20162018 Annual Report
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 20162018
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| ¨ | 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)
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| 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)
Securities registered pursuant to section 12(b) of the Act:
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| Title of Each Class | Name of Each Exchange on Which Registered |
| Common Stock, par value $.001 per share | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ý
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ¨ No ý
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
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”, “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | ¨ | Accelerated filer | ý |
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
| Emerging growth company | ¨
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
Based on the reported closing sale price of the Common Stock on The NASDAQ Global Select Market on July 1, 2016,June 29, 2018, the aggregate market value of the voting Common Stock held by non-affiliates of the Registrant was approximately $113,914,000.$106,193,000. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares outstanding of the Registrant’s Common Stock, $.001 par value, was 79,773,00388,678,700 on February 28, 2017.22, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant’s 20162018 Annual Meeting of Stockholders (which will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended December 31, 2016)2018) are incorporated by reference in Part III of this Annual Report on Form 10-K.
HARMONIC INC.
FORM 10-K
TABLE OF CONTENTS
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Forward Looking Statements
Some of the statements contained in this Annual Report on Form 10-K are forward-looking statements that involve risk and uncertainties. The statements contained in this Annual Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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;
expectations regarding the impact of our acquisition of Thomson Video Networks (“TVN”);CableOS solutions;
expectations regarding the change in TVN’s business model;impact of warrants issued to Comcast on our business;
potential future acquisitions and dispositions;
anticipated results of potential or actual litigation;
our competitive environment;
the impact of our restructuring plans;
the impact of governmental regulation;regulations, including with respect to tariffs and economic sanctions;
anticipated revenue and expenses, including the sources of such revenue and expenses;
expected impacts of changes in accounting rules;
expectations regarding the usability of our inventory and the risk that inventory will exceed forecasted demand;
expectations and estimates related to goodwill and intangible assets and their associated carrying value;
expectations regarding the applicability of tax provisions, including with respect to credits related to our acquisition of Thomson Video Networks (“TVN”); and
use of cash, cash needs and ability to raise capital; and
the condition ofcapital, including repaying or refinancing our cash investments.convertible notes.
These statements are subject to known and unknown risks, uncertainties and other factors, 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 1314 in this Annual Report on Form 10-K. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us on the date thereof, and we assume no obligation to update any such forward-looking statements. The terms “Harmonic,” “Company,” “we,” “us,” “its,” and “our”, as used in this Annual Report on Form 10-K, refer to Harmonic Inc. and its subsidiaries and its predecessors as a combined entity, except where the context requires otherwise.
PART I
We design, manufacture and sellare a leading global provider of (i) versatile and high performance video infrastructuredelivery software, products, and system solutions and services that enable our customers to efficiently create, prepare, store, playout and deliver a full range of videohigh-quality broadcast and broadband“over-the-top” (OTT) video services to consumer devices, including televisions, personal computers, laptops, tablets and smart phones. phones and (ii) cable access solutions that enable cable operators to more efficiently and effectively deploy high-speed internet, for data, voice and video services to consumers.
We operate in two segments, Video and Cable Edge.Access. Our Video business sellsprovides video processing and production and playout solutions and services worldwide to cable operators and satellite and telecommunications (telco) Pay-TVpay-TV service providers, which we refer to collectively as “service providers,” and to broadcast and media companies, including streaming new media companies. Our Video business infrastructure solutions are delivered either through shipment of our products, software licenses or as software-as-a-service (“SaaS”) subscriptions. Our Cable EdgeAccess business sellsprovides cable access solutions including Cable OS and related services, including our CableOS software-based cable access solution, primarily to cable operators globally.
Across our two business segments, we derived approximately 51%54% of our revenue from the Americas in 2016.2018. The Europe, Middle East and Africa (EMEA) and Asia Pacific (APAC) regions accounted for the remaining 31%27% and 18%19% of our 20162018 revenue, respectively.
Harmonic was initially incorporated in California in June 1988, and was reincorporated in Delaware in May 1995. Our principal executive offices are located at 4300 North First Street, San Jose, California 95134. Our telephone number is (408) 542-2500. Our Internet website is http://www.harmonicinc.com. Other than the information expressly set forth in this Annual Report on Form 10-K, the information contained or referred to on our website is not part of this report.
Industry Overview and Market Trends
Demand for Video Services Anytime, AnywhereBusiness
The delivery of video programmingWe believe our customers must continue to employ innovative technologies and Internet-based services to consumers continues to rapidly converge. Consumers increasingly seek a more personalized andaddress key trends in the dynamic video experience that can be delivered at any timeindustry.
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| ▪ | Demand for Video Services Anytime, Anywhere, on any Device. In our ubiquitous multiscreen video environment, video programming and content needs to be transformed into multiple formats, bit rates and resolutions for display on a broad range of devices. |
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| ▪ | Demand for High Quality Video. Consumer demand for high quality video anytime, anywhere and on any device requires ever-increasing bandwidth capacity in service providers’ networks, as well as technology that maximizes network bandwidth efficiency. With the advent of Ultra High Definition (Ultra HD) televisions and OTT services increasingly being rendered in “4K” high resolution and consuming approximately four times the bandwidth of traditional HD channels, we believe next generation compression technologies, such as High Efficiency Video Compression (HEVC) or advances in H.264/AVC codecs, as well as increasing requirements for HDR encoding, will continue to remain a high priority for distributors of video. |
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| ▪ | Streaming Video Service. Consumer demand for video download and streaming services from streaming media companies such as Netflix, Hulu, Google (YouTube), Amazon (Prime Video) and Apple (iTunes) continue to experience significant global growth. These and other similar services aggregate third-party and original content and stream video “over-the-top” (OTT) to any Internet-connected device utilizing Internet service providers’ networks at no incremental infrastructure cost to the consumer. |
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| ▪ | Time-Shifted Viewing. “Time-shifting” technologies include digital video recorders (DVRs), cloud and network DVRs (cDVR and nDVR) that allow a subscriber to store programming on the service provider’s servers or in the cloud, and video-on-demand (VOD) services. |
In response to any location to a variety of devices, ranging from high-definition (HD) and ultra-high-definition (Ultra HD) televisions and Internet-enabled “smart” televisions, to traditional desktop and laptop computers, to mobile platforms such as smart phones and tablet computers. In this multiscreen video environment, video programming and content needs to be transformed into multiple formats, bit rates and resolutions for display on a broad range of devices.
Consumers have grown accustomed to watching video programming and content at their convenience rather than on fixed timeframes scheduled by broadcasters and service providers. “Time-shifting” technologies such as digital video recorders (DVRs) and video-on-demand (VOD) services are enabling this flexibility,these trends and the introductionsuccess of network DVRs by some service providers has eliminated the need for local storage, allowing a subscriber to store programming on the service provider’s servers for future playback at any time, on any device.
Consumers are also accustomed to video download andOTT streaming services from new media companies, such as Netflix, Hulu, Google (YouTube)well as the growing trend of “cord-cutters” (i.e., Amazon (Amazon Instant Video)consumers who cancel traditional pay-TV subscriptions in favor of streaming services), “cord-shavers” (i.e., consumers who switch to smaller bundles of pay-TV subscriptions) and Apple (iTunes). These and other similar services aggregate third-party and original content and stream video “over-the-top” (OTT) to any Internet-connected device utilizing Internet service providers’ networks at no incremental infrastructure cost to the consumer. In response,“cord-nevers” (i.e., consumers who have never had a numberpay-TV subscription):
service providers and broadcast and media companies are now providingcontinue to provide more of their own OTT streaming video services.services, including OTT streaming of live (or “linear”) television programming;
Demand for High Quality Video
Consumer demand for high quality video anytime, anywhere and on any device requires ever-increasing bandwidth capacity in service providers’ networks, as well as technology that maximizes network bandwidth efficiency. With the adventwe believe providers of Ultra HD televisions andthese OTT services increasingly being rendered in “4K” high resolution and consuming approximately four times the bandwidth of traditional HD channels, we believe next generation compression technologies, such as High Efficiency Video Compression (HEVC) or advances in H.264/AVC codecs, will continue to remain a high priority for distributors of video.expand monetization opportunities with personalized and dynamic ad insertion, thereby expanding technological and infrastructure requirements;
Service Provider Trends
Serviceservice providers are competing intensely to offer higher quality video signals in HD, including evolving initiatives to deliver video in 4K Ultra HD resolution. In response to the growing success of new media OTT streaming companies, in addition to the time-shifting technologies described above, resolution;
service providers are broadly expanding their video streaming offerings to customers, for viewing on any device. Increasingly, these services are featuring content in the bandwidth intensive, high resolution 4K standard in order to provide consumers with higher value, differentiated video services. Service providers
are developing and expanding their content delivery and Internet Protocol (IP) networks, and increasing the capacity and efficiency of their networks with investments in various delivery infrastructure technologies to, among other things, maximize video quality and minimize bandwidth utilizationutilization;
service providers continue to consolidate to achieve greater economies of scale and enablesubscriber concentration, and acquire media companies to expand their content libraries and capabilities to develop original content;
service providers continue to enhance and differentiate their content offerings, either through in-house development of new network capacity. content or through acquisitions of existing content brands; and
service providers have an ongoing need, despite the migration of traffic to OTT, to provide services over their existing broadcast distribution infrastructures.
We believe that the delivery of video over IP will continue to change traditional video viewing habits and distribution methods and may alter the traditional advertising and subscription business models of major service providers.
Our Video Markets
Service providers continue to consolidate to achieve greater economies of scale and subscriber concentration, and to compete more effectively, especially against the growing disruptive threat of OTT offerings. In addition, service providers continue to enhance and differentiate their offerings by creating and delivering their own branded content, either through organic in-house development of new content or through acquisitions of existing content brands. For example, Comcast Corporation (“Comcast”), a cable operator, owns NBC Universal, a broadcast and media company; AT&T, a telecommunications company, has announced its intent to acquire Time Warner, a media and entertainment company; and Sky Broadcasting, a European satellite service provider, has developed its own channels and content.Providers
Content Provider Trends
Content owners and media companies in the U.S. and internationally continue to launch OTT streaming offerings to reach consumers directly, with OTT streaming of live programming becoming increasingly relevant. These offerings may be in partnership or competition with service providers.
As service providers deliver more video services to more devices and platforms, they are increasingly requiring content providers to supply content that is properly formatted for each device. As the number and types of devices continue to grow, the lack of consistent video standards means content providers must reformat and package their content in dozens of different formats to enable their content to be viewable across different devices. As a result, some broadcasters and media companies are beginning to outsource playout functionality to service providers.
In order to achieve faster time-to-market as well as reduce operational costs, content providers are adopting cloud-based technologies and transitioning portions of their operations into public cloud environments. This enables content providers to offer expanded services at a more rapid pace, distribute video directly to consumers or to distributors over IP and public networks and operate globally in a more efficient manner at greater scale.
Market Trends
Cable Market
To address increasing competition, increase average revenue per user (ARPU) and differentiate themselves, cableOperators. Cable operators continue to focus on a number ofvarious initiatives to improve and differentiate their product offerings:
Bundledservice offerings from competing service providers, including: bundled digital video, voice and high speed data services;
Expansion expansion of VOD libraries and on-demand and streaming service offerings;
Refresh of the user experience with upgraded consumer-facing applications;
Video video delivery over IP to broadband enabled consumer devices;
Capacity and capacity enhancement of high-speed data services;services.
Expansion of network capacity to support the growing number of available services, including HDTV in foreign markets; and
Collaboration with content owners on offering access to on-line content.
To support this rapid expansion of service offerings, cable operators are investing in video processing solutions that can receive, process, and distribute content from a variety of sources to a broad array of consumer devices; video storage equipment; and servers to ingest, store and intelligently distribute content. These technologies are complemented by the latest cable edge solutions to significantly scale broadband network capacity and speed.
Satellite and Telco Markets
Over 100 satelliteOperators. Satellite operators around the world have established digital television services that serve tens of millions of subscribers. These services are capable of providingsubscribers, with the ability to provide tens of thousands of linear channels, including an increasing number of HD channels and the introduction of Ultra HD channels. TheseWe believe these linear services will likely continue to expand as operators offer premium packages targeted towards specific consumer groups, with the goal of gaining loyalty and expanding ARPU. Ingrow, particularly in emerging markets, while, in parallel, satellite operators have begun offering the same linearlaunch new streaming services, and VOD options to their customer base via
broadband-connected consumer devices such as smart phones, tabletsSling TV and set-top boxes. These services are deployed in conjunction with content delivery networks (CDNs)DirecTV Now, to address younger generation viewers and are accessible through partnerships, acquisitions or internal investments. Satellite operators are expanding theirnew consumption habits.
Telcos. Telcos have established video infrastructure in order to attain greater operational efficiency for the creation and distribution of these new services across a wide range of mediums and platforms.
Internationally, and specifically in emerging markets, satellite operators continue to enjoy substantial growth in their customer base, driven mainly by rapid economic development, and the rise of a growing middle class with disposable income. As this growth continues, it is expected that these satellite operators will expand their product offerings to leverage the growing customer base and increase overall revenue.
Over the past several years, telcos around the world have added video services as a competitive response to cable and satellite operators and as a potential source of revenue growth. As their businesses have grown and matured, they have also expanded their offerings in an effort to successfully compete in the video arena,marketplace, including high-quality HD content, larger VOD libraries, time-shifting television services, bundled voice, data and video packages multiscreen video offerings to a broad range of devices, and, branded mobile-specificmore recently, streaming services. The last of these offerings, mobile wireless services, is a key competitive advantage for telcos today, as it provides a clear differentiator in anytime, anywhere service offerings for consumers looking to view content on the move. In many cases, telcos are making significant infrastructure investments to expand their video offerings into IP services and gain market share, while certain telcos are also acquiring satellite and/or cable companies to buy theachieve market reach and scale needed to be competitive in the video space.scale.
Broadcast and Media MarketsCompanies
Network broadcasters, programmers and content owners require video contribution and distribution solutions to transmit live programming of news and sports to their studios for subsequent broadcast, and deliver the same programming and content to service providers for distribution to their subscribers. These broadcastersBroadcasters generally produce their own news and sports highlight content, along with hundreds of channels of network programming that is played-to-air under strict reliability requirements.requirements using playout servers and software.
In the terrestrial broadcasting market, operators in many countries in EMEA, APACWith broadcast and South America are now required by regulationmedia companies continuing to convert from analog to digital transmission in order to free up broadcast spectrum. These broadcasters are faced with requirements of converting analog signals to digital signals prior to transmission over the air, as well as to distribute these new signals across a new terrestrial network. The conversion to digital transmission provides the opportunity to deliver new channels; HD and Ultra HD services; premium content; and interactive services.
Media companies, in order to effectively address consumer demands, are expandingexpand their offerings to support a wide range of live and linear content and to makemaking content available in higher quality video formats and on-demand. Theseon-demand, we believe these trends are increasing demand for media servers and video-optimized storage equipped to support higher resolution formats, and are accelerating demand for functionally collapsed playout systems with integrated media orchestration software.software, as well as increasing demand for media servers and video-optimized storage solutions equipped to support higher resolution formats. In addition, in order to achieve faster time-to-market and reduce operational costs, we believe content providers are adopting cloud-based technologies and transitioning portions of their operations into public cloud environments, thereby enabling expanded services at a more rapid pace, the distribution of video directly to consumers or to distributors over IP and public networks, responsibleand more efficient and scalable global operations.
In the terrestrial broadcasting market, while broadcasters in various countries that have not yet completed converting from analog to digital transmission continue with change-over efforts, operators in numerous other countries around the world are adopting the next generation of digital transmission technologies, such as the DVB-T2 standard and ATSC 3.0 standards. The ongoing conversion from analog to digital transmission and the adoption of next-generation transmission standards provides the opportunity to deliver new channels, HD and Ultra HD services, premium content, and interactive services.
Over-the-Top (OTT)
According to a 2017 Cisco study, IP video traffic accounts for movinga significant majority of Internet traffic globally, and video contenttraffic will only continue to increase for the foreseeable future. We believe service providers are being upgraded to handle larger volumes of digital content more efficiently and with greater flexibility. To effectively support these rapidly developing needs, a wide range ofbroadcast and media companies are utilizing public cloud infrastructures for video infrastructure needs,with OTT services and we believe this trend will accelerate.
New Media and OTT Markets
OTT video streaming accounts for the majority of downstream Internet traffic in North America, and new media OTT companies are aggressively pushing into international markets. These companiesofferings will continue to require high-quality video processing solutions and new technologies in order to process and distribute large amounts of live and VOD content from a wide variety of sources to a broad array of consumer devices, and to optimize adaptive bitrate video streaming quality and bandwidth utilization. Also,
With the continued proliferation of OTT companies are increasingly developingstreaming content and introducing original content, as well as developing and launching program channels similar to channels currently available from service providers. In many cases, these OTT companies can monetize theirproviders, monetizing this content viathrough the use of national, regionalized and personalized advertising delivered to the varied devices of individual viewers.viewers has become a key area of focus for companies with OTT offerings. We believe these developments may result inOTT ad insertion and other related content customization solutions will continue to attract increased investments in video production and playout solutions byfrom OTT companies.
Emerging Markets
With a growing middle class across emerging markets, we believe the Pay-TV business is poisedwill continue to grow for growth over the coming decadeforeseeable future in the Asia Pacific region, South Asia, the Middle East, Africa and Central and South America. We currently derive a meaningful portion of our revenue from countries in emerging markets.
Many consumers who are entering the middle class are now able to afford a monthly video service to gain access to their favorite programs and movies. Considering the early stages of economic development in many of these regions, together with very large populations, weWe believe some of the leading video service providers serving emerging markets will experience high subscriber growth rates and may become worldwide industry leaders. In addition, since the video services currently available to consumers
We believe subscribers in these markets are generally more
basic when compared to services available in more developed markets, we believe subscribers will demand increasingly sophisticated video services over time as consumer consumption trends in these markets track to those in more developed markets. A growing number of new regional OTT entrants in emerging markets, where global brands such as Netflix and Amazon’s Prime Video are less dominant, are delivering a variety of OTT services and experiencing rapid growth. As a result, we believe that the infrastructure and technology investments of these service providers and new market entrants are likely to grow significantly for the foreseeable future.
Further, mediaMedia companies addressing emerging markets are aggressively investing in the creation of new content, particularly content that is localized and responsive to consumer demands, with the goal of creating strong brands and a growing, loyal customer base. We believe that this growth in content creation will require these media companies to significantly increase their investmentscapabilities in video storage, processing and related technologies.
Our Video Infrastructure Technology Trends
Network Function Virtualization. We believe the industry will continue to adopt network function virtualization and unified video processing systems, whereby what had been historically discrete hardware video processing functions are integrated into software and run on the latest Intel processors in order to leverage high-performance and scalable appliance-based hardware, and as software-only virtual instances designed to run on private and/or public cloud environments.
Unified Video Playout & Processing Systems. A unified video processing system requires software-based channel origination and playout capabilities, with integrated functionality such as graphics and branding insertion and media orchestration, and an integrated control system that streamlines playout processes, improves video quality, enables time-shift and cDVR functionality, while reducing server overhead. Also, when playout functionality is deployed to the cloud, the compression and OTT packaging and origin functionality (in addition to the capability to distribute over traditional broadcast distribution networks) associated with the playout will necessarily also need to be deployed in the cloud.
By combining historically discrete video chain functions into a unified playout and distribution system where content can be ingested, formatted, stored, played-to-air and compressed, packaged and delivered, we believe functionally collapsed video playout infrastructures with integrated control systems will enable content providers
to produce more channels in higher resolution formats faster and more cost-effectively, and provide content in the widest possible range of formats.
Outsourcing of Video Infrastructure Functionality. We believe there is industry momentum for shifting virtualized and unified video processing infrastructure from broadcast center or production facilities to third party SaaS offerings hosted on public cloud infrastructure. We believe this transition enables media companies and new OTT entrants to more rapidly adapt to market dynamics, utilize A/B testing methodologies to optimize service offerings and expand within and beyond core markets.
Cable Access Business
OverviewIndustry Challenges
Cable operators continue to face challenges from the rapid growth of demand for broadband bandwidth in their networks, driven primarily by:
more users with more connected devices and applications;
bundled digital video, voice and high speed data services; and
bandwidth-intensive VOD and OTT streaming video services, and cloud applications.
In addition, the operation of network infrastructure is space, power and personnel intensive. Hardware-centric networks can also be expensive to update or replace. To remain competitive, especially in the face of heightened competition from non-cable service providers such as telcos to deliver gigabit data rates, cable operators need to significantly upgrade existing equipment and network technologies.
Technology Trends
DOCSIS 3.1. We believe the cable industry will continue to deploy the DOCSIS 3.1 standard, which enables high bandwidth data transfer over existing broadband infrastructure.
Virtualization. We believe cable operators are moving toward more software-driven architectures. Virtualized software solutions that are decoupled from underlying hardware and run on commercial off-the-shelf (COTS) servers and/or cloud architectures allow for significantly increased efficiencies, upgradability, configuration flexibility, service agility and scalability not feasible with hardware-centric approaches. We believe a software-based cable access solution can significantly reduce cable headend costs, especially costs related to physical space and power consumption, and increase operational efficiency, and that the deployment of these systems will be an important step in cable operators’ transition to all-IP networks.
Distributed Access Architecture. In addition to centralized cable access solutions, we believe there is growing interest in distributed Remote PHY solutions, particularly in competitive gigabit service markets where cable operators are competing with fiber-to-the-home (FTTH) services and are extending fiber networks deeper into their access networks. A Remote PHY architecture coupled with a software-based cable access solution running on COTS servers at a headend, and the distribution of Remote PHY nodes closer to end users, alleviates the power and space requirements of centralized systems at headend sites due to the fact that the RF processing is distributed into the field outside of the headend. We believe this distributed architecture will enable service providers to efficiently scale to support data and IP video growth.
Our Products and Solutions
Video Processing and Delivery Solutions
We offer a range of products and solutions that address the demand and market trends shaping our industry, including next-generation software-based media processing platforms.
In light of more complicated workflows inherent in managing the delivery of greater quantities of content across multiple formats to a growing population of set-top-boxes and consumer electronic devices, we believe the industry is moving towards unified video processing systems. These systems integrate what had been historically discrete hardware video processing functions into software, enabling significant cost efficiencies, greater flexibility and improved business agility across the entire video workplace. Additionally, we believe there is gaining industry momentum towards network function virtualization, whereby core video chain functions are being re-engineered and collapsed to run on the latest Intel processors in order to leverage high-performance and scalable appliance-based hardware, or as software-only virtual instances designed to run on industry standard servers in data center environments.
From production studios to broadcast newsrooms, consumer demand for higher resolution video programming and more viewing options is escalating network touch points and the server capacity needed to administer channel production and playout processes, thereby elevating costs and space restrictions. As more content is filmed in 4K and played-to-air on newly created channels supporting higher resolution HD and Ultra HD formats, these constraints are likely to be exacerbated. We believe these issues are resulting in increased demand for software-based playout systems that integrate previously discrete functionality, including graphics and branding insertion and media orchestration. This type of software provides an automated control system that streamlines playout processes, improves video quality, and reduces server overhead by combining historically discrete video chain functions into a unified playout system where content can be ingested, formatted, stored and played-to-air, a technological development known as function collapse or function integration.
We believe functionally collapsed video playout infrastructures with media orchestration systems, along with video optimized storage solutions, will enable content providers to produce more channels in higher resolution formats faster and more cost-effectively, and provide content in the widest possible range of formats and at the highest possible video quality.
As a result, we believe service providers and broadcast and media companies are likely to make significant investments in these newly architected systems in the foreseeable future.
Video Products
Video Processing Solutions
Our video processing solutions, which include network management software and application software and hardware products, provide our customers with the ability to acquire a variety of signals from different sources and in different protocols in order to deliver a variety of real-time and stored content to their subscribers for viewing on a broad range of devices.
Cloud media processing.An increasing number of service providers and media professionals are looking to cloud-based architectures for their media processing workflows, which is a fundamental shift from traditional, hardware-based approaches. We have addressed, and continue to address, this changing landscape with our VOS CloudCluster software application, which transforms traditional video preparationprocessing and delivery architectures into a fully integrated set of cloud-native functions and enables ease of migration between data center computing, public clouds and private clouds, thereby accelerating the time to
market for new broadcast and OTT services. Our VOS 360VOS360 offering provides these same capabilities through our software-as-a-service solution.in a public cloud environment, and maintenance operations of the VOS Cluster are the responsibility of Harmonic.
Broadcast and distributionOTT encoders. Our high-performance encoders compress video, audio and data channels to low bit rates while maintaining high video quality. Our latest software-based Electra encoders can deliver video in multiple formats, including standard, HD and Ultra HD, and in any video compression standard, including the MPEG-2, MPEG-4 AVC HEVC and AVS+ codecs.HEVC. This capability allows the encoders to converge workflows targeted for all forms of video delivery, whether broadcast, cable, satellite, IPTV or OTT. Today’s Electra and VOS solutions all leverage the same Harmonic PURE Compression
Engine, a software-based technology that incorporates many of the encoding algorithm and processing techniques developed by Harmonic over the past two decades. The benefits of the PURE Compression Engine include a faster rate of video quality innovation, the ability to dynamically balance workflow efficiency and resource utilization, and improved investment protection. Our EyeQ real-time video compression optimizationcontent-aware encoding solution is an optional enhancement for systems featuring PURE Compression. The EyeQ compression solution leverages the functionmechanics of the human visual systemeye to provideassess video quality and optimize encoding parameters in real time. Our VOS Cluster software application supports a superior viewing experience on any device at low bitrates.subset of broadcast and OTT encoding functionality.
Contribution encoders. Our ViBE contribution encoders provide broadcasters with video compression solutions for real-time news gathering, live sports coverage and other remote events, and enable our customers to deliver these feeds to their studios for further processing. Our latest models can encode HD and Ultra HD video signals in HEVC or AVC 4:2:2 10-bit resolution, enabling the transmission of very high-quality video with very low latency. Broadcasters and other operators also use our contribution encoders for delivery of their programming to their customers, which are typically cable, telco and satellite operators.
MultiscreenHigh-density transcoders and stream processing. We offer high-density, real-time transcoding of video for broadcast and OTT delivery with our Electra XT Xtream transcoder. This modular and scalable platform is designed to accelerate time to market for operators faced with fast channel lineup growthcost effectively transcode any incoming audio and video signal at a rise in multiscreen applications.“good enough” video quality. Our latest ProStream X and ProStream XVM real-time stream processing systems are software-based and provide high-performance, high-throughput processing for mission-critical IP video delivery applications, including multiplexing, scrambling, splicing and blackout switching. Our VOS Software Cluster software application supports stream processing.
Content preparation and delivery for multiscreen applications.Multiscreen delivery. Our ProMedia multiscreen solutions enableVOS Cluster software application enables the preparationpackaging and delivery of high-quality OTT services, including live streaming, VOD, catch-up TV, start-over TV, nDVR and network DVRcDVR services through hypertext transfer protocol (HTTP) streaming to any device. Capabilities include real-time and file-based transcoding, stream packaging, and multiscreen workflow management.management, as well as support for digital rights management (DRM) processes with a number of DRM partners. Our ProMedia X Origin multiscreen video serverVOS Cluster application ingests transcoded, segmented and encrypted output from Electra and ProMedia systems to provide high-volume live adaptive bitrate streaming and the delivery of time-shifted services.
Decoders and descramblers. Our family of ProView integrated receivers-decoder (IRD) products allows service providers to acquire content delivered via satellite, IP or terrestrial networks for distribution to their subscribers. These products, including the ProView 7100 and ProView 8100 series, are used by broadcasters to decode signals backhauled from live news and sporting events in contribution applications, as well as by content owners looking to distribute their content in a controlled manner to a large base of video service providers. Our VOS Cluster software applications support a subset of these decoding and descrambling capabilities.
Video Production Platforms and Playout Solutions
Our video production platforms consist of video-optimized storage and content management applications, which provide broadcast and media companies with file-based infrastructure to support video content production activities, such as editing, post-production and finishing.servers. Our video playout solutions, including media orchestration software, are based on scalable video servers used by broadcast and media companies to create and playout television channels.
Video servers. Our Spectrum family of video server systems are used by broadcast and media companies to create play-to-air television channels. Our customers typically use these video server products to record incoming content from either live feeds or from tapes, encoding that content in real-time into standard media files that are then stored in the server’s file system until the content is needed for playback as part of a scheduled playlist. Clips stored in the server are decoded in real-time and played-to-air according to a playout schedule in a frame-accurate, back-to-back manner to create a seamless television channel. Our Spectrum servers support SD, HD and Ultra HD programming, as well as many different media formats. Our Polaris media orchestration software solutions work with our Spectrum products and provide our customers with playout management and control tools for channel-in-a-box and integrated channel playout applications. Our VOS Cluster software application supports a subset of these video server functionalities.
Video-optimized storage.Storage
MediaGrid. Our MediaGrid shared storage system is a scale-out, network-attached storage system with a built-in media file system optimized for media production workflows. Architected as a clustered storage system with a distributed file system, MediaGrid provides highly scalable storage capacity and access bandwidth to support demanding media production applications, such as video editing, content transformation and media library management. In addition, MediaGrid systems are increasingly being employed for VOD, time-shifted television services and OTT adaptive bitrate streaming. Our VOS Cluster
software application relies on external infrastructure for storage, and is compatible with MediaGrid video-optimized storage when deployed into a customer’s traditional data center environment.
Unified Video Playout and Processing SaaS
Cloud-native SaaS solutions. Our VOS360 SaaS solution provides the functionality of our VOS Cluster in public cloud environments and is designed to be deployable in any public cloud infrastructure. With the VOS360 service, the maintenance operations of the VOS Cluster are the responsibility of Harmonic.
Our Cable Edge Business
Overview
We believe the market and industry trends highlighted above are similarly creating opportunities for our Cable Edge business, especially for the deployment of software-based solutions.
As consumption of VOD services accelerates, service provider demand for video edge QAMs increases. In addition, with heightened competition from non-cable service providers such as AT&T, Verizon and local municipalities to deliver gigabit data rates, cable operators are aggressively driving enabling broadband access technologies, including the Converged Cable Access Platform (CCAP) architecture. We also believe the cable industry will move rapidly to DOCSIS 3.1, which enables increased bandwidth data transfer over existing broadband infrastructure as cable operators begin migrating to distributed solutions.
In the last few years, the cable industry has been developingProducts and promulgating the CCAP architecture for next-generation cable edge solutions, which combines edge QAM and CMTS functions in a single system in order to combine resources for video and data delivery. We believe a software-based, centralized CCAP-based system can significantly reduce cable headend costs and increase operational efficiency, and that the deployment of these systems will be an important step in cable operators’ transition to all-IP networks.
In addition to centralized CCAP systems, we believe there is growing interest in distributed remote PHY solutions, particularly in competitive gigabit service markets where cable operators are competing with FTTH services and are extending fiber access networks deeper into their distribution networks. A remote PHY architecture alleviates the power and space requirements of centralized systems at headend sites, and we believe will enable service providers to efficiently scale to support data and video growth.
Cable Edge ProductsSolutions
Software-Based CCAPCable Access Solution. DemandAs demand continues to rapidly grow for high-speed broadband services such as OTT streaming, VOD, time-shift TV and cloud DVR. WeDVR, we believe we can help cable operators take advantage of this opportunity with our CableOS software-based CCAP,cable access solution, an end-to-end cable access solution that we believe delivers unprecedented scalability, agility and cost savings. Our CableOS solution enables the migration to multi-gigabit broadband capacity and the fast deployment of DOCSIS 3.1 data, video and voice services. We believe theour solution resolves space and power constraints in the headend and hub, eliminates dependence on hardware upgrade cycles, and reduces total cost of ownership. Our CableOS solution can be deployed based on a centralized, distributed Remote PHY or hybrid architecture.
Edge QAM products. Our Narrowcast Services Gateway (NSG) products are fully integrated edge gateway products that integrate routing, multiplexing, scrambling and modulation into a single package for the delivery of narrowcast services to subscribers over cable networks. NSG systems allow cable operators to deliver IP signals from the headend to the edge of the network for subsequent modulation onto a HFC network. Originally developed for VOD applications, the NSG has evolved to support multiple applications, including switched digital video and modular CMTS applications, as well as large-scale VOD deployments.
We believe CCAP systems will, over time, replace and make obsolete current cable edge QAM products, as well as current CMTS products, since fully compliant CCAP-based solutions will combine the functionality of these products into one system. Since we historically have not addressed the CMTS market and 2018 was our first year of generating revenues in this new market, we believe that our CableOS solution, which includes a software-based CMTS, will have an opportunity to be sold into a significantly larger and growing market, createdwith growth driven by virtualization and the CCAP standard.distributed Remote PHY architecture.
Technical Support and Professional Services
We provide maintenance and support services to most of our customers under service level agreements that are generally renewed on an annual basis. We also provide consulting, implementation and integration services to our customers worldwide. We draw upon our expertise in broadcast television, communications networking and compression technology to design, integrate and install complete solutions for our customers, including integration with third-party products and services. We offer a broad range of services, including program management, technical design and planning, building and site preparation, integration and equipment installation, end-to-end system testing and comprehensive training.
Customers
We sell our products to a variety of cable, satellite and telco, and broadcast and media companies. Set forth below is a representative list of our significant end user and integrator/reseller customers, listed alphabetically, based, in part, on revenue during 2016.
2018.
|
| |
| United States | International |
CenturyLinkAT&T | AM Technolgia SA de CVArquiva |
| Buckeye Cable | Bell TV |
| Charter Communications | Com Hem ABGroupe Canal+ |
Comcast Cable | Dayang Technology Development Inc.Netorium |
| Cox Communications | France Televisions SASCSK Corp. |
DirecTVDigitalGlue | Groupe Canal+SASky Italia |
EchoStar HoldingDish Network | Huawei Technologies Co Ltd.Sky Perfect JSAT Corp. |
| GatesAir | Sony |
| Heartland Video Systems | Netorium GmbH |
Suddenlink Communications | NYL Electronica SA |
Time Warner Cable | Telefonia Por Cable SA de CVTelecom Argentina |
| Turner Broadcasting | Vodafone |
Sales to our 10 largest customers in 2016, 20152018, 2017 and 20142016 accounted for approximately 28%37%, 32%24% and 35%28% of our net revenue, respectively. Although 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 2018, Comcast accounted for 15% of our net revenue. During 2017 and 2016, no single customer accounted for more than 10% of our net revenue. During 2015 and 2014, revenue from Comcast accounted for approximately 12% and 16% of our net revenue, respectively. The loss of any significant customer, or any material reduction in orders from any significant customer, or our failure to qualify our new products with any significant customer could materially and adversely affect our operating results, financial condition and cash flows. In addition, we are involved in most quarters in one or more relatively large individual transactions. A decrease in the number of relatively larger individual transactions in which we are involved in any quarter could adversely affect our operating results for that quarter.
Sales and Marketing
In the U.S. and internationally, we sell our products through our own direct sales force, as well as through independent resellers and systems integrators. Our direct sales team is organized geographically and by major customers and markets to support customer requirements. Our principal sales offices outside of the U.S. are located in Europe and Asia, and we have a support center in Switzerland to support our international customers and operations. Our international resellers are generally responsible for importing our products and providing certain installation, technical support and other services to customers in their territory after receiving training from us.
Our direct sales force and resellers are supported by a highly trained technical staff, which includes application engineers who work closely with our customers to develop technical proposals and design systems to optimize system performance and economic benefits for our customers. Our technical support teams provide a customized set of services, as required, for ongoing maintenance, support-on-demand and training for our customers and resellers, both in our facilities and on-site.
Our product management organization develops strategies for product lines and markets and, in conjunction with our sales force, identifies the evolving technical and application needs of customers so that our product development resources can be most effectively and efficiently deployed to meet anticipated product requirements. Our product management organization is also responsible for setting price levels, demand forecasting and general support of the sales force, particularly at major accounts.
Our corporate marketing organization is responsible for building awareness of the Harmonic brand in our markets and driving engagement with our strategies, solutions and products. The group develops all of our corporate messaging and manages all customer and industry communication mechanisms,channels, including advertising, ourpublic relations, Web presence, speakers’ bureau,and social media, events and trade shows. Theshows, as well as demand generation marketing organization also manages product launches and demand generationcampaigns in conjunction with our sales force.
Manufacturing and Suppliers
We rely on third-party contract manufacturers to assemble our products and the subassemblies and modules for our products. In 2003, we entered into an agreement with Plexus Services Corp. to act as our primary contract manufacturer. Plexus currently provides us with a substantial majority, by dollar amount, of the products we purchase from our contract manufacturers. This agreement has automatic annual renewals, unless prior notice for nonrenewal is given, and has been automatically renewed for a term expiring in October 2017.2019. We do not generally maintain long-term agreements with any of our contract manufacturers.
Many components, subassemblies and modules necessary for the manufacture or integration of our products are obtained from a sole supplier or a limited group of suppliers. While we expend considerable efforts to qualify additional component sources, consolidation of suppliers in the industry and the small number of viable alternatives have limited the results of these efforts. We do not generally maintain long-term agreements with any of our suppliers.
Intellectual Property
As of December 31, 2016,2018, we held 7181 issued U.S. patents and 4453 issued foreign patents and had 7891 patent applications pending. Although we attempt to protect our intellectual property rights through patents, trademarks, copyrights, licensing arrangements, maintaining certain technology as trade secrets and other measures, we cannot assure you that any patent, trademark, copyright or other intellectual property rights owned by us will not be invalidated, circumvented or challenged, that such intellectual property rights will provide competitive advantages to us, or that any of our pending or future patent applications will be issued with the claims, or the scope of the claims, sought by us, if at all. We cannot assure you that others
will not develop technologies that are similar or superior to our technology, duplicate our technology or design around the patents that we own. In addition, effective patent, copyright and trade secret protection may be unavailable or limited in which we do business or may do business in the future.
We generally enter into confidentiality or license agreements with our employees, consultants, vendors and customers as needed, and generally limit access to, and distribution of, our proprietary information. However, no assurances can be given that these actions will prevent misappropriation of our technology. In addition, if necessary, we are prepared to take legal action, in the future, to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Any such litigation could result in substantial costs and diversion of resources, including management time, and could negatively affect our business, operating results, financial position and cash flows.
In order to successfully develop and market our products, we may be required to enter into technology development or licensing agreements with third parties. Although many companies are often willing to enter into such technology development or licensing agreements, we cannot assure you that such agreements can be negotiated on reasonable terms or at all. The failure to enter into technology development or licensing agreements, when necessary, could limit our ability to develop and market new products and could harm our business.
Backlog
We schedule production of our products and solutions based upon our backlog, open contracts, informal commitments from customers and sales projections. Our backlog consists of unfilled firm purchase orders by customers.our customers which have not been completed. Approximately 75%82% of our backlog is projected to be converted to revenue within a rolling one-year period. OurAs of December 31, 2018 and 2017, we had backlog, including deferred revenue, at December 31, 2016 was approximately $188.4 million.of $186.4 million and $224.4 million, respectively. Delivery schedules on such orders may be deferred or canceled for a number of reasons, including reductions in capital spending by our customers or changes in specific customer requirements. In addition, due to annual capital spending budget cycles at many of our customers, the amount of our backlog at any given time is not necessarily indicative of actual revenues for any succeeding period.
Competition
The markets for video infrastructure systems are extremely competitive and have been characterized by rapid technological change and declining average selling prices. The principal competitive factors in these markets include product performance, functionality and features, reliability, pricing, breadth of product offerings, brand recognition and awareness, sales and distribution capabilities, technical support and services, and relationships with end customers. We believe that we compete favorably in each of these categories.
Our competitors in our Video business segment include verticallyLarge integrated system suppliers, such as Arris Group, Cisco Systems and Ericsson, with which we have historically competed in our Video business segment, announced sale and divestiture transactions in the last several months that impacted these companies’ video businesses: Arris announced a definitive agreement to be acquired by CommScope; Cisco Systems sold its video solutions group (now called Synamedia) to Permira, a private equity firm; and Ericsson completed the sale of a majority stake in its MediaKind video technology business to One Equity Partners, a private equity firm. In certain product lines, otherour competitors include companies includingsuch as ATEME and Elemental Technologies (an Amazon Web Services company). With respect to production and playout products, competitors include Evertz Microsystems, EVS, Grass Valley (a Belden brand) and Imagine Communications. In the OTT market, our competitors include end-to-end online video platforms such as Brightcove and Verizon Digital Media Services, who provide comprehensive OTT infrastructure solutions, some of which overlap with our products and services.
Our competitors in our Cable EdgeAccess business include Arris, Casa Systems, Cisco Systems and Cisco Systems.
Consolidation in the industry has led to the acquisition of a number of our historic competitors over the last several years. For example, Motorola Home, BigBand Networks and C-Cor were acquired by Arris; NDS and Scientific Atlanta were acquired by Cisco Systems; Envivio and Tandberg Television were acquired by Ericsson; Elemental Technologies was acquired by Amazon; and Miranda Technologies and Grass Valley were acquired by Belden Inc. Consequently, some of our principal competitors are substantially larger and have greater financial, technical, marketing and other resources than we have.Huawei Technologies.
Research and Development
We have historically devoted a significant amount of our resources to research and development. Research and development expenses in 2016, 20152018, 2017 and 20142016 were approximately $98.4$89.2 million, $87.5$96.0 million and $93.1$98.4 million, respectively. Research and development expenses as a percentpercentage of revenue in 2016, 20152018, 2017 and 20142016 were approximately 24.2%22.1%, 23.2%26.8% and 21.5%24.2%, respectively. Our internal research and development activities are conducted primarily in the United States (California, Oregon and New Jersey), France, Israel and Hong Kong. In addition, a portion of our research and development is conducted through third-party partners with engineering resources in Ukraine and in India.
Our research and development program is primarily focused on developing new products and systems, and adding new features and other improvements to existing products and systems. Our development strategy is to identify features, products and systems, in both software and hardware solutions, that are, or are expected to be, needed by our customers. OurFor our Video business segment, our current research and development efforts are focused on next-generation video processing and delivery across different deployment environments, particularly cloud-native and SaaS delivery models, and enhanced video compression, video quality, and multiscreen solutions. We also devote significant resources to production and playout and distribution solutions. OtherWith respect to our Cable Access business segment, our major research and development efforts are focused on cable edgeaccess solutions for both video and data, particularly the ongoing development of our centralized and distributed CableOS software-based CCAP solution.cable access solutions.
Our success in designing, developing, manufacturing and selling new or enhanced products will depend on a variety of factors, including the identification of market demand for new products, product selection, timely product design and development, product performance, effective manufacturing and assembly processes and sales and marketing. Because of the complexity inherent in such research and development efforts, we cannot assure you that we will successfully develop new products, or that new products developed by us will achieve market acceptance. Our failure to successfully develop and introduce new products would materially and adversely affect our business, operating results, financial condition and cash flows.
Employees
As of December 31, 2016,2018, we employed a total of 1,3761,162 full time employees, including 523425 in research and development, 233190 in sales, 303293 in service and support, 8057 in operations, 8778 in marketing (corporate and product) and 150119 in a general and administrative capacity. Of those employees, 507375 were located in the U.S. and 869787 employees were located in foreign countries in South America, the Middle East, Europe, Asia and Canada. From time to time, we also employ a number of temporary employees and consultants on a contract basis. Our employees in France are represented by labor unions and an employee works council. None of our other employees are represented by a labor union with respect to his or hertheir employment with us. We have not experienced any work stoppages, and we consider our relations with our employees to be good.
Available Information
Harmonic makes available free of charge, on the Harmonic web site, the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K (via link to the SEC website, which itself is available at http://www.sec.gov), and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after Harmonic files such material with, or furnishes such material to, the Securities and Exchange Commission. The address of the Harmonic web site is http://www.harmonicinc.com. Except as expressly set forth in this Form 10-K, the contents of our web site are not incorporated into, or otherwise to be regarded as part of, this report.
We depend on cable, satellite and telco, and broadcast and media industry capital spending for our revenue and any material decrease or delay in capital spending in any of these industries would negatively impact our operating results, financial condition and cash flows.
Our revenue has been derived from worldwide sales to service providers and broadcast and media companies, as well as, more recently, emergingin recent years, streaming media companies. We expect that these markets will provide our revenue for the foreseeable future. Demand for our products will depend on the magnitude and timing of capital spending by customers in each of these markets for the purpose of creating, expanding or upgrading their systems. These capital spending patterns are dependent on a variety of factors, including:
• the impact of general economic conditions, actual and projected;
• access to financing;
• annual capital spending budget cycles of customers in each of the industries we serve;
• the impact of industry consolidation;
• customers suspending or reducing capital spending in anticipation of: (i) new standards, such as HEVC and DOCSIS 3.1;video or cable industry standards; (ii) industry trends and technology shifts, such as virtualization and cloud-based solutions, and (iii) new products, such as products and services based on our VOS software platform or the CCAP architecture, suchour CableOS software-based cable access solution;
• delayed or reduced spending as CableOS;customers transition to or contemplate adopting new business and operating models enabled by software- and cloud-based solutions, including software-as-a-service (SaaS) unified video processing solutions;
• federal, state, local and foreign government regulation of telecommunications, television broadcasting and streaming media;
• overall demand for communication services and consumer acceptance of new video and data technologies and services;
• competitive pressures, including pricing pressures;
• the impact of fluctuations in currency exchange rates; and
• discretionary end-user customer spending patterns.
In the past, specific factors contributing to reduced capital spending have included:
• weak or uncertain economic and financial conditions in the U.S. or one or more international markets;
• uncertainty related to development of digital video industry standards;
• delays in evaluations of new services, new standards and systems architectures by many operators;
• emphasis by operators on generating revenue from existing customers, rather than from new customers, through construction, expansion or upgrades;
• a reduction in the amount of capital available to finance projects of our customers and potential customers;
• proposed and completed business combinations and divestitures by our customers and the length of regulatory review of each;
• completion of a new system or significant expansion or upgrade to a system; and
• bankruptcies and financial restructuring of major customers.
In the past, adverse economic conditions in one or more of the geographies in which we offer our products have adversely affected our customers’ capital spending in those geographies and, as a result, our business. During challenging economic
times, and in tight credit markets, many customers may delay or reduce capital expenditures. This could result in reductions in revenue from our products, longer sales cycles, difficulties in collection of accounts receivable, slower adoption of new technologies and increased price competition. If global economic and market conditions, or economic conditions in the U.S., Europe or other key markets, deteriorate, we could experience a material and adverse effect on our business, results of operations, financial condition and cash flows. Additionally, since most of our international revenue is denominated in U.S. dollars, global economic and market conditions may impact currency exchange rates and cause our products to become relatively more expensive to customers in a particular country or region, which could lead to delayed or reduced capital spending in those countries or regions, thereby negatively impacting our business and financial condition.
In addition, industry consolidation has in the past constrained, and may in the future constrain or delay, capital spending by our customers. Further, 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 a result of these capitalvarious factors and potential issues related to customer spending, issues, we may not be able to maintain or increase our revenue in the future, and our operating results, financial condition and cash flows could be materially and adversely affected.
The markets in which we operate are intensely competitive.
The markets for our products are extremely competitive and have been characterized by rapid technological change and declining average sales prices in the past. Our competitors in our Video business segment include vertically
Large integrated system suppliers, such as Arris Group, Cisco Systems and Ericsson, with which we have historically competed in our Video business segment, announced sale and divestiture transactions in the last several months that impacted these companies’ video businesses: Arris announced a definitive agreement to be acquired by CommScope; Cisco Systems sold its video solutions group (now called Synamedia) to Permira, a private equity firm; and Ericsson completed the sale of a majority stake in its MediaKind video technology business to One Equity Partners, a private equity firm. In certain product lines, otherour competitors include companies includingsuch as ATEME and Elemental Technologies (an Amazon Web Services company). With respect to production and playout products, competitors include Evertz Microsystems, EVS, Grass Valley (a Belden brand) and Imagine Communications. In the OTT market, our competitors include end-to-end online video platforms such as Brightcove and Verizon Digital Media Services, who provide comprehensive OTT infrastructure solutions, some of which overlap with our products and services. Our competitors in our Cable EdgeAccess business include Arris, Casa Systems, Cisco Systems and Cisco Systems.Huawei Technologies.
ManyA number of our principal business competitors in both of our business segments are substantially larger and/or as a result of consolidation activitymay have become larger, and haveaccess to greater financial, technical, marketing and other resources than we have, and have been in operation longer than we have. Consolidation in the Video industry has led to the acquisition of a number of our historic competitors over the last several years. For example, Motorola Home, BigBand Networksyears by substantially larger companies and C-Cor were acquiredprivate equity firms. With respect to our Cable Access business, our competitors are also substantially larger than us, and the pending acquisition of Arris by Arris; NDS and Scientific Atlanta were acquired by Cisco Systems; Envivio and Tandberg Television were acquired by Ericsson; Elemental Technologies was acquired by Amazon; and Miranda Technologies and Grass Valley were acquired by Belden Inc.CommScope will create a significantly larger combined business.
In addition, some of our larger competitors have more long-standing and established relationships with domestic and foreign customers. Many of these large enterprises are in a better position to withstand any significant reduction in capital spending by customers in our markets. They often have broader product lines and market focus, and may not be as susceptible to downturns in a particular market. These competitors may also be able to bundle their products together to meet the needs of a particular customer, and may be capable of delivering more complete solutions than we are able to provide. To the extent large enterprises that currently do not compete directly with us choose to enter our markets by acquisition or otherwise, competition would likely intensify.
Further, some of our competitors that have greater financial resources have offered, and in the future may offer, their products at lower prices than we offer for our competing products or on more attractive financing or payment terms, which has in the past caused, and may in the future cause, us to lose sales opportunities and the resulting revenue or to reduce our prices in response to that competition. Also, some competitors that are smaller than we are have engaged in, and may continue to engage in, aggressive price competition in order to gain customer traction and market share. Reductions in prices for any of our products could materially and adversely affect our operating margins and revenue.
Additionally, certain customers and potential customers have developed, and may continue to develop, their own solutions that may cause such customers or potential customers to not consider our product offerings or to displace our installed products with their own solutions. The growing availability of open source codecs and related software, as well as new server chipsets that incorporate encoding technology, has, in certain respects, lowered the barriers to entry for the video processing industry. The development of solutions by potential and existing customers and the reduction of the barriers to entry to enter the video processing industry could result in increased competition and adversely affect our results of operations and business.
If any of our competitors’ products or technologies were to become the industry standard, our business could be seriously harmed. If our competitors are successful in bringing their products to market earlier than us, or if these products are more technologically capable than ours, our revenue could be materially and adversely affected.
We need to develop and introduce new and enhanced products in a timely manner to meet the needs of our customers and to remain competitive.
All of the markets we address are characterized by continuing technological advancement, changes in customer requirements and evolving industry standards. To compete successfully, we must continually design, develop, manufacture and sell new or enhanced products that provide increasingly higher levels of performance and reliability and meet our customers changing needs. However, we may not be successful in those efforts if, among other things, our products:
• are not cost effective;
• are not brought to market in a timely manner;
• are not in accordance with evolving industry standards;
• fail to meet market acceptance or customer requirements; or
• are ahead of the needs of their markets.
We are currently developing and marketing products based on the latest video compression standards, such as HEVC, which provides significantly greater compression efficiency, thereby making more bandwidth available to operators. At the same time, we continue to devote development resources to enhance the existing AVC/H.264 compression of our products, which many of our customers continue to require. There can be no assurance that these efforts will be successful in the near future, or at all, or that our competitors will not take significant market share in encoding or transcoding.
We continue to focus our development efforts on key product solutions in our Video and Cable EdgeAccess businesses. Our VOS solution is a software-based, cloud-enabled platform that unifies the entire media processing chain, from ingest to delivery. We have launched a number of VOS-based product solutions and services, including Electra XVM,our VOS CloudCluster and VOS360.VOS360 SaaS solutions, and continue to develop and expand the capabilities of our VOS software platform. In our Cable EdgeAccess business, we have launched and continue to develop our CableOS software-based CCAP systems, and we continue to develop, market and sell our NSG edgeQAMcable access solutions.
Many of these products and initiatives are intended to integrate existing and new features and functions in response to shifts in customer demands in the relevant market, as well as to general technology trends (such as virtualized and cloud-based computing, and integrated QAM and CMTS functionality in CCAP-based products) that we believe will significantly impact our industry. The success of these significant and costly development efforts will be predicated, for certain products and initiatives, on the timing of market adoption of the new standards on which the resulting products are based, and for other products, the timing of customer adoption of our products and solutions, as well as our ability to timely develop the features and capabilities of our products and solutions. If new standards or some of our new products are adopted later than we predict or not adopted at all, or if adoption occurs earlier than we are able to deliver the applicable products or functionality, we risk spending significant research and development time and dollars on products or features that may never achieve market acceptance or that miss the customer demand window and thus do not produce the revenue that a timely introduction would have likely produced.
If we fail to develop and market new and enhanced products on a timely basis, our operating results, financial condition and cash flows could be materially and adversely affected.
Our CCAP-basedsoftware-based cable access product initiatives expose us to certain technology transition risks that may adversely impact our operating results, financial condition and cash flows.
In the last few years, the cable industry has begun to develop and promulgate the CCAP architecture for next-generation cable edge solutions, which combines edge QAM and CMTS functions in a single system in order to combine resources for video and data delivery. We believe our CableOS software-based CCAP systems, available as either acable access solutions, supporting centralized, or distributed remoteRemote PHY solution,or
hybrid configurations, will significantly reduce cable headend costs and increase operational efficiency, and are an important step in cable operators’ transition to all-IP networks. If we are unsuccessful in developing these capabilitiesand deploying our cable access solutions in a timely manner, or are otherwise delayed in making such capabilitiesour solutions available to our customers, our business may be adversely impacted, particularly if our competitors develop and market fully compliantsimilar products and solutions before we do.
We believe CCAP-based systemssoftware-based cable access solutions will, over time, replace and make obsolete current cable edge-QAM solutions, including our cable edge QAM products, as well as current CMTS solutions, which is a market our products have previouslyhistorically not addressed.addressed, as well as cable edge-QAM products. If demand for our CCAP systemssoftware-based cable access solutions is weaker than expected, or sales of our CCAP-based systems do not adequately
offset the expected decline in demand for our non-CCAP cable edge products, or the decline in demand for our non-CCAP cable edge products is more rapid and precipitous than expected,, our near and long-term operating results, financial condition and cash flows could be adversely impacted. Further, in September 2016 we granted Comcast a warrant (the “Warrant”) to purchase shares of our common stock to further incentivize them to purchase our products and adopt our technologies, particularly our CableOS software-based CCAPcable access solution. If Comcast does not adoptdeploys our CableOS system, or does sosolution in its networks more slowly than we anticipate or at a scale below our expectations, we may be unable to fully realize the anticipated benefits of our relationship with Comcast and our business and operating results, financial condition and cash flows could be materially and adversely effected.affected. Moreover, if competitors adapt new cable industry technology standards into competing cable access solutions faster than we do, or promulgate a new or competitive architecture for next-generation cable edgeaccess solutions is promulgated that renders our CCAP-based systemsCableOS solution obsolete, our business may be adversely impacted.
The sales cycle for our CableOS solutions tends to be long. For cable operators, upgrading or expanding network infrastructure is complex and expensive, and investing in a CableOS solution is a significant strategic decision that may require considerable time to evaluate, test and qualify. Potential customers need to ensure our CableOS solution will interoperate with the various components of its existing network infrastructure, including third-party equipment, servers and software. In addition, since we are a relatively new entrant into the CMTS market, we need to demonstrate significant performance, functionality and/or cost advantages with our CableOS solutions that outweigh customer switching costs. If sales cycles are significantly longer than anticipated or we are otherwise unsuccessful in growing our CableOS sales, our operating results, financial condition and cash flows could be materially and adversely affected.
Our future growth depends on market acceptance of several broadband services, on the adoption of new broadband technologies, and on several other broadband industry trends.
Future demand for many of our products will depend significantly on the growing market acceptance of emerging broadband services, including digital video, VOD, Ultra HD, IP video services (particularly streaming to tablet computers, connected TVs and mobile devices) and very high-speed data services. The market demand for such emerging services is rapidly growing, with many custom or proprietary systems in use, which increases the challenge of delivering interoperable products intended to address the requirements of such services.
The effective delivery of these services will depend, in part, on a variety of new network architectures, standards and devices, such as:
• the adoption of cloud-native media processing architectures;
• the adoption of advanced video compression standards, such as next generation H.264 compression and HEVC;
• the CCAP architecture;adoption of our cable access solutions;
• fiber to the premises, or FTTP, networks designed to facilitate the delivery of video services by telcos;
• the greater use of protocols such as IP;
• the further adoption of bandwidth-optimization techniques, such as DOCSIS 3.0 and DOCSIS 3.1;3.1 and associated specifications; and
• the introduction of new consumer devices, such as advanced set-top boxes, DVRs and networkcloud DVRs, connected TVs, tablet computers, and a variety of smart phone mobile devices.
If adoption of these emerging services and/or technologies is not as widespread or as rapid as we expect, or if we are unable to develop new products based on these technologies on a timely basis, our operating results, financial condition and cash flows could be materially and adversely affected.
Furthermore, other technological, industry and regulatory trends and requirements may affect the growth of our business.
These trends and requirements include the following:
• convergence, whereby network operators bundle video, voice and data services to consumers, including mobile delivery options;
• the increasing availability of traditional broadcast video content and video-on-demand on the Internet;
• adoption of high-bandwidth technology, such as DOCSIS 3.x, next generation LTE and FTTP;
• the use of digital video by businesses, governments and educational institutions;
• efforts by regulators and governments in the U.S. and internationally to encourage the adoption of broadband and digital technologies, as well as to regulate broadband access and delivery;
• consumer interest in higher resolution video such as Ultra HD or retina-display technologies on mobile devices;
• the need to develop partnerships with other companies involved in video infrastructure workflow and broadband services;
• the continued adoption of the television viewing behaviors of consumers in developed economies by the growing middle class across emerging economies;
• the extent and nature of regulatory attitudes towards issues such as network neutrality, competition between operators, access by third parties to networks of other operators, local franchising requirements for telcos to offer video, and other new services, such as mobile video; and
• the outcome of disputes and negotiations between content owners and service providers regarding rights of service providers to store and distribute recorded broadcast content, which outcomes may drive adoption of one technology over another in some cases.
If we fail to recognize and respond to these trends, by timely developing products, features and services required by these trends, we are likely to lose revenue opportunities and our operating results, financial condition and cash flows could be materially and adversely affected.
We depend significantly on our international revenue and are subject to the risks associated with international operations, including those of our resellers, contract manufacturers and outsourcing partners, which may negatively affect our operating results.
Revenue derived from customers outside of the U.S. in the fiscal years ended December 31, 2016, 20152018, 2017 and 20142016 represented approximately 58%55%, 53%63% and 52%58% of our revenue, respectively. Although no assurance can be given with respect to international sales growth in any one or more regions, we expect that international revenue will likely continue to represent, from year to year, a majority, and potentially increasing, percentage of our annual revenue for the foreseeable future. A significant percentage of our revenue is generated from sales to resellers, value-added resellers (“VARs”) and systems integrators, particularly in emerging market countries. Furthermore, a significant percentagethe majority of our employees are based in our international offices and locations, and most of our contract manufacturing occurs outside of the U.S. In addition, we outsource a portion of our research and development activities to certain third-party partners with development centers located in different countries, particularly Ukraine and India.
Our international operations, the international operations of our resellers, contract manufacturers and outsourcing partners, and our efforts to maintain and increase revenue in international markets are subject to a number of risks, which are generally greater with respect to emerging market countries, including the following:
• growth and stability of the economy in one or more international regions;
• fluctuations in currency exchange rates;
• changes in foreign government regulations and telecommunications standards;
• import and export license requirements, tariffs, taxes, economic sanctions, contractual limitations and other trade barriers;
• our significant reliance on resellers and others to purchase and resell our products and solutions, particularly in emerging market countries;
• availability of credit, particularly in emerging market countries;
• longer collection periods and greater difficulty in enforcing contracts and collecting accounts receivable, especially from smaller customers and resellers, particularly in emerging market countries;
• compliance with the U.S. Foreign Corrupt Practices Act (the “FCPA”), the U.K. Bribery Act and/or similar anti-corruption and anti-bribery laws, particularly in emerging market countries;
• the burden of complying with a wide variety of foreign laws, treaties and technical standards;
• fulfilling “country of origin” requirements for our products for certain customers;
• difficulty in staffing and managing foreign operations;
• business and operational disruptions or delays caused by political, social and economic instability and unrest, including risks related to terrorist activity, particularly in emerging market countries (e.g., recent significant civil, political and economic disturbances in Ukraine);
• changes in economic policies by foreign governments, including the imposition and potential continued expansion of economic sanctions by the U.S. and the European Union on the Russian Federation;
• changes in diplomatic and trade relationships, including the effectsimposition of new trade restrictions, trade protection measures, import or export requirements, trade embargoes and other trade barriers, including those imposed by the U.S. against China;
• any resulting negative economic impact ofimpacts resulting from the recentpolitical environment in the U.S. election or the U.K.’s referendum to exit the European Union; and
• business and economic disruptions and delays caused by outbreaks of disease, epidemics and potential pandemics.
We have certain international customers who are billed in their local currency, primarily the Euro, British pound and Japanese yen, which subjects us to foreign currency risk. In addition, a portion of our operating expenses relating to the cost of certain international employees, are denominated in foreign currencies, primarily the Euro, Israeli shekel, British pound, Euro, Singapore dollar, Chinese yuan and Indian rupee, althoughrupee. Although we do hedge against the Euro, British pound, Israeli shekel. Gainsshekel and Japanese yen, gains and losses on the conversion to U.S. dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in our operating results. Furthermore, payment cycles for international customers are typically longer than those for customers in the U.S. Unpredictable payment cycles could cause us to fail to meet or exceed the expectations of security analysts and investors for any given period.
Most of our international revenue is denominated in U.S. dollars, and fluctuations in currency exchange rates could cause our products to become relatively more expensive to customers in a particular country or region, leading to a reduction in revenue or profitability from sales in that country or region. The potential negative impact of a strong U.S. dollar on our business may be exacerbated by the significant devaluation of a number of foreign currencies. Also, if the U.S. dollar were to weaken against many foreign currencies, there can be no assurance that a weaker dollar would lead to growth in capitalcustomer spending in foreign markets.
Our operations outside the U.S. also require us to comply with a number of U.S. and international regulations that prohibit improper payments or offers of payments to foreign governments and their officials and political parties for corrupt purposes. For example, our operations in countries outside the U.S. are subject to the FCPA and similar laws, including the U.K. Bribery Act. Our activities in certain emerging countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or channel partners that could be in violation of various anti-corruption laws, even though these parties may not be under our control. Under the FCPA and U.K. Bribery Act, companies may be held liable for the corrupt actions taken by their directors, officers, employees, channel partners, sales agents, consultants, or other strategic or local
partners or representatives. We have internal control policies and procedures with respect to FCPA compliance, have implemented FCPA training and compliance programs for our employees, and include in our agreements with resellers a requirement that those parties comply with the FCPA. However, we cannot provide assurances that our policies, procedures and programs will prevent violations of the FCPA or similar laws by our employees or agents, particularly in emerging market countries, and as we expand our international operations. Any such violation, even if prohibited by our policies, could result in criminal or civil sanctions against us.
The effect of one or more of these international risks could have a material and adverse effect on our business, financial condition, operating results and cash flows.
We purchase several key components, subassemblies and modules used in the manufacture or integration of our products from sole or limited sources, and we rely on contract manufacturers and other subcontractors.
Many components, subassemblies and modules necessary for the manufacture or integration of our products are obtained from a sole supplier or a limited group of suppliers. For example, we depend on two suppliers for certain video encoding chips which are incorporated into several products. Our reliance on sole or limited suppliers, particularly foreign suppliers, and our reliance on contractors for manufacturing and installation of our products, involves several risks, including a potential inability to obtain an adequate supply of required components, subassemblies or modules; reduced control over costs, quality and timely delivery of components, subassemblies or modules; supplier discontinuation of components, subassemblies or modules we require; and timely installation of products. In addition, our financial results may be impacted by tariffs imposed by the resultU.S. on goods from other countries and tariffs imposed by other countries on U.S. goods, including the tariffs proposed by the U.S. government on various imports from China and by the Chinese government on certain U.S. goods, the scope and duration of the recent presidential election in the United States has created uncertainty regarding trade policies. Specifically, the new administration has suggested imposing tariffs or other
restrictions on foreign imports.which, if implemented, remain uncertain. If any such tariffs are imposed on products or components that we import, including those obtained from a sole supplier or a limited group of suppliers, we could experience reduced revenues or may have to raise our prices, either of which could have an adverse effect on our business, financial condition and operating results.
These risks could be heightened during a substantial economic slowdown, because our suppliers and subcontractors are more likely to experience adverse changes in their financial condition and operations during such a period. Further, these risks could materially and adversely affect our business if one of our sole sources, or a sole source of one of our suppliers or contract manufacturers, is adversely affected by a natural disaster. While we expend resources to qualify additional component sources, consolidation of suppliers and the small number of viable alternatives have limited the results of these efforts. Managing our supplier and contractor relationships is particularly difficult during time periods in which we introduce new products and during time periods in which demand for our products is increasing, especially if demand increases more quickly than we expect.
Plexus Services Corp., which manufactures our products at its facilities in Malaysia, currently serves as our primary contract manufacturer, and currently provides us with a substantial majority, by dollar amount, of the products that we purchase from our contract manufacturers. Most of the products manufactured by our French and Israeli operations are outsourced to another third-party manufacturer in Israel.France and Israel, respectively. From time to time we assess our relationship with our contract manufacturers, and we do not generally maintain long-term agreements with any of our suppliers or contract manufacturers. Our agreement with Plexus has automatic annual renewals, unless prior notice is given by either party, and has been automatically renewed for a term expiring in October 2017.2019.
Difficulties in managing relationships with any of our current contract manufacturers, particularly Plexus, that manufacture our products off-shore, or any of our suppliers of key components, subassemblies and modules used in our products, could impede our ability to meet our customers’ requirements and adversely affect our operating results. An inability to obtain adequate and timely deliveries of our products or any materials used in our products, or the inability of any of our contract manufacturers to scale their production to meet demand, or any other circumstance that would require us to seek alternative sources of supply, could negatively affect our ability to ship our products on a timely basis, which could damage relationships with current and prospective customers and harm our business and materially and adversely affect our revenue and other operating results. Furthermore, if we fail to meet customers’ supply expectations, our revenue would be adversely affected and we may lose sales opportunities, both short and long term, which could materially and adversely affect our business and our operating results, financial condition and cash flows. Increases, from time to time, in demand on our suppliers and subcontractors from our customers or from other parties have, on occasion, caused delays in the availability of certain components and products. In response, we may increase our inventories of certain components and products and expedite shipments of our products when necessary. These actions could increase our costs and could also increase our risk of holding obsolete or excess inventory, which, despite our use of a demand order fulfillment model, could materially and adversely affect our business, operating results, financial condition and cash flows.
The loss of one or more of our key customers, a failure to continue diversifying our customer base, or a decrease in the number of larger transactions could harm our business and our operating results.
Historically, a significant portion of our revenue has been derived from relatively few customers, due in part to the consolidation of the ownership of cable television and direct broadcast satellite system companies.media customers. Sales to our top 10 customers in the fiscal years ended December 31, 2016, 20152018, 2017 and 20142016 accounted for approximately 28%37%, 32%24% and 35%28% of revenue, respectively. Although we have broadened our customer base by further penetrating new markets and expanding internationally, we expect to see continuing industry consolidation and customer concentration.
In the fiscal year ended December 31, 2018, Comcast accounted for 15% of our net revenue. In the fiscal year ended December 31, 2017 and 2016, no single customer accounted for more than 10% of our net revenue. In the fiscal years ended December 31, 2015 and 2014, revenue from Comcast accounted for approximately 12% and 16% of our revenue, respectively, and furtherFurther consolidation in the cable industry could lead to additional revenue concentration for us. The loss of any significant customer, or any material reduction in orders from any other significant customer, or our failure to qualify our new products with any significant customer could materially and adversely affect, either long term or in a particular quarter, our operating results, financial condition and cash flows. Further, if Comcast Cable does not continue to increase its adoption of our technologies or purchasesdeployment of our products and solutions in connection with the Warrant we issued to them in September 2016, or does so more slowly or at a scale that is lower than we anticipate, we may be unable to realize the anticipated benefits of the Warrant and our operating results, financial condition and cash flows could be materially and adversely effected.
In addition, we are involved in most quarters in one or more relatively large individual transactions. A decrease in the number of the relatively larger individual transactions in which we are involved in any quarter could materially and adversely affect our operating results for that quarter.
As a result of these and other factors, we may be unable to increase our revenues from some or all of the markets we address, or to do so profitably, and any failure to increase revenues and profits from these customers could materially and adversely affect our operating results, financial condition and cash flows.
We rely on resellers, value-added resellers and systems integrators for a significant portion of our revenue, and disruptions to, or our failure to develop and manage our relationships with these customers or the processes and procedures that support them could adversely affect our business.
We generate a significant percentage of our revenue through sales to resellers, VARs and systems integrators that assist us with fulfillment or installation obligations. We expect that these sales will continue to generate a significant percentage of our revenue in the future. Accordingly, our future success is highly dependent upon establishing and maintaining successful relationships with a variety of channel partners.
We generally have no long-term contracts or minimum purchase commitments with any of our reseller, VAR or system integrator customers, and our contracts with these parties do not prohibit them from purchasing or offering products or services that compete with ours. Our competitors may provide incentives to any of our reseller, VAR or systems integrator customers to favor their products or, in effect, to prevent or reduce sales of our products. Any of our reseller, VAR or systems integrator customers may independently choose not to purchase or offer our products. Many of our resellers, and some of our VARs and system integrators are small, are based in a variety of international locations, and may have relatively unsophisticated processes and limited financial resources to conduct their business. Any significant disruption of our sales to these customers, including as a result of the inability or unwillingness of these customers to continue purchasing our products, or their failure to properly manage their business with respect to the purchase of, and payment for, our products, or their ability to comply with our policies and procedures as well as applicable laws, could materially and adversely affect our business, operating results, financial condition and cash flows. In addition, our failure to continue to establish or maintain successful relationships with reseller, VAR and systems integrator customers could likewise materially and adversely affect our business, operating results, financial condition and cash flows.
We have made, and may continue to make, acquisitions, and any acquisition could disrupt our operations, cause dilution to our stockholders and materially and adversely affect our business, operating results, cash flows and financial condition.
As part of our business strategy, from time to time we have acquired, and we may continue to acquire, businesses, technologies, assets and product lines that we believe complement or expand our existing business. For example, onin February 29, 2016, we announced the closing of our acquisition of Thomson Video Networks (“TVN”),TVN, which is headquartered in Rennes, France. Acquisitions involve numerous risks, including the following:
• unanticipated costs or delays associated with an acquisition;
• difficulties in the assimilation and integration of acquired operations, technologies and/or products;
• potential disruption of our business and the diversion of management’s attention from the regular operations of the business during the acquisition process;
• the challenges of managing a larger and more geographically widespread operation and product portfolio after the closing of the acquisition;
• potential adverse effects on new and existing business relationships with suppliers, contract manufacturers, resellers, partners and customers;
• compliance with regulatory requirements, such as local employment regulations and organized labor in France;
• risks associated with entering markets in which we may have no or limited prior experience;
• the potential loss of key employees of acquired businesses and our own business as a result of integration;
• difficulties in bringing acquired products and businesses into compliance with applicable legal requirements in jurisdictions in which we operate and sell products;
• impact of known potential liabilities or unknown liabilities, including litigation and infringement claims, associated with companies we acquire;
• substantial charges for acquisition costs or for the amortization of certain purchased intangible assets, deferred stock compensation or similar items;
• substantial impairments to goodwill or intangible assets in the event that an acquisition proves to be less valuable than the price we paid for it;
• difficulties in establishing and maintaining uniform financial and other standards, controls, procedures and policies;
• delays in realizing, or failure to realize, the anticipated benefits of an acquisition; and
• the possibility that any acquisition may be viewed negatively by our customers or investors or the financial markets.
Competition within our industry for acquisitions of businesses, technologies, assets and product lines has been, and is likely to continue to be, intense. As such, even if we are able to identify an acquisition that we would like to consummate, we may not be able to complete the acquisition on commercially reasonable terms or because the target chooses to be acquired by another company. Furthermore, in the event that we are able to identify and consummate any future acquisitions, we may, in each of those acquisitions:
• issue equity securities which would dilute current stockholders’ percentage ownership;
• incur substantial debt to finance the acquisition or assume substantial debt in the acquisition;
• incur significant acquisition-related expenses;
• assume substantial liabilities, contingent or otherwise; or
• expend significant cash.
These financing activities or expenditures could materially and adversely affect our operating results, cash flows and financial condition or the price of our common stock. Alternatively, due to difficulties in the capital or credit markets at the time, we may be unable to secure capital necessary to complete an acquisition on reasonable terms, or at all. Moreover, even if we were to obtain benefits from acquisitions in the form of increased revenue and earnings per share, there may be a delay between the time the expenses associated with an acquisition are incurred and the time we recognize such benefits.
In addition to the risks outlined above, if we are unable to continue to achieve the objectives of our TVN acquisition, the anticipated benefits and potential synergies of the acquisition may not be realized fully or at all or may take longer to realize than expected. Any failure to timely realize these anticipated benefits would have a material adverse effect on our business, operating results and financial condition. Further, if we are unable to successfully receive payment of any significant portion of TVN’s existing French R&D tax credit receivables from the French tax authority as expected, or are unable to successfully apply for or otherwise obtain the financial benefit of new French R&D tax credits in future years, our ability to achieve the anticipated benefits of the acquisition as well as our business, operating results and financial condition could be adversely affected.
As of December 31, 2016,2018, we had approximately $237$241 million of goodwill recorded on our balance sheet associated with prior acquisitions. In the event we determine that our goodwill is impaired, we would be required to write down all or a portion of such goodwill, which could result in a material non-cash charge to our results of operations in the period in which such write-down occurs.
If we are unable to successfully address one or more of these risks, our business, operating results, financial condition and cash flows could be materially and adversely affected.
We may not be able to effectively manage our operations.
WeIn recent years, we have grown significantly, principally through acquisitions, and expanded our international operations.operations significantly. For example, upon the closing of our acquisition of TVN on February 29, 2016, we added 438 employees, most of whom are based in France.
As of December 31, 2016,2018, we had 869787 employees in our international operations, representing approximately 63%68% of our worldwide workforce. Our ability to manage our business effectively in the future, including with respect to any future growth, our operation as both a hardware and increasingly software-centric business, the integration of any acquisition efforts such as
our recent acquisition of TVN, and the breadth of our international operations, will require us to train, motivate and manage our employees successfully, to attract and integrate new employees into our overall operations, to retain key employees and to continue to improve and evolve our operational, financial and management systems. There can be no assurance that we will be successful in any of these efforts, and our failure to effectively manage our operations could have a material and adverse effect on our business, operating results, cash flows and financial condition.
We face risks associated with having outsourced engineering resources located in Ukraine.
We outsource a portion of our research and development activities for both our Video and Cable Access business segments to a third-party partner with engineering resources located in Ukraine. Political, social and economic instability and unrest or violence in Ukraine, including the ongoing conflict with Russian-backed separatists or conflict with the Russian Federation directly, could cause disruptions to the business and operations of our outsourcing partner, which could slow or delay the development work our partner is undertaking for us. Instability, unrest or conflict could limit or prevent our employees from traveling to, from, or within Ukraine to direct and coordinate our outsourced engineering teams, or cause us to shift all or portions of the development work occurring in Ukraine to other locations or countries. The resulting delays could negatively impact our product development efforts, operating results and our business.
In order to manage our growth, we must be successful in addressing management succession issues and attracting and retaining qualified personnel.
Our future success will depend, to a significant extent, on the ability of our management to operate effectively, both individually and as a group. We must successfully manage transition and replacement issues that may result from the departure or retirement of members of our executive management. We cannot provide assurances that changes of management personnel in the future would not cause disruption to operations or customer relationships or a decline in our operating results.
We are also dependent on our ability to retain and motivate our existing highly qualified personnel, in addition to attracting new highly qualified personnel. Competition for qualified management, technical and other personnel is often intense, particularly in Silicon Valley, Israel and Hong Kong where we have significant research and development activities, and we may not be successful in attracting and retaining such personnel. Competitors and others have in the past attempted, and are likely in the future to attempt, to recruit our employees. While our employees are required to sign standard agreements concerning confidentiality, non-solicitation and ownership of inventions, we generally do not have non-competition agreements with our personnel. The loss of the services of any of our key personnel, the inability to attract or retain highly qualified personnel in the future or delays in hiring such personnel, particularly senior management and engineers and other technical personnel, could negatively affect our business and operating results. Furthermore, a certain portion of our personnel in the U.S. is comprised of foreign nationals whose ability to work for us depends on obtaining the necessary visas. Our ability to hire and retain foreign nationals in the U.S., and their ability to remain and work in the U.S., is affected by various laws and regulations,
including limitations on the availability of visas. Changes in U.S. laws or regulations affecting the availability of visas may adversely affect our ability to hire or retain key personnel and as a result may impair our operations.
We face risks associated with having facilities and employees located in Israel.
As of December 31, 2016,2018, we maintained facilities in Israel with a total of 185168 employees, or approximately 13%14% of our worldwide workforce. Our employees in Israel engage in a number of activities, for both our Video and Cable EdgeAccess business segments, including research and development, product development, and supply chain management for certain product lines and sales activities.
As such, we are directly affected by the political, economic and military conditions affecting Israel. Any significant conflict involving Israel could have a direct effect on our business or that of our Israeli contract manufacturers, in the form of physical damage or injury, restrictions from traveling or reluctance to travel to from or within Israel by our Israeli and other employees or those of our subcontractors, or the loss of Israeli employees to active military duty. Most of our employees in Israel are currently obligated to perform annual reserve duty in the Israel Defense Forces, and approximately 10%11% of those employees were called for active military duty in 2016.2018. In the event that more of our employees are called to active duty, certain of our research and development activities may be significantly delayed and adversely affected. Further, the interruption or curtailment of trade between Israel and its trading partners, as a result of terrorist attacks or hostilities, conflicts between Israel and any other Middle Eastern country or organization, or any other cause, could significantly harm our business. Additionally, current or future tensions or conflicts in the Middle East could materially and adversely affect our business, operating results, financial condition and cash flows.
Our operating results are likely to fluctuate significantly and, as a result, may fail to meet or exceed the expectations of securities analysts or investors, causing our stock price to decline.
Our operating results have fluctuated in the past and are likely to continue to fluctuate in the future, on an annual and a quarterly basis, as a result of several factors, many of which are outside of our control. Some of the factors that may cause these fluctuations include:
• the level and timing of capital spending of our customers in the U.S., Europe and in other markets;
• economic and financial conditions specific to each of the cable, satellite and telco, and broadcast and media industries, as well as general economic and financial market conditions, including any stemming from an unstable political environment in the United States or abroad as well as those resulting from regulatory, trade or tax policy changes from the Trump administration;Tax Cuts and Jobs Act that was enacted in December 2017 (the “TCJA”);
• changes in market acceptance of and demand for our products or our customers’ services or products;
• the timing and amount of orders, especially from large individual transactions and transactions with our significant customers;
• the mix of our products sold and the effect it has on gross margins;
• the timing of revenue recognition, including revenue recognition on sales arrangements and from transactions with significant service and support components, which may span several quarters;
• our transition to a SaaS subscription model for our Video business, which may cause near-term declines in revenue;
• the timing of completion of our customers’ projects;
• the length of each customer product upgrade cycle and the volume of purchases during the cycle;
• competitive market conditions, including pricing actions by our competitors;
• the level and mix of our domestic and international revenue;
• new product introductions by our competitors or by us;
• uncertainty in both the U.K. and the European Union due to the U.K.’s referendum to exit the European Union, which could adversely affect our results, financial condition and prospects;
• changes in domestic and international regulatory environments affecting our business;
• the evaluation of new services, new standards and system architectures by our customers;
• the cost and timely availability to us of components, subassemblies and modules;
• the mix of our customer base, by industry and size, and sales channels;
• changes in our operating and extraordinary expenses;
• the timing of acquisitions and dispositions by us and the financial impact of such transactions;
• impairment of our goodwill and intangibles;
• the impact of litigation, such as related litigation expenses and settlement costs;
• write-downs of inventory and investments;
• changes in our effective federal tax rate, including as a result of changes in our valuation allowance against our deferred tax assets, and changes in our effective state tax rates, including as a result of apportionment;
• changes to tax rules related to the deferral of foreign earnings and compliance with foreign tax rules;
• the impact of applicable accounting guidance on accounting for uncertainty in income taxes that requires us to establish reserves for uncertain tax positions and accrue potential tax penalties and interest; and
• the impact of applicable accounting guidance on business combinations that requires us to record charges for certain acquisition related costs and expenses and generally to expense restructuring costs associated with a business combination subsequent to the acquisition date.
The timing of deployment of our products by our customers can be subject to a number of other risks, including the availability of skilled engineering and technical personnel, the availability of third-party equipment and services, our customers’ ability to negotiate and enter into rights agreements with video content owners that provide theour customers with the right to deliver certain video content, and our customers’ need for local franchise and licensing approvals.
We often recognize a substantial portion of our quarterly revenue in the last month of the 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 the timing of revenue, particularly from relatively large individual transactions, can cause significant fluctuations in operating results in a particular quarter.
As a result of these factors and other factors, our operating results in one or more future periods may fail to meet or exceed the expectations of securities analysts or investors. In that event, the trading price of our common stock would likely decline.
Fluctuations in our future effective tax rates could affect our future operating results, financial condition and cash flows.
We are required to periodically review our deferred tax assets and determine whether, based on available evidence, a valuation allowance is necessary. The realization of our deferred tax assets, which are predominantly in the U.S., is dependent upon the generation of sufficient U.S. and foreign taxable income in the future to offset these assets. Based on our evaluation, a history of operating losses in recent years has led to uncertainty with respect to our ability to realize certain of our net deferred tax assets, and as a result we recorded a net increase in valuation allowance of $18.3$0.9 million and $3.1$9.0 million in 20162018 and 2015,2017, respectively, against our U.S. net deferred tax assets. This increaseThe increases in valuation allowance wasin 2018 and 2017 were offset partially by the valuation allowance release of $8.4$1.5 million and $5.8 million, respectively. The releases of valuation allowance were associated with TVN.our foreign subsidiaries and a one-time benefit in 2017 of $2.6 million relating to the refund of alternative minimum tax credit carryforwards related to the TCJA.
The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. In the event we determine that it is appropriate to create a reserve or increase an existing reserve for any such potential liabilities, the amount of the additional reserve is charged as an expense in the period in which it is determined. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate tax assessment for the applicable period, a further charge to expense in the period such short fall is determined would result. Either such charge to expense could have a material and adverse effect on our operating results for the applicable period.
We continue to be in the process of expanding our international operations and staffing to better support our expansion into international markets. This expansion involves the implementation of an international structure that includes, among other things, an international support center in Europe, research and development cost sharing arrangements, and certain licenses and other contractual arrangements between us and our wholly-owned domestic and foreign subsidiaries. As a result of these changes, we anticipate that our consolidated pre-tax income will be subject to foreign tax at relatively lower tax rates when compared to the U.S. federal statutory tax rate and, as a consequence, our effective income tax rate is expected to be lower than the U.S. federal statutory rate.
Our future effective income tax rates could be adversely affected if tax authorities challenge our international tax structure or if the relative mix of U.S. and international income changes for any reason. Accordingly, there can be no assurance that our income tax rate will be less than the U.S. federal statutory rate in future periods.
The United States recently passed a comprehensive tax reform bill that could adversely affect our financial performance.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017, or the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code. The changes include, but are not limited to, reducing the U.S. federal corporate tax rate from 35% to 21%, imposing a mandatory one-time transition tax on certain unrepatriated earnings of foreign subsidiaries, eliminating the corporate alternative minimum tax, or AMT, and a requirement to pay a minimum tax on foreign earnings for tax years beginning after December 31, 2017. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain, and our financial performance could be adversely affected. In addition, it is uncertain if, and to what extent, various states will conform to the new tax law and foreign countries will react by adopting tax legislation or taking other actions that could adversely affect our business.
We or our customers may face intellectual property infringement claims from third parties.
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. In particular, leading companies in the telecommunications industry have extensive patent portfolios. Also, patent infringement claims and litigation by entities that purchase or control patents, but do not produce goods or services covered by the claims of such patents (so-called “non-practicing entities” or “NPEs”), have increased rapidly over the last decade or so. From time to time, third parties, including NPEs, have asserted, and may assert in the future, patent, copyright, trademark and other intellectual property rights against us or our customers. Our suppliers and their customers, including us, may have similar claims asserted against them. A number of third parties, including companies with greater financial and other resources than us, have asserted patent rights to technologies that are important to us.
Any intellectual property litigation, regardless of its outcome, could result in substantial expense and significant diversion of the efforts of our management and technical personnel. An adverse determination in any such proceeding could subject us to significant liabilities and temporary or permanent injunctions and require us to seek licenses from third parties or pay royalties that may be substantial. Furthermore, necessary licenses may not be available on terms satisfactory to us, or at all. An unfavorable outcome on any such litigation matter could require that we pay substantial damages, could require that we pay ongoing royalty payments, or could prohibit us from selling certain of our products. Any such outcome could have a material and adverse effect on our business, operating results, financial condition and cash flows.
Our suppliers and customers may have intellectual property claims relating to our products asserted against them. We have agreed to indemnify some of our suppliers and most of our customers for patent infringement relating to our products. The scope of this indemnity varies, but, in some instances, includes indemnification for damages and expenses (including reasonable attorney’s fees) incurred by the supplier or customer in connection with such claims. If a supplier or a customer seeks to enforce a claim for indemnification against us, we could incur significant costs defending such claim, the underlying claim or both. An adverse determination in either such proceeding could subject us to significant liabilities and have a material and adverse effect on our operating results, cash flows and financial condition.
We may be the subject of litigation which, if adversely determined, could harm our business and operating results.
We may be subject to claims arising in the normal course of business. The costs of defending any litigation, whether in cash expenses or in management time, could harm our business and materially and adversely affect our operating results and cash flows. An unfavorable outcome on any litigation matter could require that we pay substantial damages, or, in connection with any intellectual property infringement claims, could require that we pay ongoing royalty payments or prohibit us from
selling certain of our products. In addition, we may decide to settle any litigation, which could cause us to incur significant settlement costs. A settlement or an unfavorable outcome on any litigation matter could have a material and adverse effect on our business, operating results, financial condition and cash flows.
We may sell one or more of our product lines, from time to time, as a result of our evaluation of our products and markets, and any such divestiture could adversely affect our continuing business and our expenses, revenues, results of operation, cash flows and financial position.
We periodically evaluate our various product lines and may, as a result, consider the divestiture of one or more of those product lines. For example,We have sold product lines in February 2013, we entered into an Asset Purchase Agreement with Aurora Networks pursuant to which we agreed to sell our cable access HFC Business for $46 million in cash. Any suchthe past, and any prior or future divestiture could adversely affect our continuing business and expenses, revenues, results of operations, cash flows and financial position.
Divestitures of product lines have inherent risks, including the expense of selling the product line, the possibility that any anticipated sale will not occur, delays in closing any sale, the risk of lower-than-expected proceeds from the sale of the divested business, unexpected costs associated with the separation of the business to be sold from the seller’s information technology and other operating systems, and potential post-closing claims for indemnification or breach of transition services obligations of the seller. Expected cost savings, which are offset by revenue losses from divested businesses, may also be difficult to achieve or maximize due to the seller’s fixed cost structure, and a seller may experience varying success in reducing fixed costs or transferring liabilities previously associated with the divested business.
In order to manage our growth, we must be successful in addressing management succession issues and attracting and retaining qualified personnel.
Our future success will depend, to a significant extent, on the ability of our management to operate effectively, both individually and as a group. We must successfully manage transition and replacement issues that may result from the departure or retirement of members of our executive management. We cannot provide assurances that changes of management personnel in the future would not cause disruption to operations or customer relationships or a decline in our operating results.
We are also dependent on our ability to retain and motivate our existing highly qualified personnel, in addition to attracting new highly qualified personnel. Competition for qualified management, technical and other personnel is often intense, and we may not be successful in attracting and retaining such personnel. Competitors and others have in the past attempted, and are likely in the future to attempt, to recruit our employees. While our employees are required to sign standard agreements concerning confidentiality and ownership of inventions, we generally do not have employment contracts or non-competition agreements with any of our personnel. The loss of the services of any of our key personnel, the inability to attract or retain highly qualified personnel in the future or delays in hiring such personnel, particularly senior management and engineers and other technical personnel, could negatively affect our business and operating results. Furthermore, a certain portion of our personnel is comprised of foreign nationals whose ability to work for us depends on obtaining the necessary visas. Our ability to hire and retain foreign nationals, and their ability to remain and work in the United States, is affected by various laws and regulations, including limitations on the availability of visas. Changes in the laws or regulations affecting the availability of visas may adversely affect our ability to hire or retain key personnel and as a result may impair our operations.
We could be negatively affected as a result of a future proxy contest and the actions of activist stockholders.
If a proxy contest with respect to election of our directors is initiated in the future, or if other activist stockholder activities occur, our business could be adversely affected because:
• responding to a proxy contest and other actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees;
• perceived uncertainties as to our future direction caused by activist activities may result in the loss of potential business opportunities, and may make it more difficult to attract and retain qualified personnel and business partners; and
• if individuals are elected to our Board of Directors (the “Board”) with a specific agenda, it may adversely affect our ability to effectively and timely implement our strategic plans.
Our failure to adequately protect our proprietary rights and data may adversely affect us.
At December 31, 2016,2018, we held 7181 issued U.S. patents and 4453 issued foreign patents, and had 7891 patent applications pending. Although we attempt to protect our intellectual property rights through patents, trademarks, copyrights, licensing arrangements, maintaining certain technology as trade secrets and other measures, we can give no assurances that any patent, trademark, copyright or other intellectual property rights owned by us will not be invalidated, circumvented or challenged, that such intellectual property rights will provide competitive advantages to us, or that any of our pending or future patent applications will be issued with the scope of the claims sought by us, if at all. We can give no assurances that others will not develop technologies that are similar or superior to our technologies, duplicate our technologies or design around the patents that we own. In addition, effective patent, copyright and trade secret protection may be unavailable or limited in certain foreign countries in which we do business or may do business in the future.
We generallymay enter into confidentiality or license agreements with our employees, consultants, and vendors and our customers, as needed, and generally limit access to, and distribution of, our proprietary information. Nevertheless, we cannot provide assurances that the steps taken by us will prevent misappropriation of our technology. In addition, we have taken in the past, and may take in the future, legal action to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of management time and other resources, and could materially and adversely affect our business, operating results, financial condition and cash flows.
Recently reported hacking attacks on government and commercial computer systems, particularly attacks sponsored by foreign governments or enterprises, raise the risks that such an attack may compromise, in a material respect, one or more
Our products include third-party technology and intellectual property, and our inability to acquire new technologies or use third-party technology in the future could harm our business.
In order to successfully develop and market certain of our planned products, we may be required to enter into technology development or licensing agreements with third parties. Although companies with technology useful to us are often willing to enter into technology development or licensing agreements with respect to such technology, we cannot provide assurances that such agreements may be negotiated on commercially reasonable terms, or at all. The failure to enter, or a delay in entering, into such technology development or licensing agreements, when necessary or desirable, could limit our ability to develop and market new products and could materially and adversely affect our business.
We incorporate certain third-party technologies, including software programs, into our products, and, as noted, intend to utilize additional third-party technologies in the future. In addition, the technologies that we license may not operate properly or as specified, and we may not be able to secure alternatives in a timely manner, either of which could harm our business. We could face delays in product releases until alternative technology can be identified, licensed or developed, and integrated into our products, if we are able to do so at all. These delays, or a failure to secure or develop adequate technology, could materially and adversely affect our business, operating results, financial condition and cash flows.
Our use of open source software in some of our products may expose us to certain risks.
Some of our products contain software modules licensed for use from third-party authors under open source licenses. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary software to the public. This could allow our competitors to create similar products with lower development effort and in less time and ultimately could result in a loss of product sales for us.
Although we monitor our use of open source closely, it is possible our past, present or future use of open source has triggered or may trigger the foregoing requirements. Furthermore, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In such event, we could be required to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis, any of which could materially and adversely affect our operating results, financial condition and cash flows.
We are subject to import and export control and trade and economic sanction laws and regulations that could subject us to liability or impair our ability to compete in international markets.
Our products are subject to U.S. export control laws, and may be exported outside the U.S. only with the required export license or through an export license exception, in most cases because we incorporate encryption technology into certain of our products. We are also subject to U.S. trade and economic sanction regulations which include prohibitions on the sale or supply of certain products and services to U.S. embargoed or sanctioned countries, governments, persons and entities. In addition, various countries regulate the import of certain technology and have enacted laws that could limit our ability to distribute our products, or could limit our customers’ ability to implement our products, in those countries. Although we take precautions and have processes in place to prevent our products and services from being provided in violation of such laws, our products may have been in the past, and could in the future be, provided inadvertently in violation of such laws, despite the precautions we take. If we fail to comply with these laws, we and certain of our employees could be subject to civil or criminal penalties, including the possible loss of export privileges, monetary penalties, and, in extreme cases, imprisonment of responsible employees for knowing and willful violations of these laws. Additionally, our business and operating results be adversely affected through penalties, reputational harm, loss of access to certain markets, or otherwise.
In addition, we may be subject to customs duties that could have a significant adverse impact on our operating results or, if we are able to pass on the related costs in any particular situation, would increase the cost of the related product to our customers. As a result, the future imposition of significant increases in the level of customs duties or the creation of import quotas on our products in Europe or in other jurisdictions, or any of the limitations on international sales described above, could have a material adverse effect on our business, operating results, financial condition and cash flows. Further, some of our customers in Europe have been, or are being, audited by local governmental authorities regarding the tariff classifications used for importation of our products. Import duties and tariffs vary by country and a different tariff classification for any of our
products may result in higher duties or tariffs, which could have an adverse impact on our operating results and potentially increase the cost of the related products to our customers.
We may need additional capital in the future and may not be able to secure adequate funds at all or on terms acceptable to us.
We have been engagedengage in the design, development and manufacture and sale of a variety of video and cable access products and system solutions, since inception, which has required, and will continue to require, significant research and development expenditures.
We believe that our existing cash and short-term investments of approximately $63$66 million at December 31, 20162018 will satisfy our cash requirements for at least the next 12 months. However, we may need to raise additional funds to take advantage of presently unanticipated strategic opportunities, satisfy our other cash requirements from time to time, or strengthen our financial position. Our ability to raise funds may be adversely affected by a number of factors, including factors beyond our control, such as weakness in the economic conditions in markets in which we sell our products and continued uncertainty in financial, capital and credit markets. There can be no assurance that equity or debt financing will be available to us on reasonable terms, if at all, when and if it is needed.
We may raise additional financing through public or private equity offerings, debt financings, or corporate partnership or licensing arrangements. To the extent we raise additional capital by issuing equity securities or convertible debt, our stockholders may experience dilution. To the extent that we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our technologies or products, or grant licenses on terms that are not favorable to us. To the extent we raise capital through debt financing arrangements, we may be required to pledge assets or enter into covenants that could restrict our operations or our ability to incur further indebtedness and the interest on such debt may adversely affect our operating results.
If adequate capital is not available, or is not available on reasonable terms, when needed, we may not be able to take advantage of acquisition or other market opportunities, to timely develop new products, or to otherwise respond to competitive pressures.
Cybersecurity incidents, including data security breaches or computer viruses, could harm our business by disrupting our business operations, compromising our products and services, damaging our reputation or exposing us to liability.
Cyber criminals and hackers may attempt to penetrate our network security, misappropriate our proprietary information or cause business interruptions. Because the techniques used by such computer programmers to access or sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. In the past, we have faced compromises to our network security. While we have invested in and continue to update our network security and cybersecurity infrastructure and systems, if our cybersecurity systems fail to protect against unauthorized access, sophisticated cyber-attacks, phishing schemes, data protection breaches, computer viruses, denial-of-service attacks and similar disruptions from unauthorized tampering or human error, our ability to conduct our business effectively could be damaged in a number of ways, including:
• our intellectual property and other proprietary data, or financial assets, could be stolen;
• our ability to manage and conduct our business operations could be seriously disrupted;
• defects and security vulnerabilities could be introduced into our product, software and SaaS offerings, thereby damaging the reputation and perceived reliability and security of our products; and
• personally identifiable data of our customers, employees and business partners could be compromised.
Should any of the above events occur, our reputation, competitive position and business could be significantly harmed, and we could be subject to claims for liability from customers, third parties and governmental authorities. Additionally, we could incur significant costs in order to upgrade our cybersecurity systems and remediate damages. Consequently, our business, operating results, financial condition and cash flows could be materially and adversely affected. In addition, our business operations utilize and rely upon numerous third party vendors, manufacturers, solution providers, partners and consultants, and any failure of such third parties’ cybersecurity measures could materially and adversely affect or disrupt our business.
Our operating results could be adversely affected by natural disasters affecting us or impacting our third-party manufacturers, suppliers, resellers or customers.
Our corporate headquarters is located in California, which is prone to earthquakes. We have employees, consultants and contractors located in regions and countries around the world. In the event that any of our business, sales or research and development centers or offices in the U.S. or internationally are adversely affected by an earthquake or by any other natural disaster, we may sustain damage to our operations and properties, which could cause a sustained interruption or loss of affected operations, and cause us to suffer significant financial losses.
We rely on third-party contract manufacturers for the production of our products. Any significant disruption in the business or operations of such manufacturers or of their or our suppliers could adversely impact our business. Our principal contract manufacturers and several of their and our suppliers and our resellers have operations in locations that are subject to natural disasters, such as severe weather, tsunamis, floods, fires and earthquakes, which could disrupt their operations and, in turn, our operations.
In addition, if there is a natural disaster in any of the locations in which our significant customers are located, we face the risk that our customers may incur losses or sustained business interruption, or both, which may materially impair their ability to continue their purchase of products from us. Accordingly, natural disaster in one of the geographies in which we, or our third-party manufacturers, their or our suppliers or our customers, operate could have a material and adverse effect on our business, operating results, cash flows and financial condition.
Our business and industry are subject to various laws and regulations that could adversely affect our business, operating results, cash flows and financial condition.
Our business and industry are regulated under various federal, state, local and international laws. For example, we are subject to environmental regulations such as the European Union’s Waste Electrical and Electronic Equipment (WEEE) and Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (RoHS) directives and similar legislation enacted in other jurisdictions worldwide. Our failure to comply with these laws could result in our being directly or indirectly liable for costs, fines or penalties and third-party claims, and could jeopardize our ability to conduct business in such regions and countries. We expect that our operations will be affected by other new environmental laws and regulations on an ongoing basis. Although we cannot predict the ultimate impact of any such new laws and regulations, they would likely result in additional costs, and could require that we redesign or change how we manufacture our products, any of which could have a material and adverse effect on our operating results, financial condition and cash flows.
We are subject to the Sarbanes-Oxley Act of 2002 which, among other things, requires an annual review and evaluation of our internal control over financial reporting. If we conclude in future periods that our internal control over financial reporting is not effective or if our independent registered public accounting firm is unable to provide an unqualified attestation as of future year-ends, we may incur substantial additional costs in an effort to correct such problems, and investors may lose confidence in our financial statements, and our stock price may decrease in the short term, until we correct such problems, and perhaps in the long term, as well.
We are subject to requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that require us to conduct research, disclose, and report whether or not our products contain certain conflict minerals sourced from the Democratic Republic of Congo or its surrounding countries. The implementation of these requirements could adversely affect the sourcing, availability, and pricing of the materials used in the manufacture of components used in our products. In addition, we may incur certain additional costs to comply with the disclosure requirements, including costs related to conducting diligence procedures to determine the sources of conflict minerals that may be used or necessary to the production of our products and, if applicable, potential changes to products, processes or sources of supply as a consequence of such verification activities. It is also possible that we may face reputational harm if we determine that certain of our products contain minerals not determined to be conflict-free and/or we are unable to alter our products, processes or sources of supply to avoid such materials.
Changes in telecommunications legislation and regulations in the U.S. and other countries could affect our sales and the revenue we are able to derive from our products. In particular, “net neutrality” rules issued byon December 14, 2017, the U.S. Federal Communications Commission (FCC) voted to repeal the “net neutrality” rules and return to a “light-touch” regulatory framework. The FCC’s new rules, which took effect in June 2018, granted providers of broadband internet access services greater freedom to make changes to their services, including, potentially, changes that may discriminate against or otherwise harm our business. However, a number of parties have appealed these rules, which appeals are currently being reviewed by the D.C. Circuit Court of Appeals; thus the future impact of the FCC's repeal and any changes thereto remains uncertain. Additionally, on September
30, 2018, California enacted the California Internet Consumer Protection and Net Neutrality Act of 2018, making California the fourth state to enact a state-level net neutrality law since the FCC repealed its nationwide regulations, mandating that all broadband services in California must be provided in accordance with state net neutrality requirements. The U.S. Department of Justice has sued to block the law going into effect, and California has agreed to delay enforcement until the resolution of the FCC’s repeal of the federal rules. A number of other states are considering legislation or executive actions that would regulate the conduct of broadband providers. We cannot predict whether the FCC order or state initiatives will be modified, overturned, or vacated by legal action of the court, federal legislation, or the FCC. The repeal of the net neutrality rules or other regulations dealing with access by competitors to the networks of incumbent operators could slow or stop infrastructure and services investments or expansion by service providers. Increased regulation of our customers’ pricing or service offerings could limit their investments and, consequently, revenue from our products. The impact
of new or revised legislation or regulations could have a material adverse effect on our business, operating results, financial condition and cash flows.
Some anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
We have provisions in our certificate of incorporation and bylaws that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our Board. These include provisions:
• authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;
• limiting the liability of, and providing indemnification to, our directors and officers;
• limiting the ability of our stockholders to call, and bring business before, special meetings;
• requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our Board;
• controlling the procedures for conducting and scheduling of Board and stockholder meetings; and
• providing the Board with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled special meetings.
These provisions could delay hostile takeovers, changes in control of the Company or changes in our management. As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock. Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
The nature of our business requires the application of complex revenue and expense recognition rules and the current legislative and regulatory environment affecting generally accepted accounting principles is uncertain. Significant changes in current principles could affect our financial statements going forward and changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and harm our operating results.
The accounting rules and regulations that we must comply with are complex and subject to interpretation by the Financial Accounting Standards Board (the “FASB”), the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. Recent actions and public comments from the FASB and the SEC have focused on the integrity of financial reporting and internal controls. In addition, many companies’ accounting policies are being subject to heightened scrutiny by regulators and the public. Further, the accounting rules and regulations are continually changing in ways that could materially impact our financial statements. For example, in May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“Topic 606”), as amended, which will supersedesuperseded nearly all existing revenue recognition guidance. Although the new standard permits early adoption as early as the first quarter of 2017, the effective date ofWe adopted the new revenue standard isin our first quarter of 2018. We do not plan2018 using a modified retrospective approach. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to early adopt, and accordingly, we willamend the existing accounting standard for lease accounting. The Company expects to adopt the new standard effectiveon January 1, 2018. The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in2019 and use the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized ateffective date as the date of initial applicationapplication. (See Note 2, “Summary of Significant Accounting Policies” for additional information.)
We are implementing a new enterprise resource planning system, and providing certain additional disclosures. if this new system proves ineffective or if we experience issues with the transition, we may be unable to timely or accurately prepare financial reports, make payments to our suppliers and employees, or invoice and collect from our users.
We currently planare implementing a new enterprise resource planning, or ERP system. Our ERP system is critical to adopt using the modified retrospective approach; however, a final decision regarding the adoption method has not been finalized at this time. Our final determination will depend on a number of factors such as the significance of the impact of the new standard onour ability to accurately maintain books and records and to prepare our financial results,statements. The transition to our new ERP system readiness, includingmay be disruptive to our business if the ERP system does not work as planned or if we experience issues relating to the implementation. Such disruptions could impact our ability to timely or accurately make payments to our suppliers and employees, and could also inhibit our ability to invoice, and collect from our customers. Data integrity problems or other issues may be discovered which, if not corrected, could impact our business or financial results. In addition, we may experience periodic or prolonged disruption of our financial functions arising out of this conversion, general use of such system, other periodic upgrades or updates, or other external factors that are outside of software procured from third-party providers,our control. If we encounter unforeseen problems with our ERP system or other related systems and infrastructure, it could adversely affect our financial reporting systems and our ability to accumulateproduce financial reports, the effectiveness of internal controls over financial reporting, and analyze the information necessary to assess the impact on prior period financial statements, as necessary. While we continue to assess the potential impacts, under the new standards there is the potential for significant impacts to the accounting for software licenses with undelivered features and professional services revenue with acceptances, and contract acquisition costs, both with respect to the amounts that will be capitalized as well as the period of amortization. We cannot predict the impact of future changes to accounting principles or our accounting policies on our financial statements going forward, which could have a significant effect on our reported financialbusiness, operating results and could affect the reporting of transactions completed before the announcement of the change. In addition, if we were to change our critical
accounting estimates, including those related to the recognition of license revenue and other revenue sources, our operating resultsfinancial condition could be significantlyadversely affected.
The conditional conversion feature of our convertible senior notes, if triggered, may adversely affect our financial condition and operating results.
In December 2015, we issued $128.25$128.3 million in aggregate principal amount of 4.00%4.0% convertible senior notes due 2020 (the “Notes”) through a private placement with a financial institution. The Notes bear interest at 4.00%4.0% per annum, which is payable semiannually in arrears on June 1 and December 1 of each year, commencing June 1, 2016. In the event the conditional conversion feature of the Notes is triggered, holders of the Notes will be entitled to convert the Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material effect on our reported financial results.
In May 2008, FASB issued FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)”, which has subsequently been codified asUnder Accounting Standards Codification 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20. Under ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet, and the value of the equity component would beis being treated as a debt discount for purposes of accounting for the debt component of the Notes.discount. As a result, we will beare required to record a greater amount of non-cash interest expense in current and future periods presented as a result of the amortization of the discounted carrying value of the Notes to their face amount over the term of the Notes. We will report lowerThe increased net income in our financial results because ASC 470-20 will require interest to include bothloss resulting from the current period’s amortization of the debt discount and the instrument’s non-convertible interest rate, whichunder ASC 470-20 could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the Notes.
In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method or that circumstances would not change such that we would no longer be permitted to use the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, then our diluted earnings per share wouldmay be adversely affected.
Our common stock price, and therefore the price of our Notes, may be extremely volatile, and the value of an investment in our stock may decline.
Our common stock price has been highly volatile. We expect that this volatility will continue in the future due to factors such as:
• general market and economic conditions;
• actual or anticipated variations in operating results;
• increases or decreases in the general stock market or to the stock prices of technology companies;
• announcements of technological innovations, new products or new services by us or by our competitors or customers;
• changes in financial estimates or recommendations by stock market analysts regarding us or our competitors;
• announcements by us or our competitors of significant acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments;
• announcements by our customers regarding end user market conditions and the status of existing and future infrastructure network deployments;
• additions or departures of key personnel; and
• future equity or debt offerings or our announcements of these offerings.
In addition, in recent years, the stock market in general, and The NASDAQ Stock Market and the securities of technology companies in particular, have experienced extreme price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations have in the past, and may in the future, materially and adversely affect our stock price, regardless of our operating results. In these circumstances, investors may be unable to sell their shares of our common stock at or above their purchase price over the short term, or at all.
Our stock price may decline if additional shares are sold in the market or if analysts drop coverage of or downgrade our stock.
Future sales of substantial amounts of shares of our common stock by our existing stockholders in the public market, or the perception that these sales could occur, may cause the market price of our common stock to decline. In addition, we issue additional shares upon exercise of stock options, including under our ESPP,2002 Employee Stock Purchase Plan (“ESPP”), and in connection with grants of restricted stock units (“RSUs”) on an ongoing basis. To the extent we do not elect to pay solely cash upon conversion of our Notes, we will also be required to issue additional shares of common stock upon conversion. Increased sales of our common stock in the market after exercise of outstanding stock options or grants of restricted stock units could exert downward pressure on our stock price. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price we deem appropriate.
The trading market for our common stock relies in part on the availability of research and reports that third-party industry or securities analysts publish about us. If one or more of the analysts who do cover us downgrade our stock, our stock price may decline. If one or more of these analysts cease coverage of us, we could lose visibility in the market, which in turn could cause the liquidity of our stock and our stock price to decline.
Available Information
Harmonic makes available free of charge, on the Harmonic web site, the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K (via link to the SEC website), and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after Harmonic files such material with, or furnishes such material to, the Securities and Exchange Commission. The address of the Harmonic web site is http://www.harmonicinc.com. Except as expressly set forth in this Form 10-K, the contents of our web site are not incorporated into, or otherwise to be regarded as part of, this report.
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| Item 1B. | UNRESOLVED STAFF COMMENTS |
NoneNone.
All of our facilities are leased, including our principal operations and corporate headquarters in San Jose, California. We have research and development centers in the United States, France, Israel and Hong Kong. We have sales and service offices primarily in the U.S. and various locations in Europe and Asia. Our leases, which expire at various dates through April 2027,June 2028, are for an aggregate of approximately 416,000388,000 square feet of space, of which the San Jose lease, expiring August 2020, is for
approximately 160,000 square feet of space. This(this excludes 28,00049,000 square feet of space that is vacant and available for sublease since the beginningsublease). Our San Jose lease, which expires in August 2020, is for approximately 143,000 square feet of 2016.such space. We have two business segments: Video and Cable Edge.Access. Because of the interrelation of these segments, a majority of these segments use substantially all of the properties, at least in part, and we retain the flexibility to use each of the properties in whole or in part for each of the segments. We believe that the facilities that we currently occupy are adequate for our current needs and that suitable additional space will be available, as needed, to accommodate the presently foreseeable expansion of our operations.
In October 2011, Avid Technology, Inc. (“Avid”) filed a complaint in the United States District Court for the District of Delaware alleging that our MediaGrid 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 us, rejecting Avid’s infringement allegations in their entirety. In January 2015, Avid filed an appeal with respect to the jury’s verdict with the Federal Circuit. In January 2016, the Federal Circuit issued an order vacating the verdict of noninfringement and remanding the case to the trial court for a new trial on infringement.
In June 2012, Avid served a subsequent complaint in the United States District Court for the District of Delaware alleging that our Spectrum product infringes one patent held by Avid. The complaint sought 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. In July 2014, the PTAB issued a decision finding claims 1-10 invalid and claims 11-16 not invalid. We filed an appeal with respect to the PTAB’s decision on claims 11-16 in September 2014, and the Federal Circuit affirmed the PTAB’s decision in April 2016.
In July 2017, the court issued a scheduling order consolidating both cases and setting the trial date for November 6, 2017.
On October 19, 2017, the parties agreed to settle the consolidated cases by entering into a settlement and patent portfolio cross-license agreement, and the cases were dismissed with prejudice. In connection with the agreement, we recorded a $6.0 million litigation settlement expense in “Selling, general and administrative expenses” in our 2017 Consolidated Statement of Operations. Of the associated $6.0 million settlement liability, $2.5 million was paid in October 2017 and the remaining $1.5 million and $2.0 million will be paid in the second quarter of 2019 and the third quarter of 2020, respectively.
From time to time, we are 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. While certain matters to which we are a party may 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 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 us, rejecting Avid’s infringement allegations in their entirety. On May 23, 2014, Avid filed a post-trial motion asking the court to set aside the jury’s verdict, and the judge issued an order on December 17, 2014, denying the motion. On January 5, 2015, Avid filed an appeal with respect to the jury’s verdict with the Federal Circuit, which was docketed on January 9, 2015, as Case No. 2015-1246. Avid filed its opening brief with respect to this appeal on March 24, 2015, we filed our response brief on May 7, 2015, and Avid filed its reply brief on June 16, 2015. Oral arguments were held on December 11, 2015. On January 29, 2016, the Federal Circuit issued an order vacating the verdict of noninfringement and remanding the case to the trial court for a new trial on infringement. On February 26, 2016, Harmonic filed a request for rehearing and rehearing en banc at the Federal Circuit. On March 31, 2016, the Federal Circuit denied the request for rehearing and rehearing en banc and a mandate issued on April 8, 2016. The court conducted a supplemental claim construction hearing on May 27, 2016 and issued a claim construction order on June 29, 2016. On June 17, 2016, Harmonic filed requests for ex parte reexaminations for the ’808 and ’309 patents with the United States Patent and Trademark Office (“USPTO”). The USPTO ordered reexamination of both the ’309 and ’808 patents in August 2016. The USPTO issued a Non-Final Office Action on November 25, 2016 for the ’309 patent, including rejecting all challenged claims. The USPTO issued a Non-Final Office Action for the ’808 patent on December 15, 2016, rejecting all challenged claims. The Patent Owner filed its response in both reexaminations on February 15, 2017. A status conference was held with the District Court on February 23, 2017.
In June 2012, Avid served a subsequent complaint in the United States District Court for the District of Delaware alleging that our 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. We 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 we filed our opening brief with respect to this appeal on January 29, 2015. Avid and PTAB each filed a response brief on April 27, 2015, and we filed a reply brief on May 28, 2015. Oral arguments were held on October 8, 2015. The Federal Circuit issued an order on March 1, 2016, affirming the PTAB’s decision and a mandate issued on April 7, 2016. On July 25, 2016, the court issued a scheduling order for the case and set the trial date for November 6, 2017.
An unfavorable outcome on any litigation matters could require us to pay substantial damages, or, in connection with any intellectual property infringement claims, could require us to pay ongoing royalty payments or could prevent us from selling certain of our 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 our business, operating results, financial position and cash flows.
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. From time to time, third parties have asserted, and may in the future assert, exclusive patent, copyright, trademark and other intellectual property rights against us or our customers. Such assertions arise in the normal course of our operations. The resolution of any such assertions and claims cannot be predicted with certainty.
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| Item 4. | MINE SAFETY DISCLOSURE |
Not applicable.
PART II
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| Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information of our Common Stock
Our common stock is traded on The NASDAQ Global Select Market under the symbol HLIT, and has been listed on NASDAQ since our initial public offering on May 22,in 1995. The following table sets forth, for the periods indicated, the high and low sales price per share of our common stock as reported on The NASDAQ Global Select Market:
| | | | 2016 | | 2015 | 2018 | | 2017 |
| | Sales Price | | Sales Price | Sales Price | | Sales Price |
| Quarter ended | High | | Low | | High | | Low | High | | Low | | High | | Low |
| First quarter | $ | 4.04 |
| | $ | 2.85 |
| | $ | 7.98 |
| | $ | 6.53 |
| $ | 4.20 |
| | $ | 2.95 |
| | $ | 6.10 |
| | $ | 4.90 |
|
| Second quarter | 3.64 |
| | 2.51 |
| | 7.64 |
| | 6.55 |
| 4.45 |
| | 3.40 |
| | 6.00 |
| | 4.90 |
|
| Third quarter | 5.99 |
| | 2.72 |
| | 7.09 |
| | 5.40 |
| 5.55 |
| | 4.15 |
| | 5.35 |
| | 2.80 |
|
| Fourth quarter | 6.13 |
| | 3.80 |
| | 6.31 |
| | 4.07 |
| 6.16 |
| | 4.57 |
| | 4.55 |
| | 2.85 |
|
Holders
As of February 28, 2017,22, 2019, there were approximately 374347 holders of record of our common stock.
Dividend Policy
We have never declared or paid any dividends on our capital stock. At this time, we expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.
Repurchases of Equity Securities by the Issuer
There were no stock repurchases during the year ended December 31, 2016.2018. Our stock repurchase program expired on December 31, 2016. Further stock repurchases would require authorization from the Board.
Sales of Unregistered Securities
On September 26, 2016, we granted a warrant to purchase sharesThere were no sales of our common stock to Comcast (the “Warrant”), pursuant to which Comcast may purchase up to 7,816,162 sharesunregistered securities during the year ended December 31, 2018.
Comcast’s right to exercise the Warrant is subject to certain vesting triggers relating to the execution of the Warrant, certain pricing elections by Comcast, the successful completion of field trials of certain of our products, and certain payments by Comcast for our products and services. The offer and sale of such securities was made only to an “accredited investor” (as defined by Rule 501 under the Securities Act) in reliance upon exemptions from registration under the Securities Act afforded by Section 4(a)(2) of the Securities Act and corresponding provisions of state securities laws. Reliance on Section 4(2) is based on the nature of the offering and sale and the representations made by Comcast in the Warrant with respect to its investment experience and intent. (See Note 17, “Warrants,” of the notes to our Consolidated Financial Statements for additional information).
Stock Performance Graph
Set forth below is a line graph comparing the annual percentage change in the cumulative return to the stockholders of our common stock with the cumulative return of The NASDAQ Telecommunications Index and of the Standard & Poor’s (S&P) 500 Index for the period commencing December 31, 20112013 and ending on December 31, 2016.2018. The graph assumes that $100 was invested in each of the Company’s common stock, the S&P 500 and The NASDAQ Telecommunications Index on December 31, 2011,2013, and assumes the reinvestment of dividends, if any. The comparisons shown in the graph below are based upon historical data. Harmonic cautions that the stock price performance shown in the graph below is not indicative of, nor intended to forecast, the potential future performance of the Company’s common stock.
| | | | | 12/11 | | 12/12 | | 12/13 | | 12/14 | | 12/15 | | 12/16 | | 12/13 | | 12/14 | | 12/15 | | 12/16 | | 12/17 | | 12/18 |
| Harmonic Inc. | | 100.00 |
| | 100.60 |
| | 146.43 |
| | 139.09 |
| | 80.75 |
| | 99.21 |
| | 100.00 |
| | 94.99 |
| | 55.15 |
| | 67.75 |
| | 56.91 |
| | 63.96 |
|
| S&P 500 | | 100.00 |
| | 116.00 |
| | 153.58 |
| | 174.60 |
| | 177.01 |
| | 198.18 |
| | 100.00 |
| | 113.69 |
| | 115.26 |
| | 129.05 |
| | 157.22 |
| | 150.33 |
|
| NASDAQ Telecom | | 100.00 |
| | 102.78 |
| | 143.40 |
| | 149.42 |
| | 144.02 |
| | 153.88 |
| | 100.00 |
| | 102.75 |
| | 100.20 |
| | 106.61 |
| | 130.48 |
| | 130.76 |
|
The information contained in this Stock Performance Graph section shall not be deemed to be “soliciting material”, “filed” or incorporated by reference in previous or future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that Harmonic specifically incorporates it by reference into a document filed under the Securities Act or the Exchange Act.
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| Item 6. | SELECTED FINANCIAL DATA |
The selected financial data set forth below as of December 31, 20162018 and 2015,2017, and for the fiscal years ended December 31, 2016, 20152018, 2017 and 2014,2016, are derived from our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. The selected financial data as of December 31, 2014, 20132016, 2015 and 2012,2014, and for the fiscal years ended December 31, 20132015 and 20122014 are derived from audited financial statements not included in this Annual Report on Form 10-K. This financial data should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and related notes included elsewhere in this Annual Report on Form 10-K. These historical results are not necessarily indicative of the results to be expected in the future.
On March 5, 2013, we completed the sale of our cable access HFC business to Aurora Networks. As such, the results of operations associated with cable access HFC business are presented as discontinued operations in our Consolidated Statements of Operations for all periods presented.
On February 29, 2016, we completed our acquisition of TVN and applied the acquisition method of accounting for the business combination. The selected consolidated balance sheet data as of December 31, 2016 represents the consolidated statement of financial position of the combined company. The selected consolidated statement of operations data for the year ended December 31, 2016 of the combined entity includes 10 months of operating results of TVN, beginning March 1, 2016.
|
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2016 (1) (2) | | 2015 | | 2014 | | 2013 | | 2012 |
| | (In thousands, except per share amounts) |
| Consolidated Statements of Operations Data | | | | | | | | | |
| Net revenue | $ | 405,911 |
| | $ | 377,027 |
| | $ | 433,557 |
| | $ | 461,940 |
| | $ | 476,871 |
|
Cost of revenue | 205,161 |
| | 174,315 |
| | 221,209 |
| | 241,495 |
| | 256,339 |
|
Gross profit (3) | 200,750 |
| | 202,712 |
| | 212,348 |
| | 220,445 |
| | 220,532 |
|
| Operating expenses: |
|
|
|
|
|
| | | |
| Research and development | 98,401 |
| | 87,545 |
| | 93,061 |
| | 99,938 |
| | 102,627 |
|
| Selling, general and administrative | 144,381 |
| | 120,960 |
| | 131,322 |
| | 134,014 |
| | 127,117 |
|
| Amortization of intangibles | 10,402 |
| | 5,783 |
| | 6,775 |
| | 8,096 |
| | 8,705 |
|
| Restructuring and related charges | 14,602 |
| | 1,372 |
| | 2,761 |
| | 1,421 |
| | — |
|
| Total operating expenses | 267,786 |
| | 215,660 |
| | 233,919 |
| | 243,469 |
| | 238,449 |
|
| Loss from operations | (67,036 | ) | | (12,948 | ) | | (21,571 | ) | | (23,024 | ) | | (17,917 | ) |
Interest income (expense), net (8) | (10,628 | ) | | (333 | ) | | 132 |
| | 219 |
| | 515 |
|
| Other expense, net | (31 | ) | | (282 | ) | | (356 | ) | | (347 | ) | | (293 | ) |
Loss on impairment of long-term investment (4) | (2,735 | ) | | (2,505 | ) | | — |
| | — |
| | — |
|
| Loss from continuing operations before income taxes | (80,430 | ) | | (16,068 | ) | | (21,795 | ) | | (23,152 | ) | | (17,695 | ) |
Provision for (benefit from) income taxes (5)(6) | (8,116 | ) | | (407 | ) | | 24,453 |
| | (44,741 | ) | | (1,506 | ) |
Income (loss) from continuing operations (7) | $ | (72,314 | ) | | $ | (15,661 | ) | | $ | (46,248 | ) | | $ | 21,589 |
| | $ | (16,189 | ) |
| Net income (loss) per share from continuing operations: | | | | | | | | | |
| Basic | $ | (0.93 | ) | | $ | (0.18 | ) | | $ | (0.50 | ) | | $ | 0.20 |
| | $ | (0.14 | ) |
| Diluted | $ | (0.93 | ) | | $ | (0.18 | ) | | $ | (0.50 | ) | | $ | 0.20 |
| | $ | (0.14 | ) |
| Shares used in per share calculation: | | | | | | | | | |
| Basic | 77,705 |
| | 87,514 |
| | 92,508 |
| | 106,529 |
| | 116,457 |
|
| Diluted | 77,705 |
| | 87,514 |
| | 92,508 |
| | 107,808 |
| | 116,457 |
|
| | As of December 31, |
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | (In thousands) |
| Consolidated Balance Sheet Data | | | | | | | | | |
| Cash, cash equivalents and short-term investments | $ | 62,558 |
| | $ | 152,794 |
| | $ | 104,879 |
| | $ | 170,581 |
| | $ | 201,176 |
|
| Working capital | $ | 71,938 |
| | $ | 201,250 |
| | $ | 142,754 |
| | $ | 243,650 |
| | $ | 293,978 |
|
| Total assets | $ | 554,069 |
| | $ | 524,957 |
| | $ | 480,518 |
| | $ | 606,084 |
| | $ | 717,531 |
|
Convertible debt, long-term(8) | $ | 103,259 |
| | $ | 98,295 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Stockholders’ equity | $ | 270,641 |
| | $ | 328,168 |
| | $ | 371,813 |
| | $ | 494,166 |
| | $ | 553,413 |
|
(1) In 2016, we recorded $18.0 million of restructuring and related charges, of which $14.6 million is included in operating expenses and $3.4 million is included in cost of revenue. This $18.0 million of restructuring and related charges comprised primarily of $17.8 million of severance and benefits for the termination of 118 employees worldwide, including 83 employees in France who participated in the TVN voluntary departure plan (“TVN VDP”) and $2.2 million related to the cost for exiting from our excess facility in the U.S., offset partially by approximately $2.0 million of gain from TVN pension curtailment. (See Note 11, “Restructuring and related charges,” of the notes to our Consolidated Financial Statements for detail information on restructuring and related charges and pension curtailment gain).
(2) In 2016, as a result of the TVN acquisition, we incurred acquisition-and integration-related expenses in aggregate of $16.9 million, of which $14.9 million was included in selling, general and administrative expenses and the remainder in research and development expenses and cost of revenue. (See Note 3, “Business Acquisition,” of the notes to our Consolidated Financial Statements for additional information).
(3) Gross margin decreased to 49.5% in 2016 compared to 53.8% in 2015. The decrease in gross margin was primarily due to the inclusion of TVN’s operating results which resulted in higher material, labor and overhead costs attributable to the additional headcount and facilities acquired in connection with the TVN acquisition as well as the restructuring costs incurred in 2016 related to the termination of employees of the Company’s acquired TVN subsidiary in France (the “TVN French |
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (In thousands, except per share amounts) |
| Consolidated Statements of Operations Data | | | | | | | | | |
| Net revenue | $ | 403,558 |
| | $ | 358,246 |
| | $ | 405,911 |
| | $ | 377,027 |
| | $ | 433,557 |
|
Cost of revenue | 194,349 |
| | 188,426 |
| | 205,161 |
| | 174,315 |
| | 221,209 |
|
| Gross profit | 209,209 |
| | 169,820 |
| | 200,750 |
| | 202,712 |
| | 212,348 |
|
| Operating expenses: |
|
|
|
|
|
|
|
|
|
| Research and development | 89,163 |
| | 95,978 |
| | 98,401 |
| | 87,545 |
| | 93,061 |
|
| Selling, general and administrative | 118,952 |
| | 136,270 |
| | 144,381 |
| | 120,960 |
| | 131,322 |
|
| Amortization of intangibles | 3,187 |
| | 3,142 |
| | 10,402 |
| | 5,783 |
| | 6,775 |
|
| Restructuring and related charges | 2,918 |
| | 5,307 |
| | 14,602 |
| | 1,372 |
| | 2,761 |
|
| Total operating expenses | 214,220 |
| | 240,697 |
| | 267,786 |
| | 215,660 |
| | 233,919 |
|
| Loss from operations | (5,011 | ) | | (70,877 | ) | | (67,036 | ) | | (12,948 | ) | | (21,571 | ) |
| Interest income (expense), net | (11,401 | ) | | (11,078 | ) | | (10,628 | ) | | (333 | ) | | 132 |
|
| Other expense, net | (536 | ) | | (2,222 | ) | | (31 | ) | | (282 | ) | | (356 | ) |
| Loss on impairment of long-term investments | — |
| | (530 | ) | | (2,735 | ) | | (2,505 | ) | | — |
|
| Loss from continuing operations before income taxes | (16,948 | ) | | (84,707 | ) | | (80,430 | ) | | (16,068 | ) | | (21,795 | ) |
Provision for (benefit from) income taxes | 4,087 |
| | (1,752 | ) | | (8,116 | ) | | (407 | ) | | 24,453 |
|
Loss from continuing operations | $ | (21,035 | ) | | $ | (82,955 | ) | | $ | (72,314 | ) | | $ | (15,661 | ) | | $ | (46,248 | ) |
| Net loss per share from continuing operations: | | | | | | | | | |
| Basic and diluted | $ | (0.25 | ) | | $ | (1.02 | ) | | $ | (0.93 | ) | | $ | (0.18 | ) | | $ | (0.50 | ) |
| Shares used in per share calculations: | | | | | | | | | |
| Basic and diluted | 85,615 |
| | 80,974 |
| | 77,705 |
| | 87,514 |
| | 92,508 |
|
| | As of December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (In thousands) |
| Consolidated Balance Sheet Data | | | | | | | | | |
| Cash, cash equivalents and short-term investments | $ | 65,989 |
| | $ | 57,024 |
| | $ | 62,558 |
| | $ | 152,794 |
| | $ | 104,879 |
|
| Working capital | $ | 60,297 |
| | $ | 29,686 |
| | $ | 71,938 |
| | $ | 201,250 |
| | $ | 142,754 |
|
| Total assets | $ | 510,835 |
| | $ | 508,059 |
| | $ | 554,069 |
| | $ | 524,957 |
| | $ | 480,518 |
|
| Convertible notes, long-term | $ | 114,808 |
| | $ | 108,748 |
| | $ | 103,259 |
| | $ | 98,295 |
| | $ | — |
|
| Total stockholders’ equity | $ | 228,250 |
| | $ | 218,343 |
| | $ | 270,641 |
| | $ | 328,168 |
| | $ | 371,813 |
|
Subsidiary”) under the TVN VDP, as well as an increase(4) As a result of our assessment, in 2016 and 2015, we recorded impairment charges of $2.7 million and $2.5 million for our investment in Vislink plc (“Vislink”) and VJU iTV Development GmbH (“VJU”), respectively, as we determined both of these investments were impaired on an other-than-temporary basis. (See Note 5, “Investments in Other Equity Securities,” of the notes to our Consolidated Financial Statements for additional information).
(5) In 2014, we recorded a net increase in valuation allowance of $29.0 million in 2014 against U.S. net deferred tax assets. A history of operating losses in recent years has led to uncertainty with respect to our ability to realize certain of our net deferred tax assets. This unfavorable impact was partially offset by the release of $9.0 million of tax reserves in 2014, including accrued interests and penalties, for our 2010 tax year in the United States, as a result of the expiration of the statute of limitation for that tax year. In 2016, we recorded a net increase in valuation allowance of $18.3 million against all of our U.S. deferred tax assets as well as the net operating losses generated in 2016 due to significant cumulative losses in the United States. This increase in valuation allowance was partially offset by the release of $8.4 million valuation allowance associated with the Company’s TVN French Subsidiary. Due to a change in its business model, as of December 31, 2016, our TVN French Subsidiary is forecasted to generate pretax income in future periods.
(6) In 2013, we released $39.0 million of tax reserves, including accrued interests and penalties, for our 2008 and 2009 tax years in the United States, as a result of the expiration of the statute of limitations for those tax years.
(7) Loss from operations for 2016, 2015, 2014, 2013 and 2012 included stock-based compensation expense of $13.1 million, $15.6 million, $17.3 million, $16.0 million and $18.4 million, respectively.
(8) In December 2015, we issued the Notes through a private placement with a financial institution. The Notes bear interest at 4.00% per annum, which is payable semiannually in arrears on June 1 and December 1 of each year, commencing June 1, 2016. In accordance with accounting guidance on embedded conversion features, we valued and bifurcated the conversion option associated with the Notes recording $26.9 million in stockholders’ equity. We incurred approximately $4.1 million of debt issuance costs in connection with the issuance of the Notes, which we recorded as a deduction to the carrying amount of the Notes and $0.8 million of debt issuance costs was allocated to stockholders’ equity. The resulting net debt discount, difference between the principal amount of the Notes and the carrying value of the Notes, of $30.2 million is amortized to interest expenses at an effective interest rate of 9.94% over the contractual term of the Notes. In 2015, we recorded $240,000 of coupon interest expense and $216,000 of interest expenses related to the amortization of debt discount and debt issuance costs. In 2016, we recorded $5.1 million of coupon interest expense and $5.0 million of interest expenses related to the amortization of debt discount and debt issuance costs. (See Note 12, “Convertible Notes, Other Debts, and Capital Leases,” of the notes to our Consolidated Financial Statements for additional information on the Notes).
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| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with the consolidated financial statements and the related notes. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and those listed under Item 1A, Risks Factors.
Business Overview
We design, manufacture and sellare a leading global provider of (i) versatile and high performance video infrastructuredelivery software, products, and system solutions and services that enable our customers to efficiently create, prepare, store, playout and deliver a full range of videohigh-quality broadcast and broadbandOTT video services to consumer devices, including televisions, personal computers, laptops, tablets and smart phones.phones and (ii) cable access solutions that enable cable operators to more efficiently and effectively deploy high-speed internet, for data, voice and video services to consumers’ homes.
We do business in three geographic regions: the Americas, EMEA and APAC and operate in two segments, Video and Cable Edge.Access. Our Video business sells video processing, and production and playout solutions, and services worldwide to cable operators and satellite and telecommunications (telco)(“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 Video business infrastructure solutions are delivered either through shipment of our products, software licenses or as software-as-a-service (“SaaS”) subscriptions. Our Cable EdgeAccess business sells cable access solutions and related services, including our CableOS software-based cable access solution, primarily to cable operators globally.
Acquisition of TVN
On February 29, 2016, through our wholly-owned subsidiary Harmonic International AG, we completed our acquisition of 100% of the share capital and voting rights of TVN for $82.5 million in cash. TVN, a global leader in advanced video compression solutions, is headquartered in Rennes, France. The TVN acquisition was primarily funded with cash proceeds from the issuance of the Notes in December 2015.
TVN is now a part of our Video segment and its results of operations are included in our Consolidated Statements of Operations beginning March 1, 2016. The acquisition of TVN is intended to strengthen our competitive position in the video infrastructure market as well as enhance the depth and scale of our research and development and service and support capabilities in the video arena. We believe that the combined product portfolios, research and development teams and global sales and service personnel of Harmonic and TVN will allow us to accelerate innovation for our customers while leveraging greater scale to drive operational efficiencies. (See Note 3, “Business Acquisition,” of the notes to our Consolidated Financial Statements for additional information on the TVN acquisition).
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 in 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, managemanaged 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 10 largest customers in 2016, 20152018, 2017 and 20142016 accounted for approximately 28%37%, 32%24% and 35%28% of our revenue, respectively. Although we are attempting to broaden our customer base by penetrating new markets and further expanding internationally, we expect to see continuing industry consolidation and customer concentration. During 2018, Comcast accounted for 15% of our net revenue. During 2017 and 2016, no customerssingle customer accounted for more than 10% of our net revenue. During 2015 and 2014, revenue from Comcast accounted for 12% and 16%, of our net revenue, respectively. No other customers accounted for more than 10% of our net revenue in 2015 and 2014. The loss of any significant customer, or any material reduction in orders fromby any significant customer, or our failure to qualify our new products with any significant customer could materially and adversely affect our operating results, financial condition and cash flows.
Our net revenue increased $45.3 million, or 13% in 2018, compared to 2017, primarily due to an increase in our Cable Access segment revenue of $52.1 million, partially offset by decrease in our Video segment revenue increasedof $5.6 million. The increase in 2016 compared to 2015our Cable Access segment revenue in 2018 was primarily due to an increase in sales of CableOS related hardware, software and support services. The decrease in our acquisition of TVN, which ledVideo segment revenue in 2018 was primarily due to stronger demand from both our service provider and broadcast and media customers, particularly within EMEA and the Americas.a shift in product mix to software-based products.
Our Video segment customers continue to be cautious with investments in new technologies, such as next-generation IP architecture and Ultra HD. We believe a material and growing portion of the opportunities for our video business are linked to a migration by our customers to IP workflows and the distribution of linear and on-demand, over-the-top,OTT, and new mobile video services. We believe we are well positioned to address these opportunities as we continue to steadily transition our video business away from legacy and customized computing hardware to more software-centric solutions enablingand services, including OTT SaaS subscription offerings that enable video compression and processing through our VOS software platform running on standard off-the-shelf servers, data centers and in the cloud.
Our Cable EdgeAccess strategy is to continue to deliver software-based cable access technologies, which we refer to as our CableOS solutions, to our cable operator customers. We believe our CableOS software-based cable access solutions are superior to hardware-based systems and delivers unprecedented scalability, agility and cost savings for our customers. Our
CableOS solutions, which can be deployed based on a centralized, distributed Remote PHY or hybrid architecture, enable our customers to migrate to multi-gigabit broadband capacity and the fast deployment of DOCSIS 3.1 data, video and voice services. We believe our CableOS solutions resolve space and power constraints in the headend and hub, eliminate dependence on hardware upgrade cycles and significantly reduce total cost of ownership, and will help us become a major player in the approximately $2 billion CCAP market by delivering innovative new DOCSIS 3.1 CMTS technology, which we refer to as CableOS.cable access market. In the meantime, we believe our Cable EdgeAccess segment is experiencing weaker demandgaining momentum in the marketplace as some of our customers have decreased spending on current Cable Edge products as they preparebegun to make investments inadopt new converged data and video DOCSIS 3.1 CMTS solutions. While these trends present near-term challenges for us, we believe we have made significant progress on the development of ourvirtualized DOCSIS 3.1 CMTS solutions and distributed access architectures. While we began addressing this market opportunityare in the early stages of field trials and deployments and may experience near-term challenges, we continue to make progress in the development of our CableOS solutions and in the growth of our CableOS business, with expanded commercial deployments, field trials, and customer engagements since our first CableOS shipments in the fourth quarter of 2016.
To support our Cable EdgeAccess strategy and foster the further development and growth of this segment, in September 2016, we grantedissued Comcast a warrant (the “Warrant”) to purchase shares of our common stockWarrant to further incentivize them to purchase our products and adopt our technologies, particularly our CableOS software-based CCAP systems.solutions. Pursuant to the Warrant, Comcast may, subject to certain vesting provisions, purchase up to 7,816,162 shares of our common stock, for a per share exercise price of $4.76. Comcast’s right to purchase 781,617 shares under the Warrant was vested as of the issuance date as an incentive to enter into the software license product supply agreement with us. Comcast’s rights to purchase an additional 1,954,042 shares vest upon achievement of milestones that occur upon or prior to Comcast’s election for enterprise license pricing for certain of our software products. Such pricing would obligate Comcast to make certain total payments to us over the term of the product supply agreement. Comcast’s rights to purchase an additional 1,172,425 shares vest when Comcast exceeds specified cumulative purchase amounts from us under the product supply agreement. Comcast’s rights to purchase the remaining 3,908,081 shares vest in specified tranches at the earlier of Comcast’s enterprise license pricing election (if completed by a certain date) or achievement of specified cumulative purchase amounts from us. Because the Warrant is considered an incentive for Comcast to purchase certain of the Company’s products, the value of the Warrant will beis recorded as a reduction in the Company’s net revenues to the extent such value does not exceed net revenues from pertinent sales to Comcast. (See Note 17,16, “Warrants,” of the Notes to our Consolidated Financial Statements for additional information).
As a result of the continued uncertainty regarding the timing of our customers’customers' investment decisions can be uncertain, we have implemented restructuring plans to bring our operating expenses more in line with net revenues, while simultaneously implementing an extensive Company-widebetter align the Company's resources and strategic goals. We continue to focus on expense control program.controls on a company-wide basis. (See Note 11,10, “Restructuring and Related Charges” of the Notes to our Consolidated Financial Statements for additional information).
Our aggregate balance of cash and cash equivalents and short-term investments as of December 31, 20162018 was $62.6$66.0 million, and we generated $12.3 million of cash from operations during the fiscal year 2016, we generated $0.4ended December 31, 2018. We also entered into a $15 million line of credit with Silicon Valley Bank in September 2017 which has not been used to withdraw any cash from operations.
till date. We expect that our current sources of liquidity together with our current projections of cash flow from operating activities will provide us adequate liquidity based on our current plan for the next twelve months.
Critical Accounting Policies, Judgments and Estimates
The preparation of financial statements and related disclosures requires Harmonic to make judgments, assumptions and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingencies and the reported amounts of revenue and expenses in the financial statements and accompanying notes. Material differences may result in the amount and timing of revenue and expenses if different judgments or different estimates were made. See Note 2 of the notesNotes to our Consolidated Financial Statements for details of our accounting policies. Critical accounting policies, judgments and estimates that we believe have the most significant impact on Harmonic’s financial statements are set forth below:
Business combination;
Revenue recognition;
Valuation of inventories;
Business combination;
Impairment of goodwill or long-lived assets;
Assessment of the probability of the outcome of current litigation;
Accounting for income taxes; and
Stock-based compensation.
Revenue Recognition
On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers(“Topic 606”), using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for the reporting period beginning January 1, 2018 are presented under Topic 606, while prior period amounts are not restated and continue to be reported in accordance with our historic accounting under ASC 605, Revenue Recognition (“Topic 605”). (See Note 2 “Summary of Significant Accounting Policies-Recently Adopted Accounting Pronouncements” for additional information.)
Valuation of Inventories
We state inventories at the lower of cost or net realizable value. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. We write down the cost of excess or obsolete inventory to net realizable value based on future demand forecasts and historical consumption. If there were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, we could be required to record additional charges for excess and obsolete inventory and our gross margin could be adversely affected. Inventory management is of critical importance in order to balance the need to maintain strategic inventory levels to ensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and customer requirements.
Business Combination
We applied the acquisition method of accounting for business combinations to our acquisition of TVN, which closed on February 29, 2016. (See Note 3,6, “Business Acquisition,” for additional information on TVN acquisition). Under this method of accounting, all assets acquired and liabilities assumed are recorded at their respective fair values at the date of the completion of the transaction. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, intangibles and other asset lives, among other items. Fair value is defined as the price that would be received in a sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Market participants are assumed to be buyers and sellers in the principal (most advantageous) market for the asset or liability. Additionally, fair value measurements for an asset assume the highest and best use of that asset by market participants. As a result, we may have been required to value the acquired assets at fair value measurements that do not reflect its intended use of those assets. Use of different estimates and judgments could yield different results. Any excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill.
During the fourth quarter of 2016, we completed the accounting for this business combination.
Revenue Recognition
Harmonic’s principal sources of revenue are from the sale of hardware, software, hardware and software maintenance contracts, and the sale of end-to-end solutions, encompassing design, manufacture, test, integration and installation of products. Harmonic recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been provided, the sale price is fixed or determinable, and collectability is reasonably assured.
We generally use contracts and customer purchase orders to determine the existence of an arrangement. Shipping documents and customer acceptance, when applicable, are used to verify delivery. We assess whether the sales price is fixed or determinable based on the payment terms associated with the transaction and whether the price is subject to refund or adjustment. We assess collectability based primarily on the creditworthiness of the customer, as determined by credit checks and analysis, as well as the customer’s payment history.
Significant management judgments and estimates must be made in connection with determination of the revenue to be recognized in any accounting period. Because of the concentrated nature of our customer base, different judgments or estimates made for any one large contract or customer could result in material differences in the amount and timing of revenue recognized in any particular period.
We have multiple-element revenue arrangements that include hardware and software essential to the hardware product’s functionality, non-essential software, services and support. We allocate revenue to all deliverables based on their relative selling prices. We determine the relative selling prices by first considering vendor-specific objective evidence of fair value (“VSOE”), if it exists; otherwise third-party evidence (“TPE”) of the selling price is used. When we are unable to establish selling price using VSOE or TPE, we use our best estimate of selling price (“BESP”) in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings. The Company’s process for determining BESP involves management’s judgment, and considers multiple factors that may vary over time, depending upon the unique facts and circumstances related to each deliverable. If the facts and circumstances underlying the factors considered change or should future facts and circumstances lead the Company to consider additional factors, the Company’s BESP may also change. Once revenue is allocated to all deliverables based on their relative selling prices, revenue related to hardware elements (hardware, essential software and related services) are recognized using a relative selling price allocation and non-essential software and related services are recognized under the residual method.
Sales of stand-alone software that are not considered essential to the functionality of the hardware continue to be subject to the software revenue recognition guidance. In accordance with the software revenue recognition guidance, the Company applies the residual method to recognize revenue for the delivered elements in stand-alone software transactions. Under the residual method, the amount of revenue allocated to delivered elements equals the total arrangement consideration, less the aggregate fair value of any undelivered elements, typically maintenance, provided that VSOE of fair value exists for all
undelivered elements. We establish fair value by reference to the price the customer is required to pay when an item is sold separately, using contractually stated, substantive renewal rates, when applicable, or the price of recently completed stand alone sales transactions. Accordingly, the determination as to whether appropriate objective and reliable evidence of fair value exists can impact the timing of revenue recognition for an arrangement.
Solution sales for the design, manufacture, test, integration and installation of products are accounted for in accordance with applicable guidance on accounting for performance of construction/production contracts, using the percentage-of-completion method of accounting when various requirements for the use of this accounting guidance exist. Under the percentage-of-completion method, our revenue recognized reflects the portion of the anticipated contract revenue that has been earned, equal to the ratio of actual labor hours expended to total estimated labor hours to complete the project. Costs are recognized proportionally to the labor hours incurred. Management believes that, for each such project, labor hours expended in proportion to total estimated hours at completion represents the most reliable and meaningful measure for determining a project’s progress toward completion. This requires us to estimate, at the outset of each project, a detailed project plan and associated labor hour estimates for that project. For contracts that include customized services for which labor costs are not reasonably estimable, the Company uses the completed contract method of accounting. Under the completed contract method, 100% of the contract’s revenue and cost is recognized upon the completion of all services under the contract. If the estimated costs to complete a project exceed the total contract amount, indicating a loss, the entire anticipated loss is recognized. Our application of the percentage-of-completion method of accounting is subject to our estimates of labor hours to complete each project. In the event that actual results differ from these estimates or we adjust these estimates in future periods, our operating results, financial position or cash flows for a particular period could be adversely affected.
Revenue on shipments to resellers and systems integrators is generally recognized on delivery. Resellers and systems integrators purchase our products for specific capital equipment projects of the end-user and do not hold inventory as a standard operating practice. They perform functions that include importation, delivery to the end-customer, installation or integration, and post-sales service and support. Our agreements with these resellers and systems integrators have terms which are generally consistent with the standard terms and conditions for the sale of our equipment to end users and do not provide for product rotation or pricing allowances, as are typically found in agreements with stocking resellers. We have long-term relationships with most of these resellers and systems integrators and substantial experience with similar sales of similar products. We do have instances of accepting product returns from resellers and system integrators. However, such returns typically occur in instances where the system integrator has designed a product into a project for the end user, but the integrator requests permission to return the component as it does not meet the specific project’s functional requirements. Such returns are made solely at our discretion, as our agreements with resellers and system integrators do not provide for return rights. We have sufficient experience monitoring product returns from our resellers, and, accordingly, we have concluded that we should use a sell-in model for our reseller sales.
Valuation of Inventories
We state inventories at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. We write down the cost of excess or obsolete inventory to net realizable value based on future demand forecasts and historical consumption. If there were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, we could be required to record additional charges for excess and obsolete inventory and our gross margin could be adversely affected. Inventory management is of critical importance in order to balance the need to maintain strategic inventory levels to ensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and customer requirements.
Impairment of Goodwill or Long-lived Assets
Goodwill represents the difference between the purchase price and the estimated fair value of the identifiable assets acquired and liabilities assumed. We test for goodwill impairment at the reporting unit level, which is the same as our operating segment, on an annual basis in the fourth quarter of each of our fiscal years, and at any other time at which events occur or circumstances indicate that the carrying amount of goodwill may exceed its fair value.
The provisions of the accounting standardIn evaluating goodwill for goodwill and other intangibles allows us toimpairment, we first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Various factors are considered in the qualitative assessment, including macroeconomic conditions, financial performance, or a sustained decrease in share price. If as a result of the qualitative assessment, it is deemed more likely than not that the fair value of a reporting unit is less than its carrying amount, management will perform the quantitative test.
We use a two-step process to determine the amount of goodwill impairment. The first step requires comparing the fair value of the reporting unit to its net book value, including goodwill. A potential impairment exists if the fair value of the
reporting unit(including goodwill). If we conclude that it is lowernot more likely than its net book value. The second step of the process, which is performed only if a potential impairment exists, involves determining the difference between the fair value of the reporting unit’s net assets other than goodwill and the fair value of the reporting unit. If this difference is less than the net book value of goodwill, an impairment exists and is recorded.
In the first step, the fair value of each of our reporting units is determined using both the income and market valuation approaches. Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flowsnot that the reporting unit is expected to generate over its remaining life. Under the market approach, the value of the reporting unit is based on an analysis that compares the value of the reporting unit to values of publicly-traded companies in similar lines of business. In the application of the income and market valuation approaches, we are required to make estimates of future operating trends and judgments on discount rates and other variables. Determining the fair value of a reporting unit is highly judgmental in nature and involves the use of significant estimates and assumptions. We base our fairless than its carrying value, estimates on assumptionsthen no further testing is required. However, if we believe to be reasonable butconclude that are unpredictable and inherently uncertain. Actual future results related to assumed variables could differ from these estimates. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units.
Under the income approach, we calculateit is more likely than not that the fair value of a reporting unit based onis less than its carrying value, then the present valuetwo-step goodwill impairment test is performed to identify a potential goodwill impairment and measure the amount of estimated future cash flows. Cash flow projections are based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions.impairment to be recognized, if any. The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the business's ability to execute on the projected cash flows. Under the market approach, we estimatetwo-step impairment test involves estimating the fair value based on market multiples of revenueall assets and earnings derived from comparable publicly-traded companies with similar operating and investment characteristics asliabilities of the reporting units, and then apply a control premium which is determined by considering control premiums offered as partunit, including the implied fair value of the acquisitions that have occurred in market segments that are comparable with our reporting units.goodwill, through either estimated discounted future cash flows or market-based methodologies.
During the second quarter of 2016, the sustained decline in our stock price led to a triggering event for goodwill impairment assessment. As of July 1, 2016, with a closing stock price of $3.01 on The NASDAQ Stock Market, our market capitalization was approximately $235 million. As this market capitalization was less than our net book value, further analysis was performed to determine if an impairment existed. Based on the impairment test performed, we determined that our goodwill was not impaired as of July 1, 2016.
During the fourth quarter of 2016,2018, we performed the first step of goodwill impairment testing for our two reporting units as part of our annual goodwill impairment test and concluded that goodwill was not impaired as the Video and Cable Edge reporting units had estimated fair values in excess of their carrying value by approximately 67% and 123%, respectively.impaired. We have not recorded any impairment charges related to goodwill for any prior periods.
We evaluate the recoverability of intangible assets and other long-lived assets when indicators of impairment are present. When impairment indicators are present, we evaluate the recoverability of intangible assets and other long-lived assets on the basis of undiscounted cash flows expected to result from the use of each asset group and its eventual disposition. If the undiscounted expected future cash flows are less than the carrying amount of the asset, an impairment loss is recognized in order to writedownwrite down the carrying value of the asset to its estimated fair market value. In connection with restructuring actions initiated during 2014, we recorded an impairment charge of $1.1 million in 2014 related to software development costs incurred for a discontinued IT project.
In 2015, we recorded an impairment charge of $2.5 million for our investment in VJU as we determined that the entire investment in VJU was impaired on an other-than-temporary basis. Factors considered included the severity of the impairment, expected cash flows and recent events specific to VJU. In 2016, the stock price of Vislink, our other equity investment, fell below the cost basis for several months. Based on our assessment of the positive and negative factors of Vislink’s financial and business conditions, we determined that more-likely-than-not, Vislink’s stock price would not recover to its cost basis and, as a result, we recorded a total of $2.7 million of impairment charges reflecting the new reduced cost basis. (See Note 5, “Investments in Other Equity Securities,” of the notes to our Consolidated Financial Statements for additional information).
Assessment of the Probability of the Outcome of Current Litigation
From time to time, we are 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. We assess potential liabilities in connection with each lawsuit and threatened lawsuits and accrue 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 we are a party specify the damages claimed, such claims may not represent reasonably probable 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 our favor, rejecting Avid’s infringement allegations in their entirety. On May 23, 2014, Avid filed a post-trial motion asking the court to set aside the jury’s verdict, and the judge issued an order on December 17, 2014, denying the motion. On January 5, 2015, Avid filed an appeal with respect to the jury’s verdict with the Federal Circuit, which was docketed on January 9, 2015, as Case No. 2015-1246. Avid filed its opening brief with respect to this appeal on March 24, 2015, we filed our response brief on May 7, 2015, and Avid filed its reply brief on June 16, 2015. Oral arguments were held on December 11, 2015. On January 29, 2016, the Federal Circuit issued an order vacating the verdict of noninfringement and remanding the case to the trial court for a new trial on infringement. On February 26, 2016, Harmonic filed a request for rehearing and rehearing en banc at the Federal Circuit. On March 31, 2016, the Federal Circuit denied the request for rehearing and rehearing en banc and a mandate issued on April 8, 2016. The court conducted a supplemental claim construction hearing on May 27, 2016 and issued a claim construction order on June 29, 2016. On June 17, 2016, Harmonic filed requests for ex parte reexaminations for the ’808 and ’309 patents with the United States Patent and Trademark Office (“USPTO”). The USPTO ordered reexamination of both the ’309 and ’808 patents in August 2016. The USPTO issued a Non-Final Office Action on November 25, 2016 for the ’309 patent, including rejecting all challenged claims. The USPTO issued a Non-Final Office Action for the ’808 patent on December 15, 2016, rejecting all challenged claims. The Patent Owner filed its response in both reexaminations on February 15, 2017. A status conference was held with the District Court on February 23, 2017.
In June 2012, Avid served a subsequent complaint in the United States District Court for the District of Delaware alleging that our 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. We 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 we filed our opening brief with respect to this appeal on January 29, 2015. Avid and PTAB each filed a response brief on April 27, 2015, and we filed a reply brief on May 28, 2015. Oral arguments were held on October 8, 2015. The Federal Circuit issued an order on March 1, 2016, affirming the PTAB’s decision and a mandate issued on April 7, 2016. On July 25, 2016, the court issued a scheduling order for the case and set the trial date for November 6, 2017.
An unfavorable outcome on any litigation matters could require us to pay substantial damages, or, in connection with any intellectual property infringement claims, could require us to pay ongoing royalty payments or could prevent us from selling certain of our 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 our business, operating results, financial position and cash flows.
See Note 19, “Legal Proceedings,” of the Notes to our Consolidated Financial Statements for additional information on the Avid litigation).
Accounting for Income Taxes
In preparing our financial statements, we estimate our income taxes for each of the jurisdictions in which we operate. This involves estimating our actual current tax exposuresexpense and assessing temporary differences resulting from differing treatment of items, such as reserves and accruals, for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheet.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and our future taxable income for purposes of assessing our ability to realize any future benefit from our deferred tax assets. A history of operating losses in recent years has led to uncertainty with respect to our ability to realize certain of our net deferred tax assets, and as a result we applied full valuation allowance against our U.S. net deferred tax assets as of December 31, 2015 and continued into 2016, attributing to a $18.3 million increase in valuation allowance in 2016. This increase in valuation allowance in 2016 is offset partially by the release of $8.4 million of valuation allowance associated with our TVN French Subsidiary. Due to a change in business model, as of December 31, 2016, the French Subsidiary is forecasted to generate pretax income in future periods. After considering all the positive and negative evidence, we determined that the valuation allowance for the TVN French Subsidiary should be released as of December 31, 2016 based on its projected income. In the event that actual results differ from these estimates or we adjust these estimates in future periods, our operating results and financial position could be materially affected.
We are subject to examination of our income tax returns by various tax authorities on a periodic basis. We regularly assess the likelihood of adverse outcomes resulting from such examinations to determine the adequacy of our provision for income taxes. We apply the provisions of the applicable accounting guidance regarding accounting for uncertainty in income
taxes, which requires application of a more-likely-than-not threshold to the recognition and derecognitionde-recognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits us to recognize a tax benefit measured at the largest amount of such tax benefit that, in our judgment, is more than fifty percent likely to be realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the period in which such determination is made.
We file U.S. 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. In 2016, the U.S. Internal Revenue Service concluded its audit for our 2012 tax year and as a result, we released $1.1 million of related tax reserves, including accrued interests and penalties. We also released $9.0 million and $0.5 million of related tax reserves, including accrued interests and penalties, for the 2010 and 2011 tax years in 2014 and 2015, respectively, as a result of the expiration of the statute of limitations.
The 2013 through 2015 tax years generally remain subject to examination by U.S. federal and most state tax authorities. In significant foreign jurisdictions, the 2007 through 2015 tax years generally remain subject to examination by their respective tax authorities. In 2016, the U.S. Internal Revenue Service concluded its examination of our income tax return for the tax year 2012, which commenced in August 2015. In addition, one of our subsidiaries is under audit for the 2012 and 2013 tax years, which commenced in 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.
On July 27, 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner, 145 T.C. No.3 (2015) related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was entered by the U.S. Tax Court on December 1, 2015. On February 19, 2016, the U.S. Internal Revenue Service filed a notice of appeal in Altera Corp. v. Commissioner, 145 T.C. No. 3 (2015), to the Ninth Circuit Court of Appeal. The Ninth Circuit will decide whether a regulation that mandates that stock-based compensation costs related to the intangible development activity of a qualified cost sharing arrangement (a “QCSA”) must be included in the joint cost pool of the QCSA (the “all costs rule”) is consistent with the arm’s length standard as set forth in Section 482 of the Internal Revenue Code. We concluded that no adjustment to the consolidated financial statements as of December 31, 2016 is appropriate at this time due to the uncertainties with respect to the ultimate resolution of this case.
We file annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our reserves for income taxes reflect the most likely outcome. We adjust these reserves, as well as the related interest and penalties, in light of changing facts and circumstances. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. Any changes in estimate, or settlement of any particular position, could have a material impact on our operating results, financial condition and cash flows.
Stock-based Compensation
We measure and recognize compensation expense for all stock-based compensation awards made to employees and non-employee directors, including stock options, restricted stock units and awards related to our Employee Stock Purchase Plan (“ESPP”), based upon the grant-date fair value of those awards. The grant date fair value of restricted stock units is based on the fair value of our common stock on the date of grant. The grant date fair value of our stock options and ESPP is estimated using the Black-Scholes option pricing model.
The determination of fair value of stock options and ESPP on the date of grant, using an option-pricing model, is affected by our stock price, as well as assumptions regarding a number of highly complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates, and expected dividends. We estimated the expected life of the awards based on an analysis of our historical experience of employee exercise and post-vesting termination behavior considered in relation to the contractual life of the options and purchase rights. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of the awards. We do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future. Accordingly, our expected dividend yield is zero. In addition,
Prior to January 1, 2017, stock-based compensation expense was recorded net of estimated forfeitures and, accordingly, was recorded for only those stock-based awards that we apply an expected forfeiture rateto vest. Upon the adoption of Accounting Standard Update No. 2016-09, Compensation - Stock Compensation (Topic 718) issued by the Financial Accounting Standards Board, our accounting policy was changed to account for forfeitures as they occur. The change was applied on a modified retrospective approach with a cumulative effect adjustment of $69,000 to retained earnings as of January 1, 2017 (which increased the accumulated deficit). The implementation of this accounting standard update has no impact to our statement of cash flows
because we do not have any excess tax benefits from share-based compensation as our tax provision is primarily under full valuation allowance. No prior periods were recast as a result of this change in determining the amount of stock-based compensation. We use historical forfeitures to estimate our future forfeiture rates.accounting policy.
We recognize the stock-based compensation expense for performance-based RSUs (“PRSUs”) based on the probability of achieving certain performance criteria, as defined in the PRSU agreements. We estimate the number of PRSUs ultimately
expected to vest and recognize expense using the graded vesting attribution method over the requisite service period. Changes in our estimates related to probability of achieving certain performance criteria and number of PRSUs expected to vest could significantly affect the stock-based compensation expense from one period to the next.
If factors change and we employ different assumptions to determine the fair value of our stock-based compensation awards granted in future periods, the compensation expense that we record under it may differ significantly from what we have recorded in the current period.
See Note 13,12, “Employee Benefit Plans and Stock-based Compensation,” of the notes to our Consolidated Financial Statements for additional information.
Results of Operations
Net Revenue
The following table presents the breakdown of net revenue for each of our business segments described in Item 1 of this Annual Report on Form 10-K for each of the three years ended December 31, 2016, 2015 and 2014by geographical region (in thousands, except percentages):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | | |
| | 2016 | | 2015 | | 2014 | | 2016 vs. 2015 | | 2015 vs. 2014 |
| Video | $ | 351,489 |
| | $ | 291,779 |
| | $ | 326,756 |
| | $ | 59,710 |
| 20 | % | | $ | (34,977 | ) | (11 | )% |
| Cable Edge | 54,422 |
| | 85,248 |
| | 106,801 |
| | (30,826 | ) | (36 | )% | | (21,553 | ) | (20 | )% |
| Total net revenue | $ | 405,911 |
| | $ | 377,027 |
| | $ | 433,557 |
| | $ | 28,884 |
| 8 | % | | $ | (56,530 | ) | (13 | )% |
| | | | | | | | | | | | |
| Segment revenue as a % of total net revenue: | | | | | | | | |
| Video | 87 | % | | 77 | % | | 75 | % | | | | | | |
| Cable Edge | 13 | % | | 23 | % | | 25 | % | | | | | | |
The following table presents the breakdown of revenue by geographical region for each of the three years ended December 31, 2016, 2015 and 2014 (in thousands, except percentages):
| | | | Year ended December 31, | | | | | | | Year ended December 31, | | | | | | |
| | 2016 | | 2015 | | 2014 | | 2016 vs. 2015 | | 2015 vs. 2014 | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
| Americas | $ | 207,249 |
| | $ | 212,568 |
| | $ | 245,849 |
| | $ | (5,319 | ) | (3 | )% | | $ | (33,281 | ) | (14 | )% | $ | 218,900 |
| | $ | 171,736 |
| | $ | 207,249 |
| | $ | 47,164 |
| 27 | % | | $ | (35,513 | ) | (17 | )% |
| EMEA | 126,752 |
| | 92,422 |
| | 109,645 |
| | 34,330 |
| 37 | % | | (17,223 | ) | (16 | )% | 107,074 |
| | 117,129 |
| | 126,752 |
| | (10,055 | ) | (9 | )% | | (9,623 | ) | (8 | )% |
| APAC | 71,910 |
| | 72,037 |
| | 78,063 |
| | (127 | ) | — | % | | (6,026 | ) | (8 | )% | 77,584 |
| | 69,381 |
| | 71,910 |
| | 8,203 |
| 12 | % | | (2,529 | ) | (4 | )% |
| Total net revenue | $ | 405,911 |
| | $ | 377,027 |
| | $ | 433,557 |
| | $ | 28,884 |
| 8 | % | | $ | (56,530 | ) | (13 | )% | $ | 403,558 |
| | $ | 358,246 |
| | $ | 405,911 |
| | $ | 45,312 |
| 13 | % | | $ | (47,665 | ) | (12 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
| Regional revenue as a % of total net revenue: | Regional revenue as a % of total net revenue: | | | | | | | | | Regional revenue as a % of total net revenue: | | | | | | | | |
| Americas | 51 | % | | 56 | % | | 57 | % | | | | | | | 54 | % | | 48 | % | | 51 | % | | | | | | |
| EMEA | 31 | % | | 25 | % | | 25 | % | | | | | | | 27 | % | | 33 | % | | 31 | % | | | | | | |
| APAC | 18 | % | | 19 | % | | 18 | % | | | | | | | 19 | % | | 19 | % | | 18 | % | | | | | | |
Fiscal 20162018 compared to Fiscal 20152017
Our Video segment netNet revenue in the Americas increased $59.7$47.2 million, or 20%,27% in 20162018, compared to 2015. This increase was primarily attributable to a $40.6 million increase in video product revenue and a $19.1 million increase in video service revenue, and such increases were2017, primarily due to the acquisitionan increase in revenue from sale of TVN which contributed approximately $60.0 million of revenue in 2016. While demand for video infrastructure from our customers in the AmericasCableOS products and EMEA regions improved, overall demand trends were impacted due to several significant ongoing technology transitions and evolving Pay-TV business models.services.
Our Cable Edge segmentEMEA net revenue decreased $30.8$10.1 million, or 36%,9% in 20162018, compared to 2015. The decrease was2017, primarily due to lower revenuecable access volumes in the Americas,region and lower video product volumes as a result of soft demand for our traditional linear broadcast products, which was partially offset by increased volumes of OTT-related products as customers transition to a lesser extentOTT.
APAC net revenue increased $8.2 million, or 12% in the APAC and EMEA regions. The decrease was
2018 compared to 2017, primarily due to lower spending associated with a decrease inimproved demand as some offrom our service provider and broadcast and media customers are deferring purchases as they plan their migrationfor our video products and services.
Fiscal 2017 compared to next generation DOCSIS 3.1 technologies and CCAP architectures. Several of our cable customers have started planning for the transition from DOCSIS 3.0 to DOCSIS 3.1 technologies, which will improve high speed data services and enable our customers’ networks to adopt new CCAP architectures. We are currently developing solutions based on DOCSIS 3.1 technologies and the CCAP architecture and made our first CableOS shipments in the fourth quarter of 2016.Fiscal 2016
Net revenue in the Americas decreased $5.3$35.5 million, or 3%17%, in 20162017 compared to 2015,2016, primarily due to decreased demand for our video products as customers transition investment from traditional linear broadcast video products to our new OTT and SaaS solutions, which are being used to stream premium video content to mobile devices, computers and smart TVs, including large screen Ultra HD TVs.
EMEA net revenue decreased $9.6 million, or 8%, in 2017 compared to 2016, primarily due to the pending transitionaforementioned shift from traditional broadcast Pay-TV products to new DOCSIS 3.1OTT technologies which has impacted our Cable Edge business in the near-term, offset in part by improved service provider spending for our Video products and services.
EMEA net revenue increased $34.3 million, or 37%, in 2016 compared to 2015, primarily due to improved Video product and service revenue, which wasSaaS subscriptions, partially offset by the declinean increase in service providerCable Access segment revenue as a result of increased customer demand for our Cable Edge products as they preparenew CableOS solution, compared to transition to new DOCSIS 3.1 technologies.2016.
APAC net revenue decreased $0.1$2.5 million, or 4% in 20162017 compared to 2015, primarily attributable to softer demand for our Cable Edge products due to the pending transition to DOCISIS 3.1 technologies, partially offset by increased Video service revenue from our service provider customers.
Fiscal 2015 compared to Fiscal 2014
Our Video segment net revenue decreased $35.0 million, or 11%, in 2015 compared to 2014. This decrease was primarily attributable to a $44.2 million decrease in video product revenue, offset partially by a $9.2 million increase in video service revenue. Starting in 2014, we experienced the investment pause of several of our customers as they looked ahead towards the industry’s transition to Ultra HD and high-efficiency video coding (“HEVC”) compression and new virtualized architectures for video processing and this negative factor extended into 2015 as we saw our customers making investment decisions much slower than before. The consolidation of some of our customers in the North America and EMEA regions also contributed to the spending pause we experienced, particularly in the second half of 2015. In addition, the strengthening of the U.S. dollar contributed to the decline in our international video business, as over half of our video product revenue was derived from international customers. The increases in our service revenue were2016, primarily due to an increasetiming of customer investments in the installed base of equipment being serviced for our customers, primarily in the Americas, in both the service provider and the broadcast and media markets.
Our Cable Edge segment net revenue decreased $21.6 million, or 20%, in 2015 compared to 2014. Revenue decreased in our edgeQAM products in 2015 compared to 2014. The decrease was primarily due to lower spending associated with the consolidations of certain cable operators, both in the United States and Europe, particularly in the second half of 2015, which led to a delay in several of our anticipated large projectsvideo infrastructure as well as some decreasethe negative impact from the technology shift in demand as some of our customers looked ahead to our new next generation CCAP technologies.
Net revenue in the Americas decreased $33.3 million, or 14%, in 2015 compared to 2014 primarily due to the decreased demand for both our video processing products and Cable Edge products and the unfavorable impacts from industry consolidations and spending delays ahead of new next generation product technologies and architectures. This technology spending pause also contributed to the continued decline in net revenue in EMEA and APAC in 2015. APAC net revenue decreased $6.0 million, or 8%, in 2015 compared to 2014, primarily due to softer demand for our video processing products offset in part by increased revenue from our Cable Edge products. EMEA net revenue decreased $17.2 million, or 16%, in 2015 compared to 2014 with decreases across all product categories. The fragile economic and geopolitical climates in EMEA persisted in 2015 and coupled with the strengthening of the U.S. dollar, primarily drove the overall decline in revenue throughout pockets of Europe and Russia. EMEA revenue was also negatively impacted by industry consolidation in the second half of 2015.segments.
Gross Profit
The following presents the gross profit and gross profit as a percentage of net revenue (“gross margin”) for each of the three years ended December 31, 2016, 2015 and 2014 (in thousands, except percentages):
| | | | Year ended December 31, | | | | | | | Year ended December 31, | | | | | | |
| | 2016 | | 2015 | | 2014 | | 2016 vs. 2015 | | 2015 vs. 2014 | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
| Gross profit | $ | 200,750 |
| | $ | 202,712 |
| | $ | 212,348 |
| | $ | (1,962 | ) | (1 | )% | | $ | (9,636 | ) | (5 | )% | $ | 209,209 |
| | $ | 169,820 |
| | $ | 200,750 |
| | $ | 39,389 |
| 23 | % | | $ | (30,930 | ) | (15 | )% |
| As a percentage of net revenue (“gross margin”) | 49.5 | % | | 53.8 | % | | 49.0 | % | | | | | | | 51.8 | % | | 47.4 | % | | 49.5 | % | | 4.4 | % | | | (2.1 | )% | |
Our gross margins are dependent upon, among other factors, the proportion of software sales, product mix, customer mix, product introduction costs, price reductions granted to customers and achievement of cost reductions.
Gross margin increased 4.4% in 2018, as compared to 2017, primarily due to more favorable margins generated in our Cable Access segment due to increased CableOS activity. Our Video segment gross margin also improved marginally, primarily due to a favorable product mix.
Gross margin decreased to 49.5%2.1% in 20162017, as compared to 53.8% in 2015. The decrease in gross margin was2016, primarily due to the inclusion of TVN’s operating results which resulted in higher material, labor and overhead costs attributablean unfavorable product mix, including transition from our traditional linear broadcast products to the additional headcount and facilities acquired in connection with the TVN acquisition,our new SaaS solutions, as well as the restructuringlower service margins due to increased CableOS field trial activities and new production introduction costs, incurred in 2016 related to the termination of employees of the TVN French Subsidiary under the TVN VDP,higher under-absorbed factory overhead costs, primarily driven by lower revenue and the increase of $3.7 million in amortization expense related to intangibles acquired from TVN. Additionally, gross margin was unfavorably impacted bypurchase levels year over year. In 2017, we recorded an inventory obsolescence charge of approximately $3.7 million for our legacy Cable Access product lines, compared to $4.0 million for some older Cable Edge product lines, recorded in accordance with our policy for excess and obsolete inventory and also as part of our strategic plan to reposition and dedicate our primary resources to our new CableOS product. These unfavorable margin impacts were offset in part by increased service and support revenue in 2016 compared to 2015.
Gross margin increased to 53.8% in 2015 compared to 49.0% in 2014. The increase in gross margin was primarily due to decreased expenses related to amortization, operational efficiencies and product mix shifts in our product portfolio. The expense related to amortization of intangibles included in cost of revenue decreased from $13.7 million in 2014 to $0.7 million in 2015, primarily due to the majority of our purchased tangible assets becoming fully amortized.2016.
Research and Development
Our research and development expense consistsexpenses consist 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. The following table presents the research and development expenses and the expenseexpenses as a percentage of net revenue for each of the three years ended December 31, 2016, 2015 and 2014 (in thousands, except percentages):
| | | | Year ended December 31, | | | | | | | Year ended December 31, | | | | | | |
| | 2016 | | 2015 | | 2014 | | 2016 vs. 2015 | | 2015 vs. 2014 | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
| Research and development | $ | 98,401 |
| | $ | 87,545 |
| | $ | 93,061 |
| | $ | 10,856 |
| 12 | % | | $ | (5,516 | ) | (6 | )% | $ | 89,163 |
| | $ | 95,978 |
| | $ | 98,401 |
| | $ | (6,815 | ) | (7 | )% | | $ | (2,423 | ) | (2 | )% |
| As a percentage of net revenue | 24.2 | % | | 23.2 | % | | 21.5 | % | | | | | | | 22.1 | % | | 26.8 | % | | 24.2 | % | | | | | | |
The $10.9$6.8 million, or 12%7%, increasedecrease in research and development expenseexpenses in 20162018 compared to 20152017 was primarily due to lower employee compensation costs due to headcount reductions, lower utilization of third-party engineering services as the inclusionCompany continues the process of TVN’s post-acquisitiontransforming its research and development activities from capital intensive hardware development to predominantly software development and lower travel and other discretionary costs due to vigilant cost management throughout the Company. The decrease in research and development expenses and higher expenses for CableOS product development. Such increase was partially offset in part by approximately $6.0 million in reimbursements of engineering spending by one of our large customers which ended in 2017 and higher incentive compensation associated with the Company’s performance. The research and development expense in 2018 was net of $5.9 million of French R&D tax credits.
The $2.4 million, or 2%, decrease in research and development expenses in 2017 compared to 2016 was primarily due to lower project material and outside consulting spending due to the completion of certain research and development projects in early 2017, lower employee compensation costs due to headcount reduction, and lower outside engineering services due to cost reduction efforts. The research and development expenses in each of 2017 and 2016 were net of $6.0 million in reimbursements of engineering spending in each of the year by one of our large customers, as well as approximately$5.9 million and $6.1 million of French R&D tax credits, in 2016.respectively.
Our TVN French Subsidiary participates in the French CIR program which allows companies to monetize eligible research expenses. We recognize R&D tax credits receivable from the French government for spending on innovative research and development as an offset to research and development expenses.
The $5.5 million, or 6%, decrease in research and development expense in 2015 compared to 2014 was primarily attributable to decreased headcount and related expenses as a result of our worldwide workforce reduction related to our restructuring plans, and to a lesser extent, due to a favorable impact from the strengthened U.S. dollar on our spending denominated in Israeli shekels, reimbursement of research and development expenses for work performed for one of our customers, and decreased depreciation for testing equipment.
Selling, General and Administrative
The following table presents the selling, general and administrative expenses and the expense as a percentage of net revenue for each of the three years ended December 31, 2016, 2015 and 2014 (in thousands, except percentages):
| | | | Year ended December 31, | | | | | | | Year ended December 31, | | | | | | |
| | 2016 | | 2015 | | 2014 | | 2016 vs. 2015 | | 2015 vs. 2014 | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
| Selling, general and administrative | $ | 144,381 |
| | $ | 120,960 |
| | $ | 131,322 |
| | $ | 23,421 |
| 19 | % | | $ | (10,362 | ) | (8 | )% | $ | 118,952 |
| | $ | 136,270 |
| | $ | 144,381 |
| | $ | (17,318 | ) | (13 | )% | | $ | (8,111 | ) | (6 | )% |
| As a percentage of net revenue | 35.6 | % | | 32.1 | % | | 30.3 | % | | | | | | | 29.5 | % | | 38.0 | % | | 35.6 | % | | | | | | |
The $23.4$17.3 million, or 19%, increase in selling, general and administrative expenses in 2016 compared to 2015 was primarily due to the inclusion of TVN’s post-acquisition selling, general and administrative expenses, as well as TVN acquisition- and integration-related costs. Such increases were offset in part by lower variable employee compensation related
expenses mainly due to a decrease in headcount and efforts to reduce sales and marketing related expenses. See Note 3, “Business Acquisition,” of the notes to our Consolidated Financial Statements for additional information on TVN acquisition- and integration-related costs.
The $10.4 million, or 8%13%, decrease in selling, general and administrative expenses in 20152018 compared to 20142017 was primarily attributabledue to decreasedlower employee compensation costs due to headcount reductions, higher legal and related expenses as a result of our worldwide workforce reductionsettlement charges recorded during 2017 related to our restructuring plansAvid litigation, and lower variable employeetravel and other discretionary costs due to vigilant cost management throughout the Company. This decrease was partially offset by higher incentive compensation associated with the Company’s performance.
The $8.1 million, or 6%, decrease in selling, general and administrative expenses in 2017 compared to 2016 was primarily due to lower TVN acquisition- and integration- related costs in 2017 as majority of the integration projects were completed in early 2017. In addition, lower headcount expenses as well as decreasedand lower depreciation for demonstration equipment and cost containment effortexpenses from reduction in sales and marketing related expenses.capital expenditure also contributed to the decrease year over year. These decreasesreductions were offset in part by an increasea $6.0 million charge related to the Avid litigation settlement in legal and professional expenses in connection with the acquisition of TVN.2017.
Segment Operating Income (Loss)Financial Results
The following table presents a breakdown of operating income (loss)provides summary financial information by reportable segment for each of the three years ended December 31, 2016, 2015 and 2014 (in thousands, except percentages):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | | |
| | 2016 | | 2015 | | 2014 | | 2016 vs. 2015 | | 2015 vs. 2014 |
| Video | $ | 11,963 |
| | $ | 13,529 |
| | $ | 18,073 |
| | $ | (1,566 | ) | (12 | )% | | $ | (4,544 | ) | (25 | )% |
| Cable Edge | (12,131 | ) | | (1,599 | ) | | 1,239 |
| | (10,532 | ) | 659 | % | | (2,838 | ) | (229 | )% |
| Total segment operating income (loss) | $ | (168 | ) | | $ | 11,930 |
| | $ | 19,312 |
| | (12,098 | ) | (101 | )% | | (7,382 | ) | (38 | )% |
| | | | | | | | |
| | | |
| Segment operating income (loss) as a % of segment revenue: | | | | | | |
| Video | 3.4 | % | | 4.6 | % | | 5.5 | % | | | | | | |
| Cable Edge | (22.3 | )% | | (1.9 | )% | | 1.2 | % | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | | |
| | 2018 (2) | | 2017 (1) | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
| Video | | | | | | | | | | | |
| Revenue | $ | 313,828 |
| | $ | 319,473 |
| | $ | 351,489 |
| | $ | (5,645 | ) | (2 | )% | | $ | (32,016 | ) | (9 | )% |
| Gross profit | 178,170 |
| | 173,414 |
| | 194,044 |
| | 4,756 |
| 3 | % | | (20,630 | ) | (11 | )% |
| Operating income (loss) | 26,170 |
| | (2,024 | ) | | 11,963 |
| | 28,194 |
| (1,393 | )% | | (13,987 | ) | (117 | )% |
| Segment revenue as % of total segment revenue | 77.5 | % | | 89.2 | % | | 86.6 | % | | (11.7 | )% | | | 2.6 | % | |
| Gross margin % | 56.8 | % | | 54.3 | % | | 55.2 | % | | 2.5 | % | | | (0.9 | )% | |
| Operating margin % | 8.3 | % | | (0.6 | )% | | 3.4 | % | | 8.9 | % | | | (4.0 | )% | |
| Cable Access | | | | | | | | | | | |
| Revenue | $ | 90,908 |
| | $ | 38,773 |
| | $ | 54,422 |
| | $ | 52,135 |
| 134 | % | | $ | (15,649 | ) | (29 | )% |
| Gross profit | 40,207 |
| | 8,892 |
| | 21,174 |
| | 31,315 |
| 352 | % | | (12,282 | ) | (58 | )% |
| Operating loss | (578 | ) | | (23,154 | ) | | (12,131 | ) | | 22,576 |
| (98 | )% | | (11,023 | ) | 91 | % |
| Segment revenue as % of total segment revenue | 22.5 | % | | 10.8 | % | | 13.4 | % | | 11.7 | % | | | (2.6 | )% | |
| Gross margin % | 44.2 | % | | 22.9 | % | | 38.9 | % | | 21.3 | % | | | (16.0 | )% | |
| Operating margin % | (0.6 | )% | | (59.7 | )% | | (22.3 | )% | | 59.1 | % | | | (37.4 | )% | |
| Total | | | | | | | | | | | |
| Segment Revenue | $ | 404,736 |
| | $ | 358,246 |
| | $ | 405,911 |
| | $ | 46,490 |
| 13 | % | | $ | (47,665 | ) | (12 | )% |
| Gross profit | 218,377 |
| | 182,306 |
| | 215,218 |
| | 36,071 |
| 20 | % | | (32,912 | ) | (15 | )% |
| Operating income (loss) | 25,592 |
| | (25,178 | ) | | (168 | ) | | 50,770 |
| (202 | )% | | (25,010 | ) | 14,887 | % |
The following table presents a
A reconciliation of totalour consolidated segment operating income (loss) to consolidated loss before income taxes is as follows (in thousands):
| | | | Year ended December 31, | Year ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 (2) | | 2017 (1) | | 2016 |
| Total segment operating income (loss) | $ | (168 | ) | | $ | 11,930 |
| | $ | 19,312 |
| $ | 25,592 |
| | $ | (25,178 | ) | | $ | (168 | ) |
Amortization of warrants (2) | | (1,178 | ) | | — |
| | — |
|
| Unallocated corporate expenses | (38,972 | ) | | (2,794 | ) | | (3,076 | ) | (3,769 | ) | | (20,767 | ) | | (38,972 | ) |
| Stock-based compensation | (13,060 | ) | | (15,582 | ) | | (17,287 | ) | (17,289 | ) | | (16,610 | ) | | (13,060 | ) |
| Amortization of intangibles | (14,836 | ) | | (6,502 | ) | | (20,520 | ) | (8,367 | ) | | (8,322 | ) | | (14,836 | ) |
| Loss from operations | (67,036 | ) | | (12,948 | ) | | (21,571 | ) | |
| Consolidated loss from operations | | (5,011 | ) | | (70,877 | ) | | (67,036 | ) |
| Non-operating expense, net | (13,394 | ) | | (3,120 | ) | | (224 | ) | (11,937 | ) | | (13,830 | ) | | (13,394 | ) |
| Loss before income taxes | $ | (80,430 | ) | | $ | (16,068 | ) | | $ | (21,795 | ) | $ | (16,948 | ) | | $ | (84,707 | ) | | $ | (80,430 | ) |
Fiscal 2016(1) We have historically employed an aggregate allocation methodology based on total revenues to attribute professional services revenue and sales expenses between our Video and Cable Access segments. Beginning in the fourth quarter of 2017, we have prospectively changed to a more precise attribution methodology as the activities of selling and supporting our CableOS solution have become increasingly distinct from those of our Video solutions. The impact of making this change for the year ended December 31, 2017 compared to Fiscal 2015
Video segment operating income decreased $1.6 million, or 12%, in 2016 compared to 2015, and operating margin decreased from 4.6% in 2015 to 3.4% in 2016. The decreaseour historical approach was primarily attributable to unfavorable product mix and the inclusion of TVN’s lower gross margins and higher headcount-related and facilities costs related to the TVN acquisition.
Cable Edge segment operating loss increased $10.5 million, or 659%, in 2016 compared to 2015, and operating margin decreased from (1.9)% in 2015 to (22.3)% in 2016. Thean increase in operating loss of $5.9 million from the Video segment and a corresponding decrease in operating loss of the Cable Access segment. We believe that the updated allocation methodology provides greater clarity regarding the operating metrics of the Video and Cable Access business segments.
(2) Our segment revenue for 2018 is not net of amortization of Comcast warrants, which primarily relate to our Cable Access segment. After netting the amortization of warrants from the segment revenue for Cable Access, our revenue for Cable Access segment for the year ended December 31, 2018 was $89,730 thousand and our total revenue for the year ended December 31, 2018 was $403,558 thousand.
Unallocated Corporate Expenses
Together with amortization of intangibles and stock-based compensation, we do not allocate restructuring and related charges, TVN acquisition- and integration-related costs, and certain other non-recurring charges to the operating income for each segment because our management does not include this information in the measurement of the performance of the operating segments.
Video
Our Video segment net revenue decreased $5.6 million, or 2% in 2018, compared to 2017, due to a decrease of $4.4 million in Video service revenue and a decrease of $1.2 million in Video product revenue. The decrease in our Video service revenue in 2018 was primarily due to a 36%reduced activity in connection with SaaS deployments. The decrease in our Video product revenue was primarily due to decreased demand for our traditional linear broadcast products as customers transition to our new OTT and SaaS solutions. Video segment operating margin increased 8.9% in 2018, compared to 2017, primarily due to better margins as a result of a more favorable product mix, lower operating expenses due to headcount reductions and lower other discretionary costs due to vigilant cost management throughout the Company. The increase in Video segment margin was partially offset by a decrease due to the change in methodology for allocating professional services revenue between segments in the fourth quarter of 2017.
Our Video segment net revenue decreased $32.0 million, or 9%, in 2017 compared to 2016, due to a $39.9 million decrease in video product revenue, offset in part by a $7.9 million increase in video service revenue. The decrease in our Video segment net revenue in 2017 reflects our customers’ transition from our traditional linear broadcast products to our new OTT technologies and SaaS solutions, partially offset by higher revenue due to the inclusion of two additional months of TVN post-acquisition revenue, compared to 2016. Video segment operating margin decreased 4.0% in 2017, compared to 2016, primarily due to decrease in video product revenue which led to higher unabsorbed factory overhead and higher inventory obsolescence charges for our legacy broadcast video inventory, offset partially by a decrease in discretionary operating expenses.
Cable EdgeAccess
Our Cable Access segment net revenue increased $52.1 million, or 134% in 2018, compared to 2017, primarily due to increase in shipments of hardware, software and services for our CableOS solution. Cable Access segment operating margin increased 59.1% in 2018, compared to 2017, due to higher revenue and related higher margins on sale of both software and professional services. The change in methodology for allocating professional services revenue between segments in the fourth quarter of 2017 also contributed to the increase in Cable Access margins in 2018 as compared to 2017.
Our Cable Access segment net revenue decreased $15.6 million, or 29%, in 2017 compared to 2016, primarily due to continuing lower demand for our legacy EdgeQAM technologies as some of our customers deferred purchases as they plan for a migration to next generation technologies and architectures. Cable Access segment operating margin decreased 37.4% in 2017, compared to 2016, due to the reduced demand for our legacy EdgeQAM products as well as higher service costs related to increased CableOS trial activity and new product introduction costs, as well as higher research and development expenses for CableOS development.
Fiscal 2015 compared to Fiscal 2014
Video segment operating income decreased $4.5 million, or 25%,development in 2015 compared to 2014, and operating margin decreased from 5.5% in 2014 to 4.6% in 2015. The decrease was primarily attributable to an 11% decrease in Video segment revenue, offset in part by the favorable impact from a reduction in operating expenses primarily due to decreased headcount and employee variable compensation related expenses, depreciation for demonstration equipment and cost containment effort in sales and marketing related expenses, as well as efficiencies from manufacturing and overhead spending.
Cable Edge segment operating income decreased $2.8 million, or 229%, in 2015 compared to 2014, and operating margin decreased from 1.2% in 2014 to (1.9)% in 2015. The unfavorable impact from a 20% decrease in Cable Edge segment revenue was primarily offset by efficiencies from manufacturing and overhead spending, especially for our NSG Pro products as well as lower research and development expenses.
Unallocated Corporate Expenses
Unallocated corporate expenses include certain corporate-level operating expenses and charges such as restructuring and related charges and excess facilities charges. Additionally, the unallocated corporate expenses in 2016 included $16.9 million of TVN acquisition- and integration-related costs (see Note 3, “Business Acquisition,” of the notes to our Consolidated Financial Statements for additional information) and $13.1 million of restructuring costs related to the TVN voluntary departure plan (see Note 11, “Restructuring and Asset Impairment charges-TVN VDP,” of the notes to our Consolidated Financial Statements for additional information) and an inventory obsolescence charge of approximately $4.0 million recorded for some older Cable Edge product lines in accordance with our policy for excess and obsolete inventory and also as part of our strategic plan to re-position and dedicate our primary Cable Edge resources to our new CableOS products.2017.
Amortization of Intangibles
The following table summarizes the amortization of intangibles (in thousands, except percentages): | | | | Year ended December 31, | | | | | | | Year ended December 31, | | | | | | |
| | 2016 | | 2015 | | 2014 | | 2016 vs. 2015 | | 2015 vs. 2014 | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
| Amortization of intangibles | $ | 10,402 |
| | $ | 5,783 |
| | $ | 6,775 |
| | $ | 4,619 |
| 80 | % | | $ | (992 | ) | (15 | )% | $ | 3,187 |
| | $ | 3,142 |
| | $ | 10,402 |
| | $ | 45 |
| 1 | % | | $ | (7,260 | ) | (70 | )% |
| As a percentage of net revenue | 2.6 | % | | 1.5 | % | | 1.6 | % | | | | | | | 0.8 | % | | 0.9 | % | | 2.6 | % | | | | | | |
The increase in the amortization of intangibles expense in 20162018 remained relatively flat compared to 2015 was primarily due to the amortization of intangibles related to the acquisition of TVN. 2017.
The decrease in the amortization of intangibles expense in 20152017, compared to 20142016, was primarily due to certain purchased tangible assets from prior businessintangibles for customer relationships and maintenance agreements relating to Omneon acquisition becomingbeing fully amortized.amortized in 2016.
Restructuring and Related Charges
We have implemented several restructuring plans in the past few years and recorded restructuring and related charges of $18.0 million, $1.5 million and $3.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.years. The goal of these plans wasis to bring operational expenses to appropriate levels relative to our net revenues, while simultaneously implementing extensive company-wide expense control programs.
We account for our restructuring plans under the authoritative guidance for exit or disposal activities. The restructuring and related charges are included in “Product cost“Cost of revenue” and “Operating expenses-restructuring and related charges” in the Consolidated Statements of Operations. The following table summarizes the restructuring and related charges (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | | | | |
| | 2016 | | 2015 | | 2014 | | 2016 vs. 2015 | | 2015 vs. 2014 |
| Product cost of revenue | $ | 3,400 |
| | $ | 113 |
| | $ | 315 |
| | $ | 3,287 |
| | 2,909 | % | | $ | (202 | ) | | (64 | )% |
| Operating expenses-Restructuring and related charges | 14,602 |
| | 1,372 |
| | 2,761 |
| | 13,230 |
| | 964 | % | | (1,389 | ) | | (50 | )% |
| Total | $ | 18,002 |
| | $ | 1,485 |
| | $ | 3,076 |
| | $ | 16,517 |
| | 1,112 | % | | $ | (1,591 | ) | | (52 | )% |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | | | | |
| | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
| Cost of revenue | $ | 857 |
| | $ | 1,279 |
| | $ | 3,400 |
| | $ | (422 | ) | | (33 | )% | | $ | (2,121 | ) | | (62 | )% |
| Operating expenses-Restructuring and related charges | 2,918 |
| | 5,307 |
| | 14,602 |
| | (2,389 | ) | | (45 | )% | | (9,295 | ) | | (64 | )% |
| Total restructuring and related charges | $ | 3,775 |
| | $ | 6,586 |
| | $ | 18,002 |
| | $ | (2,811 | ) | | (43 | )% | | $ | (11,416 | ) | | (63 | )% |
The $2.8 million decrease in restructuring and related charges of $18.0 million in 2016 were2018, compared to 2017, was primarily relateddue to the 2016 restructuring plan implemented in the first quarter of 2016 (the “Harmonic 2016 Restructuring Plan”), net of $2.0 million of gain fromhigher TVN pension curtailment. The restructuring charges of $1.5 million in 2015 were primarily related to the 2015 restructuring plan (the “Harmonic 2015 Restructuring Plan”) implemented during the fourth quarter of 2014. Of the $3.1 million restructuring chargesVDP and severance costs recorded in 2014, $2.2 million was recorded in the fourth quarter of 20142017 related to the Harmonic 20152016 and 2017 Restructuring planPlans, partially offset by facility exit costs and the remaining $0.9 million were related to restructuring plan implemented in the first quarter of 2013 (the “Harmonic 2013 Restructuring Plan”).
Harmonic 2016 Restructuring Plan
In the first quarter of 2016, we implemented a new restructuring plan to streamline the corporate organization, thereby reducing operatingseverance costs by consolidating duplicative resources in connection with the acquisition of TVN. The planned activities have primarily resulted, and will primarily result, in cash expenditures related to severance and related benefits,
exiting certain operating facilities and disposing of excess assets. In the second quarter of 2016, as part ofrecorded under the Harmonic 20162018 Restructuring Plan, we also initiated the TVN VDP to streamline the organization of our TVN French Subsidiary.Plan.
In 2016, we recorded an aggregate of $20.0The $11.4 million ofdecrease in restructuring and related charges under the Harmonicin 2017, compared to 2016, Restructuring Plan,was primarily due to lower TVN VDP costs in 2017, compared to 2016. Most of which $2.2 million is primarily related to the exit from the excess facility at our U.S. headquarters and the remaining $17.8 million is related to severance and benefits for the termination of 118 employees worldwide, including 83 employees in France who participated in the TVN VDP. Additionally, the restructuring and related charges under the Harmonic 2016 Restructuring Plan is offset by approximately $2.0 million of gain from TVN pension curtailment. For the employees who participated in the TVN VDP their pension benefit will be funded by the TVN VDP and as a result, the TVN defined benefit pension plan was remeasured at December 31, 2016, which resulted in a non-cash curtailment gain. We also incurred $16.9 million of TVN acquisition- and integration-related expensescosts were recorded in 2016 (Seebased on the departing employees’ service period.
See Note 3, “Business Acquisition,10, “Restructuring and Related Charges,” of the notesNotes to our Consolidated Financial Statements for additional informationdetails on TVN acquisition-and integration-related expenses).
A majorityeach of the 2016our restructuring and integration activities were completed in 2016 but someplans.
TVN VDP
In the second quarter of 2016, we initiated a consultative process with the works council for the TVN French Subsidiary and applicable union representatives to establish a voluntary departure plan to enable French employees of TVN to voluntarily terminate their employment with certain benefits. We finalized the consultation process and the terms of the voluntary departure plan in the third quarter of 2016. Following approval of the TVN VDP by the applicable French authorities in September 2016, employees were invited to apply for the voluntary termination benefits detailed in the TVN VDP. A total of 83 employees applied for the TVN VDP and were duly approved by us in the fourth quarter of 2016.
The total TVN VDP costs, including severance, certain benefits and taxes, as well as administration costs, is estimated to be approximately $15.3 million, in the aggregate, and will be paid over a period of four years, based on the TVN VDP terms agreed upon with each employee. The fair value of the total TVN VDP liability at inception is estimated to be approximately $14.8 million.
We account for these special termination benefits in accordance with ASC 712, “Compensation - Non-retirement Post-employment Benefits,” which requires that the special termination benefits be recognized as a liability and a loss beginning when an employee accepts the offer of voluntary termination and the amount can be reasonably estimated. Where an employee is required to work beyond a minimum statutory notice period, the cost of the special termination benefit is recognized as an expense over the employee’s remaining service period. Where the employee is not required to work beyond a minimum statutory notice period, the cost of the special termination benefit is recognized upon the date the employee accepts the offer of voluntary termination, provided that the amount of the benefit can be estimated. Out of the 83 employees who applied for the TVN VDP, 11 of them are required to work beyond the minimum statutory notice period into 2017. Based on the application of the accounting guidance, we recorded a charge of $13.1 million for TVN VDP costs in the fourth quarter of 2016, of which $3.5 million was already paid in 2016, resulting in a TVN VDP liability balance of $9.6 million at December 31, 2016.
Future TVN VDP payments, including severance, certain benefits and taxes, as well as administration costs, at December 31, 2016, are as follows (in thousands):
|
| | | |
| Years ending December 31, | |
| 2017 | $ | 6,757 |
|
| 2018 | 3,021 |
|
| 2019 | 1,492 |
|
| 2020 | 696 |
|
| Total VDP payments | $ | 11,966 |
|
Excess Facilities in San Jose, California
In January 2016, we exited an excess facility at our U.S. headquarters in San Jose, California and recorded $1.4 million in facility exit costs. We account for facility exit costs in accordance with ASC 420, “Exit or Disposal Cost Obligations”, which requires that a liability for such costs be recognized and measured initially at fair value on the cease-use date based on remaining lease rentals, adjusted for the effects of any prepaid or deferred items recognized, reduced by the estimated sublease
rentals that could be reasonably obtained even if it is not the intent to sublease. The fair value of these liabilities is based on aInterest Expense, Net
Interest expense, net present value model using a credit-adjusted risk-free rate. The liability will be paid out over the remainder of the leased properties’ terms, which continue through August 2020. Actual sublease terms may differ from the estimates originally made by us. Any future changes in the estimates or in the actual sublease income could require future adjustments to the liabilities, which would impact net income in the period the adjustment is recorded. As of the cease-use date, the fair value of this restructuring liability totaled $2.5 million. Offsetting these charges was an adjustment for deferred rent liability relating to this space of $1.1 million. In December 2016, as a result of a change in the estimate in sublease income, the restructuring liability was increased by $0.6 million.
Harmonic Prior Restructuring plans
The restructuring and related charges of $1.5$11.4 million, in 2015 were under the Harmonic 2015 Restructuring Plan which primarily consisted of severance and benefits for the termination of 56 employees worldwide.
The restructuring and related charges of $3.1 million in 2014 consisted of $2.2$11.1 million and $0.9$10.6 million incurred under the Harmonic 2015 Restructuring Planduring 2018, 2017 and Harmonic 2013 Restructuring Plan,2016, respectively. The $3.1 million restructuring and related chargesyear-over-year increase in 2014 consistedinterest expense, net is primarily of $1.5 million of severance and benefits related to 44 employees terminated worldwide, $1.1 million of fixed asset impairment charge related to software development costs incurred for a discontinued project, and $0.5 million of other charges.
See Note 11, “Restructuring and related Charges,” of the notes to our Consolidated Financial Statements for additional information on each restructuring plan.
Interest Income (Expense), Net
Interest income (expense), net was $(10.6) million, $(0.3) million and $0.1 million during 2016, 2015 and 2014, respectively. Interest expense increased in 2016 due to the additional interest expenses associated withhigher amortization of debt discount and issuance costs for the Notes issued in December 2015.
In December 2015, we issued $128.25 million aggregate principal amount of convertible senior notes due 2020 (“the Notes”) through a private placement with a financial institution. The Notes bear interest at 4.00% per annum, which is payable semiannually in arrears on June 1 and December 1 of each year, commencing June 1, 2016. In accordance with accounting guidance on embedded conversion features, we valued and bifurcated the conversion option associated with the Notes recording $26.9 million in stockholders’ equity. We incurred approximately $4.1 million of debt issuance costs in connection with the issuance of the Notes which we recorded as a deduction to the carrying amount of the Notes and $0.8 million of debt issuance costs was allocated to stockholders’ equity. The resulting net debt discount, difference between the principal amount of the Notes and the carrying value of the Notes, of $30.2 million is amortized to interest expenses at an effective interest rate of 9.94% over the contractual term of the Notes. In 2016, we recorded $5.1 million of coupon interest expense and $5.0 million of interest expenses related to the amortization of debt discount and debt issuance costs. In 2015, we recorded $240,000 of coupon interest expense and $216,000 of interest expenses related to the amortization of debt discount and debt issuance costs. (See See Note 12,11, “Convertible Notes, Other Debts and Capital Leases,” of the notesNotes to our Consolidated Financial Statements for additional information on the Notes).information.
Other Expense, Net
Other expense, net was $31,000, $0.3$0.5 million, $2.2 million and $0.4 million$31,000 during 2016, 20152018, 2017 and 2014,2016, respectively. Other expense, net is primarily comprised of foreign exchange gains and losses on cash, accounts receivable and intercompany balances denominated in currencies other than the functional currency of the reporting entity. Our foreign currency exposure is primarily driven by the fluctuations in the foreign currency exchanges rates of the Euro, British pound, Japanese yen and Israeli shekels. To mitigate the volatility relatedshekel. The decrease in other expense, net in 2018 compared to fluctuations in the2017 was primarily due to higher foreign exchange rates, we enter into various foreign currency forward contracts.losses resulting from the strengthening of the Euro against the U.S. dollars in 2017. See “Foreign Currency Exchange Risk” under Item 7A of this Annual Report on Form 10-K for additional information.
Loss on Impairment of Long-term InvestmentInvestments
In 2016,2014, we acquired a 3.3% interest in Vislink plc (“Vislink”), a U.K. public company listed on the AIM exchange, for $3.3 million. On February 3, 2017, Vislink completed the disposal of its hardware division and changed its name to Pebble Beach Systems (“PBS”).
Since mid-2016, the stock price of Vislink, our equity investment which trades on the AIM exchange, continued to bePBS, has traded below its cost basis for several months. Based on our assessment of the positive and negative factors of Vislink’s financial and business conditions, we believe that more-likely-than-not, Vislink’s stock price may not recover to its cost basis and, as a result of which we recorded a total of $2.7 million and $0.5 in impairment charges in 2016 reflecting a new reduced cost basis. Our remaining maximum exposure to loss from the Vislinkand 2017, respectively. We sold this investment at December 31, 2016 was limited to our reduced investment cost of $0.8 million.
In March 2015, we attended a VJU board meeting as an observer. At that meeting, we were 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 we had received from VJU. Based on our assessment, we determined that our investment in VJU was impaired on an other-than-temporary basis. As a result, we recorded an impairment charge of $2.5$0.1 million in 2015. Our impairment loss in VJU is limited to our initial costthe third quarter of investment of $2.5 million as well as the $0.1 million of research and development cost expensed in September 2014.2018.
See Note 5, “Investments in Other Equity Securities,” of the notes to our Consolidated Financial Statements for additional information.
Income Taxes
We reported the following operating results for each of the three years ended December 31, 2016, 20152018, 2017 and 20142016 (in thousands, except percentages):
| | | | Year ended December 31, | Year ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| Loss before income taxes | (80,430 | ) | | (16,068 | ) | | (21,795 | ) | (16,948 | ) | | (84,707 | ) | | (80,430 | ) |
| Provision for (benefit from) income taxes | (8,116 | ) | | (407 | ) | | 24,453 |
| 4,087 |
| | (1,752 | ) | | (8,116 | ) |
| Effective income tax rate | 10 | % | | 3 | % | | (112 | )% | (24 | )% | | 2 | % | | 10 | % |
Our effective tax rate generally differs from the U.S. federal statutory rate of 35%21% due to favorable tax rates associated with certain earnings from our operations in lower tax jurisdictions throughout the world.world and our valuation allowance in the U.S. In addition, our effective tax rates vary in each period primarily due to specific one-time, discrete items that affected the tax rate in the respective period.
In 2018, our effective income tax rate of (24)% differed from the U.S. federal statutory rate of 21% primarily due to geographical mix of income and losses, full valuation allowance against U.S. federal, California and other states deferred tax assets, foreign withholding taxes and income taxes on earnings from operations in foreign tax jurisdictions.
On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted which, among other things, lowered the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. As of December 31, 2018, we completed the accounting for transition tax and concluded that it had no tax impact because our cumulative unremitted earnings and profits are negative.
The TCJA also includes a requirement to pay a minimum tax on foreign earnings for tax years beginning after December 31, 2017. An accounting policy choice is allowed to either treat taxes due on future U.S. inclusions as a current period expense or account for the minimum tax in the measurement of deferred tax assets. We elected to treat the minimum tax as a period cost. As such, we did not recognize any deferred taxes related to the minimum tax.
In 2017, our effective income tax rate of 2% differed from the U.S. federal statutory rate of 35% primarily due to our geographical income mix, favorable tax rates associated with certain earnings from operations in lower-tax jurisdictions, tax rate changes in foreign jurisdictions, tax benefits associated with the release of tax reserves for uncertain tax positions resulting from the expiration of the applicable statute of limitations, a one-time benefit from the reduction of a valuation allowance on alternative minimum tax (“AMT”) credit carryforwards that will be refundable as a result of the TCJA, partially offset by the increase in the valuation allowance against U.S. federal, California and other state deferred tax assets, detriment from non-deductible stock-based compensation, and the net of various other discrete tax adjustments.
In 2016, our effective income tax rate of 10% differed from the then-applicable U.S. federal statutory rate of 35% primarily due to our geographical income mix and our tax valuation allowance, favorable tax rates associated with certain earnings from operations in lower-tax jurisdictions, favorable resolutions of uncertain tax positions, and the tax benefit from the realization of certain deferred tax assets as a result of the TVN acquisition, partially offset by the increase in the valuation allowance against U.S. federal, California and other state deferred tax assets, detriment from non-deductible stock-based compensation, non-deductible amortization of foreign intangibles, and the net of various discrete tax adjustments.
In 2015, our effective income tax rate of 3% differed from the U.S. federal statutory rate of 35%, primarily due to a difference in foreign tax rates and our losses generated in the United States for the year received no tax benefit as a result of a full valuation allowance against all of our U.S. deferred tax assets, as well as adjustments relating to our 2014 U.S. federal tax return filed in September 2015 and a reversal of uncertain tax positions resulting from the expiration of statutes of limitations. In addition, the impairment of the VJU investment (see Note 5, “Investments in Other Equity Securities”) received no tax benefit.
In 2014, as a result of cumulated losses in the recent years and the analysis of all available positive and negative evidence, we recorded a full valuation allowance against the beginning of year U.S. net deferred tax assets of $34.0 million. In addition, in 2014, we carried back our 2013 federal net operating loss to 2011 resulting in a tax refund. Certain federal R&D credits were also freed up as a result and utilized to offset income tax reserves as a result of the adoption of ASU 2013-11. These two events reduced the valuation allowance by approximately $5.0 million and led to the net change of valuation allowance of $29.0 million. This unfavorable net impact was offset partially by a tax benefit of $9.0 million associated with the release of tax reserves including accrued interest and penalties, for our 2010 tax year in the United States, as a result of the expiration of the applicable statute of limitation for that year.adjustments.
For a reconciliation of our effective tax rate to the U.S. federal statutory rate of 35%21% and further explanation of our provision for taxes, see Note 15,14, “Income Taxes,” of the notes to our Consolidated Financial Statements.
Liquidity and Capital Resources
As of December 31, 2016,2018, our principal sources of liquidity consisted of cash and cash equivalents of $55.6 million, short-term investments of $6.9$66.0 million, net accounts receivable of $86.8$81.8 million, our $15 million line of credit with Silicon Valley Bank, described in more detail below, and borrowings from the capital markets as well as financing from French government agencies. As of December 31, 2018, we had $128.25 million in convertible senior notes outstanding (“Notes”), which are due on December 1, 2020. The Notes bear interest at a fixed rate of 4.00% per year, payable semiannually in arrears on June 1 and December 1 of each year. We assumed certainalso had debts as a result of the TVN acquisition which were primarily related to long-term financing arrangements with French government agencies and to a lesser extent, financing obtained fromwith other financingfinancial institutions, andprimarily in France, in the aggregate balance of these debts was $21.2$19.9 million at December 31, 2016. 2018.
Our cash and cash equivalents of $66.0 million as of December 31, 2018 consisted of bank deposits held throughout the world, of which $48.1 million of the cash and cash equivalents balance was held outside of U.S. At present, such foreign funds are considered to be indefinitely reinvested in foreign countries to the extent of indefinitely reinvested foreign earnings. In the event funds from foreign operations are needed to fund cash needs in the United States and if U.S. taxes have not already been previously accrued, we may be required to accrue and pay additional U.S. and foreign withholding taxes in order to repatriate these funds.
Our principal uses of cash will include repayments of debt and related interest, purchases of inventory, payroll, restructuring
expenses, TVN acquisition- and integration-related expenses, and other operating expenses related to the development and marketing of our products, purchases of property and equipment and other contractual obligations for the foreseeable future. We believe that our cash and cash equivalents and short-term investments of $62.6$66.0 million at December 31, 20162018 will be sufficient to fund our principal uses of cash for at least the next 12 months. However, if our expectations are incorrect, we may need to raise additional funds to fund our operations, to take advantage of unanticipated strategic opportunities or to strengthen our financial position. In the future, we may enter into other arrangements for potential investments in, or acquisitions of, complementary businesses, services or technologies, which could require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.
On September 27, 2017, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (the “Bank”). The Loan Agreement provides for a secured revolving credit facility in an aggregate principal amount of up to $15.0 million. Under the terms of the Loan Agreement, the principal amount of loans, plus the face amount of any outstanding letters of credit, at any time cannot exceed up to 85% of our eligible receivables. Under the terms of the Loan Agreement, we may also request letters of credit from the Bank. Loans under the Loan Agreement will bear interest at our option, and subject to certain conditions, at an annual rate of either a prime rate or a LIBOR rate plus an applicable margin of 2.25%. There will be no applicable margin for prime rate advances when we are in compliance with the liquidity requirement of at least $20.0 million in the aggregate of consolidated cash plus availability under the Loan Agreement (the “Liquidity Requirement”) and a 0.25% margin for prime rate advances when we are not in compliance with the Liquidity Requirement. We may not request LIBOR advances when not in compliance with the Liquidity Requirement. Interest on each advance is due and payable monthly and the principal balance is due at maturity. Our obligations under the revolving credit facility are secured by a security interest on substantially all of its assets, excluding intellectual property. The Loan Agreement contains customary affirmative and negative covenants. We must comply with financial covenants requiring maintaining (i) a minimum short-term asset to short-term liabilities ratio and (ii) minimum adjusted EBITDA, in the amounts and for the periods as set forth in the Loan Agreement. We must also maintain a minimum liquidity amount, comprised of unrestricted cash held at accounts with the Bank plus proceeds available to be drawn under the Loan Agreement, equal to $10.0 million at all times.
There were no borrowings under the Loan Agreement from the closing of the Loan Agreement through December 31, 2018. As of December 31, 2016, $42.1 million of the cash and cash equivalents balance was held2018, we were in our foreign subsidiaries. At present, such foreign funds are considered to be indefinitely reinvested in foreign countries to the extent of indefinitely reinvested foreign earnings. In the event funds from foreign operations, to the extent such funds are indefinitely reinvested foreign earnings, are needed to fund cash needs in the United States and if U.S. taxes have not already been previously accrued, we would be required to accrue and pay additional U.S. taxes in order to repatriate these funds.
In December 2015, we issued $128.25 million aggregate principal amount of the Notes. We incurred approximately $4.1 million of debt issuance cost, of which $3.5 million was paid in 2015 and the remainder was paid in the first quarter of 2016. The Notes bear interest at a fixed rate of 4.00% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2016 and mature on December 1, 2020. Concurrentcompliance with the issuance of the Notes, we used $49.9 million of the net proceeds from the Notes to repurchase 11.1 million shares of our common stock. The remaining net proceeds from the Notes were used to fund our acquisition of TVN, which was completed on February 29, 2016. (See Note 3, “Business Acquisition,” of the notes to our Consolidated Financial Statements for additional information on TVN Acquisition).
On December 22, 2014, we 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 our behalf. Revolving loanscovenants under the Credit Agreement may be borrowed, repaid and re-borrowed until December 22, 2015, at which time all amounts borrowed must be repaid. On December 7, 2015, we entered into a first amendment to the Credit Agreement with JPMorgan to permit us to incur the indebtedness related to issuance of the Notes. On December 15, 2015, we entered into a second amendment to the Credit Agreement with JPMorgan to extend the expiration date of the Credit Agreement to February 20, 2016. The credit agreement with JPMorgan expired on February 20, 2016 and we did not renew the agreement or enter into any new credit agreement.Loan Agreement.
The table below presents selected cash flow data for the periods presented (in thousands):
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2016 | | 2015 | | 2014 |
| | (In thousands) |
| Net cash provided by operating activities | $ | 438 |
| | $ | 6,351 |
| | $ | 47,369 |
|
| Net cash (used in) provided by investing activities | (70,478 | ) | | (10,414 | ) | | 27,799 |
|
| Net cash (used in) provided by financing activities | (152 | ) | | 57,533 |
| | (92,007 | ) |
| Effect of exchange rate changes on cash and cash equivalents | (363 | ) | | (312 | ) | | (458 | ) |
| Net (decrease) increase in cash and cash equivalents | $ | (70,555 | ) | | $ | 53,158 |
| | $ | (17,297 | ) |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (In thousands) |
| Net cash provided by operating activities | $ | 12,284 |
| | $ | 3,064 |
| | $ | 438 |
|
| Net cash used in investing activities | (6,940 | ) | | (4,501 | ) | | (69,734 | ) |
| Net cash provided by (used in) financing activities | 2,651 |
| | 895 |
| | (152 | ) |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (763 | ) | | 1,879 |
| | (415 | ) |
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 7,232 |
| | $ | 1,337 |
| | $ | (69,863 | ) |
Operating Activities
Net cash provided by operating activities decreased $5.9increased $9.2 million in 20162018 compared to 2015,2017, primarily due to a $43.5 million increasedecrease in net loss, after adjustments for non-cash items, mainly attributable to a lower operating margin and the payment of TVN’s post-acquisition expenses and restructuring expenses. These decreases were offset in part by lesshigher cash being used for netour working capital needs, primarily attributable to an increase in deferred revenue due to the timing of customer renewals of their annual service and support contracts, and, to a lesser extent, less cash spent on the purchase of inventory due to the netting of an $8.5 million advance payment made in 2015 for inventories received in 2016.needs.
Net cash provided by operating activities decreased $41.0increased $2.6 million in 20152017 compared to 2014,2016, primarily due to more cash being generated from net working capital, offset in part by a $21.3$1.2 million increase in net loss, after adjustments for non-cash items, and more cash used in net working capital, including an advance payment of $8.5 million to an inventory supplier in 2015 in order to secure more favorable pricing from the supplier and this arrangement and advance payment was absent in 2014.loss.
We expect that cash provided by or used in operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, shipment linearity, accounts receivable collections performance, inventory and supply chain management, income tax reserves adjustments, and the timing and amount of compensation and other payments.
Investing Activities
Net cash used in investing activities increased $60.1$2.4 million in 20162018 compared to 2015,2017, primarily due to a decrease in proceeds from sales and maturities of investments of $6.8 million, offset by a decrease in purchases of property and equipment of $4.4 million.
Net cash used in investing activities decreased $65.2 million in 2017 compared to 2016, primarily due to the $75.7 million net cash paid for the TVN acquisition in 2016 offset in part by lowerand less cash used for purchases of marketable investments. In 2016, no cash was used for the purchaseproperty and equipment, offset in part by lesser proceeds from sale and maturities of marketable investments, compared to $25.3 million used for purchases of marketable investments in 2015.
Net cash used in investing activities increased $38.2 million in 2015 compared to 2014, primarily due to lower proceeds from net sales of available-for-sale investments in 2015 as well as higher capital expenditures in 2015.investments.
Financing Activities
Net cash provided by financing activities decreased $57.7increased $1.8 million in 20162018 compared to 2015,2017, primarily due to thelower payment of tax withholding obligations related to net proceedsshare settlements of $124.7 million from the sale and issuance of the Notes in December 2015, offset in part by $72.9 million cash used for share repurchases in 2015.restricted stock units.
Net cash provided by financing activities increased $149.5$1.0 million in 20152017 compared to 2014. The increase was2016, primarily due to lower net proceedsdebt payments in 2017, offset in part by higher payments of $124.7 million from the sale and issuancetax withholding obligations related to net share settlements of the NotesRSUs in December 2015 as well as lower amount of cash used for share repurchases in 2015 and to a lesser extent, higher net proceeds from sale of shares through equity incentive plans during 2015. Cash used for share repurchases in 2015 was $72.9 million, consisting of $23.0 million under our regular common stock repurchase program and $49.9 million of the net proceeds from the issuance of the Notes.2017.
Off-Balance Sheet Arrangements
None as of December 31, 2016.2018.
Contractual Obligations and Commitments
Future payments under contractual obligations and other commercial commitments, as of December 31, 20162018 are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Payments due in each fiscal year |
| | Total
Amounts
Committed | | 2017 | | 2018 and 2019 | | 2020 and 2021 | | Thereafter |
| Convertible debt | $ | 128,250 |
| | $ | — |
| | $ | — |
| | $ | 128,250 |
| | $ | — |
|
| Interest on convertible debt | 20,520 |
| | 5,130 |
| | 10,260 |
| | 5,130 |
| | — |
|
| Other debts | 19,330 |
| | 6,304 |
| | 11,671 |
| | 1,005 |
| | 350 |
|
| Capital Lease | 1,860 |
| | 971 |
| | 864 |
| | 25 |
| |
|
|
Operating leases (1) | 53,313 |
| | 12,971 |
| | 22,992 |
| | 9,427 |
| | 7,923 |
|
Purchase commitments (2) | 23,985 |
| | 19,970 |
| | 4,015 |
| | — |
| | — |
|
TVN VDP obligations (3) | 11,966 |
| | 6,757 |
| | 4,513 |
| | 696 |
| | — |
|
| Total contractual obligations | $ | 259,224 |
| | $ | 52,103 |
| | $ | 54,315 |
| | $ | 144,533 |
| | $ | 8,273 |
|
| Other commercial commitments: | | | | | | | | | |
| Standby letters of credit | $ | 1,048 |
| | $ | 1,018 |
| | $ | 30 |
| | $ | — |
| | $ | — |
|
Indemnification obligations (4) | — |
| | — |
| | — |
| | — |
| | — |
|
| Total commercial commitments | $ | 1,048 |
| | $ | 1,018 |
| | $ | 30 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Payments due in each fiscal year |
| | Total
Amounts
Committed | | Less than 1 year | | 1 to 3 years | | 4 to 5 years | | More than 5 years |
| Convertible debt | $ | 128,250 |
| | $ | — |
| | $ | 128,250 |
| | $ | — |
| | $ | — |
|
Operating leases (1) | 39,179 |
| | 13,515 |
| | 14,227 |
| | 4,743 |
| | 6,694 |
|
Purchase commitments (2) | 35,946 |
| | 30,005 |
| | 5,220 |
| | 721 |
| | — |
|
| Other debts | 19,697 |
| | 7,084 |
| | 11,940 |
| | 607 |
| | 66 |
|
| Interest on convertible debt | 10,260 |
| | 5,130 |
| | 5,130 |
| | — |
| | — |
|
Avid litigation settlement fees
| 3,500 |
| | 1,500 |
| | 2,000 |
| | — |
| | — |
|
TVN VDP obligations (3) | 2,409 |
| | 1,585 |
| | 824 |
| | — |
| | — |
|
| Capital Lease | 162 |
| | 91 |
| | 71 |
| | — |
| | — |
|
| Total contractual obligations | $ | 239,403 |
| | $ | 58,910 |
| | $ | 167,662 |
| | $ | 6,071 |
| | $ | 6,760 |
|
| Other commercial commitments: | | | | | | | | | |
| Standby letters of credit | $ | 2,179 |
| | $ | 2,179 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Indemnification obligations (4) | — |
| | — |
| | — |
| | — |
| | — |
|
| Total commercial commitments | $ | 2,179 |
| | $ | 2,179 |
| | $ | — |
| | $ | — |
| | $ | — |
|
(1) We lease facilities under operating leases expiring through April 2027.June 2028. Certain of these leases provide for renewal option for periods ranging from one to five years in the normal course of business and we may exercise the renewal option.business.
(2) During the normal course of business, in order to reduce manufacturing lead times and ensure adequate component supply, we enter into agreements with certain contract manufacturers and suppliers that allow them to procure inventory and services based upon criteria as defined by the Company.
(3) In 2016, we established the TVN VDP to enable the French employees of TVN to voluntarily terminate their employment with certain benefits. The TVN VDP was approved by the applicable French authorities in September 2016 and
we approved and accepted 83 employee applications. See Note 11,10, “Restructuring and Related Charges-TVN VDP,” of the notes to our Consolidated Financial Statements for additional information on TNV VDP.information.
(4) We indemnify our officers and the members of our Board pursuant to our bylaws and contractual indemnity agreements. We also indemnify some of our suppliers and most of our customers for specified intellectual property matters and some of our other vendors, such as building contractors, pursuant to certain parameters and restrictions. The scope of these indemnities varies, but, in some instances, includes indemnification for defense costs, damages and other expenses (including reasonable attorneys’ fees).
Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at December 31, 2016,2018, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority. Therefore, approximately $2.9$0.5 million of unrecognized tax benefits classified as “Income taxes payable, long-term” in the accompanying Consolidated Balance Sheet as of December 31, 2016,2018, had been excluded from the contractual obligations table above. See Note 15,14, “Income Taxes,” of the notes to our Consolidated Financial Statements for a discussion on income taxes.
New Accounting Pronouncements
See Note 2 of the accompanying Consolidated Financial Statements for a full description of recent accounting pronouncements, including the respective expected dates of adoption and effects on results of operations and financial condition.
|
| |
| Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Foreign Currency Exchange Risk
We market and sell our products and services through our direct sales force and indirect channel partners in North America, EMEA, APAC and Latin America. Accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates, primarily the Euro, British pound, Israeli shekel and Japanese yen. Our U.S. dollar functional
subsidiaries, which account for approximately 90%95%, 95% and 88% of our consolidated net revenue,revenues in 2018, 2017 and 2016, respectively, recorded net billings denominated in foreign currencies of approximately 13%14%, 12%18% and 10%13% of their net revenues in 2016, 20152018, 2017 and 2014,2016, respectively. In addition, a portion of our operating expenses, primarily the cost of personnel to deliver technical support on our products and professional services, sales and sales support and research and development, are denominated in foreign currencies, primarily the Euro, Israeli shekel.
As a result of the TVN acquisition, our international operations have become more significant. The functional currency of our foreign subsidiaries is generally the local currency, except for our subsidiaries in Israelshekel and Switzerland where the functional currency is the U.S. dollar. Our primary foreign currency translation exposure is related to the magnitude of foreign net profits and losses denominated in foreign currencies, in particular the Euro. However, as a result of our TVN integration plans initiated in 2016, we estimated that upon completing the TVN integration plans in 2017, our foreign currency translation risk would be significantly reduced. A 10% change in the Euro to U.S. dollar exchange applied to the results of our foreign subsidiaries that have the Euro as their functional currency would not have a material impact to our consolidated net profit and losses.British pound.
We use derivative instruments, primarily forward contracts, to manage exposures to foreign currency exchange rates and we do not enter into foreign currency forward contracts for trading purposes.
Derivatives Designated as Hedging Instruments (Cash Flow Hedges)
Beginning December 2014, we entered into forward currency contracts to hedge forecasted operating expenses and service cost related to employee salaries and benefits denominated in Israeli shekels (“ILS”) for our subsidiaries in Israel. These ILS forward contacts mature generally within 12 months and are designated as cash flow hedges. The effective portion of the gains or losses on the derivative is reported as a component of “Accumulated other comprehensive income (loss)” (“AOCI”) in the Consolidated Balance Sheet and subsequently reclassified into earnings in the same period during which the hedged transactions are recognized in earnings. If the hedge program becomes ineffective or if the underlying forecasted transaction does not occur for any reason, or it becomes probable that it will not occur, the gain or loss on the related derivative will be reclassified from AOCI to earnings immediately.
Derivatives Not Designated as Hedging Instruments (Balance Sheet Hedges)
We also enter into forward currency contracts to hedge foreign currency denominated monetary assets and liabilities. These derivative instruments are marked to market through earnings every period and mature generally within three months. Changes in the fair value of these foreign currency forward contracts are recognized in “Other expense, net” in the Consolidated Statement of Operations, and are largely offset by the changes in the fair value of the assets or liabilities being hedged.
The U.S. dollar equivalentequivalents of all outstanding notional amounts of foreign currency forward contracts are summarized as follows (in thousands):
| | | | | December 31, | | December 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| Derivatives designated as cash flow hedges: | | | | | |
| Purchase | | $ | — |
| | $ | 12,984 |
| |
| Derivatives not designated as hedging instruments: | | | | | | | | |
| Purchase | | $ | 4,056 |
| | $ | 6,942 |
| | $ | 28,975 |
| | $ | 12,875 |
|
| Sell | | $ | 11,157 |
| | $ | 11,332 |
| | $ | — |
| | $ | 1,509 |
|
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio of marketable investment securities and outstanding debt arrangements with variable rate interests.interests as well as our borrowings under the Loan Agreement.
On September 27, 2017, we entered into the Loan Agreement with Silicon Valley Bank. The Loan Agreement provides for a secured revolving credit facility in an aggregate principal amount of up to $15.0 million. Loans under the Loan Agreement will bear interest, at our option, and subject to certain conditions, at an annual rate of either a prime rate or a LIBOR rate (each as customarily defined), plus an applicable margin. The applicable margin for LIBOR rate advances is 2.25%. There will be no applicable margin for prime rate advances when we are in compliance with the Liquidity Requirement and a margin of 0.25% for prime rate advances when we are not in compliance with the Liquidity Requirement. We may not request LIBOR advances when it is not in compliance with the Liquidity Requirement. Interest on each advance is due and payable monthly and the principal balance is due at maturity.
As of December 31, 2016,2018, the Company committed $1.8 million towards security for letters of credit issued under the Loan Agreement. We have no borrowings under the Loan Agreement from the closing of the Loan Agreement through December 31, 2018.
As of December 31, 2018, our cash cash equivalents andbalance was $66.0 million. We had no short-term investments balance was $62.6 million. These amounts are held for working capital purposes and we do not hold derivative instruments in our investment portfolio. Our investment portfolio consistsas of fixed income securities that are classified as “available-for-sale securities.” These securities, like all fixed income instruments, are subject to interest rate risk and will change in value if market interest rates change. We attempt to limit this exposure by investing primarily in short-term and investment-grade instruments with original maturities of less than two years. Due to the short duration and conservative nature of our investment portfolio, a movement of 10% in market interest rates would not have a material impact on our operating results, nor the total value of the portfolio over the next fiscal year. If overall interest rates had decreased by 10% during the fourth quarter of 2016, our interest income on our cash, cash equivalents and short-term investments would have declined by less than $0.1 million, on an annualized basis, assuming a constant investment balance over the time period.December 31, 2018.
As a result of the TVN acquisition, we assumed various debt instruments. The aggregate debt balance of such instruments at December 31, 20162018 was $21.2$19.9 million, of which $1.9$0.2 million relates to obligations under capital leases with fixed interest rates. The remaining $19.3$19.7 million are debt instruments primarily financed by French government agencies, and, to a lesser extent, term loans from other financing institutions. These debt instruments have maturities ranging from three to eightseven years; expiring from 20172019 through 2023.2025. A majority of the loans are tied to the 1 month EURIBOR rate plus spread. (See Note 12,11, “Convertible notes, Other Debts and Capital Leases,” of the notes to our Consolidated Balance Sheets for additional information). As of December 31, 2016,2018, a hypothetical 1.0% increase in market interest rates on our debts subject to variable interest rate fluctuations would increase our interest expense by approximately $0.3$0.2 million annually.
As of December 31, 2016,2018, we had $128.25$128.3 million aggregate principal amount of the Notes outstanding, which have a fixed 4.0% coupon rate.
|
| |
| Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Harmonic Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of Harmonic Inc. and its subsidiaries (the Company) as of December 31, 2018 and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31, 2018, and the related notes (collectively referred to as the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the accompanying Consolidated Balance Sheets and the related Consolidated Statements of Operations, Consolidated Statements of Comprehensive Loss, Consolidated Statements of Stockholders’ Equity, and Consolidated Statements of Cash Flowsconsolidated financial statements referred to above present fairly, in all material respects, the financial position of Harmonic Inc. and its subsidiaries atthe Company as of December 31, 2016 and December 31, 2015,2018, and the results of theirits operations and theirits cash flows for each of the three years in the periodyear ended December 31, 20162018 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016,2018, based on criteria established in Internal Control — IntegratedControl-Integrated Framework (2013) issued by COSO.
Change in Accounting Principle
As discussed in Note 2 to the Committeeconsolidated financial statements, the Company has changed its method of Sponsoring Organizationsaccounting for revenue in 2018 due to the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the Treadway Commission (COSO). modified retrospective method.
Basis for Opinion
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinionsan opinion on thesethe Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our integrated audits. audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our auditsaudit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audit also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our auditsaudit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provideaudit provides a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i)(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii)(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii)(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management’s We have served as the Company’s auditor since 2018.
San Ramon, California
March 1, 2019
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Harmonic Inc.:
Opinion on Internal Control overthe Financial Reporting, appearing under Item 9A, management has excluded certain Thomson Video Networks entities fromStatements
We have audited the consolidated balance sheet of Harmonic Inc. and its assessment of internal control over financial reportingsubsidiaries (the “Company”) as of December 31, 2016 because they were acquired by2017, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and itscash flows for each of the two years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in a purchase business combination during 2016accordance with the U.S. federal securities laws and have not been integrated into the Company’s overall internal control over financial reporting process. applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We have also excluded these entities fromconducted our audit of internal control over financial reporting. The total assetsaudits of these entities are 20% and total revenues represent 12%consolidated financial statements in accordance with the standards of the relatedPCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statement amounts asstatements are free of and for the year ended December 31, 2016.material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
|
|
/S/ PRICEWATERHOUSECOOPERS LLP |
PRICEWATERHOUSECOOPERSs/ PricewaterhouseCoopers LLP |
San Jose, California
March 3, 20175, 2018
We served as the Company's auditor from 1989to 2018.
HARMONIC INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| | | | December 31, | December 31, |
| | 2016 | | 2015 | 2018 | | 2017 |
| ASSETS | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 55,635 |
| | $ | 126,190 |
| $ | 65,989 |
| | $ | 57,024 |
|
| Short-term investments | 6,923 |
| | 26,604 |
| |
| Accounts receivable, net | 86,765 |
| | 69,515 |
| 81,795 |
| | 69,844 |
|
| Inventories | 41,193 |
| | 38,819 |
| 25,638 |
| | 25,976 |
|
| Prepaid expenses and other current assets | 26,319 |
| | 25,003 |
| 23,280 |
| | 18,931 |
|
| Total current assets | 216,835 |
| | 286,131 |
| 196,702 |
| | 171,775 |
|
| Property and equipment, net | 32,164 |
| | 27,012 |
| 22,321 |
| | 29,265 |
|
| Goodwill | 237,279 |
| | 197,781 |
| 240,618 |
| | 242,827 |
|
| Intangibles, net | 29,231 |
| | 4,097 |
| 12,817 |
| | 21,279 |
|
| Other long-term assets | 38,560 |
| | 9,936 |
| 38,377 |
| | 42,913 |
|
| Total assets | $ | 554,069 |
| | $ | 524,957 |
| $ | 510,835 |
| | $ | 508,059 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
| Current liabilities: | | | | | | |
| Other debts and capital lease obligations, current | $ | 7,275 |
| | $ | — |
| $ | 7,175 |
| | $ | 7,610 |
|
| Accounts payable | 28,892 |
| | 19,364 |
| 33,778 |
| | 33,112 |
|
| Income taxes payable | 1,166 |
| | 307 |
| 1,099 |
| | 233 |
|
| Deferred revenue | 52,414 |
| | 33,856 |
| 41,592 |
| | 52,429 |
|
| Accrued and other current liabilities | 55,150 |
| | 31,354 |
| 52,761 |
| | 48,705 |
|
| Total current liabilities | 144,897 |
| | 84,881 |
| 136,405 |
| | 142,089 |
|
| Convertible notes, long-term | 103,259 |
| | 98,295 |
| 114,808 |
| | 108,748 |
|
| Other debts and capital lease obligations, long-term | 13,915 |
| | — |
| 12,684 |
| | 15,336 |
|
| Income taxes payable, long-term | 2,926 |
| | 3,886 |
| 460 |
| | 917 |
|
| Other non-current liabilities | 18,431 |
| | 9,727 |
| 18,228 |
| | 22,626 |
|
| Total liabilities | 283,428 |
| | 196,789 |
| 282,585 |
| | 289,716 |
|
| Commitments and contingencies (Note 19) |
| |
| |
| Commitments and contingencies (Note 18) | |
| |
|
| 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; 78,456 and 76,015 shares issued and outstanding at December 31, 2016 and 2015, respectively | 78 |
| | 76 |
| |
| Common stock, $0.001 par value, 150,000 shares authorized; 87,057 and 82,554 shares issued and outstanding at December 31, 2018 and 2017, respectively | | 87 |
| | 83 |
|
| Additional paid-in capital | 2,254,055 |
| | 2,236,418 |
| 2,296,795 |
| | 2,272,690 |
|
| Accumulated deficit | (1,976,222 | ) | | (1,903,908 | ) | (2,067,416 | ) | | (2,057,812 | ) |
| Accumulated other comprehensive loss | (7,270 | ) | | (4,418 | ) | |
| Accumulated other comprehensive income (loss) | | (1,216 | ) | | 3,382 |
|
| Total stockholders’ equity | 270,641 |
| | 328,168 |
| 228,250 |
| | 218,343 |
|
| Total liabilities and stockholders’ equity | $ | 554,069 |
| | $ | 524,957 |
| $ | 510,835 |
| | $ | 508,059 |
|
The accompanying notes are an integral part of these consolidated financial statements.
HARMONIC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| | | | Year ended December 31, | Year ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| Revenue: | | | | | | | | | | |
| Product | $ | 285,260 |
| | $ | 276,876 |
| | $ | 343,186 |
| $ | 252,067 |
| | $ | 224,645 |
| | $ | 285,260 |
|
| Service | 120,651 |
| | 100,151 |
| | 90,371 |
| 151,491 |
| | 133,601 |
| | 120,651 |
|
| Total net revenue | 405,911 |
| | 377,027 |
| | 433,557 |
| 403,558 |
| | 358,246 |
| | 405,911 |
|
| Cost of revenue: | | | | | | | | | | |
| Product | 145,714 |
| | 121,988 |
| | 172,280 |
| 127,268 |
| | 119,802 |
| | 145,714 |
|
| Service | 59,447 |
| | 52,327 |
| | 48,929 |
| 67,081 |
| | 68,624 |
| | 59,447 |
|
| Total cost of revenue | 205,161 |
| | 174,315 |
| | 221,209 |
| 194,349 |
| | 188,426 |
| | 205,161 |
|
| Total gross profit | 200,750 |
| | 202,712 |
| | 212,348 |
| 209,209 |
| | 169,820 |
| | 200,750 |
|
| Operating expenses: | | | | | | | | | | |
| Research and development | 98,401 |
| | 87,545 |
| | 93,061 |
| 89,163 |
| | 95,978 |
| | 98,401 |
|
| Selling, general and administrative | 144,381 |
| | 120,960 |
| | 131,322 |
| 118,952 |
| | 136,270 |
| | 144,381 |
|
| Amortization of intangibles | 10,402 |
| | 5,783 |
| | 6,775 |
| 3,187 |
| | 3,142 |
| | 10,402 |
|
| Restructuring and related charges | 14,602 |
| | 1,372 |
| | 2,761 |
| 2,918 |
| | 5,307 |
| | 14,602 |
|
| Total operating expenses | 267,786 |
| | 215,660 |
| | 233,919 |
| 214,220 |
| | 240,697 |
| | 267,786 |
|
| Loss from operations | (67,036 | ) | | (12,948 | ) | | (21,571 | ) | (5,011 | ) | | (70,877 | ) | | (67,036 | ) |
| Interest (expense) income, net | (10,628 | ) | | (333 | ) | | 132 |
| |
| Interest expense, net | | (11,401 | ) | | (11,078 | ) | | (10,628 | ) |
| Other expense, net | (31 | ) | | (282 | ) | | (356 | ) | (536 | ) | | (2,222 | ) | | (31 | ) |
| Loss on impairment of long-term investment | (2,735 | ) | | (2,505 | ) | | — |
| |
| Loss on impairment of long-term investments | | — |
| | (530 | ) | | (2,735 | ) |
| Loss before income taxes | (80,430 | ) | | (16,068 | ) | | (21,795 | ) | (16,948 | ) | | (84,707 | ) | | (80,430 | ) |
| Provision for (benefit from) income taxes | (8,116 | ) | | (407 | ) | | 24,453 |
| 4,087 |
| | (1,752 | ) | | (8,116 | ) |
| Net loss | $ | (72,314 | ) | | $ | (15,661 | ) | | $ | (46,248 | ) | $ | (21,035 | ) | | $ | (82,955 | ) | | $ | (72,314 | ) |
| | | | | | | | | | | |
| Net loss per share: | | | | | | | | | | |
| Basic and diluted | $ | (0.93 | ) | | $ | (0.18 | ) | | $ | (0.50 | ) | $ | (0.25 | ) | | $ | (1.02 | ) | | $ | (0.93 | ) |
| Shares used in per share calculations: | | | | | | | | | | |
| Basic and diluted | 77,705 |
| | 87,514 |
| | 92,508 |
| 85,615 |
| | 80,974 |
| | 77,705 |
|
The accompanying notes are an integral part of these consolidated financial statements.
HARMONIC INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Net loss | $ | (72,314 | ) | | $ | (15,661 | ) | | $ | (46,248 | ) |
| Other comprehensive income (loss), before tax: |
| |
| |
|
| Change in unrealized gains (losses) on cash flow hedges: |
|
| |
|
| |
|
|
| Unrealized gains (losses), net arising during the period | 202 |
| | (133 | ) | | 311 |
|
| Losses (gains) reclassified into earnings | 44 |
| | (424 | ) | | — |
|
| | 246 |
| | (557 | ) | | 311 |
|
| Change in unrealized gains (losses) on available-for-sale securities: | | | | | |
| Unrealized losses, net arising during the period | (903 | ) | | (785 | ) | | (815 | ) |
| Losses reclassified into earnings | 2,735 |
| | — |
| | — |
|
| | 1,832 |
| | (785 | ) | | (815 | ) |
| Adjustment to pension benefit plan | (279 | ) | | — |
| | — |
|
| Change in foreign currency translation adjustments | (4,633 | ) | | (1,111 | ) | | (1,281 | ) |
| Other comprehensive loss before tax | (2,834 | ) | | (2,453 | ) | | (1,785 | ) |
| Provision for (benefit from) income taxes | 18 |
| | (15 | ) | | (14 | ) |
| Other comprehensive loss, net of tax | (2,852 | ) | | (2,438 | ) | | (1,771 | ) |
| Total comprehensive loss | $ | (75,166 | ) | | $ | (18,099 | ) | | $ | (48,019 | ) |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net loss | $ | (21,035 | ) | | $ | (82,955 | ) | | $ | (72,314 | ) |
| Other comprehensive income (loss), before tax: |
| |
| |
|
| Change in unrealized gain (loss) on cash flow hedges: |
|
| |
|
| |
|
|
| Unrealized gain, net arising during the period | — |
| | — |
| | 202 |
|
| Loss reclassified into earnings | — |
| | — |
| | 44 |
|
| | — |
| | — |
| | 246 |
|
| Change in unrealized gain (loss) on available-for-sale securities: | | | | | |
| Unrealized loss, net arising during the period | — |
| | (658 | ) | | (903 | ) |
| Loss reclassified into earnings | — |
| | 384 |
| | 2,735 |
|
| | — |
| | (274 | ) | | 1,832 |
|
| Adjustment to pension benefit plan | 202 |
| | 528 |
| | (279 | ) |
| Unrealized foreign exchange gain (loss), net on intercompany long-term loans arising during the period | 667 |
| | (1,705 | ) | | — |
|
| Change in foreign currency translation adjustments: | | | | | |
| Translation gain (loss) arising during the period | (5,100 | ) | | 11,471 |
| | (4,633 | ) |
| Loss reclassified into earnings | 11 |
| | 106 |
| | — |
|
| | (5,089 | ) | | 11,577 |
| | (4,633 | ) |
| Other comprehensive income (loss) before tax | (4,220 | ) | | 10,126 |
| | (2,834 | ) |
| Provision for (benefit from) income taxes | 378 |
| | (526 | ) | | 18 |
|
| Other comprehensive income (loss), net of tax | (4,598 | ) | | 10,652 |
| | (2,852 | ) |
| Total comprehensive loss | $ | (25,633 | ) | | $ | (72,303 | ) | | $ | (75,166 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
HARMONIC INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
| | | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Stockholders’ Equity | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity |
| | Shares | | Amount | | Shares | | Amount | |
| Balance at December 31, 2013 | 99,413 |
| | $ | 99 |
| | $ | 2,336,275 |
| | $ | (1,841,999 | ) | | $ | (209 | ) | | $ | 494,166 |
| |
| Net loss | — |
| | — |
| | — |
| | (46,248 | ) | | — |
| | (46,248 | ) | |
| Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | (1,771 | ) | | (1,771 | ) | |
| Issuance of common stock under option, stock award and purchase plans | 2,181 |
| | 2 |
| | 1,104 |
| | — |
| | — |
| | 1,106 |
| |
| Repurchase of common stock | (13,894 | ) | | (13 | ) | | (93,115 | ) | | — |
| | — |
| | (93,128 | ) | |
| Stock-based compensation | — |
| | — |
| | 17,287 |
| | — |
| | — |
| | 17,287 |
| |
| Excess tax benefits from stock-based compensation | — |
| | — |
| | 401 |
| | — |
| | — |
| | 401 |
| |
| Balance at December 31, 2014 | 87,700 |
| | 88 |
| | 2,261,952 |
| | (1,888,247 | ) | | (1,980 | ) | | 371,813 |
| |
| Net loss | — |
| | — |
| | — |
| | (15,661 | ) | | — |
| | (15,661 | ) | |
| Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | (2,438 | ) | | (2,438 | ) | |
| Issuance of common stock under option, stock award and purchase plans | 2,855 |
| | 3 |
| | 5,670 |
| | — |
| | — |
| | 5,673 |
| |
| Repurchase of common stock | (14,540 | ) | | (15 | ) | | (72,848 | ) | | — |
| | — |
| | (72,863 | ) | |
| Stock-based compensation | — |
| | — |
| | 15,582 |
| | — |
| | — |
| | 15,582 |
| |
| Conversion feature of convertible notes due 2020 | — |
| | — |
| | 26,062 |
| | — |
| | — |
| | 26,062 |
| |
| Balance at December 31, 2015 | 76,015 |
| | 76 |
| | 2,236,418 |
| | (1,903,908 | ) | | (4,418 | ) | | 328,168 |
| 76,015 |
| | 76 |
| | 2,236,418 |
| | (1,903,908 | ) | | (4,418 | ) | | 328,168 |
|
| Net loss | — |
| | — |
| | — |
| | (72,314 | ) | | — |
| | (72,314 | ) | — |
| | — |
| | — |
| | (72,314 | ) | | — |
| | (72,314 | ) |
| Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | (2,852 | ) | | (2,852 | ) | — |
| | — |
| | — |
| | — |
| | (2,852 | ) | | (2,852 | ) |
| Issuance of common stock under option, stock award and purchase plans | 2,441 |
| | 2 |
| | 2,798 |
| | — |
| | — |
| | 2,800 |
| 2,441 |
| | 2 |
| | 2,798 |
| | — |
| | — |
| | 2,800 |
|
| Stock-based compensation | — |
| | — |
| | 13,242 |
| | — |
| | — |
| | 13,242 |
| — |
| | — |
| | 13,242 |
| | — |
| | — |
| | 13,242 |
|
| Issuance of warrant | — |
| | — |
| | 1,597 |
| | — |
| | — |
| | 1,597 |
| — |
| | — |
| | 1,597 |
| | — |
| | — |
| | 1,597 |
|
| Balance at December 31, 2016 | 78,456 |
| | $ | 78 |
| | $ | 2,254,055 |
| | $ | (1,976,222 | ) | | $ | (7,270 | ) | | $ | 270,641 |
| 78,456 |
| | 78 |
| | 2,254,055 |
| | (1,976,222 | ) | | (7,270 | ) | | 270,641 |
|
| Cumulative effect to retained earnings related to adoption of ASU 2016-09 | | — |
| | — |
| | 69 |
| | (69 | ) | | — |
| | — |
|
| Cumulative effect to retained earnings related to adoption of ASU 2016-16 | | — |
| | — |
| | — |
| | 1,434 |
| | — |
| | 1,434 |
|
| Balance at January 1, 2017 | | 78,456 |
| | 78 |
| | 2,254,124 |
| | (1,974,857 | ) | | (7,270 | ) | | 272,075 |
|
| Net loss | | — |
| | — |
| | — |
| | (82,955 | ) | | — |
| | (82,955 | ) |
| Other comprehensive income, net of tax | | — |
| | — |
| | — |
| | — |
| | 10,652 |
| | 10,652 |
|
| Issuance of common stock under option, stock award and purchase plans | | 4,098 |
| | 5 |
| | 1,954 |
| | — |
| | — |
| | 1,959 |
|
| Stock-based compensation | | — |
| | — |
| | 16,612 |
| | — |
| | — |
| | 16,612 |
|
| Balance at December 31, 2017 | | 82,554 |
| | 83 |
| | 2,272,690 |
| | (2,057,812 | ) | | 3,382 |
| | 218,343 |
|
Cumulative effect to retained earnings related to adoption of ASC 606 (1) | | — |
|
| — |
|
| — |
|
| 11,431 |
|
| — |
|
| 11,431 |
|
| Balance at January 1, 2018 | | 82,554 |
| | 83 |
| | 2,272,690 |
| | (2,046,381 | ) | | 3,382 |
| | 229,774 |
|
| Net loss | | — |
| | — |
| | — |
| | (21,035 | ) | | — |
| | (21,035 | ) |
| Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | — |
| | (4,598 | ) | | (4,598 | ) |
| Issuance of common stock under option, stock award and purchase plans | | 4,503 |
| | 4 |
| | 4,713 |
| | — |
| | — |
| | 4,717 |
|
| Stock-based compensation | | — |
| | — |
| | 17,097 |
| | — |
| | — |
| | 17,097 |
|
| Issuance of warrant | | — |
| | — |
| | 2,295 |
| | — |
| | — |
| | 2,295 |
|
| Balance at December 31, 2018 | | 87,057 |
|
| 87 |
|
| 2,296,795 |
|
| (2,067,416 | ) |
| $ | (1,216 | ) |
| $ | 228,250 |
|
(1) See Note 2, “Summary of Significant Accounting Policies-Recently Adopted Accounting Pronouncements,” for more information on the adoption of ASC 606, Revenue from Contracts with Customers (“Topic 606”) issued by the Financial Accounting Standards Board.
The accompanying notes are an integral part of these consolidated financial statements.
HARMONIC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | Year ended December 31, | Year ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| Cash flows from operating activities: | | | | | | | | | | |
| Net loss | $ | (72,314 | ) | | $ | (15,661 | ) | | $ | (46,248 | ) | $ | (21,035 | ) | | $ | (82,955 | ) | | $ | (72,314 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | | | |
| Amortization of intangibles | 14,836 |
| | 6,502 |
| | 20,520 |
| 8,367 |
| | 8,322 |
| | 14,836 |
|
| Depreciation | 18,819 |
| | 13,241 |
| | 16,459 |
| 12,971 |
| | 14,599 |
| | 18,819 |
|
| Stock-based compensation | 13,060 |
| | 15,582 |
| | 17,287 |
| 17,289 |
| | 16,610 |
| | 13,060 |
|
| Amortization of discount on convertible debt | 4,964 |
| | 216 |
| | — |
| 6,060 |
| | 5,489 |
| | 4,964 |
|
| Provision for non-cash warrant | 434 |
| | — |
| | — |
| 1,178 |
| | 153 |
| | 434 |
|
| Restructuring, asset impairment and (gain) loss on retirement of fixed assets | 2,305 |
| | 641 |
| | 1,622 |
| |
| Loss on impairment of long-term investment | 2,735 |
| | 2,505 |
| | — |
| |
| Restructuring, asset impairment and loss on retirement of fixed assets | | 1,491 |
| | 1,906 |
| | 2,305 |
|
| Loss on impairment of long-term investments | | — |
| | 530 |
| | 2,735 |
|
| Unrealized foreign exchange (gain) loss | | (1,906 | ) | | 2,369 |
| | (856 | ) |
| Gain on pension curtailment | (1,955 | ) | | — |
| | — |
| — |
| | — |
| | (1,955 | ) |
| Deferred income taxes, net | (10,085 | ) | | (512 | ) | | 32,163 |
| 661 |
| | 2,189 |
| | (10,085 | ) |
| Provision for doubtful accounts, returns and discounts | 2,589 |
| | 2,034 |
| | 1,943 |
| 2,521 |
| | 4,912 |
| | 2,589 |
|
| Provision for excess and obsolete inventories | 6,871 |
| | 1,585 |
| | 2,569 |
| 1,649 |
| | 6,005 |
| | 6,871 |
|
| Excess tax benefits from stock-based compensation | — |
| | — |
| | (15 | ) | |
| Other non-cash adjustments, net | 408 |
| | — |
| | 1,108 |
| 407 |
| | 445 |
| | 408 |
|
| Changes in operating assets and liabilities, net of effects of acquisition: | | | | | | | | | | |
| Accounts receivable | (2,563 | ) | | 2,595 |
| | (1,035 | ) | (14,700 | ) | | 12,598 |
| | (2,563 | ) |
| Inventories | (4,107 | ) | | (5,954 | ) | | 1,610 |
| (2,045 | ) | | 11,687 |
| | (4,107 | ) |
| Prepaid expenses and other assets | (1,892 | ) | | (8,206 | ) | | (3,332 | ) | 3,227 |
| | 6,642 |
| | (1,892 | ) |
| Accounts payable | 5,793 |
| | 4,683 |
| | 56 |
| 1,018 |
| | 3,432 |
| | 5,793 |
|
| Deferred revenues | 18,106 |
| | (4,541 | ) | | 11,162 |
| (4,808 | ) | | (392 | ) | | 18,106 |
|
| Income taxes payable | (133 | ) | | (1,637 | ) | | (7,094 | ) | 440 |
| | (2,978 | ) | | (133 | ) |
| Accrued and other liabilities | 2,567 |
| | (6,722 | ) | | (1,406 | ) | (501 | ) | | (8,499 | ) | | 3,423 |
|
| Net cash provided by operating activities | 438 |
| | 6,351 |
| | 47,369 |
| 12,284 |
| | 3,064 |
| | 438 |
|
| Cash flows from investing activities: | | | | | | | | | | |
| Acquisition of business, net of cash acquired | (75,669 | ) | | — |
| | — |
| |
| Purchases of investments | — |
| | (25,261 | ) | | (26,599 | ) | |
| Acquisition of business, net of cash and restricted cash acquired | | — |
| | — |
| | (74,334 | ) |
| Proceeds from maturities of investments | 19,707 |
| | 30,379 |
| | 60,811 |
| — |
| | 3,106 |
| | 19,707 |
|
| Proceeds from sales of investments | — |
| | — |
| | 13,045 |
| 104 |
| | 3,792 |
| | — |
|
| Purchases of property and equipment | (15,107 | ) | | (14,356 | ) | | (10,065 | ) | (7,044 | ) | | (11,399 | ) | | (15,107 | ) |
| Purchases of long-term investments | — |
| | (85 | ) | | (9,393 | ) | |
| Restricted cash | 591 |
| | (1,091 | ) | | — |
| |
| Net cash (used in) provided by investing activities | (70,478 | ) | | (10,414 | ) | | 27,799 |
| |
| Net cash used in investing activities | | (6,940 | ) | | (4,501 | ) | | (69,734 | ) |
| Cash flows from financing activities: | | | | | | | | | | |
| Proceeds from convertible debt | — |
| | 128,250 |
| | — |
| |
| Payment of convertible debt issuance cost | (582 | ) | | (3,527 | ) | | — |
| — |
| | — |
| | (582 | ) |
| Proceeds from other debts and capital leases | 5,968 |
| | — |
| | — |
| 5,066 |
| | 6,344 |
| | 5,968 |
|
| Repayment of other debts and capital leases | (8,338 | ) | | — |
| | — |
| (7,132 | ) | | (7,408 | ) | | (8,338 | ) |
| Proceeds from common stock issued to employees | 4,444 |
| | 9,222 |
| | 4,742 |
| 4,947 |
| | 4,716 |
| | 4,444 |
|
| Payment of tax withholding obligations related to net share settlements of restricted stock units | (1,644 | ) | | (3,549 | ) | | (3,636 | ) | (230 | ) | | (2,757 | ) | | (1,644 | ) |
| Payments for repurchases of common stock | — |
| | (72,863 | ) | | (93,128 | ) | |
| Excess tax benefits from stock-based compensation | — |
| | — |
| | 15 |
| |
| Net cash (used in) provided by financing activities | (152 | ) | | 57,533 |
| | (92,007 | ) | |
| Effect of exchange rate changes on cash and cash equivalents | (363 | ) | | (312 | ) | | (458 | ) | |
| Net (decrease) increase in cash and cash equivalents | (70,555 | ) | | 53,158 |
| | (17,297 | ) | |
| Cash and cash equivalents at beginning of period | 126,190 |
| | 73,032 |
| | 90,329 |
| |
| Cash and cash equivalents at end of period | $ | 55,635 |
| | $ | 126,190 |
| | $ | 73,032 |
| |
| Net cash provided by (used in) financing activities | | 2,651 |
| | 895 |
| | (152 | ) |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | | (763 | ) | | 1,879 |
| | (415 | ) |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | 7,232 |
| | 1,337 |
| | (69,863 | ) |
| Cash, cash equivalents and restricted cash, beginning of the year | | 58,757 |
| | 57,420 |
| | 127,283 |
|
| Cash, cash equivalents and restricted cash, end of the year | | $ | 65,989 |
| | $ | 58,757 |
| | $ | 57,420 |
|
| Supplemental disclosures of cash flow information: | | | | | | | | | | |
| Income tax payments (refunds), net | $ | (54 | ) | | $ | 952 |
| | $ | 1,926 |
| $ | 2,031 |
| | $ | 2,141 |
| | $ | (54 | ) |
| Interest payments, net | 5,275 |
| | — |
| | — |
| 5,273 |
| | 5,515 |
| | 5,275 |
|
| Supplemental schedule of non-cash investing and financing activities: | | | | | | | | | | |
| Capital expenditures incurred but not yet paid | $ | 394 |
| | $ | 235 |
| | $ | 854 |
| $ | 148 |
| | $ | 337 |
| | $ | 394 |
|
| Debt issuance costs incurred but not yet paid | — |
| | 582 |
| | — |
| |
| Issuance of warrant | | 2,295 |
| | — |
| | 1,597 |
|
| | | | | | | |
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets
| | | | | | |
| Cash and cash equivalents | | $ | 65,989 |
| | $ | 57,024 |
| | $ | 55,635 |
|
| Restricted cash included in prepaid expenses and other current assets | | — |
| | 530 |
| | 732 |
|
| Restricted cash included in other long-term assets | | — |
| | 1,203 |
| | 1,053 |
|
| Total cash, cash equivalents and restricted cash | | $ | 65,989 |
| | $ | 58,757 |
| | $ | 57,420 |
|
The accompanying notes are an integral part of these consolidated financial statements.
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF BUSINESS
Harmonic Inc. (“Harmonic” or the “Company”) designs, manufactures and sellsis a leading global provider of (i) versatile and high performance video infrastructuredelivery software, products, and system solutions and services that enable itsour customers to efficiently create, prepare, store, playout and deliver a full range of high-quality broadcast and “over-the-top” (OTT) video services to televisions and otherconsumer devices, such asincluding televisions, personal computers, laptops, tablets and smart phones. Our products generally fall into three principal categories:phones and (ii) cable access solutions that enable cable operators to more efficiently and effectively deploy high-speed internet, for data, voice and video services to consumers’ homes.
The Company operates in two segments, Video and Cable Access. The Video business sells video processing and production platforms and playout solutions video processing solutions and cable edge solutions. Harmonic also provides technical support and professional services to its customers worldwide. We sell our products and services worldwide to cable operators and satellite and telecommunications (telco) pay-TV service providers, which are collectively referred to as “service providers,” and to broadcast and media companies, satelliteincluding streaming media companies. The Video business infrastructure solutions are delivered either through shipment of our products, software licenses or as software-as-a-service (“SaaS”) subscriptions. The Cable Access business sells cable access solutions and telecommunications (telco) Pay-TV service providers and streaming new media companies.related services, including our CableOS software-based cable access solution, primarily to cable operators globally.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of Harmonic include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company’s fiscal quarters are based on 13-week periods, except for the fourth quarter which ends on December 31.
On February 29, 2016, the Company completed the acquisition of Thomson Video Networks (“TVN”) and its results of operations are included in the Company’s Consolidated Statements of Operations beginning March 1, 2016.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications / Out-of-Period Adjustments
Starting inCertain prior period amounts have been reclassified to conform to the second quarter of 2015, in lieu of presenting the amortization of investment premium as a positive adjustment in the reconciliation of net income to operating cash flows, the entire cash flow, including premium is now reflected as an investing outflow, akin to a return of capital. The Company adopted this new classification method on a prospective basis starting 2015 because the new classification method doescurrent year presentation. These reclassifications did not have a material impact to the Company’s Consolidated Statements of Cash Flow for all prior periods effected.on previously reported financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and highly liquid investments with maturities of three months or less at the date of purchase. The carrying amount of cash and cash equivalents approximates fair value because of the short maturity of those instruments.
Restricted Cash and Deposits
AsThe Company had no restricted cash balance as of December 31, 2016, the Company had $1.8 million of total restricted cash. $0.7 million of the2018. The restricted cash balances are heldbalance as of December 31, 2017 was $1.7 million. The restricted cash serves as collateral security for certain bank guarantees and is included in “Prepaid expenses and other current assets”. The remaining $1.1 million is for the bank guarantee associated with the TVN French Subsidiary’s office building lease and is included in “Other Long-term Assets” in the Company’s Consolidated Balance Sheet. These restricted fundsthey are invested in bank deposits and cannot be withdrawn from the Company’s accounts without the prior written consent of the applicable secured party. As of December 31, 2017, $0.5 million of the restricted cash balance was reported as a component of “Prepaid expenses and other current assets” and the remaining balance of $1.2 million was reported as a component of “Other long-term assets” on the Company’s Consolidated Balance Sheets.
Short-Term Investments
The Company’sCompany did not have any outstanding short-term investments which are classified as available-for-sale securities, comprised primarily of corporate bonds with stated maturities greater than three months from the date of purchase. The Company may or may not hold these securities until maturity because after considering the Company’s liquidity requirements, the Company may sell these securities prior to their stated maturities. Since these securities are considered as available to support current operations, the Company classifies securities with maturities beyond 12 months as current assets under short-term investments in the Consolidated Balance Sheets.
Short-term investments are stated at fair value, with unrealized gainsDecember 31, 2018 and losses reported in accumulated other comprehensive loss in the Consolidated Balance Sheet. The specific identification method is used to determine the cost of2017.
Investments in Equity Securities
From time to time, the Company may acquire certain equity investments for the promotion of business and strategic objectives and these investments may be in marketable equity securities or non-marketable equity securities. Effective January 1, 2018, the Company adopted Accounting Standard Update (“ASU”) No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities, and accounts for its equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. For equity investments that do not have readily determinable fair values, the Company measure these investments at cost minus impairment, if any, The Company’s equity investments are classified as long-term investments and reported as a component of “Other long-term assets” on the Company’s Consolidated Balance Sheets.
Prior to January 1, 2018, the Company accountsaccounted for its investments in entities that it doesdid not have significant influence under the cost method. Investments in equity securities arewere carried at fair value if the fair value of the security is readily determinable. Equity investments carried at fair value are classified as long-term investments and included in “Other long-term assets” in the Company’s Consolidated Balance Sheet. Unrealized gains and losses, net of taxes, on the long-term investments arewere included in the Company’s Consolidated Balance Sheet as a component of accumulated other comprehensive loss. Investments in equity securities that dodid not qualify for fair value accounting or equity method accounting arewere accounted for under the cost method. In accordance with the cost method,
The Company’s total investments in equity securities of other privately and publicly held companies were $3.6 million as of December 31, 2018 and 2017, respectively.
Liquidity
As of December 31, 2018, the Company’s initial investment is recordedprincipal sources of liquidity consisted of cash and cash equivalents of $66.0 million, net accounts receivable of $81.8 million, its $15 million line of credit with Silicon Valley Bank and financing from French government agencies. As of December 31, 2018, the Company had $128.25 million in aggregate principal amount convertible senior notes outstanding (the “Notes”), which are due on December 1, 2020. The Notes bear interest at costa fixed rate of 4.00% per year, payable semiannually in arrears on June 1 and theDecember 1 of each year. The Company reviews all of its cost method investments quarterly also had debts with French government agencies and to determine if impairment indicators exist. Cost method investments are classified as long-term investments and includeda lesser extent, with other financial institutions, primarily in “Other long-term assets”France, in the Company’s Consolidated Balance Sheet.aggregate of $19.9 million at December 31, 2018.
Variable Interest Entities
From time to time, the Company may enter into investments in entities that are considered variableThe Company’s principal uses of cash will include repayments of debt and related interest, entities under Accounting Standards Codification (ASC) Topic 810. If the Company is the primary beneficiarypurchases of a variable interest entity (“VIE”), it is required to consolidate it. To determine if the Company is the primary beneficiary of a VIE, the Company evaluates whether it has (1) the power to direct the activities that most significantly impact the VIE’s economic performance,inventory, payroll, restructuring expenses, and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significantother operating expenses related to the VIE. The assessmentdevelopment and marketing of whetherour products, purchases of property and equipment and other contractual obligations for the Company is the primary beneficiary of its VIE requires significant assumptions and judgments.foreseeable future. The Company has concludedbelieves that noneits cash and cash equivalents of $66.0 million at December 31, 2018 will be sufficient to fund its principal uses of cash for at least the Company’s equity investments require consolidation as theynext 12 months. However, if its expectations are eitherincorrect, it may need to raise additional funds to fund our operations, to take advantage of unanticipated strategic opportunities or to strengthen our financial position. Additional funds may not variable interest entitiesbe available on terms favorable to us or of the equity investments that are variable interest entities, the Company is not considered to be the primary beneficiary based on an assessment performed by management.at all.
Concentrations of Credit Risk/Risk and Major Customers/Supplier Concentration
Financial instruments which subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable. Cash, cash equivalents and short-term investments are invested in short-term, highly liquid, investment-grade obligations of commercial or governmental issuers, in accordance with the Company’s investment policy. The investment policy limits the amount of credit exposure to any one financial institution, commercial or governmental issuer.
The Company’s accounts receivable are derived from sales to worldwide cable, satellite, telco, and broadcast and media companies. The Company generally does not require collateral from its customers, and performs ongoing credit evaluations of its customers and provides for expected losses. The Company maintains an allowance for doubtful accounts based upon the expected collectability of its accounts receivable. NoTwo customers had a balance greater than 10% of the Company’s net accounts receivable balance as of December 31, 2016 and 20152018. InNo customer had a balance greater than 10% of the Company’s net accounts receivable balance as of December 31, 2017. During the year ended December 31, 2016, no2018, Comcast accounted for more than 10% of the Company’s revenue. No customer accounted for more than 10% of our net revenue. In the years ended December 31, 2015 and 2014, sales to Comcast accounted for 12% and 16% of the Company’s net revenue respectively, and no other single customer accounts for more than 10% of total net revenue.the year ended December 31, 2017.
Certain of the components and subassemblies included in the Company’s products are obtained from a single source or a limited group of suppliers. Although the Company seeks to reduce dependence on those sole source and limited source suppliers, the partial or complete loss of certain of these sources could have at least a temporary adverse effect on the Company’s results of operations and damage customer relationships.
Revenue Recognition
The Company’s principal sourcesTable of revenue are from the sale of hardware, software, hardware and software maintenance contracts, and end-to-end solutions, encompassing design, manufacture, test, integration and installation of products. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been provided, the sale price is fixed or determinable, and collectability is reasonably assured.Content
Revenue fromRecognition
On January 1, 2018, the sale of hardware and software products is recognized when risk of loss and title have transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped or delivery has occurred.Company adopted ASC 606, Revenue from distributors and system integrators is recognized on deliveryContracts with Customers(“Topic 606”), using the modified retrospective method applied to those contracts which were not completed as of the related products, provided all other revenue recognition criteria have been met. The Company’s agreements with these distributors and system integrators have terms which are generally consistent with the standard terms and conditionsJanuary 1, 2018. Results for the sale of the Company’s equipmentreporting period beginning January 1, 2018 are presented under Topic 606, while prior period amounts are not restated and continue to end users, and do not provide for product rotation or pricing allowances, as are typically found in agreements with stocking distributors. The Company accrues for sales returns and other allowances based on probable customer returns.
Deferred revenue includes billings in excess of revenue recognized, net of deferred cost of revenue, and invoiced amounts remain deferred until applicable revenue recognition criteria are met.
Shipping and handling costs incurred for inventory purchases and product shipments are recorded in cost of revenue in the Company’s Consolidated Statements of Operations. Costs associated with services are generally recognized as incurred.
The Company recognizes revenue from the sale of hardware products and software bundled with hardware that is essential to the functionality of the hardwarebe reported in accordance with applicable revenue recognitionour historic accounting guidance. For the sale of stand-alone software products, bundled with hardware but not essential to the functionality of the hardware, revenue is allocated between the hardware, including essential software and related elements, and the non-essential software and related elements.under ASC 605, Revenue Recognition (“Topic 605”). (See “Recently Adopted Accounting Pronouncements” for the hardware and essential software elements are recognized under the relative allocation method. Revenue for the non-essential software and related elements are recognized under the residual method in accordance with software accounting guidance. Revenue associated with service and maintenance agreements is recognized on a straight-line basis over the period in which the services are performed, generally one year. The Company recognizes revenue associated with solution sales using the percentage of completion or completed contract methods of accounting. Further details of these accounting policies are described below.additional information.)
Multiple Element Arrangements. The Company has revenue arrangements that include hardware and software essential to the hardware product’s functionality, and non-essential software, services and support. The Company allocates revenue to all deliverables based on their relative selling prices. The Company determines the relative selling prices by first considering vendor-specific objective evidence of fair value (“VSOE”), if it exists; otherwise third-party evidence (“TPE”) of the selling price is used. If neither VSOE nor TPE exists for a deliverable, the Company uses a best estimate of the selling price (“BESP”) for that deliverable. Once revenue is allocated to all deliverables based on their relative selling prices, revenue related to hardware elements (hardware, essential software and related services) are recognized using a relative selling price allocation and non-essential software and related services are recognized under the residual method.
The Company has established VSOE for certain elements of its arrangements based on either historical stand-alone sales to third parties or stated renewal rates for maintenance. The Company has VSOE of fair value for maintenance, training and certain professional services.
TPE is determined based on competitor prices for similar deliverables when sold separately. The Company is typically not able to determine TPE for competitors’ products or services. Generally, the Company’s go-to-market strategy differs from that of its competitors’ and the Company’s offerings contain a significant level of differentiation, such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what competitor similar products’ selling prices are on a stand-alone basis.
When the Company is unable to establish fair value of non-software deliverables using VSOE or TPE, the Company uses BESP in its allocation of arrangement consideration. The objective of using BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company determines BESP for a product or service by considering multiple factors, including, but not limited to, pricing practices, market conditions, competitive landscape, internal costs, geographies and gross margin. The determination of BESP is made through consultation with Company’s management, taking into consideration the Company’s go-to-market strategy.
Software. Sales of stand-alone software that are not considered essential to the functionality of the hardware continue to be subject to the software revenue recognition guidance.
In accordance with the software revenue recognition guidance, the Company applies the residual method to recognize revenue for the delivered elements in stand-alone software transactions. Under the residual method, the amount of revenue allocated to delivered elements equals the total arrangement consideration, less the aggregate fair value of any undelivered elements, typically maintenance, provided that VSOE of fair value exists for all undelivered elements. VSOE of fair value is based on the price charged when the element is sold separately or, in the case of maintenance, substantive renewal rates for maintenance.
Solution Sales. Solution sales for the design, manufacture, test, integration and installation of products, including equipment acquired from third parties to be integrated with Harmonic’s products, that are customized to meet the customer’s specifications are accounted for in accordance with applicable guidance on accounting for performance of construction/production contracts. Accordingly, for each arrangement that the Company enters into that includes both products and services, the Company performs a detailed evaluation to determine whether the arrangement should be accounted for under guidance for construction/production contracts or, alternatively, for arrangements that do not involve significant production, modification or customization, under other applicable accounting guidance. The Company has a long-standing history of entering into contractual arrangements to deliver the solution sales described.
For contracts that include customized services for which labor costs are not reasonably estimable, the Company uses the completed contract method of accounting. Under the completed contract method, 100% of the contract’s revenue and cost is recognized upon the completion of all services under the contract. If the estimated costs to complete a project exceed the total contract amount, indicating a loss, the entire anticipated loss is recognized.
Inventories
Inventories are stated at the lower of cost or market.net realizable value. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. The cost of inventories is comprised of material, labor and manufacturing overhead. The Company’s manufacturing overhead standards for product costs are calculated assuming full absorption of forecasted spending over projected volumes. The Company establishes provisions for excess and obsolete inventories to reduce such inventories to their estimated net realizable value after evaluation of historical sales, future demand and market conditions, expected product life cycles and current inventory levels. Such provisions are charged to cost of revenue in the Company’s Consolidated Statements of Operations.
Capitalized Software Development Costs
Costs related to researchExternal-use software. Research and development costs are generally charged to expense as incurred. The Company has not capitalized any such development costs because the costs incurred between the attainment of technological feasibility for the related software product through the date when the product is available for general release to customers has been insignificant.
Internal-use software. The Company capitalizes costs associated with internally developed and/or purchased software systems for internal use that have reached the application development stage. Capitalized costs include external direct costs of materials and services utilized in developing or obtaining internal-use software and payroll and payroll-related expenses for employees who are directly associated with and devote time to the internal-use software project. Capitalization of material software developmentsuch costs begins when a product’s technological feasibility has been established. To date, the time period between achieving technological feasibility,preliminary project stage is complete and ceases no later than the point at which the Company has defined as the establishment ofproject is substantially complete and ready for its intended purpose. These capitalized costs are amortized on a working model, which typically occurs when beta testing commences, and the general availability of such software has been short, and, as such, software development costs qualifying for capitalization have been insignificant.
The Company incurs costs associated with developing software for internal use and for which no plan exists to market the software externally. The Company capitalizes the costs as part of property and equipment and recognizes the associated depreciation over the software’s estimated useful life ofstraight-line basis, generally three years. Capitalized
During the years ended December 31, 2018 and December 31, 2017, the Company capitalized $0.9 million and $1.1 million, respectively, of its software development costs related to the development of its SaaS offerings. During the year ended December 31, 2016, research and development costs capitalized for internal use have been insignificant in each of the periods presented.software was not significant.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization areis computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are generally, five years for furniture and fixtures, three years for software developed for internal use and typically four years for machinery and equipment. Depreciation and amortization for leasehold improvements are computed using the shorter of the remaining useful lives of the assets up to 10 years, or the lease term of the respective assets.
AcquisitionsBusiness Combination
The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of assets acquired and the liabilities assumed. WhileDetermining the Company uses its best estimates and assumptions as partfair value of the purchase price allocation process to accurately value assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, intangibles and other asset lives, among other items. Fair value is defined as the price that would be received in a sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the acquisitionmeasurement date (an exit price). Market participants are assumed to be buyers and sellers in the Company’s estimates are inherently uncertainprincipal (most advantageous) market for the asset or liability. Additionally, fair value measurements for an asset assume the highest and subject to refinement.best use of that asset by market participants. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustmentsmay have been required to value the acquired assets at fair value measurements that do not reflect its intended use of those assets. Use of different estimates and judgments could yield different results. Any excess of the purchase price over the fair value of the net assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent the Company identifies adjustments to the preliminary purchase price allocation. Upon the conclusionis recognized as goodwill.
Goodwill
GoodwillAs of December 31, 2018, the Company had goodwill of $240.6 million which represents the difference between the purchase price and the estimated fair value of the identifiable assets acquired and liabilities assumed. The Company tests for goodwill impairment at the reporting unit level on an annual basis, in the fourth quarter of each of its fiscal years, and at any other time at whichor more frequently if events occur or changes in circumstances indicate that the
carrying amount of goodwill may exceed its fair value. The Company uses a two-step process to determine the amount of goodwill impairment. The first step requires comparing the fair value of the reporting unit to its net book value, including goodwill. A potential impairment exists if the fair value of the reporting unit asset is lowermore likely than its net book value. The second step of the process, which is performed only if a potential impairment exists, involves determining the difference between the fair value of the reporting unit’s net assets, other than goodwill, and the fair value of the reporting unit. If this difference is less than the net book value of goodwill, an impairment exists and is recorded.
not impaired. The Company has two reporting units, which are the same as its operating segments. Goodwill
The Company’s annual goodwill impairment test is assignedperformed in the fiscal fourth quarter, with a testing date at the end of fiscal October. In evaluating goodwill for impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting units usingunit is less than its carrying value (including goodwill). If the relativeCompany concludes that it is not more likely than not that the fair valuesvalue of a reporting unit is less than its carrying value, then no further testing is required. However, if the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the two-step goodwill impairment test is performed to identify a potential goodwill impairment and measure the amount of impairment to be recognized, if any. The two-step impairment test involves estimating the fair value of all assets and liabilities of the reporting units andunit, including the implied fair valuesvalue of the reporting units were determined utilizing a blend of the income approach and the market approach. The Company acquired TVN on February 29, 2016 and recorded additional goodwill, of $41.7 million based on the allocation of the purchase consideration (see Note 3, “Business Acquisition,” for additional information). Goodwill from the TVN acquisition was assigned to the Video reporting unit. through either estimated discounted future cash flows or market-based methodologies.
There was no impairment of goodwill resulting from the Company’s fiscal 20162018 annual impairment testing in the fourth quarter of 20162018. (See Note 8,7, “Goodwill and Identified Intangible Assets,” for additional information).
Long-lived Assets
Long-lived assets represent property and equipment and purchased intangible assets. Purchased intangible assets from business combinations and asset acquisitions include customer contracts, trademarks and trade names, and maintenance agreements and related relationships, the amortization of which is charged to general and administrative expenses, and core technology and developed technology, the amortization of which is charged to cost of revenue. The Company evaluates the recoverability of intangible assets and other long-lived assets when indicators of impairment are present. When impairment indicators are present, the Company evaluates the recoverability of intangible assets and other long-lived assets on the basis of undiscounted cash flows expected to result from the use of each asset group and its eventual disposition. If the undiscounted expected future cash flows are less than the carrying amount of the asset, an impairment loss is recognized in order to writedownwrite down the carrying value of the asset to its estimated fair market value.
In connection with restructuring actions initiated during 2014, There were no impairment charges for long-lived assets in the Company recorded a fixed assets impairment charge of $1.1 million in fiscal 2014 related to software development costs incurred for a discontinued project.years ended December 31, 2018, 2017 and 2016.
Foreign Currency
The functional currency of the Company’s Israeli, Cayman and Swiss operations is the U.S. dollar. All other foreign subsidiaries use the respective local currency as the functional currency. When the local currency is the functional currency, gains and losses from translation of these foreign currency financial statements into U.S. dollars are recorded as a separate component of other comprehensive lossincome (loss) in stockholders’ equity.
The Company’s foreign currency exposure is also related to its net position of monetary assets and monetary liabilities held by its subsidiaries in their nonfunctional currencies. These monetary assets and monetary liabilities are being remeasured into the functional currencies of the subsidiaries using exchange rates prevailing on the balance sheet date. Such remeasurement gains and losses are included in other expense, net in the Company’s Consolidated Statements of Operations. During the years ended December 31, 2016, 20152018, 2017 and 2014,2016, the Company recorded remeasurement losses of $0.2approximately $0.6 million, $0.5$2.2 million and $0.4$0.2 million, respectively.
Derivative Instruments
The Company enters into derivative instruments, primarily foreign currency forward contracts, to minimize the short-term impact of foreign currency exchange rate fluctuations on certain foreign currency denominated assets and liabilities as well as certain foreign currencies denominated expenses. The Company does not enter into derivative instruments for trading purposes and these derivatives generally have maturities within twelve months.
The derivative instruments are recorded at fair value in prepaid expenses and other current assets or accrued and other current liabilities in the Company’s Consolidated Balance Sheet. For derivative instruments designated and qualifying as cash flow hedges of forecasted foreign currency denominated transactions expected to occur within twelve months, the effective portion of the gain or loss on these hedges is reported as a component of “Accumulated other comprehensive loss” in stockholders’ equity, and is reclassified into earnings when the hedged transaction affects earnings. If the transaction being hedged fails to occur, or if a portion of any derivative is (or becomes) ineffective, the gain or loss on the associated financial instrument is recorded immediately in earnings. For derivative instruments used to hedge existing foreign currency
denominated assets or liabilities, the gains or losses on these hedges are recorded immediately in earnings to offset the changes in the fair value of the assets or liabilities being hedged.
Fair Value of Financial Instruments
The carrying value ofCompany did not enter into any cash flow hedges during the Company’s financial instruments, including cash equivalents, restricted cash, short-term investments, accounts receivable, accounts payable and accrued and other current liabilities, approximate fair value due to their short maturities.
The fair value of the Company’s liability for the TVN voluntary departure plan (“TVN VDP”), a post-employment benefit plan for employees of the TVN French Subsidiary, as ofyear ended December 31, 2016, is determined based on a discount rate of 4.25% (4-Year LIBOR + 2.5%). The Company believes this discount rate approximates it’s incremental borrowing rate in France. (See Note 11, “Restructuring and related Charges-TVN VDP,” for additional information on the TVN VDP).2018.
Research and Development
Research and development (“R&D”) costs are expensed as incurred and 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. R&D expense was $98.4$89.2 million, $87.5$96.0 million and $93.1$98.4 million for the years ended December 31, 2016, 20152018, 2017 and 2014,2016, respectively.
The R&D expenses for the year ended December 31, 2016 was net of approximately $6.0 million in reimbursements of engineering spending by one of our large customers, as well as approximately $6.1 million of R&D tax credits in 2016. OurCompany’s TVN French Subsidiary participates in the French CIRCrédit d’Impôt Recherche (“CIR”) program which allows companies to monetize eligible research expenses. The R&D tax credits receivable from the French government for spending on innovative R&D under the CIR program is recorded as an offset to R&D expenses. In the years ended December 31, 2018, 2017 and 2016, the R&D expenses were net of $5.9 million, $5.9 million and $6.1 million of R&D tax credits, respectively.
Restructuring and Related Charges
The Company’s restructuring charges consist primarily of employee severance, one-time termination benefits related to the reduction of its workforce, lease exit costs, and other costs. Liabilities for costs associated with a restructuring activity are recognized when the liability is incurred and are measured at fair value. One-time termination benefits are expensed at the date the entity notifies the employee, unless the employee must provide future service, in which case the benefits are expensed ratably over the future service period. Termination benefits are calculated based on regional benefit practices and local statutory requirements. Costs to terminate a lease before the end of its term are recognized when the entity terminates the contract in accordance with the contract terms. The Company determines the excess facilities accrual based on expected cash payments, under the applicable facility lease, reduced by any estimated sublease rental income for such facility. Other costs primarily consist of costs to write down the values of inventories and leasehold improvement write-down as a result of restructuring activities (sSee Note 11,10, “Restructuring and related Charges” for additional information).information.
Warranty
The Company accrues for estimated warranty costs at the time of revenue recognition and records such accrued liabilities as part of cost of revenue. Management periodically reviews its warranty liability and adjusts the accrued liability 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.
Advertising Expenses
All advertising costs are expensed as incurred and included in “Selling, general and administrative expenses” in the Company’s Consolidated Statements of Operations. Advertising expense was $1.4$1.0 million, $1.4$0.7 million and $0.2$1.4 million for the years ended December 31, 2016, 20152018, 2017 and 2014,2016, respectively.
Stock-based Compensation Expense
The Company measures and recognizes compensation expense for all stock-based compensation awards made to employees, and directors, including stock options, restricted stock units (“RSUs”) and awards related to the Company’s Employee Stock Purchase Plan (“ESPP”), based upon the grant-date fair value of those awards.
Applicable accounting guidance requires companiesPrior to estimate the fair value ofJanuary 1, 2017, stock-based compensation awards on the datewas recorded net of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expenseestimated forfeitures over the requisite service period inand, accordingly, was recorded for only those stock-based awards that the Company’s Consolidated StatementsCompany expected to vest. Upon the adoption of Operations.ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), issued by the Financial Accounting Standards Board (“FASB”), the Company changed its accounting policy to account for forfeitures as they occur. The change was applied on a modified retrospective approach with a cumulative effect adjustment of $69,000 to retained earnings as of January 1, 2017 (which increased the accumulated deficit).
The fair value of the Company’s stock options and ESPP is estimated at grant date using the Black-Scholes option pricing model. The Company’s determination of fair value of stock optionsthe Company’s RSUs is calculated based on the datemarket value of grant, using an option pricing model, is affected by the Company’s stock price, as well asat the assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and projected employee stock
option exercise behaviors.grant date. The fair value of each restricted stock unit grant is based on the underlying value of the Company’s common stock onmarket-based RSUs (“MRSUs”) is estimated using the date of grant.Monte-Carlo valuation model with market vesting conditions.
The Company recognizes the stock-based compensation expense for performance-based RSUs (“PRSUs”) based on the probability of achieving certain performance criteria, as defined in the PRSU agreements. The Company estimates the number of PRSUs ultimately expected to vest and recognizerecognizes expense using the graded vesting attribution method over the requisite
service period. Changes in the estimates related to probability of achieving certain performance criteria and number of PRSUs expected to vest could significantly affect the related stock-based compensation expense from one period to the next.
Pension Plan
As part ofUnder French law, the TVN acquisition,Company’s subsidiaries in France, including the Company assumed obligations to the employees of itsacquired TVN French Subsidiary, underis obligated to provide for a defined benefit plan to its employees upon their retirement from the Company. The Company’s defined benefit pension plan which was unfunded as of the acquisition date. in France is unfunded.
The Company records annual amountsits obligations relating to the pension plans based on calculations which include various actuarial assumptions including employees’ age and period of service with the company; projected mortality rates, mobility rates and increases in salaries; and a discount rate. The Company reviews its actuarial assumptions on an annual basis as of December 31 (or more frequently if a significant event requiring remeasurement occurs) and modifies the assumptions based on current rates and trends when it is appropriate to do so. The Company believes that the assumptions utilized in recording its obligations under its pension plan are reasonable based on its experience, market conditions and input from its actuaries. The Company determines its assumption for the discount rate to be used for purposes of computing annual service and interest costs based on Euro Zone AA rated corporate bonds + 10
years. The discount rate for pension benefit obligations at December 31, 2016 was 1.5%. The defined benefit obligation for the pension plan was $4.3 million as of December 31, 2016.
The Company accounts for the actuarial gains (losses) in accordance with ASC 715, “Compensation - Retirement Benefits”. If the net accumulated gain or loss exceeds 10% of the projected plan benefit obligation, a portion of the net gain or loss is amortized and included in expense for the following year based upon the average remaining service period of active plan participants, unless the Company’s policy is to recognize all actuarial gains (losses) when they occur. The Company elected to defer actuarial gains (losses) in accumulated other comprehensive income (loss). As of December 31, 2016,2018, the Company did not meet the 10% requirement, and therefore no amortization of 20162018 actuarial lossgain would be recorded in fiscal 2017.2019.
See Note 13,12, “Employee Benefit Plans and Stock-based Compensation-TVNCompensation-French Retirement Benefit Plan,” for additional information.
Income Taxes
In preparing the Company’s financial statements, the Company estimates the income taxes for each of the jurisdictions in which the Company operates. This involves estimating the Company’s actual current tax exposuresexpense and assessing temporary and permanent differences resulting from differing treatment of items, such as reserves and accruals, for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included within the Company’s Consolidated Balance Sheet.
The Company’s income tax policy is to record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the Company’s accompanying Consolidated Balance Sheets, as well as operating loss and tax credit carryforwards. The Company follows the guidelines set forth in the applicable accounting guidance regarding the recoverability of any tax assets recorded on the Consolidated Balance Sheet and provides any necessary allowances as required. Determining necessary allowances requires the Company to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities. A history of operating losses in recent years has led to uncertainty with respect to our ability to realize certain of our net deferred tax assets, and as a result we applied a full valuation allowance against our U.S. net deferred tax assets as of December 31, 2016.2018. In the event that actual results differ from these estimates or the Company adjusts these estimates in future periods, the Company’s operating results and financial position could be materially affected.
The Company is subject to examination of its income tax returns by various tax authorities on a periodic basis. The Company regularly assesses the likelihood of adverse outcomes resulting from such examinations to determine the adequacy of its provision for income taxes. The Company has applied the provisions of the applicable accounting guidance on accounting for uncertainty in income taxes, which requires application of a more-likely-than-not threshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits the Company to recognize a tax benefit measured at the largest amount of tax benefit that, in the Company’s judgment, is more than 50% likely to be realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the period of such change.
The Company files annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, the Company believes that its reserves for income taxes reflect the most likely outcome. The Company adjusts these reserves and penalties, as well as the related interest, in light of changing facts and circumstances. Changes in the Company’s assessment of its uncertain tax positions or settlement of any particular position could materially and adversely impact the Company’s income tax rate, operating results, financial position and cash flows.
The Company accounts for sales taxes imposed on its goods and services on a net basis in the Consolidated Statements of Operations.
Segment Reporting
Operating segments are defined as components of an enterprise that engage in business activities for which separate financial information is available and is evaluated by the Chief Operating Decision Maker (“CODM”), which for the Company is its Chief Executive Officer, in deciding how to allocate resources and assess performance. The Company has two operating segments: Video and Cable Edge.Access.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes cumulative translation adjustments, unrealized foreign exchange gains and losses on intercompany long-term loans, unrealized gains and losses on certain foreign currency forward contracts that qualify as cash flow hedges and available-for-sale securities, as well as actuarial gains and losses on pension plan.
RecentRecently Adopted Accounting Pronouncements
New Standards to be Implemented
ASC Topic 606, “Revenue from Contracts with Customers”
In May 2014,On January 1, 2018, the Financial Accounting Standards Board (“FASB”) issued a new standard, Accounting Standards Update (“ASU”) No. 2014-09,Company adopted ASC 606, Revenue from Contracts with Customers(“Topic 606”), using the modified retrospective method applied to those contracts which were not completed as amended,of January 1, 2018. Results for the reporting period beginning January 1, 2018 are presented under Topic 606, while prior period amounts are not restated and continue to be reported in accordance with our historic accounting under ASC 605, Revenue Recognition (“Topic 605”).
Under Topic 606, the Company began to recognize a contract asset for satisfied performance obligations that do not provide the Company with an unconditional right to consideration, which will supersede nearly all existingwas restricted under the previous standard. In addition, the Company changed its revenue recognition guidance. Under ASU 2014-09,for professional services from a completed contract method to a percentage of completion method.
The cumulative effect of initially applying Topic 606 to the Company’s consolidated balance sheet on January 1, 2018 was as follows (in thousands):
|
| | | | | | | | | | | |
| CONSOLIDATED BALANCE SHEETS | Balance as of December 31, 2017 | | Cumulative Impact from Adopting Topic 606 | | Balance as of January 1, 2018 |
| ASSETS | | | | | |
| Accounts receivable, net | $ | 69,844 |
| | $ | 1,781 |
| | $ | 71,625 |
|
| Prepaid expenses and other current assets | 18,931 |
| | 3,578 |
| | 22,509 |
|
| Other long-term assets | 42,913 |
| | 773 |
| | 43,686 |
|
| | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
| Deferred revenue | $ | 52,429 |
| | $ | (4,826 | ) | | $ | 47,603 |
|
| Other non-current liabilities | 22,626 |
| | (473 | ) | | 22,153 |
|
| Accumulated deficit | (2,057,812 | ) | | 11,431 |
| | (2,046,381 | ) |
The impact from adopting Topic 606 on the Company’s consolidated financial statements was as follows (in thousands):
|
| | | | | | | | | | | |
| | Year ended December 31, 2018 |
| CONSOLIDATED STATEMENTS OF OPERATIONS | As Reported | | Previous Accounting Guidance | | Impact from Adopting Topic 606 |
| Total net revenue | $ | 403,558 |
| | $ | 402,550 |
| | $ | 1,008 |
|
| Total cost of revenue | 194,349 |
| | 194,101 |
| | 248 |
|
| Total gross profit | 209,209 |
| | 208,449 |
| | 760 |
|
| Operating expenses: | | | | | |
| Selling, general and administrative | 118,952 |
| | 119,151 |
| | (199 | ) |
| Loss from operations | (5,011 | ) | | (5,970 | ) | | 959 |
|
| Loss before income taxes | (16,948 | ) | | (17,907 | ) | | 959 |
|
| Net loss | (21,035 | ) | | (21,994 | ) | | 959 |
|
|
| | | | | | | | | |
| | As of December 31, 2018 |
| CONSOLIDATED BALANCE SHEETS | As Reported | | Previous Accounting Guidance | | Impact from Adopting Topic 606 |
| ASSETS | | | | | |
| Accounts receivable, net | 81,795 |
| | 79,954 |
| | $ | 1,841 |
|
| Prepaid expenses and other current assets | 23,280 |
| | 19,067 |
| | 4,213 |
|
| Other long-term assets | 38,377 |
| | 37,872 |
| | 505 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
| Deferred revenue | 41,592 |
| | 47,117 |
| | (5,525 | ) |
| Other non-current liabilities | 18,228 |
| | 18,534 |
| | (306 | ) |
| Accumulated deficit | (2,067,416 | ) | | (2,079,806 | ) | | 12,390 |
|
Revenue Recognition
The Company’s principal sources of revenue are from the sale of hardware, software, hardware and software maintenance contracts, and end-to-end solutions, encompassing design, manufacture, test, integration and installation of products. The Company also derives recurring revenue from subscriptions, which are comprised of subscription fees from customers utilizing the Company’s cloud-based video processing solutions.
Revenue from contracts with customers is recognized using the following five steps:
a) Identify the contract(s) with a customer;
b) Identify the performance obligations in the contract;
c) Determine the transaction price;
d) Allocate the transaction price to the performance obligations in the contract; and
e) Recognize revenue when (or as) the Company satisfies a performance obligation.
A contract contains a promise (or promises) to transfer goods or services to a customer. A performance obligation is a promise (or a group of promises) that is distinct. The transaction price is the amount of consideration a Company expects to be entitled from a customer in exchange for providing the goods or services.
The unit of account for revenue recognition is a performance obligation. A contract may contain one or more performance obligations, including hardware, software, professional services and support and maintenance. Performance obligations are accounted for separately if they are distinct. A good or service is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and the good or service is distinct in the context of the contract. Otherwise performance obligations will be combined with other promised goods or services until the Company identifies a bundle of goods or services that is distinct.
The transaction price is allocated to all the separate performance obligations in an entityarrangement. It reflects the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services, which may include an estimate of variable consideration to the extent that it is requiredprobable of not being subject to recognize revenue upon transfersignificant reversals in the future based on the Company’s experience with similar arrangements. The transaction price also reflects the impact of the time value of money if there is a significant financing component present in an arrangement. The transaction price excludes amounts collected on behalf of third parties, such as sales taxes.
Revenue is recognized when the Company satisfies each performance obligation by transferring control of the promised goods or services to customersthe customer. Goods or services can transfer at a point in time or over time depending on the nature of the arrangement.
Deferred revenue represents the Company’s obligation to transfer goods or services to a customer for which the Company has received consideration (or an amount that reflectsof consideration is due) from the expected consideration received in exchange for those goodscustomer. Our payment terms vary by the type and location of our customer and the products or services. ASU No. 2014-09 defines a five-step process in order to achieve this core principle, which mayservices offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the use of judgment and estimates, and also requires expanded qualitative and quantitative disclosures relatingproducts or services are delivered to the nature, amount, timingcustomer. Revenue recognized during the year ended December 31, 2018 that was included within the deferred revenue balance at January 1, 2018 was $46.9 million.
Contract assets exist when the Company has satisfied a performance obligation but does not have an unconditional right to consideration (e.g., because the entity first must satisfy another performance obligation in the contract before it is entitled to invoice the customer). Contract assets are reported as a component of “Prepaid expenses and uncertaintyother current assets” on the Consolidated Balance Sheets. See Note 9, “Certain Balance Sheet Components’ for additional information.
Shipping and handling costs are accounted for as a fulfillment cost and are recorded in cost of revenue in the Company’s Consolidated Statements of Operations. Sales tax and cash flows arisingother amounts collected on behalf of third parties are excluded from contracts with customers, including significant judgments and estimates used.the transaction price.
Hardware and Software. Revenue from the sale of hardware and software products is recognized when the control is transferred. For most of the Company’s product sales (including sales to distributors and system integrators), the control is transferred at the time the product is shipped or delivery has occurred because the customer has significant risks and rewards of ownership of the asset and the Company has a present right to payment at that time. The FASBCompany’s agreements with the distributors and system integrators have terms which are generally consistent with the standard terms and conditions for the sale of the Company’s equipment to end users, and do not provide for product rotation or pricing allowances, as are typically found in agreements with stocking distributors. The Company offers return rights which are specifically identified and accrued for as sales returns at the end of the period.
Arrangements with Multiple Performance Obligations. The Company has recently issued several amendments to the new standard, including clarification on accounting for licenses of intellectual property and identifyingrevenue arrangements that include multiple performance obligations. The amendmentsCompany allocates transaction price to all separate performance obligations based on their relative standalone selling prices (“SSP”). The Company’s best evidence for SSP is the price the Company charges for that good or service when the Company sells it separately in similar circumstances to similar customers. If goods or services are not always sold separately, the Company uses the best estimate of SSP in the allocation of transaction price. The objective of determining the best estimate of SSP is to estimate the price at which the Company would transact a sale if the product or service were sold on a standalone basis. The Company’s process for determining best estimate of SSP involves management’s judgment, and considers multiple factors including, but not limited to, major product groupings, geographies, gross margin objectives and pricing practices. Pricing practices taken into consideration include ASU No. 2016-08, contractually stated prices, discounts offered and applicable price lists. These factors may vary over time, depending upon the unique facts and circumstances related to each deliverable. If the facts and circumstances underlying the factors considered change or should future facts and circumstances lead the Company to consider additional factors, the Company’s best estimate of SSP may also change.
Solution Sales. Solution sales for the design, manufacture, test, integration and installation of products, including equipment acquired from third parties to be integrated with Harmonic’s products, that are customized to meet the customer’s specifications are accounted for based on the percentage-of-completion basis, using the input method. Some of our arrangements may include acceptance provisions that require testing of the solution against specific performance criteria. The Company performs a detailed evaluation to determine whether the arrangement involves performance criteria based on our standard performance criteria. The Company has a long-standing history of entering into contractual arrangements to deliver the solution sales based on standard performance criteria. For this type of arrangement, we consider the customer acceptance clause not substantive and recognize product revenue when the customer takes possession on the product and recognize service on a percentage-of-completion basis using the input method. However, if the solution results in significant production,
modification or customization, we consider the arrangement as a single performance obligation and recognize the revenue at a point in time, depending on the complexity of the solution and nature of acceptance.
Professional services. Revenue from Contracts with Customers (Topic 606)-Principal versus Agent Considerations, which was issuedprofessional services is recognized over time, on the percentage-of-completion basis using the input method.
Input method. The use of the input method requires the Company to make reasonably dependable estimates. We use the input method based on labor hours, where revenue is calculated based on the percentage of total hours incurred in March 2016,relation to total estimated hours at completion of the contract. The input method is reasonable because the hours best reflect the Company’s efforts toward satisfying the performance obligation over time. As circumstances change over time, the Company updates its measure of progress to reflect any changes in the outcome of the performance obligation. Such changes to an entity’s measure of progress are accounted for as a change in accounting estimates.
Support and clarifiesmaintenance. Support and maintenance services are satisfied ratably over time as the implementationcustomer simultaneously receives and consumes the benefits of the services.
Contract costs. The incremental costs of obtaining a contract are capitalized if the costs are expected to be recovered. Costs that are recognized as assets are amortized straight-line over the period as the related goods or services transfer to the customer. Costs incurred to fulfill a contract are capitalized if they are not covered by other relevant guidance, for principal versus agent considerations in ASU 2014-09, and ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606)-Identifying Performance Obligations and Licensing, which was issued in April 2016, and amends the guidance in ASU No. 2014-09 relatedrelate directly to identifyinga contract, will be used to satisfy future performance obligations, and accounting for licenses of intellectual property.
The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. The new standard is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. The Company does not planare expected to early adopt, and accordingly, it will adopt the new standard effective January 1, 2018.be recovered.
The Company currently plansrecorded a net decrease to adopt using the modified retrospective approach. However, a final decision regardingopening balance of accumulated deficit of $1.4 million as of January 1, 2018 for capitalizing contract costs due to the adoption method has not been finalized at this time. The Company’s final determination will depend on a number of factors, such as the significance of thecumulative impact of adopting Topic 606 for sales commissions related to customer contracts with an amortization period in excess of one year. Anticipated contract renewals, amendments, and follow-on contracts with the new standard on its financial results, system readiness, including that of software procured from third-party providers, and its ability to accumulate and analyze the information necessary to assess the impact on prior period financial statements, as necessary.
The Company is in the initial stages of its evaluation of the impact of the new standard on its accounting policies, processes, and system requirements. The Company has assigned internal resources in addition to the engagement of third party service providers to assist in the evaluation. Furthermore, the Company has made and will continue to make investments in systems to enable timely and accurate reporting under the new standard. While the Company continues to assess all potential impacts under the new standard, there is the potential for significant impacts to the timing of recognition of software licenses with undelivered features and professional services revenue with acceptances, and contract acquisition costs, both with respect to the amounts that will be capitalized as well assame customer are considered when determining the period of amortization.
UnderThe net capitalized contract costs as of December 31, 2018 were $1.6 million, of which $1.1 million and $0.5 million were reported as components of “Prepaid expenses and other current industry-specific software revenue recognition guidance,assets” and “Other long-term assets” on the Consolidated Balance Sheets, respectively. The amortization of the capitalized contract costs for the year ended December 31, 2018 was $1.3 million.
Significant Judgments. The Company has historically concludedrevenue arrangements that it did not have VSOE of fair value of the undelivered features relatinginclude promises to delivered software licenses,transfer multiple products and accordingly, it has deferred entire revenue for such software licenses until the delivery of features. Professional services included in arrangements with acceptances have also been recognized on receipt of acceptance.to a customer. The new standard, which does not retain the concept of VSOE, requires an evaluation ofCompany may exercise significant judgment when determining whether the undelivered featuresproducts and services are considered distinct performance obligations and, therefore,that should be accounted for separately recognizedversus together.
The Company allocates the transaction price to all separate performance obligations based on the SSP of each obligation. The Company’s best evidence for SSP is the price the Company charges for that good or service when delivered comparedthe Company sells it separately in similar circumstances to the timing of delivery of software license. Professional services will be recorded assimilar customers. If goods or services are provided. Depending onnot always sold separately, the outcomeCompany uses the best estimate of SSP in the allocation of the transaction price. The objective of determining the best estimate of SSP is to estimate the price at which the Company would transact a sale if the product or service were sold on a standalone basis. The Company’s evaluation,process for determining the timingbest estimate of when revenue is recognized couldSSP involves management’s judgment, and considers multiple factors including, but not limited to, major product groupings, geographies, gross margin objectives and pricing practices. Pricing practices taken into consideration include contractually stated prices, discounts and applicable price lists. These factors may vary over time, depending upon the unique facts and circumstances related to each deliverable. If the facts and circumstances underlying the factors considered change foror should future featuresfacts and professional services undercircumstances lead the new standard.Company to consider additional factors, the Company’s best estimate of SSP may also change.
As part of the Company’s preliminary evaluation, it has also considered the impact of the guidance in ASC 340-40, Other AssetsPractical Expedients and Deferred Costs; Contracts with Customers, and the interpretations of the FASB Transition Resource Group for Revenue Recognition (“TRG”) from their November 7, 2016 meeting with respect to capitalization and amortization ofExemptions. Under Topic 606, incremental costs of obtaining a contract. Ascontractsuch as sales commissions are capitalized if they are expected to be recovered, and amortized on a result of this new guidance, the Company preliminarily believes that it will capitalize certainstraight-line basis. Expensing these costs as incurred is not permitted unless they qualify for a practical expedient. Other than capitalized costs of obtaining subscription contracts which are amortized regardless of the contract, including additional sales commissions, as the new cost guidance, as interpreted by the TRG, requires the capitalizationlife of all incremental costs thatexpected amortization period, the Company incurselected thepractical expedient to expense the costs to obtain a contract with a customer that it would not haveall other contracts as incurred, ifwhen the contract had not been obtained, provided it expects to recover the costs. Additionally, after the adoptionlife of the new guidance, the Company preliminarily believes that theexpected amortization period for the capitalized costs will be longer than the contract term, as the new cost guidance requires entities to determine whether the costs relate to specific anticipated contracts. Therefore, the Company believe that the period of benefit, as interpretedis one year or less by the TRG, for deferred commission costs will likely be longer than the initial contract period. Under the Company’s current accounting policy, it expense the commission costs immediately as incurred.using a portfolio approach.
WhileThe Company elected the practical expedient under Topic 606 to not disclose the transaction price allocated to remaining performance obligations, since the majority of the Company’s arrangements have original expected durations of one year or less, or the invoicing corresponds to the value of the Company’s performance completed to date.
The Company elected the practical expedient that allows the Company continues to not assess a contract for a significant financing component if the potential impactsperiod between the customer’s payment and the transfer of the new standard, including the areas described above, the Company does not knowgoods or cannot reasonably estimate quantitative information related to the impact of the new standard on its financial statements at this time.services is one year or less.
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
See Note 17, “Segment Information” for the Company beginning in the first quarter of fiscal 2017 and early adoption is permitted. The adoption of this new guidance is not expected to have a material impact on the Company’s consolidated financial statements.further disaggregated revenue information.
Other Recently Adopted Accounting Pronouncements
In January 2016, the FASB issued an accounting standard updateASU No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments to be measured at fair value with changes in fair value recognized in net income and simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The accountingCompany adopted this new standard update also updates certain presentation and disclosure requirements. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2018, and earlythe adoption is permitted. The Company is currently evaluating thedid not have a material impact of this accounting standard update on its consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires entities to present the aggregate changes in cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, the statement of cash flows is required to present restricted cash and restricted cash equivalents as a part of the beginning and ending balances of cash and cash equivalents. The Company adopted this new standard in the first quarter of fiscal 2018 on a retrospective basis. The Company’s total restricted cash balance was zero, $1.7 million and $1.8 million as of December 31, 2018, 2017 and 2016, respectively. These restricted cash balances are presented as a part of the ending and beginning balances of cash, cash equivalents and restricted cash on the Company’s Consolidated Statements of Cash Flows for the corresponding periods. See Note 9, “Certain Balance Sheet Components” for additional information.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The objective of ASU 2017-01 is to clarify the definition of a business in order to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The Company adopted this new standard in the first quarter of fiscal 2018, and the adoption had no impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This new standard requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Costs for implementation activities in the application development stage can be capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. The costs capitalized are expensed over the term of the hosting arrangement. The amendments in the new ASU also require the entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. This new standard is effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years and should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted, including adoption in any interim period.
The Company early adopted this new standard in the third quarter of fiscal 2018 and applied it prospectively to all implementation costs incurred after the date of adoption. The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements for the year ended December 31, 2018. Should the Company incur significant implementation costs in a cloud computing arrangement that is a service contract in future, the new standard could have a significant impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
In February 2016, the FASB amendsissued ASU No. 2016-02, Leases (Topic 842), to amend the existing accounting standard for lease accounting. Under this guidance,This new standard will require lessees to recognize most leases on their balance sheets as a right-of-use asset with a corresponding lease liability, and lessors should applyto recognize a “right-of-use” model in accountingnet lease investment. Additional qualitative and quantitative disclosures will also be required.
The new standard is effective for all leases (including subleases) and eliminate the concept of operating leases and off-balance sheet leases. This new leases standard requires aCompany on January 1, 2019, with early adoption permitted. A modified retrospective transition approach foris required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the
financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into after,between the date of initial application with an optionand the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. The Company expects to adopt the new standard on January 1, 2019 and use certain transition relief. the effective date as the date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.
The new standard will be effective forprovides a number of optional practical expedients in transition. The Company expects to elect the ‘package of practical expedients’, which permits the Company beginning innot to reassess under the first quarter of fiscal 2019new standard its prior conclusions about lease identification, lease classification and early adoption is permitted.initial direct costs. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company is currently evaluatingexpects to elect the methods and impactshort-term lease recognition exemption for all leases that qualify.
While the Company continues to assess all of adopting the new leases standardeffects of adoption, the Company currently believes that the most significant effects on its consolidated financial statements.
In March 2016,statements relate to the FASB issued an accounting standard update to clarifyrecognition of the requirements for assessing whether contingent call (put) options that can accelerate the payment of principalright-of-use assets and lease liabilities on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The standard will be effectiveits balance sheets for the Company beginning in
operating leases, and providing significant new disclosures about the first quarter of fiscal 2017 and early adoption is permitted. Theleasing activities. Based on our current lease portfolio, adoption of this accountingthe standard update is not expectedestimated to have anyresult in an increase in operating lease assets and liabilities of approximately $23 million with an insignificant impact on the financial statementsour Consolidated Statements of the Company.
In March 2016, the FASB issued an accounting standard update for the accounting for share-based payment transactions, including the income tax consequences, classification of awardsOperations. This estimate is subject to change as either equity or liabilities and classification on the statement of cash flows. This accounting standard update requires that all excess tax benefits and deficiencies from stock-based compensation be recognized as income tax expense or benefits in the statement of operations, as these amounts are currently recognized in additional paid-in capital in the balance sheet. Additionally, all excess income tax benefits and deficiencies from stock-based compensation arrangements are to be classified as a cash flow from operations, rather than as a cash flow from financing activities. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2017 and may be applied retrospectively or prospectively. The Company will apply both changes prospectively. The Company is currently unable to reasonably estimate the impact of these changes due to the dependency of these items on the underlying share price of the Company.we finalize our implementation.
In June 2016, the FASB issued new guidance thatASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets and certain other instruments. For trade receivables and other instruments, the Company will be required to use a new forward-looking “expected loss” model. Additionally, credit losses on available-for-sale debt securities should be recorded through an allowance for credit losses limited to the amount by which fair value is below amortized cost. The new ASU will be effective for the Company beginning in the first quarter of fiscal 2020 and early adoption is permitted. The adoption of the new ASU is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new ASU removes Step 2 of the goodwill impairment test and requires the assessment of fair value of individual assets and liabilities of a reporting unit to measure goodwill impairments. Goodwill impairment will then be the amount by which a reporting unit's carrying value exceeds its fair value. The new ASU will be effective for the Company beginning in the first quarter of fiscal 2020 on a prospective basis, and early adoption is permitted. The Company is currently evaluating the impact of adopting the new ASU on its consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The new ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. The new ASU will be effective for the Company beginning in the first quarter of fiscal 2019 and early adoption is permitted. The Company is currently evaluating the impact of adopting this new accounting guidance on its consolidated financial statements.
In August 2016, the FASB issued an accounting standard update that addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2018 and early adoption is permitted. The Company is currently evaluating the methods and impact of adopting the new accounting standard on its consolidated financial statements.
In October 2016, The Company currently believes that the FASB issued an accounting standard update which removes the prohibition in ASC 740 against the immediate recognition of the current and deferred income taxmost significant effects of intra-entity transfers of assets other than inventory. This accounting standard update is intended to reduce the complexity of U.S. GAAP and diversity in practice relatedon its consolidated financial statements relate to the tax consequencesaccounting of certain types of intra-entity asset transfers, particularly those involving intellectual property. This accounting standard update will be effectiveComcast warrants. The Company expects to complete related assessments before filing its Quarterly Report for the Company beginning in the first quarter of fiscal 2019.
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and early adoptionSimplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. This final rule is permitted.effective on November 5, 2018. The Company is currently evaluatingrelease expanded the impactdisclosure requirements on the analysis of adopting the new accounting standard on its consolidatedstockholders' equity for interim financial statements.
In November 2016, Under the FASB issuedrelease, an accounting standard update which requires companies to include restricted cash and restricted cash equivalentsanalysis of changes in its cash and cash equivalent balances in the statementeach caption of cash flows. Transfers between cash, cash equivalent, restricted cash, and restricted cash equivalents are no longerstockholders' equity presented in the statement of cash flows.balance sheet must be provided in a note or separate statement. The new guidance requiresanalysis should present a reconciliation of the totals inbeginning balance to the ending balance of each period for which a statement of cash flowscomprehensive income is required to be filed. According to the related captions. This accounting standard updaterelease, the staff of the SEC will be effectivenot object if a filer’s first presentation of changes in shareholders’ equity is included in its Quarterly Report on Form 10-Q for the quarter that begins after the final rule’s effective date. The Company beginningplans to first include the changes required by this release in its Quarterly Report on Form 10-Q for the first quarter of fiscal 2018 and early adoption is permitted. The adoption of this new guidance is not expected to have a material impact on the Company’s consolidated financial statements.
Standards Implemented
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 Company adopted this accounting standard update in the first quarter of fiscal 2016 and the adoption did not have an impact to the Company’s 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. The Company adopted this accounting standard update in the first quarter of fiscal 2016 and the adoption did not have an impact to the Company’s 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. The Company adopted this accounting standard update beginning in the first quarter of fiscal 2016. The adoption of this standard update did not have a material impact on the Company’s consolidated financial statements.2019.
In November 2015, the FASB issued an accounting standard update that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as non-current on the balance sheet. The accounting standard update will be effective for the Company beginning in the first quarterIn September 2015, the FASB issued new guidance related to business combinations. The new guidance requires that any adjustments to provisional amounts in a business combination be recorded in the period such adjustments are determined, rather than retrospectively adjusting previously reported amounts. The Company adopted the amendments beginning in the first quarter of fiscal 2016. The adoption did not have a material impact on the Company's consolidated financial statements.
NOTE 3: BUSINESS ACQUISITION
On February 29, 2016, the Company, through its wholly-owned subsidiary Harmonic International AG, completed its acquisition of 100% of the share capital and voting rights of TVN, a global leader in advanced video compression solutions headquartered in Rennes, France. In the first quarter of 2016, the Company recorded a provisional purchase price of $84.6 million, including an estimated contingent consideration of approximately $8.0 million. In the second quarter of 2016, the Company recorded a $2.1 million reduction to the contingent consideration upon finalizing the pending post-closing adjustments and, as a result, the purchase price was reduced to $82.5 million. Pursuant to the Securities Purchase Agreement entered into between the Company and the other parties thereto, dated February 11, 2016 (“TVN Purchase Agreement”), $13.5 million of the purchase consideration may remain in escrow for a period of up to 18 months and relates to certain indemnification obligations of TVN’s former equity holders. The TVN acquisition was primarily funded with cash proceeds from the issuance of convertible senior notes by the Company in December 2015. (See Note 12, “Convertible Notes, Other Debts and Capital Leases,”for additional information on the notes).
The Company believes that its acquisition of TVN has strengthened, and will continue to strengthen, the Company’s competitive position in the video infrastructure market as well as to enhance the depth and scale of the Company’s research and development (“R&D”) and service and support capabilities in the video arena. The Company believes that the combined product portfolios, R&D teams and global sales and service personnel will allow the Company to accelerate innovation for its customers while leveraging greater scale to drive operational efficiencies.
The TVN acquisition has been accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires, among other things, that the assets acquired and liabilities assumed be recognized at their acquisition date fair values, with any excess of the consideration transferred over the estimated fair values of the identifiable net assets acquired recorded as goodwill. During the fourth quarter of 2016, the Company completed the accounting for this business combination.
The final TVN purchase price has been allocated on to tangible and intangible assets acquired and liabilities assumed on the basis of their respective estimated fair values on the acquisition date. The Company’s allocation of TVN purchase consideration is as follows (in thousands):
|
| | | |
| Assets: | |
| Cash and cash equivalents | $ | 6,843 |
|
| Accounts receivable, net | 14,933 |
|
| Inventories | 3,462 |
|
| Prepaid expenses and other current assets | 2,412 |
|
| Property and equipment, net | 9,942 |
|
French R&D tax credit receivables (1) | 26,421 |
|
| Other long-term assets | 2,134 |
|
| Total assets | $ | 66,147 |
|
| Liabilities: |
|
| Other debts and capital lease obligations, current | 8,362 |
|
| Accounts payable | 12,494 |
|
| Deferred revenue | 2,504 |
|
| Accrued and other current liabilities | 18,365 |
|
| Other debts and capital lease obligations, long-term | 16,087 |
|
| Other non-current liabilities | 6,467 |
|
| Deferred tax liabilities | 2,126 |
|
| Total liabilities | $ | 66,405 |
|
| |
|
| Goodwill | 41,670 |
|
| Intangibles | 41,100 |
|
| Total purchase consideration | $ | 82,512 |
|
(1) See Note 10, “Certain Balance Sheet Components-Prepaid expenses and other current assets,” for more information on French R&D tax credit receivables.
The following table presents details of the intangible assets acquired through this business combination (in thousands, except years):
|
| | | | | |
| | Estimated Useful Life | | Fair Value |
| Backlog | 6 months | | $ | 3,600 |
|
| Developed technology | 4 years | | 21,700 |
|
| Customer relationships | 5 years | | 15,200 |
|
In-process research and development (1) | N/A | | — |
|
| Trade name | 4 years | | 600 |
|
| | | | $ | 41,100 |
|
(1) By the end of the second quarter of 2016, the Company completed the TVN in-process research and development activities and, as a result, the in-process research and development of $1.1 million was reclassified to developed technology.
Acquired identifiable intangible assets were valued using the income method and are amortized on a straight line basis over their respective estimated useful lives. Goodwill of $41.7 million arising from the acquisition was derived from expected benefits from the business synergies to be derived from the combined entities and the experienced workforce who joined the Company in connection with the acquisition. The goodwill is assigned to the Company’s video reporting unit and it is not expected to be deductible for income tax purposes.
The amortization for the developed technology is recorded in “Cost of revenues” for product and the amortization for the remaining intangibles is recorded in “Amortization of intangibles,” which are part of operating expenses, on the Consolidated Statement of Operations. The intangibles assets acquired are assigned to the Company’s video reporting unit and are expected to be deductible for income tax purposes in certain jurisdictions after completing the integration of TVN’s operations.
The Company also acquired an indefinite lived asset of $1.1 million which represents the fair value of in-process research and development activities that were estimated to be completed within six months of the acquisition date. The related research and development efforts were completed by the end of the second quarter of 2016 and the Company determined that it has become a finite lived intangible asset (developed technology) with an estimated useful life of four years.
The results of operations of TVN are included in the Company’s Consolidated Statements of Operations beginning March 1, 2016. For the year ended December 31, 2016, $60.0 million of revenue and $22.0 million of gross profit from TVN were included in the Company’s Consolidated Statement of Operations. Since the Company is in the process of integrating TVN’s operations, the Company believes it is impracticable to determine TVN’s stand-alone income (loss) from operations and net income (loss) as these measures are not meaningful representations of TVN’s stand-alone performance.
Acquisition-and integration-related expenses
As a result of the TVN acquisition, the Company incurred acquisition-and integration-related expenses in aggregate of $16.9 million for the year ended December 31, 2016. These costs consisted of acquisition-related costs which include outside legal, accounting and other professional services as well as integration-related costs which include incremental costs resulting from the TVN acquisition that are not expected to generate future benefits once the integration is fully consummated. These costs are expensed as incurred.
Acquisition-and integration-related expenses for the TVN acquisition are summarized in the table below (in thousands):
|
| | | | | | | |
| | Year ended December 31, 2016 |
| | Acquisition-related | Integration-related |
| | | | (unaudited) |
| Product cost of revenue | $ | — |
| | $ | 1,049 |
|
| Research and development | — |
| | 974 |
|
| Selling, general and administrative | 3,855 |
| | 11,058 |
|
| Total acquisition- and integration-related expenses | $ | 3,855 |
| | $ | 13,081 |
|
Pro Forma Financial Information
The following unaudited pro forma summary presents consolidated information of the Company as if the acquisition of TVN had occurred on January 1, 2015, the beginning of the comparable prior annual period. The unaudited pro forma combined results are provided for illustrative purpose only and are not indicative of the Company’s actual consolidation results.
The pro forma adjustments primarily relate to the amortization of acquired intangibles and interest expense related to financing arrangements. In addition, the unaudited pro forma net loss for the year ended December 31, 2015 was adjusted to include $16.9 million of acquisition- and integration- related expenses and $14.6 million of restructuring and related charges, as well as $3.8 million reduction in revenue related to the fair value adjustment of deferred revenue. The unaudited pro forma net loss for the year ended December 31, 2016 was adjusted to exclude $16.9 million of acquisition- and integration- related expenses and $14.6 million of restructuring and related charges. These adjustments exclude the income tax impact.
|
| | | | | | | |
| | Year ended December 31, |
| | 2016 | | 2015 |
| | (in millions, except per share amounts) |
| Net revenue | $ | 414.6 |
| | $ | 456.3 |
|
| Net loss | $ | (48.8 | ) | | $ | (65.1 | ) |
| Net loss per share-basic and diluted | $ | (0.63 | ) | | $ | (0.74 | ) |
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 December 31, 2016 | | | | | | | |
| Corporate bonds | $ | 6,928 |
| | $ | — |
| | $ | (5 | ) | | $ | 6,923 |
|
| Total short-term investments | $ | 6,928 |
| | $ | — |
| | $ | (5 | ) | | $ | 6,923 |
|
| As of December 31, 2015 | | | | | | | |
| Corporate bonds | $ | 25,557 |
| | $ | — |
| | $ | (52 | ) | | $ | 25,505 |
|
| Commercial paper | 1,099 |
| | — |
| | — |
| | 1,099 |
|
| Total short-term investments | $ | 26,656 |
| | $ | — |
| | $ | (52 | ) | | $ | 26,604 |
|
The following table summarizes the maturities of the Company’s short-term investments (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| Less than one year | $ | 6,923 |
| | $ | 19,642 |
|
| Due in 1 - 2 years | — |
| | 6,962 |
|
| Total short-term investments | $ | 6,923 |
| | $ | 26,604 |
|
Short-term investments are used to fund the Company’s current operations. In the event the Company needs or desires to access funds from the short-term investments that it holds, it is possible that the Company may not be able to do so due to market conditions. If a buyer is found, but is unwilling to purchase the investments at par or the Company’s cost, it may incur a loss. Further, rating downgrades of the security issuer or the third parties insuring such investments may require the Company to adjust the carrying value of these investments through an impairment charge. The Company’s inability to sell all or some of the Company’s short-term investments at par or the Company’s cost, or rating downgrades of issuers or insurers of these securities, could adversely affect the Company’s results of operations or financial condition.
For the years ended December 31, 2016, 2015 and 2014, realized gains and realized losses from the sale of short-term investments were not material.
At December 31, 2016 and 2015, $4.4 million and $5.4 million, respectively, of investments in equity securities of other privately and publicly held companies are considered as long-term investments and are included in “Other long-term assets” in the Consolidated Balance sheet (See Note 5, “Investments in Other Equity Securities,” for additional information).
Impairment of Short-term Investments
The Company monitors its investment portfolio for impairment on a periodic basis. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis for the investment is established. A decline of fair value below amortized costs of debt securities is considered other-than temporary if the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of the entire amortized cost basis. At the present time, the Company does not intend to sell its investments that have unrealized losses in accumulated other comprehensive loss. In addition, the Company does not believe that it is more likely than not that it will be required to sell its investments that have unrealized losses in accumulated other comprehensive loss before the Company recovers the principal amounts invested. The 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 December 31, 2016.
As of December 31, 2016, 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: 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 long-term assets” in the 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. 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 $0.8 million and $1.8 million as of December 31, 2016 and December 31, 2015, respectively, and Vislink’s accumulated unrealized gain (loss), net of taxes was $0.3 million and $(1.5) million as of December 31, 2016 and December 31, 2015, respectively. The accumulated unrealized gain (loss) is included in the Consolidated Balance Sheet as a component of “Accumulated other comprehensive loss”.
The Company assessed this available-for-sale investment that was in a gross unrealized loss position on an individual basis to determine if the decline in fair value was other than temporary. The assessment as to the nature of a decline in fair value is based on, among other things, the length of time and the extent to which the market value has been less than the Company’s cost basis; the financial condition and near-term prospects of the investment; and the Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. As a result of these assessments, it was determined that the decline in fair value of Vislink investment at December 31, 2015 was not other than temporary due to the relatively short duration in which the fair value of the Vislink investment was less than the Company’s cost basis, and, as a result, the Company did not record any impairment charges as of December 2015. Vislink’s $1.5 million accumulated unrealized loss, net of taxes, at December 31, 2015 was included in the Consolidated Balance Sheets as a component of “Accumulated other comprehensive loss”.
By May 2016, Vislink’s stock price had continued to be below the Company’s cost basis for approximately seven months. The prolonged decline in Vislink’s stock price led the Company to conclude the impairment was other than temporary. Furthermore, the Company’s assessment of Vislink's near-term prospects based on Vislink’s recent financial performance suggest that Vislink's stock price may not recover to the Company’s original cost basis in 2016. As a result, the Company recorded an impairment charge in the first quarter of 2016 of $1.5 million reflecting the new reduced cost basis of the Vislink investment at April 1, 2016. As of September 30, 2016, Vislink’s stock price had declined an additional 70% from the stock price as of April 1, 2016. The Company further observed several recent adverse changes in Vislink’s financial and liquidity conditions. Based on the Company’s assessment of the positive and negative factors of Vislink’s financial and business conditions, the Company believed that more likely-than-not, Vislink’s stock price will not recover to the Company’s cost basis established at April 1, 2016. As a result, the Company recorded an additional impairment charge in the third quarter of 2016 of $1.2 million reflecting the new reduced cost basis of the Vislink investment at September 30, 2016. As of December 31, 2016, Vislink’s stock price had increased approximately 67% from the stock price as of September 30, 2016. The Company’s remaining maximum exposure to loss from the Vislink investment at December 31, 2016 was limited to its reduced investment cost of $0.8 million.
Unconsolidated Variable Interest Entities (“VIE”)
VJU
On September 26, 2014,From time to time, the Company acquiredmay enter into investments in entities that are considered variable interest entities under Accounting Standards Codification (ASC) Topic 810. If the Company is 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 consideredprimary beneficiary of a variable interest entity (“VIE”). The Company determined that, it is notrequired to consolidate the entity. To determine if the Company is the primary beneficiary of VJU because its financial interest in VJU’s equity and its research and development agreement with VJU do not empowera VIE, the Company evaluates whether it has (1) the power to direct VJU’sthe activities that will most significantly impact VJU’sthe VIE’s economic performance. VJU is accounted for as a cost method investment asperformance, and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. The assessment of whether the Company does not haveis the primary beneficiary of its VIE requires significant influence over the operationalassumptions and financial policies of VJU.judgments.
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 has no remaining loss exposure from the VJU investment at December 31, 2016.
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 19.8% to 9.9%.
EDC
On October 22,In 2014, the Company acquired an 18.4% interest in Encoding.com, Inc. (“EDC”), a privately held video transcoding service company headquartered in San Francisco, California, for $3.5 million by subscribing topurchasing 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. TheVIE but the Company determined that it is not the primary beneficiary of EDC. As a result, EDC becauseis measured at its financial interest in EDC’s equity does not empower the Company to direct EDC’s activities that will most significantly impact EDC’s economic performance. In addition, the Company determined that its investment in EDC’s Series B preferred stock does not have the risk and reward characteristics that are substantially similar to EDC’s common stock. Therefore, Harmonic does not hold an investment in EDC’s common stock or in-substance common stock. According to the applicable accounting guidance, EDC investment is accounted for as a cost-method investment.cost minus impairment, if any. The Company determined that there were no indicators existing at December 31, 20162018 and 2017 that would indicate that the EDC investment was impaired. As
NOTE 4: DERIVATIVES AND HEDGING ACTIVITIES
Derivatives Not Designated as Hedging Instruments (Balance Sheet Hedges)
The Company’s balance sheet hedges consist of December 31, 2016foreign currency forward contracts which mature generally within three months, These forward contracts are carried at fair value and December 31, 2015,they are used to minimize the carryingshort-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 EDC was both $3.6 million.
The following table presentsthese foreign currency forward contracts are recognized in “Other expense, net” in the carrying valuesConsolidated Statement of Operations and maximum exposureare largely offset by the changes in the fair value of the unconsolidated VIEsassets or liabilities being hedged.
The locations and amounts of designated and non-designated derivative instruments’ gains and losses reported in the Company’s AOCI and Consolidated Statements of Operations are as of December 31, 2016follows (in thousands):
|
| | | | | | | |
| | Carrying Value | | Maximum exposure to loss(1) |
| VJU | $ | — |
| | $ | — |
|
EDC (2) | 3,593 |
| | 3,593 |
|
| Total | $ | 3,593 |
| | $ | 3,593 |
|
|
| | | | | | | | | | | | | | |
| | | | | Year ended December 31, |
| | | Financial Statement Location | | 2018 | | 2017 | | 2016 |
| Derivatives not designated as hedging instruments: | | | |
| |
| |
|
| Gains (losses) recognized in income | | Other expense, net | | $ | (2,325 | ) | | $ | 155 |
| | $ | 343 |
|
| | | | | | | | | |
Derivatives designated as hedging instruments (1): | | | | | | | | |
| Gains in AOCI on derivatives (effective portion) | | AOCI | | $ | — |
| | $ | — |
| | $ | 202 |
|
| Losses reclassified from AOCI into income (effective portion) | | Cost of Revenue | | $ | — |
| | $ | — |
| | $ | (6 | ) |
| | | Operating Expense | | — |
| | — |
| | (38 | ) |
| | | Total | | $ | — |
| | $ | — |
| | $ | (44 | ) |
| Losses recognized in income on derivatives (ineffectiveness portion and amount excluded from effectiveness testing) | | Other expense, net | | $ | — |
| | $ | — |
| | $ | (63 | ) |
(1) The Company did not provide financial support toenter into any of its unconsolidated VIEs during the year endednew cash flow hedge contracts since December 31, 2016.
The U.S. dollar equivalents of all outstanding notional amounts of foreign currency forward contracts are summarized as follows (in thousands):
|
| | | | | | | | |
| | | December 31, |
| | | 2018 | | 2017 |
| Derivatives not designated as hedging instruments: | | | | |
| Purchase | | $ | 28,975 |
| | $ | 12,875 |
|
| Sell | | $ | — |
| | $ | 1,509 |
|
The locations and fair value amounts of the Company’s derivative instruments reported in its Consolidated Balance Sheets are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | Asset Derivatives | | | | Liability Derivatives |
| | | Balance Sheet Location | | December 31, 2018 | | December 31, 2017 | | Balance Sheet Location | | December 31, 2018 | | December 31, 2017 |
| Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
| Foreign currency contracts | | Prepaid expenses and other current assets | | $ | — |
| | $ | 33 |
| | Accrued and other current liabilities | | $ | 333 |
| | $ | 4 |
|
| | | | $ | — |
| | $ | 33 |
| | | | $ | 333 |
| | $ | 4 |
|
Offsetting of Derivative Assets and Liabilities
The Company recognizes all derivative instruments on a gross basis in the 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 December 31, 2016, there were no explicit2018, information related to the offsetting arrangements or implicit variable interests that could requirewas as follows (in thousands):
|
| | | | | | | | | | | | |
| | | | | | | |
| | | Gross Amounts of Derivatives | | Gross Amounts of Derivatives Offset in the Consolidated Balance Sheets | | Net Amounts of Derivatives Presented in the Consolidated Balance Sheets |
| Derivative assets | | $ | — |
| | $ | — |
| | $ | — |
|
| Derivative liabilities | | $ | 333 |
| | $ | — |
| | $ | 333 |
|
In connection with foreign currency derivatives entered in Israel, the CompanyCompany’s subsidiaries in Israel are required to provide financial support to anymaintain a compensating balance with their bank at the end of its unconsolidated VIEs.
(2)each month. The Company’s maximum exposure to loss with respect to EDC ascompensating balance arrangements do not legally restrict the use of cash. As of December 31, 20162018 and 2017, the total compensating balance maintained was limited to the investment cost of $3.6 million, including $0.1 million of transaction costs.$1.0 million.
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 the unconsolidated VIE which would then require the Company to consolidate the VIE. The Company also reviews all its cost-method investments at 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 6: DERIVATIVES AND HEDGING ACTIVITIES
The Company uses forward contracts, to manage exposures to foreign currency exchange rates. The Company’s primary objective in holding derivative instruments is to reduce the volatility of earnings and cash flows associated with fluctuations in foreign currency exchange rates and the Company does not use derivative instruments for trading purposes. The use of derivative instruments expose the Company to credit risk to the extent that the counterparties may be unable to meet their contractual obligations, as such, the potential risk of loss with any one counterparty is closely monitored by the Company.
Derivatives Designated as Hedging Instruments (Cash Flow Hedges)
Beginning in December 2014, the Company entered into forward currency contracts to hedge forecasted operating expenses and service costs related to employee salaries and benefits denominated in Israeli shekels (“ILS”) for its subsidiaries in Israel. These ILS forward contacts mature generally within twelve 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 Consolidated Balance Sheet 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 expense, net” in the 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 AOCI and Consolidated Statements of Operations were as follows (in thousands):
|
| | | | | | | | | | | | | | |
| | | | | Years ended December 31, |
| | | Financial Statement Location | | 2016 | | 2015 | | 2014 |
| Derivatives designated as hedging instruments: | | | | | | | | |
| Gains (losses) in AOCI on derivatives (effective portion) | | AOCI | | $ | 202 |
| | $ | (133 | ) | | $ | 311 |
|
| Gains (losses) reclassified from AOCI into income (effective portion) | | Cost of Revenue | | $ | (6 | ) | | $ | 59 |
| | $ | — |
|
| | | Operating Expense | | (38 | ) | | 365 |
| | — |
|
| | | Total | | $ | (44 | ) | | $ | 424 |
| | $ | — |
|
| Gains (losses) recognized in income on derivatives (ineffectiveness portion and amount excluded from effectiveness testing) | | Other income (expense), net | | $ | (63 | ) | | $ | (87 | ) | | $ | 18 |
|
| Derivatives not designated as hedging instruments: | | | |
| |
| |
|
| Gains (losses) recognized in income | | Other income (expense), net | | $ | 343 |
| | $ | 344 |
| | $ | (72 | ) |
As of December 31, 2016, there was no AOCI balance as there were no cash flow hedge contracts outstanding at December 31, 2016.
The U.S. dollar equivalent of all outstanding notional amounts of foreign currency forward contracts are summarized as follows (in thousands):
|
| | | | | | | | |
| | | December 31, |
| | | 2016 | | 2015 |
| Derivatives designated as cash flow hedges: | | | | |
| Purchase | | $ | — |
| | $ | 12,984 |
|
| Derivatives not designated as hedging instruments: | | | | |
| Purchase | | $ | 4,056 |
| | $ | 6,942 |
|
| Sell | | $ | 11,157 |
| | $ | 11,332 |
|
The locations and fair value amounts of the Company’s derivative instruments reported in its Consolidated Balance Sheets are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | Asset Derivatives | | | | Liability Derivatives |
| | | Balance Sheet Location | | December 31, 2016 | | December 31, 2015 | | Balance Sheet Location | | December 31, 2016 | | December 31, 2015 |
| Derivatives designated as hedging instruments: | | | | | | | | | | | | |
| Foreign currency contracts | | Prepaid expenses and other current assets | | $ | — |
| | $ | 13 |
| | Accrued and other current Liabilities | | $ | — |
| | $ | 281 |
|
| | | | $ | — |
| | $ | 13 |
| | | | $ | — |
| | $ | 281 |
|
| | | | | | | | | | | | | |
| Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
| Foreign currency contracts | | Prepaid expenses and other current assets | | $ | 54 |
| | $ | 100 |
| | Accrued and other current Liabilities | | $ | 40 |
| | $ | 90 |
|
| | | | $ | 54 |
| | $ | 100 |
| | | | $ | 40 |
| | $ | 90 |
|
| Total derivatives | | | | $ | 54 |
| | $ | 113 |
| | | | $ | 40 |
| | $ | 371 |
|
Offsetting of Derivative Assets and Liabilities
The Company recognizes all derivative instruments on a gross basis in the 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 December 31, 2016, information related to the offsetting arrangements was as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Gross Amounts of Derivatives Not Offset in the Consolidated Balance Sheets | | |
| | | Gross Amounts of Derivatives | | Gross Amounts of Derivatives Offset in the Consolidated Balance Sheets | | Net Amounts of Derivatives Presented in the Consolidated Balance Sheets | | Financial Instrument | | Cash Collateral Pledged | | Net Amount |
| Derivative Assets | | $ | 54 |
| | $ | — |
| | $ | 54 |
| | $ | (9 | ) | | $ | — |
| | $ | 45 |
|
| Derivative Liabilities | | $ | 40 |
| | $ | — |
| | $ | 40 |
| | $ | (9 | ) | | $ | — |
| | $ | 31 |
|
In connection with the foreign currency derivatives entered in Israel, the Company’s subsidiaries in Israel are required to maintain a compensating balance with their bank at the end of each month. These compensating balance arrangements do not legally restrict the use of cash. As of December 31, 2016, the total compensating balance maintained was $2.5 million.
NOTE 7:5: FAIR VALUE MEASUREMENTS
The applicable accounting guidance establishes a framework for measuring fair value and requires disclosure about the fair value measurements of assets and liabilities. This guidance requires the Company to classify and disclose assets and liabilities measured at fair value on a recurring basis, as well as fair value measurements of assets and liabilities measured on a nonrecurring basis in periods subsequent to initial measurement, in a three-tier fair value hierarchy as described below.
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 carrying value of the Company’s financial instruments, including cash equivalents, restricted cash, short-term investments, accounts receivable, accounts payable and accrued and other current liabilities, approximate fair value due to their short maturities.
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. The fair value of the Company’s convertible notes is influenced by interest rates, the Company’s stock price and stock market volatility. The estimated fair valuevalues of the Company’s convertible notes based on a market approach was approximately $143.5 million and $123.1 million as of December 31, 20162018 and 2017 was $136.5 million and $129.9 million, based on the bond’s quoted market price as of December 31, 2015,2018 and 2017, respectively, and represents a Level 2 valuation. The Company’s other debts and capital leases assumed from the TVN acquisition are classified within Level 2 because these borrowings are not actively traded and the majority of them have a variable interest rate structure based upon market rates currently available to the Company for debt with similar terms and maturities. Additionally, the Company considersmaturities, therefore, the carrying amountvalue of these debts approximate its capital lease obligations to approximate their fair value because the weighted average interest rate used to formulate the carrying amounts approximates current market rates.value. The other debts, andexcluding capital leases, outstanding as of December 31, 20162018 and 2017 were $21.2 million in the aggregate. (Seeaggregate of $19.7 million and $21.8 million, respectively. See Note 12,11, “Convertible Notes, Other debtsDebts and Capital Leases,” for additional information).information.
The Company’s liability for the TVN VDP as of December 31, 2016 of $9.6 million is classified within Level 3 because discount rates which are unobservable in the market were being used to measure the fair value of this liability. (See Note 11, “Restructuring and related Charges-TVN VDP,” for additional information). The fair value of the Company’s TVN defined pension benefit plan liability of $4.3 million as of December 31, 2016 is disclosed in2018 and 2017 was $4.9 million and $5.0 million, respectively. See Note 13,12, “Employee Benefit Plans and Stock-based Compensation-TVNCompensation-French Retirement Benefit Plan.Plan,” for additional information.
During the years ended December 31, 2016, 20152018, 2017 and 20142016 there were no nonrecurring fair value measurements of assets and liabilities subsequent to initial recognition.
The following tables provide the fair value measurement amounts for other financial assets and liabilities recorded in the Company’s Consolidated Balance Sheets at December 31, 2016 and 2015 based on the three-tier fair value hierarchy:hierarchy (in thousands):
|
| | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| As of December 31, 2016 | | | | | | | |
| Cash equivalents | | | | | | | |
| Money market funds | $ | 8,301 |
| | $ | — |
| | $ | — |
| | $ | 8,301 |
|
| Short-term investments | | | | | | | |
| Corporate bonds | — |
| | 6,923 |
| | — |
| | 6,923 |
|
| Prepaids and other current assets | | | | | | | |
| Derivative assets | — |
| | 54 |
| | — |
| | 54 |
|
| Other assets | | | | | | | |
| Long-term investment | 809 |
| | — |
| | — |
| | 809 |
|
| Total assets measured and recorded at fair value | $ | 9,110 |
| | $ | 6,977 |
| | $ | — |
| | $ | 16,087 |
|
| Accrued and other current liabilities | | | | | | | |
| Derivative liabilities | $ | — |
| | $ | 40 |
| | $ | — |
| | $ | 40 |
|
| Accrued TVN VDP, current portion | — |
| | — |
| | 6,597 |
| | 6,597 |
|
| Other non-current liabilities | | | | | | | |
| Accrued TVN VDP, long-term portion | — |
| | — |
| | 3,053 |
| | 3,053 |
|
| Total liabilities measured and recorded at fair value | $ | — |
| | $ | 40 |
| | $ | 9,650 |
| | $ | 9,690 |
|
|
| | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 ) | | Total |
| As of December 31, 2018 | | | | | | | |
| Accrued and other current liabilities | | | | | | | |
| Derivative liabilities | $ | — |
| | $ | 333 |
| | $ | — |
| | $ | 333 |
|
| Total liabilities measured and recorded at fair value | $ | — |
| | $ | 333 |
| | $ | — |
| | $ | 333 |
|
|
| | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| As of December 31, 2017 | | | | | | | |
| Cash equivalents | | | | | | | |
| Money market funds | $ | 22 |
| | $ | — |
| | $ | — |
| | $ | 22 |
|
| Prepaid expenses and other current assets | | | | | | | |
| Derivative assets | — |
| | 33 |
| | — |
| | 33 |
|
| Total assets measured and recorded at fair value | $ | 22 |
| | $ | 33 |
| | $ | — |
| | $ | 55 |
|
| Accrued and other current liabilities | | | | | | | |
| Derivative liabilities | $ | — |
| | $ | 4 |
| | $ | — |
| | $ | 4 |
|
| Total liabilities measured and recorded at fair value | $ | — |
| | $ | 4 |
| | $ | — |
| | $ | 4 |
|
The Company’s liability for the TVN VDP (as defined below) at December 31, 2018 and 2017 was $2.4 million and $5.1 million, respectively. This amount is not included in the table above because its fair value at inception, based on Level 3 inputs, was determined during the fourth quarter of fiscal 2016. Subsequently there is no recurring fair value remeasurement for this liability based on the applicable accounting guidance.
NOTE 6: BUSINESS ACQUISITION
On February 29, 2016, the Company completed its acquisition of TVN, a global leader in advanced video compression solutions headquartered in Rennes, France, for $82.5 million in cash. The acquisition strengthened the Company’s competitive position in the video infrastructure market and enhanced the depth and scale of the Company’s research and development and service and support capabilities in the video arena.
During the fourth quarter of 2016, the Company completed the accounting for this business combination. The purchase price was allocated to tangible and intangible assets acquired and liabilities assumed on the basis of their respective estimated fair values on the acquisition date. The Company’s allocation of TVN purchase consideration is as follows (in thousands):
|
| | | |
| Assets: | |
| Cash and cash equivalents | $ | 6,843 |
|
| Accounts receivable, net | 14,933 |
|
| Inventories | 3,462 |
|
| Prepaid expenses and other current assets | 2,412 |
|
| Property and equipment, net | 9,942 |
|
French R&D tax credit receivables (1) | 26,421 |
|
| Other long-term assets | 2,134 |
|
| Total assets | $ | 66,147 |
|
| Liabilities: |
|
| Other debts and capital lease obligations, current | 8,362 |
|
| Accounts payable | 12,494 |
|
| Deferred revenue | 2,504 |
|
| Accrued and other current liabilities | 18,365 |
|
| Other debts and capital lease obligations, long-term | 16,087 |
|
| Other non-current liabilities | 6,467 |
|
| Deferred tax liabilities | 2,126 |
|
| Total liabilities | $ | 66,405 |
|
| |
|
| Goodwill | 41,670 |
|
| Intangibles | 41,100 |
|
| Total purchase consideration | $ | 82,512 |
|
(1) See Note 9, “Certain Balance Sheet Components-Prepaid expenses and other current assets,” for more information on French R&D tax credit receivables.
The following table presents details of the intangible assets acquired through this business combination (in thousands, except years):
|
| | | | | |
| | Estimated Useful Life | | Fair Value |
| Backlog | 6 months | | $ | 3,600 |
|
| Developed technology | 4 years | | 21,700 |
|
| Customer relationships | 5 years | | 15,200 |
|
| Trade name | 4 years | | 600 |
|
| | | | $ | 41,100 |
|
Acquired identifiable intangible assets were valued using the income method and are amortized on a straight line basis over their respective estimated useful lives. Goodwill of $41.7 million arising from the acquisition was derived from expected benefits from the business synergies to be derived from the combined entities and the experienced workforce who joined the Company in connection with the acquisition. The goodwill is not expected to be deductible for income tax purposes but the intangibles assets acquired are expected to be deductible for income tax purposes in certain jurisdictions. Both goodwill and intangibles assets acquired were assigned to the Company’s video reporting unit.
Acquisition-and integration-related expenses
As a result of the TVN acquisition, the Company incurred acquisition-and integration-related expenses and these costs are expensed as incurred. Acquisition-related costs include outside legal, accounting and other professional services.
The following table summarizes the acquisition-and integration-related expenses for the TVN acquisition (in thousands):
|
| | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| As of December 31, 2015 | | | | | | | |
| Cash equivalents | | | | | | | |
| Money market funds | $ | 53,434 |
| | $ | — |
| | $ | — |
| | $ | 53,434 |
|
| U.S. Treasury bills | 24,998 |
| | — |
| | — |
| | 24,998 |
|
| Short-term investments | | | | | | | |
| Corporate bonds | — |
| | 25,505 |
| | — |
| | 25,505 |
|
| Commercial paper | — |
| | 1,099 |
| | — |
| | 1,099 |
|
| Prepaids and other current assets | | | | | | | |
| Time deposit pledged for credit card facility | — |
| | 580 |
| | — |
| | 580 |
|
| Derivative assets | — |
| | 113 |
| | — |
| | 113 |
|
| Other assets | | | | | | | |
| Long-term investment | 1,840 |
| | — |
| | — |
| | 1,840 |
|
| Total assets measured and recorded at fair value | $ | 80,272 |
| | $ | 27,297 |
| | $ | — |
| | $ | 107,569 |
|
| Accrued and other current liabilities | | | | | | | |
| Derivative liabilities | $ | — |
| | $ | 371 |
| | $ | — |
| | $ | 371 |
|
| Total liabilities measured and recorded at fair value | $ | — |
| | $ | 371 |
| | $ | — |
| | $ | 371 |
|
|
| | | | | | | | | | | |
| | Acquisition-related | Integration-related(1) |
| | Year ended December 31, 2016 | | Year ended December 31, 2017 (unaudited) | | Year ended December 31, 2016 (unaudited) |
| Cost of revenue | $ | — |
| | $ | 342 |
| | $ | 1,049 |
|
| Research and development | — |
| | 7 |
| | 974 |
|
| Selling, general and administrative | 3,855 |
| | 2,469 |
| | 11,058 |
|
| Total acquisition- and integration-related expenses | $ | 3,855 |
| | $ | 2,818 |
| | $ | 13,081 |
|
(1) Integration-related costs include incremental costs resulting from the TVN acquisition that are not expected to generate future benefits once the integration is fully consummated. All integration efforts were completed by 2017 and the Company does not expect any more such expenses to continue after 2017.
NOTE 8:7: GOODWILL AND IDENTIFIED INTANGIBLE ASSETS
Goodwill
Goodwill represents the difference between the purchase price and the estimated fair value of the identifiable assets acquired and liabilities assumed. Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. The Company has two reporting units, Video and Cable Edge.Access.
The Company tests for goodwill impairment at the reporting unit level on an annual basis, or more frequently if events or changes in circumstances indicate that the asset is more likely than not impaired. The Company’s annual goodwill impairment test is performed in the fiscal fourth quarter, with a testing date at the end of fiscal October.
As of December 31, 2016, In evaluating goodwill for impairment, the Company has recordedfirst assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value (including goodwill). If the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, then no further testing is required. However, if the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the two-step goodwill impairment test is performed to identify a potential goodwill impairment and measure the amount of $41.7 million which includesimpairment to be recognized, if any. The two-step impairment test involves estimating the impactfair value of measurement period adjustments forall assets and liabilities of the TVN acquisition. Goodwill fromreporting unit, including the TVN acquisition is assigned to the Video reporting unit.implied fair value of goodwill, through either estimated discounted future cash flows or market-based methodologies.
The changes in the Company’s carrying amount of goodwill for the year ended December 31, 2016 are as follows (in thousands):
|
| | | | | | | | | | | | |
| | | Video | | Cable Edge | | Total |
| Balance as of December 31, 2015 | | $ | 136,904 |
| | $ | 60,877 |
| | $ | 197,781 |
|
| Goodwill from TVN acquisition | | 41,670 |
| | — |
| | 41,670 |
|
| Foreign currency translation adjustment | | (2,055 | ) | | (117 | ) | | (2,172 | ) |
| Balance as of December 31, 2016 | | $ | 176,519 |
| | $ | 60,760 |
| | $ | 237,279 |
|
Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows and determining appropriate discount rates, growth rates, an appropriate control premium and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit which could trigger impairment. If the Company’s assumptions and related estimates change in the future, or if the Company’s reporting structure changes or other events and circumstances change (e.g. such as a sustained decrease in the Company’s stock price), the Company may be required to record impairment charges in future periods. Any impairment charges that the Company may take in the future could be material to its results of operations and financial condition.
A significant decline in a company’s stock price may suggest that an adverse change in the business climate may have caused the fair value of one or more reporting units to fall below their carrying value. During the second quarter of 2016, the sustained decline in the Company’s stock price led to a triggering event for goodwill impairment assessment. As of July 1, 2016, with a closing stock price of $3.01 on The NASDAQ Stock Market, the Company’s market capitalization was approximately $235 million. As this market capitalization was less than the Company’s net book value, further analysis was performed to determine if an impairment exists. When assessing goodwill for impairment, the Company used multiple valuation methodologies to determine its enterprise value. The valuation methods used included the Company’s market capitalization adjusted for a control premium and the Company’s discounted cash flow analysis, which involves making significant assumptions and estimates, including expectations of the Company’s future financial performance, the Company’s weighted average cost of capital and the Company’s interpretation of currently enacted tax laws. Based on the impairment test performed, management determined that the Company’s goodwill was not impaired as of July 1, 2016. As of September 30, 2016, the Company’s closing stock price was $5.93.
The Company performed its annual goodwill impairment review at October 31, 2016. As of October 31, 2016, with a closing stock price of $5.10 on The NASDAQ Stock Market, the Company’s market capitalization was approximately $400 million. The Company used the same methodologies as in the second quarter of 2016 to determine its enterprise value but with updated assumptions and estimates to reflect the most current expectations of the Company’s future financial performance. Based on the impairment test performed, management concluded that goodwill was not impaired as the Video and Cable Edge reporting units had estimated fair values in excess of their carrying value by approximately 67% and 123%, respectively. As of December 31, 2016, the Company’s closing stock price was $5.00. |
| | | | | | | | | | | | |
| | | Video | | Cable Access | | Total |
| Balance as of December 31, 2016 | | $ | 176,519 |
| | $ | 60,760 |
| | $ | 237,279 |
|
| Foreign currency translation adjustment | | 5,493 |
| | 55 |
| | 5,548 |
|
| Balance as of December 31, 2017 | | $ | 182,012 |
| | $ | 60,815 |
| | $ | 242,827 |
|
| Foreign currency translation adjustment | | (2,173 | ) |
| (36 | ) |
| (2,209 | ) |
| Balance as of December 31, 2018 | | $ | 179,839 |
|
| $ | 60,779 |
|
| $ | 240,618 |
|
The Company has not recorded any impairment charges related to goodwill for any prior periods. If future economic conditions are different than those projected by management, future impairment charges may be required.
Intangible Assets, Net
For the year ended December 31, 2016, the gross amount for intangible assets increased $39.5 million, of which $41.1 million was due to the TVN acquisition, offset in part by $1.6 million of foreign currency exchange effect. The following istable provides a summary of the Company’s identified intangible assets (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2016 | | December 31, 2015 |
| | Weighted Average Remaining Life (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Developed core technology | 3.2 | | $ | 31,707 |
| | $ | (15,216 | ) | | $ | 16,491 |
| | $ | 10,987 |
| | $ | (10,987 | ) | | $ | — |
|
| Customer relationships/contracts | 4.2 | | 44,384 |
| | (32,098 | ) | | 12,286 |
| | 29,200 |
| | (25,752 | ) | | 3,448 |
|
| Trademarks and tradenames | 3.2 | | 573 |
| | (119 | ) | | 454 |
| | — |
| | — |
| | — |
|
| Maintenance agreements and related relationships | N/A | | 5,500 |
| | (5,500 | ) | | — |
| | 5,500 |
| | (4,851 | ) | | 649 |
|
| Order Backlog | N/A | | 3,011 |
| | (3,011 | ) | | — |
| | — |
| | — |
| | — |
|
| Total identifiable intangibles | | | $ | 85,175 |
| | $ | (55,944 | ) | | $ | 29,231 |
| | $ | 45,687 |
| | $ | (41,590 | ) | | $ | 4,097 |
|
The TVN in-process research and development efforts were completed by the end of the second quarter of 2016 and the Company determined that it has become a finite lived intangible asset (developed technology) with an estimated useful life of four years. |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2018 | | December 31, 2017 |
| | Weighted Average Remaining Life (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Developed core technology | 1.2 | | $ | 31,707 |
| | $ | (25,576 | ) | | $ | 6,131 |
| | $ | 31,707 |
| | $ | (20,396 | ) | | $ | 11,311 |
|
| Customer relationships/contracts | 2.2 | | 44,650 |
| | (38,146 | ) | | 6,504 |
| | 44,819 |
| | (35,205 | ) | | 9,614 |
|
| Trademarks and tradenames | 1.2 | | 623 |
| | (441 | ) | | 182 |
| | 654 |
| | (300 | ) | | 354 |
|
| Maintenance agreements and related relationships | N/A | | 5,500 |
| | (5,500 | ) | | — |
| | 5,500 |
| | (5,500 | ) | | — |
|
| Order Backlog | N/A | | 3,112 |
| | (3,112 | ) | | — |
| | 3,177 |
| | (3,177 | ) | | — |
|
| Total identifiable intangibles | | | $ | 85,592 |
| | $ | (72,775 | ) | | $ | 12,817 |
| | $ | 85,857 |
| | $ | (64,578 | ) | | $ | 21,279 |
|
Amortization expense for the identifiable intangible assets for the years ended December 31, 2016, 2015 and 2014 was allocated as follows (in thousands):
| |
| December 31, | Year Ended December 31, |
| 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| Included in cost of revenue | $ | 4,434 |
| | $ | 719 |
| | $ | 13,745 |
| $ | 5,180 |
| | $ | 5,180 |
| | $ | 4,434 |
|
| Included in operating expenses | 10,402 |
| | 5,783 |
| | 6,775 |
| 3,187 |
| | 3,142 |
| | 10,402 |
|
| Total amortization expense | $ | 14,836 |
| | $ | 6,502 |
| | $ | 20,520 |
| $ | 8,367 |
| | $ | 8,322 |
| | $ | 14,836 |
|
The estimated future amortization expense of identifiable intangible assets with definite lives as of December 31, 2018 is as follows (in thousands):
| | | | Cost of Revenue | | Operating Expenses | | Total | Cost of Revenue | | Operating Expenses | | Total |
| Year ended December 31, | | | | | | | | | | |
| 2017 | $ | 5,180 |
| | $ | 3,092 |
| | $ | 8,272 |
| |
| 2018 | 5,180 |
| | 3,092 |
| | 8,272 |
| |
| 2019 | 5,180 |
| | 3,092 |
| | 8,272 |
| $ | 5,180 |
| | $ | 3,158 |
| | $ | 8,338 |
|
| 2020 | 951 |
| | 2,972 |
| | 3,923 |
| 951 |
| | 3,028 |
| | 3,979 |
|
| 2021 | — |
| | 492 |
| | 492 |
| — |
| | 500 |
| | 500 |
|
| Total future amortization expense | $ | 16,491 |
| | $ | 12,740 |
| | $ | 29,231 |
| $ | 6,131 |
| | $ | 6,686 |
| | $ | 12,817 |
|
NOTE 9:8: ACCOUNTS RECEIVABLE
Accounts receivable, net of allowances, consisted of the following (in thousands): | | | | December 31, | December 31, |
| | 2016 | | 2015 | 2018 | | 2017 |
| Accounts receivable, net: | | | | | | |
| Accounts receivable | $ | 91,596 |
| | $ | 73,855 |
| $ | 85,292 |
| | $ | 74,475 |
|
| Less: allowance for doubtful accounts and sales returns | (4,831 | ) | | (4,340 | ) | (3,497 | ) | | (4,631 | ) |
| Total | $ | 86,765 |
| | $ | 69,515 |
| $ | 81,795 |
| | $ | 69,844 |
|
Trade accounts receivable are recorded at invoiced amounts and do not bear interest. The Company generally does not require collateral and performs ongoing credit evaluations of its customers and provides for expected losses. The Company maintains an allowance for doubtful accounts based upon the expected collectability of its accounts receivable. The expectation of collectability is based on the Company’s review of credit profiles of customers, contractual terms and conditions, current economic trends and historical payment experience. The Company offers return rights which are specifically identified and accrued for as sales returns at the end of the period.
The following table is a summary of activityactivities in allowances for doubtful accounts and sales returns for the three years ended December 31, 2016, 2015 and 2014 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Balance at Beginning of Period | | Charges to Revenue | | Charges (Credits) to Expense | | Additions to (Deductions from) Reserves | | Balance at End of Period |
| Year ended December 31, | | | | | | | | | |
| 2016 | $ | 4,340 |
| | $ | 1,488 |
| | $ | 1,100 |
| | $ | (2,097 | ) | | $ | 4,831 |
|
| 2015 | $ | 7,057 |
| | $ | 1,826 |
| | $ | 208 |
| | $ | (4,751 | ) | | $ | 4,340 |
|
| 2014 | $ | 8,214 |
| | $ | 2,181 |
| | $ | (238 | ) | | $ | (3,100 | ) | | $ | 7,057 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Balance at Beginning of Period | | Charges to Revenue | | Charges (Credits) to Expense | | Additions to (Deductions from) Reserves | | Balance at End of Period |
| Year ended December 31, | | | | | | | | | |
| 2018 | $ | 4,631 |
| | $ | 1,949 |
| | $ | 572 |
| | $ | (3,655 | ) | | $ | 3,497 |
|
| 2017 | $ | 4,831 |
| | $ | 4,030 |
| | $ | 881 |
| | $ | (5,111 | ) | | $ | 4,631 |
|
| 2016 | $ | 4,340 |
| | $ | 1,488 |
| | $ | 1,100 |
| | $ | (2,097 | ) | | $ | 4,831 |
|
NOTE 10:9: CERTAIN BALANCE SHEET COMPONENTS
The following tables provide details of selected balance sheet components (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2018 |
| 2017 |
| Inventories: | | | |
| Raw materials | $ | 1,705 |
|
| $ | 2,881 |
|
| Work-in-process | 991 |
|
| 933 |
|
| Finished goods | 12,267 |
|
| 10,130 |
|
| Service-related spares | 10,675 |
|
| 12,032 |
|
| Total | $ | 25,638 |
| | $ | 25,976 |
|
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| Prepaid expenses and other current assets: | | | |
| Deferred cost of revenue | $ | 6,856 |
| | $ | 4,601 |
|
French R&D tax credits receivables (1) | 5,895 |
| | — |
|
| Prepaid maintenance, royalty, rent, property taxes and value added tax | 5,526 |
| | 7,167 |
|
Prepaid customer incentive (2) | 1,162 |
| | — |
|
Restricted cash (3) | 731 |
| | 1,093 |
|
Prepaid inventories to contract manufacturer (4) | — |
| | 8,500 |
|
| Other | 6,149 |
| | 3,642 |
|
| Total | $ | 26,319 |
| | $ | 25,003 |
|
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Prepaid expenses and other current assets: | | | |
French R&D tax credits receivable (1) | $ | 7,305 |
| | $ | 6,609 |
|
Contract assets (2) | 3,834 |
| | — |
|
| Deferred cost of revenue | 3,671 |
| | 4,440 |
|
| Prepaid maintenance, royalty, rent, property taxes and VAT | 3,497 |
| | 3,867 |
|
| Capitalized commission | 1,098 |
| | — |
|
| Restricted cash | — |
| | 530 |
|
| Other | 3,875 |
| | 3,485 |
|
| Total | $ | 23,280 |
| | $ | 18,931 |
|
(1) The Company’s acquired TVN subsidiary in France (the “TVN French Subsidiary”) participates in the French Crédit d’Impôt Recherche (“CIR”) program (the “R&D tax credits”) which allows companies to monetize eligible research expenses. The R&D tax credits can be used to offset against income tax payable to the French government in each of the four years after being incurred, or if not utilized, are recoverable in cash. The amount of R&D tax credits recoverable are subject to audit by the French government and during the second quarter of 2016,year ended December 31, 2018 and 2017, the French government approved the 2012 claim2014 and 2013 claims and refunded $5.8$6.4 million to the TVN French Subsidiary.Subsidiary in each of the periods, respectively. The remaining R&D tax credit receivablescredits receivable at December 31, 20162018 were approximately $25.7$26.5 million and are expected to be recoverable from 20172019 through 20202022 with $5.9$7.3 million reported underas a component of “Prepaid and other Current Assets” and $19.8$19.2 million reported underas a component of “Other Long-term Assets” on the Company’s Consolidated Balance Sheets.
(2) On September 26, 2016,Contract assets reflect the satisfied performance obligations for which the Company granted a warrant to purchase shares of common stock (the “Warrant”) to Comcast pursuant to which Comcast may, subject to certain vesting provisions. The Warrant issued to Comcast is considered an incentive for Comcast to purchase certain of the Company’s products. Therefore the value of the Warrant will be recorded as a reduction in the Company’s net revenues to the extent such value does not exceed net revenues from pertinent salesyet have an unconditional right to Comcast. The portionconsideration.
(3) The restricted cash balances are held as cash collateral security for certain bank guarantees. 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. Additionally, as of December 31, 2016, the Company had approximately $1.1 million of restricted cash for the bank guarantee associated with the TVN French Subsidiary’s office building lease. This amount is reported under “Other Long-term Assets” on the Company’s Consolidated Balance Sheets.
(4) From time to time, the Company makes advance payment to a supplier for future inventory in order to secure more favorable pricing. The advance payment balance at December 31, 2015 was fully offset in 2016 against the accounts payable owed to this supplier. No advance payment to this supplier was outstanding at December 31, 2016.
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| Inventories: | | | |
| Raw materials | $ | 9,889 |
| | $ | 5,421 |
|
| Work-in-process | 2,318 |
| | 1,950 |
|
| Finished goods | 17,776 |
| | 19,827 |
|
| Service-related spares | 11,210 |
| | 11,621 |
|
| Total | $ | 41,193 |
| | $ | 38,819 |
|
| | | | December 31, | December 31, |
| | 2016 | | 2015 | 2018 | | 2017 |
| Property and equipment, net: | | | | | | |
| Machinery and equipment | $ | 97,989 |
| | $ | 93,010 |
| $ | 75,094 |
| | $ | 87,121 |
|
| Capitalized software | 34,519 |
| | 29,391 |
| 32,696 |
| | 35,139 |
|
| Leasehold improvements | 14,455 |
| | 10,000 |
| 14,951 |
| | 15,051 |
|
| Furniture and fixtures | 8,993 |
| | 7,808 |
| 6,049 |
| | 6,534 |
|
| Property and equipment, gross | 155,956 |
| | 140,209 |
| 128,790 |
| | 143,845 |
|
| Less: accumulated depreciation and amortization | (123,792 | ) | | (113,197 | ) | (106,469 | ) | | (114,580 | ) |
| Total | $ | 32,164 |
| | $ | 27,012 |
| $ | 22,321 |
| | $ | 29,265 |
|
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| Accrued and other current liabilities: | | | |
| Accrued employee compensation and related expenses | $ | 19,377 |
| | $ | 12,083 |
|
Accrued TVN VDP, current (1) | 6,597 |
| | — |
|
| Accrued warranty | 4,862 |
| | 3,913 |
|
| Customer deposits | 4,537 |
| | 953 |
|
| Contingent inventory reserves | 2,210 |
| | 1,315 |
|
| Accrued royalty payments | 1,912 |
| | 873 |
|
| Other | 15,655 |
| | 12,217 |
|
| Total | $ | 55,150 |
| | $ | 31,354 |
|
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Other long-term assets: | | | |
| French R&D tax credits receivable | $ | 19,249 |
| | $ | 22,322 |
|
| Deferred tax assets | 8,695 |
| | 10,462 |
|
| Equity investment | 3,593 |
| | 3,593 |
|
| Other | 6,840 |
| | 6,536 |
|
| Total | $ | 38,377 |
| | $ | 42,913 |
|
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| Other non-current Liabilities: | | | |
| Deferred revenue, long-term | $ | 4,652 |
| | $ | 3,093 |
|
| Pension, long-term | 4,237 |
| | — |
|
| Deferred rent, long-term | 4,226 |
| | 6,340 |
|
Accrued TVN VDP, long-term (1) | 3,053 |
| | — |
|
| Other | 2,263 |
| | 294 |
|
| Total | $ | 18,431 |
| | $ | 9,727 |
|
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Accrued and other current liabilities: | | | |
| Accrued employee compensation and related expenses | $ | 21,451 |
| | $ | 16,414 |
|
| Accrued warranty | 4,869 |
| | 4,381 |
|
| Customer deposits | 4,642 |
| | 5,020 |
|
| Contingent inventory reserves | 2,500 |
| | 3,806 |
|
Accrued TVN VDP, current (1) | 1,585 |
| | 3,186 |
|
| Accrued royalty payments | 1,998 |
| | 2,195 |
|
| Accrued Avid litigation settlement fees, current | 1,500 |
| | — |
|
| Other | 14,216 |
| | 13,703 |
|
| Total | $ | 52,761 |
| | $ | 48,705 |
|
(1) See Note 11,10, “Restructuring and related charges-TVNRelated Charges-TVN VDP,” for additional information on the Company’s TVN VDP liabilities.
NOTE 11:10: RESTRUCTURING AND RELATED CHARGES
The Company has implemented several restructuring plans in the past few years and recorded restructuring and related charges of $18.0 million, $1.5 million and $3.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.years. The goal of these plans was to bring operational expenses to appropriate levels relative to itsthe Company’s net revenues, while simultaneously implementing extensive company-wide expense control programs.
The restructuring charges of $18.0 million in 2016 were primarily related to 2016 restructuring plan implemented in the first quarter of 2016. The restructuring charges of $1.5 million in 2015 were primarily related to the 2015 restructuring plan implemented during fourth quarter of 2014. Of the $3.1 million restructuring charges recorded in 2014, $2.2 million was recorded in the fourth quarter of 2014 related to the 2015 restructuring plan and the remaining $0.9 million were related to restructuring plan implemented in 2013.
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“Cost of revenue” and “Operating expenses-restructuring
expenses - Restructuring and related charges” in the Consolidated Statements of Operations. The following table summarizes the restructuring and related charges (in thousands):
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2016 (1) | | 2015 | | 2014 |
| Product cost of revenue | $ | 3,400 |
| | $ | 113 |
| | $ | 315 |
|
| Operating expenses-Restructuring and related charges | 14,602 |
| | 1,372 |
| | 2,761 |
|
| Total | $ | 18,002 |
| | $ | 1,485 |
| | $ | 3,076 |
|
|
| | | | | | | | | | | |
| | Year ended December 31, |
| Restructuring and related charges in: | 2018 | | 2017 | | 2016 (1) |
| Cost of revenue | $ | 857 |
| | $ | 1,279 |
| | $ | 3,400 |
|
| Operating expenses - Restructuring and related charges | 2,918 |
| | 5,307 |
| | 14,602 |
|
| Total restructuring and related charges | $ | 3,775 |
| | $ | 6,586 |
| | $ | 18,002 |
|
(1) The restructuring and related charges for the fiscal year ended December 31, 2016 is net of $0.6 million and $1.4 million, in product costCost of revenue and operating expenses-restructuringOperating expenses - Restructuring and related charges, respectively, of gain from TVN pension curtailment. See Note 13, “Employee Benefit Plans and Stock-based Compensation-TVN Retirement Benefit Plan,”“Harmonic 2016 Restructuring Plan” below for additional informationinformation.
As of December 31, 2018 and December 31, 2017, the Company’s total restructuring liability was $5.3 million and $8.0 million, respectively, of which $3.3 million and $4.4 million, respectively, were reported as a component of “Accrued and other current liabilities”, and the remaining $2.0 million and $3.6 million, respectively, were reported as a component of “Other non-current liabilities” on gain from TVN pension curtailment.the Company’s Consolidated Balance Sheets.
The following table summarizes the activities related to the Company’s restructuring plans during the fiscal year ended December 31, 2018 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Harmonic 2016 Restructuring Plan | | Harmonic 2017 Restructuring Plan | | Harmonic 2018 Restructuring Plan | |
| | Excess facilities | | TVN VDP | | Excess facilities | | Severance and benefits | | Excess facilities | | Severance and benefits | | Total |
| Balance at December 31, 2017 | $ | 2,426 |
| | $ | 5,128 |
| | $ | 296 |
| | $ | 193 |
| | $ | — |
| | $ | — |
| | $ | 8,043 |
|
| Charges for current period | — |
| | — |
| | — |
| | — |
| | 932 |
| | 2,124 |
| | 3,056 |
|
| Adjustments to restructuring provisions | 132 |
| | 531 |
| | 167 |
| | — |
| | 5 |
| | (116 | ) | | 719 |
|
| Reclassification of deferred rent | — |
| | — |
| | — |
| | — |
| | 332 |
| | — |
| | 332 |
|
| Cash payments | (1,015 | ) | | (3,066 | ) | | (146 | ) | | (193 | ) | | (203 | ) | | (2,052 | ) | | (6,675 | ) |
| Foreign exchange effect | — |
| | (184 | ) | | — |
| | — |
| | — |
| | 44 |
| | (140 | ) |
| Balance at December 31, 2018 | $ | 1,543 |
| | $ | 2,409 |
| | $ | 317 |
| | $ | — |
| | $ | 1,066 |
| | $ | — |
| | $ | 5,335 |
|
Harmonic 20162018 Restructuring
In the first quarter of 2016,2018, the Company approved and implemented a new restructuring plan (the “Harmonic 20162018 Restructuring Plan”) to streamline the corporate organization, thereby reducing operating costs by consolidating duplicative resources in connection with the acquisition of TVN.. The plannedrestructuring activities haveunder this plan primarily resulted, and will primarily result, in cash expenditures related to severance and related benefits and exiting certain operating facilities and disposing of excess assets. In the second quarter of 2016, as partinclude worldwide workforce reductions of the Company’s 2016 restructuring initiative, the Company also initiated a voluntary departure plan in France to streamline the organizationCompany. As of the TVN French Subsidiary (the “TVN VDP”).
In 2016,December 31, 2018, the Company recorded an aggregate amount of $20.0$2.1 million of restructuring and related charges under the Harmonic 2016 Restructuring Plan, of which $2.2 million is primarily related to the Company exiting from the excess facility at its U.S. headquarters and the remaining $17.8 million is related tofor severance and employee benefits for the termination of 11859 employees worldwide, including 83 employees in France who participatedprimarily in the TVN VDP. (See details of TVN VDP described below). Additionally,United States and across all functions. The Company made $2.1 million in payments for this plan during the restructuring and related charges under the Harmonic 2016 Restructuring Plan is offset by approximately $2.0 million of gain from TVN pension curtailment. For the employees who participated in the TVN VDP, their pension benefit will be funded by the TVN VDP and as a result, the TVN defined benefit pension plan was remeasured atfiscal year ended December 31, 2016, which resulted in a non-cash curtailment gain. This gain was recorded as an offset to restructuring costs in the Company’s Statement of Operations, of which $0.6 million is included in product cost of revenue and the remaining $1.4 million is included in operating expenses-restructuring and related charges. (See Note 13, “Employee Benefit Plans and Stock-based Compensation-TVN Retirement Benefit Plan,” for additional information on gain from TVN pension curtailment).
2018. The Company also incurred $16.9 million of TVN acquisition- and integration-related expenses in 2016 (See Note 3, “Business Acquisition,” for additional information on TVN acquisition-and integration-related expenses).
A majority of the 2016 restructuring and integration activities under this plan were completed in 2016 but some of the TVN VDP activities will continue into 2017 based on the contractual terms with each employee. The Company anticipates incurring approximately $5 million of additional restructuring and TVN acquisition- and integration-related expenses, under this plan in 2017. The estimated synergies from these restructuring activities and the TVN integration effort is anticipated to exceed $20 million on an annualized basis.
TVN VDP2018.
In the second quarterThe total TVN VDP costs, including severance, certain benefits and taxes, as well as administration costs, is estimated at approximately $15.3 million, in aggregate, and will be paid over a period of four years, based on the TVN VDP terms agreed with each employee. The fair value of the total TVN VDP liability at inception is estimated to be approximately $14.8 million.
The Company accounts for these special termination benefits in accordance with ASC 712, “Compensation - Non-retirement Post-employment Benefits,” which requires that the special termination benefits be recognized as a liability and a
loss beginning when an employee accepts the offer of voluntary termination and the amount can be reasonably estimated. Where an employee is required to work beyond a minimum statutory notice period, the cost of the special termination benefit is recognized as an expense over the employee’s remaining service period. Where the employee is not required to work beyond a minimum statutory notice period, the cost of the special termination benefit is recognized upon the date the employee accepts the offer of voluntary termination, provided that the amount of the benefit can be estimated. Out of the 83 employees who applied for TVN VDP, 11 of them are required to work beyond the minimum statutory notice period into 2017. Based on the application of the accounting guidance, the Company recorded a charge of $13.1 million for TVN VDP costs in the fourth quarter of 2016, of which $3.5 million was already paid in 2016, resulting in a TVN VDP liability balance of $9.6 million at December 31, 2016.
The table below shows the estimated future payments for TVN VDP as of December 31, 2016 (in thousands):
|
| | | |
| Years ending December 31, | |
| 2017 | $ | 6,757 |
|
| 2018 | 3,021 |
|
| 2019 | 1,492 |
|
| 2020 | 696 |
|
| Total | $ | 11,966 |
|
Excess FacilitiesFacility in San Jose, California
In January 2016,August 2018, the Company exited an additional excess facility at its U.S. headquarters in San Jose, California and recorded $1.4$0.9 million in facility exit costs. The Company accounts for facility exit costs in accordance with ASC 420, “Exit or Disposal Cost Obligations”, which requires that a liability for such costs be recognized and measured initially at fair value on the cease-use date based on remaining lease rentals, adjusted for the effects of any prepaid or deferred items recognized, reduced by the estimated sublease rentals that could be reasonably obtained even if it is not the intent to sublease. The fair value of these liabilities is based on a net present value model using a credit-adjusted, risk-free rate. The liability will be paid out over the remainder of the leased properties’ terms, which continue through August 2020. Actual sublease terms may differ from the estimates originally made by the Company. Any future changes in the estimates or in the actual sublease income could require future adjustments to the liabilities, which would impact net income in the period the adjustment is recorded. As of the cease-use date, the fair value of this restructuring liability totaled $1.2 million. Offsetting these charges was an adjustment for deferred rent liability relating to this space of $0.3 million. As of December 31, 2018, the remaining liability for the additional excess facility exited in August 2018 was $1.1 million, which will be paid out over the remainder of the leased properties’ term through August 2020.
Harmonic 2017 Restructuring
In the third quarter of 2017, the Company implemented a restructuring plan (the “Harmonic 2017 Restructuring Plan”) to better align its operating costs with the continued decline in its net revenues. In 2017, the Company recorded $2.5 million of restructuring and related charges under this plan, consisting of $2.1 million of employee severance and $0.4 million related to the closure of one of the Company’s offices in New York. The activities under this plan were completed in 2017. During 2018, as a result of a change in the estimate of the sublease income, the restructuring liability related to the New York excess facility was increased by $0.2 million. As of December 31, 2018, the remaining $0.3 million liability under the Harmonic 2017 Restructuring Plan relates to the accrual for the New York excess facility, which will be paid out over the remainder of the leased properties’ term through August 2020.
Harmonic 2016 Restructuring
In the first quarter of 2016, the Company implemented a restructuring plan (the “Harmonic 2016 Restructuring Plan”) to reduce operating costs by consolidating duplicative resources in connection with the acquisition of TVN. The planned activities included global workforce reductions, exiting certain operating facilities and disposing of excess assets and an employee voluntary departure plan in France (the “TVN VDP”).
In 2016, the Company recorded an aggregate of $20.0 million of restructuring and related charges under the Harmonic 2016 Restructuring Plan, of which $2.2 million was primarily related to the exit from the excess facility at its U.S. headquarters and the remaining $17.8 million was related to severance and benefits for the termination of 118 employees worldwide, including 83 employees in France who participated in the TVN VDP. The restructuring and related charges under this plan were partially offset by approximately $2.0 million of gain from TVN pension curtailment. For the employees who participated in the TVN VDP, their pension benefit will be funded by the TVN VDP and as a result, the TVN defined benefit pension plan was remeasured at December 31, 2016, which resulted in a non-cash curtailment gain.
TVN VDP
The Company recorded 0.5 million, $1.8 million and $13.1 million of TVN VDP costs in the years ended December 31, 2018, 2017 and 2016, respectively. In aggregate, in 2018, 2017 and 2016, the Company had paid $13.8 million of TVN VDP costs. The TVN VDP liability balance as of December 31, 2018 was $2.4 million, payable from 2019 through 2020.
Excess Facility in San Jose, California
In January 2016, the Company exited an excess facility at its U.S. headquarters in San Jose, California and recorded $1.4 million in facility exit costs. The fair value of these liabilities is based on a net present value model using a credit-adjusted risk-free rate. The liability will be paid out over the remainder of the leased properties’ term, which continues through August 2020. As of the cease-use date, the fair value of this restructuring liability totaled $2.5 million. Offsetting these charges was an adjustment for deferred rent liability relating to this space of $1.1 million. In December 2016, asAs a result of a change in the estimate inof the sublease income, the restructuring liability was increased by $0.6 million.
The following table summarizes the activity in the Company’s restructuring accrual related to the Harmonic 2016 Restructuring Plan$1.2 million as of December 31, 2016 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Excess facilities (1) | | VDP (2) | | Non-VDP Severance and benefits (3) | | Other charges | | Total |
| Charges for 2016 Restructuring Plan | $ | 1,655 |
| | $ | 13,175 |
| | $ | 4,702 |
| | $ | 247 |
| | $ | 19,779 |
|
| Adjustments to restructuring provisions | 582 |
| | — |
| | (88 | ) | | (247 | ) | | 247 |
|
| Reclassification of deferred rent | 1,087 |
| | — |
| | — |
| | — |
| | 1,087 |
|
| Cash payments | (948 | ) | | (3,484 | ) | | (3,075 | ) | | — |
| | (7,507 | ) |
| Foreign exchange loss | (1 | ) | | (41 | ) | | (20 | ) | | — |
| | (62 | ) |
| Balance at December 31, 2016 | 2,375 |
| | 9,650 |
| | 1,519 |
| | — |
| | 13,544 |
|
Less: current portion (4) | (1,085 | ) | | (6,597 | ) | | (1,519 | ) | | — |
| | (9,201 | ) |
Long-term portion (4) | $ | 1,290 |
| | $ | 3,053 |
| | $ | — |
| | $ | — |
| | $ | 4,343 |
|
(1) In2017. As of December 2016,31, 2018, the Company also exited from anremaining liability for the excess facility at its officeexited in Paris, France and recorded $0.2January 2016 was $1.5 million, of facility exit costs. This liabilitywhich will be fully paid inout over the first quarterremainder of 2017.
(2) See discussion on TVN VDP above for future estimated payments under the TVN VDPleased properties’ term through August 2020.
(3) The Company anticipates that the remaining severance and benefits (non-TVN VDP related) accrual at December 31, 2016 will be fully paid by the first quarter
(4) The current portion and long-term portion of the restructuring liability are reported under “Accrued and other current liabilities” and “Other non-current liabilities”, respectively, on the Company’s Consolidated Balance Sheets.
Harmonic 2015 Restructuring
In the fourth quarter of 2014, the Company implemented a restructuring plan (the “Harmonic 2015 Restructuring Plan”) to reduce 2015 operating costs and the planned restructuring activities involve headcount reduction, exiting certain operating facilities and disposing excess assets. The Company recorded $2.2 million and $1.5 million of restructuring and impairment charges under the Harmonic 2015 Restructuring Plan in fiscal 2014 and 2015, respectively, consisting primarily of severance and benefits for the termination of 56 employees worldwide as well as a fixed asset impairment charge related to software development costs incurred for a discontinued information technology.
The following table summarizes the activities in the Harmonic 2015 restructuring accrual during the years ended December 31, 2016, 2015 and 2014 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Termination of an information technology ("IT") project | | Severance and benefits | | Termination of a research and development project | | Other charges | | Total |
| Charges for 2015 Restructuring Plan | $ | 1,138 |
| | $ | 599 |
| | $ | 307 |
| | $ | 125 |
| | $ | 2,169 |
|
| Cash payments | — |
| | (294 | ) | | (307 | ) | | — |
| | (601 | ) |
| Non-cash write-offs | (1,138 | ) | | — |
| | — |
| | (108 | ) | | (1,246 | ) |
| Balance at December 31, 2014 | — |
| | 305 |
| | — |
| | 17 |
| | 322 |
|
| Charges for 2015 Restructuring Plan | — |
| | 1,413 |
| | — |
| | 204 |
| | 1,617 |
|
| Adjustments to restructuring provisions | — |
| | (126 | ) | | — |
| | (6 | ) | | (132 | ) |
| Cash payments | — |
| | (1,328 | ) | | — |
| | (13 | ) | | (1,341 | ) |
| Non-cash write-offs | — |
| | — |
| | — |
| | (202 | ) | | (202 | ) |
| Balance at December 31, 2015 | — |
| | 264 |
| | — |
| | — |
| | 264 |
|
| Adjustments to restructuring provisions | — |
| | (70 | ) | | — |
| |
| | (70 | ) |
| Cash payments | — |
| | (194 | ) | | — |
| |
| | (194 | ) |
| Balance at December 31, 2016 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Harmonic 2013 Restructuring
The Company implemented a series of restructuring plans in 2013 to reduce costs and improve efficiencies and the actions extended through the third quarter of 2014. The Company recorded restructuring charges of $2.2 million in 2013 under this plan consisting primarily of severance and benefits related to the termination of 85 employees worldwide and, to a lesser extent, the costs associated with writing down some of its inventory to net realizable value due to restructuring activities in its Israel facilities. The Company recorded an additional $0.9 million restructuring charges in 2014 under this plan primarily for severance and benefits related to the termination of 25 employees worldwide.
The following table summarizes the activities in the Harmonic 2013 restructuring accrual during the years ended December 31, 2014 and 2013 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Severance | | Impairment of Leasehold Improvement | | Obsolete Inventories | | Termination of a Research and Development Project | | Excess Facilities | | Total |
| Charges for 2013 Restructuring Plan | $ | 1,663 |
| | $ | 101 |
| | $ | 404 |
| | $ | — |
| | $ | — |
| | $ | 2,168 |
|
| Adjustments to restructuring provisions | 29 |
| | 48 |
| | — |
| | — |
| | — |
| | 77 |
|
| Cash payments | (1,513 | ) | | — |
| | — |
| | — |
| | — |
| | (1,513 | ) |
| Non-cash write-offs | — |
| | (149 | ) | | (404 | ) | | — |
| | — |
| | (553 | ) |
| Balance at December 31, 2013 | 179 |
| | — |
| | — |
| | — |
| | — |
| | 179 |
|
| Charges for 2013 Restructuring Plan | 829 |
| | — |
| | — |
| | 63 |
| | 32 |
| | 924 |
|
| Adjustments to restructuring provisions | (17 | ) | | — |
| | — |
| | — |
| | — |
| | (17 | ) |
| Cash payments | (991 | ) | | — |
| | — |
| | (63 | ) | | (32 | ) | | (1,086 | ) |
| Balance at December 31, 2014 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
NOTE 12:11: CONVERTIBLE NOTES, OTHER DEBTS AND CAPITAL LEASES
4.00% Convertible Senior Notes
In December 2015, the Company issued $128.25 million aggregate principal amount of unsecured convertible senior notes4.00% Senior Convertible Notes due 2020 (the “offering” or “Notes”, as applicable) through a private placement with a financial institution. The Notes do not contain any financial covenants.pursuant to an indenture (the “Indenture”), dated December 14, 2015, by and between the Company and U.S. Bank National Association, as trustee. The Notes bear interest at a fixed rate of 4.00% per year, payable semiannually in arrearscash on June 1 and December 1 of each year beginning on June 1, 2016. Theand the Notes will mature on December 1, 2020 unless earlier repurchased or converted. The Company incurred approximately $4.1 million of debt issuance cost, of which $3.5 million was paid in 2015 and the remainder was paid in the first quarter of 2016.
Concurrent with the closing of the offering, the Company used $49.9 million of the net proceeds to repurchase 11.1 million shares of the Company’s common stock from purchasers of the offering in privately negotiated transactions effected through the initial purchaser or its affiliate as the Company’s agent. Additionally, the Company used the remaining net proceeds from the offering to fund the TVN acquisition, which closed on February 29, 2016.
Subject to satisfaction of certain conditions and during certain periods, the Notes will be convertible at the option of holders into cash, shares of the Company’s common stock, par value $0.001 (“Common Stock”), or a combination thereof, at the Company’s election, at an initial conversion rate of 173.9978 shares of Common Stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $5.75 per share). The conversion rate, and thus the correspondingeffective conversion price, willmay be subject to adjustment uponadjusted under certain circumstances, including in connection with conversions made following certain fundamental changes and under other circumstances, in each case, as set forth in the occurrence of certain events.Indenture.
Prior to the close of business on the business day immediately preceding September 1, 2020, the Notes will be convertible only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on April 1, 2016 (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the Notes on each applicable trading day; (2) during the five business day period after any five5 consecutive trading day period (the “ measurement period ”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. Commencing on September 1, 2020 until the close of business on the second scheduled trading day immediately preceding the maturity date, the Notes will be convertible in multiples of $1,000 principal amount regardless of the foregoing circumstances.
If a fundamental change occurs, holders of the Notes may require the Company to purchase all or any portion of their Notes for cash at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Concurrent with the closing of the offering, the Company used $49.9 million of the net proceeds to repurchase 11.1 million shares of the Company’s common stock from purchasers of Notes in the offering in privately negotiated transactions. In addition, if specific corporate events occur priorthe Company incurred approximately $4.1 million of debt issuance cost, resulting in net proceeds to the maturity date,Company of approximately $74.2 million, which was used to fund the TVN acquisition.
In accordance with accounting guidance on embedded conversion features, the conversion rate may be increased for a holder who elects to convertfeature associated with the Notes was valued at $26.1 million and bifurcated from the host debt instrument and recorded in connection with such a corporate event.
In accounting for the issuance ofstockholders’ equity. The resulting debt discount on the Notes the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the initial proceeds of the Notes as a whole. The difference between the initial proceeds of the Notes and the liability component (the “debt discount”) of $26.9 million is amortized to interest expense using the effective interest method over the term of the Notes. The equity component of the Notes is included in additional paid-in capital in the Consolidated Balance Sheets and is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the transaction costs related to the issuance of the Notes, the Company allocated the total amount of $4.1 million incurred to the liability and equity components using the same proportions as the proceeds from the Notes. Transaction costs attributable to the liability component were $3.2 million and were recorded as a direct deduction from the carrying amount of the debt liability in long-term liability in the Consolidated Balance Sheets and are being amortized to interest expense in the Consolidated Statements of Operations usingat the effective interest methodrate over the termcontractual terms of the Notes. Transaction costs attributable to the equity component were $0.9 million and were netted with the equity component of the Notes in additional paid-in capital in the Consolidated Balance Sheets.
The following table presents the components of the Notes as of December 31, 20162018 and December 31, 20152017 (in thousands, except for years and percentages):
| | | | | | | December 31, |
| | December 31, 2016 | | December 31, 2015 | 2018 | | 2017 |
| Liability: | | | | | | |
| Principal amount | $ | 128,250 |
| | $ | 128,250 |
| $ | 128,250 |
| | $ | 128,250 |
|
| Less: Debt discount, net of amortization | (22,302 | ) | | (26,732 | ) | (11,996 | ) | | (17,404 | ) |
| Less: Debt issuance costs, net of amortization | (2,689 | ) | | (3,223 | ) | (1,446 | ) | | (2,098 | ) |
| Carrying amount | $ | 103,259 |
| | $ | 98,295 |
| $ | 114,808 |
| | $ | 108,748 |
|
| Remaining amortization period (years) | 3.9 years |
| | 4.9 years |
| 1.9 years |
| | 2.9 years |
|
| Effective interest rate on liability component | 9.94 | % | | 9.94 | % | 9.94 | % | | 9.94 | % |
| | | | | |
| Equity: | | | | |
| Value of conversion option | $ | 26,925 |
| | $ | 26,925 |
| |
| Less: Equity issuance costs | (863 | ) | | (863 | ) | |
| Carrying amount | $ | 26,062 |
| | $ | 26,062 |
| |
| Carrying amount of equity component | | $ | 26,062 |
| | $ | 26,062 |
|
The following table presents interest expense recognized related to the Notes for the years ended December 31, 2016 and December 31, 2015 (in thousands):
|
| | | | | | | |
| | Year ended December 31, |
| | 2016 | | 2015 |
| Contractual interest expense | $ | 5,130 |
| | $ | 240 |
|
| Amortization of debt discount | 4,430 |
| | 193 |
|
| Amortization of debt issuance costs | 534 |
| | 23 |
|
| Total interest expense recognized | $ | 10,094 |
| | $ | 456 |
|
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Contractual interest expense | $ | 5,130 |
| | $ | 5,130 |
| | $ | 5,130 |
|
| Amortization of debt discount | 5,408 |
| | 4,898 |
| | 4,430 |
|
| Amortization of debt issuance costs | 652 |
| | 591 |
| | 534 |
|
| Total interest expense recognized | $ | 11,190 |
| | $ | 10,619 |
| | $ | 10,094 |
|
Other Debts and Capital Leases
In connection with the TVN acquisition, theThe Company assumedhas a variety of debt and credit facilities in France to satisfy the financing requirements of TVN operations. These arrangements are summarized in the table below (in thousands):
| | | | | | December 31, |
| | December 31, 2016 | 2018 | | 2017 |
Financing from French government agencies related to various government incentive programs (1) | $ | 17,930 |
| $ | 18,783 |
| | $ | 20,565 |
|
Term loans (2) | 1,400 |
| |
Secured borrowings (3) | — |
| |
| Term loans | | 914 |
| | 1,282 |
|
| Obligations under capital leases | 1,860 |
| 162 |
| | 1,099 |
|
| Total debt obligations | 21,190 |
| 19,859 |
| | 22,946 |
|
| Less: current portion | (7,275 | ) | (7,175 | ) | | (7,610 | ) |
| Long-term portion | $ | 13,915 |
| $ | 12,684 |
| | $ | 15,336 |
|
Other than the 4.00% Notes, the Company did not have any other indebtedness
(1) Loans backed by French R&D tax credit receivables were $16.7 million and $17.7 million as of December 31, 2015.
(1)2018 and 2017, respectively. As of December 31, 2016, the Company’s TVN French Subsidiary had an aggregate of $17.9 million of loans due to various financing programs of French government agencies, $14.7 million of which is related to loans backed by R&D tax credit receivables. As of December 31, 2016,2018, the TVN French Subsidiary had an aggregate of $25.7$26.5 million of R&D tax credit receivables from the French government from 20172019 through 2020.2022. (See Note 10,9, “Certain Balance Sheet Components-Prepaid expenses and other current assets,”Components” for more information). These tax loans have a fixed rate of 0.6%, plus EURIBOR 1 month plus 1.3% and maturesmature between 20172019 through 2019.2021. The remaining loans of $3.3$2.1 million atand $2.9 million as of December 31, 20162018 and 2017, respectively, primarily relatesrelate to financial support from French government agencies for R&D innovation projects at minimal interest rates, and thesethe loans mature between 2020 through 2023.
(2) One of the term loans with a certain financial institution contains annual covenants that require the TVN French Subsidiary to maintain a minimum working capital balance and various other financial covenants and restrictions that limit the French Subsidiary’s ability to incur additional indebtedness. The annual covenant is based on French statutory year-end results and the TVN French Subsidiary failed the 2016 covenant test primarily due to the Company’s plan to integrate TVN’s
operations into other subsidiaries for tax planning and logistic purpose. The Company has informed the financial institution of the 2016 covenant test results and has made plans to pay off the entire loan balance of approximately $0.4 million in early 2017 and as a result, the entire loan balance is recorded under “Other debts and capital lease obligations, current,” in the Consolidated Balance Sheets.
(3) The TVN French Subsidiary obtained advances under a credit line with BPI France against a pool of eligible receivables with recourse. The maximum advance under this credit line for receivables is €2 million (approximately $2.1 million as converted using the exchange rateoutstanding at December 31, 2016), less applicable fees, and €200,000 (approximately $0.2 million as converted using the exchange rate at December 31, 2016) of cash is pledged for this program. This credit line was renewed in July 2016 for an additional year with no material change to the terms of the credit agreement. There was no balance outstanding to BPI France as of December 31, 2016.
2018 mature between 2019 through 2025.
Future minimum repayments
The table below showspresents the future minimum repayments of other debts and capital lease obligations as of December 31, 20162018 (in thousands):
| | | Years ending December 31, | Capital lease obligations | | Other Debt obligations | Capital lease obligations | | Other Debt obligations |
| 2017 | $ | 971 |
| | $ | 6,304 |
| |
| 2018 | 801 |
| | 5,416 |
| |
| 2019 | 63 |
| | 6,255 |
| 91 |
| | 7,084 |
|
| 2020 | 25 |
| | 554 |
| 49 |
| | 6,607 |
|
| 2021 | — |
| | 451 |
| 22 |
| | 5,333 |
|
| 2022 | | — |
| | 452 |
|
| 2023 | | — |
| | 155 |
|
| Thereafter | — |
| | 350 |
| — |
| | 66 |
|
| Total | $ | 1,860 |
| | $ | 19,330 |
| $ | 162 |
| | $ | 19,697 |
|
Line of Credit Facilities
On December 22, 2014,September 27, 2017, the Company entered into a CreditLoan and Security Agreement (the “Credit“Loan Agreement”) with JPMorgan ChaseSilicon Valley Bank N.A. (“JPMorgan”(the “Bank”). The Loan Agreement provides for a $20.0 millionsecured revolving credit facility with a sublimitin an aggregate principal amount of $10.0 million forup to $15.0 million. Under the issuanceterms of commercial and standbythe Loan Agreement, the principal amount of loans, plus the face amount of any outstanding letters of credit, onat any time cannot exceed up to 85% of the Company’s behalf. Revolvingeligible receivables. Under the terms of the Loan Agreement, the Company may also request letters of credit from the Bank. The proceeds of any loans under the CreditLoan Agreement maywill be borrowed, repaidused for working capital and re-borrowed until December 22, 2015,general corporate purposes.
Loans under the Loan Agreement will bear interest, at which time all amounts borrowed mustthe Company’s option, and subject to certain conditions, at an annual rate of either a prime rate or a LIBOR rate plus an applicable margin of 2.25%. There will be repaid. On December 7, 2015,no applicable margin for prime rate advances when the Company entered intois in compliance with the liquidity requirement of at least $20.0 million in the aggregate of consolidated cash plus availability under the Loan Agreement (the “Liquidity Requirement”) and a first amendment to the Credit Agreement with JPMorgan to permit0.25% margin for prime rate advances when the Company is not in compliance with the Liquidity Requirement. The Company may not request LIBOR advances when it is not in compliance with the Liquidity Requirement. Interest on each advance is due and payable monthly and the principal balance is due at maturity. The Company’s obligations under the revolving credit facility are secured by a security interest on substantially all of its assets, excluding intellectual property.
The Loan Agreement contains customary affirmative and negative covenants. The Company must comply with financial covenants requiring it to incurmaintain (i) minimum a short-term asset to short-term liabilities ratio and (ii) minimum adjusted EBITDA, in the indebtedness relatedamounts and for the periods as set forth in the Loan Agreement. The Company must also maintain a minimum liquidity amount, comprised of unrestricted cash held at accounts with the Bank plus proceeds available to issuancebe drawn under the Loan Agreement, equal to $10.0 million at all times. As of December 31, 2018, the Company was in compliance with the covenants under the Loan Agreement.
As of December 31, 2018, the Company committed $1.8 million towards security for letters of credit issued under the Loan Agreement. There were no borrowings under the Loan Agreement from the closing of the Notes mentioned above. OnLoan Agreement through December 15, 2015, the Company entered into a second amendment to the Credit Agreement with JPMorgan to extend the expiration date of the Credit Agreement to February 20, 2016. The Company did not renew the agreement or enter into any new agreement.31, 2018.
NOTE 13:12: EMPLOYEE BENEFIT PLANS AND STOCK-BASED COMPENSATION
The Company’s stock benefit plans include the employee stock purchase plan and current active stock plans adopted in 1995 and 2002 as well as one stock plan assumed through an acquisition in 2010. Other than the employee stock purchase plan, the 1995 stock plan and the 2002 director plan described below, the other inactive plans have no shares available for future grant. The Company also assumed two existing TVN employee equity benefit plans in connection with the TVN acquisition. As of December 31, 2016, for the stock plan assumed through an acquisition, 121,043 shares were reserved for issuance.
Employee StockEquity Award Plans
1995 Stock Plan
The 1995 Stock Plan provides for the grant of incentive stock options, non-statutory stock options and restricted stock units (“RSUs”).RSUs. Incentive stock options may be granted only to employees. All other awards may be granted to employees and consultants. Under the terms of the 1995 Stock Plan, no incentive stock optionsoption or non-statutory stock option may be granted at prices notin the ordinary course with a per share exercise price that is less than 100% of the fair value of the Company’s common stock on the date of grant and non-statutory stock options may be granted at prices not less than 85% of the fair value of the Company’s common stock on the date of grant. RSUs have no exercise price. Both options and RSUs vest over a period of time as determined by the Company’s Board of Directors (the “Board”), generally two to four years, and expire seven years from date of grant. Options granted prior to February 2006 expire 10 years from the date of grant. Grants of RSUs and any non-statutory stock options issued at prices less than the fair market value on the date of grant
decrease the plan reserve by 1.5 shares for every unit or share granted, and any forfeitures of these awards due to their not vesting would increase the plan reserve by 1.5 shares for every unit or share forfeited. In connection with the Company’s acquisition of TVN, the Company agreed to make grants of RSUs with respect to a total of up to 1,750,000 shares (taking into account the share count provision for RSUs in the Company’s 1995 Stock Plan). The Company’s stockholders approved an amendment to the 1995 Stock Plan at the Company’s 2016 annual meeting of stockholders (“2016 Annual Meeting”) which increased the number of shares of common stock reserved for issuance under the 1995 Stock Plan by 2,000,000 shares. As of December 31, 2016,2018, an aggregate of 12,029,5889,915,865 shares of common stock were reserved for issuance under the 1995 Stock Plan, of which 3,501,4983,819,736 shares remained available for grant.
In August 2016, the Company granted 898,533 shares of performance-based RSUs (“PRSUs”) under the 1995 Stock Plan to fund a portion of its 2016 incentive bonus payment obligations to its key executives and other eligible employees. The vesting of the PRSUs is based on the achievement of certain financial and non-financial operating goals of the Company and occurs within the next three to six months from the grant date.
2002 Director Plan
The 2002 Director Plan provides for the grant of non-statutory stock options and RSUs to non-employee directors of the Company. Under the terms of the 2002 Director Plan, no non-statutory stock optionsoption may be granted at prices notwith a per share exercise price that is less than 100% of the fair value of the Company’s common stock on the date of grant. RSUs have no exercise price. Both options and RSUs vest over a period of time as determined by the Board, generally three years for the initial grant and one year for subsequent grants to a non-employee director, and expire seven years from the date of grant. Grants of RSUs decrease the plan reserve by 1.5 shares for every unit granted, and any forfeiture of these awards due to their not vesting would increase the plan reserve by 1.5 shares for every unit forfeited. In November 2015,The Company’s stockholders approved an amendment to the authorized2002 Director Stock Plan at the Company’s 2018 annual meeting of stockholders (“2018 Annual Meeting”) which increased the number of shares of common stock reserved for issuance under the 2002 Director Stock Plan was increased from 2,000,000 to 2,350,000.by 400,000 shares. As of December 31, 2016,2018, an aggregate of 643,244947,536 shares of common stock were reserved for issuance under the 2002 Director Plan, of which 409,244643,661 shares remained available for grant.
Employee Stock Purchase Plan
The 2002 Employee Stock Purchase Plan (“ESPP”) provides for the issuance of share 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. The Company’s stockholders
approved an amendment to the ESPP at the 2018 Annual Meeting which increased the number of shares of common stock reserved for issuance under the ESPP by 1,300,000 shares. Under the ESPP, 1,265,458, 888,1521,132,438, 1,291,875 and 440,0401,265,458 shares were issued during fiscal 2016, 20152018, 2017 and 2014,2016, respectively, representing $3.7$4.0 million, $5.2$4.4 million and $2.7$3.7 million in contributions. As of December 31, 2016, 906,3902018, 1,282,358 shares were reserved for future purchases by eligible employees.
Stock Options, RSUs and PRSUsOption Activities
The following table summarizes the Company’s stock option RSUactivities and PRSU activitiesrelated information during the year ended December 31, 2016 (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, 2015 | 6,150 |
| | 5,674 |
| | $ | 6.56 |
| | 2,182 |
| | $ | 6.99 |
|
| Authorized | 2,000 |
| | — |
| | — |
| | — |
| | — |
|
| Granted | (6,201 | ) | | 946 |
| | 3.19 |
| | 3,503 |
| | 3.78 |
|
| Options exercised | — |
| | (150 | ) | | 4.77 |
| | — |
| | — |
|
| Shares released | — |
| | — |
| | — |
| | (1,480 | ) | | 6.57 |
|
| Forfeited or canceled | 1,963 |
| | (1,451 | ) | | 6.46 |
| | (341 | ) | | 5.56 |
|
| Balance at December 31, 2016 | 3,912 |
| | 5,019 |
| | $ | 6.01 |
| | 3,864 |
| | $ | 4.26 |
|
* The preceding table includes PRSUs activities during the year ended December 31, 2016.
The following table summarizes information about stock options outstanding as of December 31, 20162018 (in thousands, except per share amounts and term)terms):
| | | | Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value | Stock Options Outstanding |
| | | Number of Shares | | Weighted Average Exercise Price (per share) | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
| Balance at December 31, 2017 | | 3,880 |
| | $ | 6.04 |
| | | | |
| Granted | | — |
| | — |
| | |
| Exercised | | (239 | ) | | 3.79 |
| | |
| Forfeited | | (35 | ) | | 4.76 |
| | |
| Canceled or expired | | (538 | ) | | 8.75 |
| | |
| Balance at December 31, 2018 | | 3,068 |
| | 5.76 |
| | 2.3 | | $ | 1,148.7 |
|
| As of December 31, 2018 | | | | | | |
| Vested and expected to vest | 4,839 |
| | $ | 6.05 |
| | 3.8 | | $ | 1,930 |
| 3,067 |
| | $ | 5.76 |
| | 2.3 | | $ | 1,147.7 |
|
| Exercisable | 3,240 |
| | 6.61 |
| | 3.0 | | 388 |
| 2,994 |
| | $ | 5.78 |
| | 2.3 | | $ | 1,082.0 |
|
TheAggregate intrinsic value of options vested and expected to vest and exercisable as of December 31, 2016 is calculated based onrepresents the difference between the exercise price of the stock options and the fair value of the Company’s common stock as of December 31, 2016.stock. The intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 2015 and 2014 was $0.1$0.3 million, $1.7$0.3 million and $0.80.1 million, respectively,respectively.
The Company realized no income tax benefit from stock option exercises for the years ended December 31, 2018, 2017 and 2016 due to recurring losses and valuation allowances.
Restricted Stock Units (“RSUs”) Activities
The following table summarizes the Company’s RSUs activities and related information during the year ended December 31, 2018 (in thousands, except per share amounts and terms):
|
| | | | | | |
| | Restricted Stock Units Outstanding |
| | Number of Shares | | Weighted Average Grant Date Fair Value Per Share |
| Balance at December 31, 2017 | 2,904 |
| | $ | 5.09 |
|
| Granted | 3,906 |
| | 3.97 |
|
| Vested | (3,177 | ) | | 4.91 |
|
| Forfeited | (230 | ) | | 4.89 |
|
| Balance at December 31, 2018 | 3,403 |
| | $ | 3.99 |
|
The estimated fair value of RSUs is calculated based on the difference between the exercisemarket price and the fair value of the Company’s common stock as ofon the exercisegrant date.
The following table summarizes information about RSUs and PRSUs outstanding as of December 31, 2016 (in thousands, except term): |
| | | | | | | | |
| | Number of Shares Underlying Restricted Stock Units | | Weighted Average Remaining Vesting Period (Years) | | Aggregate Fair Value |
| Vested and expected to vest | 3,606 |
| | 0.6 | | $ | 18,031 |
|
The fair value of RSUs and PRSUsall restricted stock units vested and expected to vest as of during the years ended December 31, 2018, 2017 and 2016 is calculated was $15.6 million, $13.0 million and $9.7 million, respectively.
Performance- and Market-based awards
Starting 2015, the Company began to settle a portion of its incentive bonus payment to eligible employees by issuing PRSUs from the 1995 Stock Plan. The Company granted 1,443,168, 1,165,685 and 898,533 PRSUs to its employees during the years ended December 31, 2018, 2017 and 2016, respectively, of which 1,343,168, 1,165,685 and 610,579 PRSUs vested
during the years ended December 31, 2018, 2017 and 2016, respectively, for the purpose of settling amounts earned under the Company’s incentive bonus plans. The vesting of the remaining PRSUs will be based on the achievement of certain financial and non-financial operating goals of the Company, subject to the Board’s approval. The stock-based compensation recognized for PRSUs were $6.1 million, $3.2 million and $2.8 million, for the years ended December 31, 2018, 2017 and 2016, respectively.
In 2017, the Company granted 344,500 MRSUs under the 1995 Stock Plan to its key executives and certain eligible employees that may vest during a three-year period as part of its long-term incentive program. In 2018, the Company granted 40,000 MRSUs that may vest during an eighteen-month period from the date of grant. The vesting conditions of these awards are based on the market value of the Company's common stock. The fair value of these shares was estimated using a Monte-Carlo simulation and the Company’s common stockstock-based compensation recognized in 2018 and 2017 for these MRSUs was $0.2 million and $0.9 million, respectively. No MRSUs had vested as of December 31, 2016.2018.
TVN Employee Equity Benefit Plan
TVN’s existing employee equity benefit plans consist of the French Employee Incentive plan and the Overseas Long Term Incentive plan. The Company’s acquisition of TVN gave rise to a change-in-control event which causes both plans to become fully vested and the settlement of both plans have to be made in cash according to the agreements. The payment was made in full in the second quarter of 2016 in the amount of approximately $2.9 million upon finalizing the closing adjustments to the TVN purchase price.
TVN Retirement Benefit Plan
As part of the TVN acquisition the Company assumed obligations under defined benefit pension plans which were unfunded as of the acquisition date. Under French law, the Company’s subsidiaries in France, including the acquired TVN French Subsidiary, is requiredare obligated to make certain payments to their employees upon their retirement from the Company. These payments are based on the retiring employee’s salary for a number of months that varies according to the employee’s period of service and position. Salary used in the calculation is the employee’s average monthly salary for the twelve months prior to retirement. The payments are made in one lump-sum at the time of retirement. The French pension plan is unfunded and there are no contributions to the plan required by related laws or funding regulations. No required contributions are expected in fiscal 2019, but the Company, at its discretion, may make contributions to the defined benefit plan.
The company’s defined benefit pension obligations are measured as of December 31. The present value of these lump-sum payments is determined on an actuarial basis and the actuarial valuation takes into account the employees’ age and period of service with the company;Company, projected mortality rates, mobility rates, and increases in salaries;salaries and a discount rate.
The table below shows the present value of the Company’s pension obligations as of December 31, 20162018 and December 31, 2017 and the changes to the Company’s pension obligations for each of those years were as follows (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Projected benefit obligation: | | | |
| Balance at January 1 | $ | 5,033 |
| | $ | 4,264 |
|
| Service cost | 243 |
| | 259 |
|
| Interest cost | 74 |
| | 71 |
|
| Actuarial (gains) losses | (202 | ) | | (528 | ) |
| Benefits paid | (13 | ) | | — |
|
| Adjustment for prior year balance | — |
| | 343 |
|
| Foreign currency translation adjustment | (254 | ) | | 624 |
|
| Balance at December 31 | $ | 4,881 |
| | $ | 5,033 |
|
| | | | |
| Presented on the Consolidated Balance Sheets under: | | | |
| Current portion (presented under “Accrued and other current liabilities”) | $ | 63 |
| | 34 |
|
| Long-term portion (presented under “Other non-current liabilities”) | $ | 4,818 |
| | 4,999 |
|
The table below presents the components of net periodic benefit costs (in thousands):
|
| | | |
| | December 31, 2016 |
| Projected benefit obligation: | |
| Acquired from TVN acquisition | $ | 5,907 |
|
| Service cost | 217 |
|
| Interest cost | 87 |
|
| Actuarial losses | 279 |
|
| Curtailment | (1,955 | ) |
| Foreign currency translation adjustment | (271 | ) |
| As of December 31, 2016 | $ | 4,264 |
|
| | |
| Presented on the Consolidated Balance Sheets under: | |
| Current portion (presented under “Accrued and other current liabilities”) | $ | 27 |
|
| Long-term portion (presented under “Other non-current liabilities”) | $ | 4,237 |
|
|
| | | | | | | |
| | Year ended December 31, |
| | 2018 | | 2017 |
| Service cost | $ | 243 |
| | $ | 259 |
|
| Interest cost | 74 |
| | 71 |
|
Amortization of net actuarial loss (gain) (1) | — |
| | — |
|
| Net periodic benefit cost included in operating loss | $ | 317 |
| | $ | 330 |
|
Net periodic costs for the year ended December 31, 2016 were $304,000 and the accumulated benefit obligation as of December 31, 2016 was $3.3 million. During the year ended December 31, 2016, the Company recorded an actuarial loss of $0.3 million as a component of accumulated other comprehensive Income (loss) (“AOCI”).
(1) The Company accounts foruses the allowable 10% corridor approach to determine the amount of actuarial lossgains or losses subject to amortization in accordance with ASC 715, “Compensation - Retirement Benefits”. If the net accumulated gainpension cost. Gains or loss exceeds 10% of the projected plan benefit obligation or the market-related value of plan assets,losses are amortized on a portion of the net gain or loss is amortized and included in expense for the following year based uponstraight-line basis over the average future remaining service period of active plan participants, unless the Company’s policy is to recognize all actuarial gains (losses) when they occur. The Company elected to defer actuarial gains (losses) in AOCI. As of December 31, 2016, the Company did not meet the 10% requirement, and therefore no amortization of 2016 actuarial loss would be recorded in fiscal 2017.
As indicated in Note 11, “Restructuring and related charges”, the Company finalized the terms of the TVN VDP and 83 employee applications were approved by the Company in the fourth quarter of 2016. The Company settled its retirement obligations under the TVN defined benefit pension plan for the terminating employees through payment of voluntary termination benefits. The Company accounts for these settlements in accordance with ASC 715, “Compensation - Retirement Benefits”, which requires that the settlement be accounted for when an employee accepts the offer of voluntary termination. As a result of the TVN VDP, the defined benefit pension plan was remeasured, which resulted in a non-cash curtailment gain of approximately $2.0 million. The curtailment gain was recognized in the Consolidated Statement of Operations during the fourth quarter of 2016 and the Company’s pension liability was reduced by the same amount. Of the $2.0 million pension curtailment gain, $0.6 million is included in product cost of revenue and the remaining $1.4 million is included in operating expenses-restructuring and related charges in the Consolidated Statement of Operations. The remeasurement did not have a material effect on other components of net periodic pension expense for the year ended December 31, 2016.participants.
The following assumptions were used in determining the Company’s pension obligation:
|
| | |
| December 31, 2016 |
Discount rate | 1.5 | % |
Mobility rate | 3.0 | % |
Salary progression rate | 2.0 | % |
|
| | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Discount rate | 1.7 | % | | 1.5 | % |
| Mobility rate | 6.0 | % | | 6.0 | % |
| Salary progression rate | 2.0 | % | | 2.0 | % |
The Company evaluates the discount rate assumption annually. The discount rate used foris determined using the Company’s valuation study was basedaverage yields on high-quality fixed-income securities that have maturities consistent with the ratetiming of long-term Euro zone AA rated 10 year corporate bonds as of December 31, 2016, which yielded 1.5%.benefit payments.
The Company also evaluates other assumptions related to demographic factors, such as retirement age, mortality rates and turnover periodically, updating them to reflect experience and expectations for the future. The mortality assumption related to the Company’s defined benefit pension plan used the most current mortality tables published in January 2017 by the French National Institute of Statistics and Economic Studies.
FutureAs of December 31, 2018, future benefits expected to be paid in each of the next five years, and in the aggregate for the five year period thereafter are as follows (in thousands):
| | | Years ending December 31, | | |
| 2017 | $ | 29 |
| |
| 2018 | 29 |
| |
| 2019 | 46 |
| $ | 63 |
|
| 2020 | — |
| — |
|
| 2021 | 66 |
| 41 |
|
| 2022 - 2026 | 2,015 |
| |
| 2022 | | 80 |
|
| 2023 | | 479 |
|
| 2024 - 2028 | | 2,626 |
|
| | $ | 2,185 |
| $ | 3,289 |
|
401(k) Plan
The Company has a retirement/savings plan for its U.S. employees, 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 can make 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 Company’s contributions to the plan waswere $0.3 million, $0.3 million and $0.4 million for each of the fiscal years from 2014 through 2016.2018, 2017 and 2016, respectively.
Stock-based Compensation
The following table summarizes stock-based compensation expense for all plans (in thousands):
| | | | Year ended December 31, | Year ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| Stock-based compensation in: | | | | | | | | | | |
| Cost of revenue | $ | 1,554 |
| | $ | 1,862 |
| | $ | 2,359 |
| $ | 1,953 |
| | $ | 2,370 |
| | $ | 1,554 |
|
| Research and development expense | 3,711 |
| | 4,435 |
| | 4,844 |
| 5,192 |
| | 5,313 |
| | 3,711 |
|
| Selling, general and administrative expense | 7,795 |
| | 9,285 |
| | 10,084 |
| 10,144 |
| | 8,927 |
| | 7,795 |
|
| Total stock-based compensation in operating expense | 11,506 |
| | 13,720 |
| | 14,928 |
| 15,336 |
| | 14,240 |
| | 11,506 |
|
| Total stock-based compensation recognized in net loss | $ | 13,060 |
| | $ | 15,582 |
| | $ | 17,287 |
| $ | 17,289 |
| | $ | 16,610 |
| | $ | 13,060 |
|
As of December 31, 2016,2018, total unrecognized stock-based compensation cost net of estimated forfeitures, related to unvested stock options and RSUs was $0.1 million and PRSUs was $11.8$8.5 million, respectively, and is expected to be recognized over a weighted-average period of 1.6 years.
As part of its equity incentive program, the Company grants PRSUs, the vesting of which depends on the achievement of certain financial0.3 years and non-financial goals of the Company. The Company assesses the expected achievement levels of the performance goals at the end of each reporting period. The grant date fair value of the PRSUs expected to vest based on the Company’s best estimate of its performance against the performance goals is recognized as compensation expense. During the1.5 years, ended December 31, 2016 and 2015, the Company recorded approximately $2.8 million and $0.6 million of stock-based compensation expenses related to PRSUs, respectively. There were no stock-based compensation expenses related to PRSUs recorded in the year ended December 31, 2014.
Valuation Assumptions
The Company estimates the fair value of employee stock options and stock purchase rights under the ESPP using a Black-Scholes option valuation model. 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. At the date of grant, the Company estimated the fair value of each stock option grant and stock purchase right granted under the ESPP using the following weighted average assumptions:
| | | | Employee Stock Options | | ESPP | Employee Stock Options | | ESPP |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Expected term (in years) | 4.30 |
| | 4.65 |
| | 4.70 |
| | 0.50 |
| | 0.50 |
| | 0.50 |
| 4.30 |
| | 4.30 |
| | 0.50 |
| | 0.50 |
| | 0.50 |
|
| Volatility | 36 | % | | 38 | % | | 40 | % | | 70 | % | | 34 | % | | 32 | % | 42 | % | | 36 | % | | 55 | % | | 48 | % | | 70 | % |
| Risk-free interest rate | 1.4 | % | | 1.5 | % | | 1.7 | % | | 0.6 | % | | 0.3 | % | | 0.1 | % | 1.8 | % | | 1.4 | % | | 1.9 | % | | 1.2 | % | | 0.6 | % |
| Expected dividends | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % |
The expected term of the employee stock option represents the weighted-average period that the stock options are expected to remain outstanding. The computation of 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 expected term of the stock purchase right under ESPP 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 ornot paid any cash dividends and does not plan to pay any cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero infuture.
There were no stock options granted during 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.
year ended December 31, 2018. The weighted-average fair value per share of stock options granted for the years ended December 31, 2017 and 2016 2015was $1.85 and 2014 was $0.99, $2.51 and $2.36, respectively.
The fair value of all stock options vested during the years ended December 31, 2018, 2017 and 2016 2015 and 2014 was $2.3$0.7 million, $3.0$1.7 million and $3.2$2.3 million, respectively.
The estimated weighted-average fair value per share of stock purchase rights under the ESPP, granted for the years ended December 31, 2018, 2017 and 2016 2015was $1.33, $1.50 and 2014 was $1.04, $1.69 and $1.79, respectively.
The Company realized no income tax benefit from stock option exercises for the year ended December 31, 2016 and 2015 due to recurring losses and valuation allowances. As required, the Company presents excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash flows. The total realized tax benefit attributable to stock options exercised during the year ended December 31, 2014 was $15,000.
The estimated fair value of RSUs is based on the market price of the Company’s common stock on the grant date. The fair value of all restricted stock units issued during the years ended December 31, 2016, 2015 and 2014 was $9.7 million, $11.1 million and $12.0 million, respectively.
NOTE 14:13: STOCKHOLDERS’ EQUITY
Preferred Stock
Harmonic has 5,000,000 authorized shares of preferred stock. No shares of preferred stock were issued or outstanding in any of the periods presented.
Common Stock Repurchases
In April 2012, the Board approved a stock repurchase program that provided for the repurchase of up to $25 million of the Company’s outstanding common stock. Under the program, the Company was authorized to repurchase shares of common stock in open market transactions or pursuant to any trading plan that was adopted in accordance with Rule 10b5-1 of the Exchange Act. From time to time, the Board approved further increases to the program and the amount approved for this program was increased to $300 million periodically through May 2014 and the repurchase period expired on December 31, 2016. There were no stock repurchases during the year ended December 31, 2016 and theOur stock repurchase program expired on December 31, 2016. FurtherNo stock was repurchased during fiscal 2018, 2017 and 2016. Any further stock repurchases would require authorization from the Board.
During the years ended December 31, 2015 and 2014, the Company repurchased from open market transactions 3.4 million and 13.9 million shares of its common stock, respectively, at a total cost of $23.0 million and $93.1 million, respectively, and at an average share price of $6.70 for each of those period. The excess of cost over par value for the repurchase of the Company’s common stock is recorded to additional paid-in-capital. Common stock repurchased under the
program was recorded based upon the trade date for accounting purposes. All common shares repurchased under this program have been retired.
Additionally, on December 8, 2015, the Board approved the use of part of the proceeds from the sale and issuance of the Notes, issued on December 14, 2015, (see Note 12, “Convertible Notes, Other Debts and Capital Leases,” for additional information on the Notes) to repurchase shares of the Company’s common stock from purchasers of the Note offering in privately negotiated transactions effected through the initial purchaser or its affiliate as the Company’s agent. Repurchases of 11.1 million shares of the Company’s common stock effected concurrently with the Note offering was completed on December 14, 2015 at a price of $4.49 per share for an aggregate purchase price of $49.9 million.
Accumulated Other Comprehensive Income (Loss) (“AOCI”)
The components of AOCI, on an after-tax basis where applicable, were as follows (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| Foreign currency translation adjustments | $ | (7,267 | ) | | $ | (2,634 | ) |
Gain (loss) on investments, net of taxes (1) | 276 |
| | (1,538 | ) |
Loss on cash flow hedges (1) | — |
| | (246 | ) |
| Actuarial loss | (279 | ) | | — |
|
| Total accumulated other comprehensive loss | $ | (7,270 | ) | | $ | (4,418 | ) |
(1) See Consolidated Statements of Comprehensive Loss for the amounts related to cash flow hedges and investments that were reclassified into the Consolidated Statements of Operations for the periods presented. |
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Foreign currency translation adjustments | $ | (779 | ) | | $ | 4,310 |
|
| Unrealized foreign exchange loss on intercompany long-term loans, net of taxes | (888 | ) | | (1,177 | ) |
| Actuarial gain | 451 |
| | 249 |
|
| Total accumulated other comprehensive income (loss) | $ | (1,216 | ) | | $ | 3,382 |
|
NOTE 15:14: INCOME TAXES
Loss from operations before income taxes consists of the following (in thousands):
| | | | Year ended December 31, | Year ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| United States | $ | (53,833 | ) | | $ | (16,826 | ) | | $ | (15,515 | ) | $ | (19,780 | ) | | $ | (50,041 | ) | | $ | (53,833 | ) |
| International | (26,597 | ) | | 758 |
| | (6,280 | ) | 2,832 |
| | (34,666 | ) | | (26,597 | ) |
| Loss before income taxes | $ | (80,430 | ) | | $ | (16,068 | ) | | $ | (21,795 | ) | $ | (16,948 | ) | | $ | (84,707 | ) | | $ | (80,430 | ) |
The components of the provision for (benefit from)benefit from income taxes consist of the following (in thousands):
| | | | Year ended December 31, | Year ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| Current: | | | | | | | | | | |
| Federal | $ | (950 | ) | | $ | (1,981 | ) | | $ | (11,525 | ) | $ | (305 | ) | | $ | (4,530 | ) | | $ | (950 | ) |
| State | 181 |
| | 120 |
| | 8 |
| 116 |
| | 129 |
| | 181 |
|
| International | 2,738 |
| | 1,966 |
| | 1,619 |
| 2,958 |
| | 273 |
| | 2,738 |
|
| Deferred: | | | | | | | | | | |
| Federal | (713 | ) | | — |
| | 25,722 |
| — |
| | — |
| | (713 | ) |
| State | — |
| | — |
| | 8,249 |
| |
| International | (9,372 | ) | | (512 | ) | | 380 |
| 1,318 |
| | 2,376 |
| | (9,372 | ) |
| Total provision for (benefit from) income taxes | $ | (8,116 | ) | | $ | (407 | ) | | $ | 24,453 |
| $ | 4,087 |
| | $ | (1,752 | ) | | $ | (8,116 | ) |
The differences between the provision for (benefit from) income taxes computed at the U.S. federal statutory rate at 35%21% and the Company’s actual provision for (benefit from) income taxes are as follows (in thousands):
| | | | Year ended December 31, | Year ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| Benefit from for income taxes at U.S. Federal statutory rate | $ | (28,150 | ) | | $ | (5,624 | ) | | $ | (7,628 | ) | $ | (3,559 | ) | | $ | (29,648 | ) | | $ | (28,150 | ) |
| State taxes | 150 |
| | 120 |
| | 5,368 |
| |
| Differential in rates on foreign earnings | 11,741 |
| | 1,584 |
| | 4,311 |
| 4,299 |
| | 15,920 |
| | 11,741 |
|
| Non-deductible amortization expense | 617 |
| | 947 |
| | 3,138 |
| — |
| | — |
| | 617 |
|
| Tax Reform tax rate reduction | | — |
| | 14,527 |
| | — |
|
| Change in valuation allowance | 4,465 |
| | 2,230 |
| | 26,053 |
| 1,449 |
| | (2,834 | ) | | 4,465 |
|
| Change in liabilities for uncertain tax positions | (960 | ) | | (1,083 | ) | | (8,126 | ) | (250 | ) | | (2,009 | ) | | (960 | ) |
| Non-deductible stock-based compensation | 1,480 |
| | 1,398 |
| | 1,665 |
| 1,363 |
| | 1,934 |
| | 1,480 |
|
| Research and development tax credits | (129 | ) | | (178 | ) | | (841 | ) | |
| Non-deductible meals and entertainment | 441 |
| | 395 |
| | 361 |
| |
| Non-deductible acquisition cost | — |
| | 457 |
| | — |
| |
| Permanent Differences | | 1,096 |
| | 380 |
| | 441 |
|
| Adjustments related to tax positions taken during prior years | (163 | ) | | (781 | ) | | — |
| 184 |
| | (473 | ) | | (163 | ) |
| Adjustments made under intercompany transactions | 1,779 |
| | — |
| | — |
| — |
| | — |
| | 1,779 |
|
| Withholding tax | 457 |
| | — |
| | — |
| |
| Tax refund | | (305 | ) |
| (834 | ) |
| — |
|
| Other | 156 |
| | 128 |
| | 152 |
| (190 | ) | | 1,285 |
| | 634 |
|
| Total provision for (benefit from) income taxes | $ | (8,116 | ) | | $ | (407 | ) | | $ | 24,453 |
| $ | 4,087 |
| | $ | (1,752 | ) | | $ | (8,116 | ) |
The Company operates in multiple jurisdictions and its profits are taxed pursuant to the tax laws of these jurisdictions. OurThe Company’s effective income tax rate may be affected by changes in orits 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’smanagement's assessment of matters such as the ability to realize deferred tax assets. The Company’s effective tax rate varies from year to year primarily due to the absence of several onetime, discrete items that benefited or decremented the tax rates in the previous years.
In 2018, the Company had a worldwide consolidated loss before tax of $16.9 million and tax expense of $4.1 million, with an annual effective income tax rate of (24)%. The Company’s 2018 effective income tax rate differed from the U.S. federal statutory rate of 21% primarily due to geographical mix of income and losses, full valuation allowance against U.S. federal, California and other states deferred tax assets, foreign withholding taxes and income taxes on earnings from operations in foreign tax jurisdictions.
On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted which, among other things, lowered the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. As of December 31, 2018, the Company completed the accounting for transition tax and concluded that it had no tax impact because the Company's cumulative unremitted earnings and profits are negative.
The TCJA also includes a requirement to pay a minimum tax on foreign earnings for tax years beginning after December 31, 2017. An accounting policy election is allowed to either treat taxes due on future U.S. inclusions as a current period expense or account for the minimum tax in the measurement of deferred tax assets. The Company has elected to treat the minimum tax as a period cost. As such, the Company has not recognized any deferred taxes related to the minimum tax.
In 2017, the Company had a worldwide consolidated loss before tax of $84.7 million and tax benefit of $1.8 million, with an annual effective tax rate of 2%. The Company’s 2017 effective income tax rate differed from the U.S. federal statutory rate of 35% primarily due to geographical income mix, favorable tax rates associated with certain earnings from operations in lower-tax jurisdictions, tax rate change in foreign jurisdictions, tax benefits associated with the release of tax reserves for uncertain tax positions resulting from the expiration of the statutes of limitations, a one-time benefit of $2.6 million from the reduction of a valuation allowance on alternative minimum tax (“AMT”) credit carryforwards that will be refundable as a result of the TCJA, partially offset by the increase in the valuation allowance against U.S. federal, California and other state deferred tax assets, detriment from non-deductible stock-based compensation, and the net of various other discrete tax adjustments.
In 2016, the Company had a worldwide consolidated loss before tax of $80.4 million and tax benefit of $8.1 million, with an annual effective income tax rate of 10%. The Company’s 2016 effective income tax rate differed from the U.S. federal statutory rate of 35% primarily due to the Company’s geographical income mix and its tax valuation allowance, favorable tax rates associated with certain earnings from operations in lower-tax jurisdictions, favorable resolutions of uncertain tax positions, and the tax benefit from the realization of certain deferred tax assets as a result of the TVN acquisition, partially offset by the increase in the valuation allowance against U.S. federal, California and other state deferred tax assets, detriment from non-deductible stock-based compensation, non-deductible amortization of foreign intangibles, and the net of various discrete tax adjustments.
In 2015, the Company had worldwide consolidated loss before tax of $16.1 million and tax benefit of $0.4 million, with an effective income tax rate of 3%. The Company’s 2015 effective income tax rate differed from 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 for the year received 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 statutes of limitations. In addition, the impairment of the VJU investment (see Note 5, “Investments in Other Equity Securities”) received no tax benefit.
In 2014, as a result of cumulated losses in the recent years and the analysis of all available positive and negative evidence, the Company recorded a full valuation allowance against the beginning of year U.S. net deferred tax assets of $34.0 million. In addition, in 2014, the Company carried back its 2013 federal net operating loss to 2011 resulting in a tax refund. Certain federal R&D credits were also freed up as a result and utilized to offset income tax reserves as a result of the adoption of the ASU 2013-11. These two events reduced the valuation allowance by approximately $5.0 million and led to the net change of valuation allowance of $29.0 million. This unfavorable net impact was offset partially by a tax benefit of $9.0 million associated with the release of tax reserves including accrued interest and penalties, for our 2010 tax year in the United States, as a result of the expiration of the applicable statute of limitations for that year.adjustments.
The components of net deferred tax assets included in the Consolidated Balance Sheets are as follows (in thousands):
| | | | December 31, | December 31, |
| | 2016 | | 2015 | 2018 | | 2017 |
| Deferred tax assets: | | | | | | |
| Reserves and accruals | $ | 25,527 |
| | $ | 16,413 |
| $ | 17,090 |
| | $ | 17,247 |
|
| Net operating loss carryovers | 33,321 |
| | 27,023 |
| |
| Research and development credit carryovers | 28,759 |
| | 27,595 |
| |
| Net operating loss carryforwards | | 29,900 |
| | 34,915 |
|
| Research and development credit carryforwards | | 36,446 |
| | 34,419 |
|
| Deferred stock-based compensation | 4,292 |
| | 5,834 |
| 2,201 |
| | 2,677 |
|
| Depreciation and amortization | 554 |
| | — |
| |
| Other tax credits | 2,738 |
| | 2,738 |
| |
Intangibles
| | 2,585 |
| | 2,062 |
|
| Other | | 939 |
| | 1,441 |
|
| Gross deferred tax assets | 95,191 |
| | 79,603 |
| 89,161 |
| | 92,761 |
|
| Valuation allowance | (74,480 | ) | | (64,545 | ) | (77,144 | ) | | (77,756 | ) |
| Gross deferred tax assets after valuation allowance | 20,711 |
| | 15,058 |
| 12,017 |
| | 15,005 |
|
| Deferred tax liabilities: | | | | | | |
| Depreciation and amortization | — |
| | (1,189 | ) | (391 | ) | | (259 | ) |
| Intangibles | (1,417 | ) | | (899 | ) | |
| Convertible notes | (8,603 | ) | | (10,233 | ) | (2,931 | ) | | (4,284 | ) |
| Other | (510 | ) | | (510 | ) | |
| Gross deferred tax liabilities | (10,530 | ) | | (12,831 | ) | (3,322 | ) | | (4,543 | ) |
| Net deferred tax assets | $ | 10,181 |
| | $ | 2,227 |
| $ | 8,695 |
| | $ | 10,462 |
|
The following table summarizes the activities related to the Company’s valuation allowance (in thousands):
| | | | Year ended December 31, | Year ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| Balance at beginning of period | $ | 64,545 |
| | $ | 75,199 |
| | $ | 38,644 |
| $ | 77,756 |
| | $ | 74,480 |
| | $ | 64,545 |
|
| Additions | 18,291 |
| | 3,068 |
| | 39,556 |
| 928 |
| | 9,028 |
| | 18,291 |
|
| Deductions | (8,356 | ) | | (13,722 | ) | | (3,001 | ) | (1,540 | ) | | (5,752 | ) | | (8,356 | ) |
| Balance at end of period | $ | 74,480 |
| | $ | 64,545 |
| | $ | 75,199 |
| $ | 77,144 |
| | $ | 77,756 |
| | $ | 74,480 |
|
Management regularly assesses the ability to realize deferred tax assets recorded based upon the weight of available evidence, including such factors as recent earnings history and expected future taxable income on a jurisdiction by jurisdiction basis. In the event that the Company changes its determination as to the amount of realizable deferred tax assets, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
In 2016,2018, the Company continued to record a valuation allowance against all of its United States deferred tax assets as well as its net operating losses generated in 2016 due to significant cumulative losses in the United States, resulting in a net increase in valuation allowance of $18.3$0.9 million. This increase in valuation allowance is offset partially by the release of $8.4$1.5 million of valuation allowance associated withagainst one of its Israel subsidiaries due to cumulative income generated in the TVN French Subsidiary. Due to a change in its business model,recent years as well as the analysis of December 31, 2016, the TVN French Subsidiary is forecasted to generate pretax income in future periods. After considering all theavailable positive and negative evidence, the Company determined that the valuation allowance for the TVN French Subsidiary should be released as of December 31, 2016 based on its projected income.evidence. As of December 31, 2016,2018, the Company had a valuation allowance of $74.5$77.1 million against all of its U.S. federal, California and other statestates net deferred tax assets, including net operating loss carryforwards and R&D tax credit carryforwards, and against majorityassets.
The Company adopted ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, using a modified-retrospective transition method, in the first quarter of its foreignfiscal 2017. As a result, the Company recorded a cumulative effect of $4.6 million of additional gross deferred tax assets.asset associated with shared-based payment and an offsetting valuation allowance of the same amount, therefore resulting in no net impact to the Company’s beginning retained earnings or effective tax rate for 2017.
In November 2015,October 2016, the FASB issued an accounting standard updateASU No. 2016-16, Income Taxes (topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires companies to recognize the income tax consequences of all intra-entity sales of assets other than inventory when they occur. As a result, a reporting entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that alltransaction are eliminated in consolidation. Any deferred tax assetsasset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The Company early adopted this ASU during the first quarter of fiscal 2017 on a modified retrospective approach and liabilities, along with any related valuation allowance, be classifiedrecorded a cumulative-effect adjustment of $1.4 million to the retained earnings as non-current onof January 1, 2017 (which reduced the balance sheet. The accounting standard update will be effective for the Company beginningaccumulated deficit). Correspondingly, in the first quarter of fiscal 2017, and early adoption is permitted. Thethe Company early-adopted this accounting standard update as of the end of its fiscal 2015 on a prospective basis, resulting in $15.9recognized an additional $1.1 million of net deferred tax assets, alongafter netting with its related$2.1 million of valuation allowance, being classified from current assetsand write off the remaining $0.3 million of unamortized tax expenses deferred under the previous guidance to non-current assetsprovision for income taxes in the first quarter of fiscal 2017.
On July 27, 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner, 145 T.C. No.3 (2015) related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was entered by the U.S. Tax Court on December 1, 2015 (the “2015 Decision”). On February 19, 2016, the Consolidated Balance SheetU.S. Internal Revenue Service filed a notice of appeal in Altera Corp. v. Commissioner, 145 T.C. No. 3 (2015), to the Ninth Circuit Court of Appeals. The Ninth Circuit was to decide whether a regulation that mandates that stock-based compensation costs related to the intangible development activity of a qualified cost sharing arrangement (a “QCSA”) must be included in the joint cost pool of the QCSA (the “all costs rule”) is consistent with the arm’s length standard as set forth in Section 482 of December 31, 2015. Other than this reclassification, the adoptionInternal Revenue Code. On July 24, 2018, the Ninth Circuit Court of this accounting standard update did not haveAppeals issued an impactopinion in Altera Corp. v. Commissioner (the “Altera Opinion”) requiring related parties in an intercompany cost-sharing arrangement to share expenses related to share-based compensation. This opinion reversed the 2015 Decision of the United States Tax Court. The Ninth Circuit subsequently withdrew the opinion on August 7, 2018. Due to uncertainties surrounding the Company’s consolidated financial statements.ultimate resolution of the 2015 Decision, the Company continues to share expenses related to share-based compensation despite the 2015 Decision.
As of December 31, 2016,2018, the Company had $103.7$95.9 million, $23.1$38.0 million, $31.3$21.6 million and $23.1$48.0 million of foreign, U.S. federal, U.S. California state, and U.S. other states net operating loss carryforwards (“NOL”), respectively. There is no expiration to the utilization of the foreign NOL, while the U.S. federal and California NOL will begin to expire at various dates
beginning in 20172026 through 2036,2039, if not utilized. As
As of December 31, 2016,2018, the Company had U.S. federal and California state tax credit carryforwards of approximately $10.0$13.2 million and $32.6$34.9 million, respectively. If not utilized, the U.S. federal tax credit carryforwards will begin to expire in 2031, while the California tax credit forward will not expire. In addition, as of December 31, 2016, the Company had U.S. federal alternative minimum tax (“AMT”) credit carryforward of approximately $2.7 million, which will not expire.
The Company has not provided U.S. federal and California state income taxes as well asand foreign withholding taxes, on approximately $7.0$15.3 million of cumulative undistributed earnings for certain non-U.S. subsidiaries, because such earnings are intended to be indefinitely reinvested. Determination of the amount of unrecognized deferred tax liability for temporary differences related to investmentinvestments in these non-U.S. subsidiaries that are essentially permanent in duration is not practicable.
The Company applies the provisions of the applicable accounting guidance regarding accounting for uncertainty in income taxes, which requiresrequire application of a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits the recognition of a tax benefit measured at the largest amount of such tax benefit that, in our judgment, is more than fifty percent likely to be realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions to be recognized in earnings in the period in which such determination is made. The Company will continue to review its tax positions and provide for, or reverse, unrecognized tax benefits as issues arise. As of December 31, 2016,2018, the Company had $19.2$16.6 million of unrecognized future tax benefits that would favorably impact the effective tax rate in future periods if recognized. The following table summarizes the activityactivities related to the Company’s gross unrecognized tax benefits (in millions):
| | | | Year ended December 31, | Year ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| Balance at beginning of period | $ | 15.6 |
| | $ | 15.7 |
| | $ | 24.2 |
| $ | 18.8 |
| | $ | 19.2 |
| | $ | 15.6 |
|
| Increase in balance related to tax positions taken during current year | 4.6 |
| | 0.7 |
| | 1.0 |
| 1.0 |
| | 1.4 |
| | 4.6 |
|
| Decrease in balance as a result of a lapse of the applicable statues of limitations | (1.0 | ) | | (0.9 | ) | | (9.5 | ) | (0.1 | ) | | (2.2 | ) | | (1.0 | ) |
| Decrease in balance due to settlement with tax authorities | | (1.6 | ) | | — |
| | — |
|
| Increase in balance related to tax positions taken during prior years | — |
| | 0.3 |
| | — |
| 0.2 |
| | 1.8 |
| | — |
|
| Decrease in balance related to tax positions taken during prior years | — |
| | (0.2 | ) | | — |
| (0.3 | ) | | (1.4 | ) | | — |
|
| Balance at end of period | $ | 19.2 |
| | $ | 15.6 |
| | $ | 15.7 |
| $ | 18.0 |
| | $ | 18.8 |
| | $ | 19.2 |
|
The Company recognizes interest and penalties related to unrecognized tax positions in income tax expenses on the Consolidated Statements of Operations. The net interest and penalties reductioncharges recorded for the years ended December 31, 2016 2015 and 2014 related to unrecognized tax benefits was ($35,000), ($31,000), and ($1.0) million, respectively. The net reduction in interest and penalties in 2016, 2015 and 2014 was attributable to the reversal of accrued interest and penalties of $0.2 million, $0.2 million, and $1.8 million, respectively, due to decreases in unrecognized tax benefits resulting from the expiration of the statutes of limitations on the Company’s U.S. corporate tax returns for 2008 through 2012 tax years.2018, were not material. The Company had approximately $24.0 thousand and $0.5 million of accrued interest and penalties related to uncertain tax positions as of December 31, 20162018 and December 31, 2015.2017.
The Company files U.S. 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 2012 tax year. As a result, the Company released $1.1 million of related tax reserves, including accrued interests and penalties. Additionally, the Company released $9.0 million and $0.5 million of related tax reserves, including accrued interests and penalties, for the 2010 and 2011 tax years in 2014 and 2015 respectively, as a result of the expiration of the statute of limitations.
The 2013 through 20152018 tax years generally remain subject to examination by U.S. federal and most state tax authorities. In significant foreign jurisdictions, the 2007 through 2015 tax years generally remain subject to examination by their respective tax authorities. In the quarter ended September 30, 2016, the U.S. Internal Revenue Service concluded its examination of the Company’s income tax return for the tax year 2012, which commenced in August 2015. In addition, a subsidiary of the Company is under audit for the 2012 andfrom 2013 to 2017 tax years which commenced in the first quarter of 2015, by the IsraelSwiss tax authority. If, upon the conclusion of these audits,this audit, the ultimate determination of taxes owed in the United States or IsraelSwitzerland 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.
On July 27, 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner, 145 T.C. No.3 (2015) related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was entered by the U.S. Tax Court on December 1, 2015. On February 19, 2016, the U.S. Internal Revenue Service filed a notice of appeal in Altera Corp. v. Commissioner, 145 T.C. No. 3 (2015), to the Ninth Circuit Court of Appeal. The Ninth Circuit will decide whether a regulation that mandates that stock-based compensation costs related to the intangible development activity of a qualified cost sharing arrangement (a “QCSA”) must be included in the joint cost pool of the QCSA (the “all costs rule”) is consistent with the arm’s length standard as set forth in Section 482 of the Internal Revenue Code. The Company concluded that no adjustment to the consolidated financial statements as of December 31, 2016 is appropriate at this time due to the uncertainties with respect to the ultimate resolution of this case.
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 substantially met these various thresholds and the Switzerland tax holiday is effective through the end of 2018. The income tax benefits attributable to the Switzerland holiday were estimated to be approximately $0.4 million, $0.6 million and $0.7 million for each of the fiscal years 2016, 20152018, 2017 and 2014, respectively,2016, increasing diluted earnings per share by approximately $0.005, $0.007 and $0.008 for each of the fiscal years 2016, 20152018, 2017 and 2014,2016, respectively.
NOTE 16:15: NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss attributable to common stockholders for the applicable period by the weighted average number of common shares outstanding during the period. Potentially dilutive shares, consisting of outstanding stock options, restricted stock units, ESPP plan awards as well as the Notes, are excluded from the net loss per share computations when their effect is anti-dilutive.
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share amounts):
|
| | | | | | | | | | | |
| | December 31, |
| | 2016 | | 2015 | | 2014 |
| Numerator: | | | | | |
| Net loss | $ | (72,314 | ) | | $ | (15,661 | ) | | $ | (46,248 | ) |
| Denominator: | | | | | |
| Weighted average number of shares outstanding: | | | | | |
| Basic and diluted | 77,705 |
| | 87,514 |
| | 92,508 |
|
| Net loss per share: | | | | | |
| Basic and diluted | $ | (0.93 | ) | | $ | (0.18 | ) | | $ | (0.50 | ) |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Numerator: | | | | | |
| Net loss | $ | (21,035 | ) | | $ | (82,955 | ) | | $ | (72,314 | ) |
| Denominator: | | | | | |
| Weighted average number of shares outstanding: | | | | | |
| Basic and diluted | 85,615 |
| | 80,974 |
| | 77,705 |
|
| Net loss per share: | | | | | |
| Basic and diluted | $ | (0.25 | ) | | $ | (1.02 | ) | | $ | (0.93 | ) |
The diluted net loss per share is the same as basic net loss per share for the years ended December 31, 2018, 2017 and 2016, 2015 and 2014 becauseas the effect of inclusion of potential common shares are only considered when their effectoutstanding would be dilutive.have been anti-dilutive due to the Company’s net losses for the years presented. The following table presentssets forth the potential weighted common shares outstanding that were excluded from the computation of basic and diluted net loss per share calculations (in thousands):
| | | | December 31, | December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| Stock options | 5,295 |
| | 6,460 |
| | 7,115 |
| 3,327 |
| | 4,470 |
| | 5,295 |
|
| Restricted stock units | 2,536 |
| | 2,178 |
| | 2,066 |
| 2,997 |
| | 3,059 |
| | 2,536 |
|
| Stock purchase rights under the ESPP | 659 |
| | 518 |
| | 346 |
| 609 |
| | 620 |
| | 659 |
|
Warrants (1) | 206 |
| | — |
| | — |
| 1,268 |
| | 782 |
| | 206 |
|
Total | 8,696 |
| | 9,156 |
| | 9,527 |
| 8,201 |
| | 8,931 |
| | 8,696 |
|
(1) On September 26,In 2016, in connection with the execution of a product supply agreement pursuant to which an affiliate of Comcast Corporation (together with Comcast Corporation, “Comcast”) may, in its sole discretion, purchase from the Company licenses to certain of the Company’s software products, the Company granted Comcast a warrant to purchase shares of its common stock. (SeeSee Note 17, “Warrants”16, “Warrants,” for additional information).information. The warrants will have a dilutive impact on diluted net income per share when the Company’s average market price of its common stock for a given period exceeds the warrant exercise price of $4.76 per share.
Also excluded(2) Excluded from the table above are the Notes, which are convertible under certain conditions into an aggregate of 22,304,348 shares of common stock (seestock. See Note 12,11, “Convertible Notes, Other Debts and Capital Leases”Leases,” for additional
information on the Notes).Notes. Since the Company’s intent is to settle the principal amount of the Notes in cash, the treasury stock method is being used to calculate any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share when the Company’s average market price of its common stock for a given period exceeds the conversion price of $5.75 per share.
NOTE 17:16: WARRANTS
On September 26, 2016, the Company granted a warrant to purchase shares of common stock (the “Warrant”) to Comcast pursuant to which Comcast may, subject to certain vesting provisions, purchase up to 7,816,162 shares of the Company’s common stock subject to adjustment in accordance with the terms of the Warrant, for a per share exercise price of
$4.76. $4.76. Comcast may exercise the Warrant for cash or on a net share basis. The Warrant expires on September 26, 2023 or the prior consummation of a change of control of the Company.
Comcast’s right to purchase 781,617 shares vested as of the Warrant issuance date as an incentive to enter into the software license product supply agreement. Comcast’s rightsright to purchase 1,172,425 shares vested as of July 31, 2018 upon the acceptance and completion of field trials. Comcast’s right to purchase an additional 1,954,042781,617 shares will vest upon achievement of milestones that occur upon or prior to Comcast’s election for enterprise license pricing for certain of the Company’s CableOS software products. Such pricing would obligate Comcast to make certain total payments to the Company over the term of the product supply agreement. These rights are expected to vest in 2018.
Comcast’s rights to purchase an additional 1,172,425 shares in specified tranches vest when Comcast exceeds specified cumulative purchase amounts from the Company under the product supply agreement. Comcast’s rightsagreement and, for certain tranches, such purchases are made within specified time periods.
The Warrant is considered an incentive for Comcast to purchase certain of the remaining 3,908,081 shares vest in specified tranches atCompany’s products. Therefore the earlier of Comcast’s enterprise license pricing election (if completed by a certain date) or achievement of specified cumulative purchase amounts from the Company.
The $1.6 million value of the vested Warrant is recorded as an asset, which is recognized as a reduction in the Company’s net revenues in proportion to the pertinent sales to Comcast. The Warrant is considered indexed to the Company’s common stock and classified as stockholders’ equity based on its terms. Accordingly, the vested Warrant amounts are included in “Additional paid-in capital”.
Because the Warrants contain performance criteria, which include cumulative purchase amounts Comcast must achieve for the Warrants to vest, the final measurement date for the Warrants is the date on which the Warrants vest. Prior to the final measurement, when achievement of the performance criteria has been deemed probable, the estimated fair value of Warrants is being recorded as a reduction to the Company’s net revenue based on the estimated number of Warrants expected to vest, the proportion of purchases by Comcast within the period relative to the cumulative purchase levels required for the Warrants to vest and the then-current fair value of the related Warrants. To the extent that estimate change in the future as to the number of Warrants that will vest, as well as changes in the fair market value of the Warrants, a cumulative catch-up adjustment will be recorded in the period in which the estimates change. The value of the Warrant is recorded as a reduction in the Company’s net revenues to the extent such value does not exceed net revenues from pertinent sales to Comcast.
The fair value of the Warrant is determined using the Black-Scholes option pricing model. The assumptions utilized in the Black-Scholes model include the risk-free interest rate, expected volatility, and expected life in years. The risk-free interest rate is based on the U.S. Treasury yield curve rates with maturity terms similar to the expected life of the Warrant. Expected volatility is determined utilizing historical volatility over a period of time equal to the expected life of the Warrant. Expected life is equal to the remaining contractual term of the Warrant. The dividend yield is assumed to be zero since the Company has not historically declared dividends and does not have any plans to declare dividends in the future.
The portion of the Warrant which vested on September 26, 2016 had a fair value of $1.6 million. The fair value was determined using the Black-Scholes option valuation model using the following assumptions: expected term of 7 years, volatility of 42%, risk-free interest rate of 1.4%, and expected dividends of 0.0%. The Warrant is considered indexed
On July 31, 2018, pursuant to the Company’s common stockvesting provisions of the Warrant, an additional tranche of 1,172,425 shares vested and classifiedbecame exercisable upon the acceptance of completion of field trials by Comcast. The fair value of the Warrant on the date of vesting was estimated to be $2.3 million using the Black-Scholes option pricing model with the following assumptions: expected term of 5.2 years, volatility of 45%, risk-free interest rate of 2.9%, and expected dividends of 0.0%. The fair value of the Warrant was recorded as stockholders’ equity based on its terms. Accordingly, the vested Warrant amount was includeda component of “Other long-term assets” with an equal offset to “Additional paid in “Additional paid-in capital” on the Company’s Consolidated Balance Sheets andSheets. The Company will not be remeasured in the future periods.
The Warrant is considered an incentive for Comcast to purchase certain of the Company’s products. Therefore the value of the Warrant will be recordedamortize this asset as a reduction in the Company’s net revenues in proportion to the extent such value does not exceed net revenues from pertinent sales to Comcast. The portion of
During the Warrant which vested on September 26,year ended December 31, 2018, 2017 and 2016, had a value of $1.6the Company recorded $1.2 million, $0.2 million and is deemed a customer incentive paid upfront and in the fourth quarter of 2016, $0.4 million, of this prepaid incentive has been recordedrespectively as a reduction to the Company’s 2016 net revenues from Comcast. The remaining $1.2 million of this prepaid incentive is recorded as an asset under “Prepaid expenses and other current assets” on the Company’s Consolidated Balance Sheet as of December 31, 2016. The Company considers this asset to be recoverable based on the expectation of Comcast’s future purchasein connection with amortization of the pertinent products. The asset will be assessed for impairment if no longer deemed recoverable.Warrant.
NOTE 18:17: SEGMENT INFORMATION, GEOGRAPHIC INFORMATION AND CUSTOMER CONCENTRATION
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 CODM, which for the Company is its Chief Executive Officer, in deciding how to allocate resources and assess performance. Based on our internal reporting structure, the Company consists of two operating segments: Video and Cable Edge.Access. The operating segments were determined based on the nature of the products offered. The Video segment sellsprovides video processing and production and playout solutions and services worldwide to broadcast and media companies, streaming new media companies, cable operators, and satellite and telecommunications (telco) Pay-TV service providers. The Cable EdgeAccess segment sellsprovides CableOS cable edgeaccess solutions and related services to cable operators globally.
On February 29, 2016, the Company completed its acquisition of 100% of the outstanding equity of TVN and assigned TVN to its Video operating segment.
The following table provides summary financial information by reportable segment (in thousands):
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2018 | | 2017 (1) | | 2016 |
| Video | | | | | |
| Revenue | $ | 313,828 |
| | $ | 319,473 |
| | $ | 351,489 |
|
| Gross profit | 178,170 |
| | 173,414 |
| | 194,044 |
|
| Operating income (loss) | 26,170 |
| | (2,024 | ) | | 11,963 |
|
| Cable Access | | | | | |
| Revenue | $ | 89,730 |
| | $ | 38,773 |
| | $ | 54,422 |
|
| Gross profit | 39,029 |
| | 8,892 |
| | 21,174 |
|
| Operating loss | (1,756 | ) | | (23,154 | ) | | (12,131 | ) |
| Total | | | | | |
| Revenue | $ | 403,558 |
| | $ | 358,246 |
| | $ | 405,911 |
|
| Gross profit | 217,199 |
| | 182,306 |
| | 215,218 |
|
| Operating income (loss) | 24,414 |
| | (25,178 | ) | | (168 | ) |
(1) The Company has historically employed an aggregate allocation methodology based on total revenues to attribute professional services revenue and sales expenses between its Video and Cable Access segments. Beginning in the fourth quarter of 2017, the Company prospectively changed to a more precise attribution methodology as the activities of selling and supporting the CableOS solution have become increasingly distinct from those of Video solutions. The impact of making this change for the fiscal year ended December 31, 2017 compared to the Company’s historical approach was an increase in operating loss of $5.9 million from the Video segment and a corresponding decrease in operating loss of the Cable Access segment. The Company believes that the updated allocation methodology provides greater clarity regarding the operating metrics of the Video and Cable Access business segments.
A reconciliation of the Company’s consolidated segment operating income (loss) to consolidated loss before income taxes is as follows (in thousands):
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2018 | | 2017 (1) | | 2016 (1) |
| Total segment operating income (loss) | $ | 24,414 |
| | $ | (25,178 | ) | | $ | (168 | ) |
Unallocated corporate expenses (1) | (3,769 | ) | | (20,767 | ) | | (38,972 | ) |
| Stock-based compensation | (17,289 | ) | | (16,610 | ) | | (13,060 | ) |
| Amortization of intangibles | (8,367 | ) | | (8,322 | ) | | (14,836 | ) |
| Consolidated loss from operations | (5,011 | ) | | (70,877 | ) | | (67,036 | ) |
| Non-operating expense, net | (11,937 | ) | | (13,830 | ) | | (13,394 | ) |
| Loss before income taxes | $ | (16,948 | ) | | $ | (84,707 | ) | | $ | (80,430 | ) |
(1) For the years ended December 31, 2017 and 2016, the unallocated corporate expenses included TVN acquisition- and integration-related costs, TVN VDP costs (see Note 10, “Restructuring and Related charges-TVN VDP,” for more information on TVN VDP ) and Cable Access product line inventory obsolescence costs, totaling $7.9 million and $32.2 million, respectively. In addition, in fiscal 2017, the unallocated corporate expenses included $8.0 million of Avid litigation settlement cost and associated legal fees (see Note 19, “Legal Proceedings,” for more information). The remaining unallocated corporate expenses for all years presented above include primarily other restructuring charges and excess facilities charges.
Unallocated Corporate Expenses
Together with amortization of intangibles and stock-based compensation, the Company does not allocate amortization of intangibles, stock-based compensation, restructuring and related charges, TVN acquisition- and integration-related costs, and certain other non-recurring charges to the operating income (loss) 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.
On February 29, 2016, the Company completed its acquisition
Geographic Information
The followinggeographic distribution of Harmonic’s revenue and property and equipment, net is summarized in the tables provide summary financial information by reportable segmentbelow (in thousands):
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Net revenue: |
|
| |
|
| |
|
|
| Video | $ | 351,489 |
| | $ | 291,779 |
| | $ | 326,756 |
|
| Cable Edge | 54,422 |
| | 85,248 |
| | 106,801 |
|
| Total consolidated net revenue | $ | 405,911 |
| | $ | 377,027 |
| | $ | 433,557 |
|
| | | | | | |
| Operating income (loss): |
|
| |
|
| |
|
|
| Video | $ | 11,963 |
| | $ | 13,529 |
|
| $ | 18,073 |
|
| Cable Edge | (12,131 | ) | | (1,599 | ) | | 1,239 |
|
| Total segment operating income (loss) | (168 | ) | | 11,930 |
| | 19,312 |
|
| Unallocated corporate expenses | (38,972 | ) | | (2,794 | ) | | (3,076 | ) |
| Stock-based compensation | (13,060 | ) | | (15,582 | ) | | (17,287 | ) |
| Amortization of intangibles | (14,836 | ) | | (6,502 | ) | | (20,520 | ) |
| Loss from operations | (67,036 | ) | | (12,948 | ) | | (21,571 | ) |
| Non-operating expense, net | (13,394 | ) | | (3,120 | ) | | (224 | ) |
| Loss before income taxes | $ | (80,430 | ) | | $ | (16,068 | ) | | $ | (21,795 | ) |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2018 | | 2017 | | 2016 |
Net revenue (1): | | | | | |
| United States | $ | 181,965 |
| | $ | 131,773 |
| | $ | 171,016 |
|
| Other countries | 221,593 |
| | 226,473 |
| | 234,895 |
|
| Total | $ | 403,558 |
| | $ | 358,246 |
| | $ | 405,911 |
|
Unallocated corporate expenses include certain corporate-level operating expenses and charges such as restructuring and related charges and excess facilities charges. Additionally, the unallocated corporate expenses in 2016 included $16.9 million of TVN acquisition- and integration-related costs (see Note 3, “Business Acquisition,” of the notes(1) Revenue is attributed to our Consolidated Financial Statements for additional information) and $13.1 million of restructuring costs related to the TVN VDP (see Note 11, “Restructuring and Related charges-TVN VDP,” of the notes to our Consolidated Financial Statements for additional information) and an inventory obsolescence charge of approximately $4.0 million recorded for some older Cable Edge product lines in accordance with the Company’s policy for excess and obsolete inventory and also as part of our strategic plan to re-position and dedicate the Company’s primary Cable Edge resources to its new CableOS products.
Geographic Information
Revenue by geographic region,countries based on the location at which each sale originates, and property and equipment, net by geographic region, are summarized as follows (in thousands):of the customer.
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Net revenue: | | | | | |
| United States | $ | 171,016 |
| | $ | 175,466 |
| | $ | 206,610 |
|
| Other countries | 234,895 |
| | 201,561 |
| | 226,947 |
|
| Total | $ | 405,911 |
| | $ | 377,027 |
| | $ | 433,557 |
|
Other than the U.S., no single country accounted for 10% or more of the Company’s net revenues for the years ended December 31, 2016, 20152018, 2017 and 2014.2016.
| | | | As of December 31, | As of December 31, |
| | 2016 | | 2015 | 2018 | | 2017 |
| Property and equipment, net: | | | | | | |
| United States | $ | 15,197 |
| | $ | 17,086 |
| $ | 10,376 |
| | $ | 13,786 |
|
| Israel | 9,966 |
| | 7,560 |
| 6,975 |
| | 8,904 |
|
| France | 4,872 |
| | — |
| 3,519 |
| | 4,573 |
|
| Other countries | 2,129 |
| | 2,366 |
| 1,451 |
| | 2,002 |
|
| Total | $ | 32,164 |
| | $ | 27,012 |
| $ | 22,321 |
| | $ | 29,265 |
|
Customer Concentration
DuringNet revenue from Comcast accounted for 15% of the Company’s total net revenue during the year ended December 31, 2018. During the years ended December 31, 2017 and 2016, no single customer accounted for more than 10% of our net revenue. Net revenue from Comcast accounted for 12% and 16%, respectively, of the Company’s total net revenue during the years ended December 31, 2015 and 2014. Other than Comcast, no customer accounted for 10% or more of the Company’s total net revenue for fiscal years 2015 and 2014.
NOTE 19:18: COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities under non-cancelable operating leases which expire at various dates through April 2027.June 2028. In addition, the Company leases vehicles and phones in Israel under non-cancelable operating leases, the last of which expires in 2019.2020. Total rent expense related to these operating leases was $9.7$10.1 million, $9.0$10.2 million and $9.89.7 million for the years ended December 31, 20162018, 20152017 and 20142016, respectively. Future minimum lease payments under non-cancellable operating leases at December 31, 20162018, are as follows (in thousands):
| | | | Operating Leases | Operating Leases |
| Year ending December 31, | | |
| 2017 | $ | 12,971 |
| |
| 2018 | 12,361 |
| |
| 2019 | 10,631 |
| $ | 13,515 |
|
| 2020 | 7,407 |
| 10,139 |
|
| 2021 | 2,020 |
| 4,088 |
|
| 2022 | | 2,523 |
|
| 2023 | | 2,220 |
|
| Thereafter | 7,923 |
| 6,694 |
|
| Total minimum payments | $ | 53,313 |
| $ | 39,179 |
|
Warranty
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. Activities for the Company’s warranty accrual for each fiscal year, which is included in accrued and other current liabilities, is summarized below (in thousands):
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Balance at beginning of period | $ | 3,913 |
| | $ | 4,242 |
| | $ | 3,606 |
|
| Accrual for current period warranties | 5,655 |
| | 5,470 |
| | 7,278 |
|
| Balance assumed from TVN acquisition | 1,012 |
| | — |
| | — |
|
| Changes in liability related to pre-existing warranties | (173 | ) | | (92 | ) | | 3 |
|
| Warranty costs incurred | (5,545 | ) | | (5,707 | ) | | (6,645 | ) |
| Balance at end of period | $ | 4,862 |
| | $ | 3,913 |
| | $ | 4,242 |
|
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Balance at beginning of period | $ | 4,381 |
| | $ | 4,862 |
| | $ | 3,913 |
|
| Accrual for current period warranties | 6,612 |
| | 5,117 |
| | 5,482 |
|
| Balance assumed from TVN acquisition | — |
| | — |
| | 1,012 |
|
| Warranty costs incurred | (6,124 | ) | | (5,598 | ) | | (5,545 | ) |
| Balance at end of period | $ | 4,869 |
| | $ | 4,381 |
| | $ | 4,862 |
|
Bank Guarantees and standby Letters of Credit
As of December 31, 2018 and Guarantees
The Company’s financial2017, the Company has outstanding bank guarantees consisted ofand standby letters of credit in aggregate of $2.3 million and $2.7 million, respectively, consisting of building leases and performance bonds issued to customers.
During 2017, one of the Company’s subsidiaries entered into a $2.0 million credit facility with a foreign bank for the purpose of issuing performance guarantees. As of December 31, 2016,The credit facility is secured by a $2.2 million guarantee issued by the Company had $1.0 million of standby letters ofparent company. There were no amounts outstanding under this credit outstanding primarily related to its credit card facility in Switzerland and, to a lesser extent, performance bond and state requirements imposed on employers. In addition, the Company had $1.9 million of bank guarantees outstanding as of December 31, 2016, of which $1.2 million was related to a building lease for the TVN French Subsidiary, $0.4 million was related to the building leases in Israel,2018 and the remaining amount was mostly related to performance bonds issued to customers of the TVN French Subsidiary.December 31, 2017.
Indemnification
The Company is obligated to indemnify it’sits officers and its directors pursuant to its bylaws and contractual indemnity agreements. The Company 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 the indemnification provisions through December 31, 20162018.
Royalties
The Company has licensed certain technologies from various companies. It incorporates these technologies into its own products and is required to pay royalties for such use, usually based on shipment of the related products. In addition, the Company has obtained research and development grants under various Israeli government programs that require the payment of royalties on sales of certain products resulting from such research. DuringRoyalty expenses were $4.2 million, $5.2 million and $4.1 million for the years ended December 31, 2016, 20152018, 2017 and 2014 royalty expenses were $4.1 million, $2.9 million and $3.2 million,2016, respectively, and they are included in product cost of revenue in the Company’s Consolidated Statements of Operations.
Purchase Obligations
The Company relies on a limited number of contract manufacturers and suppliers to provide manufacturing services for a substantial majority of its products. Obligations to purchase inventory and other commitments are generally expected to be fulfilled within one year. The Company had approximately $24.0$35.9 million of non-cancelable commitments to purchase inventories and other commitments as of December 31, 20162018.
NOTE 20:19: LEGAL PROCEEDINGS
In October 2011, Avid Technology, Inc. (“Avid”) filed a complaint in the United States District Court for the District of Delaware alleging that Harmonic’s Media Grid product infringes two patents held by Avid. A jury trial on this complaint commenced on January 23, 2014 and, on February 4, 2014, the jury returned a unanimous verdict in favor of us, rejecting Avid’s infringement allegations in their entirety. In January 2015, Avid filed an appeal with respect to the jury’s verdict with the Federal Circuit. In January 2016, the Federal Circuit issued an order vacating the verdict of noninfringement and remanding the case to the trial court for a new trial on infringement.
In June 2012, Avid served a subsequent complaint in the United States District Court for the District of Delaware alleging that the Company’s Spectrum product infringes one patent held by Avid. The complaint sought 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. In July 2014, the PTAB issued a decision finding claims 1-10 invalid and claims 11-16 not invalid. We filed an appeal with respect to the PTAB’s decision on claims 11-16 in September 2014, and the Federal Circuit affirmed the PTAB’s decision in April 2016.
In July 2017, the court issued a scheduling order consolidating both cases and setting the trial date for November 6, 2017.
On October 19, 2017, the parties agreed to settle the consolidated cases by entering into a settlement and patent portfolio cross-license agreement, and the cases were dismissed with prejudice. In connection with the agreement, the Company recorded a $6.0 million litigation settlement expense in “Selling, general and administrative expenses” in the Company’s 2017 Consolidated Statement of Operations. Of the associated $6.0 million settlement liability, $2.5 million was paid in October 2017 and the remaining $1.5 million and $2.0 million will be paid in the second quarter of 2019 and the third quarter of 2020, respectively.
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 probable 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
Table 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 the Company, rejecting Avid’s infringement allegations in their entirety. On May 23, 2014, Avid filed a post-trial motion asking the court to set aside the jury’s verdict, and the judge issued an order on December 17, 2014, denying the motion. On January 5, 2015, Avid filed an appeal with respect to the jury’s verdict with the Federal Circuit, which was docketed on January 9, 2015, as Case No. 2015-1246. Avid filed its opening brief with respect to this appeal on March 24, 2015, the Company filed its response brief on May 7, 2015, and Avid filed its reply brief on June 16, 2015. Oral arguments were held on December 11, 2015. On January 29, 2016, the Federal Circuit issued an order vacating the verdict of noninfringement and remanding the case to the trial court for a new trial on infringement. On February 26, 2016, Harmonic filed a request for rehearing and rehearing en banc at the Federal Circuit. On March 31, 2016, the Federal Circuit denied the request for rehearing and rehearing en banc and a mandate issued on April 8, 2016. The court conducted a supplemental claim construction hearing on May 27, 2016 and issued a claim construction order on June 29, 2016. On June 17, 2016, Harmonic filed requests for ex parte reexaminations for the ’808 and ’309 patents with the United States Patent and Trademark Office (“USPTO”). The USPTO ordered reexamination of both the ’309 and ’808 patents in August 2016. The USPTO issued a Non-Final Office Action on November 25, 2016 for the ’309 patent, including rejecting all challenged claims. The USPTO issued a Non-Final Office Action for the ’808 patent on December 15, 2016, rejecting all challenged claims. The Patent Owner filed its response in both reexaminations on February 15, 2017. A status conference was held with the District Court on February 23, 2017.Content In June 2012, Avid served a subsequent complaint in the United States District Court for the District of Delaware alleging that the Company’s Spectrum product infringes one patent held by Avid. The complaint seeks injunctive relief and unspecified damages. In September 2013, the U.S. Patent Trial and Appeal Board (“PTAB”) authorized an inter partes review to be instituted as to claims 1-16 of the patent asserted in this second complaint. A hearing before the PTAB was conducted on May 20, 2014. On July 10, 2014, the PTAB issued a decision finding claims 1-10 invalid and claims 11-16 not invalid. The Company filed an appeal with respect to the PTAB’s decision on claims 11-16 on September 11, 2014. The appeal was docketed with the Federal Circuit on October 22, 2014, as Case No. 2015-1072, and the Company filed its opening brief with respect to this appeal on January 29, 2015. Avid and PTAB each filed a response brief on April 27, 2015, and the Company filed a reply brief on May 28, 2015. Oral arguments were held on October 8, 2015. The Federal Circuit issued an order on March 1, 2016, affirming the PTAB’s decision and a mandate issued on April 7, 2016. On July 25, 2016, the court issued a scheduling order for the case and set the trial date for November 6, 2017.
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 20: SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth our unaudited quarterly Consolidated Statement of Operations data for each of the eight quarters ended December 31, 20162018. In management’s opinion, the data has been prepared on the same basis as the audited Consolidated Financial Statements included in this report, and reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data.
| | | | Fiscal 2016 (1) | Fiscal 2018 |
| | 1st Quarter (6) | | 2nd Quarter | | 3rd Quarter (6) | | 4th Quarter (3) (5) | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter |
| | (In thousands, except per share amounts) | (In thousands, except per share amounts) |
| Quarterly Data: | | | | | | | | | | | | | | |
| Net revenue | $ | 81,832 |
| | $ | 109,571 |
| | $ | 101,406 |
| | $ | 113,102 |
| $ | 90,127 |
| | $ | 99,160 |
| | $ | 100,616 |
| | $ | 113,655 |
|
Gross profit (4) | 40,654 |
| | 51,040 |
| | 51,363 |
| | 57,693 |
| |
Net loss (2) | $ | (25,180 | ) | | $ | (20,679 | ) | | $ | (16,012 | ) | | $ | (10,443 | ) | |
| Net loss per share: | | | | | | | | |
Gross profit (2) | | 47,183 |
| | 51,603 |
| | 50,102 |
| | 60,321 |
|
Net income (loss) (1) (3) (4) | | (13,694 | ) | | (2,913 | ) | | (7,758 | ) | | 3,330 |
|
| Net income (loss) per share: | |
|
| |
|
| |
|
| |
|
|
| Basic and diluted | | $ | (0.16 | ) | | $ | (0.03 | ) | | $ | (0.09 | ) | | $ | 0.04 |
|
| Shares used in per share calculations: | | | | | | | | |
| Basic | $ | (0.33 | ) | | $ | (0.27 | ) | | $ | (0.21 | ) | | $ | (0.13 | ) | 83,912 |
| | 85,304 |
| | 86,321 |
| | 86,846 |
|
| Diluted | $ | (0.33 | ) | | $ | (0.27 | ) | | $ | (0.21 | ) | | $ | (0.13 | ) | 83,912 |
| | 85,304 |
| | 86,321 |
| | 89,028 |
|
| Shares used in per share calculations: | | | | | | | | |
| Basic and diluted | 76,996 |
| | 77,342 |
| | 78,092 |
| | 78,389 |
| |
| | Fiscal 2015 | Fiscal 2017 |
| | 1st Quarter (6) | | 2nd Quarter | | 3rd Quarter | | 4th Quarter (5) | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter |
| | (In thousands, except per share amounts) | (In thousands, except per share amounts) |
| Quarterly Data: | | | | | | | | | | | | | | |
| Net revenue | $ | 104,016 |
| | $ | 103,103 |
| | $ | 83,305 |
| | $ | 86,603 |
| $ | 82,943 |
| | $ | 82,315 |
| | $ | 92,014 |
| | $ | 100,974 |
|
Gross profit (4) | 55,028 |
| | 54,385 |
| | 46,231 |
| | 47,068 |
| |
| Net loss | $ | (2,657 | ) | | $ | (994 | ) | | $ | (4,811 | ) | | $ | (7,199 | ) | |
Gross profit (2) | | 40,408 |
| | 33,815 |
| | 47,025 |
| | 48,572 |
|
Net loss (1) (4) | | (24,027 | ) | | (31,500 | ) | | (15,583 | ) | | (11,516 | ) |
| Net loss per share: | | | | | | | |
|
| |
|
|
|
|
|
|
|
|
| Basic | $ | (0.03 | ) | | $ | (0.01 | ) | | $ | (0.05 | ) | | $ | (0.08 | ) | |
| Diluted | $ | (0.03 | ) | | $ | (0.01 | ) | | $ | (0.05 | ) | | $ | (0.08 | ) | |
| Basic and diluted | | $ | (0.30 | ) | | $ | (0.39 | ) | | $ | (0.19 | ) | | $ | (0.14 | ) |
| Shares used in per share calculations: | | | | | | | | | | | | | | |
| Basic and diluted | 88,655 |
| | 88,426 |
| | 87,991 |
| | 84,932 |
| 79,810 |
| | 80,590 |
| | 81,445 |
| | 82,014 |
|
(1) On February 29, 2016, the Company completed the acquisition of TVN and applied the acquisition method of accounting for the business combination. The selected quarterly financial data for the year ended December 31, 2016 of the combined entity includes 10 months of operating results of TVN beginning March 1, 2016.
(2) In 2016, as a result of the TVN acquisition,2017, the Company incurred acquisition-andTVN acquisition- and integration-related expenses of $3.0$2.2 million, $3.4$0.5 million, $5.3$0.1 million and $5.2$0.1 million induring the first through fourth quarter of 2016, respectively.2017. These costs consisted of acquisition-related costs which include outside legal, accounting and other professional services as well as integration-related costs which include incremental costs resulting from the TVN acquisition that are not expected to generate future benefits once the integration is fully consummated. These costs are expensed as incurred.
(3) In 2016, as part of the TVN integration plan,incurred and the Company established thedid not incur any TVN VDP to enable the French employees of TVN to voluntarily terminate with certain benefits. The plan was approved by the applicable French authoritiesacquisition- and a total of 83 employees applied for the TVN VDP and were duly approved by the Companyintegration-related expenses in the fourth quarter of 2016. Based on the applicable accounting guidance, the Company recorded a charge of $13.1 million for TVN VDP in the fourth quarter of 2016. This charge is offset partially by a $2.0 million pension curtailment gain. (See Note 11, “Restructuring and related charges-TVN VDP,” of the notes to the Consolidated Financial Statements for additional information on the TVN VDP and pension curtailment gain).2018.
(4)
(2) Gross margin decreased to 49.7% in49.8% during the third quarter of 2018 compared to 52.0% during the second quarter of 2018
and increased to 53.1% during the fourth quarter primarily as a result of product mix. Gross margin decreased to 41.1% during the second quarter of 2017 compared to 48.7% during the first quarter of 2016 compared to 54.3% in the fourth quarter of 2015,2017, primarily due to a $4.8 million decline in revenue resulting mostly from timing in revenue recognitionlower service margins and higher inventory obsolescence charges for certain projects. Gross margin decreased to 46.6% in the second quarter of 2016 compared to 49.7% in the first quarter of 2016, primarilyCompany’s legacy broadcast video inventory due to the inclusion of TVN’s operating results which resulted in higher material, labor and overhead costs attributable to the additional headcount and facilities acquired in connection with the TVN acquisition,reduced demand, as well as an approximately $4.5 millionhigher inventory obsolescence charge for someour older Cable Edge product lines. GrossThe factors negatively impacting the gross margin increased to 50.7% induring the second quarter of 2017 were mostly absent during the third quarter of 2016
2017, and together with a more favorable product mix, the gross margin increased to 51.1% during the third quarter of 2017 compared to 46.6% in41.1% during the second quarter of 2016 primarily due to the absence of the Cable Edge inventory obsolescence charge in the third quarter of 2016.2017.
(5) A history of operating losses in recent years has led to uncertainty with respect to the Company’s ability to realize certain net deferred tax assets. In 2015, the Company recorded a valuation allowance against all of its U.S. net deferred tax assets, resulting in an increase in valuation allowance of $3.1 million in
(3) During the fourth quarter of 2015. This increase in valuation allowance is offset partially by2018, the release of $0.9 million valuation allowance against one of its Israel subsidiariesCompany recorded net income primarily due to cumulative income generated in recent years. Inhigher revenues with stronger gross margins of 53.1% coupled with reduced operating expenses as a result of our vigilant cost management.
(4) During the fourth quarter of 2016,2018, the Company recorded an additional valuation allowance of $18.3 million against all of the United States deferred tax assets as well as its net operating losses generated in 2016. This increase in valuation allowance is offset partially by the release of $8.4released $1.0 million of valuation allowance associated with one of Company’s foreign subsidiaries. During the TVN French Subsidiary. Due to a change in its business model, as of December 31, 2016, the TVN French Subsidiary is forecasted to generate pretax income in future periods.
(6) In the firstthird and thirdfourth quarter of 2016,2017, the Company recorded impairment charges$2.4 million of $1.5 million and $1.2 million, respectively,tax benefit associated with the release of tax reserves for its investment in Vislink. In the first quarter of 2015, the Company recorded an impairment charge of $2.5 million for its investment in VJU. These impairment charges were recordeduncertain tax positions as a result of the Company’s assessment which concluded that their impairmentexpiration of statute of limitations and $2.5 million of tax benefits associated with the alternative minimum tax refund related to the TCJA, respectively. These tax benefits were on an other-than-temporary basis. (See Note 5, “Investmentsoffset by $3.0 million tax expense recorded during the fourth quarter of 2017, related to tax law changes in Other Equity Securities,”one of the notes to the Consolidated Financial Statements for additional information).Company’s foreign subsidiaries.
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| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
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| Item 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company’s assessment, management has concluded that its internal control over financial reporting was effective as of December 31, 2016.
We acquired TVN on February 29, 2016 and are in the process of integrating the acquired business of TVN entities into our overall internal control over financial reporting process. As of December 31, 2016 certain TVN entities have been integrated into our internal control over financial reporting process. For those TVN entities which are not integrated, their post acquisition revenue included in the year ended December 31, 2016 accounted for approximately 12% of our consolidated net revenue for the year ended December 31, 2016 and their total assets as of December 31, 2016 accounted for approximately 20% of our consolidated total assets as of December 31, 2016. We excluded the TVN business for the non-integrated TVN entities from the assessment of internal control over financial reporting as of December 31, 2016.2018.
The Company’s independent registered public accounting firm, PricewaterhouseCoopersArmanino LLP, has issued a report onaudited the effectiveness of the Company’s internal control over financial reporting, as stated in their report which appears in Part II, Item 8 of this Form 10-K.
Changes in Internal Control over Financial Reporting
There waswere no changechanges in our internal control over financial reporting that occurred during theour fourth quarter of fiscal year 20162018, which were identified in connection with management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
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| Item 9B. | OTHER INFORMATION |
None.
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K pursuant to Instruction G to Exchange Act Form 10-K, and the Registrant will file its definitive Proxy Statement for its 20172019 Annual Meeting of Stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the “2017“2019 Proxy Statement”), not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certain information included in the 20172019 Proxy Statement is incorporated herein by reference.
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| Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this item will be set forth in the 20172019 Proxy Statement and is incorporated herein by reference.
Harmonic has adopted a Code of Business Conduct and Ethics for Senior Operational and Financial Leadership (the “Code”), which that applies to itsall employees, including Harmonic’s Chief Executive Officer, its Chief Financial Officer itsand Corporate Controller and other senior operational and financial management.Controller. The Code is available on the Company’s website at www.harmonicinc.com.
Harmonic intends to satisfy the disclosure requirement under Form 8-K regarding an amendment to, or waiver from, a provision of this Code of Ethics by posting such information on our website, at the address specified above, and, to the extent required by the listing standards of The NASDAQ Global Select Market, by filing a Current Report on Form 8-K with the Securities and Exchange Commission disclosing such information.
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| Item 11. | EXECUTIVE COMPENSATION |
The information required by this item will be set forth in the 20172019 Proxy Statement and is incorporated herein by reference.
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| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information related to security ownership of certain beneficial owners and security ownership of management and related stockholder matters will be set forth in the 20172019 Proxy Statement and is incorporated herein by reference.
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| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this item will be set forth in the 20172019 Proxy Statement and is incorporated herein by reference.
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| Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this item will be set forth in the 20172019 Proxy Statement and is incorporated herein by reference.
PART IV
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| Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
1. Financial Statements. See Index to Consolidated Financial Statements in Item 8 on page 57 of this Annual Report on Form 10-K.
2. Financial Statement Schedules. Financial statement schedules have been omitted because the information is not required to be set forth herein, is not applicable or is included in the financial statements or the notes thereto.
3. Exhibits. The documents listed in the Exhibit Index of this Annual Report on Form 10-K are filed herewith or are incorporated by reference in this Annual Report on Form 10-K, in each case as indicated therein.
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| |
Exhibit Number | Description |
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| 3.1(ii) | |
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| 3.2 (xv) | |
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| 4.1(i) | Form of Common Stock Certificate |
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| 4.2(iii) | |
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| 4.3(viii) | |
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| 4.4(vii) | |
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| 4.5(x)† | |
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| 10.1(i)* | Form of Indemnification Agreement |
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| 10.2(vii)* | |
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| 10.3(xiv)* | |
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| 10.4(xiv)* | |
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| 10.5(xiii)* | |
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| 10.6(xiii)* | |
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| 10.8(vii)* | |
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| 10.9(iv) | |
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| 10.10(iv) | |
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| 10.11(iv) | |
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| 10.12 (xii) | |
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| 10.13(v) | |
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| 10.15(vi)* | |
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| 10.16(xi) | Put Option Agreement, dated as of December 7, 2015, by and between Harmonic Inc. and Mr. Eric Louvet, Mr. Eric Gallier, Mr. Jean-Marc Guiot, Mr. Claude Perron, Mrs. Crystele Trévisan-Jallu, Mrs. Delphine Sauvion, Mr. Marc Procureur, Mr. Christophe Delahousse, Mr. Hervé Congard, Mr. Arnaud de Puyfontaine, FPCI Winch Capital 3, Montalivet Networks and FPCI CIC Mezzanine 3 |
| |
| 10.18(xi) | Sale and Purchase Agreement, dated as of February 11, 2016, by and between Harmonic International AG and Mr. Eric Louvet, Mr. Eric Gallier, Mr. Jean-Marc Guiot, Mr. Claude Perron, Mrs. Crystele Trévisan-Jallu, Mrs. Delphine Sauvion, Mr. Marc Procureur, Mr. Christophe Delahousse, Mr. Hervé Congard, Mr. Arnaud de Puyfontaine, FPCI Winch Capital 3, Montalivet Networks and FPCI CIC Mezzanine 3 for the acquisition of Thomson Video Networks |
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| 10.19(x) | |
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| 21.1 | |
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| 23.1 | |
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| 23.2 | |
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| 31.1 | |
| |
|
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| 31.2 | |
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| 32.1 | |
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| 32.2 | |
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| 101 | The following materials from Registrant’s Annual Report on Form 10-K for the year ended December 31, 2018, formatted in Extensible Business Reporting Language (XBRL) includes: Consolidated Balance Sheets at December 31, 2018 and December 31, 2017; (ii) Consolidated Statements of Operations for the Years Ended December 31, 2018, December 31, 2017 and December 31, 2016; (iii) Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2018, December 31, 2017 and December 31, 2016; (iv) Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018, December 31, 2017 and December 31, 2016; (v) Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, December 31, 2017 and December 31, 2016; and (vi) Notes to Consolidated Financial Statements. |
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| * | Indicates a management contract or compensatory plan or arrangement relating to executive officers or directors of the Company. |
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| † | Registrant has omitted portions of this exhibit and filed such exhibit separately with the Securities and Exchange Commission pursuant to a grant of confidential treatment under Rule 406 promulgated under the Securities Act. |
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| (i) | Previously filed as an Exhibit to the Company’s Registration Statement on Form S-1 No. 33-90752. |
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| (ii) | Previously filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. |
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| (iii) | Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated July 25, 2002. |
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| (iv) | Previously filed as an Exhibit to the Company’s Current Annual Report on Form 10-K for the year ended December 31, 2008. |
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| (v) | Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated December 18, 2009. |
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| (vi) | Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated December 21, 2017. |
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| (vii) | Previously filed as an Exhibit to the Company’s Registration Statement on Form S-8, dated June 22, 2017. |
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| (xiii) | Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated December 14, 2015. |
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| (ix) | Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated September 26, 2016. |
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| (x) | Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated September 26, 2016. |
(xi) Previously filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
| |
| (xii) | Previously filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. |
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| (xiii) | Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated March 26, 2018. |
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| (xiv) | Previously filed as an Exhibit to the Company’ Registration Statement on Form S-8, dated June 25, 2018. |
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| (xv) | Previously filed as an exhibit to the Company’s Periodic Report on Form 10-Q, dated November 5, 2018. |
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| Item 16. | FORM 10-K SUMMARY |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant, Harmonic Inc., a Delaware corporation, has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on March 3, 2017.1, 2019.
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| HARMONIC INC. |
| | |
| By: | /s/ PATRICK J. HARSHMAN |
| | Patrick J. Harshman |
| | President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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| | |
| Signature | Title | Date |
| | | |
| /s/ PATRICK J. HARSHMAN | President & Chief Executive Officer (Principal Executive Officer) | March 3, 20171, 2019 |
| (Patrick J. Harshman) | | |
| | | |
/s/ HAROLD L. COVERTSANJAY KALRA | Chief Financial Officer | March 3, 20171, 2019 |
(Harold L. Covert)Sanjay Kalra) | (Principal Financial and Accounting Officer) | |
| | | |
| /s/ PATRICK GALLAGHER | Chairman | March 3, 20171, 2019 |
| (Patrick Gallagher) | | |
| | | |
| /s/ E. FLOYD KVAMME | Director | March 3, 20171, 2019 |
| (E. Floyd Kvamme) | | |
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/s/ WILLIAM REDDERSEN | Director | March 3, 2017 |
(William Reddersen) | | |
| | | |
| /s/ SUSAN G. SWENSON | Director | March 3, 20171, 2019 |
| (Susan G. Swenson ) | | |
| | | |
| /s/ MITZI REAUGH | Director | March 3, 20171, 2019 |
| (Mitzi Reaugh) | | |
| | | |
| /s/ NIKOS THEODOSOPOULOS | Director | March 3, 20171, 2019 |
| (Nikos Theodosopoulos) | | |
| | | |
/s/ TOM LOOKABAUGHDAVID KRALL | Director | March 3, 20171, 2019 |
(Tom Lookabaugh)David Krall) | | |
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EXHIBIT INDEX
The following Exhibits to this report are filed herewith or, as shown below, are incorporated herein by reference.
|
| /s/ DEBORAH L. CLIFFORD | Director | March 1, 2019 |
Exhibit
Number(Deborah L. Clifford)
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2.1(xiii) | Asset Purchase Agreement, dated as of February 18, 2013, by and between Harmonic Inc. and Aurora Networks |
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3.1(ii) | Certificate of Incorporation of Harmonic Inc., as amended |
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3.2 | Amended and Restated Bylaws of Harmonic Inc. |
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4.1(i) | Form of Common Stock Certificate |
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4.2(iii) | Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Harmonic Inc. |
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4.3(xxi) | Indenture, dated December 14, 2015, by and between the Company and U.S. Bank National Association |
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4.4(xxi) | Form of 4.00% Senior Convertible Note due 2020 (included in Exhibit 4.3) |
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4.5(xxiii)† | Warrant to Purchase Shares of Common Stock of Harmonic, Inc. |
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10.1(i)* | Form of Indemnification Agreement |
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10.2(xii)* | 1995 Stock Plan, as amended and restated on June 27, 2012 |
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10.4(xix)* | 2002 Director Stock Plan, as amended and restated on June 9, 2016 |
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10.5(xv)* | 2002 Employee Stock Purchase Plan, as amended and restated on June 9, 2016 |
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10.6(v)* | Change of Control Severance Agreement between Harmonic Inc. and Patrick Harshman, effective May 30, 2006 |
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10.7(vi)* | Change of Control Severance Agreement between Harmonic Inc. and Neven Haltmayer, effective April 19, 2007 |
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10.8(vii)* | Change of Control Severance Agreement between Harmonic Inc. and Nimrod Ben-Natan, effective April 11, 2008 |
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10.9(viii)* | Harmonic Inc. 2002 Director Stock Plan Restricted Stock Unit Agreement |
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10.10(viii) | Professional Service Agreement between Harmonic Inc. and Plexus Services Corp., dated September 22, 2003 |
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10.11(viii) | Amendment, dated January 6, 2006, to the Professional Services Agreement for Manufacturing between Harmonic Inc. and Plexus Services Corp., dated September 22, 2003 |
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10.12(viii) | Addendum 1, dated November 26, 2007, to the Professional Services Agreement between Harmonic Inc. and Plexus Services Corp., dated September 22, 2003 |
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10.13(ix)* | Harmonic Inc. 1995 Stock Plan Restricted Stock Unit Agreement |
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10.14(x) | Lease Agreement between Harmonic Inc. and CRP North First Street, L.L.C. dated December 15, 2009 |
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10.17(xvii)* | Letter Agreement with Bart Spriester, dated July 29, 2014 |
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10.18(xvii)* | Change of Control Severance Agreement between Harmonic Inc. and Bart Spriester, effective September 10, 2014 |
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10.21(xviii)* | Offer Letter Agreement with Harold Covert, dated October 22, 2015 |
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10.22(xviii)* | Change of Control Severance Agreement between Harmonic Inc. and Harold Covert, dated October 27, 2015 |
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10.24 (xx) | Purchase Agreement, dated as of December 8, 2015, by and between Harmonic Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated |
| | |
|
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10.25(xxvi) | Put Option Agreement, dated as of December 7, 2015, by and between Harmonic Inc. and Mr. Eric Louvet, Mr. Eric Gallier, Mr. Jean-Marc Guiot, Mr. Claude Perron, Mrs. Crystele Trévisan-Jallu, Mrs. Delphine Sauvion, Mr. Marc Procureur, Mr. Christophe Delahousse, Mr. Hervé Congard, Mr. Arnaud de Puyfontaine, FPCI Winch Capital 3, Montalivet Networks and FPCI CIC Mezzanine 3 |
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10.26(xxvi) | Sale and Purchase Agreement, dated as of February 11, 2016, by and between Harmonic International AG and Mr. Eric Louvet, Mr. Eric Gallier, Mr. Jean-Marc Guiot, Mr. Claude Perron, Mrs. Crystele Trévisan-Jallu, Mrs. Delphine Sauvion, Mr. Marc Procureur, Mr. Christophe Delahousse, Mr. Hervé Congard, Mr. Arnaud de Puyfontaine, FPCI Winch Capital 3, Montalivet Networks and FPCI CIC Mezzanine 3 for the acquisition of Thomson Video Networks |
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10.27(xxiv) | Registration Rights Agreement, dated September 26, 2016, by and between the Company and Comcast. |
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10.28(xxv)* | Transition letter agreement, dated December 12, 2016, by and between the Company and Harold Covert. |
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21.1 | Subsidiaries of Harmonic Inc. |
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23.1 | Consent of Independent Registered Public Accounting Firm |
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31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
101 | The following materials from Registrant’s Annual Report on Form 10-K for the year ended December 31, 2016, formatted in Extensible Business Reporting Language (XBRL) includes: Consolidated Balance Sheets at December 31, 2016 and December 31, 2015; (ii) Consolidated Statements of Operations for the Years Ended December 31, 2016, December 31, 2015 and December 31, 2014; (iii) Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2016, December 31, 2015 and December 31, 2014; (iv) Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2016, December 31, 2015 and December 31, 2014; (v) Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, December 31, 2015 and December 31, 2014; and (vi) Notes to Consolidated Financial Statements. |
| |
* | Indicates a management contract or compensatory plan or arrangement relating to executive officers or directors of the Company. |
| |
† | Registrant has omitted portions of this exhibit and filed such exhibit separately with the Securities and Exchange Commission pursuant to a grant of confidential treatment under Rule 406 promulgated under the Securities Act. |
| |
(i) | Previously filed as an Exhibit to the Company’s Registration Statement on Form S-1 No. 33-90752. |
| |
(ii) | Previously filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. |
| |
(iii) | Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated July 25, 2002. |
| |
(iv) | Previously filed as an Exhibit to the Company’s Current Report on Form S-8 dated June 5, 2003. |
| |
(v) | Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated May 31, 2006. |
| |
(vi) | Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated April 19, 2007. |
| |
(vii) | Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated April 16, 2008. |
| |
(viii) | Previously filed as an Exhibit to the Company’s Current Annual Report on Form 10-K for the year ended December 31, 2008. |
| |
(ix) | Previously filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 3, 2009. |
| |
(x) | Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated December 18, 2009. |
| |
(xi) | Previously filed as an Exhibit to the Company’s Registration Statement on Form S-8 dated September 21, 2010. |
| |
(xii) | Previously filed as an Exhibit to the Company’s Registration Statement on Form S-8, dated July 30, 2012. |
| |
(xiii) | Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated March 11, 2013. |
| |
(xiv) | Previously filed as an Exhibit to the Company’s Current Report on Form 10-Q for the quarter ended September 26, 2014. |
| |
(xv) | Previously filed as an Exhibit to the Company’s Registration Statement on Form S-8 dated November 7, 2014. |
| |
(xvi) | Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated December 19, 2014. |
| |
(xvii) | Previously filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. |
(xviii) Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated October 21, 2015.
(xix) Previously filed as an Exhibit to the Company’s Registration Statement on Form S-8 dated November 6, 2015.
(xx) Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated December 7, 2015.
(xxi) Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated December 14, 2015.
(xxiii) Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated September 26, 2016.
(xxiv) Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated September 26, 2016.
(xxv) Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated December 13, 2016.
| |
(xxvi) | Previously filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. |
