10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________
Form 10-Q
_____________________________________________________
(Mark One)
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended October 2, 2015
 
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File No. 000-25826
_____________________________________________________
HARMONIC INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________
Delaware
77-0201147
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
4300 North First Street
San Jose, CA 95134
(408) 542-2500
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
____________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
¨
Accelerated filer
ý
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares of the registrant’s Common Stock, $.001 par value, outstanding on November 2, 2015 was 87,072,661.


Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
 
 

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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARMONIC INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share data)
 
October 2, 2015
 
December 31, 2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
61,571

 
$
73,032

Short-term investments
25,990

 
31,847

Accounts receivable, net
64,128

 
74,144

Inventories
39,873

 
32,747

Deferred income taxes, short-term
3,375

 
3,375

Prepaid expenses and other current assets
31,709

 
17,539

Total current assets
226,646

 
232,684

Property and equipment, net
26,619

 
27,221

Goodwill
197,825

 
197,884

Intangibles, net
5,628

 
10,599

Other assets
10,190

 
12,130

Total assets
$
466,908

 
$
480,518

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
16,626

 
$
15,318

Income taxes payable
176

 
893

Deferred revenue
43,350

 
38,601

Accrued liabilities
29,139

 
35,118

Total current liabilities
89,291

 
89,930

Income taxes payable, long-term
4,296

 
4,969

Deferred tax liabilities, long-term
3,095

 
3,095

Other non-current liabilities
10,358

 
10,711

Total liabilities
107,040

 
108,705

Commitments and contingencies (Note 16)

 

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

 

Common stock, $0.001 par value, 150,000 shares authorized; 87,477 and 87,700 shares issued and outstanding at October 2, 2015 and December 31, 2014, respectively
87

 
88

Additional paid-in capital
2,259,757

 
2,261,952

Accumulated deficit
(1,896,709
)
 
(1,888,247
)
Accumulated other comprehensive loss
(3,267
)
 
(1,980
)
Total stockholders’ equity
359,868

 
371,813

Total liabilities and stockholders’ equity
$
466,908

 
$
480,518

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

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HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
 
Three months ended
 
Nine months ended
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
Revenue:
 
 
 
 
 
 
 
Product
$
57,245

 
$
84,583

 
$
215,165

 
$
259,371

Services
26,060

 
23,478

 
75,259

 
66,311

Total net revenue
83,305

 
108,061

 
290,424

 
325,682

Cost of revenue:
 
 
 
 
 
 
 
Product
23,584

 
41,802

 
95,021

 
134,336

Services
13,490

 
12,831

 
39,759

 
35,789

Total cost of revenue
37,074

 
54,633

 
134,780

 
170,125

Total gross profit
46,231

 
53,428

 
155,644

 
155,557

Operating expenses:
 
 
 
 
 
 
 
Research and development
21,679

 
22,803

 
65,824

 
70,176

Selling, general and administrative
28,966

 
32,114

 
91,443

 
98,640

Amortization of intangibles
1,446

 
1,661

 
4,338

 
5,329

Restructuring and related charges
397

 
388

 
626

 
821

Total operating expenses
52,488

 
56,966

 
162,231

 
174,966

Loss from operations
(6,257
)
 
(3,538
)
 
(6,587
)
 
(19,409
)
Interest income, net
30

 
47

 
102

 
191

Other income (expense), net
148

 
(261
)
 
(299
)
 
(376
)
Loss on impairment of long-term investment

 

 
(2,505
)
 

Loss before income taxes
(6,079
)
 
(3,752
)
 
(9,289
)
 
(19,594
)
(Benefit from) provision for income taxes
(1,268
)
 
(4,830
)
 
(827
)
 
21,800

Net income (loss)
$
(4,811
)
 
$
1,078

 
$
(8,462
)
 
$
(41,394
)
 
 
 
 
 
 
 
 
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.05
)
 
$
0.01

 
$
(0.10
)
 
$
(0.44
)
Diluted
$
(0.05
)
 
$
0.01

 
$
(0.10
)
 
$
(0.44
)
Shares used in per share calculation:
 
 
 
 
 
 
 
Basic
87,991

 
90,618

 
88,359

 
94,113

Diluted
87,991

 
91,800

 
88,359

 
94,113

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

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HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands)
 
Three months ended
 
Nine months ended
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
Net income (loss)
$
(4,811
)
 
$
1,078

 
$
(8,462
)
 
$
(41,394
)
Other comprehensive income (loss) before tax:
 
 
 
 
 
 
 
Change in unrealized losses on cash flow hedges:
 
 
 
 
 
 
 
Unrealized loss arising during the period
(550
)
 

 
(218
)
 

Gains reclassified into earnings
(127
)
 

 
(314
)
 

 
(677
)
 

 
(532
)
 

Change in unrealized gains (loss) on available-for-sale securities:
(928
)
 
(308
)
 
17

 
(333
)
Change in foreign currency translation adjustments
(364
)
 
(670
)
 
(766
)
 
(440
)
Other comprehensive loss before tax
(1,969
)
 
(978
)
 
(1,281
)
 
(773
)
Provision for (benefit from) income taxes
12

 
(7
)
 
6

 
(12
)
Other comprehensive loss, net of tax
(1,981
)
 
(971
)
 
(1,287
)
 
(761
)
Total comprehensive income (loss)
$
(6,792
)
 
$
107

 
$
(9,749
)
 
$
(42,155
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

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HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Nine months ended
 
October 2, 2015
 
September 26, 2014
Cash flows from operating activities:
 
 
 
Net loss
$
(8,462
)
 
$
(41,394
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Amortization of intangibles
4,971

 
18,378

Depreciation
10,143

 
12,641

Stock-based compensation
11,845

 
12,720

Loss on impairment of long-term investment
2,505

 

Deferred income taxes, net

 
31,782

Provision for excess and obsolete inventories
1,234

 
2,013

Allowance for doubtful accounts, returns and discounts
576

 
(116
)
Excess tax benefits from stock-based compensation

 
(194
)
Other non-cash adjustments, net
354

 
1,108

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
9,440

 
(472
)
Inventories
(7,936
)
 
2,401

Prepaid expenses and other assets
(13,817
)
 
(5,321
)
Accounts payable
1,772

 
(786
)
Deferred revenue
5,237

 
7,770

Income taxes payable
(1,372
)
 
(8,292
)
Accrued and other liabilities
(7,926
)
 
(4,717
)
Net cash provided by operating activities
8,564

 
27,521

Cash flows from investing activities:
 
 
 
Purchases of investments
(20,714
)
 
(26,599
)
Proceeds from maturities of investments
26,534

 
43,236

Proceeds from sales of investments

 
7,408

Purchases of property and equipment
(10,393
)
 
(8,859
)
Purchases of long-term investments
(85
)
 
(5,867
)
Restricted cash
(1,091
)
 

Net cash (used in) provided by investing activities
(5,749
)
 
9,319

Cash flows from financing activities:
 
 
 
Payments for repurchase of common stock
(20,007
)
 
(86,407
)
Proceeds from common stock issued to employees
9,255

 
4,357

Payment of tax withholding obligations related to net share settlements of restricted stock units
(3,288
)
 
(3,116
)
Excess tax benefits from stock-based compensation

 
194

Net cash used in financing activities
(14,040
)
 
(84,972
)
Effect of exchange rate changes on cash and cash equivalents
(236
)
 
(169
)
Net decrease in cash and cash equivalents
(11,461
)
 
(48,301
)
Cash and cash equivalents at beginning of period
73,032

 
90,329

Cash and cash equivalents at end of period
$
61,571

 
$
42,028

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

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

NOTE 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) which Harmonic Inc. (“Harmonic,” or the “Company”) considers necessary for a fair statement of the results of operations for the interim periods covered and the consolidated financial condition of the Company at the date of the balance sheets. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 2, 2015 (the “2014 Form 10-K”). The interim results presented herein are not necessarily indicative of the results of operations that may be expected for the full fiscal year ending December 31, 2015, or any other future period. The Company’s fiscal quarters are based on 13-week periods, except for the fourth quarter, which ends on December 31.
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The year-end condensed balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2 to its audited Consolidated Financial Statements included in the 2014 Form 10-K. There have been no significant changes to these policies during the nine months ended October 2, 2015.

NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (“FASB”) issued new authoritative guidance for revenue recognition, requiring an entity to recognize the amount of revenue that reflects the consideration to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. On August 12, 2015, the FASB issued an accounting standard update for the deferral of the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. The Company has not yet selected a transition method and it is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
In August 2014, the FASB issued new authoritative guidance related to the disclosures around going concern. The new guidance specifies management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new guidance will be effective for the Company beginning in the fourth quarter of fiscal 2016 and early adoption is permitted. The Company is currently evaluating the impact of adopting this new accounting standard but does not expect that it will have a material effect on its consolidated financial statements.
In November 2014, the FASB issued an accounting standard update for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. An entity will continue to evaluate whether the economic characteristics and risks of the embedded derivative feature are clearly and closely related to those of the host contract, among other relevant criteria. The amendments clarify how current GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2016 and early adoption is

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permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
In February 2015, the FASB issued an accounting standard update that changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2016 and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
In April 2015, the FASB issued an accounting standard update on whether a cloud computing arrangement includes a software license. The guidance requires the accounting for a cloud computing arrangement that includes a software license element to be consistent with the accounting for acquisition of other software licenses. Cloud computing arrangement without software licenses are to be accounted for as a service contract. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2016 and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
In July 2015, the FASB issued an accounting standard update that requires inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2017 and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
NOTE 3: SHORT-TERM INVESTMENTS
The following table summarizes the Company’s short-term investments (in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
As of October 2, 2015
 
 
 
 
 
 
 
State, municipal and local government agencies bonds
$
2,502

 
$
1

 
$

 
$
2,503

Corporate bonds
23,484

 
15

 
(12
)
 
23,487

Total short-term investments
$
25,986

 
$
16

 
$
(12
)
 
$
25,990

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

 
$
16

 
$
(1
)
 
$
13,961

Corporate bonds
17,899

 
3

 
(16
)
 
17,886

Total short-term investments
$
31,845

 
$
19

 
$
(17
)
 
$
31,847

The following table summarizes the maturities of the Company’s short-term investments (in thousands):
 
October 2, 2015
 
December 31, 2014
Less than one year
$
20,545

 
$
30,946

Due in 1 - 2 years
5,445

 
901

Total short-term investments
$
25,990

 
$
31,847

These available-for-sale investments are presented as “Current Assets” in the Condensed Consolidated Balance Sheets as they are available for current operations. Realized gains and losses from the sale of investments for each of the three and nine months ended October 2, 2015 and September 26, 2014 were not material.
As of October 2, 2015 and December 31, 2014, $6.2 million and $8.6 million, respectively, of investments in equity securities of other privately and publicly held companies were considered as long-term investments and were included in “Other assets” in the Condensed Consolidated Balance Sheet (See Note 4, “Investments in Other Equity Securities” for additional information).

Impairment of Short-term Investments

The Company monitors its investment portfolio for impairment on a periodic basis. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis for the investment is established. A decline of fair value below amortized costs of debt securities is considered other-than-temporary if the Company has the intent to sell the security or it is more likely than not that the

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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 October 2, 2015.
As of October 2, 2015, there were no individual available-for-sale securities in a material unrealized loss position and the amount of unrealized losses on the total investment balance was insignificant.

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

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

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

The Company attended a VJU board meeting on March 5, 2015 as an observer. At that meeting, the Company was made aware of significant decreases in VJU’s business prospects, VJU’s existing working capital and prospects for additional funding, compared to the prior information the Company had received from VJU. Based on the Company’s assessment, the Company determined that its investment in VJU was impaired on an other-than-temporary basis. Factors considered included the severity of the impairment and recent events specific to VJU. Based on the Company’s assessment of VJU’s expected cash flows, the entire investment is expected to be non-recoverable. As a result, the Company recorded an impairment charge of $2.5 million in the first quarter of 2015. The Company’s impairment loss in VJU is limited to its initial cost of investment of $2.5 million as well as the $0.1 million research and development cost expensed in September 2014.
At VJU’s shareholders meeting held on October 15, 2015, additional contributions by existing shareholders were approved. The Company did not provide additional contributions to VJU, and as a result, the Company ‘s equity interest in VJU decreased from to 19.8% to 9.9%.
EDC
On October 22, 2014, the Company acquired an 18.4% interest in Encoding.com, Inc. (“EDC”), a video transcoding service company headquartered in San Francisco, California, for $3.5 million by purchasing EDC’s Series B preferred stock. Since EDC’s equity is deemed not sufficient to permit it to finance its activities without additional support from its shareholders, EDC is considered a VIE. The Company determined that it is not the primary beneficiary of EDC because its financial interest in EDC’s equity does not empower the Company to direct EDC’s activities that will most significantly impact EDC’s economic performance. In addition, the Company determined that its investment in EDC’s Series B preferred stock does not have the risk

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and reward characteristics that are substantially similar to EDC’s common stock. Therefore, Harmonic does not hold an investment in EDC’s common stock or in-substance common stock. According to the applicable accounting guidance, the EDC investment is accounted for as a cost-method investment. The Company determined that there were no indicators existing at October 2, 2015 that would indicate that the EDC investment was impaired.

The following table presents the carrying values and maximum exposure of the unconsolidated VIEs as of October 2, 2015 (in thousands):
 
Carrying Value
 
Maximum exposure to loss(1)
VJU
$

 
$

EDC(2)
3,593

 
3,593

Total
$
3,593

 
$
3,593


(1) The Company did not provide financial support to any of its unconsolidated VIEs and as of October 2, 2015, there were no explicit arrangements or implicit variable interests that could require the Company to provide financial support to any of its unconsolidated VIEs.

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

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

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

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Three months ended
 
Nine months ended
 
 
Financial Statement Location
 
October 2, 2015
 
September 26, 2014
 
October 2, 2015
 
September 26, 2014
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Losses in AOCI on derivatives (effective portion)
 
AOCI
 
$
(550
)
 
$

 
$
(218
)
 
$

Gains reclassified from AOCI into income (effective portion)
 
Cost of Revenue
 
$
18

 
$

 
$
44

 
$

 
 
Operating Expense
 
109

 

 
270

 

 
 
  Total
 
$
127

 
$

 
$
314

 
$

Loss recognized in income on derivatives (ineffectiveness portion and amount excluded from effectiveness testing)
 
Other income (expense), net
 
$
(5
)
 
$

 
$
(57
)
 
$

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Gains (losses) recognized in income
 
Other income (expense), net
 
$
(165
)
 
$
(95
)
 
$
220

 
$
(201
)
The Company anticipates the AOCI balance of $(221,000) at October 2, 2015, relating to net unrealized losses from cash flow hedges, will be reclassified to earnings within the next twelve months.
The U.S. dollar equivalents of all outstanding notional amounts of foreign currency forward contracts are summarized as follows (in thousands):

 
October 2, 2015
 
December 31, 2014
Derivatives designated as cash flow hedges:
 

 

Purchase
 
$
14,280

 
$
16,903

Derivatives not designated as hedging instruments:
 

 

Purchase
 
$
8,244

 
$
1,043

Sell
 
$
7,827

 
$
4,925

The locations and fair value amounts of the Company’s derivative instruments reported in its Condensed Consolidated Balance Sheets are as follows (in thousands):
 
 
 
 
Asset Derivatives
 
 
 
Derivative Liabilities
 
 
Balance Sheet Location
 
October 2, 2015
 
December 31, 2014
 
Balance Sheet Location
 
October 2, 2015
 
December 31, 2014
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Prepaid expenses and other current assets
 
$
60

 
$
329

 
Accrued Liabilities
 
$
291

 
$

 
 
 
 
$
60

 
$
329

 
 
 
$
291

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Prepaid expenses and other current assets
 
$
117

 
$
12

 
Accrued Liabilities
 
$
35

 
$
7

 
 
 
 
$
117

 
$
12

 
 
 
$
35

 
$
7

Total derivatives
 
 
 
$
177

 
$
341

 
 
 
$
326

 
$
7

Offsetting of Derivative Assets and Liabilities
The Company recognizes all derivative instruments on a gross basis in the Condensed Consolidated Balance Sheets. However, the arrangements with its counterparties allows for net settlement, which are designed to reduce credit risk by permitting net settlement with the same counterparty. As of October 2, 2015, information related to the offsetting arrangements was as follows (in thousands):

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Gross Amounts of Derivatives Not Offset in the Condensed Consolidated Balance Sheets
 
 
 
 
Gross Amounts of Derivatives
 
Gross Amounts of Derivatives Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts of Derivatives Presented in the Condensed Consolidated Balance Sheets
 
Financial Instrument
 
Cash Collateral Pledged
 
Net Amount
Derivative Assets
 
$
177

 

 
$
177

 
$
(169
)
 

 
$
8

Derivative Liabilities
 
$
326

 

 
$
326

 
$
(169
)
 

 
$
157

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

NOTE 6: FAIR VALUE MEASUREMENTS
The applicable accounting guidance establishes a framework for measuring fair value and requires disclosure about the fair value measurements of assets and liabilities. This guidance requires the Company to classify and disclose assets and liabilities measured at fair value on a recurring basis, as well as fair value measurements of assets and liabilities measured on a nonrecurring basis in periods subsequent to initial measurement, in a three-tier fair value hierarchy as described below.
The guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance describes three levels of inputs that may be used to measure fair value:
Level 1 — Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company primarily uses broker quotes for valuation of its short-term investments. The forward exchange contracts are classified as Level 2 because they are valued using quoted market prices and other observable data for similar instruments in an active market.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company uses the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. During the nine months ended October 2, 2015, there were no nonrecurring fair value measurements of assets and liabilities subsequent to initial recognition.

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The following table sets forth the fair value of the Company’s financial assets and liabilities measured at fair value based on the three-tier fair value hierarchy (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
As of October 2, 2015
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
14,062

 
$

 
$

 
$
14,062

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

 
2,503

 

 
2,503

Corporate bonds

 
23,487

 

 
23,487

Prepaids and other current assets
 
 
 
 
 
 
 
Time deposit pledged for credit card facility

 
580

 

 
580

Derivative assets

 
177

 

 
177

Other assets
 
 
 
 
 
 
 
Long-term investment
2,587

 

 

 
2,587

Total assets measured and recorded at fair value
$
16,649

 
$
26,747

 
$

 
$
43,396

Accrued liabilities
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
326

 
$

 
$
326

Total liabilities measured and recorded at fair value
$

 
$
326

 
$

 
$
326

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

 
$

 
$

 
$
23,121

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

 
13,961

 

 
13,961

Corporate bonds

 
17,886

 

 
17,886

Prepaids and other current assets
 
 
 
 
 
 
 
Derivative assets

 
341

 

 
341

Other assets
 
 
 
 
 
 
 
Long-term investment
2,606

 

 

 
2,606

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

 
$
32,188

 
$

 
$
57,915

Accrued liabilities
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
7

 
$

 
$
7

Total liabilities measured and recorded at fair value
$

 
$
7

 
$

 
$
7


NOTE 7: BALANCE SHEET COMPONENTS
The following tables provide details of selected balance sheet components (in thousands):
 
October 2, 2015
 
December 31, 2014
Accounts receivable, net:
 
 
 
Accounts receivable
$
67,304

 
$
81,201

Less: allowances for doubtful accounts, returns and discounts
(3,176
)
 
(7,057
)
Total
$
64,128

 
$
74,144



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

 
$

Prepaid software license to Vislink(2)

 
1,233

Other Prepayments
10,963

 
9,713

Deferred cost of revenue
2,794

 
2,524

Income tax receivable
1,914

 
2,316

Restricted cash(3)
1,091

 

Other
747

 
1,753

Total
$
31,709

 
$
17,539


(1) During the first quarter of 2015, the Company made a $14.2 million advance payment for future inventory requirements to a supplier in order to secure more favorable pricing. The Company anticipates that this amount will begin to offset in the fourth quarter of 2015 through the second quarter of 2016 against the accounts payable owed to this supplier.
(2) The prepaid inventories were related to prepayment for software licenses made to Vislink (see Note 4, “Investments in Other Equity Securities” for additional information on Vislink).
(3) The Company has restricted cash of $0.5 million that serves as collateral for rent guarantees on certain operating leases in Israel. Additionally, the Company holds $0.6 million of restricted cash as collateral for its corporate card credit facility in Switzerland. These restricted funds are invested in bank deposits and cannot be withdrawn from the Company’s accounts without the prior written consent of the applicable secured party.
Inventories:
 
 
 
Raw materials
$
2,400

 
$
1,422

Work-in-process
1,526

 
1,255

Finished goods
35,947

 
30,070

Total
$
39,873

 
$
32,747

Property and equipment, net:
 
 
 
Furniture and fixtures
$
7,820

 
$
7,691

Machinery and equipment
120,067

 
116,031

Leasehold improvements
10,307

 
8,140

Property and equipment, gross
138,194

 
131,862

Less: accumulated depreciation and amortization
(111,575
)
 
(104,641
)
Total
$
26,619

 
$
27,221


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

 
$
60,909

 
$
197,884

Foreign currency translation adjustment
(41
)
 
(18
)
 
(59
)
As of October 2, 2015
$
136,934

 
$
60,891

 
$
197,825

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

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October 2, 2015
 
December 31, 2014
 
Range of Useful Lives
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Identifiable intangibles:
 
 
 
 
 
 
 
 
 
 
 
 
 
Developed core technology
4-6 years
 
$
136,145

 
$
(136,059
)
 
$
86

 
$
136,145

 
$
(135,426
)
 
$
719

Customer relationships/contracts
5-6 years
 
67,098

 
(62,434
)
 
4,664

 
67,098

 
(58,784
)
 
8,314

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

 
(6,222
)
 
878

 
7,100

 
(5,534
)
 
1,566

Total identifiable intangibles
 
 
$
210,343

 
$
(204,715
)
 
$
5,628

 
$
210,343

 
$
(199,744
)
 
$
10,599

Amortization expense for the identifiable purchased intangible assets for the three and nine months ended October 2, 2015 and September 26, 2014 was allocated as follows (in thousands):
 
Three months ended
 
Nine months ended
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
Included in cost of revenue
$
86

 
$
3,851

 
$
633

 
$
13,049

Included in operating expenses
1,446

 
1,661

 
4,338

 
5,329

Total amortization expense
$
1,532

 
$
5,512

 
$
4,971

 
$
18,378

The estimated future amortization expense of purchased intangible assets with definite lives is as follows (in thousands):
 
Cost of Revenue
 
Operating
Expenses
 
Total
Year ended December 31,
 
 
 
 
 
2015 (remaining three months)
$
86

 
$
1,446

 
$
1,532

2016

 
4,096

 
4,096

Total future amortization expense
$
86

 
$
5,542

 
$
5,628


NOTE 9: RESTRUCTURING AND RELATED CHARGES
The Company implemented several restructuring plans in the past few years. The goal of these plans was to bring operational expenses to appropriate levels relative to its net revenues, while simultaneously implementing extensive company-wide expense control programs.
The Company accounts for its restructuring plans under the authoritative guidance for exit or disposal activities. The restructuring and asset impairment charges are included in “Product cost of revenue” and “Operating expenses-restructuring and related charges” in the Condensed Consolidated Statements of Operations. The following table summarizes the restructuring and related charges (in thousands):
 
Three months ended
 
Nine months ended
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
Restructuring and related charges in:
 
 
 
 
 
 
 
Product cost of revenue
$
113

 
$
15

 
$
113

 
$
94

Operating expenses-Restructuring and related charges
397

 
388

 
626

 
821

Total restructuring and related charges
$
510

 
$
403

 
$
739

 
$
915

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

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facilities and disposing of excess assets. The Company started the restructuring activities pursuant to this plan in the fourth quarter of 2014 and expects to complete its actions by end of 2015. The Company recorded $2.2 million of restructuring and asset impairment charges under this plan in the fourth quarter of 2014 consisting of a $1.1 million fixed asset impairment charge related to software development costs incurred for a discontinued information technology (“IT”) project, $0.6 million of severance and benefits related to the termination of 19 employees worldwide, $0.3 million of excess material costs associated with the termination of a research and development project and $0.1 million of other charges. The Company recorded $510,000 and $739,000 of restructuring charges under this plan, in the three and nine months ended October 2, 2015, respectively. Such restructuring charges consisted of severance and benefits related to the termination of 22 employees.

The following table summarizes the activity in the Harmonic 2015 restructuring accrual during the nine months ended October 2, 2015 (in thousands):
 
 
Severance and benefits
 
Other charges
 
Total
Balance at December 31, 2014
 
$
305

 
$
17

 
$
322

Restructuring charges
 
759

 

 
759

Adjustments to restructuring provisions
 
(14
)
 
(6
)
 
(20
)
Cash payments
 
(543
)
 
(11
)
 
(554
)
Balance at October 2, 2015
 
$
507

 
$

 
$
507

Harmonic 2013 Restructuring
The Company implemented a series of restructuring plans in 2013 to reduce costs and improve efficiencies. These restructuring plans extended to actions taken through the third quarter of fiscal 2014. As a result, the Company recorded restructuring charges of $2.2 million and $0.9 million in fiscal 2013 and fiscal 2014, respectively. The restructuring charges in the three and nine months ended September 26, 2014 were $403,000 and $915,000, respectively, under these plans, consisting of severance and benefits related to the termination of 25 employees worldwide, costs associated with exiting from a research and development project, as well as costs associated with vacating from an excess facility in France. For a complete discussion of the restructuring actions related to the 2013 restructuring plans, see Note 11, “Restructuring and Asset Impairment Charges” of Notes to Consolidated Financial Statements in the 2014 Form 10-K.

NOTE 10: CREDIT FACILITIES
On December 22, 2014, the Company entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”) for a $20.0 million revolving credit facility, with a sublimit of $10.0 million for the issuance of commercial and standby letters of credit on the Company’s behalf. Revolving loans under the Credit Agreement may be borrowed, repaid and re-borrowed until December 22, 2015, at which time all amounts borrowed must be repaid. There were no borrowings under the Credit Agreement during the nine months ended October 2, 2015. As of October 2, 2015, the amount available for borrowing under this facility, net of $0.5 million of standby letters of credit, was $19.5 million.

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

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


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Table of Contents

Obligations under the Credit Agreement are secured only by a pledge of 66.67% of the Company’s equity interests in its foreign subsidiary, Harmonic International AG. Additionally, to the extent that the Company in the future forms any direct or indirect, domestic, material subsidiaries, those subsidiaries will be required to provide a guaranty of the Company’s obligations under the Credit Agreement.

The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit the Company’s and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments or pay dividends, in each case subject to certain exceptions. The Company is also required to maintain, on a consolidated basis, total cash and marketable securities of at least $35.0 million and EBITDA of at least $20.0 million determined on a rolling four-quarter basis. As of October 2, 2015, the Company was in compliance with the covenants under the Credit Agreement.

NOTE 11: EMPLOYEE BENEFIT PLANS
Harmonic grants stock options and restricted stock units (“RSUs”) pursuant to stockholder approved equity incentive plans. These equity incentive plans are described in detail in Note 14, “Employee Benefit Plans” of Notes to Consolidated Financial Statements in the 2014 Form 10-K.
Stock Options and Restricted Stock Units
The following table summarizes the Company’s stock option and RSU unit activity during the nine months ended October 2, 2015 (in thousands, except per share amounts):
 
 
 
Stock Options Outstanding
 
Restricted Stock Units Outstanding
 
Shares
Available for
Grant
 
Number
of
Shares
 
Weighted
Average
Exercise Price
 
Number
of
Units
 
Weighted
Average
Grant
Date Fair
Value
Balance at December 31, 2014
7,480

 
7,255

 
$
6.65

 
2,241

 
$
6.40

Authorized

 

 

 

 

Granted
(4,000
)
 
1,156

 
7.58

 
1,895

 
7.17

Options exercised

 
(748
)
 
5.32

 

 

Shares released

 

 

 
(1,526
)
 
6.47

Forfeited or cancelled
1,887

 
(1,606
)
 
8.05

 
(189
)
 
6.79

Balance at October 2, 2015
5,367

 
6,057

 
$
6.62

 
2,421

 
$
6.99

The following table summarizes information about stock options outstanding as of October 2, 2015 (in thousands, except per share amounts):
 
Number
of
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
Vested and expected to vest
5,777

 
$
6.60

 
4.1
 
$
994

Exercisable
3,634

 
6.44

 
3.2
 
968

The intrinsic value of options vested and expected to vest and exercisable as of October 2, 2015 is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of October 2, 2015. The intrinsic value of options exercised is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of the exercise date. The intrinsic value of options exercised during the three and nine months ended October 2, 2015 was $28,000 and $1.7 million, respectively. The intrinsic value of options exercised during the three and nine months ended September 26, 2014 was $0.3 million and $0.7 million, respectively.
The following table summarizes information about RSUs outstanding as of October 2, 2015 (in thousands, except per share amounts):

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Table of Contents

 
Number of
Shares
Underlying
Restricted
Stock
Units
 
Weighted
Average
Remaining
Vesting
Period
(Years)
 
Aggregate
Fair
Value
Vested and expected to vest
1,859

 
0.8
 
$
10,856

The fair value of RSUs vested and expected to vest as of October 2, 2015 is calculated based on the fair value of the Company’s common stock as of October 2, 2015.
Employee Stock Purchase Plan
The 2002 Employee Stock Purchase Plan (“ESPP”) provides for the issuance of common stock purchase rights to employees of the Company. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. The ESPP enables employees to purchase shares at 85% of the fair market value of the common stock at the beginning or end of the offering period, whichever is lower. Offering periods generally begin on the first trading day on or after January 1 and July 1 of each year. Employees may participate through payroll deductions of 1% to 10% of their earnings. In the event that there are insufficient shares in the plan to fully fund the issuance, the available shares will be allocated across all participants based on their contributions relative to the total contributions received for the offering period.
401(k) Plan
The Company has a retirement/savings plan which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. This plan allows participants to contribute up to the applicable Internal Revenue Code limitations under the plan. The Company has made discretionary contributions to the plan of 25% of the first 4% contributed by eligible participants, up to a maximum contribution per participant of $1,000 per year. The contributions for the nine months ended October 2, 2015 and September 26, 2014 were $342,000 and $354,000, respectively.

NOTE 12: STOCK-BASED COMPENSATION
Stock-based compensation expense consists primarily of expenses for stock options and RSUs granted to employees and shares issued under the ESPP. The following table summarizes stock-based compensation expense (in thousands):
 
Three months ended
 
Nine months ended
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
Stock-based compensation in:
 
 
 
 
 
 
 
Cost of revenue
$
433

 
$
612

 
$
1,383

 
$
1,751

Research and development expense
1,074

 
1,219

 
3,249

 
3,589

Selling, general and administrative expense
2,320

 
2,521

 
7,213

 
7,380

Total stock-based compensation in operating expense
3,394

 
3,740

 
10,462

 
10,969

Total stock-based compensation
$
3,827

 
$
4,352

 
$
11,845

 
$
12,720

The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.
Stock Options
The Company estimated the fair value of all employee stock options using a Black-Scholes valuation model with the following weighted average assumptions:

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Three months ended
 
Nine months ended
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
Expected term (years)
4.60

 
4.70

 
4.70

 
4.70

Volatility
37
%
 
40
%
 
38
%
 
40
%
Risk-free interest rate
1.5
%
 
1.8
%
 
1.6
%
 
1.7
%
Expected dividends
0.0
%
 
0.0
%
 
0.0
%
 
0.0
%
The expected term represents the weighted-average period that the stock options are expected to remain outstanding. The computation of the expected term was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The Company uses its historical volatility for a period equivalent to the expected term of the options to estimate the expected volatility. The risk-free interest rate that the Company uses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.
The weighted-average fair value per share of options granted was $2.01 and $2.48 for the three months ended October 2, 2015 and September 26, 2014, respectively. The weighted-average fair value per share of options granted was $2.63 and $2.36 for the nine months ended October 2, 2015 and September 26, 2014, respectively.

The fair value of all stock options vested during each of the three months ended October 2, 2015 and September 26, 2014 was $0.6 million. The fair value of all stock options vested during the nine months ended October 2, 2015 and September 26, 2014 was $2.5 million and $2.6 million, respectively.

There were no realized tax benefits attributable to stock options exercised in jurisdictions where this expense is deductible for tax purposes for the nine months ended October 2, 2015. The total realized tax benefit attributable to stock options exercised during the nine months ended September 26, 2014 was $194,000.
 
Restricted Stock Units
The aggregate fair value of all RSUs issued during the three months ended October 2, 2015 and September 26, 2014 were $2.2 million and $2.7 million, respectively. The aggregate fair value of all RSUs issued during the nine months ended October 2, 2015 and September 26, 2014 were $9.9 million and $10.0 million, respectively.
Employee Stock Purchase Plan
The value of the stock purchase rights under the ESPP consists of: (1) the 15% discount on the purchase of the stock; (2) 85% of the fair value of the call option; and (3) 15% of the fair value of the put option. The call option and put option were valued using the Black-Scholes option pricing model. The weighted average fair value of the Company’s ESPP shares at purchase dates was estimated using the following weighted average assumptions during the nine months ended October 2, 2015 and September 26, 2014:
 
Purchase Period Ending
 
December 31,
2015
 
June 30,
2015
 
December 31,
2014
 
June 30,
2014
Expected term (years)
0.50

 
0.50

 
0.50

 
0.50

Volatility
32
%
 
35
%
 
33
%
 
28
%
Risk-free interest rate
0.1
%
 
0.1
%
 
0.1
%
 
0.1
%
Expected dividends
0.0
%
 
0.0
%
 
0.0
%
 
0.0
%
Estimated weighted average fair value per share at purchase date
$1.64
 
$1.75
 
$1.84
 
$1.70
The expected term represents the period of time from the beginning of the offering period to the purchase date. The Company uses its historical volatility for a period equivalent to the expected term of the options to estimate the expected volatility. The risk-free interest rate that the Company uses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. The Company has never declared or paid any cash dividends

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and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.
Unrecognized Stock-Based Compensation
As of October 2, 2015, the Company had approximately $14.7 million of unrecognized stock-based compensation expense related to the unvested portion of its stock options and RSUs that is expected to be recognized over a weighted-average period of approximately 1.9 years.

NOTE 13: INCOME TAXES
The Company reported the following operating results for the periods presented (in thousands):
 
Three months ended
 
Nine months ended
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
Loss before income taxes
$
(6,079
)
 
$
(3,752
)
 
$
(9,289
)
 
$
(19,594
)
(Benefit from) provision for income taxes
(1,268
)
 
(4,830
)
 
(827
)
 
21,800

Effective income tax rate
20.9
%
 
128.7
%

8.9
%

(111.3
)%
The Company operates in multiple jurisdictions and its profits are taxed pursuant to the tax laws of these jurisdictions. The Company’s effective income tax rate may be affected by changes in, or interpretations of tax laws and tax agreements in any given jurisdiction, utilization of net operating loss and tax credit carry forwards, changes in geographical mix of income and expense, and changes in management’s assessment of matters such as the ability to realize deferred tax assets, as well as recognition of uncertain tax benefits, the effects of the statute of limitations, or settlement with tax authorities.
The Company’s effective income tax rate of 8.9% for the nine months ended October 2, 2015 was lower than the U.S. federal statutory rate of 35% primarily due to a difference in foreign tax rates and the Company’s U.S. losses generated in the nine months ended October 2, 2015 receiving no tax benefit as a result of a full valuation allowance against all of its U.S. deferred tax assets as well as adjustments relating to its 2014 U.S. federal tax return filed in September 2015 and the reversal of uncertain tax positions resulting from the expiration of the statute of limitations. The impairment of the VJU investment (see Note 4, "Investments in Other Equity Securities") received no tax benefit.
The Company’s effective income tax rate of (111.3)% for the nine months ended September 26, 2014 differed from the U.S. federal statutory rate of 35%, primarily due to a $28.7 million increase in the valuation allowance against U.S. federal, California, and other state deferred tax assets. The increased valuation allowance was a result of a history of operating losses in recent years that has led to uncertainty with respect to the Company’s ability to realize certain of its net deferred tax assets, of which $4.2 million and $24.5 million were recorded in the third and second quarter of 2014, respectively. This unfavorable impact was offset in part by net tax benefits of $8.5 million associated with the release of tax reserves for uncertain tax positions as a result of the expiration of statute of limitations, which were released in the third quarter of 2014.
The Company files U.S. federal and state, and foreign income tax returns in jurisdictions with varying statutes of limitations during which such tax returns may be audited and adjusted by the relevant tax authorities. The 2011 through 2014 tax years generally remain subject to examination by most state tax authorities in the United States. The Company’s income tax return for 2012 is currently under examination by the U.S. Internal Revenue Service, which commenced in August 2015, and the 2013 through 2014 tax years remain subject to examination by the U.S. federal tax authority. In August 2015, the Company was notified by the County of Santa Clara, California, of a new property tax audit for the 2012 through 2015 tax years. The Company is in the process of appealing a $1.6 million assessment for underpayment of property tax and associated interest relating to a previous audit cycle which commenced in 2013, for the 2007 through 2011 tax years. In connection with the previous audit cycle, the Company has made several advance payments to the Santa Clara County aggregating $1.8 million, of which $0.6 million was recorded in operating expenses in prior years and the remainder $1.2 million was included in “Prepaid and other current assets” on our Condensed Consolidated Balance Sheet as of October 2, 2015, as we expect a tax refund for this amount. The Company expects to settle the appeal in early 2016. In significant foreign jurisdictions, the 2006 through 2014 tax years generally remain subject to examination by their respective tax authorities. A subsidiary of the Company is under audit for the 2012 and 2013 tax years, which commenced in the first quarter of 2015, by the Israel tax authority. If, upon the conclusion of these audits, the ultimate determination of taxes owed in the United States or Israel is for an amount in excess of the tax provision the Company has recorded in the applicable period, the Company’s overall tax expense, effective tax rate, operating results and cash flow could be materially and adversely impacted in the period of adjustment.

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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 October 2, 2015, the total amount of gross unrecognized tax benefits, including interest and penalties, was approximately $15.9 million, of which $4.3 million would affect the Company’s effective tax rate if the benefits are eventually recognized.  The remaining gross unrecognized tax benefit does not affect the Company’s effective tax rate as it relates to positions that would be settled with tax attributes such as net operating loss carryforward or tax credits previously subject to a valuation allowance. The Company recognizes interest and penalties related to unrecognized tax positions in income tax expense. The Company had $0.6 million of gross interest and penalties accrued as of October 2, 2015. The Company will continue to review its tax positions and provide for, or reverse, unrecognized tax benefits as issues arise. As of October 2, 2015, the Company anticipates that the balance of gross unrecognized tax benefits will decrease up to approximately $1.4 million due to expiration of the applicable statues of limitations over the next 12 months.

NOTE 14: INCOME (LOSS) PER SHARE
The following table sets forth the computation of the basic and diluted net income (loss) per share (in thousands, except per share amounts):
 
Three months ended
 
Nine months ended
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
Numerator:
 
 
 
 
 
 
 
Net income (loss)
$
(4,811
)
 
$
1,078

 
$
(8,462
)
 
$
(41,394
)
Denominator:
 
 
 
 
 
 
 
Weighted average shares used to compute net income(loss) per share-basic
87,991

 
90,618

 
88,359

 
94,113

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

 
1,182

 

 

Weighted average shares used to compute net income(loss) per share-diluted
87,991

 
91,800

 
88,359

 
94,113

Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.05
)
 
$
0.01

 
$
(0.10
)
 
$
(0.44
)
Diluted
$
(0.05
)
 
$
0.01

 
$
(0.10
)
 
$
(0.44
)
The following table sets forth the potentially dilutive shares from stock options, RSUs and the ESPP, for the periods presented, which were excluded from the net income (loss) per share computations because their effect was anti-dilutive (in thousands):
 
Three months ended
 
Nine months ended
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
Potentially dilutive equity awards outstanding
8,817

 
5,196

 
9,403

 
9,321


NOTE 15: SEGMENT INFORMATION
Operating segments are defined as components of an enterprise that engage in business activities for which separate financial information is available and evaluated by the Company’s Chief Operating Decision Maker ( “CODM”), which for Harmonic is its Chief Executive Officer, in deciding how to allocate resources and assess performance. Prior to the fourth quarter of 2014, the Company operated its business in one reportable segment. In connection with the 2015 annual planning process, the Company changed its operating segments to align with how the CODM expected to evaluate the financial information used to allocate resources and assess performance of the Company. The new reporting structure consists of two operating segments: Video and Cable Edge. As a result, the segment information presented has been conformed to the new operating segments for all prior periods.
The new operating segments were determined based on the nature of the products offered. The Video segment sells video processing and production and playout solutions and services worldwide to broadcast and media companies, streaming new

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media companies, cable operators, and satellite and telecommunications (telco) Pay-TV service providers. The Cable Edge segment sells cable edge solutions and related services to cable operators globally.
The Company does not allocate amortization of intangibles, stock-based compensation, restructuring and asset impairment charges, and certain other non-recurring charges to the operating income for each segment because management does not include this information in the measurement of the performance of the operating segments. A measure of assets by segment is not applicable as segment assets are not included in the discrete financial information provided to the CODM.
The following tables provide summary financial information by reportable segment (in thousands):


 
Three months ended
 
Nine months ended
 
October 2, 2015
 
September 26, 2014
 
October 2, 2015
 
September 26, 2014
Net revenue:


 


 


 


  Video
$
71,889

 
$
81,360

 
$
219,378

 
$
239,823

  Cable Edge
11,416

 
26,701

 
71,046

 
85,859

Total consolidated net revenue
$
83,305

 
$
108,061

 
$
290,424

 
$
325,682

 


 


 


 


Operating income (loss):


 


 


 


  Video
$
3,575

 
$
6,609

 
$
8,386

 
$
9,426

  Cable Edge
(3,963
)
 
120

 
2,582

 
3,178

Total segment operating income (loss)
(388
)
 
6,729

 
10,968

 
12,604

Unallocated corporate expenses*
(510
)
 
(403
)
 
(739
)
 
(915
)
Stock-based compensation
(3,827
)
 
(4,352
)
 
(11,845
)
 
(12,720
)
Amortization of intangibles
(1,532
)
 
(5,512
)
 
(4,971
)
 
(18,378
)
Loss from operations
(6,257
)
 
(3,538
)
 
(6,587
)
 
(19,409
)
Non-operating income (expense)
178

 
(214
)
 
(2,702
)
 
(185
)
Loss before income taxes
$
(6,079
)
 
$
(3,752
)
 
$
(9,289
)
 
$
(19,594
)

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

NOTE 16: COMMITMENTS AND CONTINGENCIES
Leases
Future minimum lease payments under non-cancelable operating leases as of October 2, 2015 are as follows (in thousands):
Years ending December 31,
 
2015 (remaining three months)
$
1,809

2016
9,346

2017
8,739

2018
8,435

2019
8,245

Thereafter
6,402

Total
$
42,976


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Warranties
The Company accrues for estimated warranty costs at the time of product shipment. Management periodically reviews the estimated fair value of its warranty liability and records adjustments based on the terms of warranties provided to customers, historical and anticipated warranty claims experience, and estimates of the timing and cost of warranty claims. Activity for the Company’s warranty accrual, which is included in accrued liabilities, is summarized below (in thousands):
 
Three months ended
 
Nine months ended
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
Balance at beginning of period
$
4,167

 
$
3,532

 
$
4,242

 
$
3,606

Accrual for current period warranties
1,182

 
2,028

 
4,215

 
5,383

Warranty costs incurred
(1,448
)
 
(1,629
)
 
(4,556
)
 
(5,058
)
Balance at end of period
$
3,901

 
$
3,931

 
$
3,901

 
$
3,931

Purchase Commitments with Contract Manufacturers and Other Suppliers
The Company relies on a limited number of contract manufacturers and suppliers to provide manufacturing services for a substantial majority of its products. In addition, some components, sub-assemblies and modules are obtained from a sole supplier or limited group of suppliers. During the normal course of business, in order to reduce manufacturing lead times and ensure adequate component supply, the Company enters into agreements with certain contract manufacturers and suppliers that allow them to procure inventory and services based upon criteria defined by the Company. The Company had approximately $21.2 million of non-cancelable purchase commitments with contract manufacturers and other suppliers as of October 2, 2015.
Standby Letters of Credit
As of October 2, 2015, the Company’s financial guarantees consisted of standby letters of credit outstanding, which were primarily related to performance bonds and state requirements imposed on employers. The maximum amount of potential future payments under these arrangements was $0.5 million as of October 2, 2015.
Indemnification
Harmonic is obligated to indemnify its officers and the members of its Board of Directors (the “Board”) pursuant to its bylaws and contractual indemnity agreements. Harmonic also indemnifies some of its suppliers and most of its customers for specified intellectual property matters pursuant to certain contractual arrangements, subject to certain limitations. The scope of these indemnities varies, but, in some instances, includes indemnification for damages and expenses (including reasonable attorneys’ fees). There have been no amounts accrued in respect of these indemnification provisions through October 2, 2015.
Guarantees
The Company has $0.4 million of guarantees in Israel as of October 2, 2015, with the majority relating to rent obligations for buildings used by its Israeli subsidiaries.
Legal proceedings
From time to time, the Company is involved in lawsuits as well as subject to various legal proceedings, claims, threats of litigation, and investigations in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment, and other matters. The Company assesses potential liabilities in connection with each lawsuit and threatened lawsuits and accrues an estimated loss for these loss contingencies if both of the following conditions are met: information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. While certain matters to which the Company is a party specify the damages claimed, such claims may not represent reasonably possible losses. Given the inherent uncertainties of litigation, the ultimate outcome of these matters cannot be predicted at this time, nor can the amount of possible loss or range of loss, if any, be reasonably estimated.

In October 2011, Avid Technology, Inc. (“Avid”) filed a complaint in the U. S. District Court for the District of Delaware alleging that the Company’s Media Grid product infringes two patents held by Avid. A jury trial on this complaint commenced on January 23, 2014 and, on February 4, 2014, the jury returned a unanimous verdict in favor of the Company, rejecting Avid’s infringement allegations in their entirety.  On May 23, 2014, Avid filed a post-trial motion asking the court to set aside the jury’s verdict, and the judge issued an order on December 17, 2014, denying the motion. On January 5, 2015, Avid filed an appeal with respect to the jury’s verdict with the Federal Circuit, which was docketed on January 9, 2015, as Case No.

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2015-1246. Avid filed its opening brief with respect to this appeal on March 24, 2015, the Company filed its response brief on May 7, 2015, and Avid filed its reply brief on June 16, 2015.  An order has not yet been issued regarding the scheduling of oral arguments.

In June 2012, Avid served a subsequent complaint in the U.S. District Court for the District of Delaware alleging that the Company’s Spectrum product infringes one patent held by Avid. The complaint seeks injunctive relief and unspecified damages. In September 2013, the U.S. Patent Trial and Appeal Board (“PTAB”) authorized an inter partes review to be instituted as to claims 1-16 of the patent asserted in this second complaint. A hearing before the PTAB was conducted on May 20, 2014.  On July 10, 2014, the PTAB issued a decision finding claims 1 - 10 invalid and claims 11 - 16 not invalid.  The Company filed an appeal with respect to the PTAB’s decision on claims 11 - 16 on September 11, 2014. The appeal was docketed with the Federal Circuit on October 22, 2014, as Case No. 2015-1072, and the Company filed its opening brief with respect to this appeal on January 29, 2015. Avid and PTAB each filed a response brief on April 27, 2015, and the Company filed a reply brief on May 28, 2015. Oral arguments were held on October 8, 2015. The Federal Circuit has not yet issued an order in this matter.

The Company is unable to predict the outcome of these lawsuits and therefore is unable to estimate an amount or range of any reasonably possible losses resulting from them. An unfavorable outcome on any litigation matter could require that the Company pay substantial damages, or, in connection with any intellectual property infringement claims, could require that the Company pay ongoing royalty payments or could prevent the Company from selling certain of its products. As a result, a settlement of, or an unfavorable outcome on, any of the matters referenced above or other litigation matters could have a material adverse effect on the Company’s business, operating results, financial condition and cash flows.

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

 
$
(768
)
 
$
(1,980
)
Other comprehensive income (loss) before reclassifications
(766
)
 
(218
)
 
17

 
(967
)
Amounts reclassified from AOCI

 
(314
)
 

 
(314
)
Provision for income taxes

 

 
(6
)
 
(6
)
Balance as of October 2, 2015
$
(2,289
)
 
$
(221
)
 
$
(757
)
 
$
(3,267
)
The effects of amounts reclassified from AOCI into the condensed consolidated statement of operations were as follows (in thousands):
 
Three months ended
 
Nine months ended
 
October 2, 2015
 
September 26, 2014
 
October 2, 2015
 
September 26, 2014
Gains on cash flow hedges from foreign currency contracts:
 
 
 
 
 
 
 
  Cost of revenue
$
18

 
$

 
$
44

 
$

  Operating expenses
109

 

 
270

 

    Total reclassifications from AOCI
$
127

 
$

 
$
314

 
$

Common Stock Repurchases
On April 24, 2012, the Board approved a stock repurchase program that provided for the repurchase of up to $25 million of our outstanding common stock. During 2013, the Board approved $195 million of increases to the program, increasing the aggregate authorized amount of the program to $220 million. On February 6, 2013, the Board approved a modification to the program that permits the Company to also repurchase its common stock pursuant to a plan that meets the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. On May 14, 2014, the Board approved an additional $80

24

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million increase to the program, resulting in an aggregate authorized purchase of $300 million under the program and the repurchase period was extended through the end of 2016.
As of October 2, 2015, the Company had purchased 40.2 million shares of common stock under this program at a weighted average price of $6.25 per share for an aggregate purchase price of $252.3 million, including $1.0 million of expenses. The remaining authorized amount for stock repurchases under this program was $48.6 million as of October 2, 2015. For additional information, see “Item 2 - Unregistered sales of equity securities and use of proceeds” of this Quarterly Report on Form 10-Q.

NOTE 18: SUBSEQUENT EVENT
Management and Organizational Changes

On November 2, 2015, Carolyn V. Aver resigned from her position as the Chief Financial Officer of the Company. Ms. Aver will remain available to the Company in an advisory capacity until December 31, 2015 to assist with the transition of her responsibilities and other related matters. In connection with Ms. Aver’s resignation, Mr. Covert, who stepped down from the Company’s board, was appointed as the Company’s Chief Financial Officer and principal financial and accounting officer. On October 30, 2015, George Stromeyer, resigned from his position as Senior Vice President, Worldwide Sales of the Company.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The terms “Harmonic,” the “Company,” “we,” “us,” “its,” and “our,” as used in this Quarterly Report on Form 10-Q (this “Form 10-Q”), refer to Harmonic, Inc. and its subsidiaries and its predecessors as a combined entity, except where the context requires otherwise.
Some of the statements contained in this Form 10-Q are forward-looking statements that involve risk and uncertainties. The statements contained in this Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future. In some cases, you can identify forward-looking statements by terminology such as, “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements regarding:
developing trends and demands in the markets we address, particularly emerging markets;
economic conditions, particularly in certain geographies, and in financial markets;
new and future products and services;
capital spending of our customers;
our strategic direction, future business plans and growth strategy;
industry and customer consolidation;
expected demand for and benefits of our products and services;
seasonality of revenue and concentration of revenue sources;
the potential impact of our continuing stock repurchase plan;
potential future acquisitions and dispositions;
anticipated results of potential or actual litigation;
our competitive environment;
the impact of governmental regulation;
anticipated revenue and expenses, including the sources of such revenue and expenses;
expected impacts of changes in accounting rules;
use of cash, cash needs and ability to raise capital; and
the condition of our cash investments.
These statements are subject to known and unknown risks, uncertainties and other factors, any of which may cause our actual results to differ materially from those implied by the forward-looking statements. Important factors that may cause actual results to differ from expectations include those discussed in “Risk Factors” beginning on page 39 of this Form 10-Q. All forward-looking statements included in this Form 10-Q are based on information available to us on the date thereof, and we assume no obligation to update any such forward-looking statements.

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


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Historically, our revenue has been dependent upon capital spending in the cable, satellite, telco, broadcast and media industries, including streaming media. Our customers’ capital spending patterns are dependent on a variety of factors, including but not limited to: economic conditions in the U.S. and international markets; access to financing; annual budget cycles of each of the industries we serve; impact of industry consolidations; and customers suspending or reducing capital spending in anticipation of new products or new standards, new industry trends and/or technology shifts. If our product portfolio and product development plans do not position us well to capture an increased portion of the capital spending in the markets on which we compete, our revenue may decline. As we attempt to further diversify our customer base in these markets, we may need to continue to build alliances with other equipment manufacturers, content providers, resellers and system integrators, managed services providers and software developers; adapt our products for new applications; take orders at prices resulting in lower margins; and build internal expertise to handle the particular operational, payment, financing and/or contractual demands of our customers, which could result in higher operating costs for us. Implementation issues with our products or those of other vendors have caused in the past, and may cause in the future, delays in project completion for our customers and delay our recognition of revenue.

A majority of our revenue has been derived from relatively few customers, due in part to the consolidation of our service provider customers. Sales to our ten largest customers in the three and nine months ended October 2, 2015 accounted for approximately 28% and 34%, respectively, of our net revenue, compared to 36% and 37%, respectively, for the same periods in 2014. Although we are attempting to broaden our customer base by penetrating new markets and further expanding internationally, we expect to see continuing industry consolidation and customer concentration. No customers accounted for more than 10% of net revenue in the three months October 2, 2015 and Comcast accounted for 15% of out net revenue for the same period in 2014. In the first nine months of 2015 and 2014, revenue from Comcast accounted for approximately 13% and 18% of our net revenue, respectively. The loss of Comcast or any other significant customer, any material reduction in orders by Comcast or any significant customer, or our failure to qualify our new products with a significant customer could materially and adversely affect our operating results, financial condition and cash flows.
Our net revenue decreased $24.8 million, or 23%, in the three months ended October 2, 2015, compared to the corresponding period in 2014, primarily due to a $15.3 million decrease in our Cable Edge segment revenue and a $9.5 million decrease in our Video segment revenue. Our net revenue decreased $35.3 million, or 11%, in the nine months ended October 2, 2015, compared to the corresponding period in 2014, primarily due to a $20.5 million decrease in our Video segment revenue and a $14.8 million decrease in our Cable Edge segment revenue.
The decreases in our Cable Edge segment revenue in the three and nine months ended October 2, 2015 were primarily due to the negative impact and project delays resulting from industry consolidations in the North America and in the Europe, Middle East and Africa (“EMEA”) regions as well as reduced capital spending by some of our customers in anticipation of the next generation Converged Cable Access Platform (“CCAP”) technologies, and to a lesser extent the unfavorable impact from the strengthening of the U.S. dollar.
The decreases in our Video segment revenue in the three and nine months ended October 2, 2015, were primarily due to softer demand trends worldwide stemming from customers’ technology and business model transitions, unfavorable currency impact and industry consolidations resulting in an unanticipated deferral of several large projects in the North America and EMEA regions in the third quarter of 2015. The decreases in our Video segment in the three and nine months ended October 2, 2015 were offset in part by higher service revenue, primarily in the Americas region.
The delay by our customers in purchasing new solutions in anticipation of the adoption of next generation technologies and architectures, including the continued delays by new and existing broadcast and media company and service provider customers, first began in 2014. We believe we are still in the early stages of adoption and delays could continue in varying degrees for the next several quarters. Meanwhile, our customers’ consolidation activities are ongoing and may further contribute to investment uncertainties in the coming months.
As a result of the decrease in our net revenue and the continued uncertainty regarding the timing of our customers’ investment decisions, we implemented restructuring plans to bring our operating expenses more in line with net revenues, while simultaneously implementing extensive, Company-wide expense control programs (See Note 9, “Restructuring and Related Charges” of the Notes to our Condensed Consolidated Financial Statements for additional information).
Our quarterly revenue has been, and may continue to be, affected by seasonal buying patterns. Typically, revenue in the first quarter of the year is seasonally lower than other quarters, as our customers often are still finalizing their annual budget and capital spending projections for the year. Further, we often recognize a substantial portion of our quarterly revenues in the last 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.

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As part of our business strategy, (1) from time to time we have acquired or invested in, and continue to consider acquiring or investing in, businesses, technologies, assets and product lines that we believe complement or may enhance or expand our existing business, and (2) from time to time we consider divesting a product line that we believe may no longer complement or expand our existing business. In March 2013, we completed the sale of our cable access HFC business to Aurora Networks, Inc. for $46 million, and in 2014, we made strategic minority investments in three companies (See Note 4, “Investments in Other Equity Securities,” of the notes to our Condensed Consolidated Financial Statements for additional information).

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
There have been no material changes to our critical accounting policies, judgments and estimates, during the nine months ended October 2, 2015, from those disclosed in our 2014 Annual Report on Form 10-K (the “2014 Form 10-K”).

ACCOUNTING PRONOUNCEMENTS
For a summary of recent accounting pronouncements applicable to our consolidated condensed financial statements see
Note 2 to the Condensed Consolidated Financial Statements in Item 1, which is incorporated herein by reference.

RESULTS OF OPERATIONS
Net Revenue
Prior to the fourth quarter of 2014, we operated our business in one reportable segment. In connection with our 2015 annual planning process, we changed our operating segments to align with how our chief operating decision maker, which for us is our Chief Executive Officer, expected to evaluate the financial information used to allocate resources and assess our performance. The new reporting structure consists of two operating segments: Video and Cable Edge. As a result, the segment information presented has been conformed to the new operating segments for all prior periods.
The new operating segments were determined based on the nature of the products offered. The Video segment sells video processing and production and playout solutions and services worldwide to service providers as well as to broadcast and media companies, including streaming new media companies. The Cable Edge segment sells cable edge solutions and related services to cable operators globally.
The following table presents the breakdown of revenue by segment for the three and nine months ended October 2, 2015 and September 26, 2014 (in thousands, except percentages):
 
Three months ended
 
 
 
 
Nine months ended
 
 
 
 
October 2, 2015
 
September 26, 2014
 
Q3 FY15 vs Q3 FY14
 
October 2, 2015
 
September 26, 2014
 
Q3 FY15 YTD vs Q3 FY14 YTD
Segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
Video
$
71,889

 
$
81,360

 
$
(9,471
)
(12
)%
 
$
219,378

 
$
239,823

 
$
(20,445
)
(9
)%
Cable Edge
11,416

 
26,701

 
(15,285
)
(57
)%
 
71,046

 
85,859

 
(14,813
)
(17
)%
Total
$
83,305

 
$