HLIT-2015.07.03-10Q
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 July 3, 2015
 
¨
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 July 30, 2015 was 88,128,032.


Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
 
 

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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARMONIC INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
July 3, 2015
 
December 31, 2014
 
(In thousands, except par value amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
76,049

 
$
73,032

Short-term investments
29,034

 
31,847

Accounts receivable, net
76,079

 
74,144

Inventories
32,499

 
32,747

Deferred income taxes, short-term
3,375

 
3,375

Prepaid expenses and other current assets
28,860

 
17,539

Total current assets
245,896

 
232,684

Property and equipment, net
27,087

 
27,221

Goodwill
197,903

 
197,884

Intangibles, net
7,160

 
10,599

Other assets
11,172

 
12,130

Total assets
$
489,218

 
$
480,518

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
21,286

 
$
15,318

Income taxes payable
112

 
893

Deferred revenue
46,922

 
38,601

Accrued liabilities
29,985

 
35,118

Total current liabilities
98,305

 
89,930

Income taxes payable, long-term
4,923

 
4,969

Deferred tax liabilities, long-term
3,095

 
3,095

Other non-current liabilities
11,679

 
10,711

Total liabilities
118,002

 
108,705

Commitments and contingencies (Note 16)

 

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; 88,485 and 87,700 shares issued and outstanding at July 3, 2015 and December 31, 2014, respectively
88

 
88

Additional paid-in capital
2,264,312

 
2,261,952

Accumulated deficit
(1,891,898
)
 
(1,888,247
)
Accumulated other comprehensive loss
(1,286
)
 
(1,980
)
Total stockholders’ equity
371,216

 
371,813

Total liabilities and stockholders’ equity
$
489,218

 
$
480,518

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

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HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
Three months ended
 
Six months ended
 
July 3,
2015
 
June 27,
2014
 
July 3,
2015
 
June 27,
2014
 
(In thousands, except per share amounts)
Product revenue
$
77,447

 
$
86,528

 
$
157,920

 
$
174,788

Service revenue
25,656

 
23,061

 
49,199

 
42,833

Net revenue
103,103

 
109,589

 
207,119

 
217,621

Product cost of revenue
35,977

 
47,928

 
71,437

 
92,534

Service cost of revenue
12,741

 
11,844

 
26,269

 
22,958

Total cost of revenue
48,718

 
59,772

 
97,706

 
115,492

Gross profit
54,385

 
49,817

 
109,413

 
102,129

Operating expenses:
 
 
 
 
 
 
 
Research and development
21,816

 
23,485

 
44,145

 
47,373

Selling, general and administrative
31,281

 
32,979

 
62,477

 
66,526

Amortization of intangibles
1,446

 
1,718

 
2,892

 
3,668

Restructuring and related charges
185

 
284

 
229

 
433

Total operating expenses
54,728

 
58,466

 
109,743

 
118,000

Loss from operations
(343
)
 
(8,649
)
 
(330
)
 
(15,871
)
Interest income, net
17

 
67

 
72

 
144

Other income (expense), net
59

 
(127
)
 
(447
)
 
(115
)
Loss on impairment of long-term investment

 

 
(2,505
)
 

Loss before income taxes
(267
)
 
(8,709
)
 
(3,210
)
 
(15,842
)
Provision for income taxes
727

 
28,353

 
441

 
26,630

Net loss
$
(994
)
 
$
(37,062
)
 
$
(3,651
)
 
$
(42,472
)
 
 
 
 
 
 
 
 
Net loss per share:
 
 
 
 
 
 
 
Basic and diluted
$
(0.01
)
 
$
(0.39
)
 
$
(0.04
)
 
$
(0.44
)
Shares used in per share calculation:
 
 
 
 
 
 
 
Basic and diluted
88,426

 
93,966

 
88,541

 
95,899

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

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HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
 
Three months ended
 
Six months ended
 
July 3,
2015
 
June 27,
2014
 
July 3,
2015
 
June 27,
2014
 
(In thousands)
Net loss
$
(994
)
 
$
(37,062
)
 
$
(3,651
)
 
$
(42,472
)
Other comprehensive income (loss) before tax:
 
 
 
 
 
 
 
  Change in unrealized losses on cash flow hedges:
 
 
 
 
 
 
 
    Unrealized gains arising during the period
516

 

 
332

 

    Gains reclassified into earnings
(138
)
 

 
(187
)
 

 
378

 

 
145

 

  Change in unrealized gains (loss) on available-for-sale securities:
460

 
(32
)
 
945

 
(25
)
  Change in foreign currency translation adjustments
582

 
190

 
(402
)
 
230

Other comprehensive income before tax
1,420

 
158

 
688

 
205

Benefit from income taxes
(10
)
 
(4
)
 
(6
)
 
(5
)
Other comprehensive income, net of tax
1,430

 
162

 
694

 
210

Total comprehensive income (loss)
$
436

 
$
(36,900
)
 
$
(2,957
)
 
$
(42,262
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

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HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Six months ended
 
July 3, 2015
 
June 27, 2014
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(3,651
)
 
$
(42,472
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Amortization of intangibles
3,439

 
12,866

Depreciation
6,930

 
8,486

Stock-based compensation
8,018

 
8,368

Loss on impairment of long-term investment
2,505

 

Deferred income taxes, net

 
27,407

Provision for excess and obsolete inventories
843

 
1,377

Allowance for doubtful accounts, returns and discounts
(713
)
 
600

Excess tax benefits from stock-based compensation
(22
)
 
(304
)
Other non-cash adjustments, net
252

 
847

Changes in assets and liabilities:
 
 
 
Accounts receivable
(1,222
)
 
(5,485
)
Inventories
(595
)
 
5,379

Prepaid expenses and other assets
(11,635
)
 
(2,424
)
Accounts payable
6,415

 
2,324

Deferred revenue
9,833

 
10,873

Income taxes payable
(815
)
 
562

Accrued and other liabilities
(5,994
)
 
(1,625
)
Net cash provided by operating activities
13,588

 
26,779

Cash flows from investing activities:
 
 
 
Purchases of investments
(12,986
)
 
(26,599
)
Proceeds from maturities of investments
15,744

 
30,846

Purchases of property and equipment
(7,505
)
 
(6,479
)
Purchases of long-term investments
(85
)
 

Net cash used in investing activities
(4,832
)
 
(2,232
)
Cash flows from financing activities:
 
 
 
Payments for repurchase of common stock
(12,171
)
 
(54,751
)
Proceeds from (repurchases of) common stock issued to employees
6,491

 
(1,272
)
Excess tax benefits from stock-based compensation
22

 
304

Net cash used in financing activities
(5,658
)
 
(55,719
)
Effect of exchange rate changes on cash and cash equivalents
(81
)
 
16

Net increase (decrease) in cash and cash equivalents
3,017

 
(31,156
)
Cash and cash equivalents at beginning of period
73,032

 
90,329

Cash and cash equivalents at end of period
$
76,049

 
$
59,173

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

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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 2, 2015 (the “2014 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, 2015, 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 (“U.S. GAAP”).
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 the 2014 Form 10-K. There have been no significant changes to these policies during the six months ended July 3, 2015.

NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, requiring an entity to recognize the amount of revenue that reflects the consideration to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. On July 9, 2015, the FASB approved the deferral of the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. The Company has not yet selected a transition method and it is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
On November 3, 2014, the FASB issued ASU No. 2014-16, “Derivatives and Hedging (Topic 815) - Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity”. ASU 2014-16 was issued to clarify how current U.S. GAAP should be interpreted in evaluating the economic characteristics and risk of a host contract in a hybrid financial instrument that is issued in the form of a share.  In addition, ASU 2014-16 was issued to clarify that in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (that is, the relative strength of the debt-like or equity-like terms and features given the facts and circumstances) when considering how to weight those terms and features. ASU 2014-16 is effective in the fiscal year beginning after December 15, 2015. Early adoption in an interim period is permitted. The Company is currently evaluating the impact of the adoption of ASU 2014-16 on its consolidated financial statements.
On February 18, 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810) - Amendments to the Consolidation Analysis”, intended to improve targeted areas of consolidation guidance for all entities. ASU 2015-02 is effective in the fiscal

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year beginning after December 15, 2015. Early adoption in an interim period is permitted. The Company is currently evaluating the impact of the adoption of ASU 2015-02 on its consolidated financial statements.
On April 15, 2015, the FASB issued ASU No. 2015-05, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”. ASU 2015-05 amends ASC 350-40 to provide customers with guidance on whether a cloud computing arrangement contains a software license to be accounted for as internal-use software. ASU No. 2015-05 is effective in the fiscal year beginning after December 15, 2015. Early adoption in an interim period is permitted. The Company is currently evaluating the impact of the adoption of ASU 2015-05 on its consolidated financial statements.

On July 22, 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330) - Simplifying the Measurement of Inventory”. ASU 2015-11 provides additional guidance regarding the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. ASU 2015-11 is effective in the fiscal year beginning after December 15, 2016. Early adoption in an interim period is permitted. The Company is currently evaluating the impact of the adoption of ASU 2015-11 on its consolidated financial statements.

NOTE 3: 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 July 3, 2015
 
 
 
 
 
 
 
State, municipal and local government agencies bonds
$
8,868

 
$
4

 
$

 
$
8,872

Corporate bonds
20,192

 

 
(30
)
 
20,162

Total short-term investments
$
29,060

 
$
4

 
$
(30
)
 
$
29,034

As of December 31, 2014
 
 
 
 
 
 
 
State, municipal and local government agencies bonds
$
13,946

 
$
16

 
$
(1
)
 
$
13,961

Corporate bonds
17,899

 
3

 
(16
)
 
17,886

Total short-term investments
$
31,845

 
$
19

 
$
(17
)
 
$
31,847

The following table summarizes the maturities of the Company’s short-term investments (in thousands):
 
July 3, 2015
 
December 31, 2014
Less than one year
$
23,341

 
$
30,946

Due in 1 - 2 years
5,693

 
901

Total short-term investments
$
29,034

 
$
31,847

These available-for-sale investments are presented as “Current Assets” in the Condensed Consolidated Balance Sheets as they are available for current operations. Realized gains and losses from the sale of investments for each of the three and six months ended July 3, 2015 and June 27, 2014 were not material.
As of July 3, 2015 and December 31, 2014, $7.2 million and $8.6 million, respectively, of investments in equity securities of other privately and publicly held companies were considered as long-term investments and were included in “Other assets” in the Condensed Consolidated Balance Sheet (See Note 4, “Investments in Other Equity Securities” for additional information).

Impairment of Short-term 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

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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 July 3, 2015.
As of July 3, 2015, 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 4: INVESTMENTS IN OTHER EQUITY SECURITIES
From time to time, the Company may acquire certain equity investments for the promotion of business objectives and these investments are classified as long-term investments and included in “Other assets” in the Condensed Consolidated Balance Sheet.

On September 2, 2014, the Company acquired a 3.3% interest in Vislink plc (“Vislink”), a U.K. public company listed on the AIM exchange, for $3.3 million, and also made a $3.3 million prepayment for future software license purchases. The investment in Vislink is being accounted for as a cost method investment as the Company does not have significant influence over the operational and financial policies of Vislink. Since the Vislink investment is also an available-for-sale security, its value is marked to market for the difference in fair value at period end. The carrying value of Vislink was $3.6 million and $2.6 million as of July 3, 2015 and December 31, 2014, respectively, and Vislink’s accumulated unrealized gain(loss), net of taxes was $0.2 million and $(0.7) million as of July 3, 2015 and December 31, 2014, respectively. The accumulated unrealized gain(loss) is included in the Condensed Consolidated Balance Sheets as a component of “Accumulated other comprehensive income (loss)”. As of July 3, 2015, there was no outstanding balance in the prepayment to Vislink for future software license purchase. The Company determined that there were no impairment indicators existing at July 3, 2015 that would indicate that the Vislink investment was impaired. As of July 3, 2015, the Company’s maximum exposure to loss from the Vislink investment was limited to its initial investment cost of $3.3 million.
 
Unconsolidated Variable Interest Entities

VJU
On September 26, 2014, the Company acquired a 19.8% interest in VJU iTV Development GmbH (“VJU”), a software company based in Austria, for $2.5 million. Since VJU’s equity is deemed not sufficient to permit it to finance its activities without additional support from its shareholders, VJU is considered a variable interest entity (“VIE”). The Company determined that it is not the primary beneficiary of VJU because its financial interest in VJU’s equity and its research and development agreement with VJU do not empower the Company to direct VJU’s activities that will most significantly impact VJU’s economic performance. VJU is accounted for as a cost method investment as the Company does not have significant influence over the operational and financial policies of VJU.

The Company attended a VJU board meeting on March 5, 2015 as an observer. At that meeting, the Company was made aware of significant decreases in VJU’s business prospects, VJU’s existing working capital and prospects for additional funding, compared to the prior information the Company had received from VJU. Based on the Company’s assessment, the Company determined that its investment in VJU was impaired on an other-than-temporary basis. Factors considered included the severity of the impairment and recent events specific to VJU. Based on the Company’s assessment of VJU’s expected cash flows, the entire investment is expected to be non-recoverable. As a result, the Company recorded an impairment charge of $2.5 million in the first quarter of 2015. The Company’s impairment loss in VJU is limited to its initial cost of investment of $2.5 million as well as the $0.1 million research and development cost expensed in September 2014.  
EDC
On October 22, 2014, the Company acquired an 18.4% interest in Encoding.com, Inc. (“EDC”), a video transcoding service company headquartered in San Francisco, California, for $3.5 million by purchasing EDC’s Series B preferred stock. Since EDC’s equity is deemed not sufficient to permit it to finance its activities without additional support from its shareholders, EDC is considered a VIE. The Company determined that it is not the primary beneficiary of EDC because its financial interest in EDC’s equity does not empower the Company to direct EDC’s activities that will most significantly impact EDC’s economic performance. In addition, the Company determined that its investment in EDC’s Series B preferred stock does not have the risk and reward characteristics that are substantially similar to EDC’s common stock. Therefore, Harmonic does not hold an investment in EDC’s common stock or in-substance common stock. According to the applicable accounting guidance, the EDC investment is accounted for as a cost-method investment.

The following table presents the carrying values and maximum exposure of the unconsolidated VIEs as of July 3, 2015 (in thousands):

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Carrying Value
 
Maximum exposure to loss(1)
VJU
$

 
$

EDC(2)
3,593

 
3,593

Total
$
3,593

 
$
3,593


(1) The Company did not provide financial support to any of its unconsolidated VIEs and as of July 3, 2015, there were no explicit arrangements or implicit variable interests that could require the Company to provide financial support to any of its unconsolidated VIEs.

(2) The Company’s maximum exposure to loss with respect to EDC as of July 3, 2015 was limited to a total investment cost of $3.6 million, including $0.1 million of transaction costs.

Each reporting period, the Company reviews all of its unconsolidated VIE investments to determine whether there are any reconsideration events that may result in the Company being a primary beneficiary of any unconsolidated VIE which would then require the Company to consolidate the VIE. The Company also reviews all of its cost-method investments in each reporting period to determine whether a significant event of change in circumstances has occurred that may have an adverse effect on the fair value of each investment.

NOTE 5: DERIVATIVES AND HEDGING ACTIVITIES
The Company uses forward contracts to manage exposures to foreign currency exchange rates. The Company’s primary objective in holding derivative instruments is to reduce the volatility of earnings and cash flows associated with fluctuations in foreign currency exchange rates and the Company does not use derivative instruments for trading purposes. The use of derivative instruments expose the Company to credit risk to the extent that the counterparties may be unable to meet their contractual obligations, as such, the potential risk of loss with any one counterparty is closely monitored by the Company.
Derivatives Designated as Hedging Instruments (Cash Flow Hedges)
Beginning in December 2014, the Company entered into forward currency contracts to hedge forecasted operating expenses and service costs related to employee salaries and benefits denominated in Israeli shekels (“ILS”) for its subsidiaries in Israel. These ILS forward contacts mature generally within 12 months and are designated as cash flow hedges. For derivatives that are designated as hedges of forecasted foreign currency denominated operating expenses and service costs, the Company assesses effectiveness based on changes in spot currency exchange rates. Changes in spot rates on the derivative are recorded as a component of “Accumulated other comprehensive income (loss)” (“OCI”) in the Condensed Consolidated Balance Sheets until such time as the hedged transaction impacts earnings. The change in fair value of the forward points, which reflects the interest rate differential between the two countries on the derivative, is excluded from the effectiveness assessment. Gains or losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
Derivatives Not Designated as Hedging Instruments (Balance Sheet Hedges)
Balance sheet hedges consist of foreign currency forward contracts, mature generally within three months, are carried at fair value and they are used to minimize the short-term impact of foreign currency exchange rate fluctuation on cash and certain trade and inter-company receivables and payables. Changes in the fair value of these foreign currency forward contracts are recognized in “Other income (expense), net” in the Condensed Consolidated Statement of Operations and are largely offset by the changes in the fair value of the assets or liabilities being hedged.
The locations and amounts of designated and non-designated derivative instruments’ gains and losses reported in the Company’s Condensed Consolidated Statements of Operations were as follows (in thousands):

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Three months ended
 
Six months ended
 
 
Financial Statement Location
 
July 3, 2015
 
June 27, 2014
 
July 3, 2015
 
June 27, 2014
Derivatives Designated as Hedging instruments:
 
 
 
 
 
 
 
 
 
 
Gains in accumulated OCI on derivatives (effective portion)
 
Accumulated OCI
 
$
516

 
$

 
$
332

 
$

Gains reclassified from accumulated OCI into income (effective portion)
 
Cost of Revenue
 
$
19

 
$

 
$
26

 
$

 
 
Operating Expense
 
119

 

 
161

 

 
 
  Total
 
$
138

 
$

 
$
187

 
$

Loss recognized in income on derivatives (ineffectiveness portion and amount excluded from effectiveness testing)
 
Other income (expense), net
 
$
(10
)
 
$

 
$
(52
)
 
$

Derivatives Not Designated as Hedging instruments:
 
 
 
 
 
 
 
 
 
 
Gains (losses) recognized in income
 
Other income (expense), net
 
$
133

 
$
70

 
$
385

 
$
(107
)
The Company anticipates the accumulated OCI balance of $456,000 at July 3, 2015, relating to net unrealized gains from cash flow hedges, will be reclassified to earnings in 2015.
The U.S. dollar equivalents of all outstanding notional amounts of foreign currency forward contracts are summarized as follows (in thousands):

 
July 3, 2015
 
December 31, 2014
Derivatives designated as cash flow hedges:
 

 

Purchase
 
$
14,471

 
$
16,903

Derivatives not designated as hedging instruments:
 

 

Purchase
 
$
5,849

 
$
1,043

Sell
 
$
7,895

 
$
4,925

The locations and fair value amounts of the Company’s derivative instruments reported in its Condensed Consolidated Balance Sheets are as follows (in thousands):
 
 
 
 
Asset Derivatives
 
 
 
Derivative Liabilities
 
 
Balance Sheet Location
 
July 3, 2015
 
December 31, 2014
 
Balance Sheet Location
 
July 3, 2015
 
December 31, 2014
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Prepaid expenses and other current assets
 
$
433

 
$
329

 
Accrued Liabilities
 
$

 
$

 
 
 
 
$
433

 
$
329

 
 
 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Prepaid expenses and other current assets
 
$
249

 
$
12

 
Accrued Liabilities
 
$
81

 
$
7

 
 
 
 
$
249

 
$
12

 
 
 
$
81

 
$
7

Total derivatives
 
 
 
$
682

 
$
341

 
 
 
$
81

 
$
7

Offsetting of Derivative Assets and Liabilities
The Company recognizes all derivative instruments on a gross basis in the Condensed Consolidated Balance Sheets. However, the arrangements with its counterparties allows for net settlement, which are designed to reduce credit risk by permitting net settlement with the same counterparty. To further limit credit risk, the Company also enters into cash collateral security arrangements with the same counterparty. As of July 3, 2015, information related to the offsetting arrangements was as follows (in thousands):

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Gross Amounts of Derivatives Not Offset in the Condensed Consolidated Balance Sheets
 
 
 
 
Gross Amounts of Derivatives
 
Gross Amounts of Derivatives Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts of Derivatives Presented in the Condensed Consolidated Balance Sheets
 
Financial Instrument
 
Cash Collateral Pledged
 
Net Amount
Derivative Assets
 
$
682

 

 
$
682

 
$
(74
)
 

 
$
608

Derivative Liabilities
 
$
81

 

 
$
81

 
$
(74
)
 

 
$
7

As of December 31, 2014, there was no potential effect of rights of offset associated with the outstanding foreign currency forward contracts that would result in a net derivative asset or net derivative liability.


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NOTE 6: 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.
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 six months ended July 3, 2015, there were no nonrecurring fair value measurements of assets and liabilities subsequent to initial recognition.

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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 July 3, 2015
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
25,956

 
$

 
$

 
$
25,956

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

 
8,872

 

 
8,872

Corporate bonds

 
20,162

 

 
20,162

Prepaids and other current assets
 
 
 
 
 
 
 
Derivative assets

 
682

 

 
682

Other assets
 
 
 
 
 
 
 
Long-term investment
3,574

 

 

 
3,574

   Total assets measured and recorded at fair value
$
29,530

 
$
29,716

 
$

 
$
59,246

Accrued liabilities
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
81

 
$

 
$
81

   Total liabilities measured and recorded at fair value
$

 
$
81

 
$

 
$
81

 
Level 1
 
Level 2
 
Level 3
 
Total
As of December 31, 2014
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
23,121

 
$

 
$

 
$
23,121

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

 
13,961

 

 
13,961

Corporate bonds

 
17,886

 

 
17,886

Prepaids and other current assets
 
 
 
 
 
 
 
Derivative assets

 
341

 

 
341

Other assets
 
 
 
 
 
 
 
Long-term investment
2,606

 

 

 
2,606

Total assets measured and recorded at fair value
$
25,727

 
$
32,188

 
$

 
$
57,915

Accrued liabilities
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
7

 
$

 
$
7

Total liabilities measured and recorded at fair value
$

 
$
7

 
$

 
$
7


NOTE 7: BALANCE SHEET COMPONENTS
The following tables provide details of selected balance sheet components (in thousands):
 
July 3, 2015
 
December 31, 2014
Accounts receivable, net:
 
 
 
Accounts receivable
$
80,096

 
$
81,201

Less: allowances for doubtful accounts, returns and discounts
(4,017
)
 
(7,057
)
Total
$
76,079

 
$
74,144



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Prepaid expenses and other current assets:
 
 
 
Prepaid inventories to contract manufacturer(1)
$
14,200

 
$

Prepaid software license to Vislink(2)

 
1,233

Other Prepayments
10,061

 
9,713

Deferred cost of revenue
2,346

 
2,524

Income tax receivable
998

 
2,316

Other
1,255

 
1,753

 
$
28,860

 
$
17,539


(1) During the first quarter of 2015, the Company made a $14.2 million advance payment for future inventory requirements to a supplier in order to secure more favorable pricing. The Company anticipates that this amount will begin to offset in the fourth quarter of 2015 through the first quarter of 2016 against the accounts payable owed to this supplier.
(2) The prepaid inventories were related to prepayment for software licenses made to Vislink (see Note 4, “Investments in Other Equity Securities” for additional information on Vislink).
Inventories:
 
 
 
Raw materials
$
1,601

 
$
1,422

Work-in-process
1,325

 
1,255

Finished goods
29,573

 
30,070

Total
$
32,499

 
$
32,747

Property and equipment, net:
 
 
 
Furniture and fixtures
$
7,708

 
$
7,691

Machinery and equipment
118,476

 
116,031

Leasehold improvements
10,176

 
8,140

Property and equipment, gross
136,360

 
131,862

Less: accumulated depreciation and amortization
(109,273
)
 
(104,641
)
Total
$
27,087

 
$
27,221


NOTE 8: GOODWILL AND IDENTIFIED INTANGIBLE ASSETS
Goodwill
The following table presents goodwill by reportable segments (in thousands):
 
Video
 
Cable Edge
 
Total
As of December 31, 2014
$
136,975

 
$
60,909

 
$
197,884

Foreign currency translation adjustment
13

 
6

 
19

As of July 3, 2015
$
136,988

 
$
60,915

 
$
197,903

Identified Intangible Assets
The following is a summary of identifiable intangible assets (in thousands):

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July 3, 2015
 
December 31, 2014
 
Range of Useful Lives
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Identifiable intangibles:
 
 
 
 
 
 
 
 
 
 
 
 
 
Developed core technology
4-6 years
 
$
136,145

 
$
(135,973
)
 
$
172

 
$
136,145

 
$
(135,426
)
 
$
719

Customer relationships/contracts
5-6 years
 
67,098

 
(61,218
)
 
5,880

 
67,098

 
(58,784
)
 
8,314

Maintenance agreements and related relationships
6-7 years
 
7,100

 
(5,992
)
 
1,108

 
7,100

 
(5,534
)
 
1,566

Total identifiable intangibles
 
 
$
210,343

 
$
(203,183
)
 
$
7,160

 
$
210,343

 
$
(199,744
)
 
$
10,599

Amortization expense for the identifiable purchased intangible assets for the three and six months ended July 3, 2015 and June 27, 2014 was allocated as follows (in thousands):
 
Three months ended
 
Six months ended
 
July 3,
2015
 
June 27,
2014
 
July 3,
2015
 
June 27,
2014
Included in cost of revenue
$
86

 
$
4,482

 
$
547

 
$
9,198

Included in operating expenses
1,446

 
1,718

 
2,892

 
3,668

Total amortization expense
$
1,532

 
$
6,200

 
$
3,439

 
$
12,866

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,
 
 
 
 
 
2015 (remaining 6 months)
$
172

 
$
2,892

 
$
3,064

2016

 
4,096

 
4,096

Total future amortization expense
$
172

 
$
6,988

 
$
7,160


NOTE 9: RESTRUCTURING AND RELATED CHARGES
The Company implemented several restructuring plans in the past few years. The goal of these plans was to bring operational expenses to appropriate levels relative to its net revenues, while simultaneously implementing extensive company-wide expense control programs.
The Company accounts for its restructuring plans under the authoritative guidance for exit or disposal activities. The restructuring and asset impairment charges are included in “Product cost of revenue” and “Operating expenses-restructuring and related charges” in the Condensed Consolidated Statements of Operations. The following table summarizes the restructuring and related charges (in thousands):
 
Three months ended
 
Six months ended
 
July 3,
2015
 
June 27,
2014
 
July 3,
2015
 
June 27,
2014
Restructuring and related charges in:
 
 
 
 
 
 
 
Product cost of revenue
$

 
$

 
$

 
$
79

Operating expenses-Restructuring and related charges
185

 
284

 
229

 
433

Total restructuring and related charges
$
185

 
$
284

 
$
229

 
$
512

Harmonic 2015 Restructuring
In the fourth quarter of 2014, the Company approved a new restructuring plan (the “Harmonic 2015 Restructuring Plan”) to reduce 2015 operating costs and the planned restructuring activities involve headcount reduction, exiting certain operating

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facilities and disposing of excess assets. The Company started the restructuring activities pursuant to this plan in the fourth quarter of 2014 and expects to complete its actions by end of 2015. The Company recorded $2.2 million of restructuring and asset impairment charges under this plan in the fourth quarter of 2014 consisting of a $1.1 million fixed asset impairment charge related to software development costs incurred for a discontinued information technology (“IT”) project, $0.6 million of severance and benefits related to the termination of 19 employees worldwide, $0.3 million of excess material costs associated with the termination of a research and development project and $0.1 million of other charges. The Company recorded $185,000 and $229,000 of restructuring charges under this plan, in the three and six months ended July 3, 2015, respectively. Such restructuring charges consisted of severance and benefits related to the termination of five employees.

The following table summarizes the activity in the Harmonic 2015 restructuring accrual during the six months ended July 3, 2015 (in thousands):
 
 
Severance and benefits
 
Other charges
 
Total
Balance at December 31, 2014
 
$
305

 
$
17

 
$
322

Restructuring charges
 
246

 

 
246

Adjustments to restructuring provisions
 
(11
)
 
(6
)
 
(17
)
Cash payments
 
(447
)
 
(11
)
 
(458
)
Balance at July 3, 2015
 
$
93

 
$

 
$
93

Harmonic 2013 Restructuring
The Company implemented a series of restructuring plans in 2013 to reduce costs and improve efficiencies. These restructuring plans extended to actions taken through the third quarter of fiscal 2014. As a result, the Company recorded restructuring charges of $2.2 million and $0.9 million in fiscal 2013 and fiscal 2014, respectively. The restructuring charges in the three and six months ended June 27, 2014 were $284,000 and $512,000, respectively, under these plans, consisting of severance and benefits related to the termination of 20 employees worldwide and costs associated with vacating from an excess facility in France. For a complete discussion of the restructuring actions related to the 2013 restructuring plans, see Note 11, “Restructuring and Asset Impairment Charges” of Notes to Consolidated Financial Statements in the 2014 Form 10-K.

NOTE 10: CREDIT FACILITIES
On December 22, 2014, the Company entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”) for a $20.0 million revolving credit facility, with a sublimit of $10.0 million for the issuance of commercial and standby letters of credit on the Company’s behalf. Revolving loans under the Credit Agreement may be borrowed, repaid and re-borrowed until December 22, 2015, at which time all amounts borrowed must be repaid. There were no borrowings under the Credit Agreement during the six months ended July 3, 2015. As of July 3, 2015, the amount available for borrowing under this facility, net of $0.5 million of standby letters of credit, was $19.5 million.

The revolving loan bears interest, at the Company’s election, at either (a) an adjusted LIBOR rate for a term of one, two or three months, plus an applicable margin of 1.75% or (b) the prime rate plus an applicable margin of -1.30%, provided that such rate shall not be less than the one month adjusted LIBOR rate, plus 2.5%. In the event that the balance of the Company’s accounts held with JPMorgan falls below $30.0 million in aggregate total worldwide consolidated cash and short-term investments (the “Consolidated Cash Threshold”) for five consecutive business days, the Company is obligated to pay a one-time facility fee of $50,000 to JPMorgan. The Company is also obligated to pay JPMorgan a non-usage fee equal to the average daily unused portion of the credit facility multiplied by a per annum rate of 0.25% if, during any calendar month, the balance in the Company’s accounts held with JPMorgan falls below the Consolidated Cash Threshold for five consecutive business days.

The Company will pay a letter of credit fee with respect to any letters of credit issued under the Credit Agreement in an amount equal to (a) in the case of a standby letter of credit, the maximum amount available to be drawn under such standby letter of credit multiplied by a per annum rate of 1.75% and (b) in the case of a commercial letter of credit, the greater of $100 or 0.75% of the original maximum available amount of such commercial letter of credit. The Company will also pay other customary transaction fees and costs in connection with the issuance of letters of credit under the Credit Agreement.

Obligations under the Credit Agreement are secured only by a pledge of 66 2/3% of the Company’s equity interests in its foreign subsidiary, Harmonic International AG. Additionally, to the extent that the Company in the future forms any direct or

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indirect, domestic, material subsidiaries, those subsidiaries will be required to provide a guaranty of the Company’s obligations under the Credit Agreement.

The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit the Company’s and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments or pay dividends, in each case subject to certain exceptions. The Company is also required to maintain, on a consolidated basis, total cash and marketable securities of at least $35.0 million and EBITDA of at least $20.0 million determined on a rolling four-quarter basis. As of July 3, 2015, the Company was in compliance with the covenants under the Credit Agreement.

NOTE 11: 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 14, “Employee Benefit Plans” of Notes to Consolidated Financial Statements in the 2014 Form 10-K.
Stock Options and Restricted Stock Units
The following table summarizes the Company’s stock option and RSU unit activity during the six months ended July 3, 2015 (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, 2014
7,480

 
7,255

 
$
6.65

 
2,241

 
$
6.40

Authorized

 

 

 

 

Granted
(3,372
)
 
1,154

 
7.58

 
1,479

 
7.55

Options exercised

 
(724
)
 
5.34

 

 

Shares released

 

 

 
(1,173
)
 
6.50

Forfeited or cancelled
1,702

 
(1,533
)
 
8.05

 
(115
)
 
6.45

Balance at July 3, 2015
5,810

 
6,152

 
$
6.63

 
2,432

 
$
7.11

The following table summarizes information about stock options outstanding as of July 3, 2015 (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
5,810

 
$
6.61

 
4.3
 
$
3,336

Exercisable
3,456

 
6.46

 
3.3
 
2,706

The intrinsic value of options vested and expected to vest and exercisable as of July 3, 2015 is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of July 3, 2015. 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 intrinsic value of options exercised during the three and six months ended July 3, 2015 was $0.3 million and 1.6 million, respectively. The intrinsic value of options exercised during the three and six months ended June 27, 2014 was $0.2 million and $0.4 million, respectively.
The following table summarizes information about RSUs outstanding as of July 3, 2015 (in thousands, except per share amounts):

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Number of
Shares
Underlying
Restricted
Stock
Units
 
Weighted
Average
Remaining
Vesting
Period
(Years)
 
Aggregate
Fair
Value
Vested and expected to vest
2,204

 
0.9
 
$
14,790

The fair value of RSUs vested and expected to vest as of July 3, 2015 is calculated based on the fair value of the Company’s common stock as of July 3, 2015.
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 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.
401(k) Plan
The Company 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. The Company 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. The contributions for the six months ended July 3, 2015 and June 27, 2014 were $242,000 and $277,000, respectively.

NOTE 12: STOCK-BASED COMPENSATION
Stock-based compensation expense consists primarily of expenses for stock options and RSUs granted to employees and shares issued under the ESPP. The following table summarizes stock-based compensation expense (in thousands):
 
Three months ended
 
Six months ended
 
July 3,
2015
 
June 27,
2014
 
July 3,
2015
 
June 27,
2014
Stock-based compensation in:
 
 
 
 
 
 
 
Cost of revenue
$
422

 
$
623

 
$
950

 
$
1,139

Research and development expense
1,027

 
1,269

 
2,175

 
2,370

Selling, general and administrative expense
2,435

 
2,669

 
4,893

 
4,859

Total stock-based compensation in operating expense
3,462

 
3,938

 
7,068

 
7,229

Total stock-based compensation
$
3,884

 
$
4,561

 
$
8,018

 
$
8,368

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.
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:

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Three months ended
 
Six months ended
 
July 3,
2015
 
June 27,
2014
 
July 3,
2015
 
June 27,
2014
Expected term (years)
4.60

 
4.70

 
4.70

 
4.70

Volatility
37
%
 
39
%
 
38
%
 
40
%
Risk-free interest rate
1.5
%
 
1.7
%
 
1.5
%
 
1.7
%
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 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 weighted-average fair value per share of options granted was $2.44 and $2.70 for the three months ended July 3, 2015 and June 27, 2014, respectively. The weighted-average fair value per share of options granted was $2.63 and $2.35 for the six months ended July 3, 2015 and June 27, 2014, respectively.

The fair value of all stock options vested during the three months ended July 3, 2015 and June 27, 2014 were $0.6 million and $0.7 million, respectively. The fair value of all stock options vested during the six months ended July 3, 2015 and June 27, 2014 were $1.9 million and $2.0 million, respectively.

The total realized tax benefit attributable to stock options exercised in jurisdictions where this expense is deductible for tax purposes was $120,000 for the three months ended April 3, 2015 and $22,000 for the six months ended July 3, 2015. The total realized tax benefit attributable to stock options exercised during the three and six months ended June 27, 2014 were $119,000 and $304,000, respectively.
 
Restricted Stock Units
The aggregate fair value of all RSUs issued during the three months ended July 3, 2015 and June 27, 2014 were $1.6 million and $2.0 million, respectively. The aggregate fair value of all RSUs issued during the six months ended July 3, 2015 and June 27, 2014 were $7.6 million and $7.4 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. The weighted average fair value of the Company’s ESPP shares at purchase dates was estimated using the following weighted average assumptions during the six months ended July 3, 2015 and June 27, 2014:
 
Purchase Period Ending
 
June 30,
2015
 
June 30,
2014
Expected term (years)
0.50

 
0.50

Volatility
35
%
 
28
%
Risk-free interest rate
0.1
%
 
0.1
%
Expected dividends
0.0
%
 
0.0
%
Estimated weighted average fair value per share at purchase date
$1.75
 
$1.70
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

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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.
Unrecognized Stock-Based Compensation
As of July 3, 2015, the Company had approximately $17.8 million of unrecognized stock-based compensation expense related to the unvested portion of its stock options and RSUs that is expected to be recognized over a weighted-average period of approximately 2.0 years.

NOTE 13: INCOME TAXES
The Company reported the following operating results for the periods presented (in thousands):
 
Three months ended
 
Six months ended
 
July 3,
2015
 
June 27,
2014
 
July 3,
2015
 
June 27,
2014
Loss before income taxes
$
(267
)
 
$
(8,709
)
 
$
(3,210
)
 
$
(15,842
)
Provision for income taxes
727

 
28,353

 
441

 
26,630

Effective income tax rate
(272.3
)%
 
(325.6
)%

(13.7
)%

(168.1
)%
The Company operates in multiple jurisdictions and its profits are taxed pursuant to the tax laws of these jurisdictions. The Company’s effective income tax rate may be affected by changes in, or interpretations of tax laws and tax agreements in any given jurisdiction, utilization of net operating loss and tax credit carry forwards, changes in geographical mix of income and expense, and changes in management’s assessment of matters such as the ability to realize deferred tax assets, as well as recognition of uncertain tax benefits, the effects of statute of limitation, or settlement with tax authorities.
The Company’s effective income tax rate of (13.7)% for the six months ended July 3, 2015 differed from the U.S. federal statutory rate of 35% primarily due to a difference in foreign tax rates. U.S. losses generated for the six months ended July 3, 2015 received no tax benefit as a result of a full valuation allowance against all of our U.S. deferred tax assets and the impairment of the VJU investment (see Note 4, "Investments in Other Equity Securities") received no tax benefit.
The Company’s effective income tax rate of (168.1)% for the six months ended June 27, 2014 differed from the U.S. federal statutory rate of 35%, primarily due to a $24.5 million increase in the valuation allowance against both U.S. federal and state deferred tax assets. The increased valuation allowance was a result of a history of operating losses in recent years, including the lower than expected revenue and profitability in the second quarter of 2014, which has led to uncertainty with respect to the Company’s ability to realize certain of its net deferred tax assets.
The Company files U.S. federal and 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 2011 through 2014 tax years generally remain subject to examination by U.S. federal and most state tax authorities. In significant foreign jurisdictions, the 2006 through 2014 tax years generally remain subject to examination by their respective tax authorities. In July 2015, the Company was notified that the U.S. Internal Revenue Service will be auditing its 2012 tax year. In addition, a subsidiary of the Company is under audit for the 2012 and 2013 tax years, which commenced in the first quarter of 2015, by the Israel tax authority. If, upon the conclusion of these audits, the ultimate determination of taxes owed in the United States or Israel is for an amount in excess of the tax provision the Company has recorded in the applicable period, the Company’s overall tax expense, effective tax rate, operating results and cash flow could be materially and adversely impacted in the period of adjustment.
The Company’s operations in Switzerland are subject to a reduced tax rate under the Switzerland tax holiday which requires various thresholds of investment and employment in Switzerland. The Company has met these various thresholds and the Switzerland tax holiday is effective through the end of 2018.
As of July 3, 2015, the total amount of gross unrecognized tax benefits, including interest and penalties, was approximately $16.2 million, which if recognized, would affect the Company’s effective tax rate. The Company recognizes interest and penalties related to unrecognized tax positions in income tax expense. The Company had $0.6 million of gross interest and penalties accrued as of July 3, 2015. The Company will continue to review its tax positions and provide for, or reverse, unrecognized tax benefits as issues arise. As of July 3, 2015, the Company anticipates that the balance of gross unrecognized tax benefits will decrease up to approximately $0.8 million due to expiration of the applicable statues of limitations over the next 12 months.


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NOTE 14: 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
 
Six months ended
 
July 3,
2015
 
June 27,
2014
 
July 3,
2015
 
June 27,
2014
Numerator:
 
 
 
 
 
 
 
Net loss
$
(994
)
 
$
(37,062
)
 
$
(3,651
)
 
$
(42,472
)
Denominator:
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
 
 
 
 
 
 
 
Basic and diluted
88,426

 
93,966

 
88,541

 
95,899

Net loss per share:
 
 
 
 
 
 
 
Basic and diluted
$
(0.01
)
 
$
(0.39
)
 
$
(0.04
)
 
$
(0.44
)
The following table sets forth the potentially dilutive shares from stock options, RSUs and the ESPP, for the periods presented, which were excluded from the net loss per share computations because their effect was anti-dilutive (in thousands):
 
Three months ended
 
Six months ended
 
July 3,
2015
 
June 27,
2014
 
July 3,
2015
 
June 27,
2014
Potentially dilutive equity awards outstanding
9,751

 
11,696

 
9,696

 
11,384


NOTE 15: SEGMENT INFORMATION
Operating segments are defined as components of an enterprise that engage in business activities for which separate financial information is available and evaluated by the Company’s Chief Operating Decision Maker ( “CODM”), which for Harmonic is its Chief Executive Officer, in deciding how to allocate resources and assess performance. Prior to the fourth quarter of 2014, the Company operated its business in one reportable segment. In connection with the 2015 annual planning process, the Company changed its operating segments to align with how the CODM expected to evaluate the financial information used to allocate resources and assess performance of the Company. The new reporting structure consists of two operating segments: Video and Cable Edge. As a result, the segment information presented has been conformed to the new operating segments for all prior periods.
The new operating segments were determined based on the nature of the products offered. The Video segment sells video processing and production and playout solutions and services worldwide to broadcast and media companies, streaming new media companies, cable operators, and satellite and telecommunications (telco) Pay-TV service providers. The Cable Edge segment sells cable edge solutions and related services to cable operators globally.
The Company does not allocate amortization of intangibles, stock-based compensation, restructuring and asset impairment charges, and certain other non-recurring charges to the operating income for each segment because management does not include this information in the measurement of the performance of the operating segments. A measure of assets by segment is not applicable as segment assets are not included in the discrete financial information provided to the CODM.
The following tables provide summary financial information by reportable segment (in thousands):


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Three months ended
 
Six months ended
 
July 3, 2015
 
June 27, 2014
 
July 3, 2015
 
June 27, 2014
Net revenue:


 


 


 


  Video
$
78,207

 
$
77,311

 
$
147,489

 
$
158,463

  Cable Edge
24,896

 
32,278

 
59,630

 
59,158

Total consolidated net revenue
$
103,103

 
$
109,589

 
$
207,119

 
$
217,621

 


 


 


 


Operating income (loss):


 


 


 


  Video
$
4,901

 
$
382

 
$
4,811

 
$
2,817

  Cable Edge
357

 
2,014

 
6,545

 
3,058

Total segment operating income
5,258

 
2,396

 
11,356

 
5,875

Unallocated corporate expenses*
(185
)
 
(284
)
 
(229
)
 
(512
)
Stock-based compensation
(3,884
)
 
(4,561
)
 
(8,018
)
 
(8,368
)
Amortization of intangibles
(1,532
)
 
(6,200
)
 
(3,439
)
 
(12,866
)
Loss from operations
(343
)
 
(8,649
)
 
(330
)
 
(15,871
)
Non-operating income (expense)
76

 
(60
)
 
(2,880
)
 
29

Loss before income taxes
$
(267
)
 
$
(8,709
)
 
$
(3,210
)
 
$
(15,842
)

*Unallocated corporate expenses include certain corporate-level operating expenses and charges such as restructuring and related charges.

NOTE 16: COMMITMENTS AND CONTINGENCIES
Leases
Future minimum lease payments under non-cancelable operating leases as of July 3, 2015, after giving effect to $50,000 of future sublease income, are as follows (in thousands):
Years ending December 31,
 
2015 (remaining 6 months)
$
4,479

2016
9,112

2017
8,517

2018
8,263

2019
8,070

Thereafter
6,226

Total
$
44,667

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
 
Six months ended
 
July 3,
2015
 
June 27,
2014
 
July 3,
2015
 
June 27,
2014
Balance at beginning of period
$
4,091

 
$
3,659

 
$
4,242

 
$
3,606

Accrual for current period warranties
1,438

 
1,606

 
3,033

 
3,355

Warranty costs incurred
(1,362
)
 
(1,733
)
 
(3,108
)
 
(3,429
)
Balance at end of period
$
4,167

 
$
3,532

 
$
4,167

 
$
3,532


23

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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 and services based upon criteria defined by the Company. The Company had approximately $23.9 million of non-cancelable purchase commitments with contract manufacturers and other suppliers as of July 3, 2015.
Standby Letters of Credit
As of July 3, 2015, 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 $0.5 million as of July 3, 2015.
Indemnification
Harmonic is obligated to indemnify its officers and the members of its Board of Directors (the “Board”) 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 July 3, 2015.
Guarantees
The Company has $0.4 million of guarantees in Israel as of July 3, 2015, with the majority relating to rent obligations for buildings used by its Israeli subsidiaries.
Legal proceedings
From time to time, the Company is involved in lawsuits as well as subject to various legal proceedings, claims, threats of litigation, and investigations in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment, and other matters. The Company assesses potential liabilities in connection with each lawsuit and threatened lawsuits and accrues an estimated loss for these loss contingencies if both of the following conditions are met: information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. While certain matters to which the Company is a party specify the damages claimed, such claims may not represent reasonably possible losses. Given the inherent uncertainties of litigation, the ultimate outcome of these matters cannot be predicted at this time, nor can the amount of possible loss or range of loss, if any, be reasonably estimated.

In October 2011, Avid Technology, Inc. (“Avid”) filed a complaint in the United States District Court for the District of Delaware alleging that the Company’s Media Grid product infringes two patents held by Avid. A jury trial on this complaint commenced on January 23, 2014 and, on February 4, 2014, the jury returned a unanimous verdict in favor of the Company, rejecting Avid’s infringement allegations in their entirety.  On May 23, 2014, Avid filed a post-trial motion asking the court to set aside the jury’s verdict, and the judge issued an order on December 17, 2014, denying the motion. On January 5, 2015, Avid filed an appeal with respect to the jury’s verdict with the Federal Circuit, which was docketed on January 9, 2015, as Case No. 2015-1246. Avid filed its opening brief with respect to this appeal on March 24, 2015, the Company filed its response brief on May 7, 2015, and Avid filed its reply brief on June 16, 2015.  An order has not yet been issued regarding the scheduling of oral arguments.

In June 2012, Avid served a subsequent complaint in the United States District Court for the District of Delaware alleging that the Company’s Spectrum product infringes one patent held by Avid. The complaint seeks injunctive relief and unspecified damages. In September 2013, the U.S. Patent Trial and Appeal Board (“PTAB”) authorized an inter partes review to be instituted as to claims 1-16 of the patent asserted in this second complaint. A hearing before the PTAB was conducted on May 20, 2014.  On July 10, 2014, the PTAB issued a decision finding claims 1 - 10 invalid and claims 11 - 16 not invalid.  The Company filed an appeal with respect to the PTAB’s decision on claims 11 - 16 on September 11, 2014. The appeal was docketed with the Federal Circuit on October 22, 2014, as Case No. 2015-1072, and the Company filed its opening brief with respect to this appeal on January 29, 2015. Avid and PTAB each filed a response brief on April 27, 2015, and the Company filed a reply brief on May 28, 2015.  An order has not yet been issued regarding the scheduling of oral arguments.

The Company is unable to predict the outcome of these lawsuits and therefore is unable to estimate an amount or range of any reasonably possible losses resulting from them. An unfavorable outcome on any litigation matter could require that the

24

Table of Contents

Company 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 the matters referenced above or other litigation matters could have a material adverse effect on the Company’s business, operating results, financial position and cash flows.

NOTE 17: STOCKHOLDERS’ EQUITY
Accumulated Other Comprehensive Loss (“AOCI”)
The components of accumulated other comprehensive loss, on an after-tax basis where applicable, were as follows (in thousands):
 
Foreign Currency Translation Adjustments
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized Gains (Losses) on Available-for-Sale Investments
 
Total
Balance as of December 31, 2014
$
(1,523
)
 
$
311

 
$
(768
)
 
$
(1,980
)
Other comprehensive income (loss) before reclassifications
(402
)
 
332

 
945

 
875

Amounts reclassified from AOCI

 
(187
)
 

 
(187
)
Benefit from income taxes

 

 
6

 
6

Balance as of July 3, 2015
$
(1,925
)
 
$
456

 
$
183

 
$
(1,286
)
The effects of amounts reclassified from AOCI into the condensed consolidated statement of operations were as follows (in thousands):
 
Three months ended
 
Six months ended
 
July 3, 2015
 
June 27, 2014
 
July 3, 2015
 
June 27, 2014
Gains on cash flow hedges from foreign currency contracts:
 
 
 
 
 
 
 
  Cost of revenue
$
19

 
$

 
$
26

 
$

  Operating expenses
119

 

 
161

 

    Total reclassifications from AOCI
$
138

 
$

 
$
187

 
$

Common Stock Repurchases
On April 24, 2012, the Board approved a stock repurchase program that provided for the repurchase of up to $25 million of our outstanding common stock. During 2013, the Board approved $195 million of increases to the program, increasing the aggregate authorized amount of the program to $220 million. On February 6, 2013, the Board approved a modification to the program that permits the Company to also repurchase its common stock pursuant to a plan that meets the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. On May 14, 2014, the Board approved an additional $80 million increase to the program, resulting in an aggregate authorized purchase of $300 million under the program and the repurchase period was extended through the end of 2016.
As of July 3, 2015, the Company had purchased 38.9 million shares of common stock under this program at a weighted average price of $6.26 per share for an aggregate purchase price of $244.5 million, including $1.0 million of expenses. The remaining authorized amount for stock repurchases under this program was $56.5 million as of July 3, 2015. For additional information, see “Item 2 - Unregistered sales of equity securities and use of proceeds” of this Quarterly Report on Form 10-Q.


25

Table of Contents

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 (this “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:
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;
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;
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 39 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 that enable our customers to efficiently create, prepare and deliver a full range of video and broadband services to consumer devices, including televisions, personal computers, laptops, tablets and smart phones. We operate in two segments, Video and Cable Edge. Our Video business sells video processing and production and playout solutions and services worldwide to cable operators and satellite and telecommunications (telco) Pay-TV service providers, which we refer to collectively as “service providers,” as well as to broadcast and media companies, including streaming new media companies. Our Cable Edge business sells cable edge solutions and related services, primarily to cable operators globally.


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Historically, our revenue has been dependent upon capital spending in the cable, satellite, telco, broadcast and media industries, including streaming media. Our customers’ capital spending patterns are dependent on a variety of factors, including but not limited to: economic conditions in the U.S. and international markets; access to financing; annual budget cycles of each of the industries we serve; impact of industry consolidations; and customers suspending or reducing capital spending in anticipation of new products or new standards, new industry trends and/or technology shifts. If our product portfolio and product development plans do not position us well to capture an increased portion of the capital spending in the markets on which we compete, 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, content providers, resellers and system integrators, managed services providers and software developers; adapt our products for new applications; take orders at prices resulting in lower margins; and build internal expertise to handle the particular operational, payment, financing and/or contractual demands of our customers, which could result in higher operating costs for us. 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.

A majority of our revenue has been derived from relatively few customers, due in part to the consolidation of our service provider customers. During each of the three and six months ended July 3, 2015, sales to our ten largest customers accounted for approximately 38% of our net revenue, compared to 40% for the same periods in 2014. 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 six months ended July 3, 2015, revenue from Comcast accounted for approximately 11% and 15% of our net revenue, respectively, compared with 19% of our net revenue in each of the corresponding three and six months periods in 2014. The loss of Comcast or any other significant customer, any material reduction in orders by Comcast or any significant customer, or our failure to qualify our new products with a significant customer could materially and adversely affect our operating results, financial condition and cash flows.
Our net revenue decreased $6.5 million, or 6%, in the three months ended July 3, 2015, compared to the corresponding period in 2014, primarily due to a $7.4 million decrease in our Cable Edge segment revenue, offset in part by a $0.9 million increase in our Video segment revenue. The decrease in Cable Edge segment revenue was primarily due to decreased capital spending as some of our customers began to absorb the network capacity they recently purchased from us, as well as slower investment levels due to industry consolidation. The decrease in Cable Edge segment revenue spanned all geographic regions, but was most notable in North America. The increase in our Video segment revenue was primarily in the Americas region, led by a rebound from our service provider and media customers, an accelerating adoption of next-generation products and architectures and higher service revenue. The increase in Video segment revenue in the Americas region was offset in part by softer demand from our international customers as the strengthening of the U.S. dollar continues to impact their purchasing power.
Our net revenue decreased $10.5 million, or 5%, in the six months ended July 3, 2015, compared to the corresponding period in 2014, primarily due to a $11.0 million decrease in our Video segment revenue, offset in part by a $0.5 million increase in our Cable Edge segment revenue. The decrease in our Video segment revenue was primarily due to our customers delaying their investment spending in anticipation of the adoption of next generation technologies and architectures and softness in demand trends in Europe, the Middle East and Africa (“EMEA”) and Asia-Pacific (“APAC”) which were exacerbated by the continued strengthening of the U.S. dollar as over half our Video segment revenue is generated from international customers, offset in part by increased revenue derived from media customers and increased service revenue in the Americas. The increase in our Cable Edge segment revenue primarily occurred in the first quarter of 2015 primarily due to increased demand for our NSG Pro platform, however, demand for our NSG Pro Platform declined in the second quarter of 2015 as some customers began to absorb the network capacity they recently purchased from us, as well as due to industry consolidation.
The delay by our customers in purchasing new solutions in anticipation of the adoption of next generation technologies and architectures, including the continued delays by new and existing broadcast and media company and service provider customers, first began in 2014, although we saw some increased adoption of our new video product technologies in the second quarter of 2015. We believe we are still in the early stages of adoption and delays could continue in varying degrees for the next several quarters. Meanwhile, our customers’ consolidation activities are ongoing and may further contribute to investment uncertainties in the coming months.
As a result of the decrease in our net revenue and the continued uncertainty regarding the timing of our customers’ investment decisions, we implemented restructuring plans to bring our operating expenses more in line with net revenues, while simultaneously implementing extensive, Company-wide expense control programs (See Note 9, “Restructuring and Related Charges” of the Notes to our Condensed Consolidated Financial Statements for additional information).
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

27

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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.

As part of our business strategy, (1) from time to time we have acquired or invested in, and continue to consider acquiring or investing in, businesses, technologies, assets and product lines that we believe complement or may enhance or 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 March 2013, we completed the sale of our cable access HFC business to Aurora Networks, Inc. for $46 million, and in 2014, we made strategic minority investments in three companies (See Note 4, “Investments in Other Equity Securities,” of the notes to our Condensed Consolidated Financial Statements for additional information).

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
There have been no material changes to our critical accounting policies, judgments and estimates, during the six months ended July 3, 2015, from those disclosed in our 2014 Annual Report on Form 10-K (the “2014 Form 10-K”).

RESULTS OF OPERATIONS
Net Revenue
Prior to the fourth quarter of 2014, we operated our business in one reportable segment. In connection with our 2015 annual planning process, we changed our operating segments to align with how our chief operating decision maker, which for us is our Chief Executive Officer, expected to evaluate the financial information used to allocate resources and assess our performance. The new reporting structure consists of two operating segments: Video and Cable Edge. As a result, the segment information presented has been conformed to the new operating segments for all prior periods.
The new operating segments were determined based on the nature of the products offered. The Video segment sells video processing and production and playout solutions and services worldwide to service providers as well as to broadcast and media companies, including streaming new media companies. The Cable Edge segment sells cable edge solutions and related services to cable operators globally.
The following table presents the breakdown of revenue by segment for the three and six months ended July 3, 2015 and June 27, 2014 (in thousands, except percentages):
 
Three months ended
 
 
 
 
Six months ended
 
 
 
 
July 3, 2015
 
June 27, 2014
 
Q2 FY15 vs Q2 FY14
 
July 3, 2015
 
June 27, 2014
 
Q2 FY15 YTD vs Q2 FY14 YTD
Segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
Video
$
78,207

 
$
77,311

 
$
896

1
 %
 
$
147,489

 
$
158,463

 
$
(10,974
)
(7
)%
Cable Edge
24,896

 
32,278

 
(7,382
)
(23
)%
 
59,630

 
59,158

 
472

1
 %
Total
$
103,103

 
$
109,589

 
$
(6,486
)
(6
)%
 
$
207,119

 
$
217,621

 
$
(10,502
)
(5
)%
Segment revenue as a % of total net revenue:
 
 
 
 
 
 
 
 
 
 
Video
76
%
 
71
%
 
 
 
 
71
%
 
73
%
 
 
 
Cable Edge
24
%
 
29
%
 
 
 
 
29
%
 
27
%
 
 
 
The following table presents the breakdown of revenue by geographical region for the three and six months ended July 3, 2015 and June 27, 2014 (in thousands, except percentages):

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Table of Contents

 
Three months ended
 
 
 
 
Six months ended
 
 
 
 
July 3, 2015
 
June 27, 2014
 
Q2 FY15 vs Q2 FY14
 
July 3, 2015
 
June 27, 2014
 
Q2 FY15 YTD vs Q2 FY14 YTD
Geography:
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
60,342

 
$
60,066

 
$
276

 %
 
$
120,860

 
$
124,952

 
$
(4,092
)
(3
)%
EMEA
27,360

 
31,519

 
(4,159
)
(13
)%
 
52,033

 
55,706

 
(3,673
)
(7
)%
APAC
15,401

 
18,004

 
(2,603
)
(14
)%
 
34,226

 
36,963

 
(2,737
)
(7
)%