TMCnet News

POLYCOM INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[August 01, 2014]

POLYCOM INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(Edgar Glimpses Via Acquire Media NewsEdge) YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH OUR CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES. EXCEPT FOR HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. WHEN USED IN THIS REPORT, THE WORDS "MAY," "BELIEVE," "COULD," "ANTICIPATE," "WOULD," "MIGHT," "PLAN," "EXPECT," "WILL," "INTEND," "POTENTIAL," "OBJECTIVE," "STRATEGY," "SHOULD," "DESIGNED," AND SIMILAR EXPRESSIONS OR THE NEGATIVE OF THESE TERMS ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS, INCLUDING, AMONG OTHER THINGS, STATEMENTS REGARDING OUR UNIQUE POSITION AND ANTICIPATED PRODUCTS, IMPORTANT DRIVERS, CUSTOMER AND GEOGRAPHIC REVENUE LEVELS AND MIX, GROSS MARGINS, OPERATING COSTS AND EXPENSES AND OUR CHANNEL INVENTORY LEVELS, INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE FUTURE RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" IN THIS DOCUMENT, AS WELL AS OTHER INFORMATION FOUND IN THE DOCUMENTS WE FILE FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2013.



Overview We are a global leader in open, standards-based unified communications and collaboration ("UC&C") solutions for voice, video and content collaboration solutions. Our solutions are powered by the Polycom® RealPresence® Platform, comprehensive software infrastructure and rich application programming interfaces ("APIs") that interoperate with a broad set of communication, business, mobile, and cloud applications and devices to deliver secure face-to-face video collaboration across different environments. With Polycom® RealPresence® collaboration solutions, from infrastructure to endpoints for all environments, people all over the world can collaborate face-to-face without being in the same physical location. Individuals and teams can connect, communicate, and collaborate through a high-definition visual experience from their desktops, meeting rooms, classrooms, home offices, mobile devices, web browsers, and specialized solutions such as video carts for healthcare applications. By removing the barriers of distance and time, connecting experts to where they are needed most, and creating greater trust and understanding through visual connection, we enable people to make better decisions faster and to increase their productivity while saving time and money and being environmentally responsible.

We sell our solutions globally through a high-touch sales model that leverages our broad network of channel partners, including distributors, value-added resellers, system integrators, leading communications services providers, and retailers. We manufacture our products through an outsourced model optimized for quality, reliability, and fulfillment agility.


We believe important drivers for the adoption of collaboration solutions include: - UC&C solutions, including voice and video offerings, as a preferred method of communication, - increasing presence of video on desktop and laptop devices, - growth of video-capable mobile devices (including tablets and smartphones), - growth of Microsoft® Lync® in the corporate environment and the resulting impact on sales of Polycom's Lync-compactible voice and video devices, - expansion of business applications with integrated web-based video and content collaboration, - virtualization and the move to private, public, and hybrid clouds, - adoption of UC&C by small and medium businesses, - growth of the number of teleworkers globally, - new pricing models and options for video delivery, including subscription-based software pricing and as-a-service offerings, - emergence of Bring Your Own Device (BYOD) programs in businesses of all sizes, across all regions, - demand for UC&C solutions for business-to-business and business-to-consumer communications and the move of consumer applications into the business space, and - continued commitment by organizations and individuals to reduce their carbon footprint and expenses by choosing video collaboration over travel.

28 --------------------------------------------------------------------------------We believe we are uniquely positioned as the UC&C ecosystem partner of choice through our strategic partnerships, support of open standards, innovative technology, multiple delivery modes and customer-centric go-to-market capabilities.

Revenues for the three and six months ended June 30, 2014 were $332.0 million and $660.5 million, respectively, a decrease of $13.2 million, or 4%, and $23.4 million, or 3%, respectively, from the same periods in 2013. On a year-over-year basis, our total product revenues declined while service revenues increased. The overall decreases in product revenues for the three and six months ended June 30, 2014 were primarily a result of lower sales of our UC group systems products, mainly driven by lower IP conference phone revenues as a result of Cisco Systems, Inc. ("Cisco" or "Cisco System") no longer reselling a product they previously purchased from us, and, to a lesser extent, due to lower UC platform product revenues. The decreases were partially offset by increased revenues from our UC personal devices products. The increases in service revenues were driven primarily by increased maintenance revenues on a larger installed base and increased maintenance service renewals year-over-year as a result of ongoing efforts to increase maintenance service renewal rates.

From a segment perspective, our Americas, EMEA, and APAC segment revenues accounted for 51%, 25%, and 24%, respectively, of our revenues in the three months ended June 30, 2014. Our Americas and APAC segment revenues decreased by 4% and 10%, respectively, and our EMEA segment revenues increased by 4% in the three months ended June 30, 2014 as compared to the same period in 2013. In the six months ended June 30, 2014, our Americas, EMEA, and APAC segment revenues accounted for 50%, 26%, and 24%, respectively, of our revenues. Our Americas and APAC segment revenues decreased by 5% and 7%, respectively, and our EMEA segment revenues increased by 2% in the six months ended June 30, 2014 as compared to the same period in 2013. On a year-over-year basis, product revenues declined in our Americas and APAC segments, but increased in our EMEA segment, in the three months ended June 30, 2014, and declined across all our regions during the six months ended June 30, 2014. Service revenues increased in our EMEA and APAC segments, but decreased in our Americas segment, in the three months ended June 30, 2014, and increased across all our segments during the six months ended June 30, 2014. See Note 17 of Notes to Condensed Consolidated Financial Statements for further information on our segments, including a summary of our segment revenues, segment contribution margins, and segment gross accounts receivable.

The discussion of results of operations at the consolidated level is also followed by a discussion of results of operations by segment for the three and six months ended June 30, 2014 and 2013.

Operating margins increased by 2 percentage points in the three months ended June 30, 2014 and remained relatively flat during the six month period ended June 30, 2014 as compared to the same periods in 2013. The increase in the three months ended June 30, 2014 was primarily due to increased gross margins and decreased operating expenses as a percentage of revenues by 1% each. Increased gross margins were primarily driven by a higher product gross margin as a result of changes in product mix toward higher margin RealPresence Group Series products within our UC group systems product category. The decrease in operating expenses as a percentage of revenues was primarily due to lower headcount and facility related costs due to actions taken to better align expenses to our revenue and gross margin profile and to improve our operating margins, partially offset by higher restructuring charges related to these actions.

During the six months ended June 30, 2014, we generated approximately $80.6 million in cash flow from operating activities, which after the impact of investing and financing activities described in further detail under "Liquidity and Capital Resources," resulted in a $20.5 million net increase in our total cash and cash equivalents from December 31, 2013.

29 --------------------------------------------------------------------------------Results of Operations for the Three and Six Months Ended June 30, 2014 and 2013 The following table sets forth, as a percentage of revenues (unless indicated otherwise), condensed consolidated statements of operations data for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2014 2013 2014 2013 Revenues: Product revenues 71 % 73 % 71 % 73 % Service revenues 29 % 27 % 29 % 27 % Total revenues 100 % 100 % 100 % 100 % Cost of revenues: Cost of product revenues as a % of product revenues 41 % 42 % 42 % 42 % Cost of service revenues as a % of service revenues 41 % 41 % 41 % 41 % Total cost of revenues 41 % 42 % 41 % 41 % Gross profit 59 % 58 % 59 % 59 % Operating expenses: Sales and marketing 29 % 32 % 29 % 32 % Research and development 15 % 16 % 15 % 16 % General and administrative 7 % 7 % 7 % 7 % Amortization of purchased intangibles 1 % - 1 % 1 % Restructuring costs 3 % 1 % 6 % 1 % Transaction-related costs - - 0 % 1 % Total operating expenses 55 % 56 % 58 % 58 % Operating income 4 % 2 % 1 % 1 % Interest and other income (expense), net: Interest expense (1 )% - - - Other income (expense) - - - - Interest and other income (expense), net (1 )% - - - Income from continuing operations before provision for (benefit from) income taxes 3 % 2 % 1 % 1 % Provision for (benefit from) income taxes - - - - Net income from continuing operations 3 % 2 % 1 % 1 % Gain from sale of discontinued operations, net of taxes - - - - Net income 3 % 2 % 1 % 1 % Revenues We manage our business primarily on a geographic basis, organized into three geographic segments. Our revenues, which include product and service revenues, for each segment are summarized for the periods indicated in the following table: Three Months Ended Six Months Ended June 30, June 30, Increase June 30, June 30, Increase $ in thousands 2014 2013 (Decrease) 2014 2013 (Decrease) Americas $ 167,806 $ 175,629 (4 )% $ 330,875 $ 346,610 (5 )% % of revenues 51 % 51 % 50 % 51 % EMEA $ 83,067 $ 79,727 4 % $ 172,104 $ 168,819 2 % % of revenues 25 % 23 % 26 % 25 % APAC $ 81,146 $ 89,878 (10 )% $ 157,564 $ 168,557 (7 )% % of revenues 24 % 26 % 24 % 24 % Total revenues $ 332,019 $ 345,234 (4 )% $ 660,543 $ 683,986 (3 )% 30 -------------------------------------------------------------------------------- In the three months ended June 30, 2014, the decrease in total revenues was due to a decrease in product revenues of $14.9 million, or 6%, partially offset by an increase in service revenues of $1.6 million, or 2%, as compared to the same period in 2013. The decrease in product revenues was primarily a result of lower sales of our UC group systems and UC platform products, partially offset by increased sales of our UC personal devices products year-over-year. In the six months ended June 30, 2014, the decrease in total revenues was due to a decrease in product revenues of $29.4 million, or 6%, partially offset by an increase in service revenues of $6.0 million, or 3%, as compared to the same period in 2013.

The decrease in product revenues was primarily a result of lower sales of our UC group systems, partially offset by increased sales of our UC personal devices products and, to a lesser extent, increased sales of our UC platform products year-over-year. The increase in service revenues in the three and six months ended June 30, 2014 was primarily driven by increased maintenance service revenues on a larger installed base and increased maintenance service renewals year-over-year, partially offset by decreased revenues from managed services related to the Hewlett-Packard visual collaboration business we acquired in 2011. As these managed services contracts expire, customers may elect to purchase other Polycom product solutions rather than renew their managed services contracts, as was the case for the three months ended June 30, 2014.

This trend is likely to continue.

The overall decreases in the Americas and APAC segment revenues in the three and six months ended June 30, 2014 were driven primarily by decreased revenues across several of our key geographic markets, including China, the United States, Canada, Japan, and Brazil, partially offset by increases in Australia, India and Mexico. The overall increases in the EMEA segment revenues in the three and six months ended June 30, 2014 were primarily due to growth in the United Kingdom, France, and Benelux, partially offset by decreases in Russia and the Nordic countries. On a year-over-year basis, product and service revenues decreased in our Americas segment and increased in our EMEA segment in the three months ended June 30, 2014. Our APAC segment product revenues decreased and service revenues increased in the three months ended June 30, 2014. Our product revenues decreased and service revenues increased across all our segments in the six months ended June 30, 2014 as compared to the same period of 2013.

In 2013, Cisco informed us that it would end of life, and therefore no longer resell, the IP conference phones they purchase from us, resulting in a year-over-year decrease of revenues of approximately $13.6 million and $22.5 million in the three and six months ended June 30, 2014, respectively. We do not expect any further revenues from this relationship in 2014. The decrease in the revenues of these IP conference phones as a result of this change accounted for the majority of our year-over-year product revenue decreases in the three and six months ended June 30, 2014. We have been planning for the transition and are working to evolve the features and functionality of our VoIP conference phone portfolio to be interoperable in a Cisco environment.

In the three and six months ended June 30, 2014, one channel partner, ScanSource Communications ("ScanSource"), located in our Americas segment, accounted for 18% of our total revenues, respectively. In the three and six months ended June 30, 2013, ScanSource accounted for 16%% of our total revenues, respectively. We believe it is unlikely that the loss of any of our channel partners would have a long term material adverse effect on our consolidated revenues or segment revenues as we believe end-users would likely purchase our products from a different channel partner. However, a loss of any one of these channel partners could have a short-term material adverse impact.

In addition to the primary view on a geographic basis, we also track revenues by groups of similar products and services for various purposes. The following table presents revenues for groups of similar products and services for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, Increase June 30, June 30, Increase $ in thousands 2014 2013 (Decrease) 2014 2013 (Decrease) UC group systems $ 218,448 $ 232,998 (6 )% $ 431,820 $ 465,425 (7 )% UC personal devices 53,639 50,849 5 % 110,113 100,095 10 % UC platform 59,932 61,387 (2 )% 118,610 118,466 - Total revenues $ 332,019 $ 345,234 (4 )% $ 660,543 $ 683,986 (3 )% UC group systems include all immersive telepresence, group video and group voice systems products and the related service elements. On a year-over-year basis, the decreases in UC group systems revenues were primarily driven by decreases in sales of our group voice products and related services from our Americas segment and, to a lesser extent, decreases in sales of our group video products and related services from our APAC and EMEA segments and decreases in sales of immersive telepresence products and related services in our Americas and APAC segments. The decreases were partially offset by increased revenues from our group video products and related services from our America segment and, to a lesser extent, group voice products and related services from our EMEA and APAC segments.

31 -------------------------------------------------------------------------------- UC personal devices include desktop video devices and desktop voice products and the related service elements. The increases in UC personal devices revenues were primarily due to increased sales of our desktop voice products and related services in our Americas and EMEA segments, partially offset by decreased revenues from desktop video products and related services across all regions and, to a lesser extent, decreased revenues from desktop voice products and related services in our APAC segment. Overall, the increases in UC personal devices revenues were due in part to increased demand for our Microsoft® Lync® interoperable solutions and the continued adoption of VoIP technologies.

UC platform includes our RealPresence Platform hardware and software products and the related service elements. The decrease in UC platform revenues in the three months ended June 30, 2014 was driven by decreased sales of our UC platform products and related service in our Americas segment, partially offset by increased revenues from our EMEA and APAC segments. In the six months ended June 30, 2014, the increases in UC platform revenues in our EMEA and APAC segments were largely offset by decreased revenues from our Americas segment, resulting in a less than 1% increase in UC platform revenues.

Cost of Revenues and Gross Margins Three Months Ended Six Months Ended June 30, June 30, Increase June 30, June 30, Increase/ $ in thousands 2014 2013 (Decrease) 2014 2013 (Decrease) Product Cost of Revenues $ 97,710 $ 105,286 (7 )% $ 195,346 $ 207,164 (6 )% % of Product Revenues 41 % 42 % (1) pt 42 % 42 % - Product Gross Margins 59 % 58 % 1 pt 58 % 58 % - Service Cost of Revenues $ 39,087 $ 38,350 2 % $ 77,990 $ 76,127 2 % % of Service Revenues 41 % 41 % - 41 % 41 % - Service Gross Margins 59 % 59 % - 59 % 59 % - Total Cost of Revenues $ 136,797 $ 143,636 (5 )% $ 273,336 $ 283,291 (4 )% % of Total Revenues 41 % 42 % (1) pt 41 % 41 % - Total Gross Margins 59 % 58 % 1 pt 59 % 59 % - Cost of Product Revenues and Product Gross Margins Cost of product revenues consists primarily of contract manufacturer costs, including material and direct labor, our manufacturing organization, tooling depreciation, warranty expense, freight expense, royalty payments, amortization of certain intangible assets, stock-based compensation costs and an allocation of overhead expenses, including facilities and IT costs. Cost of product revenues and product gross margins included charges for stock-based compensation of $0.5 million and $0.7 million for the three months ended June 30, 2014 and 2013, respectively, and $1.2 million and $1.6 million for the six months ended June 30, 2014 and 2013, respectively. Cost of product revenues at the segment level consists of the standard cost of product revenues and does not include items such as warranty expense, royalties, and the allocation of overhead expenses, including facilities and IT costs, as well as stock-based compensation costs and amortization of purchased intangible assets.

The increase in the product gross margins as a percentage of revenues in the three months ended June 30, 2014 was primarily due to changes in product mix towards higher margin RealPresence Group Series products within our UC group systems product category and, to a lesser extent, lower freight expense, partially offset by increased royalty expense. Gross margins as a percentage of revenues in the six months ended June 30, 2014 remained relatively flat compared to the same period in 2013. From a segment perspective, product gross margins increased in our Americas segment and decreased in our EMEA segment year-over-year. Product gross margins in our APAC segment increased in the three months ended June 30, 2014 and decreased in the six months ended June 30, 2014, as compared to the same periods in 2013.

Cost of Service Revenues and Service Gross Margins Cost of service revenues consists primarily of material and direct labor, including stock-based compensation costs, depreciation, and an allocation of overhead expenses, including facilities and IT costs. Cost of service revenues and service gross margins included charges for stock-based compensation expense of $1.1 million and $1.6 million for the three months ended June 30, 2014 and 2013, respectively, and $2.1 million and $3.1 million for the six months ended June 30, 2014 and 2013, respectively. Cost of service revenues at the segment level consists of the standard cost of service revenues and does not include items such as warranty expense, royalties, and the allocation of overhead expenses, including facilities and IT costs, as well as stock-based compensation costs and amortization of purchased intangible assets.

32 -------------------------------------------------------------------------------- In the three and six months ended June 30, 2014, service gross margins as a percentage of revenues remained relatively flat as compared to the same periods in 2013. On a year-over-year basis, the increased cost of service revenue was primarily due to increased service revenues and direct spending costs, including outside services and warranty expenses which were partially offset by lower managed network costs. From a segment perspective, service gross margins as a percentage of revenues increased in our EMEA and APAC segments and decreased in our Americas segment.

Total Cost of Revenues and Total Gross Margins On a year-over-year basis, the increase in total gross margins in the three months ended June 30, 2014 was primarily due to the increase in the product gross margins as a percentage of revenues, as discussed under Cost of Product Revenues and Product Gross Margins while service gross margins remained relatively flat, as discussed under Cost of Service Revenues and Service Gross Margins.

We expect gross margins to remain relatively flat in the near term. Forecasting future gross margin percentages is difficult, and there are a number of risks related to our ability to maintain or improve our current gross margin levels.

Our cost of revenues as a percentage of revenues can vary significantly based upon a number of factors such as the following: uncertainties surrounding revenue levels, including future pricing and/or potential discounts as a result of the economy or in response to the strengthening of the U.S. dollar in our international markets, and related production level variances; competition; the extent to which new services sales accompany our product sales as well as maintenance renewal rates; changes in technology; changes in product mix; variability of stock-based compensation costs; royalties to third parties; utilization of our professional services personnel as we develop our professional services practice and as we make investments to expand our professional services offerings; fluctuations in freight and repair costs; our ability to achieve greater efficiencies in the installations of our immersive telepresence products; manufacturing efficiencies of subcontractors; manufacturing and purchase price variances; changes in prices on commodity components; warranty and recall costs; and the timing of sales.

Sales and Marketing Expenses Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, $ in thousands 2014 2013 Decrease 2014 2013 Decrease Expenses $ 97,836 $ 109,657 (11 )% $ 191,804 $ 218,372 (12 )% % of Revenues 29 % 32 % (3) pts 29 % 32 % (3) pts Sales and marketing expenses consist primarily of salaries and commissions for our sales force, including stock-based compensation costs, advertising and promotional expenses, product marketing expenses, and an allocation of overhead expenses, including facilities and IT costs. Sales and marketing expenses, except for direct sales and marketing expenses, are not allocated to our segments. Sales and marketing expenses included charges for stock-based compensation expense of $5.3 million and $5.7 million for the three months ended June 30, 2014 and 2013, respectively, and $5.7 million and $13.9 million for the six months ended June 30, 2014 and 2013, respectively.

The year-over-year decreases in sales and marketing expenses were primarily due to decreased headcount-related costs, including compensation expense and stock-based compensation cost, and lower headcount-based allocations, as well as decreased spending on marketing program and travel and entertainment expenses.

Sales and marketing headcount decreased by 11% from June 30, 2013 to June 30, 2014 as part of our plans to improve operating performance.

We expect our sales and marketing expenses to remain flat or increase slightly in absolute dollars in the near term. Expenses will also fluctuate depending on revenue levels achieved as certain expenses, such as commissions, are determined based upon the revenues achieved. Forecasting sales and marketing expenses as a percentage of revenues is highly dependent on expected revenue levels and could vary significantly depending on actual revenues achieved in any given quarter.

Marketing expenses will also fluctuate depending upon the timing and extent of marketing programs as we market new products.

Research and Development Expenses Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, $ in thousands 2014 2013 Decrease 2014 2013 Decrease Expenses $ 49,031 $ 54,628 (10 )% $ 97,178 $ 110,563 (12 )% % of Revenues 15 % 16 % (1) pt 15 % 16 % (1) pt 33 -------------------------------------------------------------------------------- Research and development costs are expensed as incurred and consist primarily of compensation costs, including stock-based compensation costs, outside services, expensed materials, depreciation and an allocation of overhead expenses, including facilities and IT costs. Research and development costs are not allocated to our segments. Research and development expenses included charges for stock-based compensation expense of $3.1 million and $4.2 million for the three months ended June 30, 2014 and 2013, respectively, and $4.1 million and $8.9 million for the six months ended June 30, 2014 and 2013, respectively.

The year-over-year decreases in research and development expenses were primarily due to lower program spending, decreased headcount-related costs, including compensation expense and stock-based compensation cost, as well as the capitalization of certain internal costs related to internally developed software products to be sold.

We believe that innovation and technological leadership is critical to our future success, and we are committed to continuing a significant level of research and development to develop new technologies and products to combat competitive pressures. We are also investing more heavily in research and development as a result of increased business opportunities with strategic partners and service provider customers as a result of our key strategic initiatives in these areas. We expect that research and development expenses in absolute dollars will remain flat or increase slightly in the near term but will fluctuate depending on the timing and number of development activities in any given quarter. Research and development expenses as a percentage of revenues are highly dependent on expected revenue levels and could vary significantly depending on actual revenues achieved in any given quarter.

General and Administrative Expenses Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, $ in thousands 2014 2013 Increase 2014 2013 Increase Expenses $ 24,636 $ 24,299 1 % $ 48,429 $ 47,993 1 % % of Revenues 7 % 7 % - 7 % 7 % - General and administrative expenses consist primarily of compensation costs, including stock-based compensation costs, professional service fees, allocation of overhead expenses, including facilities and IT costs, litigation costs and bad debt expense. General and administrative expenses are not allocated to our segments. General and administrative expenses included charges for stock-based compensation expense of $3.8 million and $4.6 million for the three months ended June 30, 2014 and 2013, respectively, and $6.4 million and $8.6 million for the six months ended June 30, 2014 and 2013, respectively.

The year-over-year increases in general and administrative expenses were primarily due to increased bad debt expense and increased legal fees and insurance premiums, largely offset by decreased compensation expense, including stock-based compensation cost.

Significant future charges due to costs associated with litigation or uncollectability of our receivables could increase our general and administrative expenses and negatively affect our profitability in the quarter in which they are recorded. Additionally, predicting the timing of litigation and bad debt expense associated with uncollectible receivables is difficult.

Future general and administrative expense increases or decreases in absolute dollars are difficult to predict due to the lack of visibility of certain costs, including legal costs associated with defending claims against us, as well as legal costs associated with asserting and enforcing our intellectual property portfolio and other factors. We expect our general and administrative expenses to remain relatively flat in the near term but they could fluctuate depending on the level and timing of expenditures associated with the litigation described in Note 9 of Notes to Condensed Consolidated Financial Statements.

Amortization of Purchased Intangibles In the three months ended June 30, 2014 and 2013, we recorded $2.4 million and $2.5 million, respectively, in operating expenses and recorded $0.7 million and $1.2 million, respectively, in cost of product revenues for amortization of purchased intangibles related to acquisitions. In the six months ended June 30, 2014 and 2013, we recorded $4.9 million and $5.0 million, respectively, in operating expenses, and recorded $1.6 million and $2.5 million, respectively, in cost of product revenues for amortization of purchased intangibles related to acquisitions. The year-over-year decreases in amortization expenses were primarily due to certain intangible assets acquired in prior years being fully amortized. Purchased intangible assets are being amortized over their estimated useful lives, which range from several months to eight years.

34 --------------------------------------------------------------------------------Restructuring During the three months ended June 30, 2014 and 2013, we recorded restructuring costs of $9.2 million and $4.3 million, respectively. During the six months ended June 30, 2014 and 2013, we recorded restructuring costs of $39.5 million and $9.8 million, respectively. The year-over-year increases in restructuring costs were primarily due to certain actions taken in the six months ended June 30, 2014 that were designed to better align expenses to our revenue and gross margin profile and position the company for improved operating performance, including the reduction or elimination of certain facilities globally and the elimination of approximately 6% of our global workforce as announced in January 2014. See Note 7 of Notes to Condensed Consolidated Financial Statements for further information on restructuring costs.

Our facilities-related restructuring reserves are recorded net of estimated sublease income that we expect to generate based upon current comparable leases in the respective markets. To the extent that actual sublease income is different from our estimates, or the timing of subleasing the facility is different than we originally estimated, we will adjust our restructuring reserves which may result in additional restructuring costs in the future.

In the future, we may take additional restructuring actions to gain operating efficiencies or reduce our operating expenses, while simultaneously implementing additional cost containment measures and expense control programs. Such restructuring actions are subject to significant risks, including delays in implementing expense control programs or workforce reductions and the failure to meet operational targets due to the loss of employees, all of which would impair our ability to achieve anticipated cost reductions. If we do not achieve the anticipated cost reductions, our financial results could be negatively impacted.

Transaction-related Costs We expense all acquisition-related and other transaction-related costs as incurred. These costs generally include legal and accounting fees and other integration services. There were no transaction-related costs in the three months ended June 30, 2014 compared to less than $0.1 million in the same period in 2013. In the six months ended June 30, 2014 and 2013, we recorded approximately $0.2 million and $3.3 million of transaction-related expenses, respectively. We have spent, and may in the future, spend significant resources identifying and acquiring businesses.

Interest and Other Income (Expense), Net Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, $ in thousands 2014 2013 2014 2013 Interest expense $ (1,460 ) $ (479 ) $ (2,934 ) $ (886 ) Other income (expense) (236 ) 95 543 (257 ) Interest and other income (expense), net (1,696 ) (384 ) (2,391 ) (1,143 ) Interest expense consists primarily of interest on our borrowings under the Credit Agreement entered into in September 2013 and imputed interest related to certain long-term obligations. Other income (expense) consists primarily of interest earned on our cash, cash equivalents and investments less bank charges resulting from the use of our bank accounts, realized gains and losses on investments, non-income based taxes and fees, gains and losses on asset disposals and foreign exchange related gains and losses.

The increases in interest expense year-over year were primarily due to interest expense on the borrowings under the Credit Agreement. We expect interest expense to increase in 2014 as compared to the prior year as a result of a full year of interest expense on our borrowings under the Credit Agreement.

The increase in net other expense during the three months ended June 30, 2014 as compared to net other income the same period in 2013 was primarily due to lower interest income, partially offset by lower non-income based taxes and fees and lower foreign exchange losses. The increase in the net other income during the six months ended June 30, 2014 as compared to net other expense in the same period in 2013 was primarily due to a release in the first quarter of 2014 of sales and use tax reserves from prior years, lower non-income based taxes and fees and lower asset disposal losses, partially offset by lower interest income.

Other income (expense) will fluctuate due to changes in interest rates and returns on our cash and investments, any future impairment of investments, foreign currency rate fluctuations on un-hedged exposures, fluctuations in costs associated with our hedging program, gains and losses on asset disposals and timing of non-income based taxes and license fees. The cash balance could also decrease depending upon the amount of cash used in our stock repurchase activity, any future acquisitions, and other factors, which would also impact our interest income.

35 --------------------------------------------------------------------------------Income Tax Expense (Benefits) From Continuing Operations Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, $ in thousands 2014 2013 2014 2013 Income tax expense (benefit) from continuing operations $ 1,855 $ 412 $ (1,763 ) $ (2,959 ) Effective tax rate 17.8 % 7.2 % (62.9 )% (66.4 )% The effective tax rates for the three and six months ended June 30, 2014 and 2013 differ from the U.S. federal statutory rate of 35% primarily due to impacts associated with proportional earnings from our operations in lower tax jurisdictions, recurring permanent adjustments, and discrete benefits recorded during the quarters. For the three and six months ended June 30, 2014, discrete benefits of $0.2 million and $1.5 million were recorded for tax benefits realized on disqualifying dispositions of stock from our employee stock purchase plan. In addition, included in the tax rate for the six months ended June 30, 2014 is a discrete tax benefit recorded in the first quarter of $0.9 million related to stock-based compensation expense adjustments for certain terminated employees. Discrete benefits recorded during the three and six months ended June 30, 2013 include $2.2 million recorded in the first quarter of 2013 related to the reinstatement of the federal research and development tax credit signed into law on January 2, 2013, but retroactive to 2012, and $1.0 million recorded in the second quarter of 2013 related to previously non-deductible acquisition-related expenses that became deductible in the quarter. In addition, $0.8 million and $0.3 million of tax benefits realized on disqualifying dispositions of stock from our employee stock purchase plan were recorded in the first and second quarters of 2013, respectively.

As of June 30, 2014, the amount of gross unrecognized tax benefits was $22.1 million, all of which would affect our effective tax rate if realized. We recognize interest income and interest expense and penalties on tax overpayments and underpayments within income tax expense. As of June 30, 2014 and December 31, 2013, we had approximately $1.6 million and $1.5 million, respectively, of accrued interest and penalties related to uncertain tax positions. We anticipate that, except for $0.9 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.

We are a U.S. based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions, and have entered into agreements with the local governments in certain foreign jurisdictions where we have significant operations to provide us with favorable tax rates in those jurisdictions if certain criteria are met. Tax benefits realized from favorable tax rates for the quarters ended June 30, 2014 and 2013 were not material in the aggregate and did not have a material impact on earnings per share.

We regularly assess 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 we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates, which are difficult to predict, could be unfavorably affected by changes in, or interpretation of, tax rules and regulations in the jurisdictions in which we do business, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, by lapses of the availability of the U.S. research and development tax credit, or by changes in the valuation of our deferred tax assets and liabilities. Further, the accounting for stock compensation expense in accordance with ASC 718 and uncertain tax positions in accordance with ASC 740 could result in more unpredictability and variability to our future effective tax rates.

We are also subject to the periodic examination of our income tax returns by the Internal Revenue Service and other tax authorities, and in some cases, we have received additional tax assessments. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. We may underestimate the outcome of such examinations which, if significant, would have a material adverse effect on our results of operations and financial condition. The timing of the resolution of income tax examinations is highly uncertain and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. While it is reasonably possible that some issues in current on-going tax examinations could be resolved within the next 12 months, based on the current facts and circumstances, we cannot estimate the timing of such resolution or the range of potential changes as it relates to the unrecognized tax benefits that are recorded as part of our financial statements. We do not expect any material settlements in the next 12 months, but the outcomes of these examinations are inherently uncertain.

36 --------------------------------------------------------------------------------Discontinued Operations On December 4, 2012, we completed the disposition of the net assets of the enterprise wireless voice solutions ("EWS") business to Mobile Devices Holdings, LLC, a Delaware limited liability corporation. We received cash consideration of approximately $50.7 million, resulting in a gain on sale of the discontinued operations, net of taxes, of $35.4 million, as reflected in our consolidated financial statements for the year ended December 31, 2012. In the six months ended June 30, 2013, we recorded an additional gain on sale of discontinued operations, net of taxes, of approximately $0.5 million as a result of a net working capital adjustment in accordance with the Purchase Agreement. Additional cash consideration of up to $37.5 million is payable to Polycom over the next three years subject to certain conditions, including meeting certain agreed-upon EBITDA-based milestones for the fiscal years ending December 31, 2014, 2015 and 2016. These conditions were not met for the fiscal year ended December 31, 2013.

Such additional cash consideration will be accounted for as a gain on sale of discontinued operations, net of taxes, when it is realized or realizable. For the six months ended June 30, 2014, there was no realized gain or loss on sale of discontinued operations.

Segment Information Our business is organized around four major geographic theatres: North America, Caribbean and Latin America ("CALA"), Europe, Middle East and Africa ("EMEA") and Asia Pacific ("APAC"). For reporting purposes, we aggregate North America and CALA into one segment named Americas and report EMEA and APAC as separate segments. The segments are determined in accordance with how management views and evaluates its business and allocates its resources, and based on the criteria as outlined in the authoritative guidance.

A description of our products and services as well as selected financial data for each segment can be found in Note 17 of Notes to Condensed Consolidated Financial Statements. Future changes to our organizational structure or business may result in changes to the reportable segments disclosed.

Segment contribution margin includes all segment revenues less the related cost of sales and direct marketing and sales expenses. Management allocates some infrastructure costs, such as facilities and IT costs, in determining segment contribution margin. Contribution margin is used, in part, to evaluate the performance of, and to 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, stock-based compensation costs, research and development costs, general and administrative costs, such as legal and accounting costs, transaction-related costs, amortization of purchased intangible assets, restructuring costs, and interest and other income (expense), net.

37 --------------------------------------------------------------------------------The following is a summary of the financial information for each of our segments for the periods indicated (in thousands): Americas EMEA APAC Total For the three months ended June 30, 2014: Revenues $ 167,806 $ 83,067 $ 81,146 $ 332,019 % of total revenues 51 % 25 % 24 % 100 % Contribution margin $ 69,155 $ 35,108 $ 33,366 $ 137,629 % of segment revenues 41 % 42 % 41 % 41 % For the three months ended June 30, 2013: Revenues $ 175,629 $ 79,727 $ 89,878 $ 345,234 % of total revenues 51 % 23 % 26 % 100 % Contribution margin $ 68,748 $ 32,049 $ 37,238 $ 138,035 % of segment revenues 39 % 40 % 41 % 40 % 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 % For the six months ended June 30, 2013: Revenue $ 346,610 $ 168,819 $ 168,557 $ 683,986 % of total revenue 51 % 25 % 24 % 100 % Contribution margin 137,977 69,609 68,083 275,669 % of segment revenue 40 % 41 % 40 % 40 % As of June 30, 2014: Gross accounts receivable $ 86,945 $ 68,878 $ 65,300 $ 221,123 % of total gross accounts receivable 39 % 31 % 30 % 100 % As of December 31, 2013: Gross accounts receivable $ 86,243 $ 71,970 $ 66,921 $ 225,134 % of total gross accounts receivable 38 % 32 % 30 % 100 % AMERICAS Three Months Ended Six Months Ended June 30, June 30, Increase June 30, June 30, Increase $ in thousands 2014 2013 (Decrease) 2014 2013 (Decrease) Revenues $ 167,806 $ 175,629 (4 )% $ 330,875 $ 346,610 (5 )% Contribution margin $ 69,155 $ 68,748 1 % $ 139,128 $ 137,977 1 % Contribution margin as % of Americas revenues 41 % 39 % 2 pts 42 % 40 % 2 pts The decreases in our Americas segment revenues was primarily due to decreased revenues in the United States, Canada, and Brazil, partially offset by increased revenues in Mexico. On a year-over-year basis, the decreases in Americas segment revenues were primarily driven by decreased revenues from UC group systems as a result of decreased sales in IP conference phones previously purchased and resold by Cisco and, to a lesser extent, decreased revenues from UC platform products and the related services, partially offset by increased revenues from UC personal devices. The decreases in UC platform revenues were as a result of decreased sales in our RealPresence products and the related services. The increases in UC personal devices revenues were primarily due to increased desktop voice sales as a result of Microsoft® Lync® voice deployments, partially offset by decreased desktop video revenues.

In the three months ended June 30, 2014 and 2013, one channel partner in our Americas segment accounted for 36% and 31%, respectively, of our Americas revenues. In the six months ended June 30, 2014 and 2013, one channel partner in our Americas segment accounted for 36% and 32%, respectively, of our Americas revenues. We believe it is unlikely that the loss of any of our channel partners would have a long term material adverse effect on our segment revenues as we believe end-users would likely purchase our products from a different channel partner. However, a loss of any one of these channel partners could have a short-term material adverse impact.

38 -------------------------------------------------------------------------------- The increases in contribution margin as a percentage of Americas segment revenues were primarily due to higher gross margins and decreased direct sales and marketing expenses as a percentage of revenues. The increases in gross margins were primarily due to higher product gross margins driven by a product mix shift toward higher margin RealPresence Group Series products within our UC group systems product category, while service gross margins declined slightly in the three months ended June 30, 2014 and remained relatively flat in the six months ended June 30, 2014 as compared to the same periods in 2013. The decreases in direct sales and marketing expenses were primarily driven by lower headcount-related costs as a result of our restructuring actions, including decreased compensation and commission expenses and lower headcount-based allocations, as well as decreased marketing programs spending.

EMEA Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, $ in thousands 2014 2013 Increase 2014 2013 Increase Revenues $ 83,067 $ 79,727 4 % $ 172,104 $ 168,819 2 % Contribution margin $ 35,108 $ 32,049 10 % $ 72,774 $ 69,609 5 % Contribution margin as % of EMEA revenues 42 % 40 % 2 pts 42 % 41 % 1 pt The increases in our EMEA segment revenues were primarily due to increased revenues from the United Kingdom, France, and Benelux as a result of slowly improving economic environment in these countries, partially offset by decreased revenues in Russia and the Nordic countries. On a year-over-year basis, the increases in EMEA segment revenues were across all product categories. The increases in UC group systems revenues was primarily due to increased revenues from group voice sales, partially offset by decreased revenues from group video products and the related services. The increases in UC personal devices revenues were primarily driven by increased revenues from desktop voice sales as a result of Microsoft® Lync® voice deployments, partially offset by decreased revenues from desktop video products and the related services. The increases in UC platform revenues were primarily due to increased sales in our RealPresence products and the related services.

In the three months ended June 30, 2014 and 2013, one channel partner in our EMEA segment accounted for 14% and 11%, respectively, of our EMEA revenues. In the six months ended June 30, 2014 and 2013, one channel partner in our EMEA segment accounted for 13% and 11%, respectively, of our EMEA revenues. We believe it is unlikely that the loss of any of our channel partners would have a long term material adverse effect on our segment revenues as we believe end-users would likely purchase our products from a different channel partner.

However, a loss of any one of these channel partners could have a short-term material adverse impact.

The increases in contribution margin as a percentage of EMEA segment revenues were primarily due to decreased direct sales and marketing expenses as a percentage of revenues, partially offset by lower gross margins. The decreases in direct sales and marketing expenses were primarily due to lower headcount-related costs as a result of our restructuring actions, including decreased compensation and commission expenses, as well as lower headcount-based allocations and outside services costs. The decreases in gross margins were primarily due to lower service gross margins driven by increased warranty costs and lower product gross margins as a result of a product mix shift away from higher margin UC group video products.

APAC Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, Increase $ in thousands 2014 2013 Decrease 2014 2013 (Decrease) Revenues $ 81,146 $ 89,878 (10 )% $ 157,564 $ 168,557 (7 )% Contribution margin $ 33,366 $ 37,238 (10 )% $ 65,020 $ 68,083 (4 )% Contribution margin as % of APAC revenues 41 % 41 % - 41 % 40 % 1 pt 39 -------------------------------------------------------------------------------- The decreases in our APAC segment revenues were primarily driven by decreased revenues from UC group systems and, to a lesser extent, from UC personal devices products and the related services, partially offset by increased revenues from UC platform products and the related services. The decreases in UC group systems revenues in APAC were primarily driven by decreased revenues from group video and immersive telepresence products and the related services, partially offset by increased group voice revenues. The decreases in UC personal devices revenues were due to decreased desktop voice sales and, to a lesser extent, decreased desktop video sales. Revenues decreased year-over-year primarily in China and Japan, partially offset by increased revenues in India and Australia. The overall decline in our APAC segment revenues was primarily due to continuing slowdown of government spending and softer demand, as well as a challenging macro-economic environment in the region.

In the three months ended June 30, 2014 and 2013, three channel partners in our APAC segment, in aggregate, accounted for 40% and 44%, respectively, of our APAC revenues. In the six months ended June 30, 2014, three channel partners in our APAC segment, in aggregate, accounted for 38% of our APAC revenues. In the six months ended June 30, 2013, one channel partner in our APAC segment accounted for 16% of our APAC revenues. We believe it is unlikely that the loss of any of our channel partners would have a long term material adverse effect on our segment revenues as we believe end-users would likely purchase our products from a different channel partner. However, a loss of any one of these channel partners could have a short-term material adverse impact.

Contribution margin as a percentage of APAC segment revenues in the three months ended June 30, 2014 was flat compared to the same period in 2013. The increase in contribution margin as a percentage of APAC segment revenues in the six months ended June 30, 2014 was primarily due to lower direct sales and marketing expenses as a percentage of revenues and slightly increased gross margins. The decrease in direct sales and marketing expenses was driven by lower headcount-related costs as a result of our restructuring actions, including lower compensation and commission expenses and lower headcount-based allocations, as well as decreased marketing program spending. The increase in gross margins was primarily due to increased service gross margins driven by increased service revenues while cost of service revenues in absolute dollars were relatively flat year-over-year, partially offset by slightly decreased product gross margins.

Liquidity and Capital Resources As of June 30, 2014, our principal sources of liquidity included cash and cash equivalents of $413.1 million, short-term investments of $136.3 million, and long-term investments of $90.9 million. Substantially all of our short-term and long-term investments are comprised of U.S. government and agency securities and corporate debt securities. See Note 11 of Notes to Condensed Consolidated Financial Statements for further information on our short-term and long-term investments. We also have outstanding letters of credit totaling approximately $7.3 million, which are in place to satisfy certain of our facility lease requirements, as well as other legal, tax, and insurance obligations.

Our total cash and cash equivalents and investments held in the Americas totaled $234.3 million, and the remaining $406.1 million was held by various foreign subsidiaries outside of the Americas as of June 30, 2014. If we need to access our cash and cash equivalents and investments held outside of the United States in order to fund acquisitions, share repurchases, or our working capital needs, we may be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes.

In September 2013, we entered into a Credit Agreement (the "Credit Agreement") among the Company, certain of its subsidiaries from time to time party thereto as guarantors, the lenders from time to time party thereto and Morgan Stanley Senior Funding, Inc., as Administrative Agent and Collateral Agent. The Credit Agreement provides for a $250.0 million term loan (the "Term Loan") that matures on September 13, 2018 (the "Maturity Date"). The Term Loan bears interest at our option under either a base rate formula or a LIBOR-based formula, each as set forth in the Credit Agreement. The Term Loan is payable in quarterly installments of principal equal to $1.6 million that began on December 31, 2013, with the remaining outstanding principal amount of the Term Loan being due and payable on the Maturity Date. The Credit Agreement contains certain customary affirmative and negative covenants, and we are also required to maintain compliance with a consolidated fixed charge coverage ratio and a consolidated secured leverage ratio. We entered into the Credit Agreement in conjunction with and for the purposes of funding any purchase of our common stock pursuant to the $250.0 million modified "Dutch Auction" self-tender offer announced in September 2013. We were in compliance with all debt covenants as of June 30, 2014. See Note 10 of Notes to Condensed Consolidated Financial Statements for further details.

We generated cash from operating activities totaling $80.6 million and $82.1 million in the six months ended June 30, 2014 and 2013, respectively. The decrease in cash provided by operating activities for the six months ended June 30, 2014 as compared to the same period in 2013 was primarily due to lower net income after adjusting for non-cash expenses, largely offset by improved cash collection and higher accrued liabilities adjustments.

40 -------------------------------------------------------------------------------- The total net change in cash and cash equivalents for the six months ended June 30, 2014 was an increase of $20.5 million. The primary sources of cash were $80.6 million from operating activities, $13.5 million cash proceeds from the exercise of stock options and purchases under the employee stock purchase plan, and $1.8 million from excess tax benefit. The primary uses of cash during this period were $37.1 million of net purchases of investments, $26.8 million for purchases of property and equipment and costs for internally developed software products, $8.4 million for stock repurchases to satisfy tax withholding obligations, and $3.1 million of debt payment.

Our days-sales-outstanding ("DSO") metric was 49 days and 54 days at June 30, 2014 and 2013, respectively. The decrease in DSO is due in part to improved revenue linearity in the second quarter of 2014 over the prior-year quarter and improved cash collections. DSO could vary as a result of a number of factors such as fluctuations in revenue linearity, an increase in international receivables, and increases in receivables from service providers and government entities, which have customarily longer payment terms. DSO could be negatively impacted in the current economic environment if our partners experience difficulty in financing purchases, which results in delays in payment to us.

Inventory turns were 5.2 turns at June 30, 2014 as compared to 5.7 turns at June 30, 2013. We believe inventory turns will fluctuate depending on our ability to reduce lead times as well as changes in product mix and a mix of ocean freight versus air freight. Our inventory turns may also decrease in the future as a result of the flexibility required to respond to customer demands.

We enter into foreign currency forward contracts, which typically mature in one month, to hedge our exposure to foreign currency fluctuations of foreign currency-denominated receivables, payables, and cash balances. We record on the condensed consolidated balance sheet at each reporting period the fair value of our foreign currency forward contracts and record any fair value adjustments in results of operations. Gains and losses associated with currency rate changes on contracts are recorded as interest and other income (expense), net, offsetting transaction gains and losses on the related assets and liabilities.

Additionally, our hedging costs can vary depending upon the size of our hedge program, whether we are purchasing or selling foreign currency relative to the U.S. dollar and interest rates spreads between the U.S. and other foreign markets.

Additionally, we also have a hedging program that uses foreign currency forward contracts to hedge a portion of anticipated revenues, cost of revenues, and operating expenses denominated in the Euro and British Pound, as well as operating expenses denominated in Chinese Yuan and Israeli Shekel. Our foreign exchange risk management program objective is to reduce volatility in our cash flows from unanticipated foreign currency fluctuations. At each reporting period, we record the fair value of our unrealized forward contracts on the condensed consolidated balance sheet with related unrealized gains and losses as a component of cumulative other comprehensive income, a separate element of stockholders' equity. Realized gains and losses associated with the effective portion of the foreign currency forward contracts are recorded within revenues, cost of revenues, or operating expenses, depending upon the underlying exposure being hedged. Any excluded and ineffective portions of a hedging instrument would be recorded as interest and other income (expense), net.

From time to time, the Board of Directors approves plans to purchase shares of our common stock in the open market. In September 2013, our Board of Directors authorized the repurchase of $400.0 million, or approximately 20% of our outstanding common stock ("Return of Capital Program"), through a $250.0 million modified "Dutch Auction" self-tender offer (the "Tender Offer") and subsequent privately negotiated transactions. We funded the program with $150.0 million in cash and a $250.0 million Term Loan. The Tender Offer expired on October 30, 2013. On December 4, 2013, we announced plans to repurchase an aggregate of $114.6 million of common stock through an accelerated share repurchase ("ASR") program and entered into separate ASR agreements with two financial institutions. The ASR program represents the last phase of our $400.0 million Return of Capital Program. Under the terms of the ASR agreements, we paid an aggregate $114.6 million of cash and took an initial delivery of approximately 8.0 million shares in December 2013. The ASR contracts were settled in June 2014, whereby we 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 less an agreed upon discount during the term of the transactions. Total shares repurchased were immediately retired upon delivery. See Note 14 of Notes to our Condensed Consolidated Financial Statements for further details. In July 2014, we announced that our Board of Directors had approved a new share repurchase plan under which we may at our discretion purchase shares in the open market with an aggregate value of up to $200.0 million. We expect to execute this new authorization over the next two years and to fund the share repurchases through cash on hand and future cash flow from operations.

At June 30, 2014, we had open purchase orders related to our contract manufacturers and other contractual obligations of approximately $274.9 million primarily related to inventory purchases. We also currently have commitments that consist of obligations under our operating leases. In the event that we decide to cease using a facility and seek to sublease such facility or terminate a lease obligation through a lease buyout or other means, we may incur a material cash outflow at the time of such transaction, which will negatively impact our operating results and overall cash flows. In addition, if facilities rental rates decrease or if it takes longer than expected to sublease these facilities, we could incur a significant further charge to operations and our operating and overall cash flows could be negatively impacted in the period that these changes or events occur.

41 -------------------------------------------------------------------------------- These purchase commitments and lease obligations are reflected in our Condensed Consolidated Financial Statements once goods or services have been received or at such time that we are obligated to make payments related to these goods, services or leases. In addition, our bank has issued letters of credit totaling approximately $7.3 million, which are used to secure the leases on some of our foreign offices as well as other legal, tax, and insurance obligations. The table set forth below shows, as of June 30, 2014, the future minimum lease payments due under our current lease obligations. The table below excludes approximately $10.5 million related to the current portion of minimum lease payments associated with leased space that was restructured. The non-current portion of minimum lease payments associated with leased space that was restructured is included in other long-term liabilities in the table below. In addition to these minimum lease payments, we are contractually obligated under the majority of our operating leases to pay certain operating expenses during the term of the lease, such as maintenance, taxes and insurance.

Our contractual obligations as of June 30, 2014 are as follows (in thousands): Projected Other Minimum Annual Long- Lease Operating Term Purchase Interest Payments Lease Costs Liabilities Commitments Debt Payments (1) Total Remainder of 2014 $ 12,376 $ 2,148 $ - $ 273,758 $ 3,125 $ 2,478 $ 293,885 2015 21,478 3,684 3,350 1,191 6,250 5,685 41,638 2016 15,399 2,673 5,905 - 6,250 7,780 38,007 2017 13,118 2,192 6,255 - 6,250 9,583 37,398 2018 10,489 1,526 6,339 - 223,438 7,359 249,151 Thereafter 30,238 4,366 30,222 - - - 64,826Total payments $ 103,098 $ 16,589 $ 52,071 $ 274,949 $ 245,313 $ 32,885 $ 724,905 ____________ (1) The estimated future interest payments are calculated based on the assumptions that (a) there are no other principal repayments beyond the required quarterly principal amortization and (b) the borrowings are made under LIBOR tranches and bear interest at forecasted LIBOR rates at filing plus a spread of 1.75%.

As discussed in Note 18 of our Notes to Condensed Consolidated Financial Statements, at June 30, 2014, we had unrecognized tax benefits, including related interest, totaling $23.7 million, $1.0 million of which may be released in the next 12 months due to the lapse of certain statutes of limitation in the applicable tax jurisdictions.

We believe that our available cash, cash equivalents and investments will be sufficient to meet our operating expenses and capital requirements for the next 12 months based on our current business plans. However, we may require or desire additional funds to support our operating expenses and capital requirements or for other purposes, such as acquisitions, and may seek to raise such additional funds through public or private equity financing, debt financing or from other sources. We cannot assure you that additional financing will be available at all or that, if available, such financing will be obtainable on terms favorable to us and would not be dilutive. Our future liquidity and cash requirements will depend on numerous factors, including the introduction of new products and potential acquisitions of related businesses or technology.

Off-Balance Sheet Arrangements As of June 30, 2014, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical Accounting Policies and Estimates Our significant accounting policies were described in Note 1 to our audited Consolidated Financial Statements and under "Critical Accounting Policies and Estimates" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no changes to our critical accounting estimates during the six months ended June 30, 2014, except for stock-based compensation as described in Note 15 of Notes to Condensed Consolidated Financial Statements. With the exception of the accounting standards update discussed below, there have been no significant changes to these policies or recent accounting pronouncements or changes in accounting pronouncements that are of potential significance to us during the six months ended June 30, 2014.

42 --------------------------------------------------------------------------------Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standard update which provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The guidance is effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. We have not yet selected a transition method nor have we determined the impact of adoption on our consolidated financial statements.

In July 2013, the FASB issued an accounting standard update which clarifies that an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The guidance is effective prospectively for reporting periods beginning after December 15, 2013.

We adopted the guidance in the three months ended March 31, 2014, and such adoption did not have a material impact on our condensed consolidated financial statements.

[ Back To TMCnet.com's Homepage ]