flows from Financing Activities

During the three months ended March 31, 2022, cash used in financing activities was $129.8 million, primarily consisting of payments for repurchases of our common stock from the open market of $136.2 million, partially offset by proceeds from the issuance of common stock under employee equity incentive plans of $19.2 million.

During the three months ended March 31, 2021, cash used in financing activities was $85.8 million, primarily consisting of payments for repurchases of our common stock from the open market of $101.4 million, partially offset by proceeds from the issuance of common stock under employee equity incentive plans of $18.1 million.

During the six months ended June 30, 2022, cash used in financing activities was $615.7 million, consisting of payments for repurchases of our common stock from the open market of $619.9 million, and employee taxes withheld and paid of $18.8 million upon vesting of restricted stock units, offset partially by proceeds from the issuance of common stock under employee equity incentive plans of $23.0 million.

During the six months ended June 30, 2021, cash used in financing activities was $80.8 million, consisting of payments for repurchases of our common stock from the open market of $101.4 million, and employee taxes withheld and paid of $6.4 million upon vesting of restricted stock units, offset partially by proceeds from the issuance of common stock under employee equity incentive plans of $26.9 million.

Stock Repurchase Program

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The New Repurchase Program does not obligate us to acquire any of our common stock and may be suspended or discontinued by the company at any time without prior notice.

During the quarter ended March 31, 2022, we repurchased a total of $136.2 million of our common stock.

March 31, 2022, the remaining authorized amount for repurchases under the New Repurchase Program was $790.8 million.

During the quarter ended June 30, 2022, we repurchased a total of $483.7 million of our common stock.

As of June 30, 2022, the remaining authorized amount for repurchases under the New Repurchase Program was $307.2 million.

Refer to Note 6.

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We have operating lease arrangements for office space, data center, equipment and other corporate assets.

As of March 31, 2022, we had lease payment obligations, net of immaterial sublease income, of $88.4 million, with $18.0 million payable within 12 months.

As of June 30, 2022, we had lease payment obligations, net of immaterial sublease income, of $82.1 million, with $11.9 million payable within 12 months.

Purchase Obligations

Purchase obligations represent an estimate of all open purchase orders and contractual obligations, made either directly by Arista or by our contract manufacturers on our behalf, in the ordinary course of business for which we have not received the goods or services.

As of March 31, 2022, we had $4.3 billion of such purchase obligations, with $2.5 billion expected to be received within 12 months, and $0.8 billion with confirmed receipt dates in excess of one year.

In addition, we had $1.0 billion of purchase obligations that were placed in the current quarter for which receipt dates have yet to be confirmed.

Purchase obligations represent an estimate of all non-cancellable open purchase orders and contractual obligations, made either directly by Arista or by our contract manufacturers on our behalf, in the ordinary course of business for which we have not received the goods or services.

As of June 30, 2022, we had $4.47 billion of such purchase obligations, out of which $2.94 billion are expected to be received within 12 months, and $1.53 billion are expected to be received after one year.

These open purchase orders are considered enforceable and legally binding, and while we may have some limited ability to reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services, this can only occur with the agreement of the related supplier.

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In connection with the Tax Cuts and Jobs Act of 2017("TCJA"), we recorded a federal income tax payable for transition tax on the mandatory deemed repatriation of foreign earnings that will be payable over an eight-year period.

As of March 31, 2022, $6.3 million of long-term transition tax payable represents the remaining federal income tax payable due between one and three years.

In addition to the long-term transition tax payable, as of March 31, 2022 we have recorded long-term tax liabilities of $68.2 million related to uncertain tax positions;

As of June 30, 2022, $6.3 million of long-term transition tax payable represents the remaining federal income tax payable due between one and three years.

In addition to the long-term transition tax payable, as of June 30, 2022, we have recorded long-term tax liabilities of $73.1 million related to uncertain tax positions;

however, we are unable to make a reasonably reliable estimate of the timing of settlement, if any, of these future payments.

In addition, beginning in 2022, the TCJA eliminates the option to deduct research and development expenditures currently and requires taxpayers to capitalize and amortize them over five years pursuant to IRC Section 174.

Although there is proposed legislation that would defer the capitalization requirement to later years, we have no assurance that the provision will be repealed or otherwise modified.

Consequently, we accrued an incremental income tax liability of $49.0 million as of March 31, 2022, associated with these new regulations, and may incur up to an additional $130.0 million in tax liabilities for the remainder of 2022.

Consequently, we estimate the incremental cash tax impact resulting from the new regulations to be approximately $184.0 million for the year, of which the liability for the first six months of 2022 has been paid as of June 30, 2022;

however, we do not anticipate any material change to our effective tax rate.

Off-balance Sheet Arrangements

As of March 31, 2022, we did not have any relationships with any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

As of June 30, 2022, we did not have any relationships with any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Estimates

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To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

We believe the critical accounting policies and estimates in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K filed with the SEC on February 15, 2022 reflect our more significant judgments and estimates used in the preparation of the condensed consolidated financial statements.

There have been no significant changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K.

We believe the critical accounting estimates in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K filed with the SEC on February 15, 2022 reflect our more significant judgments and estimates used in the preparation of the condensed consolidated financial statements.

There have been no significant changes to our critical accounting estimates as disclosed in our Annual Report on Form 10-K.

Recent Accounting Pronouncements

Refer to the sections titled “ Recently Adopted Accounting Pronouncements” in Note 1.

Refer to the subheading titled “ Recently Adopted Accounting Pronouncements” in Note 1.

Organization and Summary of Significant Accounting Policies of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis