0000851310-14-000036.txt : 20140804 0000851310-14-000036.hdr.sgml : 20140804 20140804160755 ACCESSION NUMBER: 0000851310-14-000036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20140627 FILED AS OF DATE: 20140804 DATE AS OF CHANGE: 20140804 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARMONIC INC CENTRAL INDEX KEY: 0000851310 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 770201147 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25826 FILM NUMBER: 141013033 BUSINESS ADDRESS: STREET 1: 4300 NORTH FIRST STREET CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4084906242 MAIL ADDRESS: STREET 1: 4300 NORTH FIRST STREET CITY: SAN JOSE STATE: CA ZIP: 95134 FORMER COMPANY: FORMER CONFORMED NAME: HARMONIC LIGHTWAVES INC DATE OF NAME CHANGE: 19950404 10-Q 1 hlit-20140627x10q.htm 10-Q HLIT-2014.06.27-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________
Form 10-Q
_____________________________________________________
(Mark One)
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 27, 2014
 
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File No. 000-25826
_____________________________________________________
HARMONIC INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________
Delaware
77-0201147
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
4300 North First Street
San Jose, CA 95134
(408) 542-2500
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
____________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
¨
Accelerated filer
ý
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares of the registrant’s Common Stock, $.001 par value, outstanding on July 24, 2014 was 91,674,813.



TABLE OF CONTENTS
 

2


PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

HARMONIC INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
June 27, 2014
 
December 31, 2013
 
(In thousands, except par value amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
59,173

 
$
90,329

Short-term investments
75,238

 
80,252

Accounts receivable, net
79,937

 
75,052

Inventories
30,170

 
36,926

Deferred income taxes
6,746

 
24,650

Prepaid expenses and other current assets
23,766

 
21,521

Total current assets
275,030

 
328,730

Property and equipment, net
32,781

 
34,945

Goodwill
198,099

 
198,022

Intangibles, net
18,252

 
31,119

Other assets
8,281

 
13,268

Total assets
$
532,443

 
$
606,084

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
24,630

 
$
22,380

Income taxes payable
664

 
331

Deferred revenue
38,017

 
27,020

Accrued liabilities
33,676

 
35,349

Total current liabilities
96,987

 
85,080

Income taxes payable, long-term
12,734

 
15,165

Other non-current liabilities
17,913

 
11,673

Total liabilities
127,634

 
111,918

Commitments and contingencies (Note 15)

 

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

 

Common stock, $0.001 par value, 150,000 shares authorized; 92,475 and 99,413 shares issued and outstanding at June 27, 2014 and December 31, 2013, respectively
92

 
99

Additional paid-in capital
2,289,187

 
2,336,275

Accumulated deficit
(1,884,471
)
 
(1,841,999
)
Accumulated other comprehensive loss
1

 
(209
)
Total stockholders’ equity
404,809

 
494,166

Total liabilities and stockholders’ equity
$
532,443

 
$
606,084

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

3


HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
Three months ended
 
Six months ended
 
June 27,
2014
 
June 28,
2013
 
June 27,
2014
 
June 28,
2013
 
(In thousands, except per share amounts)
Product revenue
$
86,528

 
$
96,777

 
$
174,788

 
$
179,252

Service revenue
23,061

 
20,351

 
42,833

 
39,548

Net revenue
109,589

 
117,128

 
217,621

 
218,800

Product cost of revenue
47,928

 
48,932

 
92,534

 
94,169

Service cost of revenue
11,844

 
10,304

 
22,958

 
20,574

Total cost of revenue
59,772

 
59,236

 
115,492

 
114,743

Gross profit
49,817

 
57,892

 
102,129

 
104,057

Operating expenses:
 
 
 
 
 
 
 
Research and development
23,485

 
25,820

 
47,373

 
51,071

Selling, general and administrative
32,979

 
34,424

 
66,526

 
67,693

Amortization of intangibles
1,718

 
2,010

 
3,668

 
4,098

Restructuring and related charges
284

 
242

 
433

 
666

Total operating expenses
58,466

 
62,496

 
118,000

 
123,528

Loss from operations
(8,649
)
 
(4,604
)
 
(15,871
)
 
(19,471
)
Interest income, net
67

 
30

 
144

 
94

Other expense, net
(127
)
 
(133
)
 
(115
)
 
(300
)
Loss from continuing operations before income taxes
(8,709
)
 
(4,707
)
 
(15,842
)
 
(19,677
)
Provision for (benefit from) income taxes
28,353

 
(1,303
)
 
26,630

 
(6,770
)
Loss from continuing operations
(37,062
)
 
(3,404
)
 
(42,472
)
 
(12,907
)
Income (loss) from discontinued operations, net of taxes (including gain on disposal of $14,819, net of taxes, for the six months ended June 28, 2013)

 
(396
)
 

 
15,528

Net income (loss)
$
(37,062
)
 
$
(3,800
)
 
$
(42,472
)
 
$
2,621

Basic and diluted net income (loss) per share from:
 
 
 
 
 
 
 
Continuing operations
$
(0.39
)
 
$
(0.03
)
 
$
(0.44
)
 
$
(0.11
)
Discontinued operations
$
0.00

 
$
0.00

 
$
0.00

 
$
0.14

Net income (loss)
$
(0.39
)
 
$
(0.03
)
 
$
(0.44
)
 
$
0.02

Shares used in per share calculation:
 
 
 
 
 
 
 
Basic and diluted
93,966

 
109,938

 
95,899

 
112,534

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

4


HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
 
Three months ended
 
Six months ended
 
June 27,
2014
 
June 28,
2013
 
June 27,
2014
 
June 28,
2013
 
(In thousands)
Net income (loss)
$
(37,062
)
 
$
(3,800
)
 
$
(42,472
)
 
$
2,621

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
190

 
154

 
230

 
(470
)
Loss on investments
(32
)
 
(46
)
 
(25
)
 
(41
)
       Other comprehensive income (loss) before tax
158

 
108

 
205

 
(511
)
       Income tax benefit related to items of other comprehensive income (loss)
(4
)
 
(9
)
 
(5
)
 
(12
)
       Other comprehensive income (loss), net of tax
162

 
117

 
210

 
(499
)
Comprehensive income (loss)
$
(36,900
)
 
$
(3,683
)
 
$
(42,262
)
 
$
2,122

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

5


HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Six months ended
 
June 27,
2014
 
June 28,
2013
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(42,472
)
 
$
2,621

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Amortization of intangibles
12,866

 
13,805

Depreciation
8,486

 
8,140

Stock-based compensation
8,368

 
8,008

Gain on sale of discontinued operations, net of tax

 
(14,819
)
Loss on impairment of fixed assets

 
149

Deferred income taxes
27,407

 
(9,307
)
Provision for excess and obsolete inventories
1,377

 
2,143

Allowance for doubtful accounts, returns and discounts
600

 
1,062

Excess tax benefits from stock-based compensation
(304
)
 

Other non-cash adjustments, net
847

 
777

Changes in assets and liabilities:
 
 
 
Accounts receivable
(5,485
)
 
(1,390
)
Inventories
5,379

 
7,167

Prepaid expenses and other assets
(2,424
)
 
3,541

Accounts payable
2,324

 
(2,929
)
Deferred revenue
10,873

 
3,937

Income taxes payable
562

 
(877
)
Accrued and other liabilities
(1,625
)
 
(2,946
)
Net cash provided by operating activities
26,779

 
19,082

Cash flows from investing activities:
 
 
 
Purchases of investments
(26,599
)
 
(39,117
)
Proceeds from maturities of investments
30,846

 
36,838

Proceeds from sales of investments

 
27,506

Purchases of property and equipment
(6,479
)
 
(8,755
)
Proceeds from sale of discontinued operations, net of selling costs

 
43,638

Net cash (used in) provided by investing activities
(2,232
)
 
60,110

Cash flows from financing activities:
 
 
 
Payments for repurchase of common stock
(54,751
)
 
(95,372
)
Proceeds from (repurchases of) common stock issued to employees
(1,272
)
 
2,818

Excess tax benefits from stock-based compensation
304

 

Net cash used in financing activities
(55,719
)
 
(92,554
)
Effect of exchange rate changes on cash and cash equivalents
16

 
(105
)
Net decrease in cash and cash equivalents
(31,156
)
 
(13,467
)
Cash and cash equivalents at beginning of period
90,329

 
96,670

Cash and cash equivalents at end of period
$
59,173

 
$
83,203

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

6


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

NOTE 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) which Harmonic Inc. (“Harmonic,” or the “Company”) considers necessary for a fair statement of the results of operations for the interim periods covered and the consolidated financial condition of the Company at the date of the balance sheets. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on February 28, 2014 (“2013 Form 10-K”). The interim results presented herein are not necessarily indicative of the results of operations that may be expected for the full fiscal year ending December 31, 2014, or any other future period. The Company’s fiscal quarters are based on 13-week periods, except for the fourth quarter, which ends on December 31.
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The year-end condensed balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“US GAAP”).
Discontinued Operations
In the first quarter of fiscal 2013, the Company completed the sale of its cable access hybrid-fiber coaxial ("HFC") business to Aurora Networks (“Aurora”). The results of operations associated with the cable access HFC business were presented as discontinued operations in its unaudited condensed consolidated financial statements as described in Note 3, "Discontinued Operations". There were no operating activities associated with the cable access HFC business after December 31, 2013. Unless noted otherwise, all discussions herein with respect to the Company’s unaudited condensed consolidated financial statements relate to the Company’s continuing operations.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Significant Accounting Policies
The Company’s significant accounting policies are described in Note 2 to its audited Consolidated Financial Statements included in its 2013 Form 10-K. There have been no significant changes to these policies during the six months ended June 27, 2014.
NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
In March 2013, the FASB issued ASU 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon De-recognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity”. The ASU addresses accounting for a cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The new guidance became effective for the Company beginning in the first quarter of fiscal 2014 and it did not have a material impact on the Company’s Consolidated Financial Statements.
In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. Under certain circumstances, unrecognized tax benefits should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The new guidance became effective for the Company beginning in the first quarter of fiscal 2014 and it did not have a material impact on the Company’s Consolidated Financial Statements.
On April 10, 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity". This guidance raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both

7


discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The guidance is effective for the Company beginning in the first quarter of fiscal 2015. The Company does not expect the adoption of ASU 2014-08 will have a material impact on its financial position, results of operations or cash flows.
On May 28, 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers", requiring an entity to recognize the amount of revenue that reflects the consideration to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard becomes effective for the Company in the first quarter of fiscal 2017. We have not yet selected a transition method and we are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

NOTE 3: DISCONTINUED OPERATIONS
In February 2013, the Company entered into an Asset Purchase Agreement with Aurora pursuant to which the Company agreed to sell its cable access HFC business for $46.0 million in cash. On March 5, 2013, the sale transaction closed and the Company received gross proceeds of $46.0 million from the sale and recorded a net gain of $15.0 million in connection with the sale in the first quarter of fiscal 2013, adjusted by ($0.2) million in the second quarter of fiscal 2013, primarily related to adjustments on inventory and fixed assets sold to Aurora, for a net gain of $14.8 million. The gain was included in income from discontinued operations, net of tax in the Condensed Consolidated Statement of Operations for the six months ended June 28, 2013.
In March 2013, the Company entered into a transition services agreement (‘TSA”) with Aurora to provide contract manufacturing and other various support, including providing order fulfillment, taking warranty calls, attending to product returns from customers, providing cost accounting analysis, receiving payments from customers and remitting such payments to Aurora. The TSA fees were a fixed amount per month and were determined based on the Company’s estimated cost of delivering the transition services. In addition, in April 2013, the Company and Aurora signed a sublease agreement for the Company’s Milpitas warehouse for the remaining period of the lease.
The TSA ended in October 2013 and the billing to Aurora was recorded in the Condensed Consolidated Statements of Operations under income from continuing operations as an offset to the expenses incurred to deliver the transition services. The table below provides details on the income statement caption under which the TSA billing was recorded (in thousands):
 
Three months ended
 
Six months ended
 
June 28, 2013
Product cost of revenue
$
361

 
$
536

Research and development
12

 
21

Selling, general and administrative
228

 
372

Total TSA billing to Aurora
$
600

 
$
928

The Company recorded a gain of $14.8 million in the six months ended June 28, 2013 , in connection with the sale of the cable access HFC business, calculated as follows (in thousands):
Gross Proceeds
 
 
$
46,000

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

 
 
Prepaid expenses and other current assets
612

 
 
Property and equipment, net
1,180

 
 
Goodwill de-recognized
14,547

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

Less : Selling cost
 
 
2,467

Less : Tax effect
 
 
7,234

Gain on disposal, net of taxes
 
 
$
14,819


8


Since the Company has one reporting unit, upon the sale of the cable access HFC business, approximately $14.5 million of the carrying value of goodwill was allocated to the cable access HFC business based on the relative fair value of the cable access HFC business to the fair value of the Company. The remaining carrying value of goodwill was tested for impairment, and the Company determined that goodwill was not impaired as of March 29, 2013.
The results of operations associated with the cable access HFC business are presented as discontinued operations in the Company’s Condensed Consolidated Statements of Operations for fiscal 2013. There were no operating activities associated with the cable access HFC business after December 31, 2013. Revenue and the components of net income related to the discontinued operations for the three and six months ended June 28, 2013 were as follows (in thousands):
 
Three months ended
 
Six months ended
 
June 28, 2013
Revenue
$

 
$
9,556

Operating income (loss)
$
(319
)
 
$
515

Less : benefit from income taxes
(60
)
 
(194
)
Add : Gain (loss) on disposal, net of taxes
(137
)
 
14,819

Income from discontinued operations, net of taxes
$
(396
)
 
$
15,528


NOTE 4: SHORT-TERM INVESTMENTS
The following table summarizes the Company’s short-term investments (in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
As of June 27, 2014
 
 
 
 
 
 
 
State, municipal and local government agencies bonds
$
35,412

 
$
41

 
$
(33
)
 
$
35,420

Corporate bonds
30,112

 
16

 
(11
)
 
30,117

Commercial paper
5,694

 

 

 
5,694

U.S. federal government bonds
4,004

 
3

 


 
4,007

Total short-term investments
$
75,222

 
$
60

 
$
(44
)
 
$
75,238

As of December 31, 2013
 
 
 
 
 
 
 
State, municipal and local government agencies bonds
$
40,426

 
$
38

 
$
(15
)
 
$
40,449

Corporate bonds
33,483

 
20

 
(7
)
 
33,496

Commercial paper
2,299

 

 

 
2,299

U.S. federal government bonds
4,004

 
4

 

 
4,008

Total short-term investments
$
80,212

 
$
62

 
$
(22
)
 
$
80,252

The following table summarizes the maturities of the Company’s short-term investments (in thousands):
 
June 27, 2014
 
December 31, 2013
Less than one year
$
52,594

 
$
55,278

Due in 1 - 2 years
22,644

 
24,974

Total short-term investments
$
75,238

 
$
80,252

Realized gains and losses from the sale of investments for the three and six months ended June 27, 2014 and June 28, 2013 were not material.
Impairment of Investments
The Company monitors its investment portfolio for impairment on a periodic basis. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis for the investment is established. A decline of fair value below amortized costs of debt securities is considered other-than-temporary if the Company has the intent to sell the security or it is more likely than not that the

9


Company will be required to sell the security before recovery of the entire amortized cost basis. At the present time, the Company does not intend to sell its investments that have unrealized losses in accumulated other comprehensive loss. In addition, the Company does not believe that it is more likely than not that it will be required to sell its investments that have unrealized losses in accumulated other comprehensive loss before the Company recovers the principal amounts invested. The Company believes that the unrealized losses are temporary and do not require an other-than-temporary impairment, based on its evaluation of available evidence as of June 27, 2014.
As of June 27, 2014, there were no individual available-for-sale securities in a material unrealized loss position and the amount of unrealized losses on the total investment balance was insignificant.

NOTE 5: DERIVATIVES AND HEDGING ACTIVITIES
The Company enters into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations on cash and certain trade and inter-company receivables and payables, primarily denominated in Euro, British pound, Japanese yen and Israeli shekel. These contracts reduce the exposure to fluctuations in foreign currency exchange rate movements as the gains and losses associated with foreign currency balances are generally offset with the gains and losses on the forward contracts. These contracts are not designated as hedges that are eligible for hedge accounting treatment and are marked to market through earnings every period and generally range from one to three months in original maturity. We do not enter into foreign currency forward contacts for trading purposes. The balance sheet location and net fair value of each of the Company’s derivatives are as follows (in thousands):
 
 
 
 
Fair Value of Asset (Liability)
Derivatives not designated as hedging instruments
 
Balance Sheet Location
 
June 27, 2014
 
December 31, 2013
Foreign currency contracts
 
Prepaid expenses and other current assets
 
$
79

 
$
196

Foreign currency contracts
 
Accrued liabilities
 
(16
)
 
(195
)
The effects of the changes in the fair values of non-designated foreign currency forward contracts are summarized as follows (in thousands) :
 
 
Three Months Ended
 
Six months ended
 
 
June 27, 2014
 
June 28, 2013
 
June 27, 2014
 
June 28, 2013
Gain (loss) recorded in other income (expense), net
 
$
70

 
$
10

 
$
(106
)
 
$
815


NOTE 6: FAIR VALUE MEASUREMENTS
The applicable accounting guidance establishes a framework for measuring fair value and requires disclosure about the fair value measurements of assets and liabilities. This guidance requires the Company to classify and disclose assets and liabilities measured at fair value on a recurring basis, as well as fair value measurements of assets and liabilities measured on a nonrecurring basis in periods subsequent to initial measurement, in a three-tier fair value hierarchy as described below.
The guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance describes three levels of inputs that may be used to measure fair value:
Level 1 — Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company primarily uses broker quotes for valuation of its short-term investments. The forward exchange contracts are classified as Level 2 because they are valued using quoted market prices and other observable data for similar instruments in an active market.

10


Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company uses the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. During the six months ended June 27, 2014, there were no nonrecurring fair value measurements of assets and liabilities subsequent to initial recognition.
The following table sets forth the fair value of the Company’s financial assets and liabilities measured at fair value based on the three-tier fair value hierarchy (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
As of June 27, 2014
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
26,184

 
$

 
$

 
$
26,184

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

 
35,420

 

 
35,420

Corporate bonds

 
30,117

 

 
30,117

Commercial paper

 
5,694

 

 
5,694

U.S. federal government bonds
4,007

 

 

 
4,007

Prepaids and other current assets
 
 
 
 
 
 
 
Derivative assets (1)

 
79

 

 
79

Total assets measured and recorded at fair value
$
30,191

 
$
71,310

 
$

 
$
101,501

Accrued liabilities
 
 
 
 
 
 
 
Derivative liabilities (1)
$

 
$
16

 
$

 
$
16

Total liabilities measured and recorded at fair value
$

 
$
16

 
$

 
$
16

 
Level 1
 
Level 2
 
Level 3
 
Total
As of December 31, 2013
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
51,014

 
$

 
$

 
$
51,014

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

 
40,449

 

 
40,449

Corporate bonds

 
33,496

 

 
33,496

Commercial paper

 
2,299

 

 
2,299

U.S. federal government bonds
4,008

 

 

 
4,008

Prepaids and other current assets
 
 
 
 
 
 
 
Derivative assets (1)

 
196

 

 
196

Total assets measured and recorded at fair value
$
55,022

 
$
76,440

 
$

 
$
131,462

Accrued liabilities
 
 
 
 
 
 
 
Derivative liabilities (1)
$

 
$
195

 
$

 
$
195

Total liabilities measured and recorded at fair value
$

 
$
195

 
$

 
$
195

(1) Derivative assets and liabilities represent forward currency exchange contracts. The Company enters into these contracts to minimize the short-term impact of foreign currency exchange rates fluctuations primarily from trade and inter-company receivables and payables.


11


NOTE 7: BALANCE SHEET COMPONENTS
The following tables provide details of selected balance sheet components (in thousands):
 
June 27, 2014
 
December 31, 2013
Accounts receivable, net:
 
 
 
Accounts receivable
$
87,627

 
$
83,266

Less: allowances for doubtful accounts, returns and discounts
(7,690
)
 
(8,214
)
Accounts receivable, net
$
79,937

 
$
75,052


Inventories:
 
 
 
Raw materials
$
1,836

 
$
2,389

Work-in-process
718

 
976

Finished goods
27,616

 
33,561

 
$
30,170

 
$
36,926

Property and equipment, net:
 
 
 
Furniture and fixtures
$
8,644

 
$
8,227

Machinery and equipment
116,851

 
114,178

Leasehold improvements
8,334

 
7,888

Property and equipment, gross
133,829

 
130,293

Less: accumulated depreciation and amortization
(101,048
)
 
(95,348
)
 
$
32,781

 
$
34,945


NOTE 8: GOODWILL AND IDENTIFIED INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the six months ended June 27, 2014 are as follows (in thousands):
Balance at beginning of period
$
198,022

Foreign currency translation adjustment
77

Balance at end of period
$
198,099

The following is a summary of identified intangible assets (in thousands):
 
 
 
June 27, 2014
 
December 31, 2013
 
Range of Useful Lives
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Identifiable intangibles:
 
 
 
 
 
 
 
 
 
 
 
 
 
Developed core technology
4-6 years
 
$
136,145

 
$
(130,880
)
 
$
5,265

 
$
136,145

 
$
(121,681
)
 
$
14,464

Customer relationships/contracts
5-6 years
 
67,098

 
(56,351
)
 
10,747

 
67,098

 
(53,772
)
 
13,326

Trademarks and tradenames
4-5 years
 
11,361

 
(11,152
)
 
209

 
11,361

 
(10,565
)
 
796

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

 
(5,069
)
 
2,031

 
7,100

 
(4,567
)
 
2,533

Total identifiable intangibles
 
 
$
221,704

 
$
(203,452
)
 
$
18,252

 
$
221,704

 
$
(190,585
)
 
$
31,119


12


Amortization expense for the identifiable purchased intangible assets for the three and six months ended June 27, 2014 and June 28, 2013 was allocated as follows (in thousands):
 
Three months ended
 
Six months ended
 
June 27,
2014
 
June 28,
2013
 
June 27,
2014
 
June 28,
2013
Included in cost of revenue
$
4,482

 
$
4,762

 
$
9,198

 
$
9,707

Included in operating expenses
1,718

 
2,010

 
3,668

 
4,098

Total amortization expense
$
6,200

 
$
6,772

 
$
12,866

 
$
13,805

The estimated future amortization expense of purchased intangible assets with definite lives is as follows (in thousands):
 
Cost of Revenue
 
Operating
Expenses
 
Total
Year ended December 31,
 
 
 
 
 
2014 (remaining 6 months)
$
4,546

 
$
3,107

 
$
7,653

2015
719

 
5,783

 
6,502

2016

 
4,097

 
4,097

2017

 

 

2018

 

 

Total future amortization expense
$
5,265

 
$
12,987

 
$
18,252


NOTE 9: RESTRUCTURING AND RELATED CHARGES
The Company accounts for its restructuring plans under the authoritative guidance for exit or disposal activities. The restructuring and related charges are included in “Product cost of revenue” and "Operating expenses-restructuring and related charges” in the Condensed Consolidated Statements of Operations. The following table summarizes the restructuring and related charges (in thousands):
 
Three months ended
 
Six months ended
 
June 27,
2014
 
June 28,
2013
 
June 27,
2014
 
June 28,
2013
Restructuring and related charges in:
 
 
 
 
 
 
 
Product cost of revenue
$

 
$
65

 
$
79

 
$
206

Operating expenses-Restructuring and related charges
284

 
242

 
433

 
666

 
$
284

 
$
307

 
$
512

 
$
872

Harmonic 2013 Restructuring
In the first quarter of fiscal 2013, the Company committed to a restructuring plan to reduce costs and improve efficiencies. This restructuring plan extended to actions taken through fiscal 2014. In fiscal 2013, the Company recorded $2.2 million of restructuring charges under this plan consisting of worldwide workforce reductions, writing down leasehold improvements and furniture related to its Milpitas warehouse to estimated net realizable value, and obsolete inventory at its Israel facilities. Of the $2.2 million restructuring charges in fiscal 2013, $872,000 was recorded in the six months ended June 28, 2013. For a complete discussion of the restructuring actions related to the 2013 restructuring plan, please refer to Note 9 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
The Company recorded $284,000 and $512,000 under this plan, in the three and six months ended June 27, 2014, respectively. The restructuring charges in the six months ended June 27, 2014 consisted of severance and benefits related to the termination of twenty employees worldwide, and costs associated with vacating from an excess facility in France. The following table summarizes the activity in the restructuring accrual under this plan during the six months ended June 27, 2014 (in thousands):

13


 
Severance
 
Excess facilities
 
Total
Balance at December 31, 2013
$
179

 
$

 
$
179

2013 Plan restructuring charges
487

 
32

 
519

Adjustments to restructuring provisions
(7
)
 

 
(7
)
Cash payments
(592
)
 
(32
)
 
(624
)
Balance at June 27, 2014
$
67

 
$

 
$
67

The Company anticipates that the remaining restructuring accrual balance of $67,000 will be substantially paid out by the third quarter of fiscal 2014.
HFC Restructuring
As a result of the sale of the cable access HFC business in March 2013, the Company recorded $600,000 of restructuring charges under "Income from discontinued operations" in fiscal 2013 consisting of severance and benefits and contact termination costs. For a complete discussion of the restructuring actions related to the HFC restructuring plan, please refer to Note 9 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

The remaining restructuring accrual balance of $13,000 as of December 31, 2013 was fully paid in the first quarter of fiscal 2014.

NOTE 10: CREDIT FACILITIES
Harmonic has a bank line of credit facility with Silicon Valley Bank that provides for borrowings of up to $10.0 million and matures on August 22, 2014. There were no borrowings during the six months ended June 27, 2014. As of June 27, 2014, the amount available for borrowing under this facility, net of $0.2 million of standby letters of credit, was $9.8 million.
This facility, which became effective in August 2011 and was amended in August 2012, contains a financial covenant that requires Harmonic to maintain a ratio of unrestricted cash, accounts receivable and short term investments to current liabilities (less deferred revenue) of at least 1.75 to 1.00. As of June 27, 2014, the Company’s ratio under that covenant was 3.6 to 1. In the event of noncompliance by Harmonic with the covenants under the facility, including the financial covenant referenced above, Silicon Valley Bank would be entitled to exercise its remedies under the facility, including declaring all obligations immediately due and payable. As of June 27, 2014, Harmonic was in compliance with the covenants under the line of credit facility. Borrowings pursuant to the line would bear interest at the bank’s prime rate (3.25% at June 27, 2014,) or at LIBOR for the desired borrowing period (an annualized rate of 0.15% for a one month borrowing period at June 27, 2014) plus 1.75%, or 1.90%. Borrowings are not collateralized.

NOTE 11: EMPLOYEE BENEFIT PLANS
Harmonic grants stock options and restricted stock units (“RSUs”) pursuant to stockholder approved equity incentive plans. These equity incentive plans are described in detail in Note 12, “Employee Benefit Plans”, of Notes to Consolidated Financial Statements in the 2013 Form 10-K
Stock Options and Restricted Stock Units
The following table summarizes the Company’s stock option and RSU unit activity during the six months ended June 27, 2014 (in thousands, except per share amounts):

14


 
 
 
Stock Options Outstanding
 
Restricted Stock Units Outstanding
 
Shares
Available for
Grant
 
Number
of
Shares
 
Weighted
Average
Exercise Price
 
Number
of
Units
 
Weighted
Average
Grant
Date Fair
Value
Balance at December 31, 2013
8,752

 
7,885

 
$
6.92

 
3,018

 
$
6.34

Authorized

 

 

 

 

Granted
(3,195
)
 
1,349

 
6.49

 
1,230

 
6.55

Options exercised

 
(199
)
 
5.25

 

 

Shares released

 

 

 
(1,187
)
 
6.22

Forfeited or cancelled
1,296

 
(1,285
)
 
8.43

 
(132
)
 
6.26

Balance at June 27, 2014
6,853

 
7,750

 
$
6.64

 
2,929

 
$
6.48

The following table summarizes information about stock options outstanding as of June 27, 2014 (in thousands, except per share amounts):
 
Number
of
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
Vested and expected to vest
7,359

 
$
6.65

 
3.8
 
$
8,610

Exercisable
4,807

 
6.84

 
2.7
 
5,460

The intrinsic value of options vested and expected to vest and exercisable as of June 27, 2014 is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of June 27, 2014. The intrinsic value of options exercised during the three and six months ended June 27, 2014 was $0.2 million and $0.4 million, respectively. The intrinsic value of options exercised during the three and six months ended June 28, 2013 was $0.4 million and $0.9 million, respectively.
The following table summarizes information about restricted stock units outstanding as of June 27, 2014 (in thousands, except per share amounts):
 
Number of
Shares
Underlying
Restricted
Stock
Units
 
Weighted
Average
Remaining
Vesting
Period
(Years)
 
Aggregate
Fair
Value
Vested and expected to vest
2,691

 
0.8
 
$
20,045

The fair value of restricted stock units vested and expected to vest as of June 27, 2014 is calculated based on the fair value of the Company's common stock as of June 27, 2014.
Employee Stock Purchase Plan
The 2002 Employee Stock Purchase Plan (“ESPP”) provides for the issuance of common stock purchase rights to employees of the Company. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. The ESPP enables employees to purchase shares at 85% of the fair market value of the common stock at the beginning or end of the offering period, whichever is lower. Offering periods generally begin on the first trading day on or after January 1 and July 1 of each year. Employees may participate through payroll deductions of 1% to 10% of their earnings. In the event that there are insufficient shares in the plan to fully fund the issuance, the available shares will be allocated across all participants based on their contributions relative to the total contributions received for the offering period.
There was a shortage of approved shares in the ESPP to fund the total employee contributions from January 2, 2013 to June 30, 2013. The shares available in the plan were sufficient to fund approximately 53% of the total contributions. As a result, the shares available were issued ratably to the participants based on each of their contributions during the offering period, relative to the total contributions received from all participants. The participants were refunded the remaining 47% of their contributions and the ESPP was suspended for the second half of 2013. The Company’s stockholders approved a 1,000,000

15


share increase in the authorized shares for the ESPP during the Company’s annual meeting on August 14, 2013, and contributions under the ESPP resumed in January 2014.
401(k) Plan
Harmonic has a retirement/savings plan which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. This plan allows participants to contribute up to the applicable Internal Revenue Code limitations under the plan. Harmonic has made discretionary contributions to the plan of 25% of the first 4% contributed by eligible participants, up to a maximum contribution per participant of $1,000 per year. Harmonic contributed $277,000 and $312,000 for the six months ended June 27, 2014 and June 28, 2013, respectively.

NOTE 12: STOCK-BASED COMPENSATION
Stock-based compensation expense consists primarily of expenses for stock options and restricted stock units granted to employees and shares issued under the ESPP. The following table summarizes stock-based compensation expense (in thousands):
 
Three months ended
 
Six months ended
 
June 27,
2014
 
June 28,
2013
 
June 27,
2014
 
June 28,
2013
Stock-based compensation in:
 
 
 
 
 
 
 
Cost of revenue
$
623

 
$
622

 
$
1,139

 
$
1,233

Research and development expense
1,269

 
1,121

 
2,370

 
2,324

Selling, general and administrative expense
2,669

 
2,279

 
4,859

 
4,364

Total stock-based compensation in operating expense
3,938

 
3,400

 
7,229

 
6,688

Total stock-based compensation
$
4,561

 
$
4,022

 
$
8,368

 
$
7,921

Stock Options
The Company estimated the fair value of all employee stock options using a Black-Scholes valuation model with the following weighted average assumptions:
 
Three months ended
 
Six months ended
 
June 27,
2014
 
June 28,
2013
 
June 27,
2014
 
June 28,
2013
Expected term (years)
4.70

 
4.70

 
4.70

 
4.70

Volatility
39
%
 
49
%
 
40
%
 
51
%
Risk-free interest rate
1.7
%
 
1.1
%
 
1.7
%
 
0.8
%
Expected dividends
0.0
%
 
0.0
%
 
0.0
%
 
0.0
%
The expected term represents the weighted-average period that the stock options are expected to remain outstanding. The computation of the expected term was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The Company uses its historical volatility for a period equivalent to the expected term of the options to estimate the expected volatility. The risk-free interest rate that the Company uses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.
The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.
The weighted-average fair value per share of options granted was $2.70 and $2.60 for the three months ended June 27, 2014 and June 28, 2013, respectively. The weighted-average fair value per share of options granted was $2.35 and $2.50 for the six months ended June 27, 2014 and June 28, 2013, respectively.

16



The fair value of all stock options vested during the three months ended June 27, 2014 and June 28, 2013 were both at $0.7 million. The fair value of all stock options vested during the six months ended June 27, 2014 and June 28, 2013 were both at $2.0 million.
The total realized tax benefit attributable to stock options exercised during the three and six months ended June 27, 2014, in jurisdictions where this expense is deductible for tax purposes, was $119,000 and $304,000, respectively. The Company did not recognize any tax benefit attributable to stock options exercised during the six months ended June 28, 2013.
Restricted Stock Units
The aggregate fair value of all restricted stock units issued during the three months ended June 27, 2014 and June 28, 2013 was $2.0 million and $1.8 million respectively. The estimated fair value of all restricted stock units issued during the six months ended June 27, 2014 and June 28, 2013 were both at $7.4 million.
Employee Stock Purchase Plan
The value of the stock purchase rights under the ESPP consists of: (1) the 15% discount on the purchase of the stock; (2) 85% of the fair value of the call option; and (3) 15% of the fair value of the put option. The call option and put option were valued using the Black-Scholes option pricing model. The weighted average fair value of the Company's ESPP shares at purchase dates was estimated using the following weighted average assumptions during the six months ended June 27, 2014 and June 28, 2013:
 
Purchase Period Ending
 
June 30,
2014
 
June 30,
2013
Expected term (years)
0.50

 
0.49

Volatility
28
%
 
30
%
Risk-free interest rate
0.1
%
 
0.2
%
Expected dividends
0.0
%
 
0.0
%
Estimated weighted average fair value per share at purchase date
$1.70
 
$1.23
The expected term represents the period of time from the beginning of the offering period to the purchase date. The Company uses its historical volatility for a period equivalent to the expected term of the options to estimate the expected volatility. The risk-free interest rate that the Company uses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.
The ESPP was suspended for the second half of 2013 due to all authorized shares under the plan having been issued through the offering period ended June 30, 2013. The Company’s stockholders approved a 1,000,000 share increase in the authorized shares for the ESPP during the Company’s annual meeting on August 14, 2013, and contributions under the ESPP resumed in January 2014. As a result, the Company did not have any stock-based compensation expense in the second half of fiscal 2013 related to the ESPP.
Unrecognized Stock-Based Compensation
As of June 27, 2014, total unamortized stock-based compensation cost related to unvested stock options and restricted stock units was $20.6 million. This amount will be recognized as expense using the straight-line attribution method over the remaining weighted-average vesting period of 1.8 years.


17


NOTE 13: INCOME TAXES
The Company reported the following operating results for the periods presented (in thousands):
 
Three months ended
 
Six months ended
 
June 27,
2014
 
June 28,
2013
 
June 27,
2014
 
June 28,
2013
Loss from continuing operations before income taxes
$
(8,709
)
 
$
(4,707
)
 
$
(15,842
)
 
$
(19,677
)
Provision for (benefit from) income taxes
28,353

 
(1,303
)
 
26,630

 
(6,770
)
Effective income tax rate
(325.6
)%
 
27.7
%

(168.1
)%

34.4
%
The Company's quarterly income taxes reflect an estimate of the corresponding fiscal year's annual effective tax rate and include, where applicable, adjustments for discrete tax items.
The Company's effective rate for the six months ended June 27, 2014 was higher than the U.S. federal statutory rate of 35% primarily due to a $24.5 million increase in the valuation allowance against both U.S. federal and state deferred tax assets. The increased valuation allowance was a result of a history of operating losses in recent years, including the lower than expected revenue and profitability in the second quarter, that has led to uncertainty with respect to the Company’s ability to realize certain of its net deferred tax assets. The Company will continue to assess the realizability of the remaining deferred tax assets, which primarily relates to California state tax and certain foreign jurisdictions going forward and adjust the valuation allowance accordingly. As such, further valuation allowance increases may be recorded in the next twelve months.
The Company's effective rate for the six months ended June 28, 2013 was slightly lower than the U.S. federal statutory rate of 35% primarily attributable to the net of various discrete items, non-deductible amortization on foreign intangibles, the differential in foreign tax rates, federal research and development tax credit, and non-deductible stock-based compensation expense. The discrete items included primarily the increase in the valuation allowance on California research and development tax credit and accrued interest on uncertain tax positions, offset partially by the benefit associated with the reinstatement of the prior year's federal research and development tax credit, and the benefit associated with the reversal of previously recorded foreign income taxes due to the expiration of the statute of limitation in the foreign jurisdictions.
The Company files federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations during which such tax returns may be audited and adjusted by the relevant tax authorities. The U.S. Internal Revenue Service has concluded its audit for the 2008 and 2009 tax years. In addition, the statute of limitations on the Company's 2008 and 2009 U.S. corporate income tax return expired in September 2013 and, as a result, in the third quarter of 2013, the Company released the related tax reserves, including accrued interest and penalties, for those tax years. The 2010 through 2012 tax years generally remain subject to examination by U.S. federal and most state tax authorities. The statute of limitation for the 2010 tax year will be expiring in September 2014 and the tax reserve for the 2010 tax year is approximately $5.5 million. In significant foreign jurisdictions, the 2006 through 2012 tax years generally remain subject to examination by their respective tax authorities.
The Company's operations in Switzerland are subject to a reduced tax rate under the Switzerland tax holiday which requires various thresholds of investment and employment in Switzerland. The Company has met these various thresholds and the Switzerland tax holiday is effective through the end of 2018.
As of June 27, 2014, the total amount of gross unrecognized tax benefits, including interest and penalties, was approximately $26.1 million, that if recognized, would affect the Company's effective tax rate. The Company recognizes interest and penalties related to unrecognized tax positions in income tax expense. The Company had $1.8 million of gross interest and penalties accrued as of June 27, 2014. The Company will continue to review its tax positions and provide for, or reverse, unrecognized tax benefits as issues arise. As of June 27, 2014, the Company anticipates that the balance of gross unrecognized tax benefits will decrease up to approximately $8.3 million due to expiration of the applicable statues of limitations over the next twelve months.


18


NOTE 14: INCOME (LOSS) PER SHARE
The following table sets forth the computation of the basic and diluted net loss per share (in thousands, except per share amounts):
 
Three months ended
 
Six months ended
 
June 27,
2014
 
June 28,
2013
 
June 27,
2014
 
June 28,
2013
Numerator:
 
 
 
 
 
 
 
Loss from continuing operations
$
(37,062
)
 
$
(3,404
)
 
$
(42,472
)
 
$
(12,907
)
Income (loss) from discontinued operations

 
(396
)
 

 
15,528

Net income (loss)
$
(37,062
)
 
$
(3,800
)
 
$
(42,472
)
 
$
2,621

Denominator:
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
 
 
 
 
 
 
 
Basic and diluted
93,966

 
109,938

 
95,899

 
112,534

Basic and diluted net income (loss) per share from:
 
 
 
 
 
 
 
Continuing operations
$
(0.39
)
 
$
(0.03
)
 
$
(0.44
)
 
$
(0.11
)
Discontinued operations
$
0.00

 
0.00

 
$
0.00

 
$
0.14

Net Income (loss)
$
(0.39
)
 
$
(0.03
)
 
$
(0.44
)
 
$
0.02

The following table sets forth the potentially dilutive shares from stock options, restricted stock units and the ESPP, for the periods presented, that were excluded from the net income (loss) per share computations because their effect was anti-dilutive (in thousands):
 
Three months ended
 
Six months ended
 
June 27,
2014
 
June 28,
2013
 
June 27,
2014
 
June 28,
2013
Potentially dilutive equity awards outstanding
11,696

 
13,182

 
11,384

 
12,949


NOTE 15: COMMITMENTS AND CONTINGENCIES
Leases
Future minimum lease payments under non-cancelable operating leases as of June 27, 2014, after giving effect to $0.3 million of future sublease income from Aurora, are as follows (in thousands):
Years ending December 31,
 
2014 (remaining six months)
$
5,264

2015
10,199

2016
8,531

2017
7,788

2018
7,661

Thereafter
13,738

Total
$
53,181


19


Warranties
The Company accrues for estimated warranty costs at the time of product shipment. Management periodically reviews the estimated fair value of its warranty liability and records adjustments based on the terms of warranties provided to customers, historical and anticipated warranty claims experience, and estimates of the timing and cost of warranty claims. Activity for the Company’s warranty accrual, which is included in accrued liabilities, is summarized below (in thousands):
 
Three months ended
 
Six months ended
 
June 27,
2014
 
June 28,
2013
 
June 27,
2014
 
June 28,
2013
Balance at beginning of period
$
3,659

 
$
3,270

 
$
3,606

 
$
4,292

Transfer to Aurora as part of the sale of discontinued operations

 

 


 
(939
)
Accrual for current period warranties
1,606

 
1,948

 
3,355

 
3,342

Warranty costs incurred
(1,733
)
 
(1,990
)
 
(3,429
)
 
(3,467
)
Balance at end of period
$
3,532

 
$
3,228

 
$
3,532

 
$
3,228

Purchase Commitments with Contract Manufacturers and Other Suppliers
The Company relies on a limited number of contract manufacturers and suppliers to provide manufacturing services for a substantial majority of its products. In addition, some components, sub-assemblies and modules are obtained from a sole supplier or limited group of suppliers. During the normal course of business, in order to reduce manufacturing lead times and ensure adequate component supply, the Company enters into agreements with certain contract manufacturers and suppliers that allow them to procure inventory based upon criteria defined by the Company. The Company had approximately $24.5 million of non-cancelable purchase commitments with contract manufacturers and other suppliers as of June 27, 2014.
Standby Letters of Credit
As of June 27, 2014, the Company’s financial guarantees consisted of standby letters of credit outstanding, which were principally related to performance bonds and state requirements imposed on employers. The maximum amount of potential future payments under these arrangements was $0.2 million as of June 27, 2014.
Indemnification
Harmonic is obligated to indemnify its officers and the members of its Board of Directors pursuant to its bylaws and contractual indemnity agreements. Harmonic also indemnifies some of its suppliers and most of its customers for specified intellectual property matters pursuant to certain contractual arrangements, subject to certain limitations. The scope of these indemnities varies, but, in some instances, includes indemnification for damages and expenses (including reasonable attorneys’ fees). There have been no amounts accrued in respect of these indemnification provisions through June 27, 2014.
Guarantees
The Company has $0.5 million of guarantees in Israel as of June 27, 2014, with the majority relating to rent obligations for buildings used by its Israeli subsidiaries.
Legal proceedings
From time to time, the Company is involved in lawsuits as well as subject to various legal proceedings, claims, threats of litigation, and investigations in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment, and other matters. The Company assesses potential liabilities in connection with each lawsuit and threatened lawsuits and accrues an estimated loss for these loss contingencies if both of the following conditions are met: information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. While certain matters to which the Company is a party specify the damages claimed, such claims may not represent reasonably possible losses. Given the inherent uncertainties of litigation, the ultimate outcome of these matters cannot be predicted at this time, nor can the amount of possible loss or range of loss, if any, be reasonably estimated.

In October 2011, Avid Technology, Inc. (“Avid”) filed a complaint in the United States District Court for the District of Delaware alleging that Harmonic’s Media Grid product infringes two patents held by Avid. A jury trial on this complaint commenced on January 23, 2014 and, on February 4, 2014, the jury returned a unanimous verdict in favor of Harmonic,

20


rejecting Avid's infringement allegations in their entirety. The parties are currently engaged in post-trial briefing. Avid has indicated it intends to appeal the verdict.

In June 2012, Avid served a subsequent complaint in the United States District Court for the District of Delaware alleging that Harmonic’s Spectrum product infringes one patent held by Avid. The complaint seeks injunctive relief and unspecified damages. In September 2013, the U.S. Patent Trial and Appeal Board ("PTAB") authorized an inter partes review to be instituted as to claims 1-16 of the patent asserted in this second complaint. A hearing before the PTAB was conducted on May 20, 2014. On July 10, 2014, the PTAB issued a decision finding claims 1 - 10 invalid and claims 11 - 16 not invalid. Avid has not indicated whether it intends to appeal the PTAB’s decision.
An unfavorable outcome on any litigation matter could require that Harmonic pay substantial damages, or, in connection with any intellectual property infringement claims, could require that the Company pay ongoing royalty payments or could prevent the Company from selling certain of its products. As a result, a settlement of, or an unfavorable outcome on, any of the matters referenced above or other litigation matters could have a material adverse effect on Harmonic’s business, operating results, financial position and cash flows.

NOTE 16: STOCKHOLDERS’ EQUITY
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows (in thousands):
 
June 27, 2014
 
December 31, 2013
Foreign currency translation adjustments
$
(12
)
 
$
(242
)
Unrealized gain on investments
13

 
33

Accumulated other comprehensive loss
$
1

 
$
(209
)
Common Stock Repurchases
On April 24, 2012, our Board of Directors (the "Board") approved a stock repurchase program that provided for the repurchase of up to $25 million of our outstanding common stock. During 2013, the Board approved $195 million of increases to the program, increasing the aggregate authorized amount of the program to $220 million. On February 6, 2013, the Board approved a modification to the program that permits the Company to also repurchase its common stock pursuant to a plan that meets the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934. On May 14, 2014, the Board approved an increase to the aggregate amount authorized under the repurchase program of $80 million and extended the repurchase period through the end of 2016.
As of June 27, 2014, we had purchased 31.3 million shares of common stock under this program at a weighted average price of $6.16 per share for an aggregate purchase price of $193.0 million, excluding fees. The remaining authorized amount for stock repurchases under this program was $107.0 million as of June 27, 2014. For addition information, see "Item2 - Unregistered sales of equity securities and use of proceeds" of this Form 10-Q.


21


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The terms “Harmonic,” the “Company,” “we,” “us,” “its,” and “our,” as used in this Quarterly Report on Form 10-Q (“Form 10-Q”), refer to Harmonic Inc. and its subsidiaries and its predecessors as a combined entity, except where the context requires otherwise.
Some of the statements contained in this Form 10-Q are forward-looking statements that involve risk and uncertainties. The statements contained in this Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future. In some cases, you can identify forward-looking statements by terminology such as, “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements regarding:
developing trends and demands in the markets we address, particularly emerging markets;
economic conditions, particularly in certain geographies, and in financial markets;
new and future products and services;
capital spending of our customers;
our strategic direction, future business plans and growth strategy;
industry and customer consolidation;
expected demand for and benefits of our products and services;
economic conditions, particularly in certain geographies, and in financial markets;
seasonality of revenue and concentration of revenue sources;
the potential impact of our continuing stock repurchase plan;
potential future acquisitions and dispositions;
anticipated results of potential or actual litigation;
our competitive environment;
the impact of governmental regulation;
the impact of uncertain economic times and markets;
anticipated revenue and expenses, including the sources of such revenue and expenses;
expected impacts of changes in accounting rules;
use of cash, cash needs and ability to raise capital; and
the condition of our cash investments.
These statements are subject to known and unknown risks, uncertainties and other factors, any of which may cause our actual results to differ materially from those implied by the forward-looking statements. Important factors that may cause actual results to differ from expectations include those discussed in “Risk Factors” beginning on page 34 of this Form 10-Q. All forward-looking statements included in this Form 10-Q are based on information available to us on the date thereof, and we assume no obligation to update any such forward-looking statements.
OVERVIEW
We design, manufacture and sell versatile and high performance video infrastructure products and system solutions that enable our customers to efficiently create, prepare and deliver a full range of video services to consumer devices, including televisions, personal computers, laptops, tablets and smart phones. We sell video processing and production and playout solutions and services worldwide to broadcast and media companies, streaming new media companies, cable operators, and satellite and telecommunications (telco) Pay-TV service providers. We also sell cable edge solutions and related services to cable operators globally.

22


In the first quarter of fiscal 2013, we completed the sale of our cable access HFC business to Aurora Networks (“Aurora”) for $46.0 million in cash. The results of operations associated with the cable access HFC business were presented as discontinued operations in our unaudited condensed consolidated financial statements as described in Note 3, "Discontinued Operations". There were no operating activities associated with the cable access HFC business after December 31, 2013. Unless noted otherwise, all discussions herein with respect to the Company’s unaudited condensed consolidated financial statements relate to the Company’s continuing operations.
Historically, a majority of our revenue has been derived from relatively few customers, due in part to the consolidation of the ownership of cable operators and satellite Pay-TV service providers. Sales to our ten largest customers in the three and six months ended June 27, 2014 accounted for approximately 40% of our revenue, in both periods compared to 37% and 33%, respectively, for the same periods in 2013. The increases in the sales to our ten largest customers in the three and six months ended June 27, 2014, as compared to the same periods in 2013, were primarily due to increased cable edge product sales, including our new NSG Pro converged cable access platform ("CCAP") product. While we continue to seek to broaden our customer base by penetrating new markets and further expanding internationally, we expect to see continuing industry consolidation and customer concentration. During the three and six months ended June 27, 2014, revenue from Comcast accounted for approximately 19% of our total revenue in both periods, compared to 11% and 10%, respectively, for the same periods in 2013.
In the three and six months ended June 27, 2014, we recognized revenue of $110 million and $218 million, respectively, compared to $117 million and $219 million in the same periods in 2013. The decreases in revenue in the three and six months ended June 27, 2014, were primarily due to decreased video products revenue, primarily, we believe, as a result of some of our customers delaying their purchase decisions until products based on our new VOS software platform, as well as new UltraHD and high efficiency video coding (HEVC) technologies, become available. During the second quarter of fiscal 2014, the Company announced its new VOS solution, a software-based, fully virtualized platform that we are developing to unify the entire media processing chain, from ingest to delivery, and which is designed to operate on common server hardware in IT data center environments. Typically, a service provider or broadcast and media customer transitioning to these kinds of new technologies requires extensive planning and preparation. The decrease in our video processing and production and playout revenue was partially offset by increased revenue from our cable edge products, including our new NSG Pro product.
Our international revenue decreased 4% and 6%, respectively, in the three and six months ended June 27, 2014, as compared to the same periods in 2013, primarily due to a softer demand in the Europe, Middle East and Africa ("EMEA") region across all our products. Domestic sales decreased by 9% in the three months ended June 27, 2014, as compared to the same period in 2013 and increased 6% in the six months ended June 27, 2014, as compared to the same period in 2013. The increase in our domestic sales in the six months ended June 27, 2014, as compared to the same period in 2013, was primarily driven by increased cable edge product sales in the U.S. to cable operators. We expect that international sales will continue to account for a significant portion of our net revenue for the foreseeable future, and expect that, due to sales in emerging markets in particular, our international revenue may increase as a percentage of our total net revenue from year to year.
Historically, our revenue has been dependent upon capital spending in the cable, satellite, telco and broadcast industries. More recently, we also have derived revenue from media companies, including streaming media providers. Industry consolidation has in the past constrained, and may in the future constrain, capital spending by our customers. If our product portfolio and product development plans do not position us well to capture an increased portion of the capital spending of customers in the markets on which we focus, our revenue may decline. As we attempt to further diversify our customer base in these markets, we may need to continue to build alliances with other equipment manufacturers and content providers, adapt our products for new applications, take orders at prices resulting in lower margins, and build internal expertise to handle the particular contractual and technical demands of the media market, which could result in higher operating costs. Implementation issues with our products or those of other vendors have caused in the past, and may cause in the future, delays in project completion for our customers and delay our recognition of revenue.
Our quarterly revenue has been, and may continue to be, affected by seasonal buying patterns. Typically, revenue in the first quarter of the year is seasonally lower than other quarters, as our customers often are still finalizing their annual budget and capital spending projections for the year. Further, we often recognize a substantial portion of our quarterly revenues in the last month of each quarter. We establish our expenditure levels for product development and other operating expenses based on projected revenue levels for a specified period, and expenses are relatively fixed in the short term. Accordingly, even small variations in timing of revenue, particularly from large individual transactions, can cause significant fluctuations in operating results in a particular quarter.
As part of our business strategy, (1) from time to time we have acquired, and continue to consider acquiring, businesses, technologies, assets and product lines that we believe complement or may expand our existing business, and (2) from time to time we consider divesting a product line that we believe may no longer complement or expand our existing business. In September 2010, we completed the acquisition of Omneon, Inc., a company specializing in file-based infrastructure for the

23


production, preparation and playout of video content typically deployed by broadcasters, satellite operators, content owners and other media companies. Omneon’s business was complementary to Harmonic’s core business, and expanded our customer reach into content providers and extended our product lines into video servers and video-optimized storage for content production and playout. In March 2013, we sold our cable access HFC business to Aurora Networks. See Note 3, “Discontinued Operations” of our Condensed Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
There have been no material changes to our critical accounting policies, judgments and estimates, during the six months ended June 27, 2014, from those disclosed in our 2013 Form 10-K.

RESULTS OF OPERATIONS
Net Revenue
Net Revenue by Product Line
Harmonic’s consolidated net revenue, by product line, for the three and six months ended June 27, 2014, compared to the same periods in 2013, are presented in the table below. Also presented are the related dollar and percentage change in consolidated net revenue, by product line, in the three and six months ended June 27, 2014, as compared to the same periods in 2013.
 
Three months ended
 
Six months ended
 
June 27, 2014
 
June 28, 2013
 
June 27, 2014
 
June 28, 2013
 
(in thousands, except percentages)
Product
 
 
 
 
 
 
 
Video products(1)
$
57,196

 
$
83,746

 
$
121,214

 
$
148,882

Cable edge products
29,332

 
13,031

 
53,574

 
30,370

Service and support
23,061

 
20,351

 
42,833

 
39,548

Total
$
109,589

 
$
117,128

 
$
217,621

 
$
218,800

Increase (Decrease):
 
 
 
 
 
 
 
Video products
$
(26,550
)
 
 
 
$
(27,668
)
 
 
Cable edge products
16,301

 
 
 
23,204

 
 
Service and support
2,710

 
 
 
3,285

 
 
Total decrease
$
(7,539
)
 
 
 
$
(1,179
)
 
 
Percent change:
 
 
 
 
 
 
 
Video products
(32
)%
 
 
 
(19
)%
 
 
Cable edge products
125

 
 
 
76

 
 
Service and support
13

 
 
 
8

 
 
Total percent change
(6
)%
 
 
 
(1
)%
 
 
(1) Video products now includes video processing products and production and playout products. As new technologies continue to evolve, the functionality of the Company's video processing and production and playout products are increasingly converging onto a single platform. The distinction between the two product groups is becoming less identifiable and as a result, management has decided to report these two product groups together as one product group. The information for the prior periods have been reclassified to conform to the presentation of the current periods.
Video products net revenue decreased 32% and 19%, respectively, in the three and six months ended June 27, 2014, compared to the same periods in 2013. We believe the decrease in video products revenue was principally attributable to the decision by some of our larger customers to delay their purchase decisions until products based on our new VOS virtualized media processing software platform, as well as new Ultra HD format and new HEVC compression technologies, become available.

24


Cable edge net revenue increased 125% and 76%, respectively, in the three and six months ended June 27, 2014, compared to the same periods in 2013, primarily due to our NSG products, including the new NSG Pro product that was launched in the fourth quarter of 2013.
The 13% and 8% increase in our service and support net revenue in the three and six months ended June 27, 2014, compared to the same periods in 2013, was mainly driven by increased maintenance revenue and to a lesser extent, revenue from professional and integration services, across all regions.
Net Revenue by Geographic Region
Harmonic’s net revenue by geographical region for the three and six months ended June 27, 2014, compared with the corresponding periods in 2013, are presented in the table below. Also presented are the related dollar and percentage change in the regional revenue, in the three and six months ended June 27, 2014, from the corresponding periods in 2013.
 
Three months ended
 
Six months ended
 
June 27, 2014
 
June 28, 2013
 
June 27, 2014
 
June 28, 2013
 
(in thousands, except percentages)
Geography
 
 
 
 
 
 
 
Americas (1)
$
60,066

 
$
66,811

 
$
124,952

 
$
117,371

EMEA
31,519

 
34,618

 
55,706

 
67,333

APAC
18,004

 
15,699

 
36,963

 
34,096

Total
$
109,589

 
$
117,128

 
$
217,621

 
$
218,800

Increase (Decrease):
 
 
 
 
 
 
 
Americas
$
(6,745
)
 
 
 
$
7,581

 
 
EMEA
(3,099
)
 
 
 
(11,627
)
 
 
APAC
2,305

 
 
 
2,867

 
 
Total decrease
$
(7,539
)
 
 
 
$
(1,179
)
 
 
Percent change:
 
 
 
 
 
 
 
Americas
(10
)%
 
 
 
6
 %
 
 
EMEA
(9
)
 
 
 
(17
)
 
 
APAC
15

 
 
 
8

 
 
Total percent change
(6
)%
 
 
 
(1
)%
 
 
(1) Americas include U.S., Canada and Latin America. The information for the prior periods have been reclassified to conform to the presentation of the current periods.

Americas net revenue decreased 10% in the three months ended June 27, 2014, compared to the same period in 2013, primarily due to a slowdown in our North American broadcast and media customers for our video products. We believe that these customers have delayed their purchase decisions for several anticipated projects until products based on our new VOS virtualized media processing software platform, as well as new Ultra HD format and new HEVC compression technologies, become available. This decrease was offset partially by increased sales to U.S. cable operators, primarily for our cable edge products, including our new NSG Pro product.

Americas net revenue increased 6% in the six months ended June 27, 2014, compared to the same period in 2013, primarily due to increased sales to U.S. cable operators, primarily for our cable edge products, including our new NSG Pro product. The increase was offset partially by a slowdown in our North American broadcast and media customers for our video products in the second quarter of 2014, primarily due to our customers' growing consideration of our new VOS solution as well as the new Ultra HD format and new HEVC compression technologies.

EMEA net revenue decreased 9% and 17% in the three and six months ended June 27, 2014, compared to the same periods in 2013, primarily in Europe for our video products including encoders and video servers, as it appears that some of our larger customers are looking ahead to our new products and new technologies.

APAC net revenue increased 15% and 8% in the three and six months ended June 27, 2014, compared to the same periods in 2013, primarily due to increased sales of our cable edge products, including NSG Pro.

25




Gross Profit
Harmonic’s gross profit and gross profit as a percentage of net revenue (“gross margin”) in the three and six months ended June 27, 2014, as compared to the corresponding periods in 2013, are presented in the table below. Also presented are the related dollar and percentage changes in gross profit in the three and six months ended June 27, 2014, from the corresponding periods in 2013.
 
Three months ended
 
Six months ended
 
June 27, 2014
 
June 28, 2013
 
June 27, 2014
 
June 28, 2013
 
(In thousands, except percentages)
Gross profit
$
49,817

 
$
57,892

 
$
102,129

 
$
104,057

As a percentage of net revenue (“gross margin”)
45.5
 %
 
49.4
%
 
46.9
 %
 
47.6
%
Decrease
$
(8,075
)
 
 
 
$
(1,928
)
 
 
Percent change
(14
)%
 
 
 
(2
)%
 
 
Our gross margins are dependent upon, among other factors, achievement of cost reductions, product mix, customer mix, product introduction costs, and price reductions granted to customers.

The decrease in gross profit and gross margin in the three and six months ended June 27, 2014, compared to the corresponding periods in 2013, was primarily attributable to the decrease in our video processing and production and playout revenues, which generally carry higher gross margins than our other products, and also due to relatively lower software and firmware revenues. In addition, our cable edge revenue which grew faster than the revenue for our other products, carries a lower gross margin since the recently launched NSG Pro products have not yet benefited from full capacity cost optimization.

In the three and six months ended June 27, 2014, $4.5 million and $9.2 million of amortization of intangibles was included in cost of revenue, compared to $4.8 million and $9.7 million in the corresponding periods in 2013.

Research and Development
Harmonic’s research and development expense consists primarily of employee salaries and related expenses, contractors and outside consultants, supplies and materials, equipment depreciation and facilities costs, all associated with the design and development of new products and enhancements of existing products. Harmonic's research and development expense and the expense as a percentage of net revenue in the three and six months ended June 27, 2014, as compared with the corresponding periods in 2013, are presented in the table below. Also presented are the related dollar and percentage changes in research and development expense in the three and six months ended June 27, 2014, from the corresponding periods in 2013.
 
Three months ended
 
Six months ended
 
June 27, 2014
 
June 28, 2013
 
June 27, 2014
 
June 28, 2013
 
(In thousands, except percentages)
Research and development
$
23,485

 
$
25,820

 
$
47,373

 
$
51,071

As a percentage of net revenue
21
 %
 
22
%
 
22
 %
 
23
%
Decrease
$
(2,335
)
 
 
 
$
(3,698
)
 
 
Percent change
(9
)%
 
 
 
(7
)%
 
 
The $2.3 million or 9% decrease in research and development expenses in the three months ended June 27, 2014, compared to the corresponding period of 2013, was primarily due to reduced headcount and related expenses, including contractors, as a result of restructuring programs implemented in fiscal 2013, combined with additional attrition in our workforce.
The $3.7 million or 7% decrease in research and development expenses in the six months ended June 27, 2014, compared to the corresponding period of 2013, was primarily due to decreased headcount and related expense, including contractors, of $4.3 million and decreased prototype material costs of $0.3 million. The decrease in headcount related expenses was mainly a result of restructuring programs implemented in 2013 and a decrease in accrual for employee time off benefits. Effective April 1, 2013, the Company implemented a new program which no longer requires the accrual of employee time off benefits in the U.S.

26


These decreases in research and development expenses in the six months ended June 27, 2014 were offset partially by increased expenses on consulting and outside engineering services of $1.1 million.
Selling, General and Administrative
Harmonic’s selling, general and administrative expense, and the expense as a percentage of net revenue in the three and six months ended June 27, 2014, as compared with the corresponding periods in 2013, are presented in the table below. Also presented are the related dollar and percentage change in selling, general and administrative expense in the three and six months ended June 27, 2014, from the corresponding periods in 2013.
 
Three months ended
 
Six months ended
 
June 27, 2014
 
June 28, 2013
 
June 27, 2014
 
June 28, 2013
 
(In thousands, except percentages)
Selling, general and administrative
$
32,979

 
$
34,424

 
$
66,526

 
$
67,693

As a percentage of net revenue
30
 %
 
29
%
 
31
 %
 
31
%
Decrease
$
(1,445
)
 
 
 
$
(1,167
)
 
 
Percent change
(4
)%
 
 
 
(2
)%
 
 
The decrease in selling, general and administrative expenses in the three months ended June 27, 2014, compared to the
corresponding period of 2013, was primarily the result of decreased legal and other professional fees of $1.2 million, mainly associated with the legal proceedings with Avid Technology, and $0.7 million related to shareholder activist activity in the second quarter of 2013, and decreased headcount and related expenses of $0.6 million mainly due to lower bonus expenses accrued, offset partially by increased facilities rental and operating expenses in the U.S. as well as in the Asia region and increased depreciation for demonstration equipment, aggregating $1.1 million.

The decrease in selling, general and administrative expenses in the six months ended June 27, 2014, compared to the
corresponding period of 2013, was primarily the result of decreased legal and other professional fees of $1.7 million, mainly associated with the legal proceedings with Avid Technology, and $0.7 million related to shareholder activist activity in the second quarter of 2013, and decreased headcount and related expenses of $0.9 million mainly due to lower bonus expenses accrued, offset partially by increased facilities rental and operating expenses in the U.S. as well as in the Asia region and increased depreciation for demonstration equipment, aggregating $1.9 million.

Amortization of Intangibles
Harmonic’s amortization of intangible assets charged to operating expenses, and the amortization of intangible assets as a percentage of net revenue, in the three and six months ended June 27, 2014, as compared with the corresponding periods in 2013, are presented in the table below. Also presented are the related dollar and percentage changes in amortization of intangible assets in the three and six months ended June 27, 2014, from the corresponding periods in 2013.
 
Three months ended
 
Six months ended
 
June 27, 2014
 
June 28, 2013
 
June 27, 2014
 
June 28, 2013
 
(In thousands, except percentages)
Amortization of intangibles
$
1,718

 
$
2,010

 
$
3,668

 
$
4,098

As a percentage of net revenue
2
 %
 
2
%
 
2
 %
 
2
%
Decrease
$
(292
)
 
 
 
$
(430
)
 
 
Percent change
(15
)%
 
 
 
(10
)%
 
 
The decrease in amortization of intangibles expense in the three and six months ended June 27, 2014, compared to the corresponding periods in 2013, was primarily due to certain purchased intangible assets becoming fully amortized.
Restructuring and Related Charges
The Company accounts for its restructuring plans under the authoritative guidance for exit or disposal activities. The restructuring and related charges are included in “Product cost of revenue” and "Operating expenses-restructuring and related charges” in the Condensed Consolidated Statements of Operations. The following table summarizes the restructuring and related charges (in thousands):

27


 
Three months ended
 
Six months ended
 
June 27,
2014
 
June 28,
2013
 
June 27,
2014
 
June 28,
2013
Restructuring and related charges in:
 
 
 
 
 
 
 
Product cost of revenue
$

 
$
65

 
$
79

 
$
206

Operating expenses-Restructuring and related charges
284

 
242

 
433

 
666

 
$
284

 
$
307

 
$
512

 
$
872

The $512,000 restructuring and related charges in the six months ended June 27, 2014 consisted of $480,000 of severance and benefits covering twenty employees primarily in research and development and $32,000 of costs associated with vacating from an excess facility in France.
The $0.9 million restructuring and related charges in the six months ended June 28, 2013 consisted of $0.7 million severance and benefits covering thirty-nine employee across all functions, and $0.2 million relating to the write-down of leasehold improvements and furnitures related to the Company's Milpitas warehouse to its net realizable value. For a complete discussion of the restructuring actions and charges related to the 2013 restructuring plan, please refer to Note 9 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
Interest Income, Net
In the three months ended June 27, 2014 and June 28, 2013, interest income, net was $67,000 and $30,000, respectively. In the six months ended June 27, 2014 and June 28, 2013, interest income, net was $144,000 and $94,000, respectively.
Other Expense, Net
In the three months ended June 27, 2014 and June 28, 2013, other expense, net was $(127,000) and $(133,000), respectively. In the six months ended June 27, 2014 and June 28, 2013, other expense was $(115,000) and $(300,000), respectively. Other expense, net is primarily comprised of foreign exchange gains and losses on cash, accounts receivable and inter-company balances denominated in currencies other than the U.S dollar. For details of our hedging program and related foreign currency contracts, please refer to Note 5, Derivatives and Hedging Instruments, in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Income Taxes
Harmonic’s provision for (benefit from) income taxes and the expense (benefit) as a percentage of net revenue, in the three and six months ended June 27, 2014, as compared with the corresponding periods in 2013, are presented in the table below. Also presented are the related dollar and percentage changes in benefit from income taxes in the three and six months ended June 27, 2014, from the corresponding periods in 2013.
 
Three months ended
 
Six months ended
 
June 27, 2014
 
June 28, 2013
 
June 27, 2014
 
June 28, 2013
 
(In thousands, except percentages)
Provision for (benefit from)income taxes
$
28,353

 
$
(1,303
)
 
$
26,630

 
$
(6,770
)
As a percentage of net revenue
26
 %
 
(1
)%
 
12
 %
 
(3
)%
Increase in provision for income taxes
$
29,656