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1. BASIS OF PRESENTATION
The accompanying unaudited financial statements, consisting of the condensed consolidated balance sheet as of June 30, 2015, the condensed consolidated statements of operations for the three and six months ended June 30, 2015 and 2014, the condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2015 and 2014, and the condensed consolidated statements of cash flows for the six months ended June 30, 2015 and 2014, have been prepared in accordance with accounting principles generally accepted in the United States of America in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. In addition, the condensed consolidated balance sheet at December 31, 2014 has been derived from the audited consolidated financial statements as of that date. Accordingly, these condensed consolidated financial statements do not include all of the information and notes typically found in the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K of Polycom, Inc. and its subsidiaries (the “Company”). In the opinion of management, the accompanying unaudited financial statements have been prepared on a basis consistent with the Company’s December 31, 2014 audited financial statements and all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement have been included. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates and operating results for the three and six months ended June 30, 2015 and are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.
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2. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2015, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update which provides guidance on whether a cloud computing arrangement includes a software license to a customer of such an arrangement. If a cloud computing arrangement includes a software license, a customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses, otherwise the customer should account for the arrangement as a service contract. The standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The standard can be applied prospectively to all arrangements entered into or materially modified after the effective date, or retrospectively. The Company is evaluating the impact of adopting this standard on its consolidated financial statements and disclosures.
In April 2015, the FASB issued an accounting standard update which requires an entity to present debt issuance costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. The standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The standard will be applied retrospectively to each prior period presented. The accounting standard update is a change in balance sheet presentation only and is not expected to have a material impact on the Company’s 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. In July 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. Companies may use either a full retrospective or a modified retrospective approach to adopt the standard. The Company is evaluating the potential effects of the adoption of this standard on its Consolidated Financial Statements.
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3. 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. Additional cash consideration of up to $25.0 million is payable to Polycom over the next two years subject to certain conditions, including meeting certain agreed-upon EBITDA-based milestones for the fiscal years ending December 31, 2015 and 2016. These conditions were not met for the fiscal years ended December 31, 2014 and 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. For the six months ended June 30, 2015 and 2014, there were no realized gains on sale of discontinued operations.
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4. ACCOUNTS RECEIVABLE FINANCING
The Company has a financing agreement with an unrelated third party financing company (the “Financing Agreement”) whereby the Company 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 defined percentage of the transaction amount financed. In certain instances, these financing arrangements result in a transfer of its 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 the three and six months ended June 30, 2015, total transactions entered into pursuant to the terms of the Financing Agreement were approximately $53.0 million and $117.6 million, respectively, of which $33.7 million and $72.9 million, respectively, were related to the transfer of the financial assets arrangement. In the three and six months ended June 30, 2014, total transactions entered were approximately $51.7 million and $83.7 million, respectively, of which $37.5 million and $68.6 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 June 30, 2015 and December 31, 2014 was approximately $26.1 million and $28.5 million, respectively, of which $20.9 million and $20.2 million, respectively, was related to the accounts receivable transferred, and is included in “Trade receivables” in the Company’s condensed consolidated balance sheets. Fees incurred pursuant to the Financing Agreement were approximately $0.8 million and $0.6 million for the three months ended June 30, 2015 and 2014, respectively, and were approximately $1.7 million and $1.1 million for the six months ended June 30, 2015 and 2014 respectively. Those fees were recorded as reductions to revenues.
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5. GOODWILL, PURCHASED INTANGIBLES, AND SOFTWARE DEVELOPMENT COSTS
Goodwill
The following table presents the changes to the Company’s goodwill by segment during the six months ended June 30, 2015 (in thousands):
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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, 2014 |
$ |
308,159 |
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|
$ |
101,882 |
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|
$ |
149,190 |
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|
$ |
559,231 |
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Foreign currency translation |
|
— |
|
|
|
— |
|
|
|
18 |
|
|
|
18 |
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Balance at June 30, 2015 |
$ |
308,159 |
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|
$ |
101,882 |
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|
$ |
149,208 |
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$ |
559,249 |
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Purchased Intangible Assets and Software Development Costs
The following table presents details of the Company’s total purchased intangible assets and capitalized software development costs for products to be sold as of the following periods (in thousands):
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June 30, 2015 |
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December 31, 2014 |
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Gross Value |
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Accumulated Amortization & Impairment |
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Net Value |
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Gross Value |
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Accumulated Amortization & Impairment |
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Net Value |
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Core and developed technology |
$ |
81,178 |
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$ |
(80,745 |
) |
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$ |
433 |
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|
$ |
81,178 |
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|
$ |
(79,986 |
) |
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$ |
1,192 |
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Customer and partner relationships |
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79,525 |
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|
|
(62,446 |
) |
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|
17,079 |
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|
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79,525 |
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|
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(57,983 |
) |
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|
21,542 |
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Non-compete agreements |
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1,800 |
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|
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(1,400 |
) |
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|
400 |
|
|
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1,800 |
|
|
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(1,100 |
) |
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|
700 |
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Trade name |
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3,400 |
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|
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(3,299 |
) |
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|
101 |
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|
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3,400 |
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|
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(3,229 |
) |
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|
171 |
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Other |
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4,462 |
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(4,455 |
) |
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7 |
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4,462 |
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(4,418 |
) |
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44 |
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Finite-lived intangible assets |
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170,365 |
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(152,345 |
) |
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18,020 |
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170,365 |
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(146,716 |
) |
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23,649 |
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Indefinite-lived trade name |
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918 |
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|
— |
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|
918 |
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|
|
918 |
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|
|
— |
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|
|
918 |
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Total acquired intangible assets |
$ |
171,283 |
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$ |
(152,345 |
) |
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$ |
18,938 |
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$ |
171,283 |
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$ |
(146,716 |
) |
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$ |
24,567 |
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Capitalized software development costs for products to be sold |
$ |
9,912 |
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|
$ |
(3,254 |
) |
|
$ |
6,658 |
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|
$ |
7,416 |
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|
$ |
(1,900 |
) |
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$ |
5,516 |
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Purchased intangibles include a purchased trade name of $0.9 million with an indefinite life as the Company expects to generate cash flows related to this asset indefinitely. Consequently, this trade name is not amortized but is reviewed for impairment annually or sooner when indicators of potential impairment exist.
The following table summarizes the amortization expenses recorded in the following periods (in thousands):
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Three Months Ended |
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|
Six Months Ended |
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June 30, 2015 |
|
|
June 30, 2014 |
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June 30, 2015 |
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|
June 30, 2014 |
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Amortization of purchased intangibles in revenues |
$ |
19 |
|
|
$ |
19 |
|
|
$ |
38 |
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|
$ |
38 |
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Amortization of purchased intangibles in cost of product revenues |
|
100 |
|
|
|
731 |
|
|
|
757 |
|
|
|
1,572 |
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Amortization of purchased intangibles in operating expenses |
|
2,417 |
|
|
|
2,436 |
|
|
|
4,834 |
|
|
|
4,928 |
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Total amortization expenses of purchased intangibles |
$ |
2,536 |
|
|
$ |
3,186 |
|
|
$ |
5,629 |
|
|
$ |
6,538 |
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Amortization of purchased intangibles is not allocated to the Company’s segments.
The estimated future amortization expense as of June 30, 2015 is as follows (in thousands):
Year ending December 31, |
|
Amount |
|
|
Remainder of 2015 |
|
$ |
4,867 |
|
2016 |
|
|
8,484 |
|
2017 |
|
|
4,669 |
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Total |
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$ |
18,020 |
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In the six months ended June 30, 2015 and 2014, the Company capitalized approximately $2.5 million and $2.6 million of software development costs, respectively, for internally developed software products to be marketed and sold to customers after the point that technological feasibility has been reached and before the products are available for general release. The capitalized costs are being amortized over the estimated product useful life, generally three years, beginning when the products are available for general release. Management expects that the capitalized software development costs are recoverable from future gross profits generated by these products and services.
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6. RESTRUCTURING COSTS
The Company recorded net restructuring costs of $0.3 million and $9.2 million during the three months ended June 30, 2015 and 2014, respectively, and $0.4 million and $ 39.5 million during the six months ended June 30, 2015 and 2014, respectively. Pursuant to the announcement in January 2014, and certain discrete follow-on actions that were not material, management completed certain actions designed to better align expenses to the Company’s revenue and gross margin profile and position the Company for improved operating performance. These actions included the elimination of approximately six percent of the global workforce and the reduction or elimination of certain leased facilities. The Company has recorded a cumulative amount of $40.7 million in restructuring costs (net of adjustments related to the assumptions used in the estimate of the related liabilities reserves) as of June 30, 2015 in connection with these actions, and does not expect any remaining charges to be material.
The following table summarizes the changes in the Company’s restructuring reserves during the six months ended June 30, 2015 (in thousands):
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Severance/Other |
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|
Facilities |
|
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Total |
|
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Balance at December 31, 2014 |
$ |
664 |
|
|
$ |
40,909 |
|
|
$ |
41,573 |
|
Additions to the reserve, net |
|
3,169 |
|
|
|
(3,785 |
) |
|
|
(616 |
) |
Interest accretion |
|
— |
|
|
|
977 |
|
|
|
977 |
|
Non-cash adjustments |
|
— |
|
|
|
(201 |
) |
|
|
(201 |
) |
Cash payments |
|
(2,995 |
) |
|
|
(13,185 |
) |
|
|
(16,180 |
) |
Balance at June 30, 2015 |
$ |
838 |
|
|
$ |
24,715 |
|
|
$ |
25,553 |
|
As of June 30, 2015, the restructuring reserve was primarily comprised of facilities-related liabilities. At the time the reserve is initially set up, the Company calculates the fair value of its facilities-related liabilities based on the discounted future lease payments less sublease assumptions. This 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, are based on management’s estimate of current and forecasted market conditions and are sensitive and susceptible to change.
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7. BALANCE SHEET DETAILS
Trade receivables, net consist of the following (in thousands):
|
June 30, 2015 |
|
|
December 31, 2014 |
|
||
Gross accounts receivables |
$ |
216,034 |
|
|
$ |
214,664 |
|
Returns and related reserves |
|
(51,865 |
) |
|
|
(42,224 |
) |
Allowance for doubtful accounts |
|
(3,014 |
) |
|
|
(3,040 |
) |
Total |
$ |
161,155 |
|
|
$ |
169,400 |
|
Inventories consist of the following (in thousands):
|
June 30, 2015 |
|
|
December 31, 2014 |
|
||
Raw materials |
$ |
1,661 |
|
|
$ |
1,496 |
|
Work in process |
|
488 |
|
|
|
545 |
|
Finished goods |
|
97,760 |
|
|
|
98,287 |
|
Total |
$ |
99,909 |
|
|
$ |
100,328 |
|
Prepaid expenses and other current assets consist of the following (in thousands):
|
June 30, 2015 |
|
|
December 31, 2014 |
|
||
Non-trade receivables |
$ |
7,954 |
|
|
$ |
6,547 |
|
Prepaid expenses |
|
35,930 |
|
|
|
37,385 |
|
Derivative assets |
|
10,456 |
|
|
|
14,342 |
|
Other current assets |
|
3,037 |
|
|
|
2,798 |
|
Total |
$ |
57,377 |
|
|
$ |
61,072 |
|
Deferred revenue consists of the following (in thousands):
|
June 30, 2015 |
|
|
December 31, 2014 |
|
||
Short-term: |
|
|
|
|
|
|
|
Service |
$ |
174,213 |
|
|
$ |
171,355 |
|
Product |
|
9 |
|
|
|
94 |
|
License |
|
2,668 |
|
|
|
2,083 |
|
Total |
$ |
176,890 |
|
|
$ |
173,532 |
|
Long-term: |
|
|
|
|
|
|
|
Service |
$ |
80,167 |
|
|
$ |
85,925 |
|
License |
|
3,384 |
|
|
|
3,441 |
|
Total |
$ |
83,551 |
|
|
$ |
89,366 |
|
Changes in the deferred service revenue during the six month period ended June 30, 2015 and 2014 are as follows (in thousands):
|
Six Months Ended |
|
|||||
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||
Balance at beginning of period |
$ |
257,280 |
|
|
$ |
253,793 |
|
Additions to deferred service revenue |
|
167,332 |
|
|
|
170,459 |
|
Amortization of deferred service revenue |
|
(170,232 |
) |
|
|
(171,257 |
) |
Balance at end of period |
$ |
254,380 |
|
|
$ |
252,995 |
|
Other accrued liabilities consist of the following (in thousands):
|
June 30, 2015 |
|
|
December 31, 2014 |
|
||
Accrued expenses |
$ |
26,095 |
|
|
$ |
27,523 |
|
Accrued co-op expenses |
|
3,059 |
|
|
|
4,102 |
|
Restructuring reserves |
|
9,980 |
|
|
|
12,207 |
|
Warranty obligations |
|
11,147 |
|
|
|
11,613 |
|
Derivative liabilities |
|
5,606 |
|
|
|
8,175 |
|
Employee stock purchase plan withholdings |
|
9,088 |
|
|
|
10,658 |
|
Other accrued liabilities |
|
10,689 |
|
|
|
11,915 |
|
Total |
$ |
75,664 |
|
|
$ |
86,193 |
|
Changes in the warranty obligation during the six month period ended June 30, 2015 and 2014 are as follows (in thousands):
|
Six Months Ended |
|
|||||
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||
Balance at beginning of period |
$ |
11,613 |
|
|
$ |
9,475 |
|
Accruals for warranties issued during the period |
|
6,811 |
|
|
|
8,131 |
|
Actual charges against warranty reserve during the period |
|
(7,277 |
) |
|
|
(7,256 |
) |
Balance at end of period |
$ |
11,147 |
|
|
$ |
10,350 |
|
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8. 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.
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. On March 31, 2015 the Company entered into a settlement with the SEC. Under the terms of the settlement in which the Company did not admit or deny the SEC’s findings, the Company paid $750,000 in a civil penalty, and agreed not to commit or cause any violations of certain provisions of the Securities Exchange Act of 1934 and related rules.
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 alleged 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 alleged that the Company’s financial statements were materially false and misleading. The amended complaint alleged violations of the federal securities laws and sought unspecified compensatory damages and other relief. On April 3, 2015, the Court dismissed all claims against Polycom and granted plaintiffs leave to amend. The lead plaintiff filed a second complaint on May 4, 2015. Polycom and the individual defendants moved to dismiss the second amended complaint on June 26, 2015. Those motions are pending. At this time, the Company is 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. On January 13, 2015, the Court dismissed the operative complaint and granted plaintiffs leave to amend. On April 3, 2015, the Court approved a stipulation dismissing the action with prejudice and entering judgment in favor of defendants.
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 California state consolidated derivative lawsuit purports to assert claims on behalf of the Company, which is named as a nominal defendant in the actions. The original California state complaints 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, the Company is unable to estimate any range of reasonably possible loss relating to the derivative actions.
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 United States, 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 liability or environmental obligations.
|
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. The Term Loan is payable in quarterly installments of principal equal to $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 of 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 June 30, 2015. 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 June 30, 2015, the weighted average interest rate on the Term Loan was 2.14%, the accrued interest on the Term Loan was $0.5 million, and the current and non-current portion of the outstanding Term Loan was $6.3 million and $232.8 million, respectively.
The following table sets forth total interest expense recognized on the Term Loan (in thousands):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||||
Contractual interest expense |
$ |
1,292 |
|
|
$ |
1,225 |
|
|
$ |
2,550 |
|
|
$ |
2,454 |
|
Amortization of debt issuance costs |
|
133 |
|
|
|
133 |
|
|
|
266 |
|
|
|
267 |
|
Total |
$ |
1,425 |
|
|
$ |
1,358 |
|
|
$ |
2,816 |
|
|
$ |
2,721 |
|
|
10. INVESTMENTS
The Company had cash and cash equivalents of $412.6 million and $443.1 million at June 30, 2015 and December 31, 2014, 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 are 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, mainly 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 June 30, 2015, 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 June 30, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments-Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities |
$ |
33,637 |
|
|
$ |
27 |
|
|
$ |
— |
|
|
$ |
33,664 |
|
U.S. government agency securities |
|
61,810 |
|
|
|
13 |
|
|
|
(4 |
) |
|
|
61,819 |
|
Non-U.S. government securities |
|
11,035 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
11,035 |
|
Corporate debt securities |
|
91,673 |
|
|
|
8 |
|
|
|
(39 |
) |
|
|
91,642 |
|
Total investments - short-term |
$ |
198,155 |
|
|
$ |
49 |
|
|
$ |
(44 |
) |
|
$ |
198,160 |
|
Investments-Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities |
$ |
14,985 |
|
|
$ |
19 |
|
|
$ |
— |
|
|
$ |
15,004 |
|
U.S. government agency securities |
|
18,333 |
|
|
|
8 |
|
|
|
(5 |
) |
|
|
18,336 |
|
Corporate debt securities |
|
16,074 |
|
|
|
1 |
|
|
|
(24 |
) |
|
|
16,051 |
|
Total investments - long-term |
$ |
49,392 |
|
|
$ |
28 |
|
|
$ |
(29 |
) |
|
$ |
49,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Unrealized Losses
The following table summarizes the fair value and gross unrealized losses of the Company’s investments, including investments 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 (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 |
|
||||||
June 30, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities |
$ |
1,015 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,015 |
|
|
$ |
— |
|
U.S. government agency securities |
|
23,454 |
|
|
|
(9 |
) |
|
|
— |
|
|
|
— |
|
|
|
23,454 |
|
|
|
(9 |
) |
Non-U.S. government securities |
|
6,220 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
6,220 |
|
|
|
(1 |
) |
Corporate debt securities |
|
58,428 |
|
|
|
(63 |
) |
|
|
— |
|
|
|
— |
|
|
|
58,428 |
|
|
|
(63 |
) |
Total investments |
$ |
89,117 |
|
|
$ |
(73 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
89,117 |
|
|
$ |
(73 |
) |
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 |
) |
During the six months ended June 30, 2015 and 2014, 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.
|
11. FAIR VALUE MEASUREMENTS
The tables below set forth the Company’s recurring fair value measurements (in thousands):
|
|
|
|
|
|
Fair Value Measurements at June 30, 2015 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 |
|
$ |
3,421 |
|
|
$ |
3,421 |
|
|
$ |
— |
|
U.S. government agency securities |
|
|
1,200 |
|
|
|
— |
|
|
|
1,200 |
|
Non-U.S. government securities |
|
|
1,600 |
|
|
|
— |
|
|
|
1,600 |
|
Commercial paper |
|
|
7,779 |
|
|
|
— |
|
|
|
7,779 |
|
Short-term investments |
|
|
198,160 |
|
|
|
— |
|
|
|
198,160 |
|
Long-term investments |
|
|
49,391 |
|
|
|
— |
|
|
|
49,391 |
|
Total fixed income available-for-sale securities |
|
$ |
261,551 |
|
|
$ |
3,421 |
|
|
$ |
258,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts (a) |
|
$ |
10,456 |
|
|
$ |
— |
|
|
$ |
10,456 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts (b) |
|
$ |
5,606 |
|
|
$ |
— |
|
|
$ |
5,606 |
|
|
|
|
|
|
|
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 |
|
(a) |
Included in short-term derivative assets as “Prepaid expenses and other current assets” in the condensed consolidated balance sheets. |
(b) |
Included in short-term derivative liabilities as “Other accrued liabilities” in the condensed consolidated balance sheets. |
There have been no transfers between Level 1 and Level 2 in the three and six months ended June 30, 2015 and 2014. There were no investments classified as Level 3 as of June 30, 2015 and December 31, 2014.
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 6 for further details.
The fair value of the Company’s Term Loan under its Credit Agreement is measured using Level 2 inputs 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. The Company has elected not to record its Term Loan at fair value, but has measured it at fair value for disclosure purposes. At June 30, 2015 and December 31, 2014, the estimated fair value of the Term Loan was approximately $227.1 million and $234.9 million, respectively, using observable market inputs. See Note 9 for further details.
|
12. 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 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 in “Interest and other income (expense), net” on the condensed consolidated statements of operations. 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 of the outstanding non-designated hedges at June 30, 2015 (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 |
|
16,991 |
|
|
$ |
5,476 |
|
|
Buy |
|
|
— |
|
|
$ |
— |
|
|
— |
Brazilian Real |
|
37,282 |
|
|
$ |
11,728 |
|
|
Sell |
|
|
— |
|
|
$ |
— |
|
|
— |
Chinese Yuan |
|
40,500 |
|
|
$ |
6,414 |
|
|
Buy |
|
|
4,920 |
|
|
$ |
769 |
|
|
Buy |
Chinese Yuan |
|
41,832 |
|
|
$ |
6,683 |
|
|
Sell |
|
|
— |
|
|
$ |
— |
|
|
— |
Euro |
|
24,468 |
|
|
$ |
28,731 |
|
|
Buy |
|
|
623 |
|
|
$ |
768 |
|
|
Buy |
Euro |
|
54,174 |
|
|
$ |
63,677 |
|
|
Sell |
|
|
9,257 |
|
|
$ |
11,403 |
|
|
Sell |
British Pound |
|
15,878 |
|
|
$ |
25,200 |
|
|
Buy |
|
|
3,875 |
|
|
$ |
6,034 |
|
|
Buy |
British Pound |
|
14,261 |
|
|
$ |
22,917 |
|
|
Sell |
|
|
5,532 |
|
|
$ |
8,616 |
|
|
Sell |
Israeli Shekel |
|
53,288 |
|
|
$ |
14,379 |
|
|
Buy |
|
|
8,171 |
|
|
$ |
2,103 |
|
|
Buy |
Israeli Shekel |
|
59,170 |
|
|
$ |
15,535 |
|
|
Sell |
|
|
— |
|
|
$ |
— |
|
|
— |
Japanese Yen |
|
173,692 |
|
|
$ |
1,421 |
|
|
Buy |
|
|
— |
|
|
$ |
— |
|
|
— |
Japanese Yen |
|
247,263 |
|
|
$ |
2,003 |
|
|
Sell |
|
|
— |
|
|
$ |
— |
|
|
— |
Mexican Peso |
|
12,538 |
|
|
$ |
800 |
|
|
Buy |
|
|
— |
|
|
$ |
— |
|
|
— |
Mexican Peso |
|
26,493 |
|
|
$ |
1,701 |
|
|
Sell |
|
|
— |
|
|
$ |
— |
|
|
— |
The following table shows the effect of the Company’s non-designated hedges in the condensed consolidated statements of operations (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 |
|
|||||
|
|
|
|
Three Months Ended |
|
|||||
|
|
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||
Foreign exchange contracts |
|
Interest and other income (expense), net |
|
$ |
(1,056 |
) |
|
$ |
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|||||
|
|
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||
Foreign exchange contracts |
|
Interest and other income (expense), net |
|
$ |
3,617 |
|
|
$ |
299 |
|
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, Euros, British Pounds and Israeli Shekels. All foreign exchange contracts are carried at fair value on the condensed consolidated balance sheets and the maximum duration of foreign exchange forward contracts does not exceed 13 months. Speculation is prohibited by policy.
To receive hedge accounting treatment under ASC 815, Derivatives and Hedging, 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 revenue or operating expenses together with the hedged transaction. The time value on forward contracts is excluded from effectiveness testing and recorded to interest and other income (expense), net over the life of the contract together with any ineffective portion of the hedge.
The following table summarizes the Company’s notional position by currency, and approximate U.S. dollar equivalent of the outstanding cash flow hedges at June 30, 2015 (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 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
136,780 |
|
|
$ |
21,356 |
|
|
Buy |
Euro |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
27,977 |
|
|
$ |
32,500 |
|
|
Buy |
Euro |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
72,943 |
|
|
$ |
84,557 |
|
|
Sell |
British Pound |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
25,325 |
|
|
$ |
39,033 |
|
|
Buy |
British Pound |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
32,968 |
|
|
$ |
50,614 |
|
|
Sell |
Israeli Shekel |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
67,829 |
|
|
$ |
17,373 |
|
|
Buy |
The following tables show the effect of the Company’s derivative instruments designated as cash flow hedges in the condensed consolidated statements of operations for the following periods (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) |
|
|||||||||||||||
|
|
Three Months Ended |
|
|
|
|
Three Months Ended |
|
|
|
|
Three Months Ended |
|
|||||||||||||||
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||||||
Foreign exchange contracts |
|
$ |
(1,723 |
) |
|
$ |
422 |
|
|
Product revenues |
|
$ |
3,629 |
|
|
$ |
(1,409 |
) |
|
Interest and other income (expense), net |
|
$ |
357 |
|
|
$ |
(127 |
) |
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
(531 |
) |
|
|
330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
(1,007 |
) |
|
|
717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
(268 |
) |
|
|
277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(396 |
) |
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,723 |
) |
|
$ |
422 |
|
|
|
|
$ |
1,427 |
|
|
$ |
109 |
|
|
|
|
$ |
357 |
|
|
$ |
(127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
Six Months Ended |
|
|
|
|
Six Months Ended |
|
|||||||||||||||
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||||||
Foreign exchange contracts |
|
$ |
4,575 |
|
|
$ |
1 |
|
|
Product revenues |
|
$ |
10,265 |
|
|
$ |
(4,274 |
) |
|
Interest and other income (expense), net |
|
$ |
326 |
|
|
$ |
(52 |
) |
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
(1,332 |
) |
|
|
862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
(2,794 |
) |
|
|
1,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
(983 |
) |
|
|
692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(1,171 |
) |
|
|
366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,575 |
|
|
$ |
1 |
|
|
|
|
$ |
3,985 |
|
|
$ |
(557 |
) |
|
|
|
$ |
326 |
|
|
$ |
(52 |
) |
|
(a) |
There were no gains or losses recognized in income due to ineffectiveness in the periods presented. |
As of June 30, 2015, the Company estimated that 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 condensed consolidated statements of operations. For the six months ended June 30, 2015 and 2014, there were no such gains or losses.
The estimates of fair value are based on applicable and commonly quoted prices and prevailing financial market information as of June 30, 2015 and 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 condensed consolidated financial statements on a recurring basis.
The following table shows the Company’s derivative instruments measured at gross fair value as reflected in the condensed consolidated balance sheets (in thousands):
|
Fair Value of Derivatives Designated as Hedge Instruments |
|
|
Fair Value of Derivatives Not Designated as Hedge Instruments |
|
||||||||||
|
June 30, 2015 |
|
|
December 31, 2014 |
|
|
June 30, 2015 |
|
|
December 31, 2014 |
|
||||
Derivative assets (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
$ |
4,984 |
|
|
$ |
5,501 |
|
|
$ |
5,472 |
|
|
$ |
8,841 |
|
Derivative liabilities (b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
$ |
2,720 |
|
|
$ |
4,041 |
|
|
$ |
2,886 |
|
|
$ |
4,134 |
|
|
(a) |
All derivative assets are recorded in “Prepaid and other current assets” in the condensed consolidated balance sheets. |
(b) |
All derivative liabilities are recorded in “Other accrued liabilities” in the condensed 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 set off 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 condensed consolidated balance sheets.
The following table sets forth the offsetting of derivative assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets |
|
|||||||||
|
|
Gross Amounts of Recognized Assets |
|
|
Gross Amounts Offset in the Condensed Consolidated Balance Sheets |
|
|
Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheets |
|
|
Financial Instruments |
|
|
Cash Collateral Pledged |
|
|
Net Amount |
|
||||||
As of June 30, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
10,456 |
|
|
$ |
— |
|
|
$ |
10,456 |
|
|
$ |
(4,914 |
) |
|
$ |
— |
|
|
$ |
5,542 |
|
As of December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
14,342 |
|
|
$ |
— |
|
|
$ |
14,342 |
|
|
$ |
(8,175 |
) |
|
$ |
— |
|
|
$ |
6,167 |
|
The following table sets forth the offsetting of derivative liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets |
|
|||||||||
|
|
Gross Amounts of Recognized Liabilities |
|
|
Gross Amounts Offset in the Condensed Consolidated Balance Sheets |
|
|
Net Amounts of Liabilities Presented in the Condensed Consolidated Balance Sheets |
|
|
Financial Instruments |
|
|
Cash Collateral Pledged |
|
|
Net Amount |
|
||||||
As of June 30, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
5,606 |
|
|
$ |
— |
|
|
$ |
5,606 |
|
|
$ |
(4,915 |
) |
|
$ |
— |
|
|
$ |
691 |
|
As of December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
8,175 |
|
|
$ |
— |
|
|
$ |
8,175 |
|
|
$ |
(8,175 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
13. STOCKHOLDERS’ EQUITY
Share Repurchase Program
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 via privately negotiated transactions. In July 2014, the Company announced that its Board of Directors had approved a 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 through the end of June 2016 and to fund the share repurchases through cash on hand and future cash flow from operations. During the three and six months ended June 30, 2015, the Company purchased approximately 1.9 million and 4.8 million shares of common stock, respectively, in the open market for approximately $ 25.0 million and $65.0 million, respectively. During the three and six months ended June 30, 2014, the Company did not purchase any shares of common stock in the open market. However, the Company received 1.5 million shares in June 2014 under its accelerated share repurchase program 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. The repurchased shares of common stock have been retired and reclassified as authorized and unissued shares. As of June 30, 2015, the Company had a remaining authorization to purchase up to an additional $85.0 million of shares in the open market under the 2014 repurchase plan.
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 (in thousands). The tax effects were not shown separately, as the impacts were not material.
Six Months Ended June 30, 2015 |
|
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, 2014 |
|
$ |
1,366 |
|
|
$ |
(52 |
) |
|
$ |
2,797 |
|
|
$ |
4,111 |
|
Other comprehensive income before reclassifications |
|
|
4,575 |
|
|
|
62 |
|
|
|
191 |
|
|
|
4,828 |
|
Amounts reclassified from accumulated other comprehensive income (a) |
|
|
(3,985 |
) |
|
|
(4 |
) |
|
|
— |
|
|
|
(3,989 |
) |
Net current-period other comprehensive income |
|
|
590 |
|
|
|
58 |
|
|
|
191 |
|
|
|
839 |
|
Balance as of June 30, 2015 |
|
$ |
1,956 |
|
|
$ |
6 |
|
|
$ |
2,988 |
|
|
$ |
4,950 |
|
|
(a) |
See Note 12 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 condensed consolidated statement of operations for the six months ended June 30, 2015, net of taxes. |
|
14. STOCK-BASED COMPENSATION
The following table summarizes stock-based compensation expense recorded for the periods presented and its allocation within the condensed consolidated statements of operations (in thousands):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||||
Cost of product revenues |
$ |
505 |
|
|
$ |
520 |
|
|
$ |
1,460 |
|
|
$ |
1,160 |
|
Cost of service revenues |
|
877 |
|
|
|
1,101 |
|
|
|
2,185 |
|
|
|
2,062 |
|
Stock-based compensation expense included in cost of revenues |
|
1,382 |
|
|
|
1,621 |
|
|
|
3,645 |
|
|
|
3,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
2,698 |
|
|
|
5,333 |
|
|
|
5,311 |
|
|
|
5,724 |
|
Research and development |
|
1,915 |
|
|
|
3,059 |
|
|
|
4,488 |
|
|
|
4,101 |
|
General and administrative |
|
3,716 |
|
|
|
3,750 |
|
|
|
5,499 |
|
|
|
6,363 |
|
Stock-based compensation expense included in operating expenses |
|
8,329 |
|
|
|
12,142 |
|
|
|
15,298 |
|
|
|
16,188 |
|
Stock-based compensation expense related to employee equity awards and employee stock purchases |
|
9,711 |
|
|
|
13,763 |
|
|
|
18,943 |
|
|
|
19,410 |
|
Tax benefit |
|
1,697 |
|
|
|
2,777 |
|
|
|
3,226 |
|
|
|
3,762 |
|
Stock-based compensation expense related to employee equity awards and employee stock purchases, net of tax |
$ |
8,014 |
|
|
$ |
10,986 |
|
|
$ |
15,717 |
|
|
$ |
15,648 |
|
Stock-based compensation expense is not allocated to segments because it is centrally managed at the corporate level.
Stock Options
There were no stock options granted in the six months ended June 30, 2015 and 2014.
Performance Shares and Restricted Stock Units
During the six months ended June 30, 2015 and 2014, the Company granted 922,202 and 556,550 performance shares to certain employees and executives, at a weighted average fair value of $14.23 and $13.76 per share, respectively. The 2015 and 2014 grants are generally divided evenly over three annual performance periods commencing with calendar year 2015 and 2014, respectively, and will vest on the first, second and third anniversary of the grant date.
During the six months ended June 30, 2015 and 2014, the Company granted 2,788,043 and 2,702,115 restricted stock units to certain employees, at a weighted average fair value of $13.80 and $12.95 per share, respectively.
During the six months ended June 30, 2015 and 2014, the Company granted 120,000 and 140,000, restricted stock units to non-employee directors at a weighted average fair value of $13.14 and $12.87 per share, respectively.
Employee Stock Purchase Plan
During the six months ended June 30, 2015 and 2014, 1,183,426 and 1,696,177 shares were purchased under the Company’s employee stock purchase plan (“ESPP”), respectively. As of June 30, 2015, there were 10,131,641 shares available to be issued under the ESPP.
Valuation Assumptions
For purchase rights granted pursuant to the ESPP, the estimated fair value per share of employee stock purchase rights for the two-year offering period commencing on February 2, 2015 ranged from $3.09 to $4.27, compared to the estimated fair value per share from $2.82 to $4.48 for the two-year offering period commencing on February 3, 2014.
The fair value of each employee stock purchase right grant is estimated on the date of grant using the Black-Scholes option valuation model and is recognized as expense using the graded vesting method using the following assumptions:
|
Three and Six Months Ended |
||
|
June 30, 2015 |
|
June 30, 2014 |
Expected volatility |
30.04-30.73% |
|
32.30-42.11% |
Risk-free interest rate |
0.07-0.49% |
|
0.07-0.30% |
Expected dividends |
0.0% |
|
0.0% |
Expected life (years) |
0.5-2.0 |
|
0.5-2.0 |
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 observed interest rates appropriate for the expected life of the Company’s employee stock purchases.
The dividend yield assumption is based on the Company’s history of not paying dividends and no future expectation of dividend payouts.
The expected life of employee stock purchase rights represents the contractual terms of the underlying program.
|
16. BUSINESS SEGMENT INFORMATION
The Company conducts its business globally and is managed geographically in three segments: (1) Americas, which consists of North America and Caribbean and Latin America (“CALA”) reporting units, (2) Europe, Middle East and Africa (“EMEA”) and (3) Asia Pacific (“APAC”). The segments are determined in accordance with how management views and evaluates the Company’s business and allocates its resources, and are 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 arises 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 June 30, 2015 and December 31, 2014 and for the three and six months ended June 30, 2015 and 2014, based on the Company’s internal management reporting 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 |
|
||||
For the three months ended June 30, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
$ |
158,333 |
|
|
$ |
80,865 |
|
|
$ |
77,377 |
|
|
$ |
316,575 |
|
% of total revenue |
|
50 |
% |
|
|
26 |
% |
|
|
24 |
% |
|
|
100 |
% |
Contribution margin |
$ |
60,765 |
|
|
$ |
31,987 |
|
|
$ |
35,975 |
|
|
$ |
128,727 |
|
% of segment revenue |
|
38 |
% |
|
|
40 |
% |
|
|
46 |
% |
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
$ |
167,806 |
|
|
$ |
83,067 |
|
|
$ |
81,146 |
|
|
$ |
332,019 |
|
% of total revenue |
|
51 |
% |
|
|
25 |
% |
|
|
24 |
% |
|
|
100 |
% |
Contribution margin |
$ |
69,155 |
|
|
$ |
35,108 |
|
|
$ |
33,366 |
|
|
$ |
137,629 |
|
% of segment revenue |
|
41 |
% |
|
|
42 |
% |
|
|
41 |
% |
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
$ |
315,687 |
|
|
$ |
174,714 |
|
|
$ |
156,874 |
|
|
$ |
647,275 |
|
% of total revenue |
|
49 |
% |
|
|
27 |
% |
|
|
24 |
% |
|
|
100 |
% |
Contribution margin |
$ |
121,616 |
|
|
$ |
74,764 |
|
|
$ |
72,088 |
|
|
$ |
268,468 |
|
% of segment revenue |
|
39 |
% |
|
|
43 |
% |
|
|
46 |
% |
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
$ |
330,875 |
|
|
$ |
172,104 |
|
|
$ |
157,564 |
|
|
$ |
660,543 |
|
% of total revenue |
|
50 |
% |
|
|
26 |
% |
|
|
24 |
% |
|
|
100 |
% |
Contribution margin |
$ |
139,128 |
|
|
$ |
72,774 |
|
|
$ |
65,020 |
|
|
$ |
276,922 |
|
% of segment revenue |
|
42 |
% |
|
|
42 |
% |
|
|
41 |
% |
|
|
42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2015: Gross accounts receivable |
$ |
100,975 |
|
|
$ |
59,582 |
|
|
$ |
55,477 |
|
|
$ |
216,034 |
|
% of total gross accounts receivable |
|
47 |
% |
|
|
28 |
% |
|
|
25 |
% |
|
|
100 |
% |
As of December 31, 2014: Gross accounts receivable |
$ |
88,316 |
|
|
$ |
62,540 |
|
|
$ |
63,808 |
|
|
$ |
214,664 |
|
% of total gross accounts receivable |
|
41 |
% |
|
|
29 |
% |
|
|
30 |
% |
|
|
100 |
% |
During the three months ended June 30, 2015 and 2014, one customer, ScanSource Communications (“ScanSource”), accounted for 23% and 18%, respectively, of the Company’s revenues. During the six months ended June 30, 2015 and 2014, ScanSource accounted for 19% and 18%, respectively, of the Company’s revenues. ScanSource accounted for 27% and 19%, respectively, of total gross accounts receivable at June 30, 2015 and December 31, 2014.
The reconciliation of segment information to Polycom consolidated totals is as follows (in thousands):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||||
Segment contribution margin |
$ |
128,727 |
|
|
$ |
137,629 |
|
|
$ |
268,468 |
|
|
$ |
276,922 |
|
Corporate and unallocated costs |
|
(91,158 |
) |
|
|
(99,339 |
) |
|
|
(189,500 |
) |
|
|
(205,938 |
) |
Stock-based compensation |
|
(9,711 |
) |
|
|
(13,763 |
) |
|
|
(18,943 |
) |
|
|
(19,410 |
) |
Effect of stock-based compensation cost on warranty expense |
|
(80 |
) |
|
|
(77 |
) |
|
|
(133 |
) |
|
|
(206 |
) |
Amortization of purchased intangibles |
|
(2,517 |
) |
|
|
(3,167 |
) |
|
|
(5,591 |
) |
|
|
(6,500 |
) |
Restructuring costs |
|
(343 |
) |
|
|
(9,175 |
) |
|
|
(367 |
) |
|
|
(39,518 |
) |
Transaction-related costs |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(156 |
) |
Interest and other income (expense), net |
|
(178 |
) |
|
|
(1,696 |
) |
|
|
(1,640 |
) |
|
|
(2,391 |
) |
Income before benefit from income taxes |
$ |
24,740 |
|
|
$ |
10,412 |
|
|
$ |
52,294 |
|
|
$ |
2,803 |
|
The following table summarizes the Company’s revenues by groups of similar products and services as follows (in thousands):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UC group systems |
$ |
195,169 |
|
|
$ |
218,448 |
|
|
$ |
399,820 |
|
|
$ |
431,820 |
|
UC personal devices |
|
66,802 |
|
|
|
53,639 |
|
|
|
134,267 |
|
|
|
110,113 |
|
UC platform |
|
54,604 |
|
|
|
59,932 |
|
|
|
113,188 |
|
|
|
118,610 |
|
Total |
$ |
316,575 |
|
|
$ |
332,019 |
|
|
$ |
647,275 |
|
|
$ |
660,543 |
|
|
17. INCOME TAXES
The following table presents the income tax expense (benefit) and the effective tax rates (in thousands):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||||
Income tax expense (benefit) |
$ |
5,093 |
|
|
$ |
1,855 |
|
|
$ |
11,449 |
|
|
$ |
(1,763 |
) |
Effective tax rate |
|
20.6 |
% |
|
|
17.8 |
% |
|
|
21.9 |
% |
|
|
(62.9 |
)% |
The effective tax rates for the three and six months ended June 30, 2015 and 2014 differ from the U.S. federal statutory rate of 35% primarily due to the impact associated with proportional earnings from the Company’s operations in lower tax jurisdictions, recurring permanent adjustments and discrete benefits recorded during the quarters. For the six months ended June 30, 2014, a discrete benefit of $1.5 million was recorded for tax benefits realized on disqualifying dispositions of stock from the Company’s employee stock purchase plan. The discrete tax benefits realized on disqualifying dispositions of stock from the Company’s employee stock purchase plan were not material in each of the other periods presented. In addition, included in the tax rate for the three and six months ended June 30, 2014 is a discrete tax benefit of $0.9 million related to stock-based compensation expense adjustments for certain terminated employees.
As of June 30, 2015, the amount of gross unrecognized tax benefits was $21.7 million, all of which would affect the Company’s effective tax rate if realized. The Company recognizes interest income and interest expense and penalties on tax overpayments and underpayments within income tax expense. As of June 30, 2015 and December 31, 2014, the Company had approximately $1.7 million and $1.6 million, respectively, of accrued interest and penalties related to uncertain tax positions. The Company anticipates that, except for $0.6 million in uncertain tax positions that may be reduced related to the lapse of various statutes of limitation, there will be no material changes in uncertain tax positions in the next 12 months.
The Company regularly assesses the ability to realize deferred tax assets recorded in all entities based upon the weight of available evidence, including such factors as recent earnings history and expected future taxable income. If the Company’s future business profits do not support the realization of deferred tax assets, a valuation allowance could be recorded in the foreseeable future. In the event that the Company changes its determination as to the amount of deferred tax assets that can be realized, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
|
The following table presents the changes to the Company’s goodwill by segment during the six months ended June 30, 2015 (in thousands):
|
Americas |
|
|
EMEA |
|
|
APAC |
|
|
Total |
|
||||
Balance at December 31, 2014 |
$ |
308,159 |
|
|
$ |
101,882 |
|
|
$ |
149,190 |
|
|
$ |
559,231 |
|
Foreign currency translation |
|
— |
|
|
|
— |
|
|
|
18 |
|
|
|
18 |
|
Balance at June 30, 2015 |
$ |
308,159 |
|
|
$ |
101,882 |
|
|
$ |
149,208 |
|
|
$ |
559,249 |
|
The following table presents details of the Company’s total purchased intangible assets and capitalized software development costs for products to be sold as of the following periods (in thousands):
|
June 30, 2015 |
|
|
December 31, 2014 |
|
||||||||||||||||||
|
Gross Value |
|
|
Accumulated Amortization & Impairment |
|
|
Net Value |
|
|
Gross Value |
|
|
Accumulated Amortization & Impairment |
|
|
Net Value |
|
||||||
Core and developed technology |
$ |
81,178 |
|
|
$ |
(80,745 |
) |
|
$ |
433 |
|
|
$ |
81,178 |
|
|
$ |
(79,986 |
) |
|
$ |
1,192 |
|
Customer and partner relationships |
|
79,525 |
|
|
|
(62,446 |
) |
|
|
17,079 |
|
|
|
79,525 |
|
|
|
(57,983 |
) |
|
|
21,542 |
|
Non-compete agreements |
|
1,800 |
|
|
|
(1,400 |
) |
|
|
400 |
|
|
|
1,800 |
|
|
|
(1,100 |
) |
|
|
700 |
|
Trade name |
|
3,400 |
|
|
|
(3,299 |
) |
|
|
101 |
|
|
|
3,400 |
|
|
|
(3,229 |
) |
|
|
171 |
|
Other |
|
4,462 |
|
|
|
(4,455 |
) |
|
|
7 |
|
|
|
4,462 |
|
|
|
(4,418 |
) |
|
|
44 |
|
Finite-lived intangible assets |
|
170,365 |
|
|
|
(152,345 |
) |
|
|
18,020 |
|
|
|
170,365 |
|
|
|
(146,716 |
) |
|
|
23,649 |
|
Indefinite-lived trade name |
|
918 |
|
|
|
— |
|
|
|
918 |
|
|
|
918 |
|
|
|
— |
|
|
|
918 |
|
Total acquired intangible assets |
$ |
171,283 |
|
|
$ |
(152,345 |
) |
|
$ |
18,938 |
|
|
$ |
171,283 |
|
|
$ |
(146,716 |
) |
|
$ |
24,567 |
|
Capitalized software development costs for products to be sold |
$ |
9,912 |
|
|
$ |
(3,254 |
) |
|
$ |
6,658 |
|
|
$ |
7,416 |
|
|
$ |
(1,900 |
) |
|
$ |
5,516 |
|
The following table summarizes the amortization expenses recorded in the following periods (in thousands):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||||
Amortization of purchased intangibles in revenues |
$ |
19 |
|
|
$ |
19 |
|
|
$ |
38 |
|
|
$ |
38 |
|
Amortization of purchased intangibles in cost of product revenues |
|
100 |
|
|
|
731 |
|
|
|
757 |
|
|
|
1,572 |
|
Amortization of purchased intangibles in operating expenses |
|
2,417 |
|
|
|
2,436 |
|
|
|
4,834 |
|
|
|
4,928 |
|
Total amortization expenses of purchased intangibles |
$ |
2,536 |
|
|
$ |
3,186 |
|
|
$ |
5,629 |
|
|
$ |
6,538 |
|
The estimated future amortization expense as of June 30, 2015 is as follows (in thousands):
Year ending December 31, |
|
Amount |
|
|
Remainder of 2015 |
|
$ |
4,867 |
|
2016 |
|
|
8,484 |
|
2017 |
|
|
4,669 |
|
Total |
|
$ |
18,020 |
|
|
The following table summarizes the changes in the Company’s restructuring reserves during the six months ended June 30, 2015 (in thousands):
|
Severance/Other |
|
|
Facilities |
|
|
Total |
|
|||
Balance at December 31, 2014 |
$ |
664 |
|
|
$ |
40,909 |
|
|
$ |
41,573 |
|
Additions to the reserve, net |
|
3,169 |
|
|
|
(3,785 |
) |
|
|
(616 |
) |
Interest accretion |
|
— |
|
|
|
977 |
|
|
|
977 |
|
Non-cash adjustments |
|
— |
|
|
|
(201 |
) |
|
|
(201 |
) |
Cash payments |
|
(2,995 |
) |
|
|
(13,185 |
) |
|
|
(16,180 |
) |
Balance at June 30, 2015 |
$ |
838 |
|
|
$ |
24,715 |
|
|
$ |
25,553 |
|
|
Trade receivables, net consist of the following (in thousands):
|
June 30, 2015 |
|
|
December 31, 2014 |
|
||
Gross accounts receivables |
$ |
216,034 |
|
|
$ |
214,664 |
|
Returns and related reserves |
|
(51,865 |
) |
|
|
(42,224 |
) |
Allowance for doubtful accounts |
|
(3,014 |
) |
|
|
(3,040 |
) |
Total |
$ |
161,155 |
|
|
$ |
169,400 |
|
Inventories consist of the following (in thousands):
|
June 30, 2015 |
|
|
December 31, 2014 |
|
||
Raw materials |
$ |
1,661 |
|
|
$ |
1,496 |
|
Work in process |
|
488 |
|
|
|
545 |
|
Finished goods |
|
97,760 |
|
|
|
98,287 |
|
Total |
$ |
99,909 |
|
|
$ |
100,328 |
|
Prepaid expenses and other current assets consist of the following (in thousands):
|
June 30, 2015 |
|
|
December 31, 2014 |
|
||
Non-trade receivables |
$ |
7,954 |
|
|
$ |
6,547 |
|
Prepaid expenses |
|
35,930 |
|
|
|
37,385 |
|
Derivative assets |
|
10,456 |
|
|
|
14,342 |
|
Other current assets |
|
3,037 |
|
|
|
2,798 |
|
Total |
$ |
57,377 |
|
|
$ |
61,072 |
|
Deferred revenue consists of the following (in thousands):
|
June 30, 2015 |
|
|
December 31, 2014 |
|
||
Short-term: |
|
|
|
|
|
|
|
Service |
$ |
174,213 |
|
|
$ |
171,355 |
|
Product |
|
9 |
|
|
|
94 |
|
License |
|
2,668 |
|
|
|
2,083 |
|
Total |
$ |
176,890 |
|
|
$ |
173,532 |
|
Long-term: |
|
|
|
|
|
|
|
Service |
$ |
80,167 |
|
|
$ |
85,925 |
|
License |
|
3,384 |
|
|
|
3,441 |
|
Total |
$ |
83,551 |
|
|
$ |
89,366 |
|
Changes in the deferred service revenue during the six month period ended June 30, 2015 and 2014 are as follows (in thousands):
|
Six Months Ended |
|
|||||
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||
Balance at beginning of period |
$ |
257,280 |
|
|
$ |
253,793 |
|
Additions to deferred service revenue |
|
167,332 |
|
|
|
170,459 |
|
Amortization of deferred service revenue |
|
(170,232 |
) |
|
|
(171,257 |
) |
Balance at end of period |
$ |
254,380 |
|
|
$ |
252,995 |
|
Other accrued liabilities consist of the following (in thousands):
|
June 30, 2015 |
|
|
December 31, 2014 |
|
||
Accrued expenses |
$ |
26,095 |
|
|
$ |
27,523 |
|
Accrued co-op expenses |
|
3,059 |
|
|
|
4,102 |
|
Restructuring reserves |
|
9,980 |
|
|
|
12,207 |
|
Warranty obligations |
|
11,147 |
|
|
|
11,613 |
|
Derivative liabilities |
|
5,606 |
|
|
|
8,175 |
|
Employee stock purchase plan withholdings |
|
9,088 |
|
|
|
10,658 |
|
Other accrued liabilities |
|
10,689 |
|
|
|
11,915 |
|
Total |
$ |
75,664 |
|
|
$ |
86,193 |
|
Changes in the warranty obligation during the six month period ended June 30, 2015 and 2014 are as follows (in thousands):
|
Six Months Ended |
|
|||||
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||
Balance at beginning of period |
$ |
11,613 |
|
|
$ |
9,475 |
|
Accruals for warranties issued during the period |
|
6,811 |
|
|
|
8,131 |
|
Actual charges against warranty reserve during the period |
|
(7,277 |
) |
|
|
(7,256 |
) |
Balance at end of period |
$ |
11,147 |
|
|
$ |
10,350 |
|
|
The following table sets forth total interest expense recognized on the Term Loan (in thousands):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||||
Contractual interest expense |
$ |
1,292 |
|
|
$ |
1,225 |
|
|
$ |
2,550 |
|
|
$ |
2,454 |
|
Amortization of debt issuance costs |
|
133 |
|
|
|
133 |
|
|
|
266 |
|
|
|
267 |
|
Total |
$ |
1,425 |
|
|
$ |
1,358 |
|
|
$ |
2,816 |
|
|
$ |
2,721 |
|
|
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 June 30, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments-Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities |
$ |
33,637 |
|
|
$ |
27 |
|
|
$ |
— |
|
|
$ |
33,664 |
|
U.S. government agency securities |
|
61,810 |
|
|
|
13 |
|
|
|
(4 |
) |
|
|
61,819 |
|
Non-U.S. government securities |
|
11,035 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
11,035 |
|
Corporate debt securities |
|
91,673 |
|
|
|
8 |
|
|
|
(39 |
) |
|
|
91,642 |
|
Total investments - short-term |
$ |
198,155 |
|
|
$ |
49 |
|
|
$ |
(44 |
) |
|
$ |
198,160 |
|
Investments-Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities |
$ |
14,985 |
|
|
$ |
19 |
|
|
$ |
— |
|
|
$ |
15,004 |
|
U.S. government agency securities |
|
18,333 |
|
|
|
8 |
|
|
|
(5 |
) |
|
|
18,336 |
|
Corporate debt securities |
|
16,074 |
|
|
|
1 |
|
|
|
(24 |
) |
|
|
16,051 |
|
Total investments - long-term |
$ |
49,392 |
|
|
$ |
28 |
|
|
$ |
(29 |
) |
|
$ |
49,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
The following table summarizes the fair value and gross unrealized losses of the Company’s investments, including investments 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 (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 |
|
||||||
June 30, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities |
$ |
1,015 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,015 |
|
|
$ |
— |
|
U.S. government agency securities |
|
23,454 |
|
|
|
(9 |
) |
|
|
— |
|
|
|
— |
|
|
|
23,454 |
|
|
|
(9 |
) |
Non-U.S. government securities |
|
6,220 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
6,220 |
|
|
|
(1 |
) |
Corporate debt securities |
|
58,428 |
|
|
|
(63 |
) |
|
|
— |
|
|
|
— |
|
|
|
58,428 |
|
|
|
(63 |
) |
Total investments |
$ |
89,117 |
|
|
$ |
(73 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
89,117 |
|
|
$ |
(73 |
) |
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 |
) |
|
The tables below set forth the Company’s recurring fair value measurements (in thousands):
|
|
|
|
|
|
Fair Value Measurements at June 30, 2015 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 |
|
$ |
3,421 |
|
|
$ |
3,421 |
|
|
$ |
— |
|
U.S. government agency securities |
|
|
1,200 |
|
|
|
— |
|
|
|
1,200 |
|
Non-U.S. government securities |
|
|
1,600 |
|
|
|
— |
|
|
|
1,600 |
|
Commercial paper |
|
|
7,779 |
|
|
|
— |
|
|
|
7,779 |
|
Short-term investments |
|
|
198,160 |
|
|
|
— |
|
|
|
198,160 |
|
Long-term investments |
|
|
49,391 |
|
|
|
— |
|
|
|
49,391 |
|
Total fixed income available-for-sale securities |
|
$ |
261,551 |
|
|
$ |
3,421 |
|
|
$ |
258,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts (a) |
|
$ |
10,456 |
|
|
$ |
— |
|
|
$ |
10,456 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts (b) |
|
$ |
5,606 |
|
|
$ |
— |
|
|
$ |
5,606 |
|
|
|
|
|
|
|
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 |
|
(a) |
Included in short-term derivative assets as “Prepaid expenses and other current assets” in the condensed consolidated balance sheets. |
(b) |
Included in short-term derivative liabilities as “Other accrued liabilities” in the condensed consolidated balance sheets. |
|
The following table shows the Company’s derivative instruments measured at gross fair value as reflected in the condensed consolidated balance sheets (in thousands):
|
Fair Value of Derivatives Designated as Hedge Instruments |
|
|
Fair Value of Derivatives Not Designated as Hedge Instruments |
|
||||||||||
|
June 30, 2015 |
|
|
December 31, 2014 |
|
|
June 30, 2015 |
|
|
December 31, 2014 |
|
||||
Derivative assets (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
$ |
4,984 |
|
|
$ |
5,501 |
|
|
$ |
5,472 |
|
|
$ |
8,841 |
|
Derivative liabilities (b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
$ |
2,720 |
|
|
$ |
4,041 |
|
|
$ |
2,886 |
|
|
$ |
4,134 |
|
|
(a) |
All derivative assets are recorded in “Prepaid and other current assets” in the condensed consolidated balance sheets. |
(b) |
All derivative liabilities are recorded in “Other accrued liabilities” in the condensed consolidated balance sheets. |
The following table sets forth the offsetting of derivative assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets |
|
|||||||||
|
|
Gross Amounts of Recognized Assets |
|
|
Gross Amounts Offset in the Condensed Consolidated Balance Sheets |
|
|
Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheets |
|
|
Financial Instruments |
|
|
Cash Collateral Pledged |
|
|
Net Amount |
|
||||||
As of June 30, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
10,456 |
|
|
$ |
— |
|
|
$ |
10,456 |
|
|
$ |
(4,914 |
) |
|
$ |
— |
|
|
$ |
5,542 |
|
As of December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
14,342 |
|
|
$ |
— |
|
|
$ |
14,342 |
|
|
$ |
(8,175 |
) |
|
$ |
— |
|
|
$ |
6,167 |
|
The following table sets forth the offsetting of derivative liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets |
|
|||||||||
|
|
Gross Amounts of Recognized Liabilities |
|
|
Gross Amounts Offset in the Condensed Consolidated Balance Sheets |
|
|
Net Amounts of Liabilities Presented in the Condensed Consolidated Balance Sheets |
|
|
Financial Instruments |
|
|
Cash Collateral Pledged |
|
|
Net Amount |
|
||||||
As of June 30, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
5,606 |
|
|
$ |
— |
|
|
$ |
5,606 |
|
|
$ |
(4,915 |
) |
|
$ |
— |
|
|
$ |
691 |
|
As of December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
8,175 |
|
|
$ |
— |
|
|
$ |
8,175 |
|
|
$ |
(8,175 |
) |
|
$ |
— |
|
|
$ |
— |
|
The following table summarizes the Company’s notional position by currency, and approximate U.S. dollar equivalent of the outstanding cash flow hedges at June 30, 2015 (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 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
136,780 |
|
|
$ |
21,356 |
|
|
Buy |
Euro |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
27,977 |
|
|
$ |
32,500 |
|
|
Buy |
Euro |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
72,943 |
|
|
$ |
84,557 |
|
|
Sell |
British Pound |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
25,325 |
|
|
$ |
39,033 |
|
|
Buy |
British Pound |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
32,968 |
|
|
$ |
50,614 |
|
|
Sell |
Israeli Shekel |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
67,829 |
|
|
$ |
17,373 |
|
|
Buy |
The following tables show the effect of the Company’s derivative instruments designated as cash flow hedges in the condensed consolidated statements of operations for the following periods (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) |
|
|||||||||||||||
|
|
Three Months Ended |
|
|
|
|
Three Months Ended |
|
|
|
|
Three Months Ended |
|
|||||||||||||||
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||||||
Foreign exchange contracts |
|
$ |
(1,723 |
) |
|
$ |
422 |
|
|
Product revenues |
|
$ |
3,629 |
|
|
$ |
(1,409 |
) |
|
Interest and other income (expense), net |
|
$ |
357 |
|
|
$ |
(127 |
) |
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
(531 |
) |
|
|
330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
(1,007 |
) |
|
|
717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
(268 |
) |
|
|
277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(396 |
) |
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,723 |
) |
|
$ |
422 |
|
|
|
|
$ |
1,427 |
|
|
$ |
109 |
|
|
|
|
$ |
357 |
|
|
$ |
(127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
Six Months Ended |
|
|
|
|
Six Months Ended |
|
|||||||||||||||
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||||||
Foreign exchange contracts |
|
$ |
4,575 |
|
|
$ |
1 |
|
|
Product revenues |
|
$ |
10,265 |
|
|
$ |
(4,274 |
) |
|
Interest and other income (expense), net |
|
$ |
326 |
|
|
$ |
(52 |
) |
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
(1,332 |
) |
|
|
862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
(2,794 |
) |
|
|
1,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
(983 |
) |
|
|
692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(1,171 |
) |
|
|
366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,575 |
|
|
$ |
1 |
|
|
|
|
$ |
3,985 |
|
|
$ |
(557 |
) |
|
|
|
$ |
326 |
|
|
$ |
(52 |
) |
|
(a) |
There were no gains or losses recognized in income due to ineffectiveness in the periods presented. |
The following table summarizes the Company’s notional position by currency, and approximate U.S. dollar equivalent of the outstanding non-designated hedges at June 30, 2015 (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 |
|
16,991 |
|
|
$ |
5,476 |
|
|
Buy |
|
|
— |
|
|
$ |
— |
|
|
— |
Brazilian Real |
|
37,282 |
|
|
$ |
11,728 |
|
|
Sell |
|
|
— |
|
|
$ |
— |
|
|
— |
Chinese Yuan |
|
40,500 |
|
|
$ |
6,414 |
|
|
Buy |
|
|
4,920 |
|
|
$ |
769 |
|
|
Buy |
Chinese Yuan |
|
41,832 |
|
|
$ |
6,683 |
|
|
Sell |
|
|
— |
|
|
$ |
— |
|
|
— |
Euro |
|
24,468 |
|
|
$ |
28,731 |
|
|
Buy |
|
|
623 |
|
|
$ |
768 |
|
|
Buy |
Euro |
|
54,174 |
|
|
$ |
63,677 |
|
|
Sell |
|
|
9,257 |
|
|
$ |
11,403 |
|
|
Sell |
British Pound |
|
15,878 |
|
|
$ |
25,200 |
|
|
Buy |
|
|
3,875 |
|
|
$ |
6,034 |
|
|
Buy |
British Pound |
|
14,261 |
|
|
$ |
22,917 |
|
|
Sell |
|
|
5,532 |
|
|
$ |
8,616 |
|
|
Sell |
Israeli Shekel |
|
53,288 |
|
|
$ |
14,379 |
|
|
Buy |
|
|
8,171 |
|
|
$ |
2,103 |
|
|
Buy |
Israeli Shekel |
|
59,170 |
|
|
$ |
15,535 |
|
|
Sell |
|
|
— |
|
|
$ |
— |
|
|
— |
Japanese Yen |
|
173,692 |
|
|
$ |
1,421 |
|
|
Buy |
|
|
— |
|
|
$ |
— |
|
|
— |
Japanese Yen |
|
247,263 |
|
|
$ |
2,003 |
|
|
Sell |
|
|
— |
|
|
$ |
— |
|
|
— |
Mexican Peso |
|
12,538 |
|
|
$ |
800 |
|
|
Buy |
|
|
— |
|
|
$ |
— |
|
|
— |
Mexican Peso |
|
26,493 |
|
|
$ |
1,701 |
|
|
Sell |
|
|
— |
|
|
$ |
— |
|
|
— |
The following table shows the effect of the Company’s non-designated hedges in the condensed consolidated statements of operations (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 |
|
|||||
|
|
|
|
Three Months Ended |
|
|||||
|
|
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||
Foreign exchange contracts |
|
Interest and other income (expense), net |
|
$ |
(1,056 |
) |
|
$ |
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|||||
|
|
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||
Foreign exchange contracts |
|
Interest and other income (expense), net |
|
$ |
3,617 |
|
|
$ |
299 |
|
|
The following table summarizes the changes in accumulated other comprehensive income, net of tax, by component (in thousands). The tax effects were not shown separately, as the impacts were not material.
Six Months Ended June 30, 2015 |
|
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, 2014 |
|
$ |
1,366 |
|
|
$ |
(52 |
) |
|
$ |
2,797 |
|
|
$ |
4,111 |
|
Other comprehensive income before reclassifications |
|
|
4,575 |
|
|
|
62 |
|
|
|
191 |
|
|
|
4,828 |
|
Amounts reclassified from accumulated other comprehensive income (a) |
|
|
(3,985 |
) |
|
|
(4 |
) |
|
|
— |
|
|
|
(3,989 |
) |
Net current-period other comprehensive income |
|
|
590 |
|
|
|
58 |
|
|
|
191 |
|
|
|
839 |
|
Balance as of June 30, 2015 |
|
$ |
1,956 |
|
|
$ |
6 |
|
|
$ |
2,988 |
|
|
$ |
4,950 |
|
|
(a) |
See Note 12 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 condensed consolidated statement of operations for the six months ended June 30, 2015, net of taxes. |
|
The following table summarizes stock-based compensation expense recorded for the periods presented and its allocation within the condensed consolidated statements of operations (in thousands):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||||
Cost of product revenues |
$ |
505 |
|
|
$ |
520 |
|
|
$ |
1,460 |
|
|
$ |
1,160 |
|
Cost of service revenues |
|
877 |
|
|
|
1,101 |
|
|
|
2,185 |
|
|
|
2,062 |
|
Stock-based compensation expense included in cost of revenues |
|
1,382 |
|
|
|
1,621 |
|
|
|
3,645 |
|
|
|
3,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
2,698 |
|
|
|
5,333 |
|
|
|
5,311 |
|
|
|
5,724 |
|
Research and development |
|
1,915 |
|
|
|
3,059 |
|
|
|
4,488 |
|
|
|
4,101 |
|
General and administrative |
|
3,716 |
|
|
|
3,750 |
|
|
|
5,499 |
|
|
|
6,363 |
|
Stock-based compensation expense included in operating expenses |
|
8,329 |
|
|
|
12,142 |
|
|
|
15,298 |
|
|
|
16,188 |
|
Stock-based compensation expense related to employee equity awards and employee stock purchases |
|
9,711 |
|
|
|
13,763 |
|
|
|
18,943 |
|
|
|
19,410 |
|
Tax benefit |
|
1,697 |
|
|
|
2,777 |
|
|
|
3,226 |
|
|
|
3,762 |
|
Stock-based compensation expense related to employee equity awards and employee stock purchases, net of tax |
$ |
8,014 |
|
|
$ |
10,986 |
|
|
$ |
15,717 |
|
|
$ |
15,648 |
|
The fair value of each employee stock purchase right grant is estimated on the date of grant using the Black-Scholes option valuation model and is recognized as expense using the graded vesting method using the following assumptions:
|
Three and Six Months Ended |
||
|
June 30, 2015 |
|
June 30, 2014 |
Expected volatility |
30.04-30.73% |
|
32.30-42.11% |
Risk-free interest rate |
0.07-0.49% |
|
0.07-0.30% |
Expected dividends |
0.0% |
|
0.0% |
Expected life (years) |
0.5-2.0 |
|
0.5-2.0 |
|
Financial information for each reportable geographical segment as of June 30, 2015 and December 31, 2014 and for the three and six months ended June 30, 2015 and 2014, based on the Company’s internal management reporting 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 |
|
||||
For the three months ended June 30, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
$ |
158,333 |
|
|
$ |
80,865 |
|
|
$ |
77,377 |
|
|
$ |
316,575 |
|
% of total revenue |
|
50 |
% |
|
|
26 |
% |
|
|
24 |
% |
|
|
100 |
% |
Contribution margin |
$ |
60,765 |
|
|
$ |
31,987 |
|
|
$ |
35,975 |
|
|
$ |
128,727 |
|
% of segment revenue |
|
38 |
% |
|
|
40 |
% |
|
|
46 |
% |
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
$ |
167,806 |
|
|
$ |
83,067 |
|
|
$ |
81,146 |
|
|
$ |
332,019 |
|
% of total revenue |
|
51 |
% |
|
|
25 |
% |
|
|
24 |
% |
|
|
100 |
% |
Contribution margin |
$ |
69,155 |
|
|
$ |
35,108 |
|
|
$ |
33,366 |
|
|
$ |
137,629 |
|
% of segment revenue |
|
41 |
% |
|
|
42 |
% |
|
|
41 |
% |
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
$ |
315,687 |
|
|
$ |
174,714 |
|
|
$ |
156,874 |
|
|
$ |
647,275 |
|
% of total revenue |
|
49 |
% |
|
|
27 |
% |
|
|
24 |
% |
|
|
100 |
% |
Contribution margin |
$ |
121,616 |
|
|
$ |
74,764 |
|
|
$ |
72,088 |
|
|
$ |
268,468 |
|
% of segment revenue |
|
39 |
% |
|
|
43 |
% |
|
|
46 |
% |
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
$ |
330,875 |
|
|
$ |
172,104 |
|
|
$ |
157,564 |
|
|
$ |
660,543 |
|
% of total revenue |
|
50 |
% |
|
|
26 |
% |
|
|
24 |
% |
|
|
100 |
% |
Contribution margin |
$ |
139,128 |
|
|
$ |
72,774 |
|
|
$ |
65,020 |
|
|
$ |
276,922 |
|
% of segment revenue |
|
42 |
% |
|
|
42 |
% |
|
|
41 |
% |
|
|
42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2015: Gross accounts receivable |
$ |
100,975 |
|
|
$ |
59,582 |
|
|
$ |
55,477 |
|
|
$ |
216,034 |
|
% of total gross accounts receivable |
|
47 |
% |
|
|
28 |
% |
|
|
25 |
% |
|
|
100 |
% |
As of December 31, 2014: Gross accounts receivable |
$ |
88,316 |
|
|
$ |
62,540 |
|
|
$ |
63,808 |
|
|
$ |
214,664 |
|
% of total gross accounts receivable |
|
41 |
% |
|
|
29 |
% |
|
|
30 |
% |
|
|
100 |
% |
The reconciliation of segment information to Polycom consolidated totals is as follows (in thousands):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||||
Segment contribution margin |
$ |
128,727 |
|
|
$ |
137,629 |
|
|
$ |
268,468 |
|
|
$ |
276,922 |
|
Corporate and unallocated costs |
|
(91,158 |
) |
|
|
(99,339 |
) |
|
|
(189,500 |
) |
|
|
(205,938 |
) |
Stock-based compensation |
|
(9,711 |
) |
|
|
(13,763 |
) |
|
|
(18,943 |
) |
|
|
(19,410 |
) |
Effect of stock-based compensation cost on warranty expense |
|
(80 |
) |
|
|
(77 |
) |
|
|
(133 |
) |
|
|
(206 |
) |
Amortization of purchased intangibles |
|
(2,517 |
) |
|
|
(3,167 |
) |
|
|
(5,591 |
) |
|
|
(6,500 |
) |
Restructuring costs |
|
(343 |
) |
|
|
(9,175 |
) |
|
|
(367 |
) |
|
|
(39,518 |
) |
Transaction-related costs |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(156 |
) |
Interest and other income (expense), net |
|
(178 |
) |
|
|
(1,696 |
) |
|
|
(1,640 |
) |
|
|
(2,391 |
) |
Income before benefit from income taxes |
$ |
24,740 |
|
|
$ |
10,412 |
|
|
$ |
52,294 |
|
|
$ |
2,803 |
|
The following table summarizes the Company’s revenues by groups of similar products and services as follows (in thousands):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UC group systems |
$ |
195,169 |
|
|
$ |
218,448 |
|
|
$ |
399,820 |
|
|
$ |
431,820 |
|
UC personal devices |
|
66,802 |
|
|
|
53,639 |
|
|
|
134,267 |
|
|
|
110,113 |
|
UC platform |
|
54,604 |
|
|
|
59,932 |
|
|
|
113,188 |
|
|
|
118,610 |
|
Total |
$ |
316,575 |
|
|
$ |
332,019 |
|
|
$ |
647,275 |
|
|
$ |
660,543 |
|
|
The following table presents the income tax expense (benefit) and the effective tax rates (in thousands):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
||||
Income tax expense (benefit) |
$ |
5,093 |
|
|
$ |
1,855 |
|
|
$ |
11,449 |
|
|
$ |
(1,763 |
) |
Effective tax rate |
|
20.6 |
% |
|
|
17.8 |
% |
|
|
21.9 |
% |
|
|
(62.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
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|
|
|
||||||||||||||||||||||||||||||||||||||||
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|