Xyratex Ltd. Announces Results for the Fourth Quarter and Fiscal Year 2006

Xyratex Ltd. (Nasdaq:XRTX), a leading provider of enterprise class data storage subsystems and storage process technology, today announced results for the fourth quarter and fiscal year ended November 30, 2006. Revenues for the fourth quarter were $241.1 million, an increase of 18.4% compared to revenues of $203.6 million for the same period last year and down 8.4% compared to $263.1 million in the prior quarter. For the fourth quarter, GAAP net income was $9.4 million, or $0.32 per diluted share compared to GAAP net income of $13.8 million in the same period last year. Non-GAAP net income from continuing operations decreased 30% to $10.9 million, or a diluted earnings per share of $0.36, compared to non-GAAP net income of $15.5 million in the same quarter a year ago. A reconciliation between net income on a GAAP basis and net income on a non-GAAP basis is provided in a table immediately following the "Consolidated Statements of Cash Flows” below. Gross profit margin in the fourth quarter was 17.4%, compared to 21.7% in the same period last year and 21.1% in the prior quarter. These movements primarily result from a lower proportion of Storage Infrastructure revenues and product mix within each business. Revenues for fiscal year 2006 were $983.6 million, an increase of 44.7%, compared to revenues of $679.6 million for fiscal year 2005. GAAP net income for fiscal year 2006 was $58.2 million or $1.97 per diluted share compared to a GAAP net income of $42.2 million for fiscal year 2005. Non-GAAP net income from continuing operations for fiscal year 2006 increased 38.3% to $64.9 million, or a diluted earnings per share of $2.17, compared to non-GAAP net income of $46.9 million for fiscal year 2005. "I am very pleased with our outstanding performance for the 2006 Fiscal Year. The results for the year support our strong position in the industries we serve and our ongoing effort and focus in expanding our partnership with our existing customers and in developing partnerships with new customers,” said Steve Barber, CEO of Xyratex. "Though there is some additional uncertainty related to the capital spending plans of our customers in 2007, we are confident that the fundamentals within the markets we serve are strong and that our technology and strong execution will benefit us over the longer term.” Business Highlights We announced that the E5402E 3Gb SAS - SAS/SATA RAID system is now shipping. The 2U 12 drive E5402E provides end-users with high performance, system flexibility and simplified management and integration. We announced that Hammer will integrate Xyratex's latest E5402E SAS RAID system into its V2 branded storage solutions. The Xyratex E5402E RAID array is a 2U, 12-drive SAS-to-SAS subsystem that supports 3Gbps SAS and SATA disk drives and can be expanded to support up to 60 SAS/SATA drives. We entered into an extensive patent cross license agreement with IBM, and acquired key skills, assets and IP from ARIO Data Networks. Both the agreement and acquisition enhance our storage systems technology roadmap capability. We shipped our two millionth disk drive production test slot. In March 2005, we announced that we had shipped our one millionth test slot and we have recently doubled that milestone, which reflects our exceptional growth and strong position within the drive industry. We secured new design wins with DVS and Dallmeier in Germany as well as a number of other Tier 2 and Tier 3 customers. Business Outlook The following statements are based on current expectations. These statements are forward-looking, and actual results may differ materially. These statements do not include the potential impact of any future acquisitions or divestitures. Revenue in the first quarter of 2007 is projected to be in the range $220 to $235 million. Fully diluted earnings per share is anticipated to be between $0.16 and $0.26 on a GAAP basis in the first quarter. On a non-GAAP basis fully diluted earnings per share is anticipated to be between $0.23 and $0.33. Non-GAAP earnings per share excludes non-cash equity compensation, amortization of intangible assets, certain other acquisition related charges and related taxation expense. Conference Call/Webcast Information The company will host a conference call to discuss its results at 2:00 p.m. PT/5:00 p.m. ET on Thursday, January 4, 2007. The conference call can be accessed online via the company's website www.xyratex.com/investors, or by telephone as follows: United States (800) 295-3991Outside the United States (617) 614-3924Passcode 46851769 A replay will be available via the company's website www.xyratex.com/investors, or can be accessed by telephone through January 11, 2007 as follows: United States (888) 286-8010Outside the United States (617) 801-6888Passcode 45746111 Safe Harbor Statement This press release contains forward–looking statements. These statements relate to future events or our future financial performance, including our projected revenue and fully diluted earnings per share data (on a GAAP and non-GAAP basis) for the first quarter. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Factors that might cause such a difference include our inability to compete successfully in the competitive and rapidly changing marketplace in which we operate, failure to retain key employees, changes in our customers volume requirements, cancellation or delay of projects and adverse general economic conditions in the United States and internationally. These risks and other factors include those listed under "Risk Factors" and elsewhere in our Annual Report on Form 20-F as filed with the Securities and Exchange Commission (File No. 000-50799). In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. About Xyratex Xyratex is a leading provider of enterprise class data storage subsystems and storage process technology. The company designs and manufactures enabling technology that provides OEM and disk drive manufacturers with data storage products to support high-performance storage and data communication networks. Xyratex has over 20 years of experience in research and development relating to disk drives, storage systems and high-speed communication protocols. Founded in 1994 in an MBO from IBM, and with headquarters in the UK, Xyratex has an established global base with R&D and operational facilities in Europe, the United States and South East Asia. For more information, visit www.xyratex.com. XYRATEX LTD. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS   Three Months Ended, Year Ended November 30, November 30, November 30, November 30, 2006  2005  2006  2005  (US dollars in thousands, except per share amounts)   Revenues: Storage and Network Systems $ 167,618  $ 121,200  $ 598,752  $ 415,379  Storage Infrastructure 73,478  82,364  384,881  264,230  Total revenues 241,096  203,564  983,633  679,609    Cost of revenues 199,058  159,334  786,347  535,315  Gross profit: Storage and Network Systems 21,814  18,686  82,762  64,831  Storage Infrastructure 20,504  25,544  115,447  79,463  Equity compensation (280) -  (923) -  Total gross profit 42,038  44,230  197,286  144,294  Operating expenses: Research and development 17,466  16,845  71,391  54,327  Selling, general and administrative 15,867  11,738  60,449  38,842  Amortization of intangible assets 1,430  1,658  5,123  3,218  In process research and development -  1,000  -  3,230  Total operating expenses 34,763  31,241  136,963  99,617  Operating income 7,275  12,989  60,323  44,677  Other income 1,202  -  3,167  -  Interest income, net 295  156  1,162  1,176  Income before income taxes 8,772  13,145  64,652  45,853  Provision (benefit) for income taxes (582) (394) 6,474  3,964  Net income from continuing operations 9,354  13,539  58,178  41,889  Income from discontinued operations (net of taxes) -  280  -  280  Net income $ 9,354  $ 13,819  $ 58,178  $ 42,169    Net earnings per share - basic: Net income from continuing operations $ 0.33  $ 0.48  $ 2.03  $ 1.48  Income from discontinued operations, net of income tax -  0.01  -  0.01  Net earnings per share $ 0.33  $ 0.49  $ 2.03  $ 1.49    Net earnings per share - diluted: Net income from continuing operations $ 0.32  $ 0.47  $ 1.97  $ 1.44  Income from discontinued operations, net of income tax -  0.01  -  0.01  Net earnings per share $ 0.32  $ 0.48  $ 1.97  $ 1.45    Weighted average common shares (in thousands), used in computing net earnings per share: Basic 28,762  28,425  28,663  28,329  Diluted 29,505  28,867  29,604  29,031    XYRATEX LTD. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS     November 30, November 30, 2006  2005  (US dollars and amounts in thousands)   ASSETS Current assets: Cash and cash equivalents $ 56,921  $ 41,240  Accounts receivable, net 105,324  82,449  Inventories 93,111  71,543  Prepaid expenses 2,390  2,244  Deferred income taxes 2,513  6,480  Other current assets 7,247  3,236  Total current assets 267,506  207,192  Property, plant and equipment, net 34,471  25,643  Intangible assets, net 58,109  50,904  Deferred income taxes 15,594  17,551  Total assets $ 375,680  $ 301,290    LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 84,896  $ 79,927  Acquisition note payable -  3,000  Short-term borrowings 4,000  4,000  Employee compensation and benefits payable 16,645  13,620  Deferred revenue 16,303  16,434  Income taxes payable 1,641  421  Other accrued liabilities 14,701  15,506  Total current liabilities 138,186  132,908  Long-term debt 3,000  7,000  Total liabilities 141,186  139,908    Shareholders' equity Common shares of Xyratex Ltd. (in thousands), par value $0.01 per share 70,000 authorized, 28,793 and 28,437 issued and outstanding 288  284  Additional paid-in capital 344,686  333,886  Accumulated other comprehensive income (loss) 2,774  (1,356) Accumulated deficit (113,254) (171,432) Total shareholders' equity 234,494  161,382  Total liabilities and shareholders' equity $ 375,680  $ 301,290    XYRATEX LTD. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     Year Ended November 30, November 30, 2006  2005  (US dollars in thousands) Cash flows from operating activities: Net income from continuing operations $ 58,178  $ 41,889  Adjustments to reconcile net income to net cash used in operating activities: Depreciation 10,105  6,694  Amortization of intangible assets 5,123  3,218  Non-cash equity compensation 7,194  828  Bonus paid by trust -  144  In process research and development -  3,230  Loss on sale of assets 265  90  Changes in assets and liabilities, net of impact of acquisitions and divestitures Accounts receivable (21,098) (29,272) Inventories (21,528) (16,297) Prepaid expenses and other current assets 1,138  (542) Accounts payable 4,302  25,668  Employee compensation and benefits payable 3,025  2,474  Deferred revenue (131) (2,560) Income taxes payable 80  (643) Deferred income taxes 5,824  4,403  Other accrued liabilities 2,016  (986) Net cash used for operating activities of discontinued operations -  280  Net cash provided by operating activities 54,493  38,618    Cash flows from investing activities: Investments in property, plant and equipment (19,932) (17,070) Dispositions in property, plant and equipment 762  -  Acquisition of intangible assets (4,000) -  Acquisition of business, net of cash received (12,252) (34,845) Net cash used in investing activities (35,422) (51,915)   Cash flows from financing activities: Payments of short-term borrowings (4,000) (9,133) Payment of acquisition note payable (3,000) (2,000) Proceeds from issuance of shares 3,610  2,175  Net cash used in financing activities (3,390) (8,958) Change in cash and cash equivalents 15,681  (22,255) Cash and cash equivalents at beginning of period 41,240  63,495  Cash and cash equivalents at end of period $ 56,921  $ 41,240    XYRATEX LTD. UNAUDITED RECONCILIATION OF GAAP NET INCOME FROM CONTINUING OPERATIONS TO NON-GAAP NET INCOME   Three Months Ended GAAP Non-GAAP Non-GAAP November 30, Adjustment November 30, 2006  (a) 2006  (US dollars in thousands, except per share amounts) Revenues: Storage and Network Systems $ 167,618  $ 167,618  Storage Infrastructure 73,478  73,478  Total revenues 241,096  241,096    Cost of revenues 199,058  (280) 198,778  Gross profit: Storage and Network Systems 21,814  21,814  Storage Infrastructure 20,504  20,504  Equity compensation (280) 280  -  Total gross profit 42,038  42,318  Operating expenses: Research and development 17,466  (557) 16,909  Selling, general and administrative 15,867  (981) 14,886  Amortization of intangible assets 1,430  (1,430) -  Total operating expenses 34,763  31,795  Operating income 7,275  10,523  Other income 1,202  (1,202) -  Interest income, net 295  295  Income before income taxes 8,772  10,818  Provision (benefit) for income taxes (582) 523  (59) Net income from continuing operations 9,354  10,877    Net earnings per share from continuing operations: Basic $ 0.33  $ 0.38  Diluted $ 0.32  $ 0.36    Weighted average common shares (in thousands), used in computing net earnings per share: Basic 28,762  28,762  Diluted 29,505  416  29,921    XYRATEX LTD. UNAUDITED RECONCILIATION OF GAAP NET INCOME FROM CONTINUING OPERATIONS TO NON-GAAP NET INCOME   Year Ended GAAP Non-GAAP Non-GAAP November 30, Adjustment November 30, 2006  (a) 2006  (US dollars in thousands, except per share amounts) Revenues: Storage and Network Systems $ 598,752  $ 598,752  Storage Infrastructure 384,881  384,881  Total revenues 983,633  983,633    Cost of revenues 786,347  (923) 785,424  Gross profit: Storage and Network Systems 82,762  82,762  Storage Infrastructure 115,447  115,447  Equity compensation (923) 923  -  Total gross profit 197,286  198,209  Operating expenses: Research and development 71,391  (1,962) 69,429  Selling, general and administrative 60,449  (4,309) 56,140  Amortization of intangible assets 5,123  (5,123) -  Total operating expenses 136,963  125,569  Operating income 60,323  72,640  Other income 3,167  (3,167) -  Interest income, net 1,162  1,162  Income before income taxes 64,652  73,802  Provision for income taxes 6,474  2,384  8,858  Net income from continuing operations 58,178  64,944    Net earnings per share from continuing operations: Basic $ 2.03  $ 2.27  Diluted $ 1.97  $ 2.17    Weighted average common shares (in thousands), used in computing net earnings per share: Basic 28,663  28,663  Diluted 29,604  289  29,893    XYRATEX LTD. UNAUDITED RECONCILIATION OF GAAP NET INCOME FROM CONTINUING OPERATIONS TO NON-GAAP NET INCOME   Three Months Ended GAAP Non-GAAP Non-GAAP November 30, Adjustment November 30, 2005  (a) 2005  (US dollars in thousands, except per share amounts) Revenues: Storage and Network Systems $ 121,200  $ 121,200  Storage Infrastructure 82,364  82,364  Total revenues 203,564  203,564    Cost of revenues 159,334  159,334  Gross profit: Storage and Network Systems 18,686  18,686  Storage Infrastructure 25,544  25,544  Total gross profit 44,230  44,230  Operating expenses: Research and development 16,845  (830) 16,015  Selling, general and administrative 11,738  (207) 11,531  Amortization of intangible assets 1,658  (1,658) -  In process research and development 1,000  (1,000) -  Total operating expenses 31,241  27,546  Operating income 12,989  16,684  Interest income, net 156  156  Income before income taxes 13,145  16,840  Provision (benefit) for income taxes (394) 1,701  1,307  Net income from continuing operations 13,539  15,533    Net earnings per share from continuing operations: Basic $ 0.48  $ 0.55  Diluted $ 0.47  $ 0.54    Weighted average common shares (in thousands), used in computing net earnings per share: Basic 28,425  28,425  Diluted 28,867  28,867  XYRATEX LTD. UNAUDITED RECONCILIATION OF GAAP NET INCOME FROM CONTINUING OPERATIONS TO NON-GAAP NET INCOME   Year Ended GAAP Non-GAAP Non-GAAP November 30, Adjustment November 30, 2005  (a) 2005  (US dollars in thousands, except per share amounts) Revenues: Storage and Network Systems $ 415,379  $ 415,379  Storage Infrastructure 264,230  264,230  Total revenues 679,609  679,609    Cost of revenues 535,315  535,315  Gross profit: Storage and Network Systems 64,831  64,831  Storage Infrastructure 79,463  79,463  Total gross profit 144,294  144,294  Operating expenses: Research and development 54,327  (830) 53,497  Selling, general and administrative 38,842  (828) 38,014  Amortization of intangible assets 3,218  (3,218) -  In process research and development 3,230  (3,230) -  Total operating expenses 99,617  91,511  Operating income 44,677  52,783  Interest income, net 1,176  1,176  Income before income taxes 45,853  53,959  Provision for income taxes 3,964  3,047  7,011  Net income from continuing operations 41,889  46,948    Net earnings per share from continuing operations: Basic $ 1.48  $ 1.66  Diluted $ 1.44  $ 1.62    Weighted average common shares (in thousands), used in computing net earnings per share: Basic 28,329  28,329  Diluted 29,031  29,031        (a) Non-GAAP Adjustment for the three and twelve month periods ended November 30, 2006 and November 30, 2005 includes non-cash amortization of intangible assets, non-cash equity compensation expense and income from the sale of a product line. Non-GAAP Adjustment for the three and twelve month periods ended November 30, 2005 also includes in-process research and development expense, expenses of $830,000 resulting from withdrawing from a major research and development project and a tax benefit of $864,000 resulting from a reorganization of our legal structure. The Non-GAAP Adjustment for these periods also include the related tax effects   We believe these Non-GAAP measures are useful to investors because they provide an alternative method of measuring the operating performance of our business by excluding certain expenses, gains and losses which we believe are not indicative of our core operating results.