HLIT-2013.09.27-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________
Form 10-Q
_____________________________________________________
(Mark One)
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 27, 2013
 
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File No. 000-25826
_____________________________________________________
HARMONIC INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________
Delaware
77-0201147
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
4300 North First Street
San Jose, CA 95134
(408) 542-2500
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
____________________________________________
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  ý    No  ¨
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
¨
Accelerated filer
ý
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
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  ¨    No  ý
The number of shares of the registrant’s Common Stock, $.001 par value, outstanding on October 14, 2013 was 100,808,712.


Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
 
 

2

Table of Contents

PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

HARMONIC INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
September 27, 2013
 
December 31, 2012
 
(In thousands, except par value amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
93,330

 
$
96,670

Short-term investments
75,966

 
104,506

Accounts receivable, net
85,069

 
85,920

Inventories
40,369

 
64,270

Deferred income taxes
20,144

 
21,870

Prepaid expenses and other current assets
14,757

 
23,636

Total current assets
329,635

 
396,872

Property and equipment, net
35,551

 
38,122

Goodwill
197,956

 
212,518

Intangibles, net
37,878

 
58,447

Other assets
16,133

 
11,572

Total assets
$
617,153

 
$
717,531

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
19,987

 
$
25,447

Income taxes payable
577

 
1,797

Deferred revenue
34,115

 
33,235

Accrued liabilities
33,118

 
42,415

Total current liabilities
87,797

 
102,894

Income taxes payable, long-term
12,155

 
49,309

Other non-current liabilities
11,694

 
11,915

Total liabilities
111,646

 
164,118

Commitments and contingencies (Note 14)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued or outstanding

 

Common stock, $0.001 par value, 150,000 shares authorized; 100,901 and 114,193 shares issued and outstanding at September 27, 2013 and December 31, 2012, respectively
101

 
114

Additional paid-in capital
2,345,512

 
2,432,790

Accumulated deficit
(1,839,639
)
 
(1,879,026
)
Accumulated other comprehensive loss
(467
)
 
(465
)
Total stockholders’ equity
505,507

 
553,413

Total liabilities and stockholders’ equity
$
617,153

 
$
717,531

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Table of Contents

HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
Three months ended
 
Nine months ended
 
September 27,
2013
 
September 28,
2012
 
September 27,
2013
 
September 28,
2012
 
(In thousands, except per share amounts)
Product revenue
$
98,713

 
$
97,881

 
$
277,965

 
$
300,731

Service revenue
24,205

 
22,510

 
63,753

 
58,159

Net revenue
122,918

 
120,391

 
341,718

 
358,890

Product cost of revenue
52,747

 
53,995

 
146,916

 
167,039

Service cost of revenue
13,379

 
11,518

 
33,953

 
31,430

Total cost of revenue
66,126

 
65,513

 
180,869

 
198,469

Gross profit
56,792

 
54,878

 
160,849

 
160,421

Operating expenses:
 
 
 
 
 
 
 
Research and development
24,560

 
25,586

 
75,631

 
77,205

Selling, general and administrative
32,527

 
31,132

 
100,220

 
93,862

Amortization of intangibles
2,001

 
2,179

 
6,099

 
6,548

Restructuring and related charges
259

 

 
925

 

Total operating expenses
59,347

 
58,897

 
182,875

 
177,615

Loss from operations
(2,555
)
 
(4,019
)
 
(22,026
)
 
(17,194
)
Interest income, net
47

 
128

 
141

 
363

Other income (expense), net
230

 
(164
)
 
(70
)
 
119

Loss from continuing operations before income taxes
(2,278
)
 
(4,055
)
 
(21,955
)
 
(16,712
)
(Benefit from) provision for income taxes
(38,953
)
 
414

 
(45,723
)
 
367

Income (loss) from continuing operations
36,675

 
(4,469
)
 
23,768

 
(17,079
)
Income (loss) from discontinued operations, net of taxes (including gain on disposal of $14,813, net of taxes, for the nine months ended September 27, 2013)
91

 
(3,761
)
 
15,619

 
1,338

Net income (loss)
$
36,766

 
$
(8,230
)
 
$
39,387

 
$
(15,741
)
Basic net income (loss) per share from:
 
 
 
 
 
 
 
Continuing operations
$
0.36

 
$
(0.04
)
 
$
0.22

 
$
(0.15
)
Discontinued operations
$

 
$
(0.03
)
 
$
0.14

 
$
0.01

Net income (loss)
$
0.36

 
$
(0.07
)
 
$
0.36

 
$
(0.13
)
Diluted net income (loss) per share from:
 
 
 
 
 
 
 
Continuing operations
$
0.36

 
$
(0.04
)
 
$
0.22

 
$
(0.15
)
Discontinued operations
$

 
$
(0.03
)
 
$
0.14

 
$
0.01

Net income (loss)
$
0.36

 
$
(0.07
)
 
$
0.36

 
$
(0.13
)
Shares used in per share calculation:
 
 
 
 
 
 
 
Basic
101,144

 
116,517

 
108,695

 
116,946

Diluted
102,723

 
116,517

 
109,879

 
116,946

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Table of Contents

HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
 
Three months ended
 
 
Nine months ended
 
September 27,
2013
 
September 28,
2012
 
September 27,
2013
 
September 28,
2012
 
(In thousands)
 
Net income (loss)
$
36,766

 
$
(8,230
)
 
$
39,387

 
$
(15,741
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Changes in cumulative translation adjustments
462

 
403

 
(8
)
 
317

Foreign currency translation adjustments
462

 
403

 
(8
)
 
317

Changes in unrealized gain (loss) on investment arising during the period
52

 
5

 
11

 
30

Gain on investments
52

 
5

 
11

 
30

       Other comprehensive income before tax
514

 
408

 
3

 
347

       Income tax expense (benefit) related to items of other comprehensive income (loss)
17

 
3

 
5

 
(11
)
       Other comprehensive income (loss), net of tax
497

 
405

 
(2
)
 
358

Comprehensive income (loss)
$
37,263

 
$
(7,825
)
 
$
39,385

 
$
(15,383
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Table of Contents

HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Nine months ended
 
September 27,
2013
 
September 28,
2012
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
39,387

 
$
(15,741
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Amortization of intangibles
20,569

 
22,004

Depreciation
12,365

 
11,337

Stock-based compensation
11,953

 
14,122

Gain on sale of discontinued operations, net of tax
(14,813
)
 

Loss on impairment of fixed assets
149

 

Deferred income taxes
(10,647
)
 
1,627

Provision for inventories
2,813

 
2,466

Allowance for doubtful accounts, returns and discounts
1,161

 
2,012

Excess tax benefits from stock-based compensation

 
(80
)
Other non-cash adjustments, net
1,220

 
560

Changes in assets and liabilities:
 
 
 
Accounts receivable
(310
)
 
13,240

Inventories
10,509

 
(85
)
Prepaid expenses and other assets
8,522

 
1,847

Accounts payable
(5,418
)
 
364

Deferred revenue
5,127

 
3,307

Income taxes payable
(39,209
)
 
(1,482
)
Accrued and other liabilities
(8,244
)
 
(5,352
)
Net cash provided by operating activities
35,134

 
50,146

Cash flows from investing activities:
 
 
 
Purchases of investments
(54,773
)
 
(94,123
)
Proceeds from maturities of investments
50,681

 
44,876

Proceeds from sales of investments
31,506

 
30,486

Purchases of property and equipment
(11,249
)
 
(9,850
)
Proceeds from sale of discontinued operations, net of selling costs
43,527

 

Net cash provided by (used in) investing activities
59,692

 
(28,611
)
Cash flows from financing activities:
 
 
 
Payments for repurchase of common stock
(103,496
)
 
(14,388
)
Proceeds from issuance of common stock, net
5,355

 
4,922

Excess tax benefits from stock-based compensation

 
80

Net cash used in financing activities
(98,141
)
 
(9,386
)
Effect of exchange rate changes on cash and cash equivalents
(25
)
 
103

Net (decrease) increase in cash and cash equivalents
(3,340
)
 
12,252

Cash and cash equivalents at beginning of period
96,670

 
90,983

Cash and cash equivalents at end of period
$
93,330

 
$
103,235

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

Table of Contents

HARMONIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) which Harmonic Inc. (“Harmonic,” or the “Company”) considers necessary for a fair statement of the results of operations for the interim periods covered and the consolidated financial condition of the Company at the date of the balance sheets. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 1, 2013 (“2012 Form 10-K”). The interim results presented herein are not necessarily indicative of the results of operations that may be expected for the full fiscal year ending December 31, 2013, or any other future period. The Company’s fiscal quarters are based on 13-week periods, except for the fourth quarter, which ends on December 31.
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The year-end condensed balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“US GAAP”).
Discontinued Operations
On March 5, 2013, the Company completed the sale of its cable access HFC business to Aurora Networks (“Aurora”) for $46.0 million in cash. The Condensed Consolidated Statements of Operations have been retrospectively adjusted to present the cable access HFC business as discontinued operations, as described in “Note 3, Discontinued Operations”. Unless noted otherwise, all discussions herein with respect to the Company’s unaudited condensed consolidated financial statements relate to the Company’s continuing operations.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Significant Accounting Policies
The Company’s significant accounting policies are described in Note 2 to its audited Consolidated Financial Statements included in its 2012 Form 10-K. There have been no significant changes to these policies during the nine months ended September 27, 2013.
Reclassifications
From time to time the Company reclassifies certain prior period balances to conform to the current year presentation. These reclassifications have no material impact on previously reported total assets, total liabilities, stockholders’ equity, results of operations or cash flows.

NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
In December 2011, the FASB issued Accounting Standard Update (“ASU”) 2011-11, “Disclosures about offsetting assets and liabilities”. This guidance enhances disclosure requirements about the nature of an entity’s right to offset. The new guidance requires the disclosure of the gross amounts subject to rights of set-off, amounts offset in accordance with the accounting standards followed, and the related net exposure. The new guidance became effective for the Company beginning in the first quarter of fiscal 2013 and it did not have any impact on the Company’s Consolidated Financial Statements.
In July 2012, the FASB issued ASU 2012-2, “Intangibles - Goodwill and Other”, which allows an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived asset is impaired for determining whether it is necessary to perform the quantitative impairment test. This accounting standard update became effective for the

7

Table of Contents

Company beginning in the first quarter of fiscal 2013 and did not have any impact on the Company’s Consolidated Financial Statements.
In February 2013, the FASB issued ASU 2013-2, “Comprehensive Income”, which requires reclassification adjustments from other comprehensive income to be presented either in the financial statements or in the notes to the financial statements. The Company adopted this new guidance in the first quarter of fiscal 2013 and included the required disclosures.
In March 2013, the FASB issued ASU 2013-4, “Obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date”. The update provides requirements for the recognition, measurement and disclosure of an entity’s reasonable expectation of its obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. This guidance requires an entity to disclose the nature and amount of any such obligation, as well as other information about the obligation. The Company does not expect the adoption of ASU 2013-04 will have a material impact on its financial position, results of operations or cash flows. The guidance is effective for the Company beginning in the first quarter of its 2014 fiscal year and should be applied prospectively.
In March 2013, the FASB issued ASU 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon De-recognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity”. The ASU addresses accounting for a cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The guidance is effective for the Company beginning in the first quarter of its 2014 fiscal year and should be applied prospectively. The Company does not expect the adoption of ASU 2013-05 will have a material impact on its financial position, results of operations or cash flows.
In July 2013, the FASB issued ASU 2013-11, “Presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists”. Under certain circumstances, unrecognized tax benefits should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The guidance is effective for the Company beginning in the first quarter of 2014. The Company is currently evaluating the impact this guidance may have on its financial position, results of operations and cash flows.

NOTE 3: DISCONTINUED OPERATIONS
On February 18, 2013, the Company entered into an Asset Purchase Agreement with Aurora pursuant to which the Company agreed to sell its cable access HFC business for $46.0 million in cash. On March 5, 2013, the sale transaction closed and the Company received gross proceeds of $46.0 million from the sale and recorded a net gain of $15.0 million in connection with the sale in the first quarter of fiscal 2013, adjusted by ($0.2) million in the second quarter of fiscal 2013, primarily related to adjustments on inventory and fixed assets sold to Aurora, for a net gain of $14.8 million.
In accordance with ASC 205 “Presentation of financial statements – Discontinued Operations”, a business is classified as a discontinued operation when: (i) the operations and cash flows of the business can be clearly distinguished and have been or will be eliminated from our ongoing operations; (ii) the business has either been disposed of or is classified as held for sale; and (iii) the Company will not have any significant continuing involvement in the operations of the business after the disposal transactions.
On March 5, 2013, the Company entered into a transition services agreement (‘TSA”) with Aurora to provide contract manufacturing for up to five months and other various support, including providing order fulfillment, taking warranty calls, attending to product returns from customers, providing cost accounting analysis, receiving payments from customers and remitting such payments to Aurora for up to two months. The TSA fees are a fixed amount per month and were determined based on the Company’s estimated cost of delivering the transition services. In addition, on April 24, 2013, the Company and Aurora signed a sublease agreement for the Company’s Milpitas warehouse for the remaining period of the lease. The Company and Aurora later agreed to limit the services provided under the agreement to sales order processing support and quote support through May 2013, warehouse facilities support through July 2013, accounts payable support through June 2013, and accounts receivable collection support through October 2013, and the TSA fees were amended accordingly.
The Company determined that the cash flows generated from these transactions are both insignificant and are considered indirect cash flows. As a result, the sale of the cable access HFC business is appropriately presented as discontinued operations. The TSA billing to Aurora in the three and nine months ended September 27, 2013 was $48,000 and $977,000, respectively, and it was recorded in the Condensed Consolidated Statements of Operations under income from continuing operations as an

8

Table of Contents

offset to the expenses incurred to deliver the transition services. The table below provides details on the income statement caption under which the TSA billing was recorded (in thousands):
 
Three months ended
 
Nine months ended
 
September 27, 2013
Product cost of revenue
$
41

 
$
577

Research and development

 
21

Selling, general and administrative
7

 
379

Total TSA billing to Aurora
$
48

 
$
977

Included within the “Prepaid expenses and other current assets” ending balance at September 27, 2013 on the Condensed Consolidated Balance Sheet is $0.2 million in receivables from customers invoiced on Aurora’s behalf. Included within the “Accrued liabilities” ending balance at September 27, 2013 is $0.2 million due to Aurora primarily for invoicing to customers made on Aurora’s behalf. There is no outstanding payable to third party vendors on Aurora’s behalf and there is no outstanding receivable from Aurora for purchases made on its behalf, as the Company ceased making purchases on Aurora’s behalf at the end of May 2013.
The Company recorded a gain of $14.8 million for the nine months ended September 27, 2013, in connection with the sale of the cable access HFC business, calculated as follows (in thousands):
Gross Proceeds
 
 
$
46,000

Less : Carrying value of net assets
 
 
 
Inventories, net
$
10,579

 
 
Prepaid expenses and other current assets
612

 
 
Property and equipment, net
1,180

 
 
Goodwill de-recognized
14,547

 
 
Deferred revenue
(4,499
)
 
 
Accrued liabilities
(939
)
 
 
Total net assets sold and de-recognized
 
 
$
21,480

Less : Selling cost
 
 
$
2,473

Less : Tax effect
 
 
$
7,234

Gain on disposal, net of taxes
 
 
$
14,813

Since the Company has one reporting unit, upon the sale of the cable access HFC business, approximately $14.5 million of the carrying value of goodwill was allocated to the cable access HFC business based on the relative fair value of the cable access HFC business to the fair value of the Company. The remaining carrying value of goodwill was tested for impairment, and the Company determined that goodwill was not impaired as of March 29, 2013.
The results of operations associated with the cable access HFC business are presented as discontinued operations in the Company’s Condensed Consolidated Statements of Operations for all periods presented. Revenue and the components of net income related to the discontinued operations for the three and nine months ended September 27, 2013 and September 28, 2012 were as follows:
 
Three months ended
 
Nine months ended
 
September 27, 2013
 
September 28, 2012
 
September 27, 2013
 
September 28, 2012
Revenue
$
161

 
$
16,291

 
$
9,717

 
$
38,147

Operating income
$
154

 
$
3,070

 
$
669

 
$
5,193

Less : provision for (benefit from) income taxes
57

 
6,831

 
(137
)
 
3,855

Add : Gain (loss) on disposal, net of taxes
(6
)
 

 
14,813

 

Income (loss) from discontinued operations, net of taxes
$
91

 
$
(3,761
)
 
$
15,619

 
$
1,338



9

Table of Contents

NOTE 4: SHORT-TERM INVESTMENTS
The following table summarizes the Company’s short-term investments (in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
As of September 27, 2013
 
 
 
 
 
 
 
State, municipal and local government agencies bonds
$
36,195

 
$
41

 
$
(3
)
 
$
36,233

Corporate bonds
32,376

 
16

 
(11
)
 
32,381

Commercial paper
3,348

 

 

 
3,348

U.S. federal government bonds
4,001

 
3

 

 
4,004

Total short-term investments
$
75,920

 
$
60

 
$
(14
)
 
$
75,966

As of December 31, 2012
 
 
 
 
 
 
 
Certificates of deposit
$
1,603

 
$

 
$

 
$
1,603

State, municipal and local government agencies bonds
59,009

 
45

 
(4
)
 
59,050

Corporate bonds
31,568

 
4

 
(10
)
 
31,562

Commercial paper
10,287

 
1

 

 
10,288

U.S. federal government bonds
2,003

 

 

 
2,003

Total short-term investments
$
104,470

 
$
50

 
$
(14
)
 
$
104,506

The following table summarizes the maturities of the Company’s short-term investments (in thousands):
 
September 27, 2013
 
December 31, 2012
Less than one year
$
50,782

 
$
76,779

Due in 1 - 2 years
25,184

 
27,727

Total short-term investments
$
75,966

 
$
104,506

Realized gains and losses from the sale of investments for the three and nine months ended September 27, 2013 and September 28, 2012 were not material.
Impairment of Investments
The Company monitors its investment portfolio for impairment on a periodic basis. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis for the investment is established. A decline of fair value below amortized costs of debt securities is considered other-than-temporary if the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of the entire amortized cost basis. At the present time, the Company does not intend to sell its investments that have unrealized losses in accumulated other comprehensive loss. In addition, the Company does not believe that it is more likely than not that it will be required to sell its investments that have unrealized losses in accumulated other comprehensive loss before the Company recovers the principal amounts invested. The Company believes that the unrealized losses are temporary and do not require an other-than-temporary impairment, based on its evaluation of available evidence as of September 27, 2013.
As of September 27, 2013, there were no individual available-for-sale securities in a material unrealized loss position and the amount of unrealized losses on the total investment balance was insignificant.

NOTE 5: FAIR VALUE MEASUREMENTS
The applicable accounting guidance establishes a framework for measuring fair value and requires disclosure about the fair value measurements of assets and liabilities. This guidance requires the Company to classify and disclose assets and liabilities measured at fair value on a recurring basis, as well as fair value measurements of assets and liabilities measured on a nonrecurring basis in periods subsequent to initial measurement, in a three-tier fair value hierarchy as described below.

10

Table of Contents

The guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance describes three levels of inputs that may be used to measure fair value:
Level 1 — Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company primarily uses broker quotes for valuation of its short-term investments. The forward exchange contracts are classified as Level 2 because they are valued using quoted market prices and other observable data for similar instruments in an active market.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company uses the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. During the nine months ended September 27, 2013, there were no nonrecurring fair value measurements of assets and liabilities subsequent to initial recognition.

11

Table of Contents

The following table sets forth the fair value of the Company’s financial assets and liabilities measured at fair value based on the three-tier fair value hierarchy (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
As of September 27, 2013
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
58,220

 
$

 
$

 
$
58,220

Short-term investments
 
 
 
 
 
 
 
State, municipal and local government agencies bonds

 
36,233

 

 
36,233

Corporate bonds

 
32,381

 

 
32,381

Commercial paper

 
3,348

 

 
3,348

U.S. federal government bonds
4,004

 

 

 
4,004

Prepaids and other current assets
 
 
 
 
 
 
 
Foreign exchange forward contracts

 
5

 

 
5

Total assets measured and recorded at fair value
$
62,224

 
$
71,967

 
$

 
$
134,191

Accrued liabilities
 
 
 
 
 
 
 
Foreign exchange forward contracts
$

 
$
381

 
$

 
$
381

Total liabilities measured and recorded at fair value
$

 
$
381

 
$

 
$
381

 
Level 1
 
Level 2
 
Level 3
 
Total
As of December 31, 2012
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
54,923

 
$

 
$

 
$
54,923

Corporate bonds with maturity less than 90 days

 
3,614

 

 
3,614

U.S. federal government bonds with maturity less than 90 days
3,005

 

 

 
3,005

Short-term investments
 
 
 
 
 
 
 
Certificates of deposit

 
1,603

 

 
1,603

State, municipal and local government agencies bonds

 
59,050

 

 
59,050

Corporate bonds

 
31,562

 

 
31,562

Commercial paper

 
10,288

 

 
10,288

U.S. federal government bonds
2,003

 

 

 
2,003

Prepaids and other current assets
 
 
 
 
 
 
 
Foreign exchange forward contracts

 
344

 

 
344

Total assets measured and recorded at fair value
$
59,931

 
$
106,461

 
$

 
$
166,392

Accrued liabilities
 
 
 
 
 
 
 
Foreign exchange forward contracts
$

 
$
143

 
$

 
$
143

Total liabilities measured and recorded at fair value
$

 
$
143

 
$

 
$
143



12

Table of Contents

NOTE 6: BALANCE SHEET COMPONENTS
The following tables provide details of selected balance sheet components (in thousands):
 
September 27, 2013
 
December 31, 2012
Accounts receivable, net:
 
 
 
Accounts receivable
$
94,283

 
$
95,515

Less: allowances for doubtful accounts, returns and discounts
(9,214
)
 
(9,595
)
Accounts receivable, net
$
85,069

 
$
85,920

Inventories:
 
 
 
Raw materials
$
3,188

 
$
10,731

Work-in-process
1,378

 
4,347

Finished goods
35,803

 
49,192

Total inventories
$
40,369

 
$
64,270

Property and equipment, net:
 
 
 
Furniture and fixtures
$
8,104

 
$
7,856

Machinery and equipment
111,182

 
108,262

Leasehold improvements
7,686

 
7,612

Property and equipment, gross
126,972

 
123,730

Less: accumulated depreciation and amortization
(91,421
)
 
(85,608
)
Property and equipment, net
$
35,551

 
$
38,122


NOTE 7: GOODWILL AND IDENTIFIED INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the nine months ended September 27, 2013 are as follows (in thousands):
Balance at beginning of period
$
212,518

Reduction in goodwill associated with the sale of the cable access HFC Business
(14,547
)
Foreign currency translation adjustment
(15
)
Balance at end of period
$
197,956

The following is a summary of identified intangible assets (in thousands):
 
September 27, 2013
 
December 31, 2012
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Identifiable intangibles:
 
 
 
 
 
 
 
 
 
 
 
Developed core technology
$
136,145

 
$
(116,918
)
 
$
19,227

 
$
136,145

 
$
(102,449
)
 
$
33,696

Customer relationships/contracts
67,098

 
(52,381
)
 
14,717

 
67,098

 
(48,150
)
 
18,948

Trademarks and tradenames
11,361

 
(10,210
)
 
1,151

 
11,361

 
(9,145
)
 
2,216

Maintenance agreements and related relationships
7,100

 
(4,317
)
 
2,783

 
7,100

 
(3,513
)
 
3,587

Total identifiable intangibles
$
221,704

 
$
(183,826
)
 
$
37,878

 
$
221,704

 
$
(163,257
)
 
$
58,447


13

Table of Contents

Amortization expense for the identifiable purchased intangible assets for the three and nine months ended September 27, 2013 and September 28, 2012 was allocated as follows (in thousands):
 
Three months ended
 
Nine months ended
 
September 27,
2013
 
September 28,
2012
 
September 27,
2013
 
September 28,
2012
Included in cost of revenue
$
4,763

 
$
5,048

 
$
14,470

 
$
15,456

Included in operating expenses
2,001

 
2,179

 
6,099

 
6,548

Total amortization expense
$
6,764

 
$
7,227

 
$
20,569

 
$
22,004

The estimated future amortization expense of purchased intangible assets with definite lives is as follows (in thousands):
 
Cost of Revenue
 
Operating
Expenses
 
Total
Year ended December 31,
 
 
 
 
 
2013 (remaining 3 months)
$
4,763

 
$
1,997

 
$
6,760

2014
13,745

 
6,775

 
20,520

2015
719

 
5,783

 
6,502

2016

 
4,096

 
4,096

2017

 

 

Total future amortization expense
$
19,227

 
$
18,651

 
$
37,878


NOTE 8: RESTRUCTURING AND RELATED CHARGES
Omneon Restructuring
The Company has restructuring accruals for excess lease facilities related to the closure of the Omneon headquarters in Sunnyvale, California. The accrual was based on future rent payments, net of expected sublease income, to be made through the end of the lease term in June 2013. The following table summarizes the activity in the Omneon restructuring accrual during the nine months ended September 27, 2013 (in thousands):
 
Excess
Facilities
Balance at December 31, 2012
$
869

Cash payments
(897
)
Accretion
28

Balance at September 27, 2013

HFC Restructuring
As a result of the sale of the cable access HFC business in March 2013, the Company recorded $16,000 and $617,000 of restructuring charges under “Income from discontinued operations” in the three and nine months ended September 27, 2013, respectively. The restructuring charge for the nine months ended September 27, 2013 consisted of $522,000 of severance and benefits and $95,000 of contract termination costs. The severance and benefits are related to the termination of nine of the Company's employees by the Company as a result of the sale of the HFC business, and the reimbursement to Aurora, pursuant to the amended TSA, of severance payable by Aurora as a result of its subsequent termination of ten U.S. employees hired from the Company, in connection with Aurora's purchase of the HFC business. Three of the employees terminated by the Company were required to work to the end of the term of the TSA and, therefore, the Company recorded their severance ratably over their service period. The following table summarizes the activity in the HFC restructuring accrual during the nine months ended September 27, 2013 (in thousands):

14

Table of Contents

 
Severance
 
Contract
Termination
 
Total
Balance at December 31, 2012
$

 
$

 
$

Restructuring charges in discontinued operations
403

 
124

 
527

Adjustments to restructuring provisions
119

 
(29
)
 
90

Cash payments
(492
)
 
(95
)
 
(587
)
Balance at September 27, 2013
30

 

 
30

The Company anticipates that the remaining restructuring accrual balance of $30,000 will be paid out by the end of the fourth quarter of fiscal 2013.
Harmonic 2013 Restructuring
The Company implemented a series of restructuring plans in fiscal 2013 to reduce costs and improve efficiencies. As a result, the Company recorded restructuring charges of $0.6 million and $1.5 million in the three and nine months ended September 27, 2013, respectively. For the nine months ended September 27, 2013, the restructuring charges consisted of severance and benefits of $1.2 million related to the termination of sixty-three employees worldwide. In addition, the Company wrote–down, to its estimated net realizable value, leasehold improvements and furniture related to its Milpitas warehouse by $149,000, and wrote-down inventory to reflect $151,000 of obsolete inventories arising from the restructuring of its Israel facilities. The following table summarizes the activity in the Harmonic 2013 restructuring accrual during the nine months ended September 27, 2013 (in thousands):
 
Severance
 
Impairment
of Leasehold
Improvement
 
Obsolete inventories
 
Total
Balance at December 31, 2012
$

 
$

 
$

 
$

Restructuring charges in continuing operations
1,089

 
101

 
151

 
1,341

Adjustments to restructuring provisions
66

 
48

 

 
114

Cash payments
(1,060
)
 

 

 
(1,060
)
Non-cash write-offs

 
(149
)
 
(151
)
 
(300
)
Balance at September 27, 2013
95

 

 

 
95

Of the restructuring charges in the nine months ended September 27, 2013, $530,000 is included in “Product cost of revenue” and the remaining $925,000 is included in “Operating expenses-restructuring and related charges” in the Condensed Consolidated Statements of Operations. The Company anticipates that the remaining restructuring accrual balance of $95,000 will be paid out or used by the end of the fourth quarter of fiscal 2013.

NOTE 9: CREDIT FACILITIES
Harmonic has a bank line of credit facility with Silicon Valley Bank that provides for borrowings of up to $10.0 million and matures on August 22, 2014. As of September 27, 2013, other than standby letters of credit (Note 14), there were no amounts outstanding under the line of credit facility, and there were no borrowings during the nine months ended September 27, 2013. As of September 27, 2013, the amount available for borrowing under this facility, net of $0.2 million of standby letters of credit, was $9.8 million.
This facility, which became effective in August 2011 and was amended in August 2012, contains a financial covenant that requires Harmonic to maintain a ratio of unrestricted cash, accounts receivable and short term investments to current liabilities (less deferred revenue) of at least 1.75 to 1.00. As of September 27, 2013, the Company’s ratio under that covenant was 4.71 to 1. In the event of noncompliance by Harmonic with the covenants under the facility, including the financial covenant referenced above, Silicon Valley Bank would be entitled to exercise its remedies under the facility, including declaring all obligations immediately due and payable. As of September 27, 2013, Harmonic was in compliance with the covenants under the line of credit facility. Borrowings pursuant to the line would bear interest at the bank’s prime rate (3.25% at September 27, 2013,) or at LIBOR for the desired borrowing period (an annualized rate of 0.18% for a one month borrowing period at September 27, 2013) plus 1.75%, or 1.93%. Borrowings are not collateralized.


15

Table of Contents

NOTE 10: EMPLOYEE BENEFIT PLANS
Harmonic grants stock options and restricted stock units (“RSUs”) pursuant to stockholder approved equity incentive plans. These equity incentive plans are described in detail in Note 13, “Employee Benefit Plans”, of Notes to Consolidated Financial Statements in the 2012 Form 10-K
Stock Options and Restricted Stock Units
The following table summarizes the Company’s stock option and RSU unit activity during the nine months ended September 27, 2013 (in thousands, except per share amounts):
 
 
 
Stock Options Outstanding
 
Restricted Stock Units Outstanding
 
Shares
Available for
Grant
 
Number
of
Shares
 
Weighted
Average
Exercise Price
 
Number
of
Units
 
Weighted
Average
Grant
Date Fair
Value
Balance at December 31, 2012
10,155

 
8,900

 
$
6.83

 
3,938

 
$
6.44

Authorized

 

 

 

 

Granted
(3,361
)
 
1,360

 
5.81

 
1,333

 
5.84

Options exercised

 
(788
)
 
4.15

 

 

Shares released

 

 

 
(1,622
)
 
6.28

Forfeited or cancelled
2,015

 
(1,461
)
 
6.92

 
(418
)
 
6.51

Balance at September 27, 2013
8,809

 
8,011

 
$
6.90

 
3,231

 
$
6.27

The following table summarizes information about stock options outstanding as of September 27, 2013 (in thousands, except per share amounts):
 
Number
of
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
Vested and expected to vest
7,719

 
$
6.94

 
3.3
 
$
9,532

Exercisable
5,604

 
7.27

 
2.3
 
5,516

The intrinsic value of options vested and expected to vest and exercisable as of September 27, 2013 is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of September 27, 2013. The intrinsic value of options exercised during the three and nine months ended September 27, 2013 was $1.1 million and $2.0 million, respectively. The intrinsic value of options exercised during the three and nine months ended September 28, 2012 was $0.1 million and $0.6 million, respectively. The intrinsic value of options exercised is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of the exercise date.
The following table summarizes information about restricted stock units outstanding as of September 27, 2013 (in thousands, except per share amounts):
 
Number of
Shares
Underlying
Restricted
Stock
Units
 
Weighted
Average
Remaining
Vesting
Period
(Years)
 
Aggregate
Fair
Value (1)
Vested and expected to vest
2,934

 
0.9
 
$
22,824

(1)
Represents the fair value of the Company’s common stock as of September 27, 2013, times the number of restricted stock units vested and expected to vest as of the same date.
Employee Stock Purchase Plan
The 2002 Employee Stock Purchase Plan (“ESPP”) provides for the issuance of common stock purchase rights to employees of the Company. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. The ESPP enables employees to purchase shares at 85% of the fair market value of the common stock at the beginning or

16

Table of Contents

end of the offering period, whichever is lower. Offering periods generally begin on the first trading day on or after January 1 and July 1 of each year. Employees may participate through payroll deductions of 1% to 10% of their earnings. In the event that there are insufficient shares in the plan to fully fund the issuance, the available shares will be allocated across all participants based on their contributions relative to the total contributions received for the offering period.
There was a shortage of approved shares in the ESPP to fund the total employee contributions from January 2, 2013 to June 30, 2013. The shares available in the plan were sufficient to fund approximately 53% of the total contributions. As a result, the shares available were issued ratably to the participants based on each of their contributions during the offering period, relative to the total contributions received from all participants. The participants were refunded the remaining 47% of their contributions and the ESPP was suspended for the second half of 2013. The Company’s stockholders approved a 1,000,000 share increase in the authorized shares for the ESPP during the Company’s annual meeting on August 14, 2013, and contributions under the ESPP will resume in January 2014.
401-K Plan
Harmonic has a retirement/savings plan which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. This plan allows participants to contribute up to the applicable Internal Revenue Code limitations under the plan. Harmonic has made discretionary contributions to the plan of 25% of the first 4% contributed by eligible participants, up to a maximum contribution per participant of $1,000 per year. Harmonic’s contributions were suspended from 2009 through 2012, but have been renewed, on the same basis, for 2013.

NOTE 11: STOCK-BASED COMPENSATION
Stock-based compensation expense consists primarily of expenses for stock options and restricted stock units granted to employees and shares issued under the ESPP. The following table summarizes stock-based compensation expense (in thousands):
 
Three months ended
 
Nine months ended
 
September 27,
2013
 
September 28,
2012
 
September 27,
2013
 
September 28,
2012
Stock-based compensation in:
 
 
 
 
 
 
 
Cost of revenue
$
605

 
$
659

 
$
1,838

 
$
2,176

Research and development expense
1,076

 
1,450

 
3,400

 
4,755

Selling, general and administrative expense
2,264

 
2,388

 
6,628

 
6,816

Total stock-based compensation in operating expense
3,340

 
3,838

 
10,028

 
11,571

Total stock-based compensation
$
3,945

 
$
4,497

 
$
11,866

 
$
13,747

Stock Options
The Company estimated the fair value of all employee stock options using a Black-Scholes valuation model with the following weighted average assumptions:
 
Three months ended
 
Nine months ended
 
September 27,
2013
 
September 28,
2012
 
September 27,
2013
 
September 28,
2012
Expected term (years)
4.70

 
4.70

 
4.70

 
4.70

Volatility
46
%
 
54
%
 
51
%
 
56
%
Risk-free interest rate
1.5
%
 
0.7
%
 
0.8
%
 
0.9
%
Expected dividends
0.0
%
 
0.0
%
 
0.0
%
 
0.0
%
The expected term represents the weighted-average period that the stock options are expected to remain outstanding. The computation of the expected term was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The Company uses its historical volatility for a period equivalent to the expected term of the options to estimate the expected volatility. The risk-free interest rate that the Company uses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. The Company has never declared or paid any cash dividends

17

Table of Contents

and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.
The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.
The weighted-average fair value per share of options granted was $3.02 and $1.89 for the three months ended September 27, 2013 and September 28, 2012, respectively. The weighted-average fair value per share of options granted was $2.51 and $2.66 for the nine months ended September 27, 2013 and September 28, 2012, respectively.
The fair value of all stock options vested during the three months ended September 27, 2013 and September 28, 2012 was $0.8 million and $0.8 million, respectively. The fair value of all stock options vested during the nine months ended September 27, 2013 and September 28, 2012 was $2.8 million and $3.8 million, respectively.
The total realized tax benefit attributable to stock options exercised during the nine months ended September 28, 2012, in jurisdictions where this expense is deductible for tax purposes, was $80,000. The Company did not recognize any tax benefit attributable to stock options exercised during the nine months ended September 27, 2013.
Restricted Stock Units
The estimated fair value of restricted stock units is based on the market price of the Company’s common stock on the grant date. The fair value of all restricted stock units issued during the three months ended September 27, 2013 and September 28, 2012 was $2.8 million and $2.6 million, respectively. The fair value of all restricted stock units issued during the nine months ended September 27, 2013 and September 28, 2012 was $10.2 million and $10.3 million, respectively.
Employee Stock Purchase Plan
The value of the stock purchase rights under the ESPP consists of: (1) the 15% discount on the purchase of the stock; (2) 85% of the fair value of the call option; and (3) 15% of the fair value of the put option. The call option and put option were valued using the Black-Scholes option pricing model with the following assumptions:
 
Purchase Period Ending
 
Purchase Period Ending
 
June 30,
2013
 
June 30,
2012
 
December 31,
2012
Expected term (years)
0.49

 
0.50

 
0.50

Volatility
30
%
 
53
%
 
46
%
Risk-free interest rate
0.2
%
 
0.2
%
 
0.2
%
Expected dividends
0.0
%
 
0.0
%
 
0.0
%
The expected term represents the period of time from the beginning of the offering period to the purchase date. The Company uses its historical volatility for a period equivalent to the expected term of the options to estimate the expected volatility. The risk-free interest rate that the Company uses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.
The fair value per share of stock purchase rights under the ESPP granted for the purchase period ended June 30, 2013 and June 30, 2012, was $1.23 and $1.51, respectively. The fair value per share of stock purchase rights under the ESPP granted for the purchase period ended December 31, 2012 was $1.19. The ESPP is suspended for the second half of 2013 due to all authorized shares under the plan having been issued through the offering period ended June 30, 2013. The Company’s stockholders approved a 1,000,000 share increase in the authorized shares for the ESPP during the Company’s annual meeting on August 14, 2013, and contributions under the ESPP will resume in January 2014. As a result, the Company will not have any stock-based compensation expense in the second half of fiscal 2013 related to the ESPP.
Unrecognized Stock-Based Compensation
As of September 27, 2013, total unamortized stock-based compensation cost related to unvested stock options and restricted stock units was $20.7 million. This amount will be recognized as expense using the straight-line attribution method over the remaining weighted-average amortization period of 2.0 years.

18

Table of Contents


NOTE 12: INCOME TAXES
The income tax provision includes federal, state and local and foreign income taxes and is based on the application of a forecasted annual income tax rate applied to the current quarter’s year-to-date pre-tax income (loss). In determining the estimated annual effective income tax rate, the Company estimates the annual impact of certain factors, including projections of the Company’s annual earnings, taxing jurisdictions in which the earnings will be generated, state and local income taxes, the Company’s ability to use tax credits and net operating loss carryforwards, and available tax planning alternatives. Discrete items, including the effect of changes in tax laws, tax rates, and certain circumstances with respect to valuation allowances or other unusual or non-recurring tax adjustments, are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision, rather than being included in the estimated annual effective income tax rate.
For the nine months ended September 27, 2013, the difference between the recorded benefit from income taxes and the tax provision, based on the federal statutory rate of 35%, was primarily attributable to the net of various discrete items, non-deductible amortization on foreign intangibles, the differential in foreign tax rates, the federal research and development tax credit, and non-deductible stock-based compensation expense. The discrete items recorded in the first nine months of 2013 primarily related to the benefit associated with the reversal of previously recorded federal and, to a lesser extent, foreign income taxes as a result of the expiration of the applicable statutes of limitations in the U.S. for 2008 and 2009 and in foreign jurisdictions for various years, and the benefit associated with the reinstatement of the federal research and development tax credit for 2012, offset partially by the increase in the valuation allowance on the California research and development tax credit and accrued interest on uncertain tax positions.
For the nine months ended September 28, 2012, the difference between the recorded provision for income taxes and the tax provision, based on the federal statutory rate of 35%, was primarily attributable to the net of various discrete items, the differential in foreign tax rates, non-deductible stock-based compensation expense, and non-deductible amortization on foreign intangibles. The discrete items recorded in the first nine months of 2012 primarily related to the increase in the valuation allowance on the California research and development tax credit and accrued interest on uncertain tax positions, offset partially by the benefit associated with the reversal of previously recorded foreign income taxes due to the expiration of the statute of limitation in the foreign jurisdictions.
The Company files federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations during which such tax returns may be audited and adjusted by the relevant tax authorities. The U.S. Internal Revenue Service has concluded its audit for the 2008 and 2009 tax years. In addition, the statute of limitations on the Company's 2008 and 2009 U.S. corporate income tax return expired in September 2013 and, as a result, in the third quarter of 2013, the Company recorded a discrete net tax benefit of $38.4 million related to the release of tax reserves for uncertain tax positions for those tax years. The 2010 through 2012 tax years generally remain subject to examination by federal and most state tax authorities. In significant foreign jurisdictions, the 2006 through 2012 tax years generally remain subject to examination by their respective tax authorities. In the third quarter of 2013, the Israeli tax authority concluded its audit of a subsidiary of the Company for the years 2007 through 2010, and a final settlement was made with the Israeli tax authority. The settlement did not have a material impact on the Company's overall tax expense, deferred tax assets realization, effective tax rate, operating results or cash flow.
In compliance with applicable guidance for accounting for uncertainty in income taxes, the Company had gross unrecognized tax benefits, which include interest and penalties, of approximately $59.2 million as of December 31, 2012, and approximately $22.3 million as of September 27, 2013. If all of the unrecognized tax benefits at September 27, 2013 were recognized, the entire amount would impact the provision for income taxes. The unrecognized tax benefits may decrease significantly within the next 12 months if a related statute of limitations that is currently set to expire during that period is not extended.
The realization of our deferred tax assets is dependent upon the generation of sufficient U.S and foreign taxable income in the future to offset against those assets. We may not have sufficient taxable income in the future to determine that we will be able to realize some significant portion of our deferred tax assets. As a result, an additional valuation allowance against our deferred tax assets may be required in the period in which such a determination is made, and our operating results could be materially and adversely impacted in the period of adjustment.
The Company recognizes interest and possible penalties related to uncertain tax positions in income tax expense. During the nine months ended September 27, 2013, as a result of the expiration of the applicable statutes of limitations in the U.S. for 2008 and 2009 and in foreign jurisdictions for various years, the Company recorded a net decrease of $5.8 million for interest and possible penalties related to uncertain tax positions, resulting in a balance at September 27, 2013 of $1.4 million.


19

Table of Contents

NOTE 13: INCOME (LOSS) PER SHARE
The following table sets forth the computation of the basic and diluted net loss per share (in thousands, except per share amounts):
 
Three months ended
 
Nine months ended
 
September 27,
2013
 
September 28,
2012
 
September 27,
2013
 
September 28,
2012
Numerator:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
36,675

 
$
(4,469
)
 
$
23,768

 
$
(17,079
)
Income (loss) from discontinued operations
91

 
(3,761
)
 
15,619

 
1,338

Net income (loss)
$
36,766

 
$
(8,230
)
 
$
39,387

 
$
(15,741
)
Denominator:
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
 
 
 
 
 
 
 
Basic
101,144

 
116,517

 
108,695

 
116,946

Effect of dilutive securities from stock options, restricted stock units and ESPP
1,579

 

 
1,184

 

Diluted
102,723

 
116,517

 
109,879

 
116,946

Basic net income (loss) per share from:
 
 
 
 
 
 
 
Continuing operations
$
0.36

 
$
(0.04
)
 
$
0.22

 
$
(0.15
)
Discontinued operations
$

 
(0.03
)
 
0.14

 
0.01

Net Income (loss)
$
0.36

 
$
(0.07
)
 
$
0.36

 
$
(0.13
)
Diluted net income (loss) per share from:
 
 
 
 
 
 
 
Continuing operations
$
0.36

 
$
(0.04
)
 
$
0.22

 
$
(0.15
)
Discontinued operations
$

 
$
(0.03
)
 
$
0.14

 
$
0.01

Net Income (loss)
$
0.36

 
$
(0.07
)
 
$
0.36

 
$
(0.13
)
The following table sets forth the potentially dilutive shares from stock options, restricted stock units and the ESPP, for the periods presented, that were excluded from the net income (loss) per share computations because their effect was anti-dilutive (in thousands):
 
Three months ended
 
Nine months ended
 
September 27,
2013
 
September 28,
2012
 
September 27,
2013
 
September 28,
2012
Potentially dilutive equity awards outstanding
6,144

 
13,608

 
10,447

 
13,382


NOTE 14: COMMITMENTS AND CONTINGENCIES
Leases
Future minimum lease payments under non-cancelable operating leases as of September 27, 2013, after giving effect to $0.5 million of future sublease income from Aurora, are as follows (in thousands):
Years ending December 31,
 
2013 (remaining three months)
$
2,645

2014
9,600

2015
9,047

2016
7,811

2017
7,659

Thereafter
21,157

Total
$
57,919


20

Table of Contents

Warranties
The Company accrues for estimated warranty costs at the time of product shipment. Management periodically reviews the estimated fair value of its warranty liability and records adjustments based on the terms of warranties provided to customers, historical and anticipated warranty claims experience, and estimates of the timing and cost of warranty claims. Activity for the Company’s warranty accrual, which is included in accrued liabilities, is summarized below (in thousands):
 
Three months ended
 
Nine months ended
 
September 27,
2013
 
September 28,
2012
 
September 27,
2013
 
September 28,
2012
Balance at beginning of period
$
3,228

 
$
4,725

 
$
4,292

 
$
5,558

Transfer to Aurora as part of the sale of discontinued operations

 

 
(939
)
 

Accrual for current period warranties
1,991

 
1,314

 
5,333

 
4,407

Warranty costs incurred
(1,705
)
 
(1,677
)
 
(5,172
)
 
(5,603
)
Balance at end of period
$
3,514

 
$
4,362

 
$
3,514

 
$
4,362

Purchase Commitments with Contract Manufacturers and Other Suppliers
The Company relies on a limited number of contract manufacturers and suppliers to provide manufacturing services for a substantial majority of its products. In addition, some components, sub-assemblies and modules are obtained from a sole supplier or limited group of suppliers. During the normal course of business, in order to reduce manufacturing lead times and ensure adequate component supply, the Company enters into agreements with certain contract manufacturers and suppliers that allow them to procure inventory based upon criteria as defined by the Company. The Company had approximately $20.8 million of non-cancelable purchase commitments with contract manufacturers and other suppliers as of September 27, 2013.
Standby Letters of Credit
As of September 27, 2013, the Company’s financial guarantees consisted of standby letters of credit outstanding, which were principally related to performance bonds and state requirements imposed on employers. The maximum amount of potential future payments under these arrangements was $0.2 million as of September 27, 2013.
Indemnification
Harmonic is obligated to indemnify its officers and the members of its Board of Directors pursuant to its bylaws and contractual indemnity agreements. Harmonic also indemnifies some of its suppliers and most of its customers for specified intellectual property matters pursuant to certain contractual arrangements, subject to certain limitations. The scope of these indemnities varies, but, in some instances, includes indemnification for damages and expenses (including reasonable attorneys’ fees). There have been no amounts accrued in respect of these indemnification provisions through September 27, 2013.
Guarantees
The Company has $0.5 million of guarantees in Israel as of September 27, 2013, with the majority relating to rent obligations for buildings used by its Israeli subsidiaries.
Legal proceedings
In October 2011, Avid Technology, Inc. (“Avid”) filed a complaint in the United States District Court for the District of Delaware alleging that Harmonic’s Media Grid product infringes two patents held by Avid. A jury trial on this initial complaint is scheduled for January 2014. In June 2012, Avid served a subsequent complaint alleging that Harmonic’s Spectrum product infringes one patent held by Avid. In September 2013, the U.S. Patent Trial and Appeal Board authorized an inter partes review to be instituted as to claims of the patent asserted in this second complaint. The complaints seek injunctive relief and unspecified damages.
In November 2012, FastVDO served a lawsuit on Harmonic, alleging infringement of a patent allegedly essential to the H.264 standard and that Harmonic encoders, transcoders, software and servers that use H.264 infringe their patent. The complaint seeks injunctive relief and unspecified damages.
At this time, the Company cannot predict the outcome of the above matters.

21

Table of Contents

An unfavorable outcome on the Avid matters or the FastVDO matter referenced above or any other litigation matter could require that Harmonic pay substantial damages, or, in connection with any intellectual property infringement claims, could require that the Company pay ongoing royalty payments or could prevent the Company from selling certain of its products. As a result, a settlement of, or an unfavorable outcome on, any of such matters could have a material adverse effect on Harmonic’s business, operating results, financial position and cash flows.
Harmonic’s industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. From time to time, third parties have asserted, and may in the future assert, exclusive patent, copyright, trademark and other intellectual property rights against us or the Company’s customers. Such assertions arise in the normal course of the Company’s operations. The resolution of any such assertions and claims cannot be predicted with certainty.

NOTE 15: STOCKHOLDERS’ EQUITY
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows (in thousands):
 
September 27, 2013
 
December 31, 2012
Foreign currency translation adjustments
$
(510
)
 
$
(502
)
Unrealized gain on investments
43

 
37

Accumulated other comprehensive loss
$
(467
)
 
$
(465
)
Common Stock Repurchases
On January 28, 2013, our Board of Directors approved a $75 million increase to our existing $25 million stock repurchase program. On February 19, 2013, the Board approved a further $35 million increase to the program upon the closing of a sale of the Company’s cable access HFC business, which closed on March 5, 2013. On July 16, 2013, the Board authorized repurchasing an additional $85.0 million under the Company’s stock repurchase program, increasing the aggregate authorized amount to $220 million under the ongoing program. Under the program, the Company is authorized to repurchase shares of common stock in open market transactions or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The timing and actual number of shares repurchased, if any, depends on a variety of factors, including the price and availability of our shares, trading volume and general market conditions. The program may be suspended or discontinued at any time without prior notice.
During the three and nine months ended September 27, 2013, the Company repurchased and retired 1.1 million and 4.5 million shares of common stock for $7.7 million and $27.6 million, respectively, under this program. As part of the stock repurchase program, on May 24, 2013, the Company completed a “modified Dutch auction” tender offer and repurchased and retired an additional 12.0 million shares of its common stock at $6.25 per share. The total cost of the stock repurchase under the tender offer was approximately $76.0 million, including $1.0 million of fees and expenses. The Company charges the excess of cost over par value for the repurchase of its common stock to additional paid-in capital. As of September 27, 2013, approximately $125.2 million had been utilized to repurchase stock under the program, including under the Company's tender offer, which closed on May 24, 2013, and approximately $94.8 million was available for future purchases under the program.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The terms “Harmonic,” the “Company,” “we,” “us,” “its,” and “our,” as used in this Quarterly Report on Form 10-Q (“Form 10-Q”), refer to Harmonic Inc. and its subsidiaries and its predecessors as a combined entity, except where the context requires otherwise.
Some of the statements contained in this Form 10-Q are forward-looking statements that involve risk and uncertainties. The statements contained in this Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future. In some cases, you can identify forward-looking statements by terminology such as, “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements regarding:

22

Table of Contents

developing trends and demands in the markets we address, particularly emerging markets;
economic conditions, particularly in certain geographies, and in financial markets;
new and future products and services;
capital spending of our customers;
our strategic direction, future business plans and growth strategy;
industry and customer consolidation;
expected demand for and benefits of our products and services;
the impact of the possibility that the U.S. government will fail to timely raise its debt limit;
seasonality of revenue and concentration of revenue sources;
the potential impact of our continuing stock repurchase plan;
potential future acquisitions and dispositions;
anticipated results of potential or actual litigation;
our competitive environment;
the impact of governmental regulation;
the impact of uncertain economic times and markets;
anticipated revenue and expenses, including the sources of such revenue and expenses;
expected impacts of changes in accounting rules;
use of cash, cash needs and ability to raise capital; and
the condition of our cash investments.
These statements are subject to known and unknown risks, uncertainties and other factors, any of which may cause our actual results to differ materially from those implied by the forward-looking statements. Important factors that may cause actual results to differ from expectations include those discussed in “Risk Factors” beginning on page 34 of this Form 10-Q. All forward-looking statements included in this Form 10-Q are based on information available to us on the date thereof, and we assume no obligation to update any such forward-looking statements.

OVERVIEW
We design, manufacture and sell versatile and high performance video infrastructure products and system solutions. We enable our customers to efficiently create, prepare and deliver a full range of video services to consumer devices, including televisions, personal computers, tablets and mobile phones. Our products generally fall into three principal categories; video production platforms and playout solutions, video processing solutions and cable edge solutions. We also provide technical support services and professional services to our customers worldwide.
On March 5, 2013, the Company completed the sale of its cable access HFC business to Aurora Networks (“Aurora”) for $46 million in cash. The Condensed Consolidated Statements of Operations have been retrospectively adjusted to present the cable access HFC business as discontinued operations, as described in “Note 3, Discontinued Operations”. Unless noted otherwise, all discussions herein with respect to the Company’s unaudited condensed consolidated financial statements relate to the Company’s continuing operations.
The principal markets we serve are cable television companies, direct broadcast satellite system companies, telecommunications companies, or “telcos”, broadcaster and media companies, as well as, more recently, emerging streaming media providers, that create video programming or offer video-based infrastructure. Historically, a majority of our revenue has been derived from relatively few customers, due in part to the consolidation of the ownership of cable television and direct broadcast satellite system companies. Sales to our ten largest customers in the three and nine months ended September 27, 2013 accounted for approximately 38% and 33%, respectively, of our revenue, compared to 40% and 38%, respectively, for the same periods in 2012.

23

Table of Contents

Although we are attempting to broaden our customer base by penetrating new markets and further expanding internationally, we expect to see continuing industry consolidation and customer concentration. During the three and nine months ended September 27, 2013, revenue from Comcast accounted for 16% and 12%, respectively, of our revenue, compared to 12% and 13%, respectively, for the same periods in 2012.
In the three and nine months ended September 27, 2013, we recognized revenue of $123 million and $342 million, respectively, compared to $120 million and $359 million, respectively, in the same periods in 2012. Our international sales, which had been growing at a faster pace than our domestic sales in prior periods, decreased 1% and 3%, in the three and nine months ended September 27, 2013, as compared to the same periods in 2012. Our international sales represented 56% of our revenue in each of the three and nine months ended September 27, 2013, compared to 58% and 54% of our total revenue in the same periods in 2012. Domestic sales increased by 6% in the three months ended September 27, 2013, as compared to the same period in 2012, but decreased 7% in the nine months ended September 27, 2013, as compared to the same period in 2012. We expect that international sales will continue to account for a significant portion of our net revenue for the foreseeable future, and expect that, due to sales to emerging markets in particular, our international revenue may increase as a percentage of our total net revenue from year to year.
Historically, our revenue has been dependent upon capital spending in the cable, satellite, telco and broadcast industries. More recently, we also have derived revenue from media companies, including streaming media providers. Industry consolidation has in the past constrained, and may in the future constrain, capital spending by our customers. If our product portfolio and product development plans do not position us well to capture an increased portion of the capital spending of customers in the markets on which we focus, our revenue may decline. As we attempt to further diversify our customer base in these markets, we may need to continue to build alliances with other equipment manufacturers and content providers, adapt our products for new applications, take orders at prices resulting in lower margins, and build internal expertise to handle the particular contractual and technical demands of the media market, which could result in higher operating costs. Implementation issues with our products or those of other vendors have caused in the past, and may cause in the future, delays in project completion for our customers and delay our recognition of revenue.
Our quarterly revenue has been, and may continue to be, affected by seasonal buying patterns. Typically, revenue in the first quarter of the year is seasonally lower than other quarters, as our customers often are still finalizing their annual budget and capital spending projections for the year. Further, we often recognize a substantial portion of our quarterly revenues in the last month of each quarter. We establish our expenditure levels for product development and other operating expenses based on projected revenue levels for a specified period, and expenses are relatively fixed in the short term. Accordingly, even small variations in timing of revenue, particularly from large individual transactions, can cause significant fluctuations in operating results in a particular quarter.
The impact of economic conditions on certain of our customers and changes in our customers’ deployment plans have adversely affected our business in the past. In 2010, economic conditions in many of the countries in which we sell products were very weak, and global economic conditions and financial markets experienced a severe downturn. The downturn stemmed from a multitude of factors, including adverse credit conditions, slower economic activity, concerns about inflation and deflation, rapid changes in foreign exchange rates, increased energy costs, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns. Although there was an increase in global economic activity in the second half of 2010 and the first half of 2011, economic growth appears to have become sluggish in some geographies, and weak in other geographies, since the middle of 2011. Further, economic growth is expected to be sluggish or weak in some geographies during the balance of 2013 and perhaps beyond. If an economic downturn were to occur in the future, customers may delay or reduce capital expenditures, which, in turn, often results in lower demand for our products.
As part of our business strategy, (1) from time to time we have acquired, and continue to consider acquiring, businesses, technologies, assets and product lines that we believe complement or may expand our existing business, and (2) from time to time we consider divesting a product line that we believe may no longer complement or expand our existing business. In September 2010, we completed the acquisition of Omneon, Inc., a company specializing in file-based infrastructure for the production, preparation and playout of video content typically deployed by broadcasters, satellite operators, content owners and other media companies. Omneon’s business was complementary to Harmonic’s core business, and expanded our customer reach into content providers and extended our product lines into video servers and video-optimized storage for content production and playout. In February 2013, we entered into an agreement to sell our cable access HFC business to Aurora Networks, and the transaction closed in March 2013. See Note 3, “Discontinued Operations” of our Condensed Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

24

Table of Contents

There have been no material changes to our critical accounting policies, judgments and estimates, during the nine months ended September 27, 2013, from those disclosed in our 2012 Form 10-K.

RESULTS OF OPERATIONS

Net Revenue
Net Revenue by Product Line
Harmonic’s consolidated net revenue, by product line, for the three and nine months ended September 27, 2013, compared to the same periods in 2012, are presented in the table below. Also presented are the related dollar and percentage change in consolidated net revenue, by product line, in the three and nine months ended September 27, 2013, as compared to the same periods in 2012.
 
Three months ended
 
Nine months ended
 
September 27, 2013
 
September 28, 2012
 
September 27, 2013
 
September 28, 2012
 
(In thousands, except percentages)
Revenue by type:
 
 
 
 
 
 
 
Video processing products
$
58,047

 
$
49,899

 
$
163,362

 
$
161,880

Production and playout products
19,976

 
23,786

 
63,543

 
$
65,327

Cable edge products
20,690

 
24,196

 
51,060

 
$
73,524

Service and support
24,205

 
22,510

 
63,753

 
$
58,159

Net revenue
$
122,918

 
$
120,391

 
$
341,718

 
$
358,890

Increase (Decrease):
 
 
 
 
 
 
 
Video processing products
$
8,148

 
 
 
$
1,482

 
 
Production and playout products
(3,810
)
 
 
 
(1,784
)
 
 
Cable edge products
(3,506
)
 
 
 
(22,464
)
 
 
Service and support
1,695

 
 
 
5,594

 
 
Total increase (decrease)
$
2,527

 
 
 
$
(17,172
)
 
 
Percent change:
 
 
 
 
 
 
 
Video processing products
16
 %
 
 
 
1
 %
 
 
Production and playout products
(16
)%
 
 
 
(3
)%
 
 
Cable edge products
(14
)%
 
 
 
(31
)%
 
 
Service and support
8
 %
 
 
 
10
 %
 
 
Total percent change
2
 %
 
 
 
(5
)%
 
 
The 16% increase in our video processing revenue in the three months ended September 27, 2013, compared to the same period in 2012, was primarily due to increased sales of our encoder and decoder products in the U.S. and international broadcast and media markets. The 16% decrease in production and playout revenues was due principally to lower sales of our playout servers in the Asia Pacific region and the Europe, Middle East and Africa (“EMEA”) region in the three months ended September 27, 2013. The 14% decrease in our cable edge revenue in the three months ended September 27, 2013, compared to the same period in 2012, was primarily attributable to the softness in the U.S. Pay TV service provider market, as it appears that some providers are looking ahead to the availability of new technologies, including converged cable access platform (“CCAP”) enabled products. The 8% increase in our service and support revenues in the three months ended September 27, 2013, compared to the same period in 2012, was primarily due to the recognition of service revenue from a multi-million dollar long-term project in the third quarter of 2013. Service and support revenues are derived primarily from maintenance contracts, but also include professional and integration services and training.
The 1% increase in our video processing revenue in the nine months ended September 27, 2013, compared to the same period in 2012, was primarily due to the increased sales of our encoder and decoder products, principally in the broadcast and media market. The 3% decrease in production and playout revenue was due to lower sales of our playout servers in the Asia Pacific region, offset partially by increased production and playout revenue in the U.S. and the EMEA region, in the nine months ended

25

Table of Contents

September 27, 2013. The 31% decrease in our cable edge revenue in the nine months ended September 27, 2013, compared to the same period in 2012, was primarily attributable to the softness in the U.S. Pay TV service provider market, as it appears that some of the providers are looking ahead to the availability of new technologies, including CCAP enabled products. The 10% increase in our service and support revenues in the nine months ended September 27, 2013, compared to the same period in 2012, was driven by a higher subscription base from new maintenance contracts, as well as renewed maintenance contracts across all regions, and the recognition of service revenue from a multi-million dollar long-term contract in the third quarter of 2013.
Net Revenue by Geographic Region
Harmonic’s domestic and international net revenue in the three and nine months ended September 27, 2013, compared with the corresponding periods in 2012, are presented in the table below. Also presented are the related dollar and percentage change in domestic and international net revenue, in the three and nine months ended September 27, 2013, from the corresponding periods in 2012.
 
Three months ended
 
Nine months ended
 
September 27, 2013
 
September 28, 2012
 
September 27, 2013
 
September 28, 2012
 
(In thousands, except percentages)
Net revenue:
 
 
 
 
 
 
 
United States
$
53,878

 
$
50,675

 
$
151,848

 
$
163,476

International
69,040

 
69,716

 
189,870

 
195,414

Total
$
122,918

 
$
120,391

 
$
341,718

 
$
358,890

Increase (Decrease):
 
 
 
 
 
 
 
United States
$
3,203

 
 
 
$
(11,628
)
 
 
International
(676
)
 
 
 
(5,544
)
 
 
Total increase (decrease)
$
2,527

 
 
 
$
(17,172
)
 
 
Percent change:
 
 
 
 
 
 
 
United States
6
 %
 
 
 
(7
)%
 
 
International
(1
)%
 
 
 
(3
)%
 
 
Total percent change
2
 %
 
 
 
(5
)%
 
 
U.S. net revenue increased 6% in the three months ended September 27, 2013, compared to the three months ended September 28, 2012, and it decreased 7% in the nine months ended September 27, 2013, compared to the same period in 2012. The increase in U.S. net revenue in the three months ended September 27, 2013 was primarily due to increased sales of our encoder and decoder products to broadcast and media customers, offset partially by a decrease in U.S. revenue from cable customers. The decrease in U.S. revenue for the nine month period was principally due to a decrease in our U.S. cable edge revenue, which was primarily attributable to the softness in the U.S. Pay TV service provider market, as it appears that some of the providers are looking ahead to the availability of new technologies, including CCAP enabled products. This decrease was offset partially by increased sales of our encoder and decoder products to broadcast and media customers.
International net revenue decreased 1% and 3%, respectively, in the three and nine months ended September 27, 2013, compared to the same periods in 2012. The decrease in international net revenue in the three and nine months ended September 27, 2013, compared to the corresponding periods in 2012, was primarily due to decreased demand in Canada and the Asia Pacific region and, to a lesser extent, the Central and Latin America region, offset partially by increased revenue in the EMEA region. The decrease in Canada revenue was mainly with respect to our cable edge products due to the softness in the Pay TV service providers market, as it appears that some of the providers are looking ahead to the availability of new technologies, including CCAP enabled products, and, to a lesser extent, our video processing products. The decrease in Asia Pacific revenue was primarily with respect to our production and playout products, as we saw a reduction in capital spending in that region for those products. In EMEA, we saw some recovery across almost all our product lines in the nine months ended September 27, 2013. In addition, we recognized revenue from a multi-million dollar, long-term European project in the third quarter of 2013. We expect that international sales will continue to account for a significant percentage of our net revenue in 2013 and for the foreseeable future.

Gross Profit

26

Table of Contents

Harmonic’s gross profit and gross profit as a percentage of net revenue (“gross margin”), in the three and nine months ended September 27, 2013, as compared to the corresponding period in 2012, are presented in the table below. Also presented are the related dollar and percentage changes in gross profit in the three and nine months ended September 27, 2013, from the corresponding periods in 2012.
 
Three months ended
 
Nine months ended
 
September 27, 2013
 
September 28, 2012
 
September 27, 2013
 
September 28, 2012
 
(In thousands, except percentages)
Gross profit
$
56,792

 
$
54,878

 
$
160,849

 
$
160,421

As a percentage of net revenue (“gross margin”)
46
%
 
46
%
 
47
%
 
45
%
Increase
$
1,914

 
 
 
$
428

 
 
Percent change
3
%
 
 
 
%
 
 
Gross margin was 46% in both the three months ended September 27, 2013 and September 28, 2012. Gross margin in the three months ended September 27, 2013 was positively impacted by our gross margin improvement efforts and a favorable shift in the mix of product sold between the periods. These positive impacts were offset by lower margin from a multi-million dollar, long-term project that was recognized in the third quarter of 2013.
Gross margin was 47% in the nine months ended September 27, 2013, compared to 45% in the corresponding period in 2012. This 2% increase in gross margin was primarily due to the positive impact of a shift between the periods in the mix of products sold. In addition, gross margin for cable edge products in the second quarter of 2013 was higher than the corresponding period in 2012, as we sold more software licenses with these products in the second quarter of 2013. These positive impacts were partially offset by lower margin from a multi-million dollar, long-term European project that was recognized in the third quarter of 2013.
In the three and nine months ended September 27, 2013, $4.8 million and $14.5 million of amortization of intangibles was included in cost of revenue, compared to $5.0 million and $15.5 million, respectively, in the corresponding periods in 2012.

Research and Development
Harmonic’s research and development expense, and the expense as a percentage of net revenue, in the three and nine months ended September 27, 2013, as compared with the corresponding periods in 2012, are presented in the table below. Also presented are the related dollar and percentage changes in research and development expense in the three and nine months ended September 27, 2013, from the corresponding periods in 2012.
 
Three months ended
 
Nine months ended
 
September 27, 2013
 
September 28, 2012
 
September 27, 2013
 
September 28, 2012
 
(In thousands, except percentages)
Research and development
$
24,560

 
$
25,586

 
$
75,631

 
$
77,205

As a percentage of net revenue
20
 %
 
21
%
 
22
 %
 
22
%
Decrease
$
(1,026
)
 
 
 
$
(1,574
)
 
 
Percent change
(4
)%
 
 
 
(2
)%
 
 
The 4% decrease in research and development expense in the three months ended September 27, 2013, compared to the corresponding period in 2012, was primarily due to decreased employee compensation expense of $0.7 million, mainly due to reduction in headcount, and decreased stock-based compensation expense of $0.4 million. In addition, the research and development expenses in the three months ended September 28, 2012 included $0.3 million of expenses resulting from the adjustments from our California sales and use tax audit and property tax audit for prior years. These decreases in research and development expenses in the three months ended September 27, 2013 were offset partially by increased expenses on consulting and outside engineering services of $0.4 million, primarily related to our product development efforts.
The 2% decrease in research and development expense in the nine months ended September 27, 2013, compared to the corresponding period in 2012, was primarily the result of decreased stock-based compensation expense of $1.5 million, net decreased employee compensation expense of $0.9 million, mainly due to reduction in headcount, and decreased prototype expenses of $0.7 million, primarily due to the timing of our development projects and ongoing evolution of our product

27

Table of Contents

roadmap. In addition, the research and development expenses in the three months ended September 28, 2012 included $0.3 million of expenses resulting from the adjustments from our California sales and use tax audit and property tax audit for prior years. These decreases in research and development expenses in the nine months ended September 27, 2013 were offset partially by increased expenses on consulting and outside engineering services of $1.9 million, primarily related to our product development efforts.

Selling, General and Administrative
Harmonic’s selling, general and administrative expense, and the expense as a percentage of net revenue, in the three and nine months ended September 27, 2013, as compared with the corresponding periods in 2012, are presented in the table below. Also presented are the related dollar and percentage change in selling, general and administrative expense in the three and nine months ended September 27, 2013, from the corresponding periods in 2012.
 
Three months ended
 
Nine months ended
 
September 27, 2013
 
September 28, 2012
 
September 27, 2013
 
September 28, 2012
 
(In thousands, except percentages)
Selling, general and administrative
$
32,527

 
$
31,132

 
$
100,220

 
$
93,862

As a percentage of net revenue
26
%
 
26
%
 
29
%
 
26
%
Increase
$
1,395

 
 
 
$
6,358