10-K 1 elx0629201410k.htm 10-K ELX 06.29.2014 10K


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 29, 2014
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to
                    
Commission File No. 001-31353
EMULEX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
51-0300558
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
3333 Susan Street
Costa Mesa, California
 
92626
(Address of principal executive offices)
 
(Zip Code)
(714) 662-5600
(Registrant’s telephone number, including area code)
 Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, Par Value $0.10 Per Share
Preferred Stock Purchase Rights
 
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ        No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨        No  þ
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  þ        No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ        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  x
 
Accelerated filer  o
 
Non-accelerated filer  o
 
Smaller reporting company  o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨        No  þ
The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price of the registrant’s common stock on the New York Stock Exchange on December 27, 2013, which was the last trading day of the second quarter of fiscal 2014, of $6.95 was $552,138,677.




As of August 20, 2014, the registrant had 70,963,390 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement relating to the registrant’s 2014 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A within 120 days after the Registrant's fiscal year end of June 29, 2014, are incorporated by reference into Part III of this Annual Report on Form 10-K.

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CAUTIONARY STATEMENT RELATED TO FORWARD LOOKING STATEMENTS
Certain statements contained in this Form 10-K may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We may also make forward-looking statements in other reports filed with the Securities and Exchange Commission, in materials delivered to stockholders and in press releases. In addition, our representatives may from time to time make oral forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Words such as “anticipates,” “in the opinion,” “believes,” “intends,” “expects,” “may,” “will,” “should,” “could,” “plans,” “forecasts,” “estimates,” “predicts,” “projects,” “potential,” “continue,” and similar expressions may be intended to identify forward-looking statements.
Actual future results could differ materially from those described in the forward-looking statements as a result of a variety of factors, including those discussed in the section entitled “Risk Factors” in Part I, Item 1A, “Legal Proceedings” in Part I, Item 3, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K included elsewhere herein. We expressly disclaim any obligation or undertaking to release publicly any updates or changes to these forward-looking statements that may be made to reflect any future events or circumstances. We wish to caution readers that a number of important factors could cause actual results to differ materially from those in the forward-looking statements. These factors include the possibility that our previously announced cost savings initiatives will not be realized on a timely basis. The assumptions on which the cost savings and related capital return goals and expectations are based involve judgments with respect to, among other things, economic, competitive and financial market conditions and the impact of the cost savings initiative on our customers, all of which are difficult or impossible to predict and many of which are beyond the Company’s control. These factors also include the possibility that we may not realize the anticipated benefits from the acquisition of Endace Limited (Endace) on a timely basis or at all, and may be unable to integrate the technology, operations and personnel of Endace into our existing operations in a timely and efficient manner. In addition, intellectual property claims, with or without merit, could result in costly litigation, cause product shipment delays, require us to indemnify customers, or require us to enter into royalty or licensing agreements, which may or may not be available. Furthermore, we have in the past obtained, and may be required in the future to obtain, licenses of technology owned by other parties. We cannot be certain that the necessary licenses will be available or that they will be obtainable on commercially reasonable terms. If we were to fail to obtain such royalty or licensing agreements in a timely manner and on reasonable terms, our business, results of operations and financial condition could be materially adversely affected. Lawsuits present inherent risks, any of which could have a material adverse effect on our business, financial condition, or results of operations. Such potential risks include continuing expenses of litigation, loss of patent rights, monetary damages, injunctions against the sale of products incorporating the technology in question, counterclaims, attorneys’ fees, incremental costs associated with product or component redesigns, liabilities to customers under reimbursement agreements or contractual indemnification provisions, and diversion of management’s attention from other business matters. In addition, the fact that the economy generally, and the network connectivity and visibility market segments specifically, have been in a state of uncertainty makes it difficult to determine if past experience is a good guide to the future and makes it impossible to determine if markets will grow or shrink in the short term. Continued weakness in domestic and worldwide macro-economic conditions, including related disruptions in world credit and equity markets, and the resulting economic uncertainty for our customers, as well as the overall network connectivity and visibility markets, has and could continue to adversely affect our revenues and results of operations. As a result of these uncertainties, we are unable to predict our future results with any accuracy. Other factors affecting these forward-looking statements include but are not limited to the following: faster than anticipated declines in the storage networking market, slower than expected growth of the converged networking market or the failure of our Original Equipment Manufacturer (OEM) customers to successfully incorporate our products into their systems; our dependence on a limited number of customers and the effects of the loss of, decrease in or delays of orders by any such customers, or the failure of such customers to make timely payments; the emergence of new or stronger competitors as a result of consolidation movements in the market; the timing and market acceptance of our products or our OEM customers’ new or enhanced products; costs associated with entry into new areas of the network connectivity and visibility markets; the variability in the level of our backlog and the variable and seasonal procurement patterns of our customers; any inadequacy of our intellectual property protection and the costs of actual or potential third-party claims of infringement and any related indemnity obligations or adverse judgments; the effect of any actual or potential unsolicited offers to acquire us; proxy contests or the activities of activist investors; impairment charges, including but not limited to goodwill and intangible assets; changes in tax rates or legislation; the effects of acquisitions; the effects of terrorist activities, natural disasters, and any resulting disruption in our supply chain or customer purchasing patterns or any other resulting economic or political instability; the highly competitive nature of the markets for our products as well as pricing pressures that may result from such competitive conditions; the effect of rapid migration of customers towards newer, lower cost product platforms; transitions from board or box level to application specific integrated circuit (ASIC) solutions for selected applications; a shift in unit product mix from higher-end to lower-end or mezzanine card products; a faster than anticipated decrease in the average unit selling prices or an increase in the manufactured

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cost of our products; delays in product development; our reliance on third-party suppliers and subcontractors for components and assembly; our ability to attract and retain key technical personnel; our ability to benefit from our research and development activities as well as government grants related thereto; our dependence on international sales and internationally produced products; changes in accounting standards; and any resulting regulatory changes on our business. These and other factors could cause actual results to differ materially from those in the forward-looking statements and are discussed elsewhere in this Annual Report on Form 10-K, in our other filings with the Securities and Exchange Commission or in materials incorporated therein by reference.

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PART I
All references contained in this Annual Report on Form 10-K to years refer to our fiscal years ended June 29, 2014, June 30, 2013, and July 1, 2012, as applicable, unless the calendar year is specified. References to “Emulex,” the “Company,” the “Registrant,” “we,” “our” and “us,” refer to Emulex Corporation and its subsidiaries, unless referring to specific segment information.
 
Item 1. Business.
Introduction and Company History
Emulex is a leader in network connectivity, monitoring and management products, providing solutions for global networks that support enterprise, cloud, government and telecommunications. Emulex products enable industry-leading end-to-end application visibility, optimization and acceleration in the data center. Our portfolio of input/output (I/O) connectivity offerings, including the line of ultra high-performance Ethernet and Fibre Channel-based connectivity products, have been designed into server and storage solutions from leading Original Equipment Manufacturers (OEMs), including Cisco Systems, Inc. (Cisco), Dell Inc. (Dell), EMC Corporation (EMC), Fujitsu Ltd. (Fujitsu), Hewlett-Packard Company (Hewlett-Packard), Hitachi Data Systems (HDS), Huawei Technologies Company Ltd. (Huawei), International Business Machines Corporation (IBM), Network Appliance, Inc. (NetApp) and Oracle Corporation (Oracle), and can be found in the data centers of nearly all of the Fortune 1000. Our monitoring and management solutions, including our portfolio of network visibility and recording products, provide organizations with complete network performance management at speeds up to 100Gb Ethernet.
Emulex, a Delaware corporation, completed its initial public offering in 1981 and additional public offerings of its common stock in 1983 and 1989. Emulex’s common stock trades on the New York Stock Exchange (NYSE) under symbol ELX.
Emulex corporate headquarters are located at 3333 Susan Street, Costa Mesa, California 92626, and our telephone number is (714) 662-5600. Our Internet address is www.emulex.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information about the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The website of the SEC is www.sec.gov.
Market Segments
Fibre Channel (FC)
Beginning in the late 1990s, FC emerged as the first storage networking technology to be widely adopted by the world’s leading server and storage systems manufacturers and is now available in 2, 4, 8 and 16 Gb per second (Gb/s) FC solutions. FC is the primary I/O connectivity for transaction-intensive applications like email, databases and highly virtualized environments that require high throughput and low latency. Its advanced capabilities enabled new architectures such as Storage Area Networks (SANs) which connect multiple host computers to one or more storage arrays. A SAN essentially transforms dedicated servers and storage devices into network resources, greatly improving the performance and scalability beyond the capabilities of direct attached enterprise storage. By providing shared server access, the cost of expensive enterprise servers and storage can be spread across entire organizations. SANs are deployed to support a wide range of applications such as Local Area Network (LAN) free and serverless back-up, storage virtualization and disaster recovery.
Typical deployments of FC include enterprise-class disk, storage virtualization, data protection and archiving solutions. An emerging segment for FC deployments is solid state disk (SSD) and flash storage, for application performance and performance acceleration of databases, and data warehouses, with improved throughput and application response time. Emulex has developed strong partnerships for joint flash/SSD-based solutions with EMC Corporation and Fusion-io, Inc. Additionally, FC has been deployed within storage arrays to provide internal connectivity for disk drives, enabling enhanced performance and greater scalability.
Network Attached Storage (NAS)
The NAS architecture offers an easily deployable and scalable storage solution by providing hard disk storage that is set up with its own network address rather than being attached to a department computer that is serving applications to network workstation users. In high-end environments characterized by NAS file delivery to servers, a SAN may be deployed behind a

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NAS, making NAS and SAN solutions complementary. The majority of NAS and SAN solutions installed today are delivered to end users via integrated systems solutions offered by storage and computer system OEMs.
Internet Protocol (IP)
The IP suite is the set of communications protocols used for the Internet and similar networks, and generally the most popular protocol stack for Wide Area Networks (WANs). It is commonly known as Transmission Control Protocol over Internet Protocol (TCP/IP), because of its most important protocols: TCP and IP, which were the first networking protocols defined in this standard. TCP/IP provides end-to-end connectivity specifying how data should be formatted, addressed, transmitted, routed and received at the destination. It has four abstraction layers, each with its own protocols. From lowest to highest, the layers include: the link layer (commonly Ethernet), which contains communication technologies for a local network; the Internet layer (IP) which connects local networks, thus establishing internetworking; the transport layer (TCP) handles host-to-host communication; and the application layer contains all protocols for specific data communications services on a process-to-process level (for example, how a web browser communicates with a web server). The TCP/IP model and related protocols are maintained by the Internet Engineering Task Force (IETF).
Internet Small Computer System Interface (iSCSI)
The iSCSI protocol, ratified by the IETF in 2003, brought SANs within the reach of small and mid-sized businesses. The protocol encapsulates native Small Computer System Interface (SCSI) commands using TCP/IP and transmits the packets over the Ethernet network infrastructure. The range of iSCSI connectivity solutions spans simple Ethernet NICs that are commonly used for Ethernet LAN applications, up to high performance 10Gb Ethernet (10GbE) NICs that offer full protocol processing offload from the host computer. The emergence of 10GbE addresses the bandwidth and latency issues of 1GbE and is laying the foundation for greater adoption of network convergence in the data center. As Ethernet speeds further increase to 40GbE and 100GbE, we expect such convergence to become more widespread.
Fibre Channel Over Ethernet (FCoE)
There are two key standards in the FCoE Converged Network Adapter (CNA) market that have been developed by the International Committee for Information Technology Standards (INCITS) T11.3 working group. One is for host-based CNAs and the other is for 10GbE networking. A complementary standard, Data Center Bridging (DCB), which covers multi-hop switching (IEEE 802.1Qaz) has also been developed. FCoE combines the efficiency and enterprise hardened features of the FC protocol with the ubiquity of an Ethernet network, while leveraging the robust storage management software and tools available with FC. FCoE transports native FC frames over a “no drop” or lossless Ethernet infrastructure, allowing existing FC SAN management tools, skills, and processes to remain intact. It allows an evolutionary approach toward I/O consolidation by preserving all FC constructs, maintaining the same latency, security, and traffic management attributes of FC while preserving investments in FC drivers, tools, training, and SANs. The main value proposition of FCoE is the ability to streamline server connectivity using lossless Ethernet while protecting the substantial investments made in FC SANs during the past 15 years.

Remote Direct Memory Access (RDMA) over Converged Ethernet (RoCE)
RoCE is a network protocol that allows remote direct memory access over an Ethernet network. RoCE is a link layer protocol and hence allows communication between any two hosts in the same Ethernet broadcast domain. The RoCE protocol benefits from the characteristics of a converged Ethernet networks, the protocol can also be used on a traditional or non-converged Ethernet network. High performance network applications, including high frequency trading, networked storage or cluster computing need a network infrastructure with a high bandwidth and low latency. The advantages of RDMA are lower latency, lower CPU load and higher bandwidth.
Data Packet Capture (DPC)
The ability to respond efficiently to network problems and establish the true root cause of service-affecting issues is critical for large organizations that depend on their network for business continuity. There is an ever-increasing demand from enterprise and wireless carriers for better application performance and zero network downtime. In addition, real-time data, social networks, video, virtualization, cloud, and Voice over IP (VoIP) are all raising network throughput for both enterprises and carriers. As a result, traditional software tools used for security, network and application performance visibility are being challenged. DPC technology acquires data packets that are crossing or moving over a specific computer network, enabling IT teams to accurately capture, record, index and search on captured traffic, enabling them to use their existing analysis tools and techniques to analyze captured network traffic. With 10GbE becoming the industry standard for data center network connectivity, specialized hardware-based DPC technology is now required in order to accurately acquire packet data from the network for the purpose of monitoring performance, troubleshooting issues and analyzing information. As network speeds continue to increase beyond 10Gbp/s, inaccuracies caused in the event of packet loss will be further accentuated. As a result,

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organizations are making investments in hardware-based data packet capture technology, the key enabler for the growing Network Recording Market (NRM).
Storage I/O Interconnects
In recent years, the hard disk drive (HDD) industry has utilized I/O interconnects, such as Serial Attached SCSI (SAS) and Serial Advanced Technology Attachment (SATA) for the disk drive I/O interface. Serial I/O technologies utilize a single wire over which all control and user data passes, providing higher performance, expanded connectivity and lower cost.
SATA has already increased in line speed from 1.5 Gb/s to 3 Gb/s and 6 Gb/s. SAS is designed for the corporate and enterprise market as a replacement for parallel SCSI, allowing for much higher speed data transfers than previously available. Though SAS uses serial communication instead of the parallel method found in traditional SCSI devices, it still uses SCSI commands for interacting with SAS end devices.
Our Products
We are a leading designer, developer and supplier of ultra high-performance Ethernet and Fibre Channel-based connectivity products which have been designed into server and storage solutions from leading OEMs. Emulex monitoring and management solutions, including our portfolio of network visibility and recording products, provide organizations with complete network performance management at speeds up to 100Gb Ethernet (100GbE). In fiscal 2004, the acquisition of Vixel Corporation (Vixel) enabled us to enter the embedded storage market. In fiscal 2006, the acquisition of Aarohi Communications, Inc. (Aarohi) facilitated the addition of intelligent data center infrastructure products, such as our CNAs. In fiscal 2007, we broadened our embedded footprint adding embedded storage bridges with the acquisition of Sierra Logic, Inc. (Sierra Logic). In fiscal 2009, we entered into a multi-year partnership (including a multi-year joint development and supply agreement) with ServerEngines Corporation (ServerEngines) to deliver converged networking solutions. In fiscal 2011, we acquired ServerEngines. The combination of Emulex and ServerEngines’ technology created a unique offering that delivers a foundation for converged networking solutions, including adapter, LAN on Motherboard (LOM) and iBMC solutions. In fiscal 2013, we acquired Endace Limited (Endace), a leading supplier of network visibility infrastructure products.
Leveraging our expertise and experience in networking and I/O technology, we have approached the storage market opportunity with a networking perspective to maximize the performance and management capabilities of our solutions. We believe the performance of our products is among the highest in the industry. Furthermore, our products support high performance connectivity features to enhance data integrity. Lastly, our products offer investment protection for our OEM customers, who often develop specialized software to interface with our adapters, as we have maintained a stable application programming interface (API) since our first generation of Host Bus Adapters (HBAs) was introduced in 1996. More recently, we have expanded the functionality in our products to deliver high availability and remote centralized management that may be embedded in OEM and independent software vendors (ISV) SAN management products.
We are a world leader in network visibility and network recording and our hardware-based systems are trusted by large organizations all over the world to measure, monitor, analyze, protect and troubleshoot some of the fastest and most complex networks on earth. Our business is built on developing tools that provide organizations with 100 percent accurate visibility and history, from the basic physical connections right through to the software applications that use the network. Our solutions utilize two basic technologies, instrumentation and analysis (EndaceProbe™ Intelligent Network Recorders and EndaceVision™ Network Visibility Software), and 100 percent packet capture hardware (EndaceDAG Data Capture Cards). This broad capability provides analysis that can not only drive faster resolution of performance problems, but also establish proactive methods to prevent problems from occurring in the future. As 10GbE networking has become the norm rather than the exception and the volume of traffic being moved around corporate networks has exploded, organizations have effectively become wholly dependent on their networks. Network performance monitoring will play an increasingly important role with the increased adaption of 10GbE. The combination of Emulex networking and I/O technology and network visibility products provides this functionality with 100 percent accuracy at speeds up to 100 GbE. With the move to 10GbE and 40GbE, the market for network performance monitoring will become more relevant.
Business Operating Segments
With our acquisition of Endace, our network connectivity, monitoring and management solutions are now broken into two business operating segments consisting of three product lines. Our Connectivity Segment consists of our legacy Emulex products and includes Network Connectivity Products (NCP) and Storage Connectivity and Other Products (SCOP). Our Visibility Segment consists of our Network Visibility Products (NVP) that were acquired through the Endace acquisition.
Connectivity Segment
Networking Connectivity Products

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NCP includes industry standard Fibre Channel and Ethernet-based solutions that provide server I/O and target storage array connectivity to create networks for mission-critical enterprise and cloud data centers. These products enable servers to reliably and efficiently connect to LANs, SANs, and NAS by offloading data communication processing tasks from the server as information is delivered and sent to the network. Our NCP use industry standard protocols including Fibre Channel Protocol (FCP), IP, TCP/IP, iSCSI, FCoE, overlay networking standards including Network Virtualization using Generic Routing Encapsulation (NVGRE) and Virtual Extensible Local Area Network (VXLAN), and RoCE. RoCE is a network protocol that allows RDMA over an Ethernet network. RoCE is a link layer protocol and allows communication between any two computers in the same Ethernet broadcast domain. RoCE brings many of the same low-latency capabilities typically associated with InfiniBand (IB) to Ethernet networks. NVGRE and VXLAN support overlay networks, which is a computer network which is built on the top of another network. Our Ethernet-based products include OneConnect® Converged Network Adapters (CNAs) and Local Area Network on Motherboard (LOM) application specific integrated circuits, and custom form factor solutions for OEM blade servers that enable high performance, scalable networks and convergence. The OneConnect® CNA is a multi-function adapter that provides server connectivity for network and storage traffic and is designed to address the key challenges of evolving data center networks and improve the overall efficiency of data center operations. Unlike first generation CNAs that only provide FCoE convergence, the OneConnect® CNA provides optimized performance for all protocols (TCP/IP, FCoE, and, iSCSI) enabling one card for all applications and all leading server architectures to allow data center managers to consolidate multiple 1GbE links on to a single 10GbE link. The use of multiple protocol accelerators/offload engines allows the OneConnect® CNAs to deliver maximum performance, regardless of the mix of protocol traffic. This diverse applicability of the OneConnect® CNA simplifies server hardware configurations and reduces server sprawl in the data center.
Our Emulex OneConnect® 10GbE Network Xceleration™ solutions are designed for enterprise applications with ultra-low latency, superior message rate or packet pacing requirements, such as financial/high frequency trading (HFT) network analytics (security, financial, and network optimization) and video content delivery (Video on Demand, Peer-to-Peer IPTV), and leverage kernel bypass operations that reduce latency and transaction times.
Our FC based products include LightPulse® HBAs, FC application specific integrated circuits (ASICs), and custom -form factor solutions for OEM blade servers. Our LightPulse® FC HBAs connect host computers to a FC network. Our adapters support a wide range of operating systems and host computer system interfaces, including Peripheral Component Interconnect (PCI) and PCI Express-based platforms. Our FC HBA offerings include single, dual, and quad port adapters at throughput speeds of 2, 4, 8 and 16Gb FC for use in enterprise data centers. The LightPulse HBAs are based on the Emulex Engine (XE) 201 I/O Controller technology, which is a multi-fabric product, capable of both Fibre Channel and Ethernet-based connectivity. The XE201 enables the ability to choose a combination of up to four ports of native 8GFC and 16GFC, or 10GbE and 40GbE for the ultimate in design flexibility.
Storage Connectivity and Other Products
SCOP includes our InSpeed® switch-on-a-chip (SOC) and back-end connectivity, bridge, router products, Pilot™ Integrated Baseboard Management Controllers (iBMCs), certain legacy products and other products and services. SCOP is deployed inside storage arrays, tape libraries, and other storage appliances, and connects storage controllers to storage capacity, delivering improved performance, reliability, and connectivity. SCOP uses industry standard protocols including FC, SAS, and SATA, and support the broadest range of HDD and Solid Stated Drives (SSD) technologies. In recent years, we have significantly reduced our engineering investment in new SCOP products to focus on other areas of the overall networking and storage market including Ethernet and FCoE technologies. As a result, we expect that revenues for this product line will continue to decrease as a percentage of overall revenues in the future. Baseboard Management Controllers (BMCs) are at the heart of reducing costs associated with managing servers. Our Pilot iBMC solutions revolutionized the industry for enterprise servers by integrating the BMC, super I/O, graphics controller and Remote Keyboard, Video, Mouse and Storage (KVMS) functionality into a single ASIC, providing significant cost savings to data center managers. Like a standard BMC, when embedded in a server system or appliance, the iBMC simplifies the management of the remote server systems and appliances, whether physical or virtual servers, thereby reducing operational costs.
Visibility Segment
Network Visibility Products
NVP consists entirely of the recently acquired Endace® family of visibility and recording infrastructure products that address NRM for high speed networks. The EndaceProbe™ Intelligent Network Recorder (INR) captures, indexes and stores network traffic history in order to help organizations troubleshoot problems and respond to network security breaches. EndaceVision™ is a browser-based network traffic search engine that provides users with a unique ‘window’ into high speed networks. Through EndaceVision™, users can search and receive packets of interest from anywhere across a globally distributed network of Endace Systems through a single, browser-based user interface. The EndaceODE™ Open Application Platform, also known as ODE systems, are designed specifically to host packet-processing applications in managed data center environments. These flexible and scalable systems are used extensively by organizations that demand the very highest levels of

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packet capture accuracy and processing performance for their hosting platforms. EndaceAccess™ Head-End systems give organizations access to 40GbE and 100GbE network segments that they need to measure, monitor and protect their networks with industry standard 1 Gb/s capable monitoring and security tools.
The EndaceFlow™ NetFlow Generator Appliances (NGAs) are designed specifically to offload the work from network elements and deliver 100 percent accurate NetFlow in the right format to the tools that need to consume it.
Underpinning all of the Emulex family of network visibility and recording products are the EndaceDAG Data Capture Cards that are integrated into the EndaceProbe™ INRs and sold as stand-alone components for use in a wide range of monitoring and security systems. We believe EndaceDAG Data Capture Cards have established a reputation for being among the most accurate, reliable and best performing PCI-based packet capture cards available.
Intellectual Property
Our ability to compete depends in part upon our ability to protect our proprietary information and intellectual property. Emulex primarily relies on patent, copyright, trademark, and trade secret laws, as well as contractual agreements with our employees, customers, suppliers and consultants that include confidentiality and non-disclosure provisions for such protection. Despite these precautions, no assurance can be made that the laws of certain countries outside of United States in which our products are developed, manufactured or sold will protect our intellectual property rights and that competitors or unauthorized third parties will not otherwise be able to infringe or misappropriate our intellectual property.
We have a number of issued patents and pending patent applications in the U.S. and abroad. Most of our issued patents and pending patent applications relate to our storage and networking technology or products. We maintain an active program of obtaining patent protection for our inventions as development occurs and as new products are introduced. As a result of the rate of change of technology in our industry, we believe that the duration of the patent protection available to us for our products is adequate to cover the expected market duration for such products.
All of our software, drivers, and firmware, which are embedded within or provided exclusively for use with our hardware products, are marked with copyright notices listing our company as the copyright owner. We have been granted a number of registrations of trademarks in the U.S. and abroad. We also have a number of pending trademark registrations in the U.S. and abroad. We maintain an active practice of marking our products with trademark notices and renewing trademarks so that the duration of trademark protection is maintained for as long as needed. Additionally, we rely on trade secret law and contractual provisions to protect unique intellectual property we possess which we have determined unnecessary or uneconomical to patent or copyright, or which is not otherwise capable of more formal protection.
We have received third party claims of intellectual property infringement in the past and there can be no assurance that we will not receive additional claims of intellectual property infringement from competitors or other third parties in the future. Such litigation may result in substantial costs and diversion of resources, and may result in an injunction against the sale or distribution of our products incorporating the underlying intellectual property or require the licensing of such intellectual property from the third party initiating the lawsuit, all of which could have a material adverse effect on our business, financial condition and results of operations. See Note 10 in the accompanying notes to consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for additional information on our intellectual property litigation. Also see “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K for additional discussion of our intellectual property risks.
Engineering and Development
Emulex operates in an industry that is subject to rapid and frequent technological developments, evolving industry standards and changing customer requirements. Our ability to successfully compete in this industry is dependent upon our ability to timely design, develop and introduce products that support current and emerging industry standards that enhance the performance of storage and server networks for our customers. As a result, we plan to continue to invest in research and development activities for the foreseeable future.
We maintain several design centers throughout the United States and abroad including California, Texas, New Zealand and India. Engineering and development expenses were approximately $155.9 million, $168.4 million, and $163.6 million in fiscal 2014, fiscal 2013, and fiscal 2012, respectively.
Selling and Marketing
We sell our products worldwide to OEMs, Original Design Manufacturers (ODMs), end users, and through other distribution channels including value added resellers (VARs), systems integrators, industrial distributors, direct market resellers and other resellers. As the storage and networking markets are dominated by OEMs, our focus is to use sales specialists to expand opportunities with our existing OEMs, as well as to develop new OEM and ODM relationships. However, we are also expanding our distribution efforts, leveraging worldwide distribution channels through technical distributors such as VARs and

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systems integrators, to complement our core OEM relationships. In some cases, OEM partners leverage the distribution channel to deliver solutions to end users, making our distribution efforts complementary with our OEM focused strategy.
During fiscal 2014, most of our revenues were derived from a mix of connectivity products based largely on Fibre Channel and Ethernet technologies sold to OEMs and through distribution channels. Our significant OEM customers include the world’s leading server and storage providers, including Cisco Systems, Inc. (Cisco), Dell Inc. (Dell), EMC Corporation (EMC), Fujitsu Ltd. (Fujitsu), Hewlett-Packard Company (Hewlett-Packard), Hitachi Data Systems (HDS), Hitachi Limited (Hitachi), Hon Hai Precision Industry Co., LTD (Hon-Hai), Huawei Technologies Company Ltd. (Huawei), Intel Corporation (Intel), International Business Machines Corporation (IBM), Lenovo, Micron Technology, Inc. (Micron), NEC Corporation (NEC), Network Appliance Inc. (NetApp), Oracle Corporation (Oracle), and Unisys Corporation (Unisys). Our significant distribution partners include ASI Computer Technologies, Inc. (ASI), Avnet, Inc. (Avnet), Digital China Technology Limited, Info X Distribution, LLC (Info X), Ingram Micro Inc. (Ingram Micro), SYNNEX Corporation (SYNNEX), and Tech Data Corporation (Tech Data). The market for networking infrastructure solutions is concentrated among large OEMs, and as such, a significant portion of our revenues are generated from sales to a limited number of customers.
Seasonality
Our business fluctuates as a result of various factors, including but not limited to economic conditions, new product introductions, IT spending, industry demand, and seasonality. Although we do not consider our business to be highly seasonal, we do believe that seasonality has and may impact our business. To the extent that we do experience seasonality in our business, it would most likely have a negative impact on the sequential growth rate of our net revenues during the first and third quarters of our fiscal year.
Order Backlog
Due to an industry practice that allows customers to cancel or change orders with limited advance notice prior to shipment, we do not believe that backlog is a reliable indicator of future revenue levels. Furthermore, purchase order release lead times depend upon the scheduling practices of the individual customer, and the rate of booking new orders fluctuates from month to month. Therefore, the level of backlog at any one time is not necessarily indicative of trends in our business nor is it a meaningful indicator of future long-term revenues.
Concentration of Customers, Revenue by Operating Segments, Product Families and Geographic Area
See Note 15, “Operating Segments and Revenue by Product Families, Geographic Area and Significant Customers,” in the accompanying notes to consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for information regarding concentration of our customers as well as information regarding our revenue by operating segments, product family and geographic area. Also see “Risk Factors” contained within Part I, Item 1A of this Annual Report on Form 10-K for a discussion of the risks associated with the concentration of our customers, as well as the risks associated with our revenue by operating segments, product family and geographic area.
Competition
The market for our products remains intensely competitive and is characterized by frequent new product introductions, rapid technological change, changing customer preferences, evolving technology, and industry standards.
We believe the competitive factors for our Network Connectivity Products include price/performance, interoperability, reliability, scalability, silicon integration, technical support, time to market, product roadmap, and the extent of the installed base. We believe that we compete favorably with respect to these factors. Some of our other competitive advantages include our robust time-proven FC drivers, our single chip multi-protocol architecture, our workforce of highly experienced researchers and designers, and our intellectual property. While we believe we have historically had a competitive strength in the alliances we have built with OEM distribution channels, the growth of white box manufacturers and web giants has shifted server market share away from OEMs and enterprise end-users in recent years.
One of our largest competitors for HBA and CNA products is QLogic Corporation (QLogic). In addition, Cisco competes in the CNA market.
In some markets, CNAs face competition from NIC/iSCSI suppliers that are supplied by established Fibre Channel and Ethernet competitors as well as new entrants, including Intel Corporation (Intel), Chelsio Communications, Inc. (Chelsio), Mellanox Technologies, Ltd. (Mellanox) and other private and public companies who have invested in various aspects of data center networking. Across all storage networking technologies, we face the threat of potential competition from new entrants into the storage networking market, including large technology companies that may develop or acquire differentiating technology and then apply their resources, including established distribution channels and brand recognition, to obtain significant market share.

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We believe that the principal basis of competition for our Storage Connectivity and Other Products presently includes interoperability, reliability, scalability, price, silicon integration, performance, technical support, and backwards compatible Application Programmable Interfaces (APIs). We believe that we compete favorably with respect to these factors. We also believe that we have a competitive strength in our close relationships with OEM customers and our OEMs’ investment in storage software.
Our Storage Connectivity and Other Products, including InSpeed®, bridge and router products compete against products supplied by LSI Corporation/Avago Technologies (LSI/Avago), Marvell Technology Group Ltd. (Marvell), Maxim Integrated Products, Inc. (Maxim), and PMC-Sierra, Inc. (PMC-Sierra). Across all embedded storage technologies, we face the threat of potential competition from new entrants into the embedded storage market, including large technology companies that may develop or acquire differentiating technology and then apply their resources, including established distribution channels and brand recognition, to obtain significant market share.
We believe that the principal basis of competition for our Network Visibility Products includes Napatech and SolarFlare for the DAG technology. Our primary competitors for network recording systems (EndaceProbe™ INRs and EndaceVision™) include NetScout, Solera Networks, Riverbed, Niksun, Network Instruments and Fluke Networks.
Manufacturing and Suppliers
Our products include board level assemblies that consist primarily of electronic component parts assembled on printed circuit boards (PCBs) and system level products consisting of board level assemblies, cables, and power sources contained within an enclosure. Most component parts can be purchased from two or more sources. However, some key components that we use in our products (including our ASICs) may only be available from single sources with which we may not have contracts. In addition, we design ASICs that are embedded in our assembled products and are also sold directly to OEM customers. These ASICs are typically sole-sourced and manufactured by third party semiconductor foundries. The majority of our ASICs are manufactured under the direction of LSI/Avago, using a variety of qualified semiconductor, assembly, and test suppliers. We also purchase ASICs from eSilicon Corporation, Intel Corporation, Renesas Electronics America Inc., and Toshiba Corporation. In addition to hardware, we design software and firmware, which are provided as embedded programs within our hardware products.
The Company utilizes third party electronic manufacturing service (EMS) providers for the manufacturing and assembling of the majority of our products. The assembly operations required by our products are typical of the electronics industry, and no unusual methods, procedures or equipment are required. The sophisticated nature of the products, in most cases, requires extensive testing by specialized test devices operated by skilled personnel. Our providers perform this testing. However, we also maintain an internal test-engineering group for continuing support of test operations.
During fiscal 2014, Benchmark Electronics, Inc. (Benchmark) manufactured for us at their facilities in Korat, Thailand; Flextronics Telecom Systems, LTD. (Flextronics) manufactured for us at their facility in Zhuhai, China; GPC Electronics manufactured for us at their facility in Christchurch, New Zealand; UNICOM Engineering, Inc. (formerly NEI) manufactured for us at their facility in Canton, Massachusetts; and Wistron Corporation (Wistron) manufactured for us at their facility in Zhongshan, China. Through our continuing strategic relationships with our EMS suppliers, we believe we have a strong global manufacturing operation that supports our growing global customer base and provides us with increased supply chain efficiency, flexibility, and security.
Employees
As of June 29, 2014, we employed 1,122 employees. Other than the employee in our Brazil office, none of our employees are represented by a labor union, and we believe our employee relations are good.
Executive Officers of the Registrant
The executive and certain other officers of the Company or its principal operating subsidiaries as of June 29, 2014 were as follows:
Name
 
Position
 
Age
Jeffrey W. Benck
 
Director, President and Chief Executive Officer
 
49
Kyle B. Wescoat
 
Senior Vice President, Chief Financial Officer and Treasurer
 
62
Margie Evashenk (1)
 
Senior Vice President, Chief Development Executive
 
48
Jeffrey L. Hoogenboom (1)
 
Senior Vice President, Worldwide Sales
 
48
Perry M. Mulligan (1)
 
Senior Vice President, Operations
 
56
Randall G. Wick (2)
 
Senior Vice President, General Counsel and Secretary
 
61

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_____________
(1) These persons serve in the indicated capacities as SEC Section 16 officers of the Registrant, but are not officers of the Registrant or its subsidiaries, and are considered a "significant employee."
(2) Mr. Wick serves as an officer of the Registrant's principal operating subsidiaries; he is the Secretary of the Registrant, but is not otherwise an officer of the Registrant. Also, Mr. Wick serves in the indicated capacity as a SEC Section 16 officer of the Registrant.
Mr. Benck currently serves as a Director, President and Chief Executive Officer and President of Emulex. Mr. Benck joined Emulex in May 2008 as Executive Vice President and Chief Operating Officer and was subsequently appointed to President and Chief Operating Officer in August 2010. Mr. Benck was named a Director of Emulex and President and Chief Executive Officer of the Company in July 2013. Prior to joining the Company, Mr. Benck was President and Chief Operating Officer of QLogic Corporation, a supplier of storage networking solutions. Prior to that, Mr. Benck worked for International Business Machines (IBM) Corporation, a global leader in information technology and services, for 18 years, in his last role serving as Vice President of xSeries BladeCenter and Retail Store Solutions development. While at IBM, Mr. Benck's focus included growth initiatives, product development, marketing and strategy, portfolio management and customer relationships. Mr. Benck is widely known for his role in establishing IBM's blade server product line leadership.
Mr. Wescoat joined the Company in January 2014 as Senior Vice President, Chief Financial Officer and Treasurer. Prior to joining the Company, Mr. Wescoat serves as Senior Vice President and Chief Financial Officer of Skullcandy, Inc., a publicly traded headphone, gaming and accessories company. From February 2008 to May 2011, Mr. Wescoat served as the Vice President of Finance and Chief Financial Officer of Vizio, Inc., a producer of consumer electronics. Prior to that, Mr. Wescoat served as the Chief Administrative Officer of the Los Angeles Dodgers. Mr. Wescoat also previously served as the Vice President of Finance and Chief Financial Officer of Cherokee Inc., a multi-brand retail direct licensor, and Vans, Inc. a teen oriented, multi-channel lifestyle company.
Ms. Evashenk joined the Company in October 2006 as Senior Vice President of Engineering and was subsequently promoted to Senior Vice President, Chief Development Executive of the Company in May 2011. Although no specific departure date or terms have been agreed to, Ms. Evashenk has expressed an interest in retiring from her service with Emulex by the end of calendar year 2014 and the Company is currently working with her to develop a mutually agreeable transition plan. Prior to Emulex’s acquisition of Sierra Logic, Inc. (Sierra Logic) in October 2006, Ms. Evashenk was a Co-Founder and Vice President of Engineering for Sierra Logic. Prior to joining Sierra Logic, Ms. Evashenk held various positions in engineering and management at Hewlett-Packard Company and Agilent Technologies, Inc.
Mr. Hoogenboom joined the Company in January 2009 as Senior Vice President of Worldwide Sales. Prior to joining the Company, Mr. Hoogenboom was Vice President of Emerging Business Sales of Cadence Design Systems, Inc. from January 2008 to December 2008. From January 2007 to January 2008, Mr. Hoogenboom was Executive Vice President of Sales of LSI Corporation. Prior to joining LSI Corporation, Mr. Hoogenboom spent 18 years at Intel Corporation where he held multiple sales and marketing positions including Vice President, General Manager of Reseller Channel Sales and Vice President of Embedded Sales.
Mr. Mulligan joined the Company in July 2013 as Senior Vice President of Operations. Prior to joining the Company, Mr. Mulligan served as the Senior Vice President of Operations at QLogic Corporation. Prior to that, Mr. Mulligan spent nine years in the electronic manufacturing services industry, at Solectron and Celestica. At Solectron, he served as Senior Vice President of supply chain management and chief procurement officer, and at Celestica, he held roles as Vice President of supply chain management and president of commodity management for Asia. Prior to entering the electronics manufacturing services industry, Mr. Mulligan held a number of management positions at Nortel in operations, information technology and materials management.
Mr. Wick joined the Company in June 2002 and serves as Senior Vice President and General Counsel. Prior to joining the Company, Mr. Wick served as Vice President, Chief Operating Officer and General Counsel of TelOptics Corporation, a high technology privately held company, since November 2000. Previously, Mr. Wick served as a legal consultant for his own firm and held the positions of Vice President and General Counsel for Samsung Electronics America, Inc. from 1998 to 1999 and AST Research, Inc. from 1990 to 1998.



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Item 1A. Risk Factors.
Our operating results are difficult to forecast resulting in significant fluctuations from quarter to quarter.
Our fiscal 2014 restructuring plans may not yield the targeted cost savings on a timely basis or at all even though we incurred charges relating to such cost savings initiatives. In addition, our share repurchase program may not be completed within the expected timeframe. The assumptions on which our cost savings initiatives, share repurchase and capital return goals are based involve judgments with respect to, among other things, economic, competitive and financial market conditions and the impact of the cost savings initiative on our customers, all of which are difficult or impossible to predict and many of which are beyond the Company’s control.
Our revenues and results of operations have historically varied on a quarterly basis and may vary significantly in the future. Accordingly, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful, and you should not rely on such comparisons as indications of our future performance. We may be unable to maintain our current levels of growth or profitability in the future. Our revenues and results of operations are difficult to forecast and could be adversely affected in any given quarter by many factors, including, but not limited to:
 
Changes in the size, mix, timing and terms of OEM or other customer orders;
Changes in the sales and deployment cycles for our products or desired inventory levels for our products;
Acquisitions or strategic investments by our customers, competitors or us;
Timing and market acceptance of new or enhanced product introductions, including the next generation of server platforms based on the Intel® XEON® family and chipsets used by us, our OEM customers or competitors;
Market share losses or difficulty in gaining incremental market share;
Reduced demand from our customers if there is a shortage of, or difficulties in, acquiring components or other products, such as microprocessors, disk drives, switches, and optical modules, used in conjunction with the deployment of systems containing our products;
Seasonality or non-linearity of revenue from period to period;
Changes in general social and macroeconomic conditions, including but not limited to natural disasters, terrorism, public health crises, slower than expected market growth, reduced economic activity, delayed economic recovery, loss of consumer confidence, increased energy costs, adverse business conditions and liquidity concerns, concerns about inflation or deflation, recession, and reduced business profits and capital spending, with resulting changes in customer technology budgeting and spending;
Fluctuations in product development, procurement, resource utilization and other operating expenses;
Inability to realize anticipated efficiencies resulting from increased revenues;
Difficulties controlling costs, including operating expenses, as revenues increase;
Inability of our electronics manufacturing service providers (EMS) or suppliers to produce and distribute our products in a timely fashion;
Difficulties with updates, changes or additions to our information technology systems;
Breaches of our network security, including viruses; and
Any of these factors could yield losses or actual results to vary from forecast in the future which may trigger an impairment of our long-lived assets and goodwill.
Order deferrals and cancellations by our customers, declining average sales prices, changes in the mix of products sold, shortages of materials, delays in the introduction of new products and longer than anticipated sales cycles for our products have adversely affected our business, financial condition and results of operations in the past. Despite these factors, we, along with our EMS providers, maintain significant finished goods, work-in-progress and raw materials inventory to meet estimated order forecasts. If our customers purchase less than their forecasted orders or cancel or delay existing purchase orders, there will be higher levels of inventory that face a greater risk of obsolescence. If our customers choose to purchase products in excess of the forecasted amounts or in a different product mix, we could experience inadequate inventory or manufacturing capacity to meet such demand.
As a result of these and other unexpected factors or developments, future operating results may fall below the expectations of investors or market analysts, which would have a material adverse effect on our stock price.
We may fail to realize the anticipated benefits from future acquisitions and strategic investments.
Our future performance will depend in part on our ability to realize the anticipated benefits from acquisitions, including Endace Limited (Endace), and strategic investments, and whether we can successfully integrate, operate or partner these businesses with our existing operations in an effective and efficient manner. Integrating our operations with acquired businesses is a complex, time-consuming and expensive process and involves a number of risks and uncertainties. In addition, in order to position ourselves to take advantage of growth opportunities, we have made, and may continue to make, other strategic

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acquisitions that involve significant risks and uncertainties. The risks and uncertainties relating to acquisitions and/or strategic investments include, but are not limited to:
 
The difficulty in integrating any newly acquired businesses and operations in an efficient and effective manner;
The risk of diverting our resources and the attention of our senior management from the operations of our existing business;
Additional demands on management related to the increase in the size and scope of our company following the acquisition;
Complexities in creating and maintaining uniform standards, controls, procedures, and policies;
Difficulties in combining corporate cultures;
Difficulties in the assimilation and retention of key employees;
The risks of potential disputes concerning indemnities and other obligations that could result in substantial costs;
Unknown defects of an acquired company’s products or assets that may not be identified due to the inherent limitations involved in the due diligence process of an acquisition;
Costs and expenses associated with any undisclosed or potential liabilities of acquired businesses;
Delays, difficulties or unexpected costs in the integration, assimilation, implementation or modification of platforms, business information systems, functions, technologies and infrastructure to support the combined business, as well as maintaining uniform standards, controls (including internal accounting controls), procedures and policies;
The challenges in achieving strategic objectives, cost savings and other benefits expected from any acquisitions;
The risk that the financial returns on acquisitions will not support the expenditures incurred to acquire such businesses or the capital expenditures needed to develop such businesses;
The risks of entering markets in which we have less experience;
The risk that markets do not evolve as anticipated and the technologies acquired do not prove to be those needed to be successful in those markets;
Difficulties in maintaining relationships with present and potential customers, distributors and suppliers of the acquired business; and
The risk that the goodwill in the Visibility and Connectivity reporting unit could become impaired in the near term due to lower than expected revenues and profits.
Furthermore, to complete future acquisitions or strategic investments, we may need to issue equity securities, incur additional debt, assume contingent liabilities or recognize amortization expenses and write-downs of acquired assets, which could cause our earnings per share to decline.
Third party claims of intellectual property infringement could adversely affect our business.
On occasion, we receive communications from third parties alleging patent infringement, and there is always the chance that third parties may assert infringement claims against us. As we enter into technology markets where we have not participated before, where there are entrenched incumbents, and where our entrance into the market is disruptive, such incumbents may assert infringement claims in order to deter our competition. Any such claims, with or without merit, could result in costly litigation, cause product shipment delays, result in temporary restraining orders or injunctions concerning the sale of products in certain countries, require the redesign of products to design around asserted claims, require us to indemnify or reimburse our customers, or require us to enter into royalty or licensing agreements, which may or may not be available on commercially reasonable terms. Any such claims, with or without merit, may also cause customers to be deterred from purchasing products from us. We have obtained contractual commitments from our suppliers concerning the defense and indemnification of claims relating to certain technology provided by such suppliers, but we cannot be certain that such defense and indemnification obligations will be honored by such suppliers. Furthermore, we have in the past obtained, and may be required in the future to obtain, licenses of technology owned by other parties. We cannot be certain that the necessary licenses will be available or that they can be obtained on commercially reasonable terms. We have participated in technology standardization activities which provide for licenses being available on reasonable and non-discriminatory terms, but we cannot be certain that such licenses will actually and promptly be made available to us. If we were to fail to obtain such royalty or licensing agreements in a timely manner and on reasonable terms, our business, results of operations, and financial condition could be materially adversely affected.
Broadcom Corporation (Broadcom) filed a consolidated patent infringement suit against us during fiscal 2010. After a nearly three week trial that ended October 6, 2011, the jury reached a partial verdict involving two out of the six patents. The Court determined that one of the patents (U.S. Patent 7,058,150) [the ‘150 patent] had been infringed by us, and the jury rendered an advisory verdict on October 12, 2011 to the District Court that it is not invalid, and awarded approximately $0.4 million in damages with respect to that patent. The jury reached a unanimous verdict of non-infringement on another patent relating to Emulex Fibre Channel switch products. A mistrial was declared concerning the remaining four patents for which no

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unanimous verdict was reached. On December 15, 2011, the District Court issued judgments as a matter of law (JMOL) that the two patents, on which the jury had rendered advisory verdicts were not invalid. On December 16, 2011 the District Court issued an additional JMOL that one of the patents (U.S. Patent 7,471,691) [the‘691 patent] had been infringed by us. Effective March 30, 2014, Emulex and Broadcom entered into a Dismissal Agreement pursuant to which Emulex and Broadcom entered into certain understandings with respect to the outstanding claims relating to and arising out of the patent infringement suit. Pursuant to the terms of the Dismissal Agreement, we agreed to pay Broadcom a non-refundable, non-cancelable dismissal and standstill fee in the amount of $5 million.
See Note 10, “Commitments and Contingencies,” in the notes to the consolidated financial statements under the caption “Litigation” in Part IV, Item 15(a) of this Annual Report on Form 10-K. Also see "We are dependent on sole source and limited source third party suppliers and EMS providers for our products" elsewhere in this Item 1A - Risk Factors.
Specific risks related to the Broadcom infringement litigation, Settlement Agreement and Dismissal Agreement include:
Design changes (sometimes referred to as design-arounds) that may be used as alternatives for the patents for which there have been findings of infringement or for which infringement may be found, may present unforeseen technical problems for implementation, result in significant internal design costs, as well as third party non-recurring engineering costs, or may not adequately address infringement findings;
Total costs related to our product redesign activities may exceed our current expectations;
Our suppliers, on whom we rely for SerDes changes for chip spins, may require more time to complete redesigns which would restrict our ability to continue to sell products until redesigned products are available;
There may be technical resource and equipment availability shortages impeding our ASIC component suppliers from completing chip spins, and our OEM customers and end users from completing testing of redesigned products;
Our sales and support for products sold outside the United States may be affected by injunction, although such sales were previously found to be outside the scope of the suit;
Our continuing support and sales for products previously provided to customers and end users may be affected by injunction, although technical support is not prohibited by the 2012 Permanent Injunction for products subject to the jury verdict award of damages, or permitted under the sunset period;
The 2012 Permanent Injunction may cause our customers to exclude us from new product opportunities;
Our customers may approach us and request or demand reimbursements of expenses incurred by them related to the requalification of our products, their obligations to Broadcom under licensing agreements related to appendices of the amended 2012 Permanent Injunction, or other amounts under the indemnification provisions of our supply agreements;
Royalties or other payments associated with the 2012 Permanent Injunction may make our costs too high to meet market pricing requirements set by our customers;
Our July 3, 2012 Settlement Agreement with Broadcom requires us to maintain certain records, as well as provide certain written notices and reports, and such activities may cause additional costs and limitations for us not borne by our competitors;
Our March 30, 2014 Dismissal Agreement with Broadcom was made without prejudice to Broadcom filing future lawsuits against us or our customers or suppliers;
Broadcom may choose to not assert the patents against our competitors, thus leaving us with a competitive disadvantage relative to future business that may not be borne by our competitors;
The interpretation of the provisions of the 2012 Permanent Injunction may be unfavorable to us, resulting in part because of the complexity of the business practices used by our customers, including a large quantity of different customer product models, customer platforms, and design configurations, and the complexity of the supply chains, support implementations, and product distribution networks used by our customers, each of which may result in the need for further hearings before the Court;
Our supply to customers in the United States may continue to be disrupted by the 2012 Permanent Injunction affecting our Ethernet based products that include our BE2 or BE3 chips (collectively referred to as the affected products);
The injunction has and is expected to continue to have an adverse impact on our sales in the United States until our new redesigned products become available;
The content of the 2012 Permanent Injunction, and its Appendix, may be modified by the Court in ways that are unfavorable to us;
The Court may amend the Appendix to the 2012 Permanent Injunction to exclude certain device/customer product combinations; and
Broadcom could file additional lawsuits against us, asserting additional claims from the same patents involved in the lawsuit, or additional patents, or file other proceedings with commissions such as the International Trade Commission.
Lawsuits, such as the action brought by Broadcom, present inherent risks, including continuing expenses of litigation; risk of loss of patent rights and/or monetary damages; risk of injunction against the sale of products incorporating the

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technology in question, including substantial costs and difficulties in implementing design changes and the associated customer re-qualification thereof or maintaining favorable working relationships with our suppliers of SerDes modules; counterclaims, attorneys’ fees, potential liabilities to customers under reimbursement agreements or contractual indemnification provisions, and diversion of management’s attention from other business matters. Such lawsuits and the related risks thereof could have a material adverse effect on our business, financial condition, or results of operations.
We may not be able to generate enough cash flow from our operations to service our indebtedness, and we may incur additional indebtedness in the future, which could adversely affect our business, financial condition and results of operations.
In November 2013, we issued $175.0 million aggregate principal amount of 1.75% convertible senior notes due November 15, 2018, in a private placement offering. See Note 11 “Convertible Senior Notes,” in the notes to the consolidated financial statements in Part IV, Item 15(a) of this Annual Report on Form 10-K. Our ability to make payments on and to refinance our debt will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, business, financial, competitive, legislative, regulatory and other factors that are beyond our control.
We cannot assure that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs. We may need to refinance all or a portion of our debt on or before maturity. We cannot assure that we will be able to refinance any of our debt on commercially reasonable terms or at all. If such financings were not available on favorable terms, our business results of operations and financial condition could be materially adversely affected.
Unsolicited takeover proposals, governance change proposals, and proxy contests may be disruptive to our business.
We received an unsolicited takeover proposal in the past from Broadcom (and related proposals to change our governance and board of directors) that resulted in a proxy contest, and there can be no assurance a third party, such as a competitor or activist investor, will not make an unsolicited takeover proposal, propose to change our governance or board of directors, or make other proposals concerning takeovers in the future. The review and consideration of any takeover proposal or proposal to change our governance or board of directors may be a significant distraction for our management and employees and could require the expenditure of significant time and resources by us.
Moreover, any unsolicited takeover proposal, proxy contest or actions by an activist investor may create uncertainty for our employees and this uncertainty may adversely affect our ability to retain key employees and to hire new talent. Any such takeover proposal, proxy contest or actions by an activist investor may also create uncertainty for our customers, suppliers and other business partners, which may cause them to terminate, or not to renew or enter into, arrangements with us. The uncertainty arising from unsolicited takeover proposals, proxy contests, or actions by an activist investor, and any related costly and time-consuming litigation may disrupt our business, which could result in an adverse effect on our operating results. Management and employee distraction related to any such takeover proposal, proxy contest or actions by an activist investor also may adversely impact our ability to optimally conduct our business and pursue our strategic objectives.
We have entered into Key Employee Retention Agreements with one of our current executive officers, and adopted a Change in Control Retention Plan, in which currently an additional 23 key employees participate. The participants of these retention arrangements may be entitled to severance payments and benefits, based on a period of between twelve months and two years, upon a termination of their employment by us without cause or by them for good reason in connection with a change of control of our company (each as defined in the applicable agreement or plan). These retention arrangements may not be adequate to allow us to retain critical employees during a time when a change in control is being proposed or is imminent.
The current macroeconomic environment continues to result in a reduction in information technology spending.
The demand for our network connectivity and visibility products has been driven by the demand for high performance networking products and solutions that support enterprise computing applications, including on-line transaction processing, data mining, data warehousing, multimedia, networking and monitoring and internet applications. The current weakness in domestic and worldwide economic conditions and related disruptions in world credit and equity markets, as well as the European debt crisis, have resulted in a global downturn in spending on information technology. If the continuing weakness and uncertainty in the global economy result in significant reductions in the demand for our products, solutions, and applications, it will adversely affect our business, results of operations, and financial condition in the near term and possibly beyond. The adverse effects of any sustained reductions in information technology spending on our operating results may be exacerbated by our research and development investments, strategic investments and merger and acquisition activity, as well as customer service and support, which we may need to continue despite any such reductions in demand.

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Our business is highly competitive.
The markets for our products are highly competitive and are characterized by rapid technological advances, price erosion, frequent new product introductions, and evolving industry standards. Our current and potential competition consists of major domestic and international companies, some of which have substantially greater financial, technical, marketing, and distribution resources than we have. We currently compete against QLogic, Brocade and PMC Sierra, for our Fibre Channel (FC) products. For Ethernet products, we compete against the leading integrated circuits (IC) vendors including Intel, Broadcom, QLogic and Mellanox. Our competitors for combined Ethernet and FC products include Brocade and QLogic. For our visibility and recording infrastructure products, we compete against Napatech, SolarFlare, NetScout, Solera Networks, EMC NetWitness, Riverbed, Niksun, Network Instruments, WildPackets and Fluke Networks.
We expect that our markets will continue to attract new competition. Additional companies, including but not limited to our suppliers, strategic partners, Original Equipment Manufacturer (OEM) customers and emerging companies, may enter the markets in which we compete and new or stronger competitors may emerge as a result of consolidation in the marketplace. Additionally, our existing competitors continue to introduce products with improved price/performance characteristics, and we may have to do the same to remain competitive. Furthermore, competitors may introduce new products to the market before we do, and thus obtain a time-to-market advantage over us. Increased competition could result in increased price competition, reduced revenues, lower profit margins or loss of market share, any of which could have a material adverse effect on our business, results of operations, and financial condition.
A significant portion of our business depends upon the continued growth of the networking market.
The size of our potential market is largely dependent on the overall demand for network connectivity and visibility products and in particular, upon the broadening acceptance of our converged network and networking recording technologies. The market will also be dependent on the evolving technical nature of network recorders. We believe that our investment in multi-protocol solutions that address the high performance needs of the converged networking market, as well as our investments in network performance management solutions, provide the greatest opportunity for our future revenue growth and profitability. However, the market for converged networking products may not gain broader acceptance and customers may choose alternative technologies that we are not investing in, or products supplied by other companies. Interest continues for other storage networking technologies such as Internet Small Computer Systems Interface (iSCSI) and iSCSI Extensions for RDMA (iSER), which may satisfy some Input/Output (I/O) connectivity requirements through standard Ethernet adapters and software at little or no incremental cost to end users. The software only iSCSI solutions compete with our Network Connectivity Products, particularly in the low end of the market. We have also launched Converged Network Adapters (CNAs) using Fibre Channel over Ethernet (FCoE) or iSCSI protocols which may be used by the same customers impacting our network product revenues more than we anticipate.
In addition, the market for FC products may shrink as more storage subsystems adopt SAS based connectivity for external and direct attached storage devices. Furthermore, FCoE may not be adopted at the rate or extent that we anticipate, and adoption of FCoE is largely dependent on third-party vendors and end users. While the usage of FCoE has increased since its first specifications were completed in 2009, continued adoption of FCoE is dependent on continued collaboration and cooperation among information technology solutions providers. Since our products are sold as parts of integrated systems, demand for our products is driven by the demand for such integrated systems, including other companies’ complementary products. A lack of demand for these integrated systems or a lack of complementary products required for these integrated systems to be deployed could have a material adverse effect on our business, results of operations, and financial condition. Furthermore, our results of operations and financial condition could be materially adversely affected if the 10G and 40G Ethernet market grows at a slower rate than the historical high growth rate. If the converged networking market does not grow, grows more slowly than we anticipate, declines, or attracts more competitors than we expect, or if our products do not achieve continued market acceptance, our business, results of operations, and financial condition could be materially adversely affected.
A significant portion of our revenue is generated from sales to a limited number of customers, none of which are subject to exclusive or long-term contracts.
We rely almost exclusively on OEMs and sales through distribution channels for our revenue. For the fiscal year ended June 29, 2014, we derived approximately 84% of our net revenues from sales to OEM customers and approximately 13% from sales through distribution. Furthermore, as some of our sales through distribution channels consist of OEM products, OEM customers effectively generated approximately 88% of our revenue for the fiscal year ended June 29, 2014. Moreover, direct and indirect sales to our top five customers (including customer-specific models purchased or marketed indirectly through distributors, resellers and other third parties) accounted for approximately 76% of our net revenues for the fiscal year ended June 29, 2014. If we are unable to retain our current OEM and distributor customers, recruit additional or replacement customers, or timely collect amounts due from our customers, or if demand from our customers is reduced due to difficulties in their ability to acquire components or other products such as microprocessors, disk drives, switches and optical modules used in

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conjunction with our products or in the deployments of their products, our business, results of operations, and financial condition could be materially adversely affected.
As is common in the technology industry, our agreements with OEMs and distributors are typically non-exclusive, have no volume commitments, and often may be terminated by either party without cause. It is increasingly commonplace for our OEM and distributor customers to utilize or carry competing product lines. If we were to lose business from one or more significant OEM or distributor customers to a competitor, our business, results of operations, and financial condition could be materially adversely affected. In addition, our OEMs may elect to change their business practices in ways that affect the timing of our revenues, which may materially adversely affect our business, results of operations, and financial condition. This includes transitioning to new inventory geographies or markets.
In January 2014, our largest customer announced the proposed sale of their x86-based server business to an overseas competitor. Once complete, they plan to exit this sector of the Server market. Although both companies have publicly stated the close of the proposed sale is expected to be completed during the 2014 calendar year, there are no guarantees this will occur. In advance of and during any related transition period, we may be exposed to elevated levels of demand fluctuation, forecasting uncertainty and other business risk.
Although we continue to expand our base of customers, we believe our revenues in the future will still be derived from a limited number of customers. As a result, to the extent that sales to any of our significant customers do not increase in accordance with our expectations or are reduced or delayed, or if we are unable to collect our accounts receivables from our customers, our business, results of operations, and financial condition could be materially adversely affected.
Our industry is subject to rapid technological change.
The markets for our products are characterized by rapidly changing technology, evolving industry standards, and the frequent introduction of new products and enhancements. Our future success depends in large part on our ability to enhance our existing products and to introduce new products on a timely basis to meet changes in customer preferences and evolving industry standards. Currently, new and proposed technologies such as 32 Gb/s Fibre Channel solutions; FCoE; 40GbE and 100GbE solutions; Remote Direct Memory Access (RDMA) over Converged Ethernet (RoCE) and low latency Ethernet Solutions; PCI Express Advanced Switching; 10G base T; 6 Gb/s and 12 Gb/s SAS; and Solid State Drives (SSDs) are in development by many companies and their ultimate acceptance and deployment in the market is uncertain. While we are developing some of these technologies, we cannot be sure that the technologies we chose to develop will achieve market acceptance, or that technologies that we chose not to develop will be available for purchase or license from third parties or will be immaterial to our business.
These developments or enhancements, such as the migration of our next generation products from 40nm to 28nm or lower geometry process technologies, may be late, may have technical problems, may fail to meet customer or market specifications and may not be competitive with other products using alternative technologies that offer comparable performance and functionality. We may be unable to successfully develop additional next generation products, new products or product enhancements. Our next generation products or any new products or product enhancements may not be accepted in new or existing markets. Our business will suffer if we fail to continue to develop and introduce new products or product enhancements in a timely manner or on a cost-effective basis.
Furthermore, if our products are not available in time for the qualification cycle at an OEM, we may be forced to wait for the next qualification cycle or may miss the market window. In addition, new products and enhancements developed by us may not be backwards compatible to existing equipment already installed in the market. If we are unable, for technological or other reasons, to develop new products, enhance or sell existing products, or consume raw materials in a timely and cost effective manner in response to technological and market changes, our business, results of operations, and financial condition may be materially adversely affected.
We may be unsuccessful in our expansion into new segments of the network connectivity and visibility markets, and the costs associated with our expansion may be greater than anticipated.
To remain a significant supplier of networking technologies, we will need to continue to expand the range of products and solutions offered to our current and new OEM customers. Expansion into other areas of the connectivity and visibility markets, whether by acquisition or through internal growth, and the resulting increases in expenditures to support these new areas may be greater than anticipated and we may experience potential disruptions in our expansion caused by our downsize activities. If we fail to successfully expand into new areas of the storage, server and network recording technology markets with products that we do not currently offer, or effectively address new market opportunities, we may lose market share and revenue opportunities to our competitors, including in the 25G Ethernet market. Any such loss of opportunities or any failure by us to effectively manage the costs associated with expanding into new markets may have an adverse effect on our business and financial condition.

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Further, although most of our revenues have historically been derived from products based on FC technology, we expect that a significant portion of the future growth of our business will be driven through our offerings of converged networking solutions. We believe that our FC products and converged networking solutions will, at least initially, have similar customers and other marketing requirements that should produce certain synergies and cost savings as we expand our converged network solutions business. However, if the expansion of our converged networking solutions business does not produce the synergies and cost savings with our core FC business that we anticipate, our marketing and other business expenses relating to our converged network solutions business could be greater than anticipated and our financial condition could be adversely affected.

The timing of migration by our customers toward emerging technologies and newer product platforms varies. Any failure of our OEM customers to keep up with rapid technological change and to successfully market and sell systems that incorporate new technologies could adversely affect our business.
A significant portion of our revenues depend upon the ability and willingness of our OEM customers to commit significant resources to develop, promote, and deliver products that incorporate our technology. In addition, if our customers’ products are not commercially successful, it would have a materially adverse effect on our business, results of operations, and financial condition.
As our customers migrate from one platform to the enhanced price/performance of the next platform, we may experience reduced revenue, gross profit, or gross margin levels associated with lower average selling prices or higher relative product costs associated with improved performance. While we regularly compare forecasted demand for our products against inventory on hand and open purchase commitments, to the extent that customers migrate more quickly than anticipated, the corresponding reduction in demand for older product platforms may result in excess or obsolete inventory and related charges which could potentially have a material adverse effect on our financial condition and results of operations.
Our customers may elect to substitute low-end adapter card solutions and chip only options for use in high-end environments or applications.
We supply FC and Ethernet I/O solutions that target separate high-end, midrange and small to medium sized end users. Historically, the majority of our revenues have come from our high-end enterprise server and storage solutions. If customers elect to utilize midrange HBA and CNAs in higher-end environments or applications, or migrate to chip only solutions faster than we anticipate, our business, results of operations and financial condition could be negatively affected.
Advancement of storage device capacity technology may not allow for additional revenue growth.
Storage device density continues to improve rapidly and at some point in the future, the industry may experience a period where the advancement in technology may increase storage device capacity to a level that may equal or exceed the need for digital data storage requirements. This would result in a situation where the number of units of storage devices required in the marketplace may level out or even decrease. To the extent that growth in storage device unit demand slows or decreases, our business, financial condition and results of operations may be materially adversely affected.
Our average unit selling prices may decrease at a faster rate than we are able to realize cost reductions in our products.
We continue to experience downward pressure on the average unit selling prices of our products. Furthermore, we may provide pricing discounts to customers based upon volume purchase criteria, and achievement of such discounts may reduce our average unit selling prices. To the extent that growth in unit demand fails to offset decreases in average unit selling prices, our revenues and financial performance could materially decline. Although we have historically achieved offsetting cost reductions, our gross margins and financial performance could be materially adversely affected to the extent that average unit selling prices of our products decrease without a corresponding decrease in the costs of such products. Our gross margins could also be adversely affected by a shift in the mix of product sales to lower gross margin products. Furthermore, as our products are manufactured internationally, cost reductions would be more difficult to achieve if the value of the U.S. dollar were to deteriorate. Moreover, if the manufactured cost of our products were to increase due to inflation or other factors and we are unable to pass along such increase in our costs to our customers, our gross margins and financial performance could be materially adversely affected.
Our international business activities subject us to increased business risks.
For the fiscal year ended June 29, 2014, sales in Asia Pacific accounted for approximately 59% of our total net revenues, sales in the United States accounted for approximately 26% of our total net revenues, and sales in Europe, Middle East, Africa and the rest of the world accounted for approximately 15% of our total net revenues based on billed-to address. We expect that our sales will continue to increase outside of the United States as our customers are migrating towards using contract manufacturers located internationally, predominantly in Asia Pacific. However, because we sell to OEMs and distributors who ultimately resell our products to their customers, the geographic mix of our sales based on billed-to address may not be

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reflective of the geographic mix of end-user demand or installations. Since the majority of our sales are currently denominated in U.S. dollars, if the value of the U.S. dollar increases relative to foreign currencies, our products could become less competitive in international markets.
In addition, as we continue to expand our international operations and with our recent acquisition of Endace, an increasing amount of our expenses are incurred in currencies other than U.S. dollars, including the India Rupee and the New Zealand Dollar. Therefore, we are required from time to time to convert currencies to meet our expense obligations for such international operations, including taxes.
Although we generally purchase our inventory in U.S. dollars, our suppliers also are increasingly located outside of the U.S., and a significant portion of our products are produced at our EMS providers’ production facilities in China, Thailand and New Zealand.
As a result, we are subject to numerous risks inherent in international operations. Our international business activities could be affected, limited or disrupted by a variety of factors, including, but not limited to:
Fluctuations in freight costs and potential disruptions in the transportation infrastructure for our products and components;
Longer accounts receivable payment cycles;
Increased travel, infrastructure, accounting, and legal compliance costs associated with multiple international locations;
Difficulty in locating, hiring and retaining personnel with requisite skill sets and knowledge;
Difficulty maintaining management oversight and control of remote locations;
Changes in the value of local currencies relative to the U.S. dollar and other functional currencies;
Costs and risks of localizing products for international countries;
Import and export restrictions;
Limitations on the amount and nature of foreign investment, including restrictions on the structure and/or permissible forms of investment;
Imposition of or changes in governmental controls, taxes, tariffs, trade restrictions, and regulatory requirements to our current or future operations;
Potential restrictions on transferring funds between countries and difficulties associated with repatriating cash generated or held outside of the U.S. in a tax-efficient manner;
Taxation in multiple jurisdictions;
Bureaucratic intrusions and delays, government corruption, political instability, war, and/or terrorism; and
General economic and social conditions within international countries.
All of these factors could harm future sales of our products to international customers or production of our products outside of the United States, and have a material adverse effect on our business, results of operations, and financial condition.
We may experience delays in our product development cycle and the introduction of new products.
We have experienced delays in product development in the past and may experience similar delays in the future. Such delays may result from numerous factors, which include, but are not limited to:
Difficulties in hiring and retaining necessary employees and independent contractors;
Difficulties in reallocating engineering resources and other resource limitations;
Unanticipated or lengthy redevelopment efforts to make design changes resulting from unintentional intellectual product infringement and related injunctions;
Unanticipated engineering or manufacturing complexity, including complexity arising from third party suppliers of intellectual property such as foundries of our ASICs;
Undetected errors or failures in our products;
Changing OEM product specifications;
Delays in the acceptance or shipment of products by OEM customers; and
Changing market or competitive product requirements.
We expect to continue to engage in product development alignment activities with customers, companies we have investments in or receivables from, and other third parties. These product development alignment activities can magnify several risks for us, including the loss of control over development activities and the timing of product availability. Accordingly, we face increased risk that such product development alignment activities will result in products that are not commercially successful or that are not available in a timely fashion.
Given the short product life cycles in the markets for our products and the relatively long product development cycles, any delay or unanticipated difficulty associated with new product introductions or product enhancements could have a material adverse effect on our business, results of operations, and financial condition.

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We are dependent on sole source and limited source third party suppliers and EMS providers for our products.
We rely on third party suppliers for components and the manufacture of our products. A number of these components and products are only available from a single or limited number of suppliers. We also purchase certain components and products from single or limited suppliers and EMS providers to drive volume discounts. As a result, we have experienced delays or difficulty in securing components and finished goods in the past, as well as additional costs related to such issues. Delays or difficulty in securing components or finished goods at reasonable cost may be caused by numerous factors including, but not limited to:
Natural disasters, such as the significant flooding in Thailand in October 2011;
Discontinued production by a supplier;
Required long-term purchase commitments;
Undetected errors, failures or production quality issues, including projected failures that may constitute epidemic failure rates specified in agreements with our customers or that may require us to make concessions or accommodations for continuing customer relationships;
Timeliness of product delivery;
Increases in manufacturing costs due to lower volumes or more complex manufacturing process;
Sole sourcing of components made by a small number of suppliers, including the inability to obtain components and finished goods at reasonable cost from such sources and suppliers;
Market shortages;
Changes in business strategies of our suppliers and EMS providers;
Financial stability and viability of our suppliers and EMS providers;
Inability or unwillingness of our suppliers or EMS providers to continue their business with us;
Environmental, tax or legislative changes in the location where our products are produced or delivered;
Disruption in shipping channels;
Labor shortages or labor strikes at our suppliers or EMS providers;
Intellectual property controversies; and
Difficulties associated with international operations.
We utilize third-party EMS providers located inside and outside the United States to manufacture and test the majority of our products. These EMS providers also procure and manage most of the components used in our board and system level products. We may introduce new EMS providers and new locations into our supply chain from time to time. These transitions introduce security of supply risks as we ramp down the supply from one source and ramp up the supply from the new source. As a result of our reliance on third-party EMS providers, we may not be able to directly control product delivery schedules and the quality of our products which could have a material adverse effect on our business, results of operations, and financial condition. If our EMS providers are unable to respond in a timely fashion to changes in customer demand, we may be unable to produce enough products to respond to sudden increases in demand, resulting in lost revenues. Alternatively, in the case of order cancellations or decreases in demand, we may be liable for excess or obsolete inventory or cancellation charges resulting from contractual purchase commitments that we have with our EMS providers. We regularly provide rolling forecasts of our requirements to our EMS providers for planning purposes, pursuant to our agreements, a portion of which is binding upon us. Additionally, we are committed to accept delivery on the forecasted terms for a portion of the rolling forecast. Cancellations of orders or changes to the forecasts provided to any of our EMS providers may result in cancellation costs payable by us. In the past, we have been required to take delivery of materials from our EMS providers that were in excess of our requirements, and we have previously recognized charges and expenses related to such excess material. We expect that we will continue to incur such costs in the future.
We also purchase ASICs and field-programmable gate arrays (FPGAs) from sole source suppliers, including LSI Corporation/Avago Technologies (LSI/Avago), Marvell Technology Group Ltd., Intel Corporation, Renesas Electronics America Inc., Toshiba Corporation, Altera Corporation, and Xilinx Inc., who in turn rely on a limited number of suppliers and foundries to manufacture the ASICs and FPGAs. This creates risks in assuring the availability of such ASICs and FPGAs. While we have multiple ASIC suppliers, we sole source each of our ASICs and FPGAs, and we use the same supplier for more than one of our ASICs and FPGAs. The inability of the Company or our EMS providers to obtain these ASICs and FPGAs in sufficient quantities or in the desired time periods could delay the production and delivery of our products which, in turn, could result in lost revenue due to customer cancellations and have a material adverse effect on our business, results of operations, and financial condition.
The use of third party ASIC suppliers may also create risks relating to intellectual property controversies including the possible need to redesign ASICs provided changes by such ASIC component supplier in response to such controversies. For example, on September 14, 2009, Broadcom Corporation filed two separate patent infringement lawsuits against the Company in the U.S. District Court in the Central District of California that were subsequently amended and consolidated. The

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consolidated lawsuit includes claims related to the use of multiple lanes of phase interpolators, clock and data recovery (CDR) circuits and other circuitry used to deserialize signals in SerDes modules included within an ASIC supplied by third party ASIC suppliers. See Note 10, “Commitments and Contingencies,” in the notes to the consolidated financial statements under the caption “Litigation” in Part IV, Item 15(a) of this Annual Report on Form 10-K. Also see “Third party claims of intellectual property infringement could adversely affect our business” elsewhere in this Item 1A — Risk Factors.
Our intellectual property protections may be inadequate.
We believe that our continued success depends primarily on continuing innovation, marketing, and technical expertise, as well as the quality of product support and customer relations. At the same time, our success is partially dependent on the proprietary technology contained in our products. We currently rely on a combination of patents, copyrights, trademarks, trade secret laws, and contractual provisions to establish and protect our intellectual property rights in our products.
We cannot be certain that the steps we take to protect our intellectual property will adequately protect our proprietary rights, that others will not independently develop or otherwise acquire equivalent or superior technology, or that we can maintain such technology as trade secrets. In addition, the laws of some of the countries in which our products are or may be developed, manufactured, or sold may not protect our products and intellectual property rights to the same extent as the laws of the United States, or at all. Furthermore, we enter into various development projects and arrangements with other companies. In some cases, these arrangements allow for the sharing or use of our intellectual property. Our failure to protect our intellectual property rights could have a material adverse effect on our business, results of operations, and financial condition. We attempt to mitigate this risk by obtaining indemnification from others, where possible.
Certain of our software (as well as that of our customers) may be derived from “open source” software that is generally made available to the public by its authors and/or other third parties. Such open source software is often made available to us under licenses, such as the GNU General Public License, which impose certain obligations on us in the event we were to distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public, or license such derivative works under a particular type of license, rather than the forms of licenses customarily used to protect our intellectual property. In the event the copyright holder of any open source software were to successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public and/or stop distribution of that work.
We may be unable to attract, motivate or retain key managerial and technical personnel.
Our success depends to a significant degree upon the performance and continued service of key managers, as well as engineers involved in the development of our storage networking technologies and technical support of our products and customers. Competition for such highly skilled employees is intense in the communities in which we operate, as well as our industry, and we cannot be certain that we will be successful in recruiting, training, and retaining such personnel. In addition, employees may leave us and subsequently compete against us, and we may incur costs relating to their departure. Also, many of these key managerial and technical personnel receive stock-based compensation incentives as part of our employee retention initiatives. The number of shares authorized under stock based plans may be insufficient and shareholders may not approve to increase the number of authorized shares. New regulations, volatility in the stock market, and other factors could diminish the value of our stock-based compensation incentives, putting us at a competitive disadvantage and forcing us to use more cash compensation. If we are unable to attract new managerial and technical employees, or are unable to retain and motivate our current key managerial and technical employees, or are forced to use more cash compensation to retain or replace key personnel, our business, results of operations, and financial condition could be materially adversely affected.
Our stock price is volatile, which has and may result in lawsuits against us and our officers and directors.
The stock market in general and the stock prices of technology companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of any specific public company. The market price of our common stock has fluctuated in the past and is likely to continue to fluctuate in the future. For example, during the twelve month period ended June 29, 2014, the sales price of our common stock ranged from a low of $4.51 per share to a high of $8.99 per share. Factors that could have a significant impact on the market price of our stock include, but are not limited to, the following:
Actual or alleged intellectual property infringement;
Quarterly variations in customer demand and operating results;
The gain or loss of significant customers or design wins;
Pricing pressures;
General conditions in the computer, storage, or communications markets;
Events affecting other companies that investors deem to be comparable to us;

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Announcements of new products by us or our competitors;
Offers to buy us or a competitor for a premium over recent trading prices;
Changes in analysts’ earnings estimates;
Changes in analyst recommendations, price targets, or other parameters that may not be related to earnings estimates;
Rumors or dissemination of false information;
Dilution resulting from conversion of outstanding convertible senior notes into shares of our common stock; and
Short selling of our common stock.
In addition, a takeover proposal by any third party to acquire the outstanding shares of our common stock may result in further volatility in the price of our common stock. If a takeover does not occur following announcement of a takeover proposal, for any reason, the market price of our common stock may decline.
In the past, companies, including us, that have experienced volatility in the market price of their stock have been subject to securities class action litigation. If we were to be the subject of similar litigation in the future or experience unfavorable outcomes in any of our pending litigations, as discussed in Note 10 in the accompanying notes to our consolidated financial statements under the caption "Litigation" in part IV, Item 15(a) of this Annual Report on Form 10-K, it could have a material adverse effect on our business, results of operations, and financial condition. Such litigation would also divert management’s attention from other business matters.
Our results of operations could vary as a result of the methods, estimates, and judgments that we use in applying our accounting policies.
The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on our results of operations. Such methods, estimates, and judgments are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time that lead us to change our methods, estimates, and judgments. Changes in those methods, estimates, and judgments could significantly affect our results of operations. See “Critical Accounting Policies” contained in Part II, Item 7 of this Annual Report on Form 10-K.
The final determination of our income tax liability may be materially different from our income tax provisions and accruals.
We are subject to income taxes in both the United States and international jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions where the ultimate tax determination is uncertain. Additionally, our calculations of income taxes are based on our interpretations of applicable tax laws in the jurisdictions in which we file.
Our provision for income taxes is subject to volatility and could be adversely affected by numerous factors including:
Earnings being lower than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher tax rates;
Changes in the allocation of income and expenses related to cost sharing arrangements, including adjustments related to changes in our corporate structure, acquisitions or tax law changes;
Tax effects of increases in nondeductible compensation;
Changes in transfer pricing regulations;
Changes in domestic and foreign tax laws including possible U.S. changes to the taxation of earnings of foreign subsidiaries, the deductibility of expenses attributable to foreign income and changes to foreign tax credit rules;
Changes in accounting rules or principles, and changes in the valuation of deferred tax assets and liabilities;
Unfavorable results from income tax audits; and
Expiration or lapses of federal and state research credits.
We have adopted transfer-pricing policies between our affiliated entities. Our policies call for the licensing of intellectual property, the provision of services, and the sale of products from one affiliate to another at prices that we believe are equivalent to an arm’s length negotiated price. If the U.S. Internal Revenue Service (IRS) or the taxing authorities of any other jurisdiction were to successfully challenge our transfer pricing practices resulting in adjustments for prior or future tax years, we could become subject to higher taxes and our earnings would be adversely affected. Any redetermination of income allocations or modification of transfer pricing laws could result in an income tax assessment on the portion of income deemed to be derived from the U.S. or other taxing jurisdictions.
Although we believe our tax estimates are reasonable, there is no assurance that the final determination of our income tax liability will not be materially different than what is reflected in our income tax provisions and accruals. Significant judgment is required to determine the recognition and measurement of tax liabilities prescribed in the accounting guidance for uncertainty in income taxes. The accounting guidance for uncertainty in income taxes applies to all income tax positions, including the

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potential recovery of previously paid taxes, which, if settled unfavorably, could adversely impact our provision for income taxes. In addition, we are subject to the continuous examination of our income tax returns by the IRS and other foreign, state and local tax authorities. We are currently under audit by the IRS for fiscal years 2008 and 2009 and an amended return for fiscal 2007, and by the California Franchise Tax Board for fiscal years 2008 and 2009. In March 2014, we received a 30-Day letter from the IRS, proposing an adjustment related to the amount of "buy-in-payments" made by one of our international subsidiaries to the Company in connection with the cost-share agreement entered into by the Company and our international subsidiary in fiscal year 2008. The incremental tax liability asserted in the 30-Day Letter is approximately $70.0 million, excluding interest and penalties. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Upon the 30th day from the issuance of the 30-Day Letter from the IRS, we began accruing additional interest and will continue to do so until resolution, which may adversely impact the Company’s tax provision, net income/(loss) and cash flows. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial condition. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial condition.
We may not realize the full benefits of the New Zealand research and development grants.
We are entitled to reimbursement of certain New Zealand based research and development costs through various grant programs offered by the New Zealand government that were assumed as part of our acquisition of Endace. The receipt and amount of funds under these programs are subject to our satisfaction of certain terms and conditions. As of June 29, 2014, Endace has received an aggregate of approximately $6.9 million in credits to research and development expenses and approximately $1.1 million in credits related to capital expenditures pursuant to these grants. If we do not to satisfy the terms and conditions of any of these grant programs, expenses incurred in respect of the relevant research and development projects may not be approved for reimbursement, we may be required to return amounts previously paid to us under such grant programs, and further grants may not be available to us in the future.
Our corporate offices, principal product development facilities, EMS providers, suppliers and customers are located in regions that are subject to earthquakes and other natural disasters.
Our California facilities, which include our corporate offices and principal product development facilities, are located near major earthquake faults. Any disruption in our business activities, personal injury, or damage to the facilities in excess of our currently insured amounts as a result of earthquakes or other such natural disasters, could have a material adverse effect on our business, results of operations, and financial condition. In addition, natural disasters such as hurricanes, tsunamis, flooding, and earthquakes, such as the flooding in Thailand in October 2011 and the earthquake off the coast of Japan and the resulting tsunami in March 2011, could disrupt manufacturing operations of our EMS providers, component suppliers and customers or the downstream suppliers that are located in such impacted areas, resulting in lost revenue opportunities in the near term and/or long term.
We currently do not carry earthquake or flood insurance. However, we do carry various other lines of insurance that may or may not be adequate to protect our business in the case of a natural disaster.
Our certificate of incorporation and the related provisions under Delaware law could adversely affect the performance of our stock.
Provisions of our certificate of incorporation and Delaware General Corporation Law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders. In addition, although we do not currently maintain a shareholders rights plan, we have maintained such a plan in the past and it is possible that we may adopt a shareholders rights plan in the future should general business, market or other conditions, opportunities and risks arise. The provisions of our certificate of incorporation, Delaware law, and any shareholders rights plan are generally intended to encourage potential acquirers to negotiate with us and allow our Board of Directors the opportunity to consider alternative proposals in the interest of maximizing shareholder value. However, such provisions may also discourage acquisition proposals or delay or prevent a change in control, which could harm our stock price.

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We may be subject to theft, misuse of our electronic data or cyber attacks, which could result in third-party claims and harm our business and results of operations.
We may experience attempts by others that try to gain unauthorized access through the Internet to our information technology systems, such as when they masquerade as authorized users or surreptitiously introduce software. These attempts, which might be the result of industrial or other espionage, or actions by hackers seeking to harm us, our products, or our end users. We seek to detect and investigate these security incidents and to prevent their recurrence, but in some cases we might be unaware of an incident or its magnitude and effects. The theft or unauthorized use or publication of our trade secrets and other confidential business information as a result of such cyber threats could adversely affect our competitive position and reduce marketplace acceptance of our products; the value of our investment in research and development and marketing could be reduced; and third parties might assert against us or our customers claims related to resulting losses of confidential or proprietary information or end-user data, or system reliability. Any such event could have a material adverse effect on our business, results of operations, and financial condition.
Our system of internal controls may be inadequate.
We maintain a system of internal controls in order to ensure we are able to collect, process, summarize, and disclose the information required by the Securities and Exchange Commission within the time periods specified. Any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Due to these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Additionally, public companies in the United States are required to review their Internal Controls Over Financial Reporting (ICOFR) under the Sarbanes-Oxley Act of 2002. If our ICOFR are not adequate or fail to perform as anticipated, we may be required to restate our financial statements, receive an adverse audit opinion on the effectiveness of our internal controls, or take other actions that will divert significant financial and managerial resources, as well as subject us to fines or other government enforcement actions. Furthermore, the price of our stock could be adversely affected.
Changes in laws, regulations, and financial accounting standards may affect our reported results of operations.
As our common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, SEC and NYSE, have implemented requirements and regulations and continue developing additional regulations and requirements in response to corporate scandals and laws enacted by Congress, most notably the Sarbanes-Oxley Act of 2002. Our efforts to comply with these regulations have resulted in, and are likely to continue resulting in, increased general and administrative expenses and diversion of management time and attention from revenue-generating activities to compliance activities.
A change in accounting standards or practices and varying interpretations of existing accounting pronouncements, such as the increased use of fair value measures, revenue recognition, lease accounting, financial instruments and other accounting standards, and the potential requirement that U.S. registrants prepare financial statements in accordance with International Financial Reporting Standards (IFRS), could have a significant effect on our reported financial results or the way we conduct our business. Implementation of accounting regulations and related interpretations and policies, particularly those related to revenue and expense recognition, could cause us to defer revenue recognition or accelerate the timing of expense recognition, which would adversely affect our reported financial results, and could have an adverse effect on our stock price.
As new and modified laws, regulations, and standards are subject to varying interpretations due in part to their lack of specificity, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices.
Global warming issues may cause us to alter the way we conduct our business.
The general public is becoming more aware of global warming issues, and as a result, governments around the world are beginning to focus on addressing this issue. This may result in new environmental regulations that may unfavorably impact us, our suppliers, and our customers in how we conduct our business including the design, development, and manufacturing of our products. The cost of meeting these requirements may have an adverse impact on our results of operations and financial condition.
 
Item 1B. Unresolved Staff Comments.
None.

25



 
Item 2. Properties.
Our corporate offices and principal product development facilities are currently located in approximately 180,000 square feet of buildings in Costa Mesa, California which are owned by us. In addition, we lease facilities in California, Colorado, Texas, Washington, India, and New Zealand primarily for engineering and development and approximately 10 other remote offices throughout the world, primarily for sales.
Our future facilities requirements will depend upon our business, but we believe additional space, if required, may be obtained on reasonable terms.
 
Item 3. Legal Proceedings.
The information set forth under Note 10, “Commitments and Contingences,” in the notes to the consolidated financial statements under the caption “Litigation” included in Part IV, Item 15(a) of this Annual Report on Form 10-K is incorporated herein by reference.
 
Item 4. Mine Safety Disclosures
Not applicable.

26



PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
Principal Market and Prices
The Company’s common stock is traded on the New York Stock Exchange under the symbol ELX. The following table sets forth the high and low per share sales prices for our common stock for the indicated periods, as reported on the New York Stock Exchange.
 
 
High
 
Low
2014
 
 
 
Fourth Quarter
$
7.64

 
$
4.51

Third Quarter
7.74

 
6.93

Second Quarter
8.24

 
6.79

First Quarter
8.99

 
6.53

2013
 
 
 
Fourth Quarter
$
6.82

 
$
5.72

Third Quarter
7.73

 
6.35

Second Quarter
7.45

 
6.10

First Quarter
7.98

 
5.85

Number of Common Stockholders
The approximate number of holders of record of our common stock as of August 20, 2014 was 362.
Dividends
We have never paid cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain our earnings for the development of our business.
Issuer Purchases of Equity Securities
In November 2013, our Board of Directors authorized a plan to repurchase up to $200.0 million of our outstanding common stock. The plan superseded the existing share repurchase program authorized in August 2008. The share repurchases are authorized to be completed through the combination of individually negotiated transactions, accelerated share buybacks and open market purchases.
On November 13, 2013, we entered an accelerated share buyback agreement ("ASB") with Goldman Sachs to repurchase an aggregate of $44.3 million of our outstanding common stock. The total number of shares subject to repurchase under the ASB was determined based on the daily volume weighted average market price of our common stock over the course of a calculation period, less a discount, and was subject to certain adjustments under the ASB. Under the ASB we paid approximately $44.3 million to Goldman Sachs on November 18, 2013 and Goldman Sachs delivered to us 4.6 million shares of common stock reflecting 80% of the $44.3 million paid. Goldman Sachs delivered to us the remaining 20%, or 1.5 million shares of common stock, upon final settlement of the ASB on April 30, 2014.
Through June 29, 2014, the Company repurchased approximately 22.5 million shares of its common stock for an aggregate purchase price of approximately $150.0 million at an average purchase price of $6.68 per share under this plan. We may repurchase additional shares under this plan from time-to-time in open market purchases or privately negotiated transactions. The share repurchases will be financed by available cash balances and cash from operations.

27



Period
Total
Number
of Shares
Purchased
 
Average
Price
Paid
per
Share
 
Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans
or Programs
 
Approximate
Dollar Value
of Shares
That May
Yet Be
Purchased
Under the
Plans
or Programs
March 31, 2014 — April 27, 2014
277,416

 
$
7.41

 
277,416

 
$
94,539,525

April 28, 2014 — May 25, 2014
5,830,798

 
5.35

 
5,830,798

 
$
72,208,582

May 26, 2014 — June 29, 2014
4,100,995

 
5.42

 
4,100,995

 
$
50,000,000

Total
10,209,209

 
5.43

 
10,209,209

 
 
Sales of Unregistered Securities
There were no sales of unregistered securities for the three months ended June 29, 2014. However, in November 2013, we issued an aggregate principal amount of $175.0 million in 1.75% Convertible Senior Notes due November 2018 (Convertible Senior Notes). The Convertible Senior Notes are convertible into shares of our common stock at an initial conversion rate of approximately 97.13 per share of our common stock per $1,000 principal amounts of the Convertible Senior Notes. The initial conversion price is approximately $10.30 per share of our common stock. See Note 11 "Convertible Senior Notes" in Part IV, Item 15(a) of this Annual Report on Form 10-K.
Equity Compensation Plan Information
See Part III, Item 12 — “Security Ownership of Certain Beneficial Owners and Management” of this Annual Report on Form 10-K for certain information regarding our equity compensation plans.

28



Stock Performance Graph
The graph below compares the cumulative total stockholder return on the Company’s common stock with the cumulative total return on the Standard & Poor’s 500 Index and the S&P 500 Computer Storage and Peripherals Index for the period of five fiscal years commencing June 30, 2009 and ended June 29, 2014.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
EMULEX CORPORATION COMMON STOCK, S&P 500 INDEX AND
S&P 500 TECHNOLOGY HARDWARE, STORAGE AND PERIPHERALS INDEX
 
*
Assumes the value of the investment in the Company’s common stock and each index was $100 on June 30, 2009.
Item 6. Selected Financial Data.
The following table summarizes certain selected consolidated financial data. On August 25, 2010, we completed the acquisition of ServerEngines, and on February 26, 2013, we completed the acquisition of Endace.

29



Selected Consolidated Statements of Operations Data
 
Year Ended
June 29,
2014
 
June 30,
2013
 
July 1,
2012
 
July 3,
2011
 
June 27,
2010
(In thousands, except per share data)
Net revenues:
 
 
 
 
 
 
 
 
 
Network Connectivity Products
$
318,940

 
$
360,974

 
$
362,315

 
$
346,665

 
$
289,990

Storage Connectivity & Other Products
94,515

 
104,409

 
139,454

 
105,878

 
109,160

Network Visibility Products
33,878

 
13,184

 

 

 

Total net revenues
447,333

 
478,567

 
501,769

 
452,543

 
399,150

Cost of goods sold :
 
 
 
 
 
 
 
 
 
Cost of goods sold
153,994

 
173,004

 
184,593

 
167,280

 
133,554

Amortization of core and developed technology intangible assets
24,916

 
21,800

 
24,031

 
33,127

 
18,904

Patent litigation settlement, damages, and royalties
7,426

 
4,963

 
37,310

 

 

Total cost of sales
186,336

 
199,767

 
245,934

 
200,407

 
152,458

Gross profit
260,997

 
278,800

 
255,835

 
252,136

 
246,692

Operating expenses:
 
 
 
 
 
 
 
 
 
Engineering and development
155,909

 
168,446

 
163,552

 
170,845

 
126,850

Selling and marketing
77,757

 
66,235

 
59,990

 
58,635

 
56,554

General and administrative
41,115

 
38,893

 
35,658

 
56,133

 
50,454

Amortization of other intangible assets
6,375

 
5,935

 
6,569

 
9,334

 
6,792

In-process research and development impairment

 

 

 
6,000

 

Total operating expenses
281,156

 
279,509

 
265,769

 
300,947

 
240,650

Operating (loss) income
(20,159
)
 
(709
)
 
(9,934
)
 
(48,811
)
 
6,042

Non-operating (expense) income, net:
 
 
 
 
 
 
 
 
 
Interest income
26

 
34

 
97

 
96

 
286

Interest expense
(5,860
)
 
(24
)
 
(15
)
 
(373
)
 
(7
)
Impairment of strategic investment

 

 

 
(9,184
)
 

Other (expense) income, net
(193
)
 
(4,884
)
 
350

 
(575
)
 
23

Total non-operating (expense) income, net
(6,027
)
 
(4,874
)
 
432

 
(10,036
)
 
302

(Loss) income before income taxes
(26,186
)
 
(5,583
)
 
(9,502
)
 
(58,847
)
 
6,344

Income tax provision (benefit)
3,346

 
(369
)
 
1,578

 
24,763

 
(17,276
)
Net (loss) income
$
(29,532
)
 
$
(5,214
)
 
$
(11,080
)
 
$
(83,610
)
 
$
23,620

Net (loss) income per share:
 
 
 
 
 
 
 
 
 
Basic
$
(0.35
)
 
$
(0.06
)
 
$
(0.13
)
 
$
(0.97
)
 
$
0.29

Diluted
$
(0.35
)
 
$
(0.06
)
 
$
(0.13
)
 
$
(0.97
)
 
$
0.29

Number of shares used in per share computations:
 
 
 
 
 
 
 
 
 
Basic
83,917

 
90,271

 
86,585

 
86,038

 
80,097

Diluted
83,917

 
90,271

 
86,585

 
86,038

 
81,282


30



Selected Consolidated Balance Sheet Data
 
Year Ended
 
June 29,
2014
 
June 30,
2013
 
July 1,
2012
 
July 3,
2011
 
June 27,
2010
 
(In thousands)
Total current assets
$
281,496

 
$
239,313

 
$
363,238

 
$
302,152

 
$
417,551

Total current liabilities
67,945

 
71,586

 
102,589

 
71,242

 
60,430

Working capital
213,551

 
167,727

 
260,649

 
230,910

 
357,121

Total assets
717,923

 
710,709

 
712,959

 
702,839

 
689,450

Total debt obligations
146,478

 

 

 

 

Accumulated deficit
(501,886
)
 
(472,354
)
 
(467,140
)
 
(456,060
)
 
(372,450
)
Total stockholders’ equity
454,646

 
587,625

 
575,103

 
588,691

 
591,182

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the “Selected Financial Data” included in Part I, Item 6, and the consolidated financial statements and the accompanying notes included in Part IV, Item 15 of this Annual Report on Form 10-K. This discussion and analysis contains certain forward-looking statements. The realization of which may be impacted by various factors including, but not limited to, the “Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K.
Executive Overview
Emulex designs and markets high speed network connectivity, monitoring, and management products, providing solutions for global networks that support enterprise, cloud, government and telecommunications and enable end-to-end application visibility, optimization and acceleration in the data center. The world’s leading server and storage OEMs depend on our broad range of products to help build high performance, highly reliable, and scalable Fibre Channel Storage Area Networks (SAN) and Ethernet Converged Networking solutions, and our products can be found in the data centers of nearly all Fortune 1000. Our monitoring and management solutions, including our portfolio of network visibility and recording products, provide organizations with complete network performance management at speeds up to 100 Gb Ethernet.
With our acquisition of Endace, we have two business operating segments consisting of three product lines. Our Connectivity Segment consists of our legacy Emulex products and includes Network Connectivity Products (NCP) and Storage Connectivity and Other Products (SCOP). Our Visibility Segment consists of our Network Visibility Products (NVP) that were acquired through the Endace acquisition.
Customers in the NCP market use our industry standard Fibre Channel and Ethernet solutions to provide server Input/Output (I/O) and target storage array connectivity to create networks for mission-critical enterprise and cloud data centers. These products enable servers to reliably and efficiently connect to Local Area Networks (LANs), SANs, and Network Attached Storage (NAS) by offloading data communication processing tasks from the server as information is delivered and sent to the network. Our products use industry standard protocols including Fibre Channel Protocol (FCP), Internet Protocol (IP), Transmission Control Protocol (TCP)/IP, internet Small Computer System Interface (iSCSI), NAS, and Fibre Channel over Ethernet (FCoE).
Our Ethernet products include our OneConnect® Converged Network Adapters (CNAs), Local Area Network on Motherboard (LOM) application specific integrated circuits, and custom form factor solutions for OEM blade servers that enable high performance, scalable networks and convergence. Our Fibre Channel based products include LightPulse® Host Bus Adaptors (HBAs), Fibre Channel application specific integrated circuits (ASICs), and custom form factor solutions for OEM blade servers.
SCOP includes our InSpeed®, switch-on-a-chip (SOC) and backend connectivity, bridge, router products, Pilot™ Integrated Baseboard Management Controllers (iBMC), certain legacy products and other products and services. SCOP is deployed inside storage arrays, tape libraries, and other storage appliances, and connect storage controllers to storage capacity, delivering improved performance, reliability, and connectivity. SCOP uses industry standard protocols including Fibre Channel, Serial Attached Small Computer Interface (SAS), and Serial Advanced Technology Attachment (SATA), and support the broadest range of Hard Disk Drive (HDD) and Solid State Disk (SSD) technologies.
NVP consists entirely of the recently acquired Endace® family of network visibility and recording infrastructure products that address NRM for high speed networks. Our NVP products include EndaceProbe™ Intelligent Network Recorder,

31



EndaceVision™, EndaceODE™ Open Application Platform, EndaceAccess™ Network Visibility Head-End system, EndaceFlow™ NetFlow Generator Appliance and EndaceDAG Data Capture Cards.
We rely almost exclusively on OEMs and sales through distribution partners for our Networking segment revenue and sales to end-users and through distribution partners for our Visibility segment revenue. Our significant OEM customers include the world’s leading server and storage providers, including Cisco, Dell, EMC, Fujitsu, HDS, Hewlett-Packard, Hitachi, Huawei, Intel, IBM, NEC, NetApp, Oracle, and Xyratex. Our significant distributors include ASI, Avnet, BT, Digital China Technology Limited, Info X, Ingram Micro, Macnica, Netmarks, SYNNEX, Tech Data, and TED. The market for networking infrastructure solutions is concentrated among large OEMs, and as such, a significant portion of our revenues are generated from sales to a limited number of customers.
As of June 29, 2014, we had a total of 1,122 employees.
We use a 52 to 53 week fiscal year that ends on the Sunday nearest to June 30. Therefore, every fifth or sixth fiscal year will be a 53-week fiscal year. The last 53 week fiscal year was fiscal 2011.
Exit and Disposal Activities
During the fourth quarter of fiscal 2014, we recorded restructuring charges of approximately $1.1 million, primarily consisting of workforce reductions. The severance related charges are expected to be substantially paid in cash by the first quarter of fiscal 2015.
During the second quarter of fiscal 2014, we initiated a restructuring plan designed to streamline business operations and reduce operating expenses. The restructuring actions include a reduction in workforce of approximately 15%, the consolidation of certain engineering facilities, and the closure of our Bolton, Massachusetts facility. The total restructuring charge was approximately $8.1 million.
During the fourth quarter of fiscal 2013, we took certain actions with respect to our operations, primarily consisting of workforce reductions, and recorded approximately $2.7 million in severance costs during fiscal 2013, the majority of which was paid in July 2013.
See Note 8, "Restructuring," in the notes to consolidated financial statements in Part IV, Item 15(a) of this Annual Report on Form 10-K for details of the restructuring actions taken during fiscal 2014 and 2013.
Business Combinations
On February 26, 2013, we acquired 89.6% of the outstanding common stock and all of the outstanding stock options of Endace for cash consideration of approximately $110.4 million. As of April 25, 2013, we had acquired the outstanding noncontrolling interest for approximately $12.0 million and obtained 100% ownership of Endace. Our consolidated financial statements include the results of operations for Endace commencing as of the acquisition date. Emulex’s software-defined convergence architecture and Endace’s network visibility infrastructure are expected to provide customers with new and innovative ways to solve the challenges of network complexity and ensure application-level performance at speeds of 10Gb and beyond.
Endace was a New Zealand based company that was publicly traded on London AIM Stock Exchange as of February 26, 2013, and subsequently delisted effective March 27, 2013. Endace provides network visibility infrastructure including network monitoring appliances, network analytics software and ultra-high speed network access switching. Emulex’s software-defined convergence architecture and Endace’s network visibility infrastructure are expected to provide customers with new and innovative ways to solve the challenges of network complexity and ensure application-level performance at speeds of 10Gb and beyond. The ability of Endace’s network visibility technology to record, visualize and monitor network traffic provides customers with the ability to dynamically optimize application delivery across the infrastructure. The combination of Emulex’s and Endace’s technology is expected to provide customers the solutions to connect, monitor and manage high-performance networks.

Product Redesign Activities and Potential Royalty Obligations
Broadcom Corporation (Broadcom) filed a consolidated patent infringement suit against us during fiscal 2010. After a nearly three week trial that ended October 6, 2011, the jury reached a partial verdict involving two out of the six patents. The Court determined that one of the patents (U.S. Patent 7,058,150) [the ‘150 patent] had been infringed by us, and the jury rendered an advisory verdict on October 12, 2011 to the Court that it is not invalid, and awarded approximately $0.4 million in damages with respect to that patent. The jury reached a unanimous verdict of non-infringement on another patent relating to Emulex Fibre Channel switch products. A mistrial was declared concerning the remaining four patents for which no unanimous verdict was reached. On December 15, 2011, the Court issued judgments as a matter of law (JMOL) that the two patents, on

32



which the jury had rendered advisory verdicts, were not invalid. On December 16, 2011, the Court issued an additional JMOL that one of the patents (U.S. Patent 7,471,691) [the ‘691 patent] had been infringed by us. On March 16, 2012, the Court issued a decision concerning injunctive relief for the ‘150 and the ‘691 patents. The decision provided, in part, for a sunset period of 18 months relating to the ‘150 patent, starting on October 12, 2011. The decision further provided for a sunset period of 18 months relating to the ‘691 patent, starting on December 16, 2011. The sunset period allows us to sell the affected products to existing customers for specific customer devices, subject to limitations relating to when the products had been qualified and when certain firm orders had been placed. On April 3, 2012, the Court issued a permanent injunction (2012 Permanent Injunction) which, with respect to both the ‘150 and the ‘691 patents, further describes the prohibited activities, contains sunset provision terms including royalty rates and computations, limits the territory to allow sales of products that are manufactured outside the U.S. to customers located outside the U.S., permits design around efforts including modifications and design, development, and testing to eliminate infringement, and permits service and technical support for certain products.
Through June 29, 2014, we have incurred approximately $21.7 million, in mitigation, product redesign and appeal related expenses of which approximately $4.5 million, $8.6 million and $3.6 million were recorded during fiscal 2014, 2013, and 2012, respectively. The Company expects to incur incremental mitigation, product redesign, and appeal related expenses during fiscal 2015 up to $1 million, to be recorded within operating expenses. Engineering and development costs will include expenses for activities to redesign, design around, modify, design, develop, test and requalify certain of our affected products during the sunset period, and to implement our end of life processes in the U.S. for certain other affected products. Sales and marketing costs are likely to include expenses for customer support, pre-production samples, education and training, and other miscellaneous costs. In addition, we have agreed to participate in certain customer royalty obligations arising under their licensing agreements with Broadcom related to certain Emulex infringing products. Through June 29, 2014, the Company has recorded approximately $4.4 million in cost of sales related to such customer obligations, of which approximately $3.4 million and $0.9 million related to such payments were recorded to cost of sales in fiscal 2014 and 2013, respectively. The Company may incur additional amounts related to these obligations of approximately $5 million in future periods, all of which will reduce gross margins in the periods accrued.
Effective March 30, 2014, Emulex and Broadcom entered into a Dismissal and Standstill Agreement (the "Dismissal Agreement") pursuant to which Emulex and Broadcom entered into certain understandings with respect to the outstanding claims relating to and arising out of the patent infringement suit. Pursuant to the terms of the Dismissal Agreement, we agreed to pay Broadcom a non-refundable, non-cancelable dismissal and standstill fee in the amount of $5 million reflected in the accompanying financial statements in General and Administrative expense.
See Note 10 “Commitments and Contingencies,” in the notes to the consolidated financial statements under the caption “Litigation” in Part IV, Item 15(a) of this Annual Report on Form 10-K for additional information.

Results of Operations for Emulex Corporation and Subsidiaries
The following discussion and analysis should be read in conjunction with the selected consolidated financial data set forth in Item 6 — “Selected Consolidated Financial Data,” and our Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report on Form 10-K. All references to years refer to our fiscal years ended June 29, 2014, June 30, 2013 and July 1, 2012, as applicable, unless the calendar year is specified. The following table sets forth certain financial data for the years indicated as a percentage of net revenues.

33



 
Percentage of Net Revenues
 
2014
 
2013
 
2012
Net revenues:
 
 
 
 
 
Network Connectivity Products
71
 %
 
75
 %
 
72
 %
Storage Connectivity & Other Products
21

 
22

 
28

Network Visibility Products
8

 
3

 

Total net revenues
100

 
100

 
100

Cost of sales:
 
 
 
 
 
Cost of goods sold
34

 
36

 
37

Amortization of core and developed technology intangible assets
6

 
5

 
5

Patent litigation settlement, damages and sunset period royalties
2

 
1

 
7

Total cost of sales
42

 
42

 
49

Gross profit
58

 
58

 
51

Operating expenses:
 
 
 
 
 
Engineering and development
35

 
35

 
33

Selling and marketing
17

 
14

 
12

General and administrative
9

 
8

 
7

Amortization of other intangible assets
1

 
1

 
1

Total operating expenses
62

 
58

 
53

Operating (loss) income
(4
)
 

 
(2
)
Non-operating (expense) income, net:
 
 
 
 
 
Interest income

 

 

Interest expense
(1
)
 

 

Impairment of strategic investment

 

 

Other (expense) income, net

 
(1
)
 

Total non-operating (expense) income, net
(1
)
 
(1
)
 

(Loss) income before income taxes
(5
)
 
(1
)
 
(2
)
Income tax benefit (provision)
(1
)
 

 

Net (loss) income
(6
)%
 
(1
)%
 
(2
)%
Fiscal 2014 versus Fiscal 2013
Net Revenues.    Net revenues for fiscal 2014 decreased approximately $31.2 million, or 7%, to approximately $447.3 million, compared to approximately $478.6 million in fiscal 2013.
Net Revenues by Product Line
The following chart details our net revenues by product line for fiscal 2014 and fiscal 2013:
 
Net Revenues by Product Line
 
2014
 
Percentage of
Net Revenues
 
2013
 
Percentage of
Net Revenues
 
Increase/
(Decrease)
 
Percentage
Change
 
(Dollars in thousands)
Net revenues:
 
 
 
 
 
 
 
 
 
 
 
Connectivity Segment:
 
 
 
 
 
 
 
 
 
 
 
Network Connectivity Products
$
318,940

 
71
%
 
$
360,974

 
75
%
 
$
(42,034
)
 
(12
)%
Storage Connectivity & Other Products
94,515

 
21
%
 
104,409

 
22
%
 
(9,894
)
 
(9
)%
Total Connectivity Segment
413,455

 
92
%
 
465,383

 
97
%
 
(51,928
)
 
(11
)%
Visibility Segment:
 
 
 
 
 
 
 
 
 
 
 
Network Visibility Products
33,878

 
8
%
 
13,184

 
3
%
 
20,694

 
NM

Total net revenues
$
447,333

 
100
%
 
$
478,567

 
100
%
 
$
(31,234
)
 
(7
)%

34



Connectivity segment revenues decreased by approximately 11% in fiscal 2014 compared to fiscal 2013. The decrease in revenues was primarily due to weakness in the UNIX server and high-end storage markets.
NCP primarily consists of standup HBAs, mezzanine cards, I/O ASICs, LOMs, and UCNAs. Within NCP, Fibre Channel based product revenues accounted for the majority, ranging from 70% - 80% of total NCP revenues. Fibre Channel based product revenue decreased by approximately 16% reflecting a decrease in units shipped of approximately 13% and a decrease in average selling price of approximately 3%. The decrease in Fibre Channel based product revenues was partially offset by an increase in Ethernet based product revenues. The increase in Ethernet based product revenues of approximately 3% reflects an increase in average selling price of approximately 8% and a decrease in units shipped of approximately 5%.
SCOP primarily consists of our InSpeed®, SOC and backend connectivity, bridge and router products, iBMCs, certain legacy products and other products and services. Our SCOP revenues decreased by approximately $9.9 million, or 9%, in fiscal 2014 compared to fiscal 2013, due to products entering the end-of-life phase. Revenue from backend connectivity products decreased approximately 19% and revenue from bridging products decreased approximately 8%.
The Visibility segment resulted from our acquisition of Endace on February 26, 2013 and consists solely of NVP. NVP revenues in fiscal 2014 were approximately $33.9 million compared to $13.2 million during the four months from the acquisition date to the end of fiscal 2013, and include network visibility and intelligent network recording products.
Net Revenues by Major Customers
In addition to direct sales, some of our larger OEM customers purchase or market products indirectly through distributors, resellers or other third parties. If these indirect sales are purchases of customer-specific models, we are able to track these sales. However, if these indirect sales are purchases of our standard models, we are not able to distinguish them by OEM customer. Customers whose direct net revenues, or total direct and indirect net revenues (including customer-specific models purchased or marketed indirectly through distributors, resellers and other third parties), exceeded 10% of our fiscal year net revenues were as follows:
 
Net Revenues by Major Customers
 
Direct
Revenues
 
Total Direct and
Indirect Revenues(2)
 
2014
 
2013
 
2014
 
2013
Net revenue percentage(1)
 
 
 
 
 
 
 
OEM:
 
 
 
 
 
 
 
EMC

 

 
10
%
 
11
%
Hewlett-Packard
16
%
 
19
%
 
22
%
 
23
%
Hon Hai Precision Industry Co., Ltd. (Foxconn Technology Group)(3)
13
%
 
12
%
 

 

IBM
29
%
 
32
%
 
33
%
 
35
%
 
(1)
Amounts less than 10% are not presented.
(2)
Customer-specific models purchased or marketed indirectly through distributors, resellers, and other third parties are included with the OEM’s revenues in these columns rather than as revenue for the distributors, resellers or other third parties.
(3)
Hon Hai Precision Industry Co., Ltd. is a contract manufacturer that performed manufacturing for some of our OEM customers.
Direct sales to our top five customers accounted for approximately 65% and 71% of total net revenues for fiscal years 2014 and 2013, respectively. Direct and indirect sales to our top five customers accounted for approximately 76% and 81% of total net revenues for fiscal years 2014 and 2013, respectively. Our net revenues from customers can be significantly impacted by changes to our customers’ business and their business models.
Net Revenues by Sales Channel
Net revenues by sales channel were as follows:

35



 
Net Revenues by Sales Channel
 
2014
 
Percentage of
Net Revenues
 
2013
 
Percentage of
Net Revenues
 
Increase/
(Decrease)
 
Percentage
Change
 
(Dollars in thousands)
OEM
$
374,270

 
84
%
 
$
421,530

 
88
%
 
$
(47,260
)
 
(11
)%
Distribution
57,066

 
13
%
 
50,181

 
11
%
 
6,885

 
14
 %
End-users and Other
15,997

 
3
%
 
6,856

 
1
%
 
9,141

 
NM

Total net revenues
$
447,333

 
100
%
 
$
478,567

 
100
%
 
$
(31,234
)
 
(7
)%
The decrease in OEM net revenues for fiscal 2014 compared to fiscal 2013 reflected a decrease of approximately 12% in in both NCP and SCOP revenues. The increase in distribution net revenues during 2014 compared to fiscal 2013 was primarily due to NVP net revenues generated through distribution partners, partially offset by a decrease of approximately 10% in NCP net revenues generated through distribution partners. The increase in end-users and other net revenues during fiscal 2014 compared to fiscal 2013 was primarily due to NVP net revenues generated from end-users. We believe that a majority of our net revenues are driven by product certifications and qualifications with our OEM customers, which take products directly and indirectly through distribution and contract manufacturers. Although we view product certifications and qualifications as an important indicator of future revenue opportunities and growth for the Company, they do not necessarily ensure continued market acceptance of our products by our OEM customers. It is also very difficult to determine the future impact, if any, of product certifications and qualifications on our revenues.
Net Revenues by Geographic Territory
Our net revenues by geographic territory based on billed-to location were as follows:
 
Net Revenues by Geographic Territory
 
2014
 
Percentage of
Net Revenues
 
2013
 
Percentage of
Net Revenues
 
Increase/
(Decrease)
 
Percentage
Change
 
(Dollars in thousands)
Asia Pacific
$
264,771

 
59
%
 
$
284,064

 
60
%
 
$
(19,293
)
 
(7
)%
United States
114,427

 
26
%
 
121,719

 
25
%
 
(7,292
)
 
(6
)%
Europe, Middle East, and Africa
65,286

 
14
%
 
66,457

 
14
%
 
(1,171
)
 
(2
)%
Rest of the world
2,849

 
1
%
 
6,327

 
1
%
 
(3,478
)
 
(55
)%
Total net revenues
$
447,333

 
100
%
 
$
478,567

 
100
%
 
$
(31,234
)
 
(7
)%
The decrease in revenues across all territories was due to a decrease in NCP net revenues. Asia Pacific net revenues as a percentage of total revenues remained relatively consistent compared to fiscal 2013 as our OEM customers continue to migrate towards using contract manufacturers that are predominately located in Asia Pacific. However, since we sell to OEMs and distributors who ultimately resell our products to their customers, the geographic mix of our net revenues may not be reflective of the geographic mix of end-user demand or installations.
Gross Profit.    Gross profit consists of net revenues less cost of sales. Our gross profit by segment for fiscal 2014 and fiscal 2013 were as follows (dollars in thousands):
 
Gross Profit
 
2014
 
Gross Profit Margin
 
2013
 
Gross Profit Margin
 
Increase/(Decrease)
 
Percentage Change
Connectivity
$
241,068

 
58
%
 
$
272,061

 
58
%
 
$
(30,993
)
 
%
Visibility
19,929

 
59
%
 
6,739

 
51
%
 
13,190

 
8
%
Total Gross Profit
$
260,997

 
58
%
 
$
278,800

 
58
%
 
$
(17,803
)
 
%
Cost of sales includes the cost of producing, supporting, and managing our supply of quality finished products. Approximately $0.7 million and $1.0 million of share-based compensation expense and approximately $24.9 million and $21.8 million of amortization of technology intangible assets were included in cost of sales for fiscal 2014 and fiscal 2013, respectively. Our consolidated gross margin percentage was comparable to the prior year due to favorable product mix partially offset by an increase in royalty expense of approximately $2.5 million related to the amended 2012 Permanent Injunction.
We will continue to recognize amortization expense for technology intangible assets over their remaining useful lives, patent license fees related to the Settlement Agreement over the remaining patent license term (which expires on July 1, 2020)

36



and royalty expense and other costs related to the amended 2012 Permanent Injunction and certain customer licensing agreements with Broadcom related to the amended 2012 Permanent Injunction. We expect our consolidated and Connectivity gross margin percentage to trend downward as the portion of our revenues generated from lower margin products increases as a percentage of total revenues, primarily due to a shift within our product mix.
Engineering and Development.    Engineering and development expenses consist primarily of salaries and related expenses for personnel engaged in the design, development, and support of our products. These expenses also include third-party fees paid to consultants, prototype development expenses, and computer service costs related to supporting computer tools used in the design process. Expenses for fiscal 2014 and fiscal 2013 were as follows (dollars in thousands):
Engineering and Development
2014
 
Percentage of
Net Revenues
 
2013
 
Percentage of
Net Revenues
 
Increase/
(Decrease)
 
Percentage
Points Change
$155,909
 
35%
 
$168,446
 
35%
 
$(12,537)
 
—%
Engineering and development expenses for fiscal 2014 compared to fiscal 2013 decreased by approximately $12.5 million, or 7%. Approximately $5.6 million and $9.8 million of share-based compensation expense was included in engineering and development costs for fiscal 2014 and fiscal 2013, respectively. New product development decreased by approximately $7.9 million in fiscal 2014 compared to the prior year. Additionally, salary and related expenses decreased approximately $2.6 million due to a reduction in headcount. During fiscal 2014, we recorded approximately $5.7 million in severance costs, which were offset by cost reductions previously taken and efforts to controls costs.
Selling and Marketing.    Selling and marketing expenses consist primarily of salaries, commissions, and related expenses for personnel engaged in the marketing and sales of our products, as well as samples, trade shows, product literature, promotional support costs, and other advertising related costs. Expenses for fiscal 2014 and fiscal 2013 were as follows (dollars in thousands):
Selling and Marketing
2014
 
Percentage of
Net Revenues
 
2013
 
Percentage of
Net Revenues
 
Increase/
(Decrease)
 
Percentage
Points Change
$77,757
 
17%
 
$66,235
 
14%
 
$11,522
 
3%
Selling and marketing expenses for fiscal 2014 increased approximately $11.5 million, or 17%, compared to fiscal 2013. Approximately $3.9 million and $3.6 million of share-based compensation expense was included in selling and marketing costs for fiscal 2014 and fiscal 2013, respectively. Salary and related expenses and commissions increased approximately $6.8 million and $2.4 million, respectively, primarily due to the acquisition of Endace in February 2013 and approximately $1.5 million of severance costs. Further, pre-production samples increased approximately $2.0 million related to our mitigation activities for the 2012 Permanent Injunction.
General and Administrative.    Ongoing general and administrative expenses consist primarily of salaries and related expenses for executives, financial accounting support, human resources, administrative services, professional fees, and other corporate expenses. Expenses for fiscal 2014 and fiscal 2013 were as follows (dollars in thousands):
General and Administrative
2014
 
Percentage of
Net Revenues
 
2013
 
Percentage of
Net Revenues
 
Increase/
(Decrease)
 
Percentage
Points Change
$41,115
 
9%
 
$38,893
 
8%
 
$2,222
 
1%
General and administrative expenses for fiscal 2014 compared to fiscal 2013 increased approximately $2.2 million, or 6%. Approximately $5.1 million and $7.4 million of share-based compensation expense was included in general and administrative costs for fiscal 2014 and fiscal 2013, respectively. General and administrative expenses increased due to the $5 million dismissal and standstill fee payable to Broadcom pursuant to the Dismissal Agreement. See Note 10, "Commitments and Contingencies," in the notes to consolidated financial statements in Part IV, Item 15(a) of this Annual Report on Form 10-K. In addition, rent expense increased approximately $2.8 million due to approximately $0.7 million in contract termination costs, the expansion of facilities in India, and the full year impact of the Endace acquisition. The increase in general and administrative expenses was partially offset by a decrease of approximately $3.0 million in legal and accounting fees related to the acquisition of Endace acquisition in the prior year.
Amortization of Other Intangible Assets.    Amortization of other intangible assets consists of amortization of intangible assets such as patents, customer relationships, and tradenames with estimable lives. Our amortization expense for fiscal 2014 and fiscal 2013 was as follows (dollars in thousands):

37



Amortization of Other Intangible Assets
2014
 
Percentage of
Net Revenues
 
2013
 
Percentage of
Net Revenues
 
Increase/
(Decrease)
 
Percentage
Points Change
$6,375
 
1%
 
$5,935
 
1%
 
$440
 
—%
Amortization of other intangible assets for fiscal 2014 compared to fiscal 2013 increased by approximately $0.4 million, or 7%. The increase was primarily due to an increase in amortization of other intangibles assets associated with assets acquired from Endace, partially offset by a decrease due to a lower unamortized intangible assets balance at the beginning of fiscal 2014 as a result of certain intangible assets being fully amortized in fiscal 2013.
Non-operating (Expense) Income, net.    Non-operating (expense) income, net, consists primarily of interest income, interest expense, and other non-operating income and expense items. Our non-operating (expense) income, net for fiscal 2014 and fiscal 2013 was as follows (dollars in thousands):
Non-operating (Expense) Income, Net
2014
 
Percentage of
Net Revenues
 
2013
 
Percentage of
Net Revenues
 
(Increase)/
Decrease
 
Percentage
Points Change
$(6,027)
 
(1)%
 
$(4,874)
 
(1)%
 
$(1,153)
 
—%
Our non-operating (expense) income, net, for fiscal 2014 compared to fiscal 2013 increased by approximately $1.2 million primarily due to interest expense and amortization of issuance costs and debt discount of approximately $5.8 million related to the Convertible Senior Notes issued in November 2013 (see Note 11, "Convertible Senior Notes," in the notes to consolidated financial statements in Part IV, Item 15(a) of this Annual Report on Form 10-K) offset by a non-recurring foreign exchange transaction loss in the prior year of approximately $4.7 million related to the cash consideration paid to acquire Endace.
Income taxes.    Our income tax provision for fiscal 2014 and fiscal 2013 was as follows (dollars in thousands):
Income Taxes
2014
 
Percentage of
Net Revenues
 
2013
 
Percentage of
Net Revenues
 
Increase/
(Decrease)
 
Percentage
Points Change
$3,346
 
(1)%
 
$(369)
 
—%
 
$3,715
 
(1)%
Income tax expense for fiscal 2014 was approximately $3.3 million, compared to income tax benefit of approximately $0.4 million. We generate the majority of our taxable earnings in countries other than the U.S., our tax expense and effective tax rates reflect the mix of our earnings and losses in our U.S. and various international jurisdictions, including India, Ireland, Isle of Man and New Zealand, as well as our valuation allowance recorded against our U.S. deferred tax assets. The change in our effective tax rate between years was primarily driven by tax expense of $3.2 million related to taxable unrealized currency exchange gain resulting from outstanding inter-company loans and a tax expense of $1.2 million related to nondeductible interest from our issuance of convertible debt. This tax expense was partially offset by a reduction to our tax expense of approximately $0.9 million related to uncertain tax positions being effectively settled during the fiscal year. We may recognize taxable income/loss on the unrealized foreign exchange gains/losses on our intercompany loans for tax reporting purposes in the future. We have made no provision for U.S. income taxes or foreign withholding taxes on the earnings of our foreign subsidiaries as these amounts are intended to be indefinitely reinvested in operations outside the U.S. We also do not forecast discrete events, such as a settlement of tax audits with governmental authorities or changes in tax laws, due to their inherent uncertainty.
Fiscal 2013 versus Fiscal 2012
Net Revenues.    Net revenues for fiscal 2013 decreased approximately $23.2 million, or 5%, to approximately $478.6 million, compared to approximately $501.8 million in fiscal 2012.

38



Net Revenues by Product Line
The following chart details our net revenues by product line for fiscal years 2013 and 2012:
 
Net Revenues by Product Line
 
2013
 
Percentage of
Net Revenues
 
2012
 
Percentage of
Net Revenues
 
Increase/
(Decrease)
 
Percentage
Change
 
(Dollars in thousands)
Net revenues:
 
 
 
 
 
 
 
 
 
 
 
Connectivity Segment:
 
 
 
 
 
 
 
 
 
 
 
Network Connectivity Products
$
360,974

 
75
%
 
$
362,315

 
72
%
 
$
(1,341
)
 
 %
Storage Connectivity & Other Products
104,409

 
22
%
 
139,454

 
28
%
 
(35,045
)
 
(25
)%
Total Connectivity Segment
465,383

 
97
%
 
501,769

 
100
%
 
(36,386
)
 
(7
)%
Visibility Segment:
 
 
 
 
 
 
 
 
 
 
 
Network Visibility Products
13,184

 
3
%
 

 
%
 
13,184

 
NM

Total net revenues
$
478,567

 
100
%
 
$
501,769

 
100
%
 
$
(23,202
)
 
(5
)%
Networking segment revenues decreased by approximately 7% in fiscal 2013 compared to fiscal 2012. The decrease in revenues was primarily due to continuing weakness in the server and storage technology markets resulting from continuing concern over the global macroeconomic climate.
Fibre Channel based product revenues, which accounted for approximately 70% - 80% of total NCP revenues for fiscal 2013 and fiscal 2012 increased by approximately 2% primarily an increase in units shipped of approximately 8% partially offset by a decrease in average selling price of approximately 7% in fiscal 2013 compared to fiscal 2012. Ethernet based product revenues decreased by approximately 8% primarily due to a decrease in units shipped of approximately 29%, arising principally from lower customer demand for 10Gb LOM products as customers consumed residual inventory purchased in fiscal 2012, as well as the impact of the 2012 Permanent Injunction. This decrease was partially offset by an increase in average selling price of approximately 16% due to a change in product mix.
Our SCOP revenues decreased by approximately $35.1 million, or 25%, in fiscal 2013 compared to fiscal 2012. This decrease was primarily due to a decline in backend connectivity product shipments due to last-time buys of certain products reaching end of life during fiscal 2012.
The Visibility segment resulted from our acquisition of Endace on February 26, 2013 and consists solely of NVP. NVP revenues in fiscal 2013 were approximately $13.2 million during the four months since the acquisition date compared to no revenues in fiscal 2012, and include network visibility and intelligent network recording products.
Net Revenues by Major Customers
In addition to direct sales, some of our larger OEM customers purchase or market products indirectly through distributors, resellers or other third parties. If these indirect sales are purchases of customer-specific models, we are able to track these sales. However, if these indirect sales are purchases of our standard models, we are not able to distinguish them by OEM customer. Customers whose direct net revenues, or total direct and indirect net revenues (including customer-specific models purchased or marketed indirectly through distributors, resellers and other third parties), exceeded 10% of our fiscal year net revenues were as follows:
 
Net Revenues by Major Customers
 
Direct
Revenues
 
Total Direct and
Indirect Revenues (2)
 
2013
 
2012
 
2013
 
2012
Net revenue percentage(1)
 
 
 
 
 
 
 
OEM:
 
 
 
 
 
 
 
EMC

 

 
11
%
 

Hewlett-Packard
19
%
 
22
%
 
23
%
 
24
%
Hon Hai Precision Industry Co., Ltd. (Foxconn Technology Group)(3)
12
%
 

 

 

IBM
32
%
 
32
%
 
35
%
 
37
%
 
(1)
Amounts less than 10% are not presented.

39



(2)
Customer-specific models purchased or marketed indirectly through distributors, resellers, and other third parties are included with the OEM’s revenues in these columns rather than as revenue for the distributors, resellers or other third parties.
(3)
Hon Hai Precision Industry Co., Ltd. is a contract manufacturer that performed manufacturing for some of our OEM customers.
Direct sales to our top five customers accounted for approximately 71% and 70% of total net revenues for fiscal years 2013 and 2012, respectively. Direct and indirect sales to our top five customers accounted for approximately 81% of total net revenues for both fiscal years 2013 and 2012. Our net revenues from customers can be significantly impacted by changes to our customers’ business and their business models.
Net Revenues by Sales Channel
Net revenues by sales channel were as follows:
 
Net Revenues by Sales Channel
 
2013
 
Percentage of
Net Revenues
 
2012
 
Percentage of
Net Revenues
 
Increase/
(Decrease)
 
Percentage
Change
 
(Dollars in thousands)
OEM
$
421,530

 
88
%
 
$
455,141

 
91
%
 
$
(33,611
)
 
(7
)%
Distribution
50,181

 
11
%
 
46,385

 
9
%
 
3,796

 
8
 %
End-users and Other
6,856

 
1
%
 
243

 
%
 
6,613

 
NM

Total net revenues
$
478,567

 
100
%
 
$
501,769

 
100
%
 
$
(23,202
)
 
(5
)%
The decrease in OEM net revenues for fiscal 2013 compared to fiscal 2012 reflected a decrease of approximately 25% in SCOP revenues. The increase in distribution net revenues during 2013 compared to fiscal 2012 was primarily due to NVP net revenues generated through distribution partners, partially offset by a decrease of approximately 4% in NCP net revenues generated through distribution partners. The increase in end-users and other net revenues during fiscal 2013 compared to fiscal 2012 was primarily due to NVP net revenues generated from end-users.
Net Revenues by Geographic Territory
Our net revenues by geographic territory based on billed-to location were as follows:
 
Net Revenues by Geographic Territory
 
2013
 
Percentage of
Net Revenues
 
2012
 
Percentage of
Net Revenues
 
Increase/
(Decrease)
 
Percentage
Change
 
(Dollars in thousands)
Asia Pacific
$
284,064

 
60
%
 
$
286,572

 
57
%
 
$
(2,508
)
 
(1
)%
United States
121,719

 
25
%
 
137,504

 
28
%
 
(15,785
)
 
(11
)%
Europe, Middle East, and Africa
66,457

 
14
%
 
76,394

 
15
%
 
(9,937
)
 
(13
)%
Rest of the world
6,327

 
1
%
 
1,299

 
%
 
5,028

 
NM

Total net revenues
$
478,567

 
100
%
 
$
501,769

 
100
%
 
$
(23,202
)
 
(5
)%
We believe the decrease in the percentage of revenue in the United States and Europe, Middle East and Africa continues to be driven by the continuing migration of our OEM customers’ production to contract manufacturers predominately located in Asia Pacific. We expect this trend to continue. However, since we sell to OEMs and distributors who ultimately resell our products to their customers, the geographic mix of our net revenues may not be reflective of the geographic mix of end-user demand or installations.
Gross Profit.    Our gross profit by segment for fiscal 2013 and fiscal 2012 were as follows (dollars in thousands):
 
Gross Profit
 
2013
 
Gross Profit Margin
 
2012
 
Gross Profit Margin
 
Increase/(Decrease)
 
Percentage Change
Connectivity
$
272,061

 
58
%
 
$
255,835

 
51
%
 
$
16,226

 
7
%
Visibility
6,739

 
51
%
 

 

 
6,739

 
NM

Total Gross Profit
$
278,800

 
58
%
 
$
255,835

 
51
%
 
$
22,965

 
7
%

40



Cost of sales includes the cost of producing, supporting, and managing our supply of quality finished products. Approximately $1.0 million and $1.3 million of share-based compensation expense and approximately $21.8 million and $24.0 million of amortization of technology intangible assets were included in cost of sales for fiscal 2013 and fiscal 2012, respectively. Of these amounts, approximately $1.2 million of amortization of technology intangible assets in fiscal 2013 related to Endace. The increase in our gross profit was primarily due to the non-recurrence of certain one-time expenses incurred during fiscal 2012 that are discussed further below.
During fiscal 2013, we recorded sunset period royalty and patent license fee amortization expenses of $5.0 million related to the Settlement Agreement entered into with Broadcom on July 3, 2012 compared to $37.3 million in fiscal 2012. The $37.3 million was comprised of $36.8 million patent litigation settlement expense, $0.4 million patent litigation damages and $0.1 million of sunset royalty expense. During fiscal 2012, we also incurred approximately $2.3 million of additional expedite and freight charges in connection with our activities to mitigate the impact of the October 2011 flooding in Thailand that affected one of our contract manufacturers. The additional expenses in fiscal 2012 were partially offset by higher volume and favorable product mix during each year. We will continue to recognize license fee amortization related to the Settlement Agreement entered into with Broadcom on July 3, 2012, over the remaining nine year patent license term and increased royalty expense related to the amended injunction during fiscal 2014. We also expect the trend toward increased sales of lower margin products to continue in the future.
Engineering and Development.    Engineering and development expenses for fiscal 2013 and fiscal 2012 were as follows (dollars in thousands):
Engineering and Development
2013
 
Percentage of
Net Revenues
 
2012
 
Percentage of
Net Revenues
 
Increase/
(Decrease)
 
Percentage
Points Change
$168,446
 
35%
 
$163,552
 
33%
 
$4,894
 
2%
Engineering and development expenses for fiscal 2013 compared to fiscal 2012 increased by approximately $4.9 million, or 3%. Approximately $9.8 million and $11.9 million of share-based compensation expense were included in engineering and development costs for fiscal 2013 and fiscal 2012, respectively. Engineering and development expenses increased due to increased salary and related expenses of approximately $5.9 million related to headcount and severance costs of approximately $1.7 million. Product redesign expenses also increased by approximately $4.7 million related to our mitigation activities for the 2012 Permanent Injunction. The year over year increase was partially offset by a decrease in outside services and consulting of approximately $2.9 million as well as lower tool and software license costs resulting from optimized usage and improved pricing.
Selling and Marketing.    Selling and marketing expenses for fiscal 2013 and fiscal 2012 were as follows (dollars in thousands):
Selling and Marketing
2013
 
Percentage of
Net Revenues
 
2012
 
Percentage of
Net Revenues
 
Increase/
(Decrease)
 
Percentage
Points Change
$66,235
 
14%
 
$59,990
 
12%
 
$6,245
 
2%
Selling and marketing expenses for fiscal 2013 increased approximately $6.2 million, or 10%, compared to fiscal 2012. Approximately $3.6 million of share-based compensation expense was included in selling and marketing costs for both fiscal 2013 and fiscal 2012. Salary and related expenses increased by approximately $5.5 million due to an increase in headcount, partially due to the Endace acquisition in February 2013. Also included in the increase in salary and related expenses was $0.6 million of severance costs. Further, selling and marketing expenses increased due to increases of approximately $1.3 million in performance-based compensation, approximately $0.7 million in travel expenses, approximately $0.6 million in depreciation expense and approximately $0.4 million in outside services. The net increase in selling and marketing expenses was partially offset by a decrease in advertising costs of approximately $3.5 million.
General and Administrative.    General and administrative expenses for fiscal 2013 and fiscal 2012 were as follows (dollars in thousands):
General and Administrative
2013
 
Percentage of
Net Revenues
 
2012
 
Percentage of
Net Revenues
 
Increase/
(Decrease)
 
Percentage
Points Change
$38,893
 
8%
 
$35,658
 
7%
 
$3,235
 
1%
General and administrative expenses for fiscal 2013 compared to fiscal 2012 increased approximately $3.2 million, or 9%. Approximately $7.4 million and $5.4 million of share-based compensation expense were included in general and

41



administrative costs for fiscal 2013 and fiscal 2012, respectively. Included in general and administrative expenses was an increase of approximately $3.0 million in legal and accounting costs related to the Endace acquisition and an increase of approximately $1.4 million in other legal and consulting expenses, partially offset by a decrease of approximately $3.5 million in litigation costs related to our ongoing patent litigation dispute with Broadcom. Salary and related expenses increased by approximately $1.0 million compared to fiscal 2012, due to an increase in headcount, primarily related to the acquisition of Endace in February 2013.
Amortization of Other Intangible Assets.    Amortization of other intangible assets expense for fiscal 2013 and fiscal 2012 was as follows (dollars in thousands):
Amortization of Other Intangible Assets
2013
 
Percentage of
Net Revenues
 
2012
 
Percentage of
Net Revenues
 
Increase/
(Decrease)
 
Percentage
Points Change
$5,935
 
1%
 
$6,569
 
1%
 
$(634)
 
—%
Amortization of other intangible assets for fiscal 2013 compared to fiscal 2012 decreased by approximately $0.6 million, or 10%. The decrease was primarily due to a lower unamortized intangible assets balance at the beginning of fiscal 2013 as a result of certain intangible assets being fully amortized in fiscal 2012. The decrease was partially offset by an increase of approximately $0.4 million in amortization of other intangibles assets associated with assets acquired from Endace.
Non-operating (Expense) Income, net.    Our non-operating (expense) income, net for fiscal 2013 and fiscal 2012 was as follows (dollars in thousands):
Non-operating (Expense) Income, Net
2013
 
Percentage of
Net Revenues
 
2012
 
Percentage of
Net Revenues
 
Increase/
(Decrease)
 
Percentage
Points Change
$(4,874)
 
(1)%
 
$432
 
—%
 
$(5,306)
 
(1)%
Our non-operating (expense) income, net, for fiscal 2013 compared to fiscal 2012 decreased by approximately $5.3 million primarily due to a non-recurring foreign exchange transaction loss of approximately $4.7 million related to the cash changes in the value of the British Pound Sterling (GBP) relative to the U.S. Dollar (USD) between the date the funds to acquire Endace were converted to GBP and the dates the funds were disbursed.
Income taxes.    Our income tax provision for fiscal 2013 and fiscal 2012 was as follows (dollars in thousands):
Income Taxes
2013
 
Percentage of
Net Revenues
 
2012
 
Percentage of
Net Revenues
 
Increase/
(Decrease)
 
Percentage
Points Change
$(369)
 
—%
 
$1,578
 
—%
 
$(1,947)
 
—%
Our effective tax expense/(benefit) rate was approximately (7%) and 17% for fiscal 2013 and fiscal 2012, respectively. The change in our effective tax expense rate for fiscal 2013 compared to fiscal 2012 was primarily due to the continuing impact of our previously recorded U.S. deferred tax asset valuation allowance, the impact of our fiscal 2013 U.S. losses that will be carried back to prior tax years, and changes in the mix of earnings in international versus U.S. tax jurisdictions. We continue to generate the majority of our taxable earnings in countries other than the U.S., including India, Ireland, and Isle of Man, where such earnings are generally subject to significantly lower tax rates than the U.S. We expect this trend to continue in the future. We have made no provision for U.S. income taxes or foreign withholding taxes on the earnings of our foreign subsidiaries as these amounts are intended to be indefinitely reinvested in operations outside the U.S.
As a result of the global scope of our operations and the complexity of global tax and transfer pricing rules and regulations, the tax liabilities in each of the countries in which we operate may differ materially from our estimates and impact our expected tax rate in the future. In addition, our future effective tax rate may be
impacted by other items including newly enacted tax legislation, stock-based compensation, uncertain tax positions and examinations by various tax authorities.
Critical Accounting Policies
The preparation of our consolidated financial statements requires estimation and judgment that affect the reported amounts of net revenues, expenses, assets, and liabilities in accordance with accounting principles generally accepted in the United States. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances and which form the basis for making judgments about the carrying values of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties.

42



Changes in judgments and uncertainties relating to these estimates could potentially result in materially different results under different assumptions and conditions. If these estimates differ significantly from actual results, the impact to the consolidated financial statements may be material. We believe that the critical accounting policies that are the most significant for purposes of fully understanding and evaluating our reported financial results include the following:
Inventories.    Inventories are stated at the lower of cost, on a first-in, first-out basis, or market. We use a standard cost system to determine cost. The standard costs are adjusted periodically to represent actual cost. We regularly compare forecasted demand against inventory on hand and open purchase commitments in an effort to ensure that the carrying value of inventory does not exceed net realizable value. Accordingly, we may have to reduce the carrying value of excess and obsolete inventory if forecasted demand decreases.
Intangible Assets and Other Long-Lived Assets.    Intangible assets resulting from acquisitions or licensing agreements are carried at cost less accumulated amortization and impairment charges, if any. For assets with determinable useful lives, amortization is computed using the straight-line method over the estimated economic lives of the respective intangible assets, ranging from one to twelve years. Acquired in-process research and development (IPR&D) is recorded at fair value as an indefinite-lived intangible asset at the acquisition date until the completion or abandonment of the associated research and development efforts or impairment. IPR&D projects relate to in-process projects that have not reached technological feasibility as of the acquisition date and have no alternative future use. Upon completion of development, acquired in-process research and development assets are transferred to finite-lived intangible assets and amortized over their useful lives.
We assess whether our intangible assets and other long-lived assets should be tested for recoverability whenever events or circumstances indicate that their carrying value may not be recoverable. The amount of impairment, if any, is measured based on fair value, which is determined using projected discounted future operating cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value less selling costs.
Goodwill.    Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the acquired net tangible and intangible assets. Goodwill is not amortized, but instead, is tested at least annually for impairment, or more frequently when events or changes in circumstances indicate that goodwill might be impaired. In assessing goodwill impairment for each of its reporting units, we have the option to first assess the qualitative factors to determine whether the existence of events or circumstances leads to a determination that the fair value of such reporting unit is less than its carrying amount. The Company’s qualitative assessment of the recoverability of goodwill considers various macro-economic, industry-specific and company-specific factors. These factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of the Company’s financial performance; or (iv) a sustained decrease in the Company’s market capitalization below its net book value. If, after assessing the totality of events or circumstances, we determine it is unlikely that the fair value of such reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if we conclude otherwise, then we are required to perform the first step of the two-step impairment test by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired; otherwise, goodwill is considered impaired and the loss is measured by performing step two. Under step two, the impairment loss is measured by comparing the implied fair value of the reporting unit goodwill with the carrying amount of goodwill. We also have the option to bypass the qualitative assessment and proceed directly to performing the first step of the two-step goodwill impairment test. We may resume performing the qualitative assessment in any subsequent period.
Fair value of our reporting units is determined using the market approach, the income approach, or a combination thereof. Under the market approach, fair value is based on peer multiples and applying an appropriate control premium. The control premium used in the market approach or a combined approach is determined by considering control premiums offered as part of acquisitions that have occurred in the reporting units’ comparable market segments. Under the income approach, fair value is dependent on a discounted cash-flow analysis. The material assumptions used in performing the discounted cash-flow analysis include our operating forecasts, which are based on historical data, various internal estimates, and a variety of external sources, and are developed as part of our regular long-range planning process, as well as revenue growth rates, terminal value and risk-commensurate discount rates. The discount rates are based on estimates of a market weighted-average cost-of-capital for the reporting unit, as well as a specific assessment of the risk inherent in the respective reporting units, and were estimated to be 19% for the Connectivity reporting unit and 21% for the Visibility reporting unit. The Company based its fair value estimates on assumptions it believes to be reasonable, but are inherently uncertain.
The annual impairment test is performed during the fourth fiscal quarter. Our recent impairment test indicated that our Connectivity reporting unit’s fair value exceeded its carrying value by approximately 6%, or $31.3 million and our Visibility reporting unit's fair value exceeded its carrying value by approximately 7%, or $8.0 million.

43



The following table summarizes the approximate impact that a change in these principal key assumptions would have on the estimated fair value of the Connectivity reporting unit, leaving all other assumptions unchanged:
 
 
 
 
Excess/(Shortfall) of Fair Value over Carrying Value
 
 
Change
 
(in thousands)
Discount rate
 
± 1%
 
$22,000 - $41,000
Terminal value multiplier
 
± 1%
 
$38,000 - $24,000

The following table summarizes the approximate impact that a change in principal key assumptions would have on the estimated fair value of the Visibility reporting unit, leaving all other assumptions unchanged:
 
 
 
 
Excess/(Shortfall) of Fair Value over Carrying Value
 
 
Change
 
(in thousands)
Discount rate
 
± 1%
 
$1,000 - $14,000
Revenue growth projections
 
± 1%
 
$14,000 - $2,000
Terminal value exit multiple
 
± 0.5x
 
$13,000 - $2,000

As part of our annual test, we compare the aggregate fair value of our reporting units to the fair value of the Company as a whole based on our market capitalization. Assumptions and estimates about fair values of our goodwill are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and out internal forecasts. Our ongoing consideration of all factors described previously could result in material impairment charges in the future. Although our annual test resulted in no impairment, given the recent volatility of our market capitalization, the inherent uncertainty in forecasts, and the fact that the fair value of each reporting unit did not exceed it carrying value by a substantial margin, it is possible that our goodwill could become impaired in the near term. See Note 6, “Goodwill and Intangible Assets, Net,” in the accompanying notes to consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for additional information.
Income Taxes.    We account for income taxes using the asset and liability method, under which we recognize deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for net operating loss and tax credit carryforwards. Tax positions that meet a more-likely-than-not recognition threshold are recognized in the first reporting period that it becomes more-likely-than-not such tax position will be sustained upon examination. A tax position that meets this more-likely-than-not recognition threshold is recorded at the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Previously recognized income tax positions that fail to meet the recognition threshold in a subsequent period are derecognized in that period. Differences between actual results and our assumptions, or changes in our assumptions in future periods, are recorded in the period they become known. We record potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.
As a multinational corporation, we are subject to complex tax laws and regulations in various jurisdictions. The application of tax laws and regulations is subject to legal and factual interpretation, judgment, and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional liabilities or potentially to reverse previously recorded tax liabilities.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is recorded against any deferred tax assets when, in the judgment of management, it is more likely than not that all of or part of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including recent financial performance, scheduled reversals of temporary differences, projected future taxable income, availability of taxable income in carryback periods and tax planning strategies. Based on a review of such information, we believe that insufficient positive evidence exists to support that we will more likely than not be able to realize the majority of our U.S. federal and state

44



deferred tax assets. Therefore, we have recorded a valuation allowance against our deferred tax assets to the extent that they are not expected to be recoverable against taxes previously paid in available carryback periods.
Litigation Costs and Contingencies.    We record a charge equal to at least the minimum estimated liability for a loss contingency or litigation settlement when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated. The determination of whether a loss contingency or litigation settlement is probable or reasonably possible involves a significant amount of management judgment, as does the estimation of the range of loss given the nature of contingencies. Liabilities related to litigation settlements with multiple elements are recorded based on the fair value of each element. Legal and other litigation related costs are recognized as the services are provided. We record insurance and other indemnity recoveries for litigation costs when both of the following conditions are met: (i) the recovery is probable and (ii) collectability is reasonably assured. There are many uncertainties associated with any litigation, and we cannot provide assurance that any actions or other third party claims against us will be resolved without costly litigation or substantial settlement charges. If any of those events were to occur, our business, financial condition and results of operations could be materially and adversely affected. See Note 10, “Commitments and Contingencies,” in the notes to consolidated financial statements in Part IV, Item 15(a) of this Annual Report on Form 10-K.
Recently Adopted and Recently Issued Accounting Standards
See Note 1, “Summary of Significant Accounting Policies”, in the accompanying notes to consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for a description of the recently adopted and recently issued accounting standards.
Liquidity and Capital Resources
Our principal sources of liquidity consist of our existing cash balances and investments, as well as funds expected to be generated from operations. At June 29, 2014, we had approximately $213.6 million in working capital and approximately $158.4 million in cash and cash equivalents, as compared to approximately $167.7 million in working capital and approximately $105.6 million in cash and cash equivalents at June 30, 2013. In November 2013, we issued $175.0 million aggregate principal amount of 1.75% Convertible Senior Notes due November 2018. We received proceeds of $169.7 million from the issuance of the Convertible Senior Notes, net of debt issuance costs of approximately $5.3 million.
Our cash balances and investments are held in numerous locations throughout the world. As of June 29, 2014, our international subsidiaries held approximately 15% of our total cash, cash equivalents and investment securities, which will be used to repay obligations to U.S. affiliate entities that arise in the normal course of business and would not result in incremental U.S. tax liabilities when paid.

Cash Flows
The following table summarizes our cash flows for fiscal years 2014 and 2013:
 
2014
 
2013
 
(In thousands)
Net cash provided by (used in):
 
 
 
Operating activities
$
47,783

 
$
10,597

Investing activities
(15,983
)
 
(94,466
)
Financing activities
20,541

 
(11,200
)
Effect of foreign currency translation on cash and cash equivalents
461

 
(342
)
Increase (decrease) in cash and cash equivalents:
$
52,802

 
$
(95,411
)
Operating Activities
Cash provided by operating activities during fiscal 2014 was approximately $47.8 million compared to approximately $10.6 million for fiscal 2013. Prior year cash flows from operating activities includes a payment of $58.0 million made during fiscal 2013 related to the Settlement Agreement entered into with Broadcom on July 3, 2012. See Note 10, “Commitments and Contingencies,” in the accompanying notes to consolidated financial statements under the caption, “Litigation” included in Part IV, Item 15(a) of this Annual Report on Form 10-K. The current period cash provided by operating activities also benefits from higher income tax refunds received of approximately $2.0 million in comparison to the prior year. The current period cash provided by operating activities resulted from net loss of approximately $29.5 million, non-cash adjustments for amortization of intangible assets of approximately $31.3 million, depreciation and amortization of approximately $19.0 million, share-based

45



compensation expense of approximately $15.3 million, and accretion of debt discount and amortization of debt issuance costs of approximately $3.9 million related to the Convertible Senior Notes; and the timing of net working capital requirements.
Investing Activities
Cash used in investing activities during fiscal 2014 was approximately $16.0 million compared to approximately $94.5 million for fiscal 2013. The current period usage of cash was related to purchases of property and equipment of approximately $16.0 million. We currently expect a similar level of investment in property and equipment in the future to support our strategic objectives, although the timing may be impacted by certain project timelines and other factors. The prior period usage of cash was primarily related to our acquisition of Endace for approximately $107.7 million and purchases of property and equipment of approximately $15.7 million, offset by the maturities of investments, net of purchases, of approximately $28.9 million.
Financing Activities
Cash provided by financing activities for fiscal 2014 was approximately $20.5 million compared to cash used of approximately $11.2 million for fiscal 2013. During fiscal 2014, we issued $175.0 million aggregate principal amount of 1.75% Convertible Senior Notes due November 2018 partially offset by our repurchase of approximately 22.5 million of the Company's common shares for an aggregate of approximately $150.0 million. In connection with the Convertible Senior Notes, we incurred approximately $5.3 million of issuance costs.
Prospective Capital Needs
In November 2013, we issued $175.0 million aggregate principal amount of 1.75% Convertible Senior Notes due November 2018 (Convertible Senior Notes). Interest is payable semi-annually in arrears on May 15 and November 15 of each year, commencing May 15, 2014. The initial conversion rate is approximately 97.13 per share of our common stock per $1,000 principal amounts of the Convertible Senior Notes. The initial conversion price is approximately $10.30 per share of our common stock. See Note 11, "Convertible Senior Notes," in the notes to consolidated financial statements in Part IV, Item 15(a) of this Annual Report on Form 10-K. We used a portion of net proceeds from the offering to repurchase approximately $150.0 million of our common stock at a price per share equal to $6.68 during fiscal 2014. See Note 12, "Share Repurchase Programs," in the notes to consolidated financial statements in Part IV, Item 15(a) of this Annual Report on Form 10-K. We intend to use the remaining net proceeds from the offering and a portion of our other available capital for additional share repurchases. In November 2013, our Board of Directors approved a $200.0 million share repurchase program. At June 29, 2014, we have the authority to repurchase an additional approximately $50.0 million pursuant to this authorization.
In November 2013, we announced a cost savings program designed to streamline business operations and achieve operating expense reductions. We plan to continue our cost savings program, which includes simplifying our product portfolio, discontinuing additional programs with lower returns on investment, pursuing consolidation opportunities and identifying further efficiencies which will accordingly impact our strategic investment in research and development, sales and marketing, capital equipment, and facilities. We may also consider internal and external investment opportunities in order to achieve our growth and market leadership goals, including licensing and product development alignment agreements with our suppliers, customers, and other third parties. We believe that our existing cash and cash equivalents, and anticipated cash flows from operating activities will be sufficient to support our working capital needs, capital expenditure requirements and stock repurchases for at least the next 12 months and the foreseeable future based on currently forecasted trends. We may need to pursue additional financing if our business does not generate sufficient cash flow from operations to enable us to pay the principal amount of our Convertible Senior Notes or to fund other liquidity needs.
We have disclosed outstanding legal proceedings in Note 10, “Commitments and Contingencies,” in the accompanying notes to consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K, including the consolidated patent infringement lawsuit filed by Broadcom against us. On July 3, 2012, we entered into a Settlement Agreement pursuant to which both parties agreed to settle and release certain claims related to the patent infringement litigation. The Settlement Agreement provided for certain amendments to the April 3, 2012 Permanent Injunction, and dismissals of certain allegations of the lawsuit, including portions of the scheduled re-trial. We also received a worldwide limited license to the ‘691 patent, the ‘150 patent, the ‘194 patent and related families for certain fields of use including Fibre Channel applications. Effective March 30, 2014, Emulex and Broadcom entered into a Dismissal Agreement pursuant to which Emulex and Broadcom entered into certain understandings with respect to the outstanding claims relating to and arising out of the patent infringement suit. Pursuant to the terms of the Dismissal Agreement, we agreed to pay Broadcom a non-refundable, non-cancelable dismissal and standstill fee in the amount of $5 million.
We continue to evaluate certain customer royalty obligations arising under the licensing agreements with Broadcom that could result in additional costs of approximately $5 million in future periods. Such costs will reduce gross margins in the periods accrued. See “Product Redesign Activities and Potential Royalty Obligations” in Part II, Item 7 of this Annual Report

46



on Form 10-K. Also see “Third party claims of intellectual property infringement could adversely affect our business” and “We are dependent on sole source and limited source third party suppliers and EMS providers for our products” in Part I, Item 1A — Risk Factors, of this Annual Report on Form 10-K for a description of certain risks relating to the litigation with Broadcom that could impact our liquidity and prospective capital needs.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As of June 29, 2014, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Contractual Obligations and Commercial Commitments
The following summarizes our contractual obligations as of June 29, 2014, and the effect such obligations are expected to have on our liquidity in future periods. The estimated payments reflected in this table are based on management’s estimates and assumptions about these obligations. Because these estimates and assumptions are necessarily subjective, the actual cash outflows in future periods will vary, possibly materially, from those reflected in the table.
 
Payments Due by Period
 
Total
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
(In thousands)
Debt (1)
$
175,000

 
$

 
$

 
$

 
$

 
$
175,000

 
$

Debt interest (2)
13,783

 
3,063

 
3,063

 
3,063

 
3,063

 
1,531

 

Leases(3)
19,323

 
6,393

 
5,209

 
3,385

 
2,735

 
1,497

 
104

Purchase commitments(4)
34,719

 
34,719

 

 

 

 

 

Other commitments(5)
13,254

 
11,748

 
1,506

 

 

 

 

Total(7)(6) 
$
256,079

 
$
55,923

 
$
9,778

 
$
6,448

 
$
5,798

 
$
178,028

 
$
104

 
(1)
See Note 11, "Convertible Senior Notes," in the accompanying notes to consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K.
(2)
Includes only the cash payable component of interest in our Convertible Senior Notes.
(3)
Lease payments include common area maintenance (CAM) charges.
(4)
Purchase commitments represent an estimate of all open purchase orders and contractual obligations in the ordinary course of business for which we have not received the goods or services as of June 29, 2014. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.
(5)
Other commitments consist primarily of commitments for software license fees of approximately $4.4 million, $1.5 million of non-recurring engineering expenses and $3.8 million of the dismissal and standstill fee payable to Broadcom. See Note 10, "Commitments and Contingencies," in the accompanying notes to consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K.
(6)
Excludes approximately $40.2 million of liabilities for uncertain tax positions for which we cannot make a reasonably reliable estimate of the period of payment. See Note 14, “Income Taxes,” in the accompanying notes to consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K.
(7)
The expected timing of payments for the obligations discussed above is estimated based on current information. Timing of payment and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations. Amounts disclosed as contingent or milestone based obligations depend on the achievement of the milestones or the occurrence of the contingent events and can vary significantly.
Item 7A. Qualitative and Quantitative Disclosures about Market Risk.
Interest Rate Sensitivity
We do not believe our cash equivalents are subject to significant interest rate risk due to their short terms to maturity. As of June 29, 2014, the carrying value of our cash equivalents approximated fair value. The $175.0 million Convertible Senior Notes due November 15, 2018 have a fixed interest rate of 1.75%.
Exchange Rate Risk

47



Currently, sales to customers and arrangements with third-party manufacturers generally provide for pricing and payment in U.S. dollars (USD), and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the USD relative to other currencies could make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the USD relative to other currencies could result in our suppliers raising their prices to continue doing business with us.
In addition, we are also exposed to foreign exchange rate risk specific to our intercompany loans denominated in a currency other than the local tax reporting currency, which results in tax expense or benefit on the unrealized exchange gain or loss in the local jurisdiction. The potential effect on net loss as of June 29, 2014 resulting from a hypothetical 10% adverse change in currency exchange rates is approximately $4.1 million of incremental tax expense. As a result, fluctuations in currency exchange rates have affected, and could continue to affect our business and results of operations.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item is included herein as part of Part IV, Item 15(a) Financial Statements and Schedules of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply their judgment in evaluating the cost-benefit relationship of possible controls and procedures. The design of any system of internal control is based, in part, on assumptions about the likelihood of future events, and there can be only reasonable, and not absolute, assurance that any design will succeed in achieving its stated goals under all potential events and conditions. Over time, controls may become inadequate because of changes in circumstances or the degree of compliance with the policies and procedures may deteriorate.
As of June 29, 2014, our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, to ensure that information required to be disclosed is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosures. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of June 29, 2014 as a result of the material weakness that existed in our internal control over financial reporting as described below in "Management’s Report on Internal Control over Financial Reporting."
Notwithstanding the material weaknesses discussed below, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that the consolidated financial statements in this Annual Report on Form 10-K fairly present, in all material respects, the Company's financial condition, results of operations and cash flows for the periods presented, in conformity with U.S. generally accepted accounting principles.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management evaluated the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (1992).

48



Based on this assessment, management identified a material weakness in our internal control over financial reporting as of June 29, 2014 as further described below.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following control deficiency that constitutes a material weakness in our internal control over financial reporting as of June 29, 2014:
The Company’s internal controls over its annual goodwill impairment test were not designed effectively, as management’s review controls over the third-party valuation analyses were not designed at a precise enough level to sufficiently address the reasonableness of (i) certain assumptions estimated by management (ii) certain assumptions and calculations performed by the third-party valuation specialist, and (iii) the allocation of net assets assigned to each reporting unit. Further, in light of the fact that there was a change in the personnel performing the reviews and an additional reporting unit on which a third party valuation needed to be performed, the design of the controls did not provide for adequate time in which to effectively conduct the reviews in the current year. Although adjustments were made to the fair value and/or the carrying value of each reporting unit as a result of correcting the underlying assumptions, the adjustments did not impact the conclusion that each reporting unit passed step 1 of the annual impairment test. Therefore, the deficiency in our internal controls had no impact on our consolidated financial statements as of or for the year ended June 29, 2014, although we did modify and enhance our disclosure surrounding goodwill valuation in our critical accounting policies.
The independent registered public accounting firm that audited the consolidated financial statements included in this annual report has issued an audit report on management’s assessment of our internal control over financial reporting. See Part IV, Item 15(a) Financial Statement and Schedules of this Annual Report on Form 10-K.
Plans for Remediation of Material Weakness
Management is actively engaged in the planning for, and implementation of, remediation efforts to address the material weakness identified above. Management intends to take the following actions to address the material weakness:
Re-designing its controls, including the implementation of new controls, relating to the annual goodwill impairment analysis, including: (i) more robust and critical review of internal assumptions and inputs, (ii) specific review procedures with defined precision levels over third-party valuation assumptions and calculations, and (iii) overall assessment of the valuation conclusions.
Changes in Internal Control Over Financial Reporting
During the third quarter of 2014, management identified that system administrator access was not properly restricted within one of its subsidiary’s ERP system. This subsidiary comprises less than 10% of consolidated revenues. Management determined the risks of a material error stemming from this deficiency to be mitigated by compensating controls. Management remediated the deficiency by removing the inappropriate administrator access rights in the fourth quarter.
There were no other changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance.
The information required by this Item will be included in an amendment to this annual report on Form 10-K or incorporated by reference from our definitive proxy statement to be filed pursuant to Regulation 14A.
We have adopted the Emulex Corporation Business Ethics and Confidentiality Policy (the Code of Ethics), a code of ethics that applies to all of our directors and officers, including our Chief Executive Officer, Chief Financial Officer, Corporate Controller, and other finance organization employees. This Code of Ethics is publicly available on our website at www.emulex.com. If we make any substantive amendments to the Code of Ethics or grant any waiver, including any implicit

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waiver, from a provision of the Code of Ethics to our Chief Executive Officer, Chief Financial Officer or Corporate Controller, we will disclose the nature of such amendment or waiver on that website or in a report on Form 8-K.
Item 11. Executive Compensation.
The information required by this Item will be included in an amendment to this annual report on Form 10-K or incorporated by reference from our definitive proxy statement to be filed pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table gives information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our equity compensation plans as of June 29, 2014.
 
Plan Category
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
 
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
 
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Related in Column (a))
 
 
(a)
 
(b)
 
(c)
 
Equity compensations plans approved by security holders(1)
6,501,090

 
$
4.01

 
8,520,800

(4) 
Employee stock purchase plan approved by security holders(2)

 

 
3,648,423

 
Equity compensations plans not approved by security holders(3)
146,979

 
$
5.32

 
56,176

 
Total
6,648,069

 
$
4.04

 
12,225,399

 
 
(1)
Consists of the Emulex Corporation Employee Stock Option Plan, the Emulex Corporation 2005 Equity Incentive Plan, the Emulex Corporation 2004 Employee Stock Incentive Plan, and the Emulex Corporation Stock Award Plan for Non-Employee Directors.
(2)
The Emulex Employee Stock Purchase Plan enables employees to purchase our common stock at a 15% discount to the lower of market value at the beginning or end of each six month offering period. As such, the number of shares that may be issued during a given six month period and the purchase price of such shares cannot be determined in advance. See Note 13, “Stock-based Compensation,” in the accompanying notes to consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K.
(3)
Consists of the ServerEngines Corporation (ServerEngines) Amended and Restated 2008 Stock Option Plan, Sierra Logic, Inc. (Sierra Logic) 2001 Stock Option Plan, Aarohi Communications Inc. (Aarohi) 2001 Stock Option Plan. Options issued under these plans were converted into options to purchase Emulex Corporation common stock as a result of the acquisitions of ServerEngines, Sierra Logic, and Aarohi.
(4)
Includes net unvested stock granted of 3,599,134 shares that are not deemed issued for accounting purposes until vested.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item will be included in an amendment to this annual report on Form 10-K or incorporated by reference from our definitive proxy statement to be filed pursuant to Regulation 14A.
Item 14. Principal Accountant Fees and Services.
The information required by this Item will be included in an amendment to this annual report on Form 10-K or incorporated by reference from our definitive proxy statement to be filed pursuant to Regulation 14A.
PART IV
 
Item 15. Exhibits and Financial Statement Schedules.
(a) Financial Statements and Schedules
1.  Consolidated Financial Statements

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The consolidated financial statements listed in the accompanying Index to Consolidated Financial Statements and Schedule are filed as part of this report.
2.  Financial Statement Schedule
The financial statement schedule listed in the accompanying Index to Consolidated Financial Statements and Schedule is filed as part of this report.
3.  Exhibits
See Item 15(b) below.
(b)  Exhibits
See Exhibit Index attached to this report and incorporated herein by this reference.

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EMULEX CORPORATION AND SUBSIDIARIES
ANNUAL REPORT — FORM 10-K
Items 8, 15(a)(1) and 15(a)(2)
Index to Consolidated Financial Statements and Schedule
June 29, 2014, June 30, 2013 and July 1, 2012
(With Report of Independent Registered Public Accounting Firm Thereon)