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1. Description of Business and Basis of Presentation:
Description of Business:
Polycom, Inc. (“Polycom” or “the Company”) is a leading global provider of high-quality, easy-to-use communication solutions that enable enterprise, government, education and healthcare customers to more effectively collaborate over distance, time zones and organizational boundaries. The Company’s solutions are built on architectures that enable unified video, voice and content communications.
Polycom was incorporated in the state of Delaware in December 1990 and trades on the NASDAQ Global Select Market under the ticker symbol “PLCM”.
Principles of Accounting and Consolidation:
These Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements. Actual results could differ from those estimates.
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2. Summary of Significant Accounting Policies:
Cash and Cash Equivalents:
The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.
Investments:
Investments are classified as short-term or long-term based on their remaining maturities. The Company’s short-term and long-term investments as of December 31, 2014 are comprised of U.S. and non-U.S. government securities, U.S. agency securities and corporate debt securities. All investments are held in the Company’s name at a limited number of major financial institutions. At December 31, 2014 and 2013, all of the Company’s investments were classified as available-for-sale and unrealized gains and losses on investments are recorded as a separate component of “Accumulated other comprehensive income” in the Consolidated Statements of Stockholders’ Equity. The Company reviews the individual securities in its portfolio to determine whether a decline in a security’s fair value below the amortized cost basis is other-than-temporary. If the decline in fair value is considered to be other-than-temporary, the cost basis of the individual security is written down to its fair value as a new cost basis. If the investments are sold at a loss or are considered to have other-than-temporarily declined in value, the amount of the loss or write-down is accounted for as a realized loss and included in earnings. The specific identification method is used to determine the cost of securities disposed of, with realized gains and losses reflected in “Interest and other income (expense), net” in the Consolidated Statements of Operations.
Allowance for Doubtful Accounts:
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company regularly performs credit evaluations of its customers' financial condition and considers factors such as historical experience, credit quality, age of the accounts receivable balances, and geographic or country-specific risks and economic conditions that may affect a customer's ability to pay. The allowance for doubtful accounts is reviewed quarterly and adjusted if necessary based on the Company's assessment of its customers' abilities to pay. If the financial conditions of the Company’s customers were to deteriorate, adversely affecting their abilities to make payments, additional allowances would be required.
Inventories:
Inventories are valued at the lower of cost or market with cost computed on a first-in, first-out (FIFO) basis. Consideration is given to obsolescence, excessive levels, deterioration and other factors in evaluating net realizable value. The Company records write-downs for excess and obsolete inventory equal to the difference between the carrying value of inventory and the estimated future selling price based upon assumptions about future product life-cycles, product demand and market conditions. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Property and Equipment:
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, generally from one to seven years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the related assets, typically three to thirteen years. Disposals of capital equipment are recorded by removing the costs and accumulated depreciation from the accounts and gains or losses on disposals are included in “Interest and other income (expense), net” in the Consolidated Statements of Operations.
Goodwill:
Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination. Goodwill is not amortized but is regularly reviewed for potential impairment. The Company reviews goodwill for impairment annually during the fourth quarter of each calendar year, or whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. The Company performs an initial qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If, after the initial qualitative assessment, the Company determines that it is more likely than not that the fair value of the reporting unit exceeds its carrying value and there is no indication of impairment, no further testing is performed; however, if the Company concludes otherwise, then the Company is required to perform a two-step impairment test to assess if a potential impairment has occurred and measure an impairment loss, if any. For further discussion of goodwill and its impairment review, see Note 6.
Long-Lived Assets:
Purchased intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from several months to six years. Purchased intangible assets determined to have indefinite useful lives are not amortized. Long-lived assets, including purchased intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset or group of assets and their eventual disposition. The Company periodically assesses the remaining useful lives of long-lived assets. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the estimated fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or estimated fair value less costs to sell.
Guarantees:
Warranty
The Company provides for the estimated costs of product warranties at the time revenue is recognized. The specific terms and conditions of those warranties vary depending upon the product sold. In the case of hardware products, warranties generally start from the delivery date and continue for one year. Software products generally carry a 90-day warranty from the date of purchase. The Company’s liability under warranties on software products is to provide a corrected copy of any portion of the software found not to be in substantial compliance with the agreed upon specifications. Factors that affect the Company’s warranty obligation include product failure rates, material usage and service delivery costs incurred in correcting product failures. The Company assesses the adequacy of the recorded warranty liabilities every quarter and makes adjustments to the liability if necessary.
Deferred Services Revenue
The Company offers maintenance contracts for sale on most of its products which allow for customers to receive service and support in addition to, or subsequent to, the expiration of the contractual product warranty. The Company also provides managed services to its customers under contractual arrangements. The Company recognizes the maintenance and managed services revenues from these contracts over the life of the service contract.
Officer and Director Indemnifications
As permitted or required under Delaware law and to the maximum extent allowable under that law, the Company has certain obligations to indemnify its current and former officers and directors for certain events or occurrences while the officer or director is, or was serving, at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is unlimited; however, the Company has a director and officer insurance policy that mitigates the Company’s exposure and enables the Company to recover a portion of any future amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification obligations is not material.
Other Indemnifications
As is customary in the Company’s industry, as provided for in local law in the U.S. and other jurisdictions, the Company’s standard contracts provide remedies to its customers, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of its products. From time to time, the Company indemnifies customers against combinations of loss, expense, or liability arising from various trigger events related to the sale and the use of its products and services. In addition, from time to time the Company also provides protection to customers against claims related to undiscovered liabilities, additional product liabilities or environmental obligations.
Revenue Recognition:
The Company recognizes revenue when persuasive evidence of an arrangement exists, title and risk of loss have transferred, product payment is not contingent upon performance of installation or service obligations, the price is fixed or determinable, and collectability is reasonably assured. In instances where final acceptance of the product or service is specified by the customer, revenue is deferred until all acceptance criteria have been met. Additionally, the Company recognizes maintenance service revenues on its hardware and software products ratably over the service periods of one to five years, and other services upon the completion of installation or professional services provided.
Most of the Company’s products are integrated with software that is essential to the functionality of the equipment. Additionally, the Company provides unspecified software upgrades and enhancements related to most of these products through maintenance contracts.
A multiple-element arrangement includes the sale of one or more tangible product offerings with one or more associated services offerings, each of which are individually considered separate units of accounting. The Company allocates revenue to each element in a multiple-element arrangement based upon the relative selling price of each deliverable. When applying the relative selling price method, the Company determines the selling price for each deliverable using vendor specific objective evidence (“VSOE”) of selling price, if it exists, or third party evidence (“TPE”) of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, the Company uses its best estimate of selling price (“ESP”) for that deliverable. Revenue allocated to each element is then recognized when the other revenue recognition criteria are met for each element.
VSOE is established based on the Company’s standard pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range.
When VSOE cannot be established, the Company attempts to establish the selling price of each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately.
When the Company is unable to establish the selling price using VSOE or TPE, the Company uses ESP in its allocation of revenue for the arrangement. ESP represents the price at which the Company would transact a sale if the element were sold on a stand-alone basis. The Company determines ESP for a product by considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, and pricing practices. The determination of ESP is made based on review of historical sales price, taking into consideration the Company’s go-to-market strategy. Generally, the Company uses historical net selling prices to establish ESP. The Company regularly reviews its basis for establishing VSOE, TPE and ESP.
Sales Returns, Channel Partner Programs and Incentives
The Company’s contracts generally do not provide for a right of return on any of its products. However, a limited number of contracts contain stock rotation rights. The Company records an estimate of future returns based upon these contractual rights and its historical returns experience. The Company records estimated reductions to revenues for channel partner programs and incentive offerings including special pricing agreements, promotions and other volume-based incentives. The Company also accrues for co-op marketing funds as a marketing expense if the Company receives an identifiable benefit in exchange and can reasonably estimate the fair value of the identifiable benefit received; otherwise, it is recorded as a reduction to revenues.
Research and Development and Software Development Costs:
The Company expenses research and development costs as incurred.
Software development costs incurred prior to the establishment of technological feasibility are included in research and development costs as incurred. Eligible and material software development costs are capitalized upon the establishment of technological feasibility and before the general availability of such software products, including direct labor and related overhead costs, as well as stock-based compensation. The Company has defined technological feasibility as the establishment of a working model, which typically occurs when beta testing commences. The Company capitalized approximately $5.1 million and $2.4 million of development costs in 2014 and 2013, respectively, for software products to be marketed or sold to customers. There were no such costs capitalized in 2012 as the software development costs qualifying for capitalization were insignificant. The capitalized costs are included in “Other assets” in the Company’s Consolidated Balance Sheets and are being amortized on a product-by-product basis using the straight-line method over the estimated product life, generally three years, or on the ratio of current revenues to total projected product revenues, whichever is greater. Management believes that the capitalized software costs will be recoverable from future gross profits generated by these products.
Advertising:
The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2014, 2013, and 2012 was $13.6 million, $14.9 million, and $22.3 million, respectively.
Income Taxes:
The Company accounts for income taxes under the liability method, which recognizes deferred tax assets and liabilities based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established to reduce deferred tax assets when, based on available objective evidence, it is more likely than not that the benefit of such assets will not be realized.
The Company recognizes and measures benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. The Company evaluates its uncertain tax positions on a quarterly basis. Evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in income tax expense in the period in which the change is made, which could have a material impact on the Company’s effective tax rate and operating results. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Foreign Currency Translation:
Assets and liabilities of non-U.S subsidiaries, where that local currency is the functional currency, are translated to U.S. dollars at exchange rates in effect at the balance sheet date and income and expense accounts are translated at average exchange rates in effect during the period. The resulting translation adjustments are directly recorded to a separate component of “Accumulated other comprehensive income” on the Consolidated Balance Sheets. Foreign exchange transaction gains and losses from the remeasurement of non-functional currency denominated assets and liabilities have not been significant to date and are included in the Company’s Consolidated Statements of Operations as part of “Interest and other income (expense), net”.
As a result of the sale of the Company’s former enterprise wireless voice solutions (the “EWS”) business in December 2012 (see Note 4), which included a wholly owned Danish subsidiary with a Danish Krone functional currency, the Company recognized the associated currency translation adjustment balance of $1.1 million which effectively reduced the gain from sale of the discontinued operations.
The following table sets forth the change of foreign currency translation adjustments during each reporting period and the balances as of December 31 (in thousands):
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2014 |
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2013 |
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2012 |
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Beginning balance |
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$ |
4,219 |
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$ |
3,180 |
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$ |
1,841 |
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Foreign currency translation adjustments |
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(1,422 |
) |
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1,039 |
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1,339 |
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Ending balance |
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$ |
2,797 |
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$ |
4,219 |
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$ |
3,180 |
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Derivative Instruments:
The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For a derivative instrument designated and qualifying as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a separate component of “Accumulated other comprehensive income” in the Consolidated Statements of Stockholders’ Equity and is subsequently reclassified into earnings when the hedged exposure affects earnings. The excluded and ineffective portions of the gain or loss are reported in earnings immediately. For derivative instruments that are not designated as cash flow hedges, changes in fair value are recognized in earnings in the period of change. The Company does not hold or issue derivative financial instruments for speculative trading purposes. The Company enters into derivatives only with counterparties that are among the largest U.S. banks, ranked by assets, in order to minimize its credit risk.
Net Income Per Share:
Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the additional dilution from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options, unvested restricted stock units, and performance shares. Potentially dilutive shares are excluded from the computation of diluted net income per share when their effect is antidilutive.
Fair Value Measurements:
The Company has certain financial assets and liabilities recorded at fair value which have been classified as Level 1, 2 or 3 within the fair value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices for similar assets in active markets, or identical or similar assets in inactive markets, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability. On a recurring basis, the Company measures certain financial assets and liabilities at fair value, including its marketable securities and foreign currency contracts.
The Company’s cash equivalents and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using inputs such as quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices for identical assets in active markets include money market funds. Such instruments are generally classified within Level 1 of the fair value hierarchy. The types of instruments valued based on other observable inputs include U.S. Treasury securities and other government agencies, corporate bonds and commercial paper. Such instruments are generally classified within Level 2 of the fair value hierarchy. Level 2 instruments are priced using quoted market prices for similar instruments or nonbinding market prices that are corroborated by observable market data.
The principal market where the Company executes its foreign currency contracts is the retail market in an over-the-counter environment with a relatively high level of price transparency. The market participants and the Company’s counterparties are large money center banks and regional banks. The Company’s foreign currency contracts valuation inputs are based on quoted prices and quoted pricing intervals from public data sources such as spot rates, interest rate differentials rates and credit default rates, which do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.
In addition, the Company has facilities-related liabilities related to restructuring which were calculated based on the discounted future lease payments less sublease assumptions. This non-recurring fair value measurement is classified as a Level 3 measurement under ASC 820. The key assumptions used in the valuation model include discount rates, cash flow projections and estimated sublease income. These assumptions involve significant judgment, and are based on management’s estimate of current and forecasted market conditions and are sensitive and susceptible to change. The carrying amounts reflected in the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, accounts payable, and other accrued liabilities approximate fair value due to their short-term maturities.
Stock-Based Compensation:
The Company’s stock-based compensation programs consist of grants of stock-based awards to employees and non-employee directors, including stock options, restricted stock units and performance shares, as well as purchase rights pursuant to the Company’s Employee Stock Purchase Plan (“ESPP”). Stock-based compensation expense based on the estimated fair value of these awards is charged to operations over the requisite service period, which is generally the vesting period, including the effect of forfeitures.
The fair value of stock option and ESPP awards is estimated at the grant date using the Black-Scholes option valuation model. The fair value of restricted stock units is based on the market value of the Company’s common stock on the date of grant. The fair value of a performance share with a market condition is estimated on the date of award, using a Monte Carlo simulation model to estimate the total return ranking of the Company’s stock in relation to the target index of companies over each performance period. Stock-based compensation cost on performance shares with a market condition is not adjusted for subsequent changes regardless of the level of ultimate vesting.
Recent Pronouncements:
In January 2015, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update which simplifies income statement classification by removing the concept of extraordinary items from the US GAAP. As a result, items that are both unusual and infrequent will no longer be separately reported net of tax after continuing operations. The new standard is effective for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company does not expect any impact on the adoption of this standard on its Consolidated Financial Statements.
In August 2014, the FASB issued an accounting standard update related to the disclosures around going concern. The new standard provides guidance around management’s responsibility to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The new standard is effective for the annual periods and interim periods within those annual periods beginning after December 15, 2016. Early application is permitted. The Company does not expect any impact on the adoption of this standard on its Consolidated Financial Statements.
In May 2014, the FASB issued an accounting standard update which provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The guidance is effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company has not yet selected a transition method nor has it determined the impact of adoption on its Consolidated Financial Statements.
In July 2013, the FASB issued an accounting standard update which clarifies that an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The guidance is effective prospectively for reporting periods beginning after December 15, 2013. The Company adopted the guidance in 2014, and such adoption did not have a material impact on its Consolidated Financial Statements.
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3. Business Combinations:
On March 1, 2013 the Company completed its acquisition of certain assets of Sentri, Inc. (“Sentri”), a privately-held services company with expertise in Microsoft technologies, for approximately $8.0 million in cash, net of approximately $0.4 million cash released from an escrow account in the three months ended September 30, 2013, as a result of a net working capital adjustment. The total purchase price was allocated to the net tangible and intangible assets based upon their fair values at March 1, 2013 with the excess amount recorded as goodwill. The financial results of Sentri have been included in the Company’s Consolidated Financial Statements from the date of acquisition. Pro forma and actual results of operations of the acquisition were not material to the Company’s Consolidated Financial Statements.
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4. Discontinued Operations:
On December 4, 2012, the Company completed the disposition of the net assets of its enterprise wireless voice solutions (“EWS”) business to Mobile Devices Holdings, LLC, a Delaware limited liability corporation. The Company received cash consideration of approximately $50.7 million, resulting in a gain on sale of the discontinued operations, net of taxes, of $35.4 million, as reflected in its Consolidated Financial Statements for the year ended December 31, 2012. In 2013, the Company recorded an additional gain on sale of discontinued operations, net of taxes, of approximately $0.5 million as a result of the final net working capital adjustment in accordance with the purchase agreement. See Note 18 for discussion of income tax benefit on gain from sale of discontinued operations. Additional cash consideration of up to $37.5 million is payable over the next three years subject to certain conditions, including meeting certain agreed-upon EBITDA-based milestones for fiscal 2014, 2015 and 2016. These conditions were not met for the fiscal year ended December 31, 2013. Such additional cash consideration will be accounted for as a gain on sale of discontinued operations, net of taxes, when it is realized or realizable. In accordance with accounting guidance, the Company has included the results of operations of EWS in discontinued operations within the Consolidated Statements of Operations for all periods presented.
Summarized results from discontinued operations were as follows (in thousands):
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Year Ended December 31, |
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2014 |
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2013 |
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2012 |
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Revenues |
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$ |
— |
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$ |
— |
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$ |
71,133 |
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Income from discontinued operations |
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— |
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— |
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15,973 |
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Income tax provision |
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— |
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— |
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6,085 |
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Net income from discontinued operations |
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$ |
— |
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$ |
— |
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$ |
9,888 |
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The carrying amounts of the net assets sold at on December 4, 2012 were as follows (in thousands):
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Amount |
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Assets: |
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Cash and cash equivalents |
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$ |
248 |
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Trade receivables, net |
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7,221 |
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Inventories |
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12,659 |
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Deferred taxes |
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(306 |
) |
Prepaid expense and other assets |
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295 |
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Property and equipment, net |
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4,301 |
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Goodwill |
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30,872 |
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Purchased intangibles, net |
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5,724 |
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Assets sold |
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$ |
61,014 |
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Liabilities: |
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Accounts payable |
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$ |
2,318 |
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Accrued payroll and related liabilities |
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1,877 |
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Deferred revenue |
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5,044 |
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Other accrued liabilities |
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1,605 |
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Deferred taxes |
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1,610 |
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Liabilities transferred |
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$ |
12,454 |
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Net assets sold |
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$ |
48,560 |
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The Company recorded a gain of $35.4 million in 2012 on the sale of discontinued operations (net of taxes) which was calculated as follows (in thousands):
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Amount |
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Cash proceeds received |
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$ |
50,659 |
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Less: costs incurred directly attributable to the transaction |
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|
929 |
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Net proceeds from sale of discontinued operations |
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49,730 |
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Less: book value of net assets sold |
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48,560 |
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Less: realization of foreign currency translation adjustment upon sale of foreign EWS subsidiary |
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1,141 |
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Gain from sale of discontinued operations |
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29 |
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Income tax benefit |
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|
(35,396 |
) |
Net gain from sale of discontinued operations |
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$ |
35,425 |
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5. Accounts Receivable Financing
The Company has a financing agreement with an unrelated third party financing company (the “Financing Agreement”) whereby it offers distributors and resellers direct or indirect financing on their purchases of the Company’s products and services. In return, the Company agrees to pay the financing company a fee based on a pre-defined percentage of the transaction amount financed. In certain instances, these financing arrangements result in a transfer of our receivables, without recourse, to the financing company. If the transaction meets the applicable criteria under Accounting Standards Codification (“ASC”) 860 and is accounted for as a sale of financial assets, the accounts receivable are excluded from the balance sheet upon the third party financing company’s payment remittance to the Company. In certain legal jurisdictions, the arrangement fees that involve maintenance services or products bundled with maintenance at one price do not qualify as a sale of financial assets in accordance with the authoritative guidance. Accordingly, accounts receivable related to these arrangements are accounted for as a secured borrowing in accordance with ASC 860, and the Company records a liability for any cash received, while maintaining the associated accounts receivable balance until the distributor or reseller remits payment to the third-party financing company.
In 2014, 2013 and 2012, total transactions entered pursuant to the terms of the Financing Agreement were approximately $194.4 million, $123.4 million, and $28.3 million, respectively, of which $136.0 million, $109.4 million, and $22.9 million, respectively, were related to the transfer of the financial assets arrangement. The financing of these receivables accelerated the collection of the Company’s cash and reduced its credit exposure. The amount due from the financing company as of December 31, 2014 and 2013 was approximately $28.5 million and $22.9 million, respectively, of which $20.2 million and $21.6 million, respectively, was related to the accounts receivable transferred, and is included in “Trade receivables” in the Company’s Consolidated Balance Sheets. Fees incurred pursuant to the Financing Agreement were approximately $2.6 million, $1.8 million and $0.4 million for the fiscal year ended December 31, 2014, 2013 and 2012, respectively. Those fees were recorded as a reduction to revenues in the Company’s Consolidated Statements of Operations.
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6. Goodwill, Purchased Intangibles, and Software Development Costs:
Polycom’s business is organized around four major geographic theaters: North America, Caribbean and Latin America (“CALA”), Europe, Middle East and Africa (“EMEA”) and Asia Pacific (“APAC”), which are considered its reporting units.
In the fourth quarter of 2014, the Company performed the qualitative assessment for its four reporting units. For each reporting unit, the Company weighed the relative impact of factors that are specific to the reporting unit as well as industry and macroeconomic factors. The reporting unit specific factors that were considered included the results of the most recent impairment tests, as well as financial performance and changes to the reporting units’ carrying amounts since the most recent impairment tests. For the industry in which the reporting units operate, the Company considered growth projections from independent sources and significant developments or transactions within the industry during 2014, where applicable. The Company concluded that each of reporting unit specific and industry factors had either a positive or neutral impact on the fair value of each of the reporting units. The Company also determined that macroeconomic factors during 2014 did not have a significant impact on the discount rates and growth rates used for the valuation performed. Based on the qualitative assessment, the Company concluded that for the four reporting units, it was more likely than not that the fair value of each reporting unit exceeded its carrying amount and there was no indication of impairment. As a result, performing the two-step impairment test was unnecessary and that no impairment charge was required for 2014.
In the fourth quarter of 2013, the Company determined, based on its qualitative assessment, that further testing was necessary and performed a two-step goodwill impairment test to assess if a potential impairment had occurred and to measure an impairment loss, if any. The first step of the two-step test compares a reporting unit’s fair value to its carrying amount. The fair value was determined using an income approach and a market approach, each of which was weighted equally. Under the income approach, the fair value of an asset is based on the value of the estimated cash flows that the asset can be expected to generate in the future. These estimated future cash flows were discounted at rates ranging from 12 to 14 percent to arrive at their respective fair values. Under the market approach, the fair value of the unit is based on an analysis of financial data for publicly traded companies engaged in the same or similar lines of business. The carrying amount of each reporting unit was determined by assigning assets and liabilities, including goodwill, to each reporting unit. Based on the first step test, the estimated fair value of each reporting unit exceeded their respective carrying amount by more than 30%. Therefore, the second step of the two-step goodwill impairment test was not deemed necessary and no impairment charge was required for 2013.
The following table summarizes the changes in carrying amount of goodwill in each of the Company’s segments for the periods presented (in thousands):
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Segments |
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Americas |
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EMEA |
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APAC |
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Total |
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Balance at December 31, 2012 |
|
$ |
302,768 |
|
|
$ |
101,882 |
|
|
$ |
149,169 |
|
|
$ |
553,819 |
|
Goodwill resulting from an acquisition |
|
|
5,391 |
|
|
|
— |
|
|
|
— |
|
|
|
5,391 |
|
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
250 |
|
|
|
250 |
|
Balance at December 31, 2013 |
|
$ |
308,159 |
|
|
$ |
101,882 |
|
|
$ |
149,419 |
|
|
$ |
559,460 |
|
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
(229 |
) |
|
|
(229 |
) |
Balance at December 31, 2014 |
|
$ |
308,159 |
|
|
$ |
101,882 |
|
|
$ |
149,190 |
|
|
$ |
559,231 |
|
The following table sets forth details of the Company’s total purchased intangible assets and capitalized software development costs as of the following periods (in thousands):
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
||||||||||||||||||
|
|
Gross Value |
|
|
Accumulated Amortization & Impairment |
|
|
Net Value |
|
|
Gross Value |
|
|
Accumulated Amortization & Impairment |
|
|
Net Value |
|
||||||
Core and developed technology |
|
$ |
81,178 |
|
|
$ |
(79,986 |
) |
|
$ |
1,192 |
|
|
$ |
81,178 |
|
|
$ |
(76,952 |
) |
|
$ |
4,226 |
|
Customer and partner relationships |
|
|
79,525 |
|
|
|
(57,983 |
) |
|
|
21,542 |
|
|
|
79,525 |
|
|
|
(48,941 |
) |
|
|
30,584 |
|
Non-compete agreements |
|
|
1,800 |
|
|
|
(1,100 |
) |
|
|
700 |
|
|
|
1,800 |
|
|
|
(500 |
) |
|
|
1,300 |
|
Trade name |
|
|
3,400 |
|
|
|
(3,229 |
) |
|
|
171 |
|
|
|
3,400 |
|
|
|
(3,089 |
) |
|
|
311 |
|
Other |
|
|
4,462 |
|
|
|
(4,418 |
) |
|
|
44 |
|
|
|
4,462 |
|
|
|
(4,343 |
) |
|
|
119 |
|
Finite-lived intangible assets |
|
|
170,365 |
|
|
|
(146,716 |
) |
|
|
23,649 |
|
|
|
170,365 |
|
|
|
(133,825 |
) |
|
|
36,540 |
|
Indefinite-lived trade name |
|
|
918 |
|
|
|
— |
|
|
|
918 |
|
|
|
918 |
|
|
|
— |
|
|
|
918 |
|
Total acquired intangible assets |
|
$ |
171,283 |
|
|
$ |
(146,716 |
) |
|
$ |
24,567 |
|
|
$ |
171,283 |
|
|
$ |
(133,825 |
) |
|
$ |
37,458 |
|
Capitalized software development costs for products to be sold |
|
$ |
7,416 |
|
|
$ |
(1,900 |
) |
|
$ |
5,516 |
|
|
$ |
2,365 |
|
|
$ |
(196 |
) |
|
$ |
2,169 |
|
The Company determined that a purchased trade name intangible of $0.9 million had an indefinite life as the Company expects to generate cash flows related to this asset indefinitely. No impairment charges related to the Company’s purchased intangible assets were recognized in the years ended December 31, 2014, 2013, and 2012.
The following table summarizes amortization expense recorded in the following periods (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Amortization of purchased intangibles in revenues |
|
$ |
75 |
|
|
$ |
75 |
|
|
$ |
75 |
|
Amortization of purchased intangibles in cost of product revenues |
|
|
3,035 |
|
|
|
9,361 |
|
|
|
7,635 |
|
Amortization of purchased intangibles in operating expenses |
|
|
9,781 |
|
|
|
10,389 |
|
|
|
9,830 |
|
Total amortization expenses of purchased intangibles |
|
$ |
12,891 |
|
|
$ |
19,825 |
|
|
$ |
17,540 |
|
Amortization expense of purchased intangibles is not allocated to the Company’s operating segments.
The estimated future amortization expense of purchased intangible assets as of December 31, 2014 is as follows (in thousands):
Year ending December 31, |
|
Amount |
|
|
2015 |
|
$ |
10,495 |
|
2016 |
|
|
8,484 |
|
2017 |
|
|
4,670 |
|
2018 |
|
|
— |
|
2019 |
|
|
— |
|
Total |
|
$ |
23,649 |
|
|
7. Balance Sheet Details:
Trade receivables, net, consist of the following (in thousands):
|
|
December 31, |
|
|
|||||
|
|
2014 |
|
|
2013 |
|
|
||
Gross accounts receivables |
|
$ |
214,664 |
|
|
$ |
225,134 |
|
|
Returns and related reserves |
|
|
(42,224 |
) |
|
|
(38,938 |
) |
|
Allowance for doubtful accounts |
|
|
(3,040 |
) |
|
|
(2,827 |
) |
|
Total |
|
$ |
169,400 |
|
|
$ |
183,369 |
|
|
Inventories consist of the following (in thousands):
|
|
December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
Raw materials |
|
$ |
1,496 |
|
|
$ |
2,740 |
|
Work in process |
|
|
545 |
|
|
|
840 |
|
Finished goods |
|
|
98,287 |
|
|
|
99,729 |
|
Total |
|
$ |
100,328 |
|
|
$ |
103,309 |
|
Prepaid expenses and other current assets consist of the following (in thousands):
|
|
December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
Non-trade receivables |
|
$ |
6,547 |
|
|
$ |
9,251 |
|
Prepaid expenses |
|
|
37,385 |
|
|
|
31,164 |
|
Derivative assets |
|
|
14,342 |
|
|
|
6,748 |
|
Other current assets |
|
|
2,798 |
|
|
|
3,189 |
|
Total |
|
$ |
61,072 |
|
|
$ |
50,352 |
|
Property and equipment, net, consist of the following (in thousands):
|
|
|
|
December 31, |
|
|||||
|
|
Estimated useful Life |
|
2014 |
|
|
2013 |
|
||
Computer equipment and software |
|
3 to 5 years |
|
$ |
294,724 |
|
|
$ |
265,222 |
|
Equipment, furniture and fixtures |
|
1 to 7 years |
|
|
115,226 |
|
|
|
113,214 |
|
Tooling equipment |
|
3 years |
|
|
16,325 |
|
|
|
20,811 |
|
Leasehold improvements |
|
3 to 13 years |
|
|
59,663 |
|
|
|
59,595 |
|
|
|
|
|
|
485,938 |
|
|
|
458,842 |
|
Less: Accumulated depreciation and amortization |
|
|
|
|
(376,743 |
) |
|
|
(343,685 |
) |
Total |
|
|
|
$ |
109,195 |
|
|
$ |
115,157 |
|
Deferred revenues consist of the following (in thousands):
|
|
December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
Short-term: |
|
|
|
|
|
|
|
|
Service |
|
$ |
171,355 |
|
|
$ |
170,701 |
|
Product |
|
|
94 |
|
|
|
307 |
|
License |
|
|
2,083 |
|
|
|
1,400 |
|
Total |
|
$ |
173,532 |
|
|
$ |
172,408 |
|
Long-term: |
|
|
|
|
|
|
|
|
Service |
|
$ |
85,925 |
|
|
$ |
83,092 |
|
License |
|
|
3,441 |
|
|
|
4,375 |
|
Total |
|
$ |
89,366 |
|
|
$ |
87,467 |
|
Changes in the deferred service revenue are as follows (in thousands):
|
|
December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
Balance at beginning of period |
|
$ |
253,793 |
|
|
$ |
241,773 |
|
Additions to deferred service revenue |
|
|
347,896 |
|
|
|
354,893 |
|
Amortization of deferred service revenue |
|
|
(344,409 |
) |
|
|
(342,873 |
) |
Balance at end of period |
|
$ |
257,280 |
|
|
$ |
253,793 |
|
Other accrued liabilities consist of the following (in thousands):
|
|
December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
Accrued expenses |
|
$ |
27,523 |
|
|
$ |
22,515 |
|
Accrued co-op expenses |
|
|
4,102 |
|
|
|
4,629 |
|
Restructuring reserves |
|
|
12,207 |
|
|
|
11,238 |
|
Warranty obligations |
|
|
11,613 |
|
|
|
9,475 |
|
Derivative liabilities |
|
|
8,175 |
|
|
|
6,780 |
|
Employee stock purchase plan withholdings |
|
|
10,658 |
|
|
|
10,883 |
|
Other accrued liabilities |
|
|
11,915 |
|
|
|
12,224 |
|
Total |
|
$ |
86,193 |
|
|
$ |
77,744 |
|
Changes in the warranty obligations are as follows (in thousands):
|
|
December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
Balance at beginning of period |
|
$ |
9,475 |
|
|
$ |
10,475 |
|
Accruals for warranties issued during the period |
|
|
16,753 |
|
|
|
16,307 |
|
Charges against warranty reserve during the period |
|
|
(14,615 |
) |
|
|
(17,307 |
) |
Balance at end of period |
|
$ |
11,613 |
|
|
$ |
9,475 |
|
|
8. Restructuring Costs:
In 2014, 2013, and 2012, the Company recorded $40.3 million, $48.5 million, and $22.0 million, respectively, related to restructuring actions that included the elimination or relocation of various positions and the consolidation and elimination of certain facilities. These actions are generally intended to streamline and focus the Company’s efforts and more properly align the Company’s cost structure with its projected future revenue streams.
The following table summarizes the activity of the Company’s restructuring reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
Projects |
|
|
|
|
|
|
|
|
Severance/Other |
|
|
Facilities |
|
|
Discontinued |
|
|
Total |
|
||||
Balance at December 31, 2011 |
|
$ |
2,486 |
|
|
$ |
454 |
|
|
$ |
— |
|
|
|
2,940 |
|
Additions to the reserve, net |
|
|
13,090 |
|
|
|
11,139 |
|
|
|
— |
|
|
|
24,229 |
|
Interest accretion |
|
|
— |
|
|
|
591 |
|
|
|
— |
|
|
|
591 |
|
Non-cash write-off of leasehold improvements |
|
|
— |
|
|
|
(2,796 |
) |
|
|
— |
|
|
|
(2,796 |
) |
Cash payments and other usage |
|
|
(14,214 |
) |
|
|
(1,924 |
) |
|
|
— |
|
|
|
(16,138 |
) |
Balance at December 31, 2012 |
|
$ |
1,362 |
|
|
$ |
7,464 |
|
|
$ |
— |
|
|
|
8,826 |
|
Additions to the reserve, net |
|
|
10,185 |
|
|
|
36,770 |
|
|
|
2,880 |
|
|
|
49,835 |
|
Interest accretion |
|
|
— |
|
|
|
1,461 |
|
|
|
— |
|
|
|
1,461 |
|
Non-cash write-off of leasehold improvements |
|
|
— |
|
|
|
(3,547 |
) |
|
|
— |
|
|
|
(3,547 |
) |
Cash payments and other usage |
|
|
(10,404 |
) |
|
|
(8,362 |
) |
|
|
(2,880 |
) |
|
|
(21,646 |
) |
Balance at December 31, 2013 |
|
$ |
1,143 |
|
|
$ |
33,786 |
|
|
$ |
— |
|
|
$ |
34,929 |
|
Additions to the reserve, net |
|
|
11,755 |
|
|
|
28,524 |
|
|
|
— |
|
|
|
40,279 |
|
Interest accretion |
|
|
— |
|
|
|
2,347 |
|
|
|
— |
|
|
|
2,347 |
|
Non-cash write-off of leasehold improvements |
|
|
— |
|
|
|
(4,855 |
) |
|
|
— |
|
|
|
(4,855 |
) |
Cash payments and other usage |
|
|
(12,234 |
) |
|
|
(18,893 |
) |
|
|
— |
|
|
|
(31,127 |
) |
Balance at December 31, 2014 |
|
$ |
664 |
|
|
$ |
40,909 |
|
|
$ |
— |
|
|
$ |
41,573 |
|
During 2014, management completed the reduction or elimination of certain leased facilities and the elimination of approximately six percent of the Company’s global workforce. These actions were designed to better align expenses to the Company’s revenue and gross margin profile, and position the Company for improved operating performance, pursuant to the announcement in January 2014. As a result, the Company recorded approximately $28.6 million in restructuring charges related to idle facilities upon vacating these facilities. Additions to the reserve include $2.3 million of deferred rent that was expensed in prior periods. Additionally, the Company recorded approximately $11.8 million of restructuring charges related to severance and other employee benefits in 2014.
During 2013, management completed the consolidation and elimination of certain facilities globally and the elimination of approximately four percent of the Company’s global workforce. These actions were generally intended to optimize the organization and manage expenses to gain or improve operating efficiencies and profitability. As a result, the Company recorded approximately $38.2 million in restructuring charges related to idle facilities upon vacating these facilities. Additions to the reserve include $2.8 million of deferred rent that was expensed in prior periods. Additionally, in 2013,the Company recorded approximately $10.2 million of restructuring charges related to severance and other employee benefits, and approximately $2.9 million of other restructuring charges associated with changes to the Company’s product roadmap as it focused on products and solutions with greater revenue and margin potential.
During 2012, management completed the consolidation and elimination of certain facilities in order to gain efficiencies, including the combination of its headquarters in San Jose and Santa Clara, California into one new location in San Jose, California. As a result, the Company recorded approximately $11.7 million in restructuring charges related to idle facilities in 2012. Additions to the reserve include $2.8 million of deferred rent that was expensed in prior periods. Additionally, the Company recorded approximately $13.1 million of charges, primarily for severance and other employee benefits, related to restructuring actions approved by management in October 2011 and July 2012. The action plan approved in July 2012 resulted in the elimination of approximately four percent of our global workforce, enabling the Company to focus resources on its product development and product launch initiatives.
The Company does not expect any remaining charges related to these actions to be material. As of December 31, 2014, the restructuring reserve was primarily comprised of facilities-related liabilities. The Company calculated the fair value of its facilities-related liabilities based on the discounted future lease payments less sublease assumptions. This non-recurring fair value measurement is classified as a Level 3 measurement under ASC 820.
|
9. Debt:
In September 2013, the Company entered into a Credit Agreement (the “Credit Agreement”) that provides for a $250.0 million term loan (the “Term Loan”) maturing on September 13, 2018 (the “Maturity Date”), which bears interest at the Company’s option at either a base rate plus a spread of 0.50% to 1.00%, or a reserve adjusted LIBOR rate plus a spread of 1.50% to 2.00% based on the Company’s consolidated leverage ratio for the preceding four fiscal quarters.
The Company entered into the Credit Agreement in conjunction with and for purposes of funding purchases of the Company’s common stock pursuant to a $250.0 million modified “Dutch Auction” self-tender offer announced in September 2013. See Note 15 for further details. The Term Loan is payable in quarterly installments of principal equal to approximately $1.6 million which began on December 31, 2013, with the remaining outstanding principal amount of the Term Loan being due and payable on the Maturity Date. The Company may prepay the Term Loan, in whole or in part, at any time without premium or penalty. Amounts repaid or prepaid may not be reborrowed. The Term Loan is secured by substantially all the assets of the Company and certain domestic subsidiaries of the Company that are guarantors under the Credit Agreement, subject to certain exceptions and limitations.
The Credit Agreement contains customary affirmative and negative covenants, and financial covenants consisting of a consolidated fixed charge coverage ratio and a consolidated secured leverage ratio. The Company was in compliance with these covenants as of December 31, 2014. The Credit Agreement also includes customary events of default, the occurrence of which could result in the acceleration of the obligations under the Credit Agreement. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Credit Agreement at a per annum rate equal to 2.00% above the applicable interest rate for any overdue principal and 2.00% above the rate applicable for base rate loans for any other overdue amounts.
At December 31, 2014, the weighted average interest rate on the Term Loan was 2.04%, the accrued interest on the Term Loan was $0.4 million, and the current and noncurrent portion of the outstanding Term Loan was $6.3 million and $235.9 million, respectively.
The following table summarizes interest expense recognized related to the Term Loan for the periods presented (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Contractual interest expense |
|
$ |
4,940 |
|
|
$ |
1,605 |
|
|
$ |
— |
|
Amortization of debt issuance costs |
|
|
533 |
|
|
|
178 |
|
|
|
— |
|
Total |
|
$ |
5,473 |
|
|
$ |
1,783 |
|
|
$ |
— |
|
|
10. Investments:
The Company had cash and cash equivalents of $443.1 million and $392.6 million at December 31, 2014 and 2013, respectively. Cash and cash equivalents generally consist of cash in banks, as well as highly liquid investments in money market funds, time deposits, savings accounts, commercial paper, and corporate debt securities.
The Company’s U.S. government securities mostly comprised of direct U.S. Treasury obligations that are guaranteed by the U.S. government and U.S. government agency securities are mostly comprised of U.S. government agency instruments, including mortgage-backed securities. The Company’s Non-U.S. government securities are mostly comprised of non-U.S. government instruments, including state, municipal and foreign government securities. To ensure that the investment portfolio is sufficiently diversified, the Company’s investment policy requires that a certain percentage of the Company’s portfolio be invested in these types of securities.
The Company’s corporate debt securities are comprised of publicly-traded domestic and foreign corporate debt securities. The Company does not purchase auction rate securities, and investments are in instruments that meet high quality credit rating standards, as specified in the Company’s investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issuer or type of instrument.
At December 31, 2014, the Company’s long-term investments had contractual maturities of one to two years.
In addition, the Company has short-term and long-term investments in debt securities which are summarized as follows: (in thousands):
|
|
Cost Basis |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Fair Value |
|
||||
Balances at December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments-Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities |
|
$ |
26,930 |
|
|
$ |
7 |
|
|
$ |
(2 |
) |
|
$ |
26,935 |
|
U.S. government agency securities |
|
|
59,336 |
|
|
|
7 |
|
|
|
(6 |
) |
|
|
59,337 |
|
Non-U.S. government securities |
|
|
8,764 |
|
|
|
2 |
|
|
|
— |
|
|
|
8,766 |
|
Corporate debt securities |
|
|
90,782 |
|
|
|
10 |
|
|
|
(47 |
) |
|
|
90,745 |
|
Total investments - short-term |
|
$ |
185,812 |
|
|
$ |
26 |
|
|
$ |
(55 |
) |
|
$ |
185,783 |
|
Investments-Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities |
|
$ |
25,320 |
|
|
$ |
4 |
|
|
$ |
(10 |
) |
|
$ |
25,314 |
|
U.S. government agency securities |
|
|
17,369 |
|
|
|
1 |
|
|
|
(14 |
) |
|
|
17,356 |
|
Corporate debt securities |
|
|
16,540 |
|
|
|
2 |
|
|
|
(15 |
) |
|
|
16,527 |
|
Total investments - long-term |
|
$ |
59,229 |
|
|
$ |
7 |
|
|
$ |
(39 |
) |
|
$ |
59,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments-Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities |
|
$ |
19,792 |
|
|
$ |
9 |
|
|
$ |
— |
|
|
$ |
19,801 |
|
U.S. government agency securities |
|
|
38,388 |
|
|
|
16 |
|
|
|
(3 |
) |
|
|
38,401 |
|
Non-U.S. government securities |
|
|
13,734 |
|
|
|
10 |
|
|
|
— |
|
|
|
13,744 |
|
Corporate debt securities |
|
|
62,720 |
|
|
|
22 |
|
|
|
(4 |
) |
|
|
62,738 |
|
Total investments - short-term |
|
$ |
134,634 |
|
|
$ |
57 |
|
|
$ |
(7 |
) |
|
$ |
134,684 |
|
Investments-Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities |
|
$ |
12,252 |
|
|
$ |
8 |
|
|
$ |
— |
|
|
$ |
12,260 |
|
U.S. government agency securities |
|
|
30,627 |
|
|
|
12 |
|
|
|
(3 |
) |
|
|
30,636 |
|
Non-U.S. government securities |
|
|
2,305 |
|
|
|
4 |
|
|
|
— |
|
|
|
2,309 |
|
Corporate debt securities |
|
|
11,152 |
|
|
|
15 |
|
|
|
— |
|
|
|
11,167 |
|
Total investments - long-term |
|
$ |
56,336 |
|
|
$ |
39 |
|
|
$ |
(3 |
) |
|
$ |
56,372 |
|
Unrealized Losses
The following table summarizes the fair value and gross unrealized losses of the Company’s investments, including those securities that are categorized as cash equivalents, with unrealized losses, aggregated by type of investment instrument and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2014 and 2013 (in thousands):
|
|
Less than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
|||||||||||||||
|
|
Fair Value |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
|
Gross Unrealized Losses |
|
||||||
December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities |
|
$ |
22,355 |
|
|
$ |
(12 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
22,355 |
|
|
$ |
(12 |
) |
U.S. government agency securities |
|
|
27,348 |
|
|
|
(20 |
) |
|
|
— |
|
|
|
— |
|
|
|
27,348 |
|
|
|
(20 |
) |
Corporate debt securities |
|
|
59,667 |
|
|
|
(62 |
) |
|
|
— |
|
|
|
— |
|
|
|
59,667 |
|
|
|
(62 |
) |
Total investments |
|
$ |
109,370 |
|
|
$ |
(94 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
109,370 |
|
|
$ |
(94 |
) |
December 31, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities |
|
$ |
5,533 |
|
|
$ |
(6 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,533 |
|
|
$ |
(6 |
) |
Corporate debt securities |
|
|
9,837 |
|
|
|
(3 |
) |
|
|
1,504 |
|
|
|
(1 |
) |
|
|
11,341 |
|
|
|
(4 |
) |
Total investments |
|
$ |
15,370 |
|
|
$ |
(9 |
) |
|
$ |
1,504 |
|
|
$ |
(1 |
) |
|
$ |
16,874 |
|
|
$ |
(10 |
) |
In 2014 and 2013, there were no investments in the Company’s portfolio that were other-than temporarily impaired and the Company did not incur any material realized net gains or losses in the years ended December 31, 2014, 2013 and 2012.
|
11. Fair Value Measurements:
The tables below set forth the Company’s recurring fair value measurements for the periods presented (in thousands):
|
|
|
|
|
|
Fair Value Measurements at December 31, 2014 Using |
|
|||||
Description |
|
Total |
|
|
Quoted Prices in Active Markets for Identical Assets |
|
|
Significant Other Observable Inputs |
|
|||
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
1,395 |
|
|
$ |
1,395 |
|
|
$ |
— |
|
Commercial paper |
|
|
7,549 |
|
|
|
— |
|
|
|
7,549 |
|
Short-term investments |
|
|
185,783 |
|
|
|
— |
|
|
|
185,783 |
|
Long-term investments |
|
|
59,197 |
|
|
|
— |
|
|
|
59,197 |
|
Total fixed income available-for-sale securities |
|
$ |
253,924 |
|
|
$ |
1,395 |
|
|
$ |
252,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts (a) |
|
$ |
14,342 |
|
|
$ |
— |
|
|
$ |
14,342 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts (b) |
|
$ |
8,175 |
|
|
$ |
— |
|
|
$ |
8,175 |
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2013 Using |
|
|||||
Description |
|
Total |
|
|
Quoted Prices in Active Markets for Identical Assets |
|
|
Significant Other Observable Inputs |
|
|||
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
17,596 |
|
|
$ |
17,596 |
|
|
$ |
— |
|
Commercial paper |
|
|
2,499 |
|
|
|
— |
|
|
|
2,499 |
|
Short-term investments |
|
|
134,684 |
|
|
|
— |
|
|
|
134,684 |
|
Long-term investments |
|
|
56,372 |
|
|
|
— |
|
|
|
56,372 |
|
Total fixed income available-for-sale securities |
|
$ |
211,151 |
|
|
$ |
17,596 |
|
|
$ |
193,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts (a) |
|
$ |
6,748 |
|
|
$ |
— |
|
|
$ |
6,748 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts (b) |
|
$ |
6,780 |
|
|
$ |
— |
|
|
$ |
6,780 |
|
(a) |
Included in short-term derivative asset as “Prepaid expenses and other current assets” on the Company’s Consolidated Balance Sheets. |
(b) |
Included in short-term derivative liability as “Other accrued liabilities” on the Company’s Consolidated Balance Sheets. |
There have been no transfers between Level 1 and Level 2 in 2014 and 2013. The Company does not hold any investments classified as Level 3 as of December 31, 2014 and 2013.
In addition, the Company has facilities-related liabilities related to restructuring which were calculated based on the discounted future lease payments less sublease assumptions. This non-recurring fair value measurement is classified as a Level 3 measurement under ASC 820. See Note 8 Restructuring Costs for further details.
The Company’s Term Loan under its Credit Agreement is classified within Level 2 instruments as the borrowings are not actively traded and have a variable interest rate structure based upon market rates currently available to the Company for debt with similar terms and maturities. See Note 9. The Company has elected not to record its Term Loan at fair value, but has measured it at fair value for disclosure purpose. At December 31, 2014 and 2013, the estimated fair value of the Term Loan was approximately $234.9 million and $247.5 million, respectively, using observable market inputs.
|
12. Business Risks and Credit Concentration:
The Company sells products and services which serve the communications equipment market globally. Substantially all of the Company’s revenues are derived from sales of its products and their related services. A substantial majority of the Company’s revenue is from value-added resellers, distributors and service providers. In 2014, 2013 and 2012, one channel partner, ScanSource Communications (“ScanSource”), accounted for 17 %, 16%, and 14%, respectively, of the Company’s total revenues.
The Company subcontracts the manufacture of most of its products to Celestica Inc. (“Celestica”), Askey Computer Corporation (“Askey”), Foxconn Technology Group (“Foxconn”) and VTech Holding Ltd. (“VTech”), which are all third-party contract manufacturers. The Company uses Celestica’s facilities in Thailand and China, and Askey’s, Foxconn’s and VTech’s facilities in China and should there be any disruption in services due to natural disaster, terrorist acts, quarantines or other disruptions associated with infectious diseases, or economic or political difficulties in any of these countries or in Asia or for any other reason, such disruption would harm its business and results of operations. While the Company had begun to develop secondary manufacturing sources for certain products, Celestica’s facilities are currently the manufacturer for substantially all of these products, which means the Company is essentially sole-sourced for the manufacturing of such products, and if Celestica experiences an interruption in operations, suffers from capacity constraints, which may include constraints based on production demands from the Company as it grows its business, or is otherwise unable to meet the Company’s current or future production requirements the Company would experience a delay or inability to ship its products, which would have an immediate negative impact on its revenues. Moreover, any incapacitation of any of the Company’s or its subcontractors’ manufacturing sites, due to destruction, natural disaster or similar events could result in a loss of product inventory. As a result of any of the foregoing, the Company may not be able to meet demand for its products, which could negatively affect revenues in the quarter of the disruption or longer depending upon the magnitude of the event, and could harm its reputation.
The Company markets its products to distributors and end-users throughout the world. Management performs ongoing credit evaluations of the Company’s customers and maintains an allowance for potential credit losses. The Company’s credit risk may increase with the expansion of Polycom’s product offerings as customers place larger orders for initial stocking orders and its growth in emerging markets. There can be no assurance that the Company’s credit loss experience will remain at or near historical levels. At December 31, 2014 and 2013, one customer, ScanSource, accounted for 19% and 11% respectively, of total gross accounts receivable.
The Company has purchased licenses for technology incorporated in its products. The value of these long-term assets is monitored for any impairment and if it is determined that a write-down is necessary, this charge could have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows. There were no such charges in 2014, 2013 and 2012.
|
13. Commitments and Contingencies:
Litigation and SEC Investigation:
From time to time, the Company is involved in claims and legal proceedings that arise in the ordinary course of business. The Company expects that the number and significance of these matters will increase as business expands. In particular, the Company faces an increasing number of patent and other intellectual property claims as the number of products and competitors in Polycom’s industry grows and the functionality of video, voice, data and web conferencing products overlap. Any claims or proceedings against the Company, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources, or require the Company to enter into royalty or licensing agreements which, if required, may not be available on terms favorable to the Company or at all. If management believes that a loss arising from these matters is probable and can be reasonably estimated, the Company will record a reserve for the loss. As additional information becomes available, any potential liability related to these matters is assessed and the estimates revised. Based on currently available information, management does not believe that the ultimate outcomes of these unresolved matters, individually and in the aggregate, are likely to have a material adverse effect on the Company’s financial position, liquidity or results of operations. However, litigation is subject to inherent uncertainties, and the Company’s view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the Company’s financial position and results of operations or liquidity for the period in which the unfavorable outcome occurs or becomes probable, and potentially in future periods.
In 2014, the Company recorded $3.1 million in “Litigation reserves and payments” on its Consolidated Statements of Operations related to on-going litigation matters, which have not yet been settled.
On July 23, 2013, the Company announced that Andrew M. Miller had resigned from the positions of Chief Executive Officer and President of Polycom and from Polycom’s Board of Directors. The Company disclosed that Mr. Miller’s resignation came after a review by the Audit Committee of certain expense submissions by Mr. Miller, where the Audit Committee found certain irregularities in the submissions, for which Mr. Miller had accepted responsibility. Specifically, the Audit Committee determined that Mr. Miller improperly submitted personal expenses to Polycom for payment as business expenses and, in doing so, submitted to Polycom false information about the nature and purpose of expenses.
SEC Investigation. As previously disclosed, the Company has been cooperating with the Enforcement Staff of the Securities and Exchange Commission (“SEC”) in connection with its investigation focused on Mr. Miller's expenses and his resignation. After discussions with the Enforcement Staff, the Company recently made an offer of settlement to resolve the matter, which is subject to the SEC’s approval. The proposed settlement would be entered into by Polycom without admitting or denying the SEC’s findings and will resolve alleged violations of certain provisions of the Securities Exchange Act of 1934 and related rules. Under the terms of the proposed settlement, the Company would pay $750,000 in a civil penalty, which has been fully reserved for in its Consolidated Financial Statements, and agree not to commit or cause any violations of certain provisions of the Securities Exchange Act of 1934 and related rules. There is no assurance that the proposal will be approved by the SEC.
Class Action Lawsuit. On July 26, 2013, a purported shareholder class action, initially captioned Neal v. Polycom Inc., et al., Case No. 3:13-cv-03476-SC, and presently captioned Nathanson v. Polycom, Inc., et al., Case No. 3:13-cv-03476-SC, was filed in the United States District Court for the Northern District of California against the Company and certain of its current and former officers and directors. On December 13, 2013, the Court appointed a lead plaintiff and approved lead and liaison counsel. On February 24, 2014, the lead plaintiff filed a first amended complaint. The amended complaint alleges that, between January 20, 2011 and July 23, 2013, the Company issued materially false and misleading statements or failed to disclose information regarding the Company’s business, operational and compliance policies, including with respect to its former Chief Executive Officer’s expense submissions and the Company’s internal controls. The lawsuit further alleges that the Company’s financial statements were materially false and misleading. The amended complaint alleges violations of the federal securities laws and seeks unspecified compensatory damages and other relief. The defendants filed motions to dismiss the amended complaint. At this time, we are unable to estimate any range of reasonably possible loss relating to the securities class action.
Derivative Lawsuits. On August 21, 2013 and October 16, 2013, two purported shareholder derivative suits, captioned Saraceni v. Miller, et al., Case No. 5:13-cv-03880, and Donnelly v. Miller, et al., Case No. 5:13-cv-04810, respectively, were filed in the United States District Court for the Northern District of California against certain of the Company’s current and former officers and directors. On October 31, 2013, these two federal derivative actions were consolidated into In re Polycom, Inc. Derivative Litigation, Lead Case No. 3:13-cv-03880. Plaintiffs filed a first amended complaint on April 4, 2014. On January 13, 2015, the Court dismissed the first amended complaint and granted plaintiffs leave to file a second amended complaint.
On November 22, 2013 and December 13, 2013, two purported shareholder derivative suits, captioned Ware v. Miller, et al., Case No. 1-13-cv-256608, and Clem v. Miller, et al., Case No. 1-13-cv-257664, respectively, were filed in the Superior Court of California, County of Santa Clara, against certain of the Company’s current and former officers and directors. On January 31, 2014, these two California state derivative actions were consolidated into In re Polycom, Inc. Derivative Shareholder Litigation, Lead Case No. 1-13-cv-256608. The Court has stayed the California state derivative litigation pending resolution of both the federal derivative lawsuit and the federal securities class action.
The Federal and California state consolidated derivative lawsuits purport to assert claims on behalf of the Company, which is named as a nominal defendant in the actions. The complaints (including the dismissed federal derivative complaint) allege claims for breach of fiduciary duty, unjust enrichment, and corporate waste, and allege certain defendants failed to maintain adequate internal controls and issued, or authorized the issuance of, materially false and misleading statements, including with respect to the Company’s former Chief Executive Officer’s expense submissions and the Company’s internal controls. The complaints further allege that certain defendants approved an unjustified separation agreement and caused the Company to repurchase its own stock at artificially inflated prices. The complaints seek unspecified compensatory damages, corporate governance reforms, and other relief. At this time, we are unable to estimate any range of reasonably possible loss relating to the derivative actions.
Standby Letters of Credit:
The Company has standby letters of credit totaling approximately $7.2 million, and $7.3 million at December 31, 2014, and 2013, respectively.
Leases:
The Company leases certain office facilities and equipment under noncancelable operating leases expiring between 2015 and 2023. As of December 31, 2014, the following future minimum lease payments are due under the current lease obligations (in thousands). In addition to these minimum lease payments, the Company is contractually obligated under the majority of its operating leases to pay certain operating expenses during the term of the lease such as maintenance, taxes and insurance.
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
||
|
|
Minimum |
|
|
Estimated |
|
|
Minimum |
|
|
|||
|
|
Lease |
|
|
Sublease |
|
|
Lease |
|
|
|||
Year Ending December 31, |
|
Payments |
|
|
Receipts |
|
|
Payments |
|
|
|||
2015 |
|
$ |
31,864 |
|
|
$ |
(1,808 |
) |
|
$ |
30,056 |
|
|
2016 |
|
|
25,681 |
|
|
|
(1,683 |
) |
|
|
23,998 |
|
|
2017 |
|
|
23,122 |
|
|
|
(1,338 |
) |
|
|
21,784 |
|
|
2018 |
|
|
18,595 |
|
|
|
(1,050 |
) |
|
|
17,545 |
|
|
2019 |
|
|
18,231 |
|
|
|
(1,016 |
) |
|
|
17,215 |
|
|
Thereafter |
|
|
35,252 |
|
|
|
(1,135 |
) |
|
|
34,117 |
|
|
Total |
|
$ |
152,745 |
|
|
$ |
(8,030 |
) |
|
$ |
144,715 |
|
|
Rent expense, including the effect of any future rent escalations or rent holiday periods, is recognized on a straight-line basis over the term of the lease, which is deemed to commence upon the Company gaining access and control of the facility. Rent expense for the years ended December 31, 2014, 2013, and 2012 was $26.8 million, $32.2 million, and $32.8 million, respectively.
|
14. Foreign Currency Derivatives:
The Company maintains a foreign currency risk management program that is designed to reduce the volatility of the Company’s economic value from the effects of unanticipated currency fluctuations. International operations generate both revenues and costs denominated in foreign currencies. The Company’s policy is to hedge significant foreign currency revenues and costs to improve margin visibility and reduce earnings volatility associated with unexpected changes in currency.
Non-Designated Hedges
The Company hedges its net foreign currency monetary assets and liabilities monthly, primarily resulting from foreign currency denominated receivables and payables with foreign exchange forward contracts to reduce the risk that the Company’s earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These derivative instruments are carried at fair value with changes in the fair value recorded as interest and other income (expense), net. These derivative instruments do not subject the Company to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset remeasurement gains and losses on the hedged assets and liabilities. The Company executes non-designated foreign exchange forward contracts primarily denominated in Euros, British Pounds, Israeli Shekels, Brazilian Reals, Chinese Yuan, Japanese Yen, and Mexican Pesos.
The following table summarizes the Company’s notional position by currency, and approximate U.S. dollar equivalent, at December 31, 2014 of the outstanding non-designated hedges (foreign currency and dollar amounts in thousands):
|
|
Original Maturities of 360 Days or Less |
|
Original Maturities of Greater than 360 Days |
|
|||||||||||||||||
|
|
Foreign Currency |
|
|
USD Equivalent |
|
|
Positions |
|
Foreign Currency |
|
|
USD Equivalent |
|
|
Positions |
|
|||||
Brazilian Real |
|
|
10,747 |
|
|
$ |
4,046 |
|
|
Buy |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Brazilian Real |
|
|
21,858 |
|
|
$ |
8,251 |
|
|
Sell |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Chinese Yuan |
|
|
92,276 |
|
|
$ |
14,727 |
|
|
Buy |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Chinese Yuan |
|
|
85,309 |
|
|
$ |
13,672 |
|
|
Sell |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Euro |
|
|
28,862 |
|
|
$ |
36,641 |
|
|
Buy |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Euro |
|
|
71,418 |
|
|
$ |
92,866 |
|
|
Sell |
|
|
— |
|
|
|
— |
|
|
|
— |
|
British Pound |
|
|
27,036 |
|
|
$ |
43,558 |
|
|
Buy |
|
|
— |
|
|
|
— |
|
|
|
— |
|
British Pound |
|
|
28,399 |
|
|
$ |
46,465 |
|
|
Sell |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Israeli Shekel |
|
|
45,706 |
|
|
$ |
12,749 |
|
|
Buy |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Israeli Shekel |
|
|
39,479 |
|
|
$ |
10,146 |
|
|
Sell |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Japanese Yen |
|
|
464,897 |
|
|
$ |
3,889 |
|
|
Buy |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Japanese Yen |
|
|
799,492 |
|
|
$ |
6,724 |
|
|
Sell |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Mexican Peso |
|
|
15,906 |
|
|
$ |
1,080 |
|
|
Buy |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Mexican Peso |
|
|
34,004 |
|
|
$ |
2,367 |
|
|
Sell |
|
|
— |
|
|
|
— |
|
|
|
— |
|
The following table shows the effect of the Company’s non-designated hedges in the Consolidated Statements of Operations for the periods presented (in thousands):
Derivatives Not Designated as Hedging Instruments |
|
Location of Gain or (Loss) Recognized in Income on Derivative |
|
Amount of Gain or (Loss) Recognized in Income on Derivative |
|
|
|
|
Year Ended December 31, 2014 |
|
|||
Foreign exchange contracts |
|
Interest and other income (expense), net |
|
$ |
6,708 |
|
|
|
Year Ended December 31, 2013 |
|
|||
Foreign exchange contracts |
|
Interest and other income (expense), net |
|
$ |
(411 |
) |
|
|
Year Ended December 31, 2012 |
|
|||
Foreign exchange contracts |
|
Interest and other income (expense), net |
|
$ |
(412 |
) |
Cash Flow Hedges
The Company’s foreign exchange risk management program objective is to reduce volatility in the Company’s economic value from unanticipated foreign currency fluctuations. The Company designates forward contracts as cash flow hedges of foreign currency revenues and expenses, primarily the Chinese Yuan, Euro, British Pound and Israeli Shekel. All foreign exchange contracts are carried at fair value on the Consolidated Balance Sheets and the maximum duration of foreign exchange forward contracts do not exceed thirteen months. Speculation is prohibited by policy.
To receive hedge accounting treatment, all cash flow hedging relationships are formally designated at hedge inception, and tested both prospectively and retrospectively to ensure the forward contracts are highly effective in offsetting changes to future cash flows on the hedged transactions. The Company records effective spot to spot changes in these cash flow hedges in “Accumulated other comprehensive income” until they are reclassified to revenue, cost of revenues, or operating expenses together with the hedged transaction. The time value on forward contracts is excluded from effectiveness testing and recorded in “Interest and other income (expense), net” over the life of the contract together with any ineffective portion of the hedge.
The following tables show the effect of the Company’s derivative instruments designated as cash flow hedges in the Consolidated Statements of Operations for the periods presented (in thousands):
|
|
Gain or (Loss) Recognized in OCI-Effective Portion |
|
|
Location of Gain or (Loss) Reclassified from OCI into Income-Effective Portion |
|
Gain or (Loss) Reclassified from OCI into Income-Effective Portion |
|
|
Location of Gain or (Loss) Recognized-Ineffective Portion and Amount Excluded from Effectiveness Testing |
|
Gain or (Loss) Recognized-Ineffective Portion and Amount Excluded from Effectiveness Testing (a) |
|
|||
|
|
Year Ended December 31, 2014 |
|
|||||||||||||
Foreign exchange contracts |
|
$ |
3,627 |
|
|
Product revenues |
|
$ |
1,170 |
|
|
Interest and other income (expense), net |
|
$ |
109 |
|
|
|
|
|
|
|
Cost of revenues |
|
|
320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
$ |
3,627 |
|
|
|
|
$ |
2,341 |
|
|
|
|
$ |
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2013 |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
1,374 |
|
|
Product revenues |
|
$ |
207 |
|
|
Interest and other income (expense), net |
|
$ |
368 |
|
|
|
|
|
|
|
Cost of revenues |
|
|
279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
1,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
164 |
|
|
|
|
|
|
|
|
|
$ |
1,374 |
|
|
|
|
$ |
2,308 |
|
|
|
|
$ |
368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2012 |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
1,018 |
|
|
Product revenues |
|
$ |
7,133 |
|
|
Interest and other income (expense), net |
|
$ |
42 |
|
|
|
|
|
|
|
Cost of revenues |
|
|
(607 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
(974 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
(774 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(1,044 |
) |
|
|
|
|
|
|
|
|
$ |
1,018 |
|
|
|
|
$ |
3,734 |
|
|
|
|
$ |
42 |
|
(a) |
For the year ended December 31, 2014 and 2013, there were no gains or losses for the ineffective portion. For the year ended December 31, 2012, the loss recorded for the ineffective portion and the gain recorded for the excluded time value portion of the hedge was immaterial. |
As of December 31, 2014, the Company estimated all values reported in accumulated other comprehensive income will be reclassified to income within the next twelve months.
In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the related hedge gains and losses on the cash flow hedge would be immediately reclassified to “Interest and other income (expense), net” on the Consolidated Statements of Operations. For the years ended December 31, 2014, 2013 and 2012, there were no such gains or losses.
The following table summarizes the Company’s notional position by currency, and approximate U.S. dollar equivalent, at December 31, 2014 of the outstanding cash flow hedges, all of which are carried at fair value on the Consolidated Balance Sheet (foreign currency and dollar amounts in thousands):
|
|
Original Maturities of 360 Days or Less |
|
Original Maturities of Greater than 360 Days |
||||||||||||||||
|
|
Foreign Currency |
|
|
USD Equivalent |
|
|
Positions |
|
Foreign Currency |
|
|
USD Equivalent |
|
|
Positions |
||||
Chinese Yuan |
|
|
75,140 |
|
|
$ |
11,909 |
|
|
Buy |
|
|
62,600 |
|
|
$ |
9,781 |
|
|
Buy |
Euro |
|
|
17,185 |
|
|
$ |
22,583 |
|
|
Buy |
|
|
11,700 |
|
|
$ |
14,412 |
|
|
Buy |
Euro |
|
|
37,976 |
|
|
$ |
49,729 |
|
|
Sell |
|
|
36,800 |
|
|
$ |
45,330 |
|
|
Sell |
British Pound |
|
|
12,297 |
|
|
$ |
20,142 |
|
|
Buy |
|
|
13,300 |
|
|
$ |
20,713 |
|
|
Buy |
British Pound |
|
|
14,659 |
|
|
$ |
23,998 |
|
|
Sell |
|
|
19,100 |
|
|
$ |
29,746 |
|
|
Sell |
Israeli Shekel |
|
|
51,666 |
|
|
$ |
14,471 |
|
|
Buy |
|
|
44,400 |
|
|
$ |
11,429 |
|
|
Buy |
The estimates of fair value are based on applicable and commonly quoted prices and prevailing financial market information as of December 31, 2014. See Note 11 for additional information on the fair value measurements for all financial assets and liabilities, including derivative assets and derivative liabilities that are measured at fair value in the Consolidated Financial Statements on a recurring basis. The following table sets forth the Company’s derivative instruments measured at gross fair value as reflected in the Consolidated Balance Sheets for the periods presented (in thousands):
|
December 31, 2014 |
|
|
December 31, 2013 |
|
||||||||||
|
Fair Value of Derivatives Designated as Hedge Instruments |
|
|
Fair Value of Derivatives Not Designated as Hedge Instruments |
|
|
Fair Value of Derivatives Designated as Hedge Instruments |
|
|
Fair Value of Derivatives Not Designated as Hedge Instruments |
|
||||
Derivative assets (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
$ |
5,501 |
|
|
$ |
8,841 |
|
|
$ |
4,457 |
|
|
$ |
2,291 |
|
Derivative liabilities (b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
$ |
4,041 |
|
|
$ |
4,134 |
|
|
$ |
4,235 |
|
|
$ |
2,545 |
|
(a) |
All derivative assets are recorded as ”Prepaid expenses and other current assets” in the Consolidated Balance Sheets. |
(b) |
All derivative liabilities are recorded as ”Other accrued liabilities” in the Consolidated Balance Sheets. |
Offsetting Derivative Assets and Liabilities
The Company has entered into master netting arrangements with each of its derivative counterparties. These arrangements afford the right to net derivative assets against liabilities with the same counterparty. Under certain default provisions, the Company has the right to setoff any other amounts payable to the payee whether or not arising under this agreement. As a result of the netting provisions, the Company’s maximum amount of loss under derivative transactions due to credit risk is limited to the net amounts due from the counterparties under the derivative contracts. Although netting is permitted, it is currently the Company’s policy and practice to record all derivative assets and liabilities on a gross basis in the Consolidated Balance Sheets.
The following table sets forth the offsetting of derivative assets for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets |
|
|||||||||
|
|
Gross Amounts of Recognized Assets |
|
|
Gross Amounts Offset in the Consolidated Balance Sheets |
|
|
Net Amounts Of Assets Presented In the Consolidated Balance Sheets |
|
|
Financial Instruments |
|
|
Cash Collateral Pledged |
|
|
Net Amount |
|
||||||
As of December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
14,342 |
|
|
$ |
— |
|
|
$ |
14,342 |
|
|
$ |
(8,175 |
) |
|
$ |
— |
|
|
$ |
6,167 |
|
As of December 31, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
6,748 |
|
|
$ |
— |
|
|
$ |
6,748 |
|
|
$ |
(5,643 |
) |
|
$ |
— |
|
|
$ |
1,105 |
|
The following table sets forth the offsetting of derivative liabilities for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets |
|
|||||||||
|
|
Gross Amounts of Recognized Liabilities |
|
|
Gross Amounts Offset in the Consolidated Balance Sheets |
|
|
Net Amounts Of Liabilities Presented In the Consolidated Balance Sheets |
|
|
Financial Instruments |
|
|
Cash Collateral Pledged |
|
|
Net Amount |
|
||||||
As of December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
8,175 |
|
|
$ |
— |
|
|
$ |
8,175 |
|
|
$ |
(8,175 |
) |
|
$ |
— |
|
|
$ |
— |
|
As of December 31, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
6,780 |
|
|
$ |
— |
|
|
$ |
6,780 |
|
|
$ |
(5,643 |
) |
|
$ |
— |
|
|
$ |
1,137 |
|
|
15. Stockholders’ Equity:
Share Repurchase Programs:
From time to time, the Company’s Board of Directors has approved plans under which the Company may at its discretion purchase shares of its common stock in the open market or through privately negotiated transactions. In July 2014, the Company announced that its Board of Directors had approved a new share repurchase plan (“the 2014 repurchase plan”) under which the Company may at its discretion purchase shares in the open market with an aggregate value of up to $200.0 million. The Company expects to execute this new authorization over the next two years and to fund the share repurchases through cash on hand and future cash flow from operations. In 2014, the Company purchased 3.8 million shares of common stock for cash of $50.0 million from the open market and received 1.5 million shares upon settlement of the accelerated share repurchase contracts as discussed below. In 2013, the Company purchased 45.2 million shares of common stock for cash of $502.3 million, including the shares purchased through a tender offer and an accelerated share repurchase programs as discussed below. The purchase price for the shares of the Company’s stock repurchased is recorded as a reduction to stockholders’ equity. The excess of the cost of treasury stock that is retired over its par value and the portion allocated to additional paid-in capital based on the calculated average price in equity is recorded as a charge to retained earnings.
In September 2013, the Company announced that its Board of Directors had authorized the repurchase of $400.0 million, or approximately 20 percent, of the Company’s outstanding common stock (“Return of Capital Program”), through a $250.0 million modified “Dutch Auction” self-tender offer (the “Tender Offer”) and subsequent open market purchases or privately negotiated transactions. The Company funded the program with $150.0 million in cash and its $250.0 million Term Loan (see Note 9).
Modified “Dutch Auction” Self-Tender Offer
The Tender Offer expired on October 30, 2013. The Company accepted for payment an aggregate of 27.4 million shares of its common stock at a purchase price of $10.40 per share, for an aggregate cost of approximately $285.4 million, excluding fees and expenses relating to the Tender Offer. The excess of the purchase price over the fair value on the date the shares were tendered was not material and no charge was recorded in the Company’s Consolidated Statements of Operations. The costs associated with the Tender Offer were accounted for as an adjustment to the stockholders’ equity.
Accelerated Share Repurchase Agreements
On December 4, 2013, the Company entered into separate accelerated share repurchase (“ASR”) agreements with two financial institutions to repurchase an aggregate of $114.6 million of common stock as part of the last phase of the Company’s $400.0 million Return of Capital Program. Under the terms of the ASR agreements, the Company paid an aggregate $114.6 million of cash and received an initial delivery of approximately 8.0 million shares in December 2013. The ASR contracts were settled in June 2014, whereby the Company received an additional 1.5 million shares upon settlement. The aggregate 9.5 million shares ultimately purchased under the ASR program was determined based on the Company’s volume-weighted average stock price (“VWAP”) less an agreed upon discount during the term of the transactions. Total shares repurchased were immediately retired upon delivery and accounted for as a reduction to stockholders’ equity. The costs associated with the ASR transactions were recorded as an adjustment to the stockholders’ equity. Additionally, the Company accounted for the ASR transactions as repurchases of common stock for the purpose of calculating its earnings per share when the shares were received.
Accumulated Other Comprehensive Income:
The following table summarizes the changes in accumulated other comprehensive income, net of tax, by component for the periods presented (in thousands). The tax effects were not shown separately, as the impacts were not material.
|
|
Unrealized Gains and Losses on Cash Flow Hedges |
|
|
Unrealized Gains and Losses on Available-for- Sale Securities |
|
|
Foreign Currency Translation |
|
|
Total |
|
||||
Balance as of December 31, 2012 |
|
$ |
1,014 |
|
|
$ |
2 |
|
|
$ |
3,180 |
|
|
$ |
4,196 |
|
Other comprehensive income (loss) before reclassifications |
|
|
1,374 |
|
|
|
18 |
|
|
|
1,039 |
|
|
|
2,431 |
|
Amounts reclassified from accumulated other comprehensive income (a) |
|
|
(2,308 |
) |
|
|
53 |
|
|
|
— |
|
|
|
(2,255 |
) |
Net current-period other comprehensive income (loss) |
|
|
(934 |
) |
|
|
71 |
|
|
|
1,039 |
|
|
|
176 |
|
Balance as of December 31, 2013 |
|
$ |
80 |
|
|
$ |
73 |
|
|
$ |
4,219 |
|
|
$ |
4,372 |
|
Other comprehensive income (loss) before reclassifications |
|
|
3,627 |
|
|
|
(115 |
) |
|
|
(1,422 |
) |
|
|
2,090 |
|
Amounts reclassified from accumulated other comprehensive income (a) |
|
|
(2,341 |
) |
|
|
(10 |
) |
|
|
— |
|
|
|
(2,351 |
) |
Net current-period other comprehensive income (loss) |
|
|
1,286 |
|
|
|
(125 |
) |
|
|
(1,422 |
) |
|
|
(261 |
) |
Balance as of December 31, 2014 |
|
$ |
1,366 |
|
|
$ |
(52 |
) |
|
$ |
2,797 |
|
|
$ |
4,111 |
|
(a) |
See Note 14 for details of gains and losses, net of taxes, reclassified out of accumulated other comprehensive income into net income related to cash flow hedges and each line item of net income affected by the reclassification. Gains and losses related to available-for-sale securities were reclassified into interest and other income (expense), net in the Consolidated Statements of Operations, net of taxes. |
|
16. Stock-Based Employee Benefit Plans:
Equity Incentive Plans
Polycom’s equity incentive plans provide for, among other award types, stock options, restricted stock units, and performance shares to be granted to employees and non-employee directors. On May 26, 2011, stockholders approved the 2011 Equity Incentive Plan (“2011 Plan”) and reserved for issuance under the 2011 Plan 19,800,000 shares, terminating any remaining shares available for grant under the 2004 Equity Incentive Plan (“2004 Plan”) as of such date. On June 5, 2013, shareholders approved the addition of 10,500,000 shares to the available shares for issuance under the 2011 Plan. Additionally, to the extent any shares, not to exceed 13,636,548 shares, would have been returned to our 2004 Plan after May 26, 2011, on account of the expiration, cancellation or forfeiture of awards granted under our 1996 Stock Incentive Plan or the 2004 Plan, those shares instead have been added to the reserve of shares available under the 2011 Plan.
Activity under the above plans for the year ended December 31, 2014 was as follows:
|
|
Shares Available for Grant (1) |
|
|
Balances, December 31, 2013 |
|
|
14,272,794 |
|
Performance shares granted (2) |
|
|
(1,122,849 |
) |
Performance shares forfeited |
|
|
2,199,968 |
|
Restricted stock units granted |
|
|
(4,705,549 |
) |
Restricted stock units forfeited |
|
|
2,471,450 |
|
Options granted |
|
|
— |
|
Options forfeited |
|
|
90,156 |
|
Options forfeited under ViVu Plan (3) |
|
|
(70 |
) |
Options expired |
|
|
233,532 |
|
Balances, December 31, 2014 |
|
|
13,439,432 |
|
(1) |
For purposes of this table, shares are counted on a fungible basis (i.e., at a higher multiplier than one-for-one) for full value award activity. |
(2) |
Includes 25,666 additional shares (39,526 shares applying the applicable fungible ratio) resulting from above target performance. |
(3) |
The Company acquired the outstanding unvested stock options under the ViVu, Inc. 2008 Equity Incentive Plan as a result of its acquisition of ViVu, Inc. in 2011. |
Stock Options:
Under the terms of the 2004 Plan and the 2011 Plan, options may not be granted at prices lower than fair market value at the date of grant. Options granted expire seven years from the date of grant and are only exercisable upon vesting. The Company settles employee stock option exercises with newly issued common shares. In 2012, the Company granted 479,571 non-qualified stock options to certain employees. The weighted-average estimated fair value of those options was $4.45 per share. Per the terms of the 2012 option grant, 50% of the options vested on the one year anniversary of the grant date and the remaining 50% vested on the second anniversary of the grant date. There were no stock options granted in 2014 and 2013.
Activity under the stock option plans for the year ended December 31, 2014 was as follows:
|
|
Outstanding Options |
|
|
|
|
|
|
|
|
|
|||||
|
|
Number of Shares |
|
|
Weighted Avg Exercise Price |
|
|
Weighted Avg Contractual Term (Years) |
|
|
Aggregate Intrinsic Value (in thousands) |
|
||||
Balances, December 31, 2013 |
|
|
697,218 |
|
|
$ |
13.64 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(133,037 |
) |
|
$ |
11.37 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(90,156 |
) |
|
$ |
14.50 |
|
|
|
|
|
|
|
|
|
Options expired |
|
|
(233,532 |
) |
|
$ |
16.67 |
|
|
|
|
|
|
|
|
|
Balances, December 31, 2014 |
|
|
240,493 |
|
|
$ |
11.62 |
|
|
|
3.92 |
|
|
$ |
451,780 |
|
All stock options granted were fully vested and exercisable as of December 31, 2014. The total pre-tax intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was $0.2 million, $0.3 million and $3.1 million, respectively.
The options outstanding and currently exercisable by exercise price at December 31, 2014 are as follows:
|
|
|
|
Stock Options Outstanding and Exercisable |
|
|
|||||||||
Range of Exercise Price |
|
|
Number Outstanding |
|
|
Weighted Average Remaining Contractual Life (Yrs) |
|
|
Weighted Average Exercise Price |
|
|
||||
$ |
0.75 |
|
|
|
42 |
|
|
|
5.05 |
|
|
$ |
0.75 |
|
|
$ |
11.61 |
|
|
|
220,502 |
|
|
|
4.27 |
|
|
$ |
11.61 |
|
|
$11.67 - $11.80 |
|
|
|
19,949 |
|
|
|
0.15 |
|
|
$ |
11.77 |
|
|
|
|
|
|
|
|
240,493 |
|
|
|
3.92 |
|
|
$ |
11.62 |
|
|
As of December 31, 2013, and 2012, 525,180, and 963,873 outstanding options were exercisable at a weighted average exercise price of $14.31, and $13.22, respectively. As of December 31, 2014, total compensation cost related to stock options not yet recognized was immaterial.
Performance Shares and Restricted Stock Units:
The Compensation Committee of the Board of Directors may also grant performance shares and restricted stock units (“RSUs”) under the 2011 Plan to officers, non-employee directors, and certain other employees as a component of the Company’s broad-based equity compensation program. Performance shares represent a commitment by the Company to deliver shares of Polycom common stock at a future point in time, subject to the fulfillment by the Company of pre-defined performance criteria. Such awards will be earned only if performance targets over the performance periods established by or under the direction of the Compensation Committee are met. The number of performance shares subject to vesting is determined at the end of a given performance period. Generally, if the performance criteria are deemed achieved, performance shares will vest from one to three years from the anniversary of the grant date. RSUs are time-based awards that generally vest over a period of one to three years from the date of grant.
The Company granted performance shares to certain employees and executives, which contain a market condition based on Total Shareholder Return (TSR) and which measure the Company’s relative performance against the NASDAQ Composite Index. Such performance shares will be delivered in common stock at the end of the vesting period based on the Company’s actual performance compared to the target performance criteria and may equal from zero percent (0%) to one hundred fifty percent (150%) of the target award. The fair value of a performance share with a market condition is estimated on the date of award, using a Monte Carlo simulation model to estimate the total return ranking of the Company’s stock among the NASDAQ Composite Index companies over each performance period.
The Company also granted RSUs. The fair value of RSUs is based on the closing market price of the Company’s common stock on the date of award. The awards will be delivered in common stock at the end of each vesting period. Stock-based compensation expense for the RSUs is recognized using the graded vesting method.
In addition, the Company granted non-employee directors annual awards of RSUs. The awards vest quarterly over approximately one year from the date of grant. The fair value of these awards is the closing market price of the Company’s common stock on the date of grant. Stock-based compensation expense for these awards is amortized over six months from the date of grant due to voluntary termination provisions contained in the underlying agreements.
The following table summarizes the changes in unvested performance shares and RSUs and non-employee director RSUs for 2014:
|
|
Number of Shares (1) |
|
|
Weighted Average Grant Date Fair Value |
|
||
Unvested shares at December 31, 2013 |
|
|
9,205,462 |
|
|
$ |
12.59 |
|
Performance shares granted (2) |
|
|
729,122 |
|
|
$ |
13.64 |
|
Restricted stock units granted (3) |
|
|
3,055,551 |
|
|
$ |
12.96 |
|
Performance shares vested and issued |
|
|
(164,995 |
) |
|
$ |
9.60 |
|
Restricted stock units vested and issued |
|
|
(3,302,419 |
) |
|
$ |
13.48 |
|
Performance shares forfeited |
|
|
(1,232,780 |
) |
|
$ |
14.66 |
|
Restricted stock units forfeited |
|
|
(1,464,250 |
) |
|
$ |
12.01 |
|
Unvested shares at December 31, 2014 |
|
|
6,825,691 |
|
|
$ |
12.26 |
|
(1) |
For the purposes of this table, shares are counted on a one-for-one basis, not on a fungible share counting basis. |
(2) |
Includes 25,666 additional shares resulting from above target performance. |
(3) |
Includes 140,000 restricted stock units granted to non-employee directors. |
As of December 31, 2014, there was approximately $37.5 million of total unrecognized compensation cost related to unvested awards, which is expected to be recognized over a weighted-average period of one year. The total fair value of shares vested in 2014, 2013, and 2012 was $46.1 million, $44.2 million, and $43.4 million, respectively.
Employee Stock Purchase Plan:
During the third quarter of 2011, the Company revised the administration of its Employee Stock Purchase Plan (“ESPP”) from a six-month offering and purchase period to a two-year offering period with four six-month purchase periods. Under the current ESPP, the Company can grant stock purchase rights to all eligible employees during a two-year offering period with purchase dates at the end of each six-month purchase period (each January and July). Participants lock in a purchase price per share at the beginning of the offering period upon plan enrollment. If the stock price on any subsequent offering period enrollment date is less than the lock-in price, the ESPP has a reset feature that automatically withdraws and re-enrolls participants into a new two-year offering period. Further, the ESPP permits participants to increase or decrease contribution elections at the end of a purchase period for future purchase periods within the same offering period. Shares are purchased through employees’ payroll deductions, currently up to a maximum of 15% of employees’ compensation, at purchase prices equal to 85% of the lesser of the fair market value of the Company’s common stock at either the date of the employee’s entrance to the offering period or the purchase date. No participant may purchase more than $25,000 worth of common stock in any one calendar year period, or 10,000 shares of common stock on any one purchase date. As of December 31, 2014, there were 11,315,067 shares available to be issued under the ESPP. A total of 2,944,069 shares, 2,904,287 shares, and 1,867,683 shares were purchased in 2014, 2013, and 2012, respectively, at an average per share price of $7.55, $7.41, and $11.24, respectively.
During the three months ended March 31, 2012 and September 30, 2012, the Company modified the terms of certain existing awards under its ESPP as a result of the reset feature of the ESPP plan, and incurred a resultant cumulative $20.6 million of incremental expense to be recognized over the vesting term. Approximately $1.6 million, $8.8 million, and $10.2 million of the incremental expense was recognized in 2014, 2013, and 2012, respectively. Modification as a result of the reset feature of the ESPP plan occurred again during the three months ended September 30, 2013, while the resulting incremental expense was not material.
Stock-Based Compensation Expense:
The following table summarizes stock-based compensation expense recorded and its allocation within the Consolidated Statements of Operations for the periods presented (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Cost of sales - product |
|
$ |
2,463 |
|
|
$ |
2,892 |
|
|
$ |
3,593 |
|
Cost of sales - service |
|
|
4,293 |
|
|
|
5,852 |
|
|
|
6,611 |
|
Stock-based compensation expense included in cost of sales |
|
|
6,756 |
|
|
|
8,744 |
|
|
|
10,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
14,893 |
|
|
|
26,570 |
|
|
|
36,791 |
|
Research and development |
|
|
10,299 |
|
|
|
15,634 |
|
|
|
20,195 |
|
General and administrative |
|
|
16,012 |
|
|
|
13,517 |
|
|
|
21,571 |
|
Stock-based compensation expense included in operating expenses |
|
|
41,204 |
|
|
|
55,721 |
|
|
|
78,557 |
|
Stock-based compensation expense |
|
|
47,960 |
|
|
|
64,465 |
|
|
|
88,761 |
|
Less: tax benefit |
|
|
9,492 |
|
|
|
11,174 |
|
|
|
21,880 |
|
Stock-based compensation expense related to employee equity awards and employee stock purchases, net of tax |
|
$ |
38,468 |
|
|
$ |
53,291 |
|
|
$ |
66,881 |
|
Stock-based compensation expense is not allocated to segments because it is separately maintained at the corporate level. As the stock-based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest, such amounts have been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant based on the Company’s historical experience and revised in subsequent periods if actual forfeitures differ from those estimates. During the three months ended March 31, 2014, the Company performed its annual review of assumptions, which resulted in an increase in the forfeiture rate. The effect of the change in the forfeiture rate decreased stock-based compensation expense by approximately $1.8 million which decreased the Company’s net loss by approximately $1.4 million or $0.01 per share in the three months ended March 31, 2014. There was no material impact in the remaining period of 2014. Additionally, during the three months ended March 31, 2014, the Company recorded a benefit of $2.1 million related to actual forfeitures of awards granted to former officers, and there was no such benefit recorded in the remaining period of 2014.
Valuation Assumptions of Stock Options and Stock Purchase Rights:
The weighted-average estimated fair value of stock options granted in 2012 was $4.45 per share. The Company did not grant any stock options in 2014 and 2013. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option valuation model based on the following assumptions:
|
|
2012 |
|
|
Expected volatility |
|
|
51.24 |
% |
Risk-free interest rate |
|
|
0.5 |
% |
Expected dividends |
|
|
0.0 |
% |
Expected life (yrs) |
|
|
3.70 |
|
The estimated fair value per share of employee stock purchase rights granted pursuant to ESPP in 2014, 2013, and 2012 ranged from $2.80 to $4.48, from $2.60 to $4.57, and from $2.69 to $8.4, respectively, and was estimated on the date of grant using the Black-Scholes option valuation model based on the following assumptions:
|
|
2014 |
|
2013 |
|
2012 |
|
|
Expected volatility |
|
26.47-32.18% |
|
42.40-48.89% |
|
48.27-61.78% |
|
|
Risk-free interest rate |
|
0.05-0.47% |
|
0.08-0.35% |
|
0.09-0.24% |
|
|
Expected dividends |
|
0.0% |
|
0.0% |
|
|
0.0% |
|
Expected life (yrs) |
|
0.5-2.0 |
|
0.5-2.0 |
|
0.5-2.0 |
|
The fair value of stock options and employee stock purchase rights is recognized as expense using the graded vesting method.
The Company computed its expected volatility assumption based on blended volatility (50% historical volatility and 50% implied volatility). The selection of the blended volatility assumption was based upon the Company’s assessment that blended volatility is more representative of the Company’s future stock price trends as it weighs in the longer term historical volatility with the near term future implied volatility.
The risk-free interest rate assumption is based upon published interest rates appropriate for the expected life of the Company’s employee stock options and stock purchase rights.
The dividend yield assumption is based on the Company’s history of not paying dividends and no future expectations of dividend payouts.
The expected life of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding and 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 as influenced by changes to the terms of the Company’s stock-based awards. The expected life of employee stock purchase rights represents the contractual terms of the underlying program.
|
17. Employee Benefit Plan:
The Company has a defined contribution benefit plan under Section 401(k) of the Internal Revenue Code (the “Polycom 401(k) Plan”), which covers substantially all U.S. employees. Eligible employees may elect to contribute pre-tax amounts to the Polycom 401(k) Plan, through payroll deductions, subject to certain limitations. The Company does not offer its own stock as an investment option in the Polycom 401(k) Plan. The Company matches in cash 50% of the first 6% of compensation employees contribute to the Polycom 401(k) Plan, up to a certain maximum per participating employee per year. All matching contributions are 100% vested immediately.
The Company’s contributions to the Polycom 401(k) Plan totaled approximately $2.8 million, $3.0 million, $3.0 million in 2014, 2013, and 2012, respectively.
|
18. Income Taxes:
Income tax expense (benefit) consists of the following (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Income tax expense from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(2,843 |
) |
|
$ |
(953 |
) |
|
$ |
44,569 |
|
State |
|
|
(235 |
) |
|
|
(72 |
) |
|
|
3,283 |
|
Foreign |
|
|
8,352 |
|
|
|
8,604 |
|
|
|
9,488 |
|
|
|
$ |
5,274 |
|
|
$ |
7,579 |
|
|
$ |
57,340 |
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(2,562 |
) |
|
$ |
(10,715 |
) |
|
$ |
(13,372 |
) |
State |
|
|
(273 |
) |
|
|
(818 |
) |
|
|
(1,308 |
) |
Foreign |
|
|
(1,483 |
) |
|
|
285 |
|
|
|
(3,193 |
) |
|
|
$ |
(4,318 |
) |
|
$ |
(11,248 |
) |
|
$ |
(17,873 |
) |
Total income tax expense (benefit) from continuing operations |
|
$ |
956 |
|
|
$ |
(3,669 |
) |
|
$ |
39,467 |
|
Income tax expense (benefit) from discontinued operations |
|
$ |
— |
|
|
$ |
96 |
|
|
$ |
(29,311 |
) |
Included in income tax benefit from discontinued operations in 2012 is a tax benefit of $35.4 million recorded on the sale of the Company’s EWS business, as discussed in Note 4.
Income from continuing operations before income taxes is categorized geographically as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
United States |
|
$ |
(2,317 |
) |
|
$ |
(17,823 |
) |
|
$ |
(37,025 |
) |
Foreign |
|
|
45,332 |
|
|
|
(4,381 |
) |
|
|
39,523 |
|
Total income (loss) from continuing operations before income taxes |
|
$ |
43,015 |
|
|
$ |
(22,204 |
) |
|
$ |
2,498 |
|
The Company’s tax provision from continuing operations differs from the provision computed using statutory tax rates as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Federal tax at statutory rate |
|
$ |
15,055 |
|
|
$ |
(7,771 |
) |
|
$ |
2,194 |
|
State taxes, net of federal benefit |
|
|
(508 |
) |
|
|
(1,571 |
) |
|
|
2,354 |
|
Non-deductible share-based compensation expense |
|
|
(346 |
) |
|
|
2,900 |
|
|
|
6,143 |
|
Foreign income at tax rates different than U.S. rates |
|
|
(14,025 |
) |
|
|
7,104 |
|
|
|
(10,176 |
) |
Changes in reserves for uncertain tax positions |
|
|
(756 |
) |
|
|
(2,497 |
) |
|
|
(3,926 |
) |
Research and development tax credit |
|
|
(1,898 |
) |
|
|
(4,243 |
) |
|
|
(268 |
) |
Domestic production activities deduction |
|
|
(22 |
) |
|
|
(757 |
) |
|
|
(1,136 |
) |
Gain on intercompany debt |
|
|
— |
|
|
|
— |
|
|
|
36,163 |
|
Non-deductible executive compensation expense |
|
|
778 |
|
|
|
460 |
|
|
|
358 |
|
Subpart F income |
|
|
679 |
|
|
|
716 |
|
|
|
657 |
|
Non-deductible acquisition and divestiture costs |
|
|
(4 |
) |
|
|
(355 |
) |
|
|
4,782 |
|
Sale of intellectual property |
|
|
2,115 |
|
|
|
2,947 |
|
|
|
2,356 |
|
Foreign tax credit |
|
|
(317 |
) |
|
|
(359 |
) |
|
|
(264 |
) |
Other |
|
|
205 |
|
|
|
(243 |
) |
|
|
230 |
|
Tax provision (benefit) |
|
$ |
956 |
|
|
$ |
(3,669 |
) |
|
$ |
39,467 |
|
During 2012, the Company implemented a global restructuring program that was designed to accommodate the trend toward more software and virtual based solutions versus a traditional hardware distribution model. As part of the restructuring, $38.8 million in federal and state taxes were recorded in 2012 on the financing of the global restructuring.
The tax effects of temporary differences that give rise to the deferred tax assets (liabilities) are presented below (in thousands):
|
|
December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
Property and equipment, net, principally due to difference in depreciation |
|
$ |
7,534 |
|
|
$ |
6,508 |
|
Capitalized research and development costs |
|
|
— |
|
|
|
425 |
|
Acquired intangibles |
|
|
4,490 |
|
|
|
3,742 |
|
Inventory |
|
|
5,685 |
|
|
|
6,910 |
|
Restructuring reserves |
|
|
13,722 |
|
|
|
10,214 |
|
Deferred revenue |
|
|
10,964 |
|
|
|
13,699 |
|
Other reserves |
|
|
20,400 |
|
|
|
17,570 |
|
Share-based compensation |
|
|
11,910 |
|
|
|
15,906 |
|
Net operating loss and capital loss carryforwards |
|
|
2,535 |
|
|
|
2,511 |
|
Tax credit carryforwards |
|
|
21,237 |
|
|
|
16,457 |
|
Deferred tax asset |
|
|
98,477 |
|
|
|
93,942 |
|
Capitalized research and development costs |
|
|
(766 |
) |
|
|
— |
|
Acquired intangibles |
|
|
(1,843 |
) |
|
|
(2,249 |
) |
Deferred tax asset before valuation allowance |
|
$ |
95,868 |
|
|
$ |
91,693 |
|
Valuation allowance |
|
|
(3,216 |
) |
|
|
(3,359 |
) |
Deferred tax asset, net of valuation allowance |
|
$ |
92,652 |
|
|
$ |
88,334 |
|
As of December 31, 2014, the Company had approximately $1.4 million in tax effected net operating loss carryforwards, $1.1 million in tax effected capital loss carryforwards, and $21.2 million in tax effected credit carryforwards. All of the net operating loss carryforwards and $0.1 million in credits relate to acquisitions and, as a result, are limited in the amount that can be recognized in any one year. The capital loss and net operating loss carryforward assets and tax credit carryforwards begin to expire in 2015. Included in the net deferred tax asset balance is a $3.2 million valuation allowance, $2.7 million of which relates to research credits in a jurisdiction with a history of credits in excess of taxable profits, and $0.5 million of which relates to foreign tax credit carryforwards.
The Company provides for U.S. income taxes on the earnings of foreign subsidiaries unless they are considered permanently invested outside of the U.S. At December 31, 2014, the cumulative amount of earnings upon which U.S. income tax has not been provided is approximately $339.6 million. It is not practicable to determine the income tax liability that might be incurred if these earnings were to be repatriated to the U.S.
Excess tax benefits associated with stock option exercises are credited to stockholders’ equity. The reduction of income taxes payable resulting from the exercise of employee stock options and other employee stock programs that was credited to stockholders’ equity was approximately $5.1 million for the year ended December 31, 2012.
As a result of certain employment and capital investment actions, the Company’s income in certain foreign countries is subject to reduced tax rates. A portion of these tax incentives will expire in 2015, and the majority of the remaining tax incentives will expire in 2016. The income tax benefit attributable to tax incentives was estimated to be $3.1 million ($0.02 per share) in 2014, of which approximately $0.2 million is based on tax incentives that will expire at the end of fiscal 2015. As of December 31, 2013 and December 31, 2012, the income tax benefits attributable to tax incentives were estimated to be $1.7 million and $6.5 million ($0.01 and $0.04 per share) for each of the respective years.
In 2014 and 2013, the Company recorded reserve reductions of $0.9 million and $2.4 million, respectively, all of which were due to the expiration of statutes of limitation in both the U.S and foreign jurisdictions. In 2012, the Company recorded reserve reductions of $10.0 million, $0.8 million of which was paid in settlement of a multi-year state tax audit, and $5.7 million of which was due to a reduction in unrecognized tax benefits for research credits from acquired companies. The expiration of statutes of limitation in both the U.S. and foreign jurisdictions also resulted in reserve releases of $3.5 million.
The aggregate changes in the balance of the Company’s gross unrecognized tax benefits were as follows for the periods indicated (in thousands):
|
|
December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Beginning balance |
|
$ |
22,012 |
|
|
$ |
23,049 |
|
|
$ |
32,408 |
|
Additions based on tax positions taken during a prior period |
|
|
— |
|
|
|
— |
|
|
|
304 |
|
Reductions based on tax positions taken during a prior period |
|
|
— |
|
|
|
— |
|
|
|
(5,690 |
) |
Additions based on tax positions taken during the current period |
|
|
531 |
|
|
|
1,414 |
|
|
|
310 |
|
Reductions related to settlement of tax matters |
|
|
— |
|
|
|
— |
|
|
|
(807 |
) |
Reductions related to a lapse of applicable statue of limitations |
|
|
(901 |
) |
|
|
(2,451 |
) |
|
|
(3,476 |
) |
Ending balance |
|
$ |
21,642 |
|
|
$ |
22,012 |
|
|
$ |
23,049 |
|
The unrecognized tax benefits would affect income tax expense if recognized. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of December 31, 2014 and December 31, 2013, the Company had approximately $1.6 million and $1.5 million, respectively, of accrued interest and penalties related to uncertain tax positions.
By the end of 2015, uncertain tax positions may be reduced as a result of a lapse of the applicable statutes of limitations or the resolutions of ongoing audits in various jurisdictions. The Company anticipates that the reduction in 2015 will approximate $0.6 million and the reserve releases would be recorded as adjustments to tax expense in the period released.
The Company files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to 2011. Foreign income tax matters for most foreign jurisdictions have been concluded for years through 2008, except India which is concluded through March 2007, and Brazil, China, Israel, Singapore and the United Kingdom, which have been concluded for years through 2009 and France which has been concluded for years through 2010.
|
20. Business Segment Information:
The Company conducts its business globally and is managed geographically in three segments: (1) Americas, which consist of North America and CALA reporting units, (2) EMEA and (3) APAC. The segments are determined in accordance with how management views and evaluates the Company’s business and allocates its resources, and based on the criteria as outlined in the authoritative guidance.
Segment Revenue and Profit
Segment revenues consist of product and service revenues. Product revenues are attributed to a segment based on the ordering location of the customer. For internal reporting purposes and determination of segment contribution margins, geographic segment product revenues may differ slightly from actual geographic revenues due to internal revenue allocations between the Company’s segments. Service revenues are generally attributed to a segment based on the end-user’s location where services are performed. A significant portion of each segment’s expenses arise from shared services and infrastructure that Polycom has historically allocated to the segments in order to realize economies of scale and to use resources efficiently.
Segment contribution margin includes all geographic segment revenues less the related cost of sales and direct sales and marketing expenses. Management allocates some infrastructure costs, such as facilities and IT costs, in determining segment contribution margins. Contribution margin is used, in part, to evaluate the performance of, and allocate resources to, each of the segments. Certain operating expenses are not allocated to segments because they are separately managed at the corporate level. These unallocated costs include corporate manufacturing costs, sales and marketing costs other than direct sales and marketing expenses, research and development expenses, general and administrative costs, such as legal and accounting, stock-based compensation costs, transaction-related costs, amortization of purchased intangibles, restructuring costs and interest and other income (expense), net.
Segment Data
The results of the reportable segments are derived directly from Polycom’s management reporting system. The results are based on Polycom’s method of internal reporting and are not reported in conformity with accounting principles generally accepted in the United States. Management measures the performance of each segment based on several metrics, including contribution margin as defined above. Asset data, with the exception of gross accounts receivable, is not reviewed by management at the segment level.
Financial information for each reportable geographical segment as of and for the fiscal years ended December 31, 2014, 2013, and 2012, based on the Company’s internal management system and as utilized by the Company’s Chief Operating Decision Maker (“CODM”), its Chief Executive Officer, is as follows (in thousands):
|
|
Americas |
|
|
EMEA |
|
|
APAC |
|
|
Total |
|
||||
2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
662,533 |
|
|
$ |
349,821 |
|
|
$ |
332,800 |
|
|
$ |
1,345,154 |
|
% of total revenue |
|
|
49 |
% |
|
|
26 |
% |
|
|
25 |
% |
|
|
100 |
% |
Contribution margin |
|
$ |
270,265 |
|
|
$ |
150,426 |
|
|
$ |
140,365 |
|
|
$ |
561,056 |
|
% of segment revenue |
|
|
41 |
% |
|
|
43 |
% |
|
|
42 |
% |
|
|
42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
694,522 |
|
|
$ |
338,035 |
|
|
$ |
335,832 |
|
|
$ |
1,368,389 |
|
% of total revenue |
|
|
50 |
% |
|
|
25 |
% |
|
|
25 |
% |
|
|
100 |
% |
Contribution margin |
|
$ |
270,786 |
|
|
$ |
142,686 |
|
|
$ |
136,462 |
|
|
$ |
549,934 |
|
% of segment revenue |
|
|
39 |
% |
|
|
42 |
% |
|
|
41 |
% |
|
|
40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
689,099 |
|
|
$ |
345,723 |
|
|
$ |
357,806 |
|
|
$ |
1,392,628 |
|
% of total revenue |
|
|
49 |
% |
|
|
25 |
% |
|
|
26 |
% |
|
|
100 |
% |
Contribution margin |
|
$ |
281,229 |
|
|
$ |
138,886 |
|
|
$ |
147,699 |
|
|
$ |
567,814 |
|
% of segment revenue |
|
|
41 |
% |
|
|
40 |
% |
|
|
41 |
% |
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross accounts receivable |
|
$ |
88,316 |
|
|
$ |
62,540 |
|
|
$ |
63,808 |
|
|
$ |
214,664 |
|
% of total gross accounts receivable |
|
|
41 |
% |
|
|
29 |
% |
|
|
30 |
% |
|
|
100 |
% |
At December 31, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross accounts receivable |
|
$ |
86,243 |
|
|
$ |
71,970 |
|
|
$ |
66,921 |
|
|
$ |
225,134 |
|
% of total gross accounts receivable |
|
|
38 |
% |
|
|
32 |
% |
|
|
30 |
% |
|
|
100 |
% |
*The United States and China, individually, accounted for more than 10% of the Company’s revenues in 2014, 2013 and 2012. Net revenues in the United States were $565.9 million, $589.6 million, and $583.0 million for the years ended December 31, 2014, 2013, and 2012, respectively. Net revenues in China were $144.7 million, $147.3 million, and $159.3 million for the years ended December 31, 2014, 2013 and 2012, respectively. During 2014, 2013, and 2012, one customer, ScanSource, accounted for 17%, 16%, and 14%, respectively, of the Company’s revenues. At December 31, 2014, 2013, ScanSource accounted for 19% and 11%, respectively, of total gross accounts receivable.
The following tables set forth the reconciliation of segment information to Polycom consolidated totals (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Segment contribution margin |
|
$ |
561,056 |
|
|
$ |
549,934 |
|
|
$ |
567,814 |
|
Corporate and unallocated costs |
|
|
(409,700 |
) |
|
|
(430,471 |
) |
|
|
(418,465 |
) |
Stock-based compensation expense |
|
|
(47,960 |
) |
|
|
(64,465 |
) |
|
|
(88,761 |
) |
Effect of stock-based compensation cost on warranty expense |
|
|
(494 |
) |
|
|
(547 |
) |
|
|
(669 |
) |
Amortization of purchased intangibles |
|
|
(12,816 |
) |
|
|
(19,750 |
) |
|
|
(17,465 |
) |
Restructuring costs |
|
|
(40,347 |
) |
|
|
(48,470 |
) |
|
|
(22,024 |
) |
Litigation reserves and payments |
|
|
(3,130 |
) |
|
|
— |
|
|
|
— |
|
Transaction-related costs |
|
|
(156 |
) |
|
|
(3,424 |
) |
|
|
(14,064 |
) |
Interest and other income (expense), net |
|
|
(3,438 |
) |
|
|
(5,011 |
) |
|
|
(3,868 |
) |
Income (loss) from continuing operations before provision for (benefit from) income taxes |
|
$ |
43,015 |
|
|
$ |
(22,204 |
) |
|
$ |
2,498 |
|
The following table sets forth the Company’s revenues by groups of similar products and services as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
UC group systems |
|
$ |
868,311 |
|
|
$ |
904,923 |
|
|
$ |
956,153 |
|
UC personal devices |
|
|
236,781 |
|
|
|
219,103 |
|
|
|
180,939 |
|
UC platform |
|
|
240,062 |
|
|
|
244,363 |
|
|
|
255,536 |
|
Total |
|
$ |
1,345,154 |
|
|
$ |
1,368,389 |
|
|
$ |
1,392,628 |
|
The Company’s fixed assets, net of accumulated depreciation, are located in the following geographical areas (in thousands):
|
|
December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
United States |
|
$ |
78,692 |
|
|
$ |
79,345 |
|
EMEA |
|
|
11,254 |
|
|
|
13,036 |
|
APAC |
|
|
17,663 |
|
|
|
21,403 |
|
Other |
|
|
1,586 |
|
|
|
1,373 |
|
Total |
|
$ |
109,195 |
|
|
$ |
115,157 |
|
No single country outside of the United States has more than 10% of total net fixed assets as of December 31, 2014 and 2013.
|
FINANCIAL STATEMENT SCHEDULE—SCHEDULE II
POLYCOM, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
|
|
Balance at Beginning of Year |
|
|
Additions |
|
|
Deductions |
|
|
Balance at End of Year |
|
||||
Year ended December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
2,827 |
|
|
$ |
600 |
|
|
$ |
(387 |
) |
|
$ |
3,040 |
|
Sales returns and allowances |
|
$ |
34,654 |
|
|
$ |
86,649 |
|
|
$ |
(83,953 |
) |
|
$ |
37,350 |
|
Income tax valuation allowances |
|
$ |
3,359 |
|
|
$ |
— |
|
|
$ |
(143 |
) |
|
$ |
3,216 |
|
Year ended December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
2,921 |
|
|
$ |
— |
|
|
$ |
(94 |
) |
|
$ |
2,827 |
|
Sales returns and allowances |
|
$ |
37,422 |
|
|
$ |
93,101 |
|
|
$ |
(95,869 |
) |
|
$ |
34,654 |
|
Income tax valuation allowances |
|
$ |
3,161 |
|
|
$ |
460 |
|
|
$ |
(262 |
) |
|
$ |
3,359 |
|
Year ended December 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
1,732 |
|
|
$ |
1,189 |
|
|
$ |
— |
|
|
$ |
2,921 |
|
Sales returns and allowances |
|
$ |
30,602 |
|
|
$ |
91,356 |
|
|
$ |
(84,536 |
) |
|
$ |
37,422 |
|
Income tax valuation allowances |
|
$ |
3,301 |
|
|
$ |
— |
|
|
$ |
(140 |
) |
|
$ |
3,161 |
|
|
Description of Business:
Polycom, Inc. (“Polycom” or “the Company”) is a leading global provider of high-quality, easy-to-use communication solutions that enable enterprise, government, education and healthcare customers to more effectively collaborate over distance, time zones and organizational boundaries. The Company’s solutions are built on architectures that enable unified video, voice and content communications.
Polycom was incorporated in the state of Delaware in December 1990 and trades on the NASDAQ Global Select Market under the ticker symbol “PLCM”.
Principles of Accounting and Consolidation:
These Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements. Actual results could differ from those estimates.
|
Cash and Cash Equivalents:
The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.
Investments:
Investments are classified as short-term or long-term based on their remaining maturities. The Company’s short-term and long-term investments as of December 31, 2014 are comprised of U.S. and non-U.S. government securities, U.S. agency securities and corporate debt securities. All investments are held in the Company’s name at a limited number of major financial institutions. At December 31, 2014 and 2013, all of the Company’s investments were classified as available-for-sale and unrealized gains and losses on investments are recorded as a separate component of “Accumulated other comprehensive income” in the Consolidated Statements of Stockholders’ Equity. The Company reviews the individual securities in its portfolio to determine whether a decline in a security’s fair value below the amortized cost basis is other-than-temporary. If the decline in fair value is considered to be other-than-temporary, the cost basis of the individual security is written down to its fair value as a new cost basis. If the investments are sold at a loss or are considered to have other-than-temporarily declined in value, the amount of the loss or write-down is accounted for as a realized loss and included in earnings. The specific identification method is used to determine the cost of securities disposed of, with realized gains and losses reflected in “Interest and other income (expense), net” in the Consolidated Statements of Operations.
Allowance for Doubtful Accounts:
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company regularly performs credit evaluations of its customers' financial condition and considers factors such as historical experience, credit quality, age of the accounts receivable balances, and geographic or country-specific risks and economic conditions that may affect a customer's ability to pay. The allowance for doubtful accounts is reviewed quarterly and adjusted if necessary based on the Company's assessment of its customers' abilities to pay. If the financial conditions of the Company’s customers were to deteriorate, adversely affecting their abilities to make payments, additional allowances would be required.
Inventories:
Inventories are valued at the lower of cost or market with cost computed on a first-in, first-out (FIFO) basis. Consideration is given to obsolescence, excessive levels, deterioration and other factors in evaluating net realizable value. The Company records write-downs for excess and obsolete inventory equal to the difference between the carrying value of inventory and the estimated future selling price based upon assumptions about future product life-cycles, product demand and market conditions. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Property and Equipment:
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, generally from one to seven years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the related assets, typically three to thirteen years. Disposals of capital equipment are recorded by removing the costs and accumulated depreciation from the accounts and gains or losses on disposals are included in “Interest and other income (expense), net” in the Consolidated Statements of Operations.
Goodwill:
Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination. Goodwill is not amortized but is regularly reviewed for potential impairment. The Company reviews goodwill for impairment annually during the fourth quarter of each calendar year, or whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. The Company performs an initial qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If, after the initial qualitative assessment, the Company determines that it is more likely than not that the fair value of the reporting unit exceeds its carrying value and there is no indication of impairment, no further testing is performed; however, if the Company concludes otherwise, then the Company is required to perform a two-step impairment test to assess if a potential impairment has occurred and measure an impairment loss, if any. For further discussion of goodwill and its impairment review, see Note 6.
Long-Lived Assets:
Purchased intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from several months to six years. Purchased intangible assets determined to have indefinite useful lives are not amortized. Long-lived assets, including purchased intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset or group of assets and their eventual disposition. The Company periodically assesses the remaining useful lives of long-lived assets. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the estimated fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or estimated fair value less costs to sell.
Guarantees:
Warranty
The Company provides for the estimated costs of product warranties at the time revenue is recognized. The specific terms and conditions of those warranties vary depending upon the product sold. In the case of hardware products, warranties generally start from the delivery date and continue for one year. Software products generally carry a 90-day warranty from the date of purchase. The Company’s liability under warranties on software products is to provide a corrected copy of any portion of the software found not to be in substantial compliance with the agreed upon specifications. Factors that affect the Company’s warranty obligation include product failure rates, material usage and service delivery costs incurred in correcting product failures. The Company assesses the adequacy of the recorded warranty liabilities every quarter and makes adjustments to the liability if necessary.
Deferred Services Revenue
The Company offers maintenance contracts for sale on most of its products which allow for customers to receive service and support in addition to, or subsequent to, the expiration of the contractual product warranty. The Company also provides managed services to its customers under contractual arrangements. The Company recognizes the maintenance and managed services revenues from these contracts over the life of the service contract.
Officer and Director Indemnifications
As permitted or required under Delaware law and to the maximum extent allowable under that law, the Company has certain obligations to indemnify its current and former officers and directors for certain events or occurrences while the officer or director is, or was serving, at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is unlimited; however, the Company has a director and officer insurance policy that mitigates the Company’s exposure and enables the Company to recover a portion of any future amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification obligations is not material.
Other Indemnifications
As is customary in the Company’s industry, as provided for in local law in the U.S. and other jurisdictions, the Company’s standard contracts provide remedies to its customers, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of its products. From time to time, the Company indemnifies customers against combinations of loss, expense, or liability arising from various trigger events related to the sale and the use of its products and services. In addition, from time to time the Company also provides protection to customers against claims related to undiscovered liabilities, additional product liabilities or environmental obligations.
Revenue Recognition:
The Company recognizes revenue when persuasive evidence of an arrangement exists, title and risk of loss have transferred, product payment is not contingent upon performance of installation or service obligations, the price is fixed or determinable, and collectability is reasonably assured. In instances where final acceptance of the product or service is specified by the customer, revenue is deferred until all acceptance criteria have been met. Additionally, the Company recognizes maintenance service revenues on its hardware and software products ratably over the service periods of one to five years, and other services upon the completion of installation or professional services provided.
Most of the Company’s products are integrated with software that is essential to the functionality of the equipment. Additionally, the Company provides unspecified software upgrades and enhancements related to most of these products through maintenance contracts.
A multiple-element arrangement includes the sale of one or more tangible product offerings with one or more associated services offerings, each of which are individually considered separate units of accounting. The Company allocates revenue to each element in a multiple-element arrangement based upon the relative selling price of each deliverable. When applying the relative selling price method, the Company determines the selling price for each deliverable using vendor specific objective evidence (“VSOE”) of selling price, if it exists, or third party evidence (“TPE”) of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, the Company uses its best estimate of selling price (“ESP”) for that deliverable. Revenue allocated to each element is then recognized when the other revenue recognition criteria are met for each element.
VSOE is established based on the Company’s standard pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range.
When VSOE cannot be established, the Company attempts to establish the selling price of each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately.
When the Company is unable to establish the selling price using VSOE or TPE, the Company uses ESP in its allocation of revenue for the arrangement. ESP represents the price at which the Company would transact a sale if the element were sold on a stand-alone basis. The Company determines ESP for a product by considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, and pricing practices. The determination of ESP is made based on review of historical sales price, taking into consideration the Company’s go-to-market strategy. Generally, the Company uses historical net selling prices to establish ESP. The Company regularly reviews its basis for establishing VSOE, TPE and ESP.
Sales Returns, Channel Partner Programs and Incentives
The Company’s contracts generally do not provide for a right of return on any of its products. However, a limited number of contracts contain stock rotation rights. The Company records an estimate of future returns based upon these contractual rights and its historical returns experience. The Company records estimated reductions to revenues for channel partner programs and incentive offerings including special pricing agreements, promotions and other volume-based incentives. The Company also accrues for co-op marketing funds as a marketing expense if the Company receives an identifiable benefit in exchange and can reasonably estimate the fair value of the identifiable benefit received; otherwise, it is recorded as a reduction to revenues.
Research and Development and Software Development Costs:
The Company expenses research and development costs as incurred.
Software development costs incurred prior to the establishment of technological feasibility are included in research and development costs as incurred. Eligible and material software development costs are capitalized upon the establishment of technological feasibility and before the general availability of such software products, including direct labor and related overhead costs, as well as stock-based compensation. The Company has defined technological feasibility as the establishment of a working model, which typically occurs when beta testing commences. The Company capitalized approximately $5.1 million and $2.4 million of development costs in 2014 and 2013, respectively, for software products to be marketed or sold to customers. There were no such costs capitalized in 2012 as the software development costs qualifying for capitalization were insignificant. The capitalized costs are included in “Other assets” in the Company’s Consolidated Balance Sheets and are being amortized on a product-by-product basis using the straight-line method over the estimated product life, generally three years, or on the ratio of current revenues to total projected product revenues, whichever is greater. Management believes that the capitalized software costs will be recoverable from future gross profits generated by these products.
Advertising:
The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2014, 2013, and 2012 was $13.6 million, $14.9 million, and $22.3 million, respectively.
Income Taxes:
The Company accounts for income taxes under the liability method, which recognizes deferred tax assets and liabilities based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established to reduce deferred tax assets when, based on available objective evidence, it is more likely than not that the benefit of such assets will not be realized.
The Company recognizes and measures benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. The Company evaluates its uncertain tax positions on a quarterly basis. Evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in income tax expense in the period in which the change is made, which could have a material impact on the Company’s effective tax rate and operating results. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Foreign Currency Translation:
Assets and liabilities of non-U.S subsidiaries, where that local currency is the functional currency, are translated to U.S. dollars at exchange rates in effect at the balance sheet date and income and expense accounts are translated at average exchange rates in effect during the period. The resulting translation adjustments are directly recorded to a separate component of “Accumulated other comprehensive income” on the Consolidated Balance Sheets. Foreign exchange transaction gains and losses from the remeasurement of non-functional currency denominated assets and liabilities have not been significant to date and are included in the Company’s Consolidated Statements of Operations as part of “Interest and other income (expense), net”.
As a result of the sale of the Company’s former enterprise wireless voice solutions (the “EWS”) business in December 2012 (see Note 4), which included a wholly owned Danish subsidiary with a Danish Krone functional currency, the Company recognized the associated currency translation adjustment balance of $1.1 million which effectively reduced the gain from sale of the discontinued operations.
The following table sets forth the change of foreign currency translation adjustments during each reporting period and the balances as of December 31 (in thousands):
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Beginning balance |
|
$ |
4,219 |
|
|
$ |
3,180 |
|
|
$ |
1,841 |
|
Foreign currency translation adjustments |
|
|
(1,422 |
) |
|
|
1,039 |
|
|
|
1,339 |
|
Ending balance |
|
$ |
2,797 |
|
|
$ |
4,219 |
|
|
$ |
3,180 |
|
Derivative Instruments:
The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For a derivative instrument designated and qualifying as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a separate component of “Accumulated other comprehensive income” in the Consolidated Statements of Stockholders’ Equity and is subsequently reclassified into earnings when the hedged exposure affects earnings. The excluded and ineffective portions of the gain or loss are reported in earnings immediately. For derivative instruments that are not designated as cash flow hedges, changes in fair value are recognized in earnings in the period of change. The Company does not hold or issue derivative financial instruments for speculative trading purposes. The Company enters into derivatives only with counterparties that are among the largest U.S. banks, ranked by assets, in order to minimize its credit risk.
Net Income Per Share:
Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the additional dilution from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options, unvested restricted stock units, and performance shares. Potentially dilutive shares are excluded from the computation of diluted net income per share when their effect is antidilutive.
Fair Value Measurements:
The Company has certain financial assets and liabilities recorded at fair value which have been classified as Level 1, 2 or 3 within the fair value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices for similar assets in active markets, or identical or similar assets in inactive markets, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability. On a recurring basis, the Company measures certain financial assets and liabilities at fair value, including its marketable securities and foreign currency contracts.
The Company’s cash equivalents and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using inputs such as quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices for identical assets in active markets include money market funds. Such instruments are generally classified within Level 1 of the fair value hierarchy. The types of instruments valued based on other observable inputs include U.S. Treasury securities and other government agencies, corporate bonds and commercial paper. Such instruments are generally classified within Level 2 of the fair value hierarchy. Level 2 instruments are priced using quoted market prices for similar instruments or nonbinding market prices that are corroborated by observable market data.
The principal market where the Company executes its foreign currency contracts is the retail market in an over-the-counter environment with a relatively high level of price transparency. The market participants and the Company’s counterparties are large money center banks and regional banks. The Company’s foreign currency contracts valuation inputs are based on quoted prices and quoted pricing intervals from public data sources such as spot rates, interest rate differentials rates and credit default rates, which do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.
In addition, the Company has facilities-related liabilities related to restructuring which were calculated based on the discounted future lease payments less sublease assumptions. This non-recurring fair value measurement is classified as a Level 3 measurement under ASC 820. The key assumptions used in the valuation model include discount rates, cash flow projections and estimated sublease income. These assumptions involve significant judgment, and are based on management’s estimate of current and forecasted market conditions and are sensitive and susceptible to change. The carrying amounts reflected in the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, accounts payable, and other accrued liabilities approximate fair value due to their short-term maturities.
Stock-Based Compensation:
The Company’s stock-based compensation programs consist of grants of stock-based awards to employees and non-employee directors, including stock options, restricted stock units and performance shares, as well as purchase rights pursuant to the Company’s Employee Stock Purchase Plan (“ESPP”). Stock-based compensation expense based on the estimated fair value of these awards is charged to operations over the requisite service period, which is generally the vesting period, including the effect of forfeitures.
The fair value of stock option and ESPP awards is estimated at the grant date using the Black-Scholes option valuation model. The fair value of restricted stock units is based on the market value of the Company’s common stock on the date of grant. The fair value of a performance share with a market condition is estimated on the date of award, using a Monte Carlo simulation model to estimate the total return ranking of the Company’s stock in relation to the target index of companies over each performance period. Stock-based compensation cost on performance shares with a market condition is not adjusted for subsequent changes regardless of the level of ultimate vesting.
Recent Pronouncements:
In January 2015, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update which simplifies income statement classification by removing the concept of extraordinary items from the US GAAP. As a result, items that are both unusual and infrequent will no longer be separately reported net of tax after continuing operations. The new standard is effective for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company does not expect any impact on the adoption of this standard on its Consolidated Financial Statements.
In August 2014, the FASB issued an accounting standard update related to the disclosures around going concern. The new standard provides guidance around management’s responsibility to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The new standard is effective for the annual periods and interim periods within those annual periods beginning after December 15, 2016. Early application is permitted. The Company does not expect any impact on the adoption of this standard on its Consolidated Financial Statements.
In May 2014, the FASB issued an accounting standard update which provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The guidance is effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company has not yet selected a transition method nor has it determined the impact of adoption on its Consolidated Financial Statements.
In July 2013, the FASB issued an accounting standard update which clarifies that an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The guidance is effective prospectively for reporting periods beginning after December 15, 2013. The Company adopted the guidance in 2014, and such adoption did not have a material impact on its Consolidated Financial Statements.
|
The following table sets forth the change of foreign currency translation adjustments during each reporting period and the balances as of December 31 (in thousands):
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Beginning balance |
|
$ |
4,219 |
|
|
$ |
3,180 |
|
|
$ |
1,841 |
|
Foreign currency translation adjustments |
|
|
(1,422 |
) |
|
|
1,039 |
|
|
|
1,339 |
|
Ending balance |
|
$ |
2,797 |
|
|
$ |
4,219 |
|
|
$ |
3,180 |
|
|
Summarized results from discontinued operations were as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Revenues |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
71,133 |
|
Income from discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
15,973 |
|
Income tax provision |
|
|
— |
|
|
|
— |
|
|
|
6,085 |
|
Net income from discontinued operations |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
9,888 |
|
The carrying amounts of the net assets sold at on December 4, 2012 were as follows (in thousands):
|
|
Amount |
|
|
Assets: |
|
|
|
|
Cash and cash equivalents |
|
$ |
248 |
|
Trade receivables, net |
|
|
7,221 |
|
Inventories |
|
|
12,659 |
|
Deferred taxes |
|
|
(306 |
) |
Prepaid expense and other assets |
|
|
295 |
|
Property and equipment, net |
|
|
4,301 |
|
Goodwill |
|
|
30,872 |
|
Purchased intangibles, net |
|
|
5,724 |
|
Assets sold |
|
$ |
61,014 |
|
|
|
|
|
|
Liabilities: |
|
|
|
|
Accounts payable |
|
$ |
2,318 |
|
Accrued payroll and related liabilities |
|
|
1,877 |
|
Deferred revenue |
|
|
5,044 |
|
Other accrued liabilities |
|
|
1,605 |
|
Deferred taxes |
|
|
1,610 |
|
Liabilities transferred |
|
$ |
12,454 |
|
Net assets sold |
|
$ |
48,560 |
|
The Company recorded a gain of $35.4 million in 2012 on the sale of discontinued operations (net of taxes) which was calculated as follows (in thousands):
|
|
Amount |
|
|
Cash proceeds received |
|
$ |
50,659 |
|
Less: costs incurred directly attributable to the transaction |
|
|
929 |
|
Net proceeds from sale of discontinued operations |
|
|
49,730 |
|
Less: book value of net assets sold |
|
|
48,560 |
|
Less: realization of foreign currency translation adjustment upon sale of foreign EWS subsidiary |
|
|
1,141 |
|
Gain from sale of discontinued operations |
|
|
29 |
|
Income tax benefit |
|
|
(35,396 |
) |
Net gain from sale of discontinued operations |
|
$ |
35,425 |
|
|
The following table summarizes the changes in carrying amount of goodwill in each of the Company’s segments for the periods presented (in thousands):
|
|
Segments |
|
|||||||||||||
|
|
Americas |
|
|
EMEA |
|
|
APAC |
|
|
Total |
|
||||
Balance at December 31, 2012 |
|
$ |
302,768 |
|
|
$ |
101,882 |
|
|
$ |
149,169 |
|
|
$ |
553,819 |
|
Goodwill resulting from an acquisition |
|
|
5,391 |
|
|
|
— |
|
|
|
— |
|
|
|
5,391 |
|
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
250 |
|
|
|
250 |
|
Balance at December 31, 2013 |
|
$ |
308,159 |
|
|
$ |
101,882 |
|
|
$ |
149,419 |
|
|
$ |
559,460 |
|
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
(229 |
) |
|
|
(229 |
) |
Balance at December 31, 2014 |
|
$ |
308,159 |
|
|
$ |
101,882 |
|
|
$ |
149,190 |
|
|
$ |
559,231 |
|
The following table sets forth details of the Company’s total purchased intangible assets and capitalized software development costs as of the following periods (in thousands):
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
||||||||||||||||||
|
|
Gross Value |
|
|
Accumulated Amortization & Impairment |
|
|
Net Value |
|
|
Gross Value |
|
|
Accumulated Amortization & Impairment |
|
|
Net Value |
|
||||||
Core and developed technology |
|
$ |
81,178 |
|
|
$ |
(79,986 |
) |
|
$ |
1,192 |
|
|
$ |
81,178 |
|
|
$ |
(76,952 |
) |
|
$ |
4,226 |
|
Customer and partner relationships |
|
|
79,525 |
|
|
|
(57,983 |
) |
|
|
21,542 |
|
|
|
79,525 |
|
|
|
(48,941 |
) |
|
|
30,584 |
|
Non-compete agreements |
|
|
1,800 |
|
|
|
(1,100 |
) |
|
|
700 |
|
|
|
1,800 |
|
|
|
(500 |
) |
|
|
1,300 |
|
Trade name |
|
|
3,400 |
|
|
|
(3,229 |
) |
|
|
171 |
|
|
|
3,400 |
|
|
|
(3,089 |
) |
|
|
311 |
|
Other |
|
|
4,462 |
|
|
|
(4,418 |
) |
|
|
44 |
|
|
|
4,462 |
|
|
|
(4,343 |
) |
|
|
119 |
|
Finite-lived intangible assets |
|
|
170,365 |
|
|
|
(146,716 |
) |
|
|
23,649 |
|
|
|
170,365 |
|
|
|
(133,825 |
) |
|
|
36,540 |
|
Indefinite-lived trade name |
|
|
918 |
|
|
|
— |
|
|
|
918 |
|
|
|
918 |
|
|
|
— |
|
|
|
918 |
|
Total acquired intangible assets |
|
$ |
171,283 |
|
|
$ |
(146,716 |
) |
|
$ |
24,567 |
|
|
$ |
171,283 |
|
|
$ |
(133,825 |
) |
|
$ |
37,458 |
|
Capitalized software development costs for products to be sold |
|
$ |
7,416 |
|
|
$ |
(1,900 |
) |
|
$ |
5,516 |
|
|
$ |
2,365 |
|
|
$ |
(196 |
) |
|
$ |
2,169 |
|
The following table summarizes amortization expense recorded in the following periods (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Amortization of purchased intangibles in revenues |
|
$ |
75 |
|
|
$ |
75 |
|
|
$ |
75 |
|
Amortization of purchased intangibles in cost of product revenues |
|
|
3,035 |
|
|
|
9,361 |
|
|
|
7,635 |
|
Amortization of purchased intangibles in operating expenses |
|
|
9,781 |
|
|
|
10,389 |
|
|
|
9,830 |
|
Total amortization expenses of purchased intangibles |
|
$ |
12,891 |
|
|
$ |
19,825 |
|
|
$ |
17,540 |
|
The estimated future amortization expense of purchased intangible assets as of December 31, 2014 is as follows (in thousands):
Year ending December 31, |
|
Amount |
|
|
2015 |
|
$ |
10,495 |
|
2016 |
|
|
8,484 |
|
2017 |
|
|
4,670 |
|
2018 |
|
|
— |
|
2019 |
|
|
— |
|
Total |
|
$ |
23,649 |
|
|
Trade receivables, net, consist of the following (in thousands):
|
|
December 31, |
|
|
|||||
|
|
2014 |
|
|
2013 |
|
|
||
Gross accounts receivables |
|
$ |
214,664 |
|
|
$ |
225,134 |
|
|
Returns and related reserves |
|
|
(42,224 |
) |
|
|
(38,938 |
) |
|
Allowance for doubtful accounts |
|
|
(3,040 |
) |
|
|
(2,827 |
) |
|
Total |
|
$ |
169,400 |
|
|
$ |
183,369 |
|
|
Inventories consist of the following (in thousands):
|
|
December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
Raw materials |
|
$ |
1,496 |
|
|
$ |
2,740 |
|
Work in process |
|
|
545 |
|
|
|
840 |
|
Finished goods |
|
|
98,287 |
|
|
|
99,729 |
|
Total |
|
$ |
100,328 |
|
|
$ |
103,309 |
|
Prepaid expenses and other current assets consist of the following (in thousands):
|
|
December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
Non-trade receivables |
|
$ |
6,547 |
|
|
$ |
9,251 |
|
Prepaid expenses |
|
|
37,385 |
|
|
|
31,164 |
|
Derivative assets |
|
|
14,342 |
|
|
|
6,748 |
|
Other current assets |
|
|
2,798 |
|
|
|
3,189 |
|
Total |
|
$ |
61,072 |
|
|
$ |
50,352 |
|
Property and equipment, net, consist of the following (in thousands):
|
|
|
|
December 31, |
|
|||||
|
|
Estimated useful Life |
|
2014 |
|
|
2013 |
|
||
Computer equipment and software |
|
3 to 5 years |
|
$ |
294,724 |
|
|
$ |
265,222 |
|
Equipment, furniture and fixtures |
|
1 to 7 years |
|
|
115,226 |
|
|
|
113,214 |
|
Tooling equipment |
|
3 years |
|
|
16,325 |
|
|
|
20,811 |
|
Leasehold improvements |
|
3 to 13 years |
|
|
59,663 |
|
|
|
59,595 |
|
|
|
|
|
|
485,938 |
|
|
|
458,842 |
|
Less: Accumulated depreciation and amortization |
|
|
|
|
(376,743 |
) |
|
|
(343,685 |
) |
Total |
|
|
|
$ |
109,195 |
|
|
$ |
115,157 |
|
Deferred revenues consist of the following (in thousands):
|
|
December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
Short-term: |
|
|
|
|
|
|
|
|
Service |
|
$ |
171,355 |
|
|
$ |
170,701 |
|
Product |
|
|
94 |
|
|
|
307 |
|
License |
|
|
2,083 |
|
|
|
1,400 |
|
Total |
|
$ |
173,532 |
|
|
$ |
172,408 |
|
Long-term: |
|
|
|
|
|
|
|
|
Service |
|
$ |
85,925 |
|
|
$ |
83,092 |
|
License |
|
|
3,441 |
|
|
|
4,375 |
|
Total |
|
$ |
89,366 |
|
|
$ |
87,467 |
|
Changes in the deferred service revenue are as follows (in thousands):
|
|
December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
Balance at beginning of period |
|
$ |
253,793 |
|
|
$ |
241,773 |
|
Additions to deferred service revenue |
|
|
347,896 |
|
|
|
354,893 |
|
Amortization of deferred service revenue |
|
|
(344,409 |
) |
|
|
(342,873 |
) |
Balance at end of period |
|
$ |
257,280 |
|
|
$ |
253,793 |
|
Other accrued liabilities consist of the following (in thousands):
|
|
December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
Accrued expenses |
|
$ |
27,523 |
|
|
$ |
22,515 |
|
Accrued co-op expenses |
|
|
4,102 |
|
|
|
4,629 |
|
Restructuring reserves |
|
|
12,207 |
|
|
|
11,238 |
|
Warranty obligations |
|
|
11,613 |
|
|
|
9,475 |
|
Derivative liabilities |
|
|
8,175 |
|
|
|
6,780 |
|
Employee stock purchase plan withholdings |
|
|
10,658 |
|
|
|
10,883 |
|
Other accrued liabilities |
|
|
11,915 |
|
|
|
12,224 |
|
Total |
|
$ |
86,193 |
|
|
$ |
77,744 |
|
Changes in the warranty obligations are as follows (in thousands):
|
|
December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
Balance at beginning of period |
|
$ |
9,475 |
|
|
$ |
10,475 |
|
Accruals for warranties issued during the period |
|
|
16,753 |
|
|
|
16,307 |
|
Charges against warranty reserve during the period |
|
|
(14,615 |
) |
|
|
(17,307 |
) |
Balance at end of period |
|
$ |
11,613 |
|
|
$ |
9,475 |
|
|
The following table summarizes the activity of the Company’s restructuring reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
Projects |
|
|
|
|
|
|
|
|
Severance/Other |
|
|
Facilities |
|
|
Discontinued |
|
|
Total |
|
||||
Balance at December 31, 2011 |
|
$ |
2,486 |
|
|
$ |
454 |
|
|
$ |
— |
|
|
|
2,940 |
|
Additions to the reserve, net |
|
|
13,090 |
|
|
|
11,139 |
|
|
|
— |
|
|
|
24,229 |
|
Interest accretion |
|
|
— |
|
|
|
591 |
|
|
|
— |
|
|
|
591 |
|
Non-cash write-off of leasehold improvements |
|
|
— |
|
|
|
(2,796 |
) |
|
|
— |
|
|
|
(2,796 |
) |
Cash payments and other usage |
|
|
(14,214 |
) |
|
|
(1,924 |
) |
|
|
— |
|
|
|
(16,138 |
) |
Balance at December 31, 2012 |
|
$ |
1,362 |
|
|
$ |
7,464 |
|
|
$ |
— |
|
|
|
8,826 |
|
Additions to the reserve, net |
|
|
10,185 |
|
|
|
36,770 |
|
|
|
2,880 |
|
|
|
49,835 |
|
Interest accretion |
|
|
— |
|
|
|
1,461 |
|
|
|
— |
|
|
|
1,461 |
|
Non-cash write-off of leasehold improvements |
|
|
— |
|
|
|
(3,547 |
) |
|
|
— |
|
|
|
(3,547 |
) |
Cash payments and other usage |
|
|
(10,404 |
) |
|
|
(8,362 |
) |
|
|
(2,880 |
) |
|
|
(21,646 |
) |
Balance at December 31, 2013 |
|
$ |
1,143 |
|
|
$ |
33,786 |
|
|
$ |
— |
|
|
$ |
34,929 |
|
Additions to the reserve, net |
|
|
11,755 |
|
|
|
28,524 |
|
|
|
— |
|
|
|
40,279 |
|
Interest accretion |
|
|
— |
|
|
|
2,347 |
|
|
|
— |
|
|
|
2,347 |
|
Non-cash write-off of leasehold improvements |
|
|
— |
|
|
|
(4,855 |
) |
|
|
— |
|
|
|
(4,855 |
) |
Cash payments and other usage |
|
|
(12,234 |
) |
|
|
(18,893 |
) |
|
|
— |
|
|
|
(31,127 |
) |
Balance at December 31, 2014 |
|
$ |
664 |
|
|
$ |
40,909 |
|
|
$ |
— |
|
|
$ |
41,573 |
|
|
The following table summarizes interest expense recognized related to the Term Loan for the periods presented (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Contractual interest expense |
|
$ |
4,940 |
|
|
$ |
1,605 |
|
|
$ |
— |
|
Amortization of debt issuance costs |
|
|
533 |
|
|
|
178 |
|
|
|
— |
|
Total |
|
$ |
5,473 |
|
|
$ |
1,783 |
|
|
$ |
— |
|
|
In addition, the Company has short-term and long-term investments in debt securities which are summarized as follows: (in thousands):
|
|
Cost Basis |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Fair Value |
|
||||
Balances at December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments-Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities |
|
$ |
26,930 |
|
|
$ |
7 |
|
|
$ |
(2 |
) |
|
$ |
26,935 |
|
U.S. government agency securities |
|
|
59,336 |
|
|
|
7 |
|
|
|
(6 |
) |
|
|
59,337 |
|
Non-U.S. government securities |
|
|
8,764 |
|
|
|
2 |
|
|
|
— |
|
|
|
8,766 |
|
Corporate debt securities |
|
|
90,782 |
|
|
|
10 |
|
|
|
(47 |
) |
|
|
90,745 |
|
Total investments - short-term |
|
$ |
185,812 |
|
|
$ |
26 |
|
|
$ |
(55 |
) |
|
$ |
185,783 |
|
Investments-Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities |
|
$ |
25,320 |
|
|
$ |
4 |
|
|
$ |
(10 |
) |
|
$ |
25,314 |
|
U.S. government agency securities |
|
|
17,369 |
|
|
|
1 |
|
|
|
(14 |
) |
|
|
17,356 |
|
Corporate debt securities |
|
|
16,540 |
|
|
|
2 |
|
|
|
(15 |
) |
|
|
16,527 |
|
Total investments - long-term |
|
$ |
59,229 |
|
|
$ |
7 |
|
|
$ |
(39 |
) |
|
$ |
59,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments-Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities |
|
$ |
19,792 |
|
|
$ |
9 |
|
|
$ |
— |
|
|
$ |
19,801 |
|
U.S. government agency securities |
|
|
38,388 |
|
|
|
16 |
|
|
|
(3 |
) |
|
|
38,401 |
|
Non-U.S. government securities |
|
|
13,734 |
|
|
|
10 |
|
|
|
— |
|
|
|
13,744 |
|
Corporate debt securities |
|
|
62,720 |
|
|
|
22 |
|
|
|
(4 |
) |
|
|
62,738 |
|
Total investments - short-term |
|
$ |
134,634 |
|
|
$ |
57 |
|
|
$ |
(7 |
) |
|
$ |
134,684 |
|
Investments-Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities |
|
$ |
12,252 |
|
|
$ |
8 |
|
|
$ |
— |
|
|
$ |
12,260 |
|
U.S. government agency securities |
|
|
30,627 |
|
|
|
12 |
|
|
|
(3 |
) |
|
|
30,636 |
|
Non-U.S. government securities |
|
|
2,305 |
|
|
|
4 |
|
|
|
— |
|
|
|
2,309 |
|
Corporate debt securities |
|
|
11,152 |
|
|
|
15 |
|
|
|
— |
|
|
|
11,167 |
|
Total investments - long-term |
|
$ |
56,336 |
|
|
$ |
39 |
|
|
$ |
(3 |
) |
|
$ |
56,372 |
|
The following table summarizes the fair value and gross unrealized losses of the Company’s investments, including those securities that are categorized as cash equivalents, with unrealized losses, aggregated by type of investment instrument and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2014 and 2013 (in thousands):
|
|
Less than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
|||||||||||||||
|
|
Fair Value |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
|
Gross Unrealized Losses |
|
||||||
December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities |
|
$ |
22,355 |
|
|
$ |
(12 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
22,355 |
|
|
$ |
(12 |
) |
U.S. government agency securities |
|
|
27,348 |
|
|
|
(20 |
) |
|
|
— |
|
|
|
— |
|
|
|
27,348 |
|
|
|
(20 |
) |
Corporate debt securities |
|
|
59,667 |
|
|
|
(62 |
) |
|
|
— |
|
|
|
— |
|
|
|
59,667 |
|
|
|
(62 |
) |
Total investments |
|
$ |
109,370 |
|
|
$ |
(94 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
109,370 |
|
|
$ |
(94 |
) |
December 31, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities |
|
$ |
5,533 |
|
|
$ |
(6 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,533 |
|
|
$ |
(6 |
) |
Corporate debt securities |
|
|
9,837 |
|
|
|
(3 |
) |
|
|
1,504 |
|
|
|
(1 |
) |
|
|
11,341 |
|
|
|
(4 |
) |
Total investments |
|
$ |
15,370 |
|
|
$ |
(9 |
) |
|
$ |
1,504 |
|
|
$ |
(1 |
) |
|
$ |
16,874 |
|
|
$ |
(10 |
) |
|
The tables below set forth the Company’s recurring fair value measurements for the periods presented (in thousands):
|
|
|
|
|
|
Fair Value Measurements at December 31, 2014 Using |
|
|||||
Description |
|
Total |
|
|
Quoted Prices in Active Markets for Identical Assets |
|
|
Significant Other Observable Inputs |
|
|||
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
1,395 |
|
|
$ |
1,395 |
|
|
$ |
— |
|
Commercial paper |
|
|
7,549 |
|
|
|
— |
|
|
|
7,549 |
|
Short-term investments |
|
|
185,783 |
|
|
|
— |
|
|
|
185,783 |
|
Long-term investments |
|
|
59,197 |
|
|
|
— |
|
|
|
59,197 |
|
Total fixed income available-for-sale securities |
|
$ |
253,924 |
|
|
$ |
1,395 |
|
|
$ |
252,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts (a) |
|
$ |
14,342 |
|
|
$ |
— |
|
|
$ |
14,342 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts (b) |
|
$ |
8,175 |
|
|
$ |
— |
|
|
$ |
8,175 |
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2013 Using |
|
|||||
Description |
|
Total |
|
|
Quoted Prices in Active Markets for Identical Assets |
|
|
Significant Other Observable Inputs |
|
|||
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
17,596 |
|
|
$ |
17,596 |
|
|
$ |
— |
|
Commercial paper |
|
|
2,499 |
|
|
|
— |
|
|
|
2,499 |
|
Short-term investments |
|
|
134,684 |
|
|
|
— |
|
|
|
134,684 |
|
Long-term investments |
|
|
56,372 |
|
|
|
— |
|
|
|
56,372 |
|
Total fixed income available-for-sale securities |
|
$ |
211,151 |
|
|
$ |
17,596 |
|
|
$ |
193,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts (a) |
|
$ |
6,748 |
|
|
$ |
— |
|
|
$ |
6,748 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts (b) |
|
$ |
6,780 |
|
|
$ |
— |
|
|
$ |
6,780 |
|
(a) |
Included in short-term derivative asset as “Prepaid expenses and other current assets” on the Company’s Consolidated Balance Sheets. |
(b) |
Included in short-term derivative liability as “Other accrued liabilities” on the Company’s Consolidated Balance Sheets. |
|
The Company leases certain office facilities and equipment under noncancelable operating leases expiring between 2015 and 2023. As of December 31, 2014, the following future minimum lease payments are due under the current lease obligations (in thousands). In addition to these minimum lease payments, the Company is contractually obligated under the majority of its operating leases to pay certain operating expenses during the term of the lease such as maintenance, taxes and insurance.
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
||
|
|
Minimum |
|
|
Estimated |
|
|
Minimum |
|
|
|||
|
|
Lease |
|
|
Sublease |
|
|
Lease |
|
|
|||
Year Ending December 31, |
|
Payments |
|
|
Receipts |
|
|
Payments |
|
|
|||
2015 |
|
$ |
31,864 |
|
|
$ |
(1,808 |
) |
|
$ |
30,056 |
|
|
2016 |
|
|
25,681 |
|
|
|
(1,683 |
) |
|
|
23,998 |
|
|
2017 |
|
|
23,122 |
|
|
|
(1,338 |
) |
|
|
21,784 |
|
|
2018 |
|
|
18,595 |
|
|
|
(1,050 |
) |
|
|
17,545 |
|
|
2019 |
|
|
18,231 |
|
|
|
(1,016 |
) |
|
|
17,215 |
|
|
Thereafter |
|
|
35,252 |
|
|
|
(1,135 |
) |
|
|
34,117 |
|
|
Total |
|
$ |
152,745 |
|
|
$ |
(8,030 |
) |
|
$ |
144,715 |
|
|
|
The following table sets forth the Company’s derivative instruments measured at gross fair value as reflected in the Consolidated Balance Sheets for the periods presented (in thousands):
|
December 31, 2014 |
|
|
December 31, 2013 |
|
||||||||||
|
Fair Value of Derivatives Designated as Hedge Instruments |
|
|
Fair Value of Derivatives Not Designated as Hedge Instruments |
|
|
Fair Value of Derivatives Designated as Hedge Instruments |
|
|
Fair Value of Derivatives Not Designated as Hedge Instruments |
|
||||
Derivative assets (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
$ |
5,501 |
|
|
$ |
8,841 |
|
|
$ |
4,457 |
|
|
$ |
2,291 |
|
Derivative liabilities (b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
$ |
4,041 |
|
|
$ |
4,134 |
|
|
$ |
4,235 |
|
|
$ |
2,545 |
|
The following table sets forth the offsetting of derivative assets for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets |
|
|||||||||
|
|
Gross Amounts of Recognized Assets |
|
|
Gross Amounts Offset in the Consolidated Balance Sheets |
|
|
Net Amounts Of Assets Presented In the Consolidated Balance Sheets |
|
|
Financial Instruments |
|
|
Cash Collateral Pledged |
|
|
Net Amount |
|
||||||
As of December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
14,342 |
|
|
$ |
— |
|
|
$ |
14,342 |
|
|
$ |
(8,175 |
) |
|
$ |
— |
|
|
$ |
6,167 |
|
As of December 31, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
6,748 |
|
|
$ |
— |
|
|
$ |
6,748 |
|
|
$ |
(5,643 |
) |
|
$ |
— |
|
|
$ |
1,105 |
|
The following table sets forth the offsetting of derivative liabilities for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets |
|
|||||||||
|
|
Gross Amounts of Recognized Liabilities |
|
|
Gross Amounts Offset in the Consolidated Balance Sheets |
|
|
Net Amounts Of Liabilities Presented In the Consolidated Balance Sheets |
|
|
Financial Instruments |
|
|
Cash Collateral Pledged |
|
|
Net Amount |
|
||||||
As of December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
8,175 |
|
|
$ |
— |
|
|
$ |
8,175 |
|
|
$ |
(8,175 |
) |
|
$ |
— |
|
|
$ |
— |
|
As of December 31, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
6,780 |
|
|
$ |
— |
|
|
$ |
6,780 |
|
|
$ |
(5,643 |
) |
|
$ |
— |
|
|
$ |
1,137 |
|
The following table summarizes the Company’s notional position by currency, and approximate U.S. dollar equivalent, at December 31, 2014 of the outstanding cash flow hedges, all of which are carried at fair value on the Consolidated Balance Sheet (foreign currency and dollar amounts in thousands):
|
|
Original Maturities of 360 Days or Less |
|
Original Maturities of Greater than 360 Days |
||||||||||||||||
|
|
Foreign Currency |
|
|
USD Equivalent |
|
|
Positions |
|
Foreign Currency |
|
|
USD Equivalent |
|
|
Positions |
||||
Chinese Yuan |
|
|
75,140 |
|
|
$ |
11,909 |
|
|
Buy |
|
|
62,600 |
|
|
$ |
9,781 |
|
|
Buy |
Euro |
|
|
17,185 |
|
|
$ |
22,583 |
|
|
Buy |
|
|
11,700 |
|
|
$ |
14,412 |
|
|
Buy |
Euro |
|
|
37,976 |
|
|
$ |
49,729 |
|
|
Sell |
|
|
36,800 |
|
|
$ |
45,330 |
|
|
Sell |
British Pound |
|
|
12,297 |
|
|
$ |
20,142 |
|
|
Buy |
|
|
13,300 |
|
|
$ |
20,713 |
|
|
Buy |
British Pound |
|
|
14,659 |
|
|
$ |
23,998 |
|
|
Sell |
|
|
19,100 |
|
|
$ |
29,746 |
|
|
Sell |
Israeli Shekel |
|
|
51,666 |
|
|
$ |
14,471 |
|
|
Buy |
|
|
44,400 |
|
|
$ |
11,429 |
|
|
Buy |
The following tables show the effect of the Company’s derivative instruments designated as cash flow hedges in the Consolidated Statements of Operations for the periods presented (in thousands):
|
|
Gain or (Loss) Recognized in OCI-Effective Portion |
|
|
Location of Gain or (Loss) Reclassified from OCI into Income-Effective Portion |
|
Gain or (Loss) Reclassified from OCI into Income-Effective Portion |
|
|
Location of Gain or (Loss) Recognized-Ineffective Portion and Amount Excluded from Effectiveness Testing |
|
Gain or (Loss) Recognized-Ineffective Portion and Amount Excluded from Effectiveness Testing (a) |
|
|||
|
|
Year Ended December 31, 2014 |
|
|||||||||||||
Foreign exchange contracts |
|
$ |
3,627 |
|
|
Product revenues |
|
$ |
1,170 |
|
|
Interest and other income (expense), net |
|
$ |
109 |
|
|
|
|
|
|
|
Cost of revenues |
|
|
320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
$ |
3,627 |
|
|
|
|
$ |
2,341 |
|
|
|
|
$ |
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2013 |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
1,374 |
|
|
Product revenues |
|
$ |
207 |
|
|
Interest and other income (expense), net |
|
$ |
368 |
|
|
|
|
|
|
|
Cost of revenues |
|
|
279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
1,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
164 |
|
|
|
|
|
|
|
|
|
$ |
1,374 |
|
|
|
|
$ |
2,308 |
|
|
|
|
$ |
368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2012 |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
1,018 |
|
|
Product revenues |
|
$ |
7,133 |
|
|
Interest and other income (expense), net |
|
$ |
42 |
|
|
|
|
|
|
|
Cost of revenues |
|
|
(607 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
(974 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
(774 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(1,044 |
) |
|
|
|
|
|
|
|
|
$ |
1,018 |
|
|
|
|
$ |
3,734 |
|
|
|
|
$ |
42 |
|
(a) |
For the year ended December 31, 2014 and 2013, there were no gains or losses for the ineffective portion. For the year ended December 31, 2012, the loss recorded for the ineffective portion and the gain recorded for the excluded time value portion of the hedge was immaterial. |
The following table summarizes the Company’s notional position by currency, and approximate U.S. dollar equivalent, at December 31, 2014 of the outstanding non-designated hedges (foreign currency and dollar amounts in thousands):
|
|
Original Maturities of 360 Days or Less |
|
Original Maturities of Greater than 360 Days |
|
|||||||||||||||||
|
|
Foreign Currency |
|
|
USD Equivalent |
|
|
Positions |
|
Foreign Currency |
|
|
USD Equivalent |
|
|
Positions |
|
|||||
Brazilian Real |
|
|
10,747 |
|
|
$ |
4,046 |
|
|
Buy |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Brazilian Real |
|
|
21,858 |
|
|
$ |
8,251 |
|
|
Sell |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Chinese Yuan |
|
|
92,276 |
|
|
$ |
14,727 |
|
|
Buy |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Chinese Yuan |
|
|
85,309 |
|
|
$ |
13,672 |
|
|
Sell |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Euro |
|
|
28,862 |
|
|
$ |
36,641 |
|
|
Buy |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Euro |
|
|
71,418 |
|
|
$ |
92,866 |
|
|
Sell |
|
|
— |
|
|
|
— |
|
|
|
— |
|
British Pound |
|
|
27,036 |
|
|
$ |
43,558 |
|
|
Buy |
|
|
— |
|
|
|
— |
|
|
|
— |
|
British Pound |
|
|
28,399 |
|
|
$ |
46,465 |
|
|
Sell |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Israeli Shekel |
|
|
45,706 |
|
|
$ |
12,749 |
|
|
Buy |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Israeli Shekel |
|
|
39,479 |
|
|
$ |
10,146 |
|
|
Sell |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Japanese Yen |
|
|
464,897 |
|
|
$ |
3,889 |
|
|
Buy |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Japanese Yen |
|
|
799,492 |
|
|
$ |
6,724 |
|
|
Sell |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Mexican Peso |
|
|
15,906 |
|
|
$ |
1,080 |
|
|
Buy |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Mexican Peso |
|
|
34,004 |
|
|
$ |
2,367 |
|
|
Sell |
|
|
— |
|
|
|
— |
|
|
|
— |
|
The following table shows the effect of the Company’s non-designated hedges in the Consolidated Statements of Operations for the periods presented (in thousands):
Derivatives Not Designated as Hedging Instruments |
|
Location of Gain or (Loss) Recognized in Income on Derivative |
|
Amount of Gain or (Loss) Recognized in Income on Derivative |
|
|
|
|
Year Ended December 31, 2014 |
|
|||
Foreign exchange contracts |
|
Interest and other income (expense), net |
|
$ |
6,708 |
|
|
|
Year Ended December 31, 2013 |
|
|||
Foreign exchange contracts |
|
Interest and other income (expense), net |
|
$ |
(411 |
) |
|
|
Year Ended December 31, 2012 |
|
|||
Foreign exchange contracts |
|
Interest and other income (expense), net |
|
$ |
(412 |
) |
|
The following table summarizes the changes in accumulated other comprehensive income, net of tax, by component for the periods presented (in thousands). The tax effects were not shown separately, as the impacts were not material.
|
|
Unrealized Gains and Losses on Cash Flow Hedges |
|
|
Unrealized Gains and Losses on Available-for- Sale Securities |
|
|
Foreign Currency Translation |
|
|
Total |
|
||||
Balance as of December 31, 2012 |
|
$ |
1,014 |
|
|
$ |
2 |
|
|
$ |
3,180 |
|
|
$ |
4,196 |
|
Other comprehensive income (loss) before reclassifications |
|
|
1,374 |
|
|
|
18 |
|
|
|
1,039 |
|
|
|
2,431 |
|
Amounts reclassified from accumulated other comprehensive income (a) |
|
|
(2,308 |
) |
|
|
53 |
|
|
|
— |
|
|
|
(2,255 |
) |
Net current-period other comprehensive income (loss) |
|
|
(934 |
) |
|
|
71 |
|
|
|
1,039 |
|
|
|
176 |
|
Balance as of December 31, 2013 |
|
$ |
80 |
|
|
$ |
73 |
|
|
$ |
4,219 |
|
|
$ |
4,372 |
|
Other comprehensive income (loss) before reclassifications |
|
|
3,627 |
|
|
|
(115 |
) |
|
|
(1,422 |
) |
|
|
2,090 |
|
Amounts reclassified from accumulated other comprehensive income (a) |
|
|
(2,341 |
) |
|
|
(10 |
) |
|
|
— |
|
|
|
(2,351 |
) |
Net current-period other comprehensive income (loss) |
|
|
1,286 |
|
|
|
(125 |
) |
|
|
(1,422 |
) |
|
|
(261 |
) |
Balance as of December 31, 2014 |
|
$ |
1,366 |
|
|
$ |
(52 |
) |
|
$ |
2,797 |
|
|
$ |
4,111 |
|
|
Activity under the above plans for the year ended December 31, 2014 was as follows:
|
|
Shares Available for Grant (1) |
|
|
Balances, December 31, 2013 |
|
|
14,272,794 |
|
Performance shares granted (2) |
|
|
(1,122,849 |
) |
Performance shares forfeited |
|
|
2,199,968 |
|
Restricted stock units granted |
|
|
(4,705,549 |
) |
Restricted stock units forfeited |
|
|
2,471,450 |
|
Options granted |
|
|
— |
|
Options forfeited |
|
|
90,156 |
|
Options forfeited under ViVu Plan (3) |
|
|
(70 |
) |
Options expired |
|
|
233,532 |
|
Balances, December 31, 2014 |
|
|
13,439,432 |
|
(1) |
For purposes of this table, shares are counted on a fungible basis (i.e., at a higher multiplier than one-for-one) for full value award activity. |
(2) |
Includes 25,666 additional shares (39,526 shares applying the applicable fungible ratio) resulting from above target performance. |
(3) |
The Company acquired the outstanding unvested stock options under the ViVu, Inc. 2008 Equity Incentive Plan as a result of its acquisition of ViVu, Inc. in 2011. |
The options outstanding and currently exercisable by exercise price at December 31, 2014 are as follows:
|
|
|
|
Stock Options Outstanding and Exercisable |
|
|
|||||||||
Range of Exercise Price |
|
|
Number Outstanding |
|
|
Weighted Average Remaining Contractual Life (Yrs) |
|
|
Weighted Average Exercise Price |
|
|
||||
$ |
0.75 |
|
|
|
42 |
|
|
|
5.05 |
|
|
$ |
0.75 |
|
|
$ |
11.61 |
|
|
|
220,502 |
|
|
|
4.27 |
|
|
$ |
11.61 |
|
|
$11.67 - $11.80 |
|
|
|
19,949 |
|
|
|
0.15 |
|
|
$ |
11.77 |
|
|
|
|
|
|
|
|
240,493 |
|
|
|
3.92 |
|
|
$ |
11.62 |
|
|
The following table summarizes the changes in unvested performance shares and RSUs and non-employee director RSUs for 2014:
|
|
Number of Shares (1) |
|
|
Weighted Average Grant Date Fair Value |
|
||
Unvested shares at December 31, 2013 |
|
|
9,205,462 |
|
|
$ |
12.59 |
|
Performance shares granted (2) |
|
|
729,122 |
|
|
$ |
13.64 |
|
Restricted stock units granted (3) |
|
|
3,055,551 |
|
|
$ |
12.96 |
|
Performance shares vested and issued |
|
|
(164,995 |
) |
|
$ |
9.60 |
|
Restricted stock units vested and issued |
|
|
(3,302,419 |
) |
|
$ |
13.48 |
|
Performance shares forfeited |
|
|
(1,232,780 |
) |
|
$ |
14.66 |
|
Restricted stock units forfeited |
|
|
(1,464,250 |
) |
|
$ |
12.01 |
|
Unvested shares at December 31, 2014 |
|
|
6,825,691 |
|
|
$ |
12.26 |
|
(1) |
For the purposes of this table, shares are counted on a one-for-one basis, not on a fungible share counting basis. |
(2) |
Includes 25,666 additional shares resulting from above target performance. |
(3) |
Includes 140,000 restricted stock units granted to non-employee directors. |
The following table summarizes stock-based compensation expense recorded and its allocation within the Consolidated Statements of Operations for the periods presented (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Cost of sales - product |
|
$ |
2,463 |
|
|
$ |
2,892 |
|
|
$ |
3,593 |
|
Cost of sales - service |
|
|
4,293 |
|
|
|
5,852 |
|
|
|
6,611 |
|
Stock-based compensation expense included in cost of sales |
|
|
6,756 |
|
|
|
8,744 |
|
|
|
10,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
14,893 |
|
|
|
26,570 |
|
|
|
36,791 |
|
Research and development |
|
|
10,299 |
|
|
|
15,634 |
|
|
|
20,195 |
|
General and administrative |
|
|
16,012 |
|
|
|
13,517 |
|
|
|
21,571 |
|
Stock-based compensation expense included in operating expenses |
|
|
41,204 |
|
|
|
55,721 |
|
|
|
78,557 |
|
Stock-based compensation expense |
|
|
47,960 |
|
|
|
64,465 |
|
|
|
88,761 |
|
Less: tax benefit |
|
|
9,492 |
|
|
|
11,174 |
|
|
|
21,880 |
|
Stock-based compensation expense related to employee equity awards and employee stock purchases, net of tax |
|
$ |
38,468 |
|
|
$ |
53,291 |
|
|
$ |
66,881 |
|
The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option valuation model based on the following assumptions:
|
|
2012 |
|
|
Expected volatility |
|
|
51.24 |
% |
Risk-free interest rate |
|
|
0.5 |
% |
Expected dividends |
|
|
0.0 |
% |
Expected life (yrs) |
|
|
3.70 |
|
The estimated fair value per share of employee stock purchase rights granted pursuant to ESPP in 2014, 2013, and 2012 ranged from $2.80 to $4.48, from $2.60 to $4.57, and from $2.69 to $8.4, respectively, and was estimated on the date of grant using the Black-Scholes option valuation model based on the following assumptions:
|
|
2014 |
|
2013 |
|
2012 |
|
|
Expected volatility |
|
26.47-32.18% |
|
42.40-48.89% |
|
48.27-61.78% |
|
|
Risk-free interest rate |
|
0.05-0.47% |
|
0.08-0.35% |
|
0.09-0.24% |
|
|
Expected dividends |
|
0.0% |
|
0.0% |
|
|
0.0% |
|
Expected life (yrs) |
|
0.5-2.0 |
|
0.5-2.0 |
|
0.5-2.0 |
|
Activity under the stock option plans for the year ended December 31, 2014 was as follows:
|
|
Outstanding Options |
|
|
|
|
|
|
|
|
|
|||||
|
|
Number of Shares |
|
|
Weighted Avg Exercise Price |
|
|
Weighted Avg Contractual Term (Years) |
|
|
Aggregate Intrinsic Value (in thousands) |
|
||||
Balances, December 31, 2013 |
|
|
697,218 |
|
|
$ |
13.64 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(133,037 |
) |
|
$ |
11.37 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(90,156 |
) |
|
$ |
14.50 |
|
|
|
|
|
|
|
|
|
Options expired |
|
|
(233,532 |
) |
|
$ |
16.67 |
|
|
|
|
|
|
|
|
|
Balances, December 31, 2014 |
|
|
240,493 |
|
|
$ |
11.62 |
|
|
|
3.92 |
|
|
$ |
451,780 |
|
|
Income tax expense (benefit) consists of the following (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Income tax expense from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(2,843 |
) |
|
$ |
(953 |
) |
|
$ |
44,569 |
|
State |
|
|
(235 |
) |
|
|
(72 |
) |
|
|
3,283 |
|
Foreign |
|
|
8,352 |
|
|
|
8,604 |
|
|
|
9,488 |
|
|
|
$ |
5,274 |
|
|
$ |
7,579 |
|
|
$ |
57,340 |
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(2,562 |
) |
|
$ |
(10,715 |
) |
|
$ |
(13,372 |
) |
State |
|
|
(273 |
) |
|
|
(818 |
) |
|
|
(1,308 |
) |
Foreign |
|
|
(1,483 |
) |
|
|
285 |
|
|
|
(3,193 |
) |
|
|
$ |
(4,318 |
) |
|
$ |
(11,248 |
) |
|
$ |
(17,873 |
) |
Total income tax expense (benefit) from continuing operations |
|
$ |
956 |
|
|
$ |
(3,669 |
) |
|
$ |
39,467 |
|
Income tax expense (benefit) from discontinued operations |
|
$ |
— |
|
|
$ |
96 |
|
|
$ |
(29,311 |
) |
Income from continuing operations before income taxes is categorized geographically as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
United States |
|
$ |
(2,317 |
) |
|
$ |
(17,823 |
) |
|
$ |
(37,025 |
) |
Foreign |
|
|
45,332 |
|
|
|
(4,381 |
) |
|
|
39,523 |
|
Total income (loss) from continuing operations before income taxes |
|
$ |
43,015 |
|
|
$ |
(22,204 |
) |
|
$ |
2,498 |
|
The Company’s tax provision from continuing operations differs from the provision computed using statutory tax rates as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Federal tax at statutory rate |
|
$ |
15,055 |
|
|
$ |
(7,771 |
) |
|
$ |
2,194 |
|
State taxes, net of federal benefit |
|
|
(508 |
) |
|
|
(1,571 |
) |
|
|
2,354 |
|
Non-deductible share-based compensation expense |
|
|
(346 |
) |
|
|
2,900 |
|
|
|
6,143 |
|
Foreign income at tax rates different than U.S. rates |
|
|
(14,025 |
) |
|
|
7,104 |
|
|
|
(10,176 |
) |
Changes in reserves for uncertain tax positions |
|
|
(756 |
) |
|
|
(2,497 |
) |
|
|
(3,926 |
) |
Research and development tax credit |
|
|
(1,898 |
) |
|
|
(4,243 |
) |
|
|
(268 |
) |
Domestic production activities deduction |
|
|
(22 |
) |
|
|
(757 |
) |
|
|
(1,136 |
) |
Gain on intercompany debt |
|
|
— |
|
|
|
— |
|
|
|
36,163 |
|
Non-deductible executive compensation expense |
|
|
778 |
|
|
|
460 |
|
|
|
358 |
|
Subpart F income |
|
|
679 |
|
|
|
716 |
|
|
|
657 |
|
Non-deductible acquisition and divestiture costs |
|
|
(4 |
) |
|
|
(355 |
) |
|
|
4,782 |
|
Sale of intellectual property |
|
|
2,115 |
|
|
|
2,947 |
|
|
|
2,356 |
|
Foreign tax credit |
|
|
(317 |
) |
|
|
(359 |
) |
|
|
(264 |
) |
Other |
|
|
205 |
|
|
|
(243 |
) |
|
|
230 |
|
Tax provision (benefit) |
|
$ |
956 |
|
|
$ |
(3,669 |
) |
|
$ |
39,467 |
|
The tax effects of temporary differences that give rise to the deferred tax assets (liabilities) are presented below (in thousands):
|
|
December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
Property and equipment, net, principally due to difference in depreciation |
|
$ |
7,534 |
|
|
$ |
6,508 |
|
Capitalized research and development costs |
|
|
— |
|
|
|
425 |
|
Acquired intangibles |
|
|
4,490 |
|
|
|
3,742 |
|
Inventory |
|
|
5,685 |
|
|
|
6,910 |
|
Restructuring reserves |
|
|
13,722 |
|
|
|
10,214 |
|
Deferred revenue |
|
|
10,964 |
|
|
|
13,699 |
|
Other reserves |
|
|
20,400 |
|
|
|
17,570 |
|
Share-based compensation |
|
|
11,910 |
|
|
|
15,906 |
|
Net operating loss and capital loss carryforwards |
|
|
2,535 |
|
|
|
2,511 |
|
Tax credit carryforwards |
|
|
21,237 |
|
|
|
16,457 |
|
Deferred tax asset |
|
|
98,477 |
|
|
|
93,942 |
|
Capitalized research and development costs |
|
|
(766 |
) |
|
|
— |
|
Acquired intangibles |
|
|
(1,843 |
) |
|
|
(2,249 |
) |
Deferred tax asset before valuation allowance |
|
$ |
95,868 |
|
|
$ |
91,693 |
|
Valuation allowance |
|
|
(3,216 |
) |
|
|
(3,359 |
) |
Deferred tax asset, net of valuation allowance |
|
$ |
92,652 |
|
|
$ |
88,334 |
|
The aggregate changes in the balance of the Company’s gross unrecognized tax benefits were as follows for the periods indicated (in thousands):
|
|
December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Beginning balance |
|
$ |
22,012 |
|
|
$ |
23,049 |
|
|
$ |
32,408 |
|
Additions based on tax positions taken during a prior period |
|
|
— |
|
|
|
— |
|
|
|
304 |
|
Reductions based on tax positions taken during a prior period |
|
|
— |
|
|
|
— |
|
|
|
(5,690 |
) |
Additions based on tax positions taken during the current period |
|
|
531 |
|
|
|
1,414 |
|
|
|
310 |
|
Reductions related to settlement of tax matters |
|
|
— |
|
|
|
— |
|
|
|
(807 |
) |
Reductions related to a lapse of applicable statue of limitations |
|
|
(901 |
) |
|
|
(2,451 |
) |
|
|
(3,476 |
) |
Ending balance |
|
$ |
21,642 |
|
|
$ |
22,012 |
|
|
$ |
23,049 |
|
|
Financial information for each reportable geographical segment as of and for the fiscal years ended December 31, 2014, 2013, and 2012, based on the Company’s internal management system and as utilized by the Company’s Chief Operating Decision Maker (“CODM”), its Chief Executive Officer, is as follows (in thousands):
|
|
Americas |
|
|
EMEA |
|
|
APAC |
|
|
Total |
|
||||
2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
662,533 |
|
|
$ |
349,821 |
|
|
$ |
332,800 |
|
|
$ |
1,345,154 |
|
% of total revenue |
|
|
49 |
% |
|
|
26 |
% |
|
|
25 |
% |
|
|
100 |
% |
Contribution margin |
|
$ |
270,265 |
|
|
$ |
150,426 |
|
|
$ |
140,365 |
|
|
$ |
561,056 |
|
% of segment revenue |
|
|
41 |
% |
|
|
43 |
% |
|
|
42 |
% |
|
|
42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
694,522 |
|
|
$ |
338,035 |
|
|
$ |
335,832 |
|
|
$ |
1,368,389 |
|
% of total revenue |
|
|
50 |
% |
|
|
25 |
% |
|
|
25 |
% |
|
|
100 |
% |
Contribution margin |
|
$ |
270,786 |
|
|
$ |
142,686 |
|
|
$ |
136,462 |
|
|
$ |
549,934 |
|
% of segment revenue |
|
|
39 |
% |
|
|
42 |
% |
|
|
41 |
% |
|
|
40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
689,099 |
|
|
$ |
345,723 |
|
|
$ |
357,806 |
|
|
$ |
1,392,628 |
|
% of total revenue |
|
|
49 |
% |
|
|
25 |
% |
|
|
26 |
% |
|
|
100 |
% |
Contribution margin |
|
$ |
281,229 |
|
|
$ |
138,886 |
|
|
$ |
147,699 |
|
|
$ |
567,814 |
|
% of segment revenue |
|
|
41 |
% |
|
|
40 |
% |
|
|
41 |
% |
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross accounts receivable |
|
$ |
88,316 |
|
|
$ |
62,540 |
|
|
$ |
63,808 |
|
|
$ |
214,664 |
|
% of total gross accounts receivable |
|
|
41 |
% |
|
|
29 |
% |
|
|
30 |
% |
|
|
100 |
% |
At December 31, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross accounts receivable |
|
$ |
86,243 |
|
|
$ |
71,970 |
|
|
$ |
66,921 |
|
|
$ |
225,134 |
|
% of total gross accounts receivable |
|
|
38 |
% |
|
|
32 |
% |
|
|
30 |
% |
|
|
100 |
% |
The following tables set forth the reconciliation of segment information to Polycom consolidated totals (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Segment contribution margin |
|
$ |
561,056 |
|
|
$ |
549,934 |
|
|
$ |
567,814 |
|
Corporate and unallocated costs |
|
|
(409,700 |
) |
|
|
(430,471 |
) |
|
|
(418,465 |
) |
Stock-based compensation expense |
|
|
(47,960 |
) |
|
|
(64,465 |
) |
|
|
(88,761 |
) |
Effect of stock-based compensation cost on warranty expense |
|
|
(494 |
) |
|
|
(547 |
) |
|
|
(669 |
) |
Amortization of purchased intangibles |
|
|
(12,816 |
) |
|
|
(19,750 |
) |
|
|
(17,465 |
) |
Restructuring costs |
|
|
(40,347 |
) |
|
|
(48,470 |
) |
|
|
(22,024 |
) |
Litigation reserves and payments |
|
|
(3,130 |
) |
|
|
— |
|
|
|
— |
|
Transaction-related costs |
|
|
(156 |
) |
|
|
(3,424 |
) |
|
|
(14,064 |
) |
Interest and other income (expense), net |
|
|
(3,438 |
) |
|
|
(5,011 |
) |
|
|
(3,868 |
) |
Income (loss) from continuing operations before provision for (benefit from) income taxes |
|
$ |
43,015 |
|
|
$ |
(22,204 |
) |
|
$ |
2,498 |
|
The following table sets forth the Company’s revenues by groups of similar products and services as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
UC group systems |
|
$ |
868,311 |
|
|
$ |
904,923 |
|
|
$ |
956,153 |
|
UC personal devices |
|
|
236,781 |
|
|
|
219,103 |
|
|
|
180,939 |
|
UC platform |
|
|
240,062 |
|
|
|
244,363 |
|
|
|
255,536 |
|
Total |
|
$ |
1,345,154 |
|
|
$ |
1,368,389 |
|
|
$ |
1,392,628 |
|
The Company’s fixed assets, net of accumulated depreciation, are located in the following geographical areas (in thousands):
|
|
December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
United States |
|
$ |
78,692 |
|
|
$ |
79,345 |
|
EMEA |
|
|
11,254 |
|
|
|
13,036 |
|
APAC |
|
|
17,663 |
|
|
|
21,403 |
|
Other |
|
|
1,586 |
|
|
|
1,373 |
|
Total |
|
$ |
109,195 |
|
|
$ |
115,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|