TMCnet News

SONUS NETWORKS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[October 28, 2014]

SONUS NETWORKS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion of the financial condition and results of operations of Sonus Networks, Inc. should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and 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, which was filed with the U.S.



Securities and Exchange Commission effective February 28, 2014.

Overview We are a leading provider of networked solutions for communications service providers (e.g., telecommunications, wireless and cable service providers) and enterprises to help them advance, protect and unify their voice and data communication networks, reduce expenses and position themselves to provide new services to their customers. We help many of the world's leading communications service providers and enterprises implement the next generation of Session Initiation Protocol ("SIP")-based solutions, including Voice over IP ("VoIP") and Unified Communications ("UC") through secure, reliable and scalable Internet Protocol ("IP") networks. We also provide tightly integrated signaling and advanced routing capabilities and applications that span the mission-critical demands of both existing and next-generation 4G LTE and IMS telecommunications networks. Our products include session border controllers ("SBCs"), diameter signaling controllers ("DSCs"), policy/routing servers, media and signaling gateways and network analytics tools. Our solutions address the need 25-------------------------------------------------------------------------------- Table of Contents for communications service providers and enterprises to seamlessly link and leverage multivendor, multiprotocol communications systems and applications across a single network infrastructure. Previously, companies were required to implement separate networks for their voice and data applications. In a rapidly changing ecosystem of IP-enabled devices such as smartphones and tablets, companies want an infrastructure that enables the integration of voice and data capability into a single application on one integrated network. Our solutions help our customers realize the intended value and benefits of UC, both in public and private clouds, by enabling disparate vendor communications environments, commonplace in most enterprises today, to work seamlessly together. Likewise, our solutions enable the deployment and adoption of cloud-based communications.


We utilize both direct and indirect sales channels to reach our target customers. Customers and prospective customers in the service provider space are traditional and emerging communications service providers, including long distance carriers, local exchange carriers, Internet service providers, wireless operators, cable operators, international telephone companies and carriers that provide services to other carriers. Enterprise customers and target enterprise customers include financial institutions, retailers, state and local governments, and other multinational corporations. We collaborate with our customers to identify and develop new, advanced services and applications that can help to reduce costs, improve productivity and generate new revenue.

We have traditionally sold our products principally through a global direct sales force, with additional sales support from regional channel partners throughout the world. In 2012, we launched an expanded channel partner program, the Sonus Partner Assure Program, to expand our coverage of the service provider and enterprise market opportunities. We continue to expand this program, including the introduction in 2013 of a two-tier distribution channel model.

In concert with our Sonus Partner Assure Program, we enhanced our flagship SBC 5200 to be more enterprise- and channel-centric and launched a new SBC, the Sonus SBC 5100, to address the enterprise requirements for smaller regional office and branch offices as a result of their VoIP and SIP deployments.

On February 24, 2014, we announced our new Sonus SBC 7000 (the "SBC 7000"), which is designed to address scalability requirements for real-time, multimedia communications with the capability to license up to 150,000 sessions. The SBC 7000 is purpose-built to support emerging services such as high definition voice and video, Voice over Long-Term Evolution ("VoLTE") and Rich Communications Services ("RCS"). During the second quarter of fiscal 2014, this product became generally available for purchase by our customers.

On September 29, 2014 we announced that Michael Swade ("Mr. Swade") had been named Senior Vice President of Worldwide Sales and Marketing, effective immediately. Mr. Swade had previously served as our Interim Senior Vice President of Worldwide Sales and Marketing from July 2014 to September 2014, and as our Vice President, North American Sales from May 2014 to July 2014.

On July 30, 2014, we announced that on July 29, 2014, Todd Abbott ("Mr. Abbott") stepped down as Executive Vice President of Strategy and Go-to-Market. Mr.

Abbott remained with the Company in an advisory role to assist in the transition of his duties until October 17, 2014.

On September 17, 2014,we entered into an amendment to our stockholder rights agreement, as amended (the "Rights Plan"), to advance the final expiration date from June 26, 2015 to September 17, 2014. As a result of this amendment, effective as of the close of business on September 17, 2014, the Rights Plan has terminated by its terms. The amendment was not in response to any acquisition proposal.

On February 19, 2014 (the "PT Acquisition Date"), we completed the acquisition of Performance Technologies, Incorporated ("PT"), a Delaware corporation, for $3.75 per share, or approximately $34 million in cash, net of PT's cash and excluding acquisition-related costs. This acquisition has enabled us to expand and diversify our portfolio with an integrated, virtualized Diameter and SIP-based solution and deliver strategic value to service providers seeking to offer new multimedia services through mobile, cloud-based real-time communications. The financial results of PT are included in our condensed consolidated financial statements for the period subsequent to the PT Acquisition Date.

On June 20, 2014, we sold the PT Multi-Protocol Server ("MPS") business for $2.0 million to an affiliate of Sunhillo Corporation. We had acquired the MPS business in connection with the acquisition of PT. The results of operations of the MPS business are excluded from our consolidated results for the period subsequent to June 20, 2014.

26-------------------------------------------------------------------------------- Table of Contents Our strategy is designed to capitalize on our technology and market lead, and build a premier franchise in multimedia infrastructure solutions. We are currently focusing our major efforts on the following aspects of our business which enable next generation communications including SIP- and 4G/LTE-based networks.

• expanding our communications network solutions to address emerging UC-, IP- and cloud-based enterprise and service providers; • embracing the principles outlined by 3GPP, 4GPP2 and LTE architectures and delivering the industry's most advanced IMS (IP Multimedia Subsystem)-ready SBC and DSC product suites; • leveraging our TDM (time division multiplexing)-to-IP gateway technology leadership with service providers to accelerate adoption of SIP-enabled Unified Communication services; • expanding and broadening our customer base by targeting the enterprise market for SIP trunking and access solutions; • assisting our customers' ability to differentiate themselves by offering a sophisticated application development platform and service creation environment; • expanding our global sales distribution, marketing and support capabilities, including continued expansion of our indirect sales channel program; • actively contributing to the SIP standards definition and adoption process; • pursuing strategic transactions and alliances; and • delivering sustainable profitability by continuing to improve our overall performance.

We reported losses from operations of $4.7 million for the three months ended September 26, 2014 and $2.9 million for the three months ended September 27, 2013. We reported losses from operations of $15.3 million for the nine months ended September 26, 2014 and $21.0 million for the nine months ended September 27, 2013.

We reported net losses of $5.2 million for the three months ended September 26, 2014 and $3.8 million for the three months ended September 27, 2013. We reported net losses of $14.7 million for the nine months ended September 26, 2014 and $22.4 million for the nine months ended September 27, 2013.

Our revenue was $73.2 million in the three months ended September 26, 2014 and $68.1 million in the three months ended September 27, 2013. Our revenue was $219.5 million in the nine months ended September 26, 2014 and $200.6 million in the nine months ended September 27, 2013.

Our gross profit was $47.9 million in the three months ended September 26, 2014 and $42.3 million in the three months ended September 27, 2013. Our gross profit was $141.6 million in the nine months ended September 26, 2014 and $124.1 million in the nine months ended September 27, 2013.

Our gross profit as a percentage of revenue ("total gross margin") was 65.4% in the three months ended September 26, 2014 and 62.1% in the three months ended September 27, 2013. Our total gross margin was 64.5% in the nine months ended September 26, 2014 and 61.9% in the nine months ended September 27, 2013.

Our operating expenses were $52.6 million in the three months ended September 26, 2014, compared to $45.2 million in the three months ended September 27, 2013, and $156.9 million in the nine months ended September 26, 2014, compared to $145.1 million in the nine months ended September 27, 2013. Our operating expenses for the three months ended September 26, 2014 include $0.7 million of restructuring expense. Our operating expenses for the three months ended September 27, 2013 include $1.2 million of restructuring expense. Our operating expenses for the nine months ended September 26, 2014 include $1.3 million of acquisition-related expense and $2.2 million of restructuring expense. Our operating expenses for the nine months ended September 27, 2013 include $4.8 million of restructuring expense.

We recorded stock-based compensation expense of $6.5 million in the three months ended September 26, 2014 and $4.4 million in the three months ended September 27, 2013. We recorded stock-based compensation expense of $19.2 million in the nine months ended September 26, 2014 and $13.1 million in the nine months ended September 27, 2013. The stock-based compensation actions described below increased stock-based compensation expense while reducing cash salary and bonus expenses in both three and nine month periods.

See "Results of Operations" in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") for a discussion of these changes in our revenue and expenses.

In March 2014, we reached a settlement agreement for $2.25 million to recover a portion of our losses related to the impairment of certain prepaid royalties which we had written off in fiscal 2012. This amount is included in Other income in our condensed consolidated statement of operations for the nine months ended September 26, 2014.

27-------------------------------------------------------------------------------- Table of Contents On June 11, 2014, we modified the stock options outstanding as of that date that had been granted to our non-employee members of the Board of Directors (the "Board Members") to extend the exercise period to the lesser of three years from the date that a Board Member stepped down from his or her position on the Board of Directors or the remaining contractual life of the respective stock options.

In connection with this modification, we recorded $0.7 million of incremental stock-based compensation expense in the nine months ended September 26, 2014, and this expense is included as a component of General and administrative expense in our condensed consolidated statements of operations for the nine month period. We did not record any expense related to this modification in the three months ended September 26, 2014.

On January 2, 2014, Raymond P. Dolan, our President and Chief Executive Officer ("Mr. Dolan") elected to accept shares of restricted stock in lieu of base salary for the period from January 1, 2014 through December 31, 2014.

Accordingly, we granted Mr. Dolan 243,507 shares of restricted stock (the "2014 Dolan Salary Shares") on January 2, 2014. The number of shares granted was calculated by dividing an amount equal to 1.5 times Mr. Dolan's base salary for the period from January 1, 2014 through December 31, 2014 by $3.08, the closing price of our common stock on the date of grant. The 2014 Dolan Salary Shares will vest on December 31, 2014. If Mr. Dolan's employment is terminated by Mr.

Dolan with Good Reason (as defined in his employment agreement, as amended) or his employment is terminated by us without Cause (as defined in his employment agreement, as amended) before December 31, 2014, a pro rata portion of the 2014 Dolan Salary Shares will vest on the date of such termination. If Mr. Dolan terminates his employment without Good Reason or his employment is terminated by us for Cause before December 31, 2014, he will forfeit the 2014 Dolan Salary Shares. Effective September 16, 2014, Mr. Dolan's annual base salary was increased from $500,000 to $600,000. For the remainder of 2014, such increase will be prorated and paid in cash and will not be subject to any stock-for-cash election. We are recording stock-based compensation expense related to the 2014 Dolan Salary Shares ratably for the period of January 1, 2014 through December 31, 2014.

On January 22, 2014, 21 of our executives, including Mr. Dolan, were given the choice to receive all or half of their fiscal year 2014 bonuses (the "2014 Bonus"), if any are earned, in the form of shares of our common stock (the "2014 Bonus Shares"). Each executive could also elect not to participate in this program and to earn his or her 2014 Bonus, if any, in the form of cash. The amount of the 2014 Bonus, if any, for each executive shall be determined by the Compensation Committee of our Board of Directors (the "Compensation Committee").

The number of shares of our common stock that will be granted to those executives who elected to receive their 2014 Bonus entirely in the form of shares of common stock will be calculated by dividing an amount equal to 1.5 times each executive's 2014 Bonus earned by $3.08, the closing price of our common stock on January 2, 2014. The number of shares of common stock that will be granted to those executives who elected to receive one-half of their 2014 Bonus in the form of shares of common stock will be calculated by dividing an amount equal to 1.5 times one-half of each executive's 2014 Bonus earned by $3.08, with the cash portion equal 50% of their respective 2014 Bonus earned.

The 2014 Bonus, if any, will be granted and/or paid on a date concurrent with the timing of the payout of bonuses under the Company-wide incentive bonus program. The 2014 Bonus Shares, if any are granted, will be fully vested on the date of grant. Of the eligible executives, 17 elected to receive their entire 2014 Bonus in shares of common stock and 4 elected to receive 50% of their 2014 Bonus in shares of common stock and 50% in cash. We determined that the grant date criteria for accounting purposes for the 2014 Bonus Shares was met on July 9, 2014, and accordingly, we have determined that the grant date fair value of the 2014 Bonus Shares is $3.85 per share, the closing price of our common stock on that date. We are recording expense for the 2014 Bonus Shares expected to be earned at a rate commensurate with the expected achievement level represented by our accrual for our company-wide incentive bonus program, as the performance metrics for each are consistent.

In March 2013, 21 of our executives, including Mr. Dolan, elected to receive their fiscal year 2013 bonuses (the "2013 Bonus"), if any were earned, in the form of shares of our common stock (the "2013 Bonus Shares"). The 2013 Bonus Shares were granted on February 18, 2014 and vested immediately. We granted approximately one million 2013 Bonus Shares, with the number of shares granted calculated by dividing amounts equal to 1.5 times the respective 2013 Bonus amounts earned, as determined by the Compensation Committee, by $3.30, the closing price of our common stock on the date of grant. We recorded stock-based compensation expense for the 2013 Bonus Shares from January 1, 2013 through the grant date.

On February 14, 2013, the Compensation Committee determined that eight of our executives, excluding Mr. Dolan, would receive their bonuses with respect to fiscal 2012 in the form of restricted shares of our common stock equal to 100% of their respective target bonus amounts for fiscal 2012 (the "Executive Bonus Shares"). 50% of the Executive Bonus Shares vested on August 15, 2013 and the remaining 50% vested on February 15, 2014. We recorded the unamortized expense related to the Executive Bonus Shares as stock-based compensation expense through February 15, 2014.

On August 7, 2012, Mr. Dolan elected to receive his fiscal year 2012 bonus, if earned, in the form of restricted shares of our common stock (the "Dolan Bonus Shares"). 50% of the Dolan Bonus Shares vested on August 15, 2013 and the remaining 50% vested on February 15, 2014. We recorded the unamortized stock-based compensation expense related to the Dolan 28-------------------------------------------------------------------------------- Table of Contents Bonus Shares through February 15, 2014.

On February 11, 2014, the Board of Directors increased its number of members from nine to eleven. In connection with their appointments, on February 18, 2014, each new director received a grant of shares of restricted stock with a grant date fair value of $100,000, with the number of shares granted calculated by dividing $100,000 by $3.30, the closing price of our common stock on the date of grant, and $100,000 of options to purchase our common stock, with the number of shares calculated by dividing $100,000 by the grant date fair value of an option to purchase one share of common stock as determined by using the Black-Scholes valuation model. These awards vested on June 11, 2014, the date of our 2014 Annual Meeting of Stockholders. Each of the new directors also elected to receive their 2014 annual retainers in shares of common stock in lieu of cash. Additionally, an incumbent member of the Board was appointed Chairman of a new committee and elected to receive his incremental retainer for this chairmanship in shares of our common stock. These retainer shares were granted on February 18, 2014, with 50% vesting immediately while the remaining 50% vested on July 1, 2014. We granted options to purchase approximately 135,000 shares of common stock and 88,000 restricted shares of common stock in the first quarter of fiscal 2014 in connection with these actions.

Critical Accounting Policies and Estimates Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions and beliefs of what could occur in the future given available information. We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment. If actual results differ significantly from management's estimates and projections, there could be a material effect on our condensed consolidated financial statements. The significant accounting policies that we believe are the most critical include the following: • Revenue recognition; • Valuation of inventory; • Loss contingencies and reserves; • Stock-based compensation; • Business combinations; • Goodwill and intangible assets; and • Accounting for income taxes.

For a further discussion of our critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. There were no significant changes to our critical accounting policies from December 31, 2013 through September 26, 2014.

Results of Operations Three and nine months ended September 26, 2014 and September 27, 2013 Revenue. Revenue for the three and nine months ended September 26, 2014 and September 27, 2013 was as follows (in thousands, except percentages): Increase Three months ended from prior year September 26, September 27, 2014 2013 $ % Product $ 44,900 $ 40,712 $ 4,188 10.3 % Service 28,316 27,387 929 3.4 % Total revenue $ 73,216 $ 68,099 $ 5,117 7.5 % 29-------------------------------------------------------------------------------- Table of Contents Increase Nine months ended from prior year September 26, September 27, 2014 2013 $ % Product $ 135,885 $ 121,447 $ 14,438 11.9 % Service 83,643 79,133 4,510 5.7 % Total revenue $ 219,528 $ 200,580 $ 18,948 9.4 % Product revenue is comprised of sales of our communication infrastructure products. Our Legacy product offerings, primarily trunking and SS7 signaling, include our GSX9000 and GSX4000 Open Services Switches, our ASX Voice Application Server and our STP Signal Transfer Point solution. Our Growth-related product offerings include our Session Border Controllers, including the SBC 9000, our newly released SBC 7000, and the SBC 5200, SBC 5100, SBC 2000 and SBC 1000, SBC SWe and SBC VX; and our Diameter Signaling Controller, the DSC 8000.

Certain of our products may be incorporated into either our Legacy product revenue or Growth-related product revenue categories, depending on the application of the product within a customer's network. These products include, but are not limited to, our PSX Policy & Routing Server, GSX 9000, SGX Signaling Gateway, Sonus Insight Management System, ASX Access Gateway Control Function and our suite of network analytical products. Sales of gateway products used in connection with a Time Division Multiplexing ("TDM") network are classified as Legacy product revenue. The key differentiator for the Growth-related product revenue is whether the products we provide to our customers are used as solutions which enable next-generation networks such as SIP and 4G/LTE.

Product revenue for the three and nine months ended September 26, 2014 and September 27, 2013 was comprised of the following (in thousands, except percentages): Increase (decrease) Three months ended from prior year September 26, September 27, 2014 2013 $ % Legacy product revenue $ 13,533 $ 19,401 $ (5,868 ) (30.2 )% Growth-related product revenue 31,367 21,311 10,056 47.2 % $ 44,900 $ 40,712 $ 4,188 10.3 % Increase (decrease) Nine months ended from prior year September 26, September 27, 2014 2013 $ %Legacy product revenue $ 43,065 $ 56,177 $ (13,112 ) (23.3 )% Growth-related product revenue 92,820 65,270 27,550 42.2 % $ 135,885 $ 121,447 $ 14,438 11.9 % We have anticipated that as a result of the transition of our customers, our business and the overall market to SBC and DSC, our revenue from sales of our Legacy products will decrease over time, with the decline more than offset by increases in sales of our Growth-related products. This decline is not expected to be completely linear, as customers will from time to time require additional capacity and expansion to their existing legacy applications infrastructures. We expect that our product revenue in fiscal 2014 will increase from fiscal 2013 levels, primarily due to increased sales of our Growth-related products resulting from our continued and increasing focus on expanding our product offerings to address emerging Unified Communication and IP-based markets, such as SBC, in the enterprise and service provider markets, as well as sales from Diameter products as a result of our recent acquisition of PT.

The transition to all-IP networks, which the industry is trending toward over time, is an important part of both our customers' and our strategy for growth.

This trend has led to increased capital expenditures from certain customers as they continue to migrate their legacy networks and has continued through the nine-month period to date. We anticipate that it will continue through at least the end of fiscal 2014. During the first half of fiscal 2014, we received various purchase orders for our GSX 9000 product solution from a large customer that required additional capacity to scale its IP infrastructure and 30-------------------------------------------------------------------------------- Table of Contents support its transition to an all-IP network. We have determined that based upon the usage case that drove the customer's purchasing decision, these orders would be more accurately reflected within the Growth-related product revenue category rather than the Legacy revenue product category, as the GSX 9000 product would be used to help secure, manage, control or migrate traffic to IP network infrastructures. Accordingly, we adjusted the product revenue components reported for the three months ended March 28, 2014 by reclassifying $6.6 million of product revenue from Legacy to Growth-related. This adjustment is reflected in the product revenue components reported above for the nine months ended September 26, 2014.

In the three months ended September 26, 2014, approximately 38% of product revenue was from indirect sales through our channel program, compared to approximately 27% in the three months ended September 27, 2013. Approximately 28% of product revenue in the nine months ended September 26, 2014 was from indirect sales through our channel program, compared to approximately 20% in the nine months ended September 27, 2013. These increases were primarily due to the actions that we have taken to expand both our SBC portfolio and our sales opportunities.

In the three months ended September 26, 2014, our product revenue from sales to enterprise customers was approximately 24% of our total product revenue, compared to approximately 28% in the three months ended September 27, 2013.

Approximately 21% of our product revenue was from sales to enterprise customers in the nine months ended September 26, 2014, compared to approximately 31% in the nine months ended September 27, 2013. These sales were made both through our direct sales team and indirect sales channel partners.

We recognized product revenue totaling $3.2 million from 228 new customers in the three months ended September 26, 2014 and $6.4 million from 171 new customers in the three months ended September 27, 2013. We recognized product revenue totaling $13.1 million from 628 new customers in the nine months ended September 26, 2014 and $12.2 million from 524 new customers in the nine months ended September 27, 2013. New customers are those from whom we recognize revenue for the first time in a reporting period, although we may have had outstanding orders from such customers for several years, especially for certain multi-year projects. The timing of the completion of customer projects, revenue recognition criteria satisfaction and customer payments included in multiple element arrangements may cause our product revenue to fluctuate from one period to the next.

Service revenue is primarily comprised of hardware and software maintenance and support ("maintenance revenue") and network design, installation and other professional services ("professional services revenue").

Service revenue for the three and nine months ended September 26, 2014 and September 27, 2013 was comprised of the following (in thousands, except percentages): Increase Three months ended from prior year September 26, September 27, 2014 2013 $ % Maintenance $ 22,419 $ 21,500 $ 919 4.3 % Professional services 5,897 5,887 10 0.2 % $ 28,316 $ 27,387 $ 929 3.4 % Increase Nine months ended from prior year September 26, September 27, 2014 2013 $ % Maintenance $ 65,976 $ 63,191 $ 2,785 4.4 % Professional services 17,667 15,942 1,725 10.8 % $ 83,643 $ 79,133 $ 4,510 5.7 % Our maintenance revenue increased in both the three and nine month periods ended September 26, 2014 compared to the same prior year periods, primarily due to our larger installed customer base. The timing of the completion of projects for revenue recognition, customer payments and maintenance contracts may cause our services revenue to fluctuate from one period to the next. We expect that our service revenue in fiscal 2014 will increase slightly from fiscal 2013 levels as a result of our larger installed customer base.

The following customers each contributed 10% or more of our revenue in at least one of the three and nine month periods ended September 26, 2014 and September 27, 2013: 31-------------------------------------------------------------------------------- Table of Contents Three months ended Nine months ended September 26, September 27, September 26, September 27, Customer 2014 2013 2014 2013 CenturyLink 17% * * * AT&T Inc. 17% 18% 22% 17% * Represents less than 10% of revenue International revenue was approximately 30% of revenue in the three months ended September 26, 2014 and approximately 34% of revenue in the three months ended September 27, 2013. International revenue was approximately 29% of revenue in the nine months ended September 26, 2014 and approximately 30% of revenue in the nine months ended September 27, 2013. Due to the timing of project completions, we expect that the domestic and international components as a percentage of our revenue will fluctuate from quarter to quarter and year to year.

Our deferred product revenue was $11.7 million at September 26, 2014 and $14.8 million at December 31, 2013. Our deferred service revenue was $38.4 million at September 26, 2014 and $36.9 million at December 31, 2013. Our deferred revenue balance may fluctuate as a result of the timing of revenue recognition, customer payments, maintenance contract renewals, contractual billing rights and maintenance revenue deferrals included in multiple element arrangements.

Cost of Revenue/Gross Margin. Our cost of revenue consists primarily of amounts paid to third-party manufacturers for purchased materials and services, royalties, manufacturing and professional services personnel and related costs, and provision for inventory obsolescence. Our cost of revenue and gross margins for the three and nine months ended September 26, 2014 and September 27, 2013 were as follows (in thousands, except percentages): Decrease Three months ended from prior year September 26, September 27, 2014 2013 $ % Cost of revenue Product $ 15,074 $ 15,415 $ (341 ) (2.2 )% Service 10,240 10,420 (180 ) (1.7 )% Total cost of revenue $ 25,314 $ 25,835 $ (521 ) (2.0 )% Gross margin Product 66.4 % 62.1 % Service 63.8 % 62.0 % Total gross margin 65.4 % 62.1 % Increase (decrease) Nine months ended from prior year September 26, September 27, 2014 2013 $ % Cost of revenue Product $ 45,548 $ 42,844 $ 2,704 6.3 % Service 32,367 33,662 (1,295 ) (3.8 )% Total cost of revenue $ 77,915 $ 76,506 $ 1,409 1.8 % Gross margin Product 66.5 % 64.7 % Service 61.3 % 57.5 % Total gross margin 64.5 % 61.9 % The increase in product gross margin in the three months ended September 26, 2014 compared to the three months ended September 27, 2013 was primarily due to product and customer mix, which increased our product gross margin by approximately four percentage points, and lower manufacturing-related costs, which increased our product gross margin by approximately one half of one percentage point.

The increase in product gross margin in the nine months ended September 26, 2014 compared to the nine months ended September 27, 2013 was primarily due to higher product revenue against certain fixed costs and lower manufacturing costs, each of which increased our product gross margin by approximately one percentage point.

32-------------------------------------------------------------------------------- Table of Contents The increase in service gross margin in the three months ended September 26, 2014 compared to the three months ended September 27, 2013 was primarily due to lower third-party service costs, which increased our service gross margin by approximately three percentage points, partially offset by higher fixed costs due to the expansion of our global customer service support footprint, which decreased our service gross margin by approximately one percentage point.

The increase in service gross margin in the nine months ended September 26, 2014 compared to the nine months ended September 27, 2013 was primarily due to lower third-party service costs, which increased our service gross margin by approximately three percentage points, and lower fixed service costs resulting from restructuring actions and operational efficiencies, which increased our service gross margin by approximately one percentage point.

We believe that our total gross margin over the next few years will be 60% or greater.

Research and Development Expenses. Research and development expenses consist primarily of salaries and related personnel expenses and prototype costs related to the design, development, testing and enhancement of our products. Research and development expenses for the three and nine months ended September 26, 2014 and September 27, 2013 were as follows (in thousands, except percentages): Increase from prior year September 26, September 27, 2014 2013 $ % Three months ended $ 20,693 $ 16,566 $ 4,127 24.9 % Nine months ended $ 60,586 $ 52,086 $ 8,500 16.3 % The increase in research and development expenses in the three months ended September 26, 2014 compared to the three months ended September 27, 2013 is attributable to $3.7 million of higher employee-related expenses, $0.1 million of higher product development (third-party development, prototype and equipment) expenses and $0.3 million of net increases in other research and development expenses. The increase in employee-related expenses in the three months ended September 26, 2014 is the result of $3.1 million of higher salary and related expenses, primarily reflecting our increased research and development headcount, and $0.6 million of higher stock-based compensation expense.

The increase in research and development expenses in the nine months ended September 26, 2014 compared to the nine months ended September 27, 2013 is attributable to $9.3 million of higher employee-related expenses and $0.5 million of higher product development expenses. These increases were partially offset by the absence in the current year period of $0.6 million of expense for the impairment of intellectual property, $0.4 million of lower depreciation expense, $0.2 million of lower amortization expense related to intangible assets and $0.1 million of net decreases in other research and development expenses.

The increase in employee-related expenses in the nine months ended September 26, 2014 is the result of $6.8 million of higher salary and related expenses, primarily reflecting our increased research and development headcount, $2.2 million of higher stock-based compensation expense and $0.3 million of net increases in other employee-related expenses.

Some aspects of our research and development efforts require significant short-term expenditures, the timing of which may cause significant variability in our expenses. Rapid technological innovation is critical to our long-term success, and we believe that we are tailoring our investments to meet the requirements of our customers and market. We anticipate that our research and development expenses for fiscal 2014 will increase from fiscal 2013 levels due to our increased focus on new product development as well as the inclusion of expenses for PT.

Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries and related personnel costs, commissions, travel and entertainment expenses, promotions, customer trial and evaluations inventory and other marketing and sales support expenses. Sales and marketing expenses for the three and nine months ended September 26, 2014 and September 27, 2013 were as follows (in thousands, except percentages): Increase from prior year September 26, September 27, 2014 2013 $ % Three months ended $ 20,350 $ 18,291 $ 2,059 11.3 % Nine months ended $ 58,713 $ 58,596 $ 117 0.2 % 33-------------------------------------------------------------------------------- Table of Contents The increase in sales and marketing expenses in the three months ended September 26, 2014 compared to the three months ended September 27, 2013 is attributable to $1.5 million of higher employee-related expenses, $0.4 million of higher expense related to evaluation equipment at customer sites and $0.3 million of higher marketing expenses. These increases were partially offset by $0.1 million of net decreases in other sales and marketing expenses. The increase in employee-related expenses was the result of $0.9 million of higher salary and commissions and related expenses, $0.4 million of higher stock-based compensation expense and increases in other employee-related expenses totaling $0.2 million.

The slight increase in sales and marketing expenses in the nine months ended September 26, 2014 compared to the nine months ended September 27, 2013 is attributable to $0.7 million of higher marketing expenses and $0.7 million of higher consulting expense. These increases were partially offset by $0.4 million of lower expense related to evaluation equipment at customer sites, $0.3 million of lower depreciation, $0.2 million of lower expense related to the amortization of intangible assets and $0.4 million of net decreases in other sales and marketing expenses.

We believe that our sales and marketing expenses will increase in fiscal 2014 from fiscal 2013 levels, primarily attributable to increased personnel and related costs, including such costs attributable to the inclusion of expenses for PT, as well as our investment in our expanded sales and marketing programs.

General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related personnel costs for executive and administrative personnel, recruiting expenses and audit and professional fees.

General and administrative expenses for the three and nine months ended September 26, 2014 and September 27, 2013 were as follows (in thousands, except percentages): Increase from prior year September 26, September 27, 2014 2013 $ %Three months ended $ 10,901 $ 9,178 $ 1,723 18.8 % Nine months ended $ 34,082 $ 29,621 $ 4,461 15.1 % The increase in general and administrative expenses in the three months ended September 26, 2014 compared to the three months ended September 27, 2013 is attributable to $1.2 million of higher employee-related expenses, $0.4 million of higher expense related to foreign currency translation and $0.5 million of net increases in other general and administrative expenses. These increases were partially offset by $0.4 million of lower professional fees. The increase in employee-related expenses resulted from $0.9 million of higher stock-based compensation expense and $0.4 million of higher salary and related expenses, partially offset by $0.1 million of net decreases of other employee-related expenses.

The increase in general and administrative expenses in the nine months ended September 26, 2014 compared to the nine months ended September 27, 2013 is attributable to $3.7 million of higher employee-related expenses, $0.4 million of expense related to the sale of the MPS business, $0.3 million of higher expense related to foreign currency translation, $0.2 million of higher depreciation and $0.1 million of higher expense related to investor relations.

These increases were partially offset by $0.2 million of lower professional fees. The increase in employee-related expenses resulted from $2.8 million of higher stock-based compensation, including $0.7 million of incremental expense related to the modification of outstanding stock options held by members of our Board of Directors described in the "Overview" of this MD&A, $0.7 million of higher salary and related expenses and $0.2 million of increases in other employee-related expenses.

We believe that our general and administrative expenses will increase in fiscal 2014 compared to fiscal 2013 levels, primarily due to higher stock-based compensation expense.

Acquisition-Related Expenses. Acquisition-related expenses include those costs related to the acquisition of PT that would otherwise not have been incurred by us. These costs are primarily comprised of professional and service fees, such as legal, audit, consulting, paying agent and other fees, and expenses related to cash payments to former PT executives under their respective PT change of control agreements. We recorded acquisition-related expenses of $1.3 million in the nine months ended September 26, 2014, comprised of $1.1 million of professional and service fees and $0.2 million related to payments under applicable change of control agreements with certain PT executives. We did not record acquisition-related expenses in the three months ended September 26, 2014 or either the three or nine months ended September 27, 2013.

Restructuring Expense. We recorded restructuring expense of $0.7 million in the three months ended September 26, 2014 and $2.2 million in the nine months ended September 26, 2014 for severance and related costs in connection with 34-------------------------------------------------------------------------------- Table of Contents reducing our workforce. We recorded restructuring expense of $1.2 million in the three months ended September 27, 2013 for severance and related costs. We recorded $4.8 million of restructuring expense in the nine months ended September 27, 2013, comprised of $4.5 million for severance and related costs and $0.3 million to adjust our estimate of future sublease income.

Interest Income, net. Interest income and interest expense for the three and nine months ended September 26, 2014 and September 27, 2013 were as follows (in thousands, except percentages): Increase (decrease) Three months ended from prior year September 26, September 27, 2014 2013 $ % Interest expense $ (102 ) $ (23 ) $ 79 343.5 % Interest income 67 84 (17 ) (20.2 )% Interest income, net $ (35 ) $ 61 $ (96 ) (157.4 )% Increase (decrease) Nine months ended from prior year September 26, September 27, 2014 2013 $ % Interest expense $ (158 ) $ (71 ) $ 87 122.5 % Interest income 208 360 (152 ) (42.2 )% Interest income, net $ 50 $ 289 $ (239 ) (82.7 )% Interest expense in both the three and nine months ended September 26, 2014 and September 27, 2013 primarily relates to interest on the debt assumed in connection with the acquisition of Network Equipment Technologies, Inc. ("NET").

Interest expense in the three and nine months ended September 26, 2014 also includes expense related to the amortization of debt issuance costs in connection with our revolving credit facility. Interest income consists of interest earned on our cash equivalents, marketable debt securities and long-term investments. The decrease in interest income, net, in the current year periods compared to the prior year periods is attributable to a lower average portfolio yield on lower amounts available to invest in the current year.

Other Income (Expense), Net. We recorded $2.25 million of income in the nine months ended September 26, 2014 related to the settlement of a litigation matter in March 2014 in which we recovered a portion of our losses related to the impairment of certain prepaid royalties which we had written off in fiscal 2012.

This amount is included in Other income (expense), net, for the nine months ended September 26, 2014.

Income Taxes. We recorded provisions for income taxes of $1.7 million in the nine months ended September 26, 2014 and $1.7 million in the nine months ended September 27, 2013. These amounts reflect our estimates of the effective rates expected to be applicable for the respective full fiscal years, adjusted for any discrete events, which are recorded in the period that they occur. These estimates are reevaluated each quarter based on our estimated tax rate for the full fiscal year. The estimated amounts recorded do not include any benefit for our domestic losses, as we have concluded that a valuation allowance on any domestic benefit is required.

In September 2013, the U.S. Department of the Treasury and the Internal Revenue Service released final regulations relating to guidance on applying tax rules to amounts paid to acquire, produce or improve tangible personal property as well as rules for materials and supplies. The new rules are effective for us beginning in fiscal year 2015. We are currently assessing these rules and the impact they will have on our consolidated financial statements, if any.

Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial position, changes in financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

35-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Our consolidated statements of cash flows are summarized as follows (in thousands): Nine months ended September 26, September 27, 2014 2013 Change Net loss $ (14,663 ) $ (22,391 ) $ 7,728 Adjustments to reconcile net loss to cash flows provided by operating activities 32,252 27,352 4,900 Changes in operating assets and liabilities 10,493 25,573 (15,080 ) Net cash provided by operating activities $ 28,082 $ 30,534 $ (2,452 ) Net cash provided by (used in) investing activities $ 30,168 $ (11,145 ) $ 41,313 Net cash used in financing activities $ (79,498 ) $ (34,390 ) $ (45,108 ) Our cash, cash equivalents, marketable securities and long-term investments totaled $154.1 million at September 26, 2014 and $245.7 million at December 31, 2013. We had cash and short-term investments held by our foreign subsidiaries aggregating approximately $10 million at September 26, 2014 and approximately $5 million at December 31, 2013. We do not intend to repatriate these funds, and as such, they are not available to fund our domestic operations. If we were to repatriate the funds, they would likely be treated as income for U.S. tax purposes, fully offset by our net operating losses. We do not believe this has a material impact on our liquidity.

On June 27, 2014, we entered into a credit agreement (the "Credit Agreement") by and among us, as Borrower, Bank of America, N.A. ("Bank of America"), as Administrative Agent, Swing Line Lender and L/C Issuer, and the other lenders from time to time party thereto. The Credit Agreement provides for a revolving credit facility of up to $40 million and provides that we may select the interest rates under the credit facility equal to (1) the Eurodollar Rate (which is defined as the rate per annum equal to the London Interbank Offered Rate ("LIBOR") plus 1.5% per annum) for a Eurodollar Rate Loan; and (2) the highest of (a) the Federal Funds Rate plus 1/2 of 1%, (b) the rate of interest in effect on the borrowing date as publicly announced from time to time by Bank of America as its prime rate, and (c) the monthly Eurodollar Rate plus 1%. We will pay a 0.15% commitment fee on the unused commitments available for borrowing.

Borrowings under the Credit Agreement may be used for the general corporate purposes of the Company and its subsidiaries, including, without limitation, working capital, acquisitions, dividends and stock repurchases, to the extent permitted under the Credit Agreement. Our obligations under the Credit Agreement are guaranteed by Sonus International, Inc., Sonus Federal, Inc., NET and PT (collectively, together with us, the "Loan Parties") pursuant to a Master Continuing Guaranty and are secured by the assets of the Loan Parties pursuant to a Security and Pledge Agreement. The Credit Agreement contains affirmative, negative and financial covenants customary for financings of this type. The negative covenants include limitations on liens, indebtedness, fundamental changes, dispositions, restricted payments, investments, transactions with affiliates, certain restrictive agreements and compliance with sanctions laws and regulations. The amount of cash and cash equivalents of the Loan Parties, subject to certain exclusions, cannot be less than an aggregate amount of $100 million at any time. The credit facility will become due on June 27, 2015, subject to acceleration upon certain specified events of default, including, without limitation, payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency-related defaults, defaults relating to judgments, an ERISA Event (as defined in the Credit Agreement), the failure to pay specified indebtedness and a change of control default. We did not have any amounts outstanding under the Credit Agreement at September 26, 2014.

On July 29, 2013, we announced that our Board of Directors had authorized a stock buyback program to repurchase up to $100 million of our common stock from time to time on the open market or in privately negotiated transactions. The stock buyback program is being funded using our working capital. During the nine months ended September 26, 2014, we repurchased and retired 4.0 million shares under our stock buyback program for approximately $14.7 million in the aggregate, including transaction fees. This amount is included in financing activities in our condensed consolidated statement of cash flows for the nine months ended September 26, 2014.

On March 20, 2014, we announced the commencement of an underwritten public offering of 37.5 million shares of our common stock on behalf of Galahad Securities Limited and its affiliated entities (collectively, the "Legatum Group"). The underwriter of the offering was granted a 30-day option to purchase up to 5.625 million additional shares from the Legatum Group. The Legatum Group received all the proceeds from the underwritten offering; no shares in the underwritten offering were sold by us or any of our officers or directors. In addition, we purchased 21.5 million shares from the underwriter for $75.3 million in the aggregate, including $0.3 million of transaction fees. We funded the share repurchase with cash on hand. The repurchased shares were retired upon completion of the transaction.

36-------------------------------------------------------------------------------- Table of Contents Our operating activities provided $28.1 million of cash in the nine months ended September 26, 2014 and $30.5 million of cash in the nine months ended September 27, 2013.

Cash provided by operating activities in the nine months ended September 26, 2014 was primarily the result of lower accounts receivable, inventories and other operating assets, partially offset by decreases in accrued expenses and other long-term liabilities, deferred revenue and accounts payable. Our continued focus on maintaining appropriate inventory levels was the primary contributor to the decrease in inventory. The decrease in accounts receivable primarily reflects our continued focus on cash collections. The decrease in other operating assets was primarily the result of lower prepaid expenses. The decrease in accrued expenses and other long-term liabilities was primarily related to lower accruals related to our Amended and Restated 2000 Employee Stock Purchase Plan, as amended ("ESPP"), as a purchase was completed on behalf of participating employees on August 29, 2014, and lower accruals for professional fees and restructuring. Our net loss, adjusted for non-cash items such as depreciation, amortization, impairment charges and stock-based compensation, provided $17.6 million of cash.

Cash provided by operating activities in the nine months ended September 27, 2013 was primarily the result of lower accounts receivable, inventory and other operating assets. These amounts were partially offset by lower accounts payable, deferred revenue, and accrued expenses and other long-term liabilities. The decrease in accounts receivable primarily reflects our focus on cash collections and the decrease in other operating assets was primarily related to lower prepaid expenses. Our focus on maintaining appropriate inventory levels was the primary contributor to the decrease in inventory. The decrease in accrued expenses and other long-term liabilities was primarily related to employee compensation and related costs, including payments in connection with our Company-wide incentive bonus program, as well as lower taxes payable amounts, partially offset by an increase in accrued restructuring. Our net loss, adjusted for non-cash items such as depreciation, amortization and stock-based compensation, provided $5.0 million of cash.

Our investing activities provided $30.2 million of cash in the nine months ended September 26, 2014, comprised of $70.8 million of aggregate maturities and sales of marketable securities, $2.0 million of cash received in connection with our June 20, 2014 divestiture of the MPS business and $0.3 million of cash received in connection with the sale of fixed assets, primarily land acquired with the acquisition of PT on February 19, 2014. These amounts were partially offset by $35.0 million of cash paid, net of cash acquired, for the acquisition of PT and $7.9 million of investments in property and equipment.

Our investing activities used $11.1 million of cash in the nine months ended September 27, 2013, comprised of $6.6 million of net maturities of marketable securities and $4.5 million of investments in property and equipment.

Our financing activities used $79.5 million of cash in the nine months ended September 26, 2014, comprised of $89.9 million, including transaction fees, for the repurchase of common stock, including $75.3 million to repurchase stock in connection with the Legatum Group public offering described above, $1.7 million used to pay withholding obligations related to the net share settlement of restricted stock awards upon vesting and $0.1 million for payments on our capital leases for office equipment. These amounts were partially offset by $9.3 million of proceeds from the exercise of stock options and $2.9 million of proceeds from the sale of our common stock in connection with our ESPP.

Our financing activities used $34.4 million of cash in the nine months ended September 27, 2013, comprised of $37.3 million for the repurchase of common stock, $1.2 million used to pay withholding obligations related to the net share settlement of restricted stock awards upon vesting and $0.1 million for payments on our capital leases for office equipment. These amounts were partially offset by $2.4 million of proceeds from the exercise of stock options and $1.9 million of proceeds from the sale of our common stock in connection with our ESPP.

Based on our current expectations, we believe our current cash, cash equivalents, marketable debt securities and long-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least twelve months, including any future stock repurchases under the aforementioned stock buyback program. It is difficult to predict future liquidity requirements with certainty. The rate at which we will consume cash will be dependent on the cash needs of future operations, including changes in working capital, which will, in turn, be directly affected by the levels of demand for our products, the timing and rate of expansion of our business, the resources we devote to developing our products and any litigation settlements.

We anticipate devoting substantial capital resources to continue our research and development efforts, to maintain our sales, support and marketing, to improve our controls environment, for other general corporate activities and to vigorously defend against existing and potential litigation. See Note 16 to our condensed consolidated financial statements for a description of our contingencies.

37-------------------------------------------------------------------------------- Table of Contents Recent Accounting Pronouncements On June 19, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force) ("ASU 2014-12"). ASU 2014-12 which clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense (measured as of the grant date without taking into account the effect of the performance target) related to an award for which transfer to the employee is contingent on the entity's satisfaction of a performance target until it becomes probable that the performance target will be met. ASU 2014-12 does not contain any new disclosure requirements. ASU 2014-12 is effective for us on January 1, 2015. We do not expect the adoption of ASU 2014-12 to have a material impact on our condensed consolidated financial statements.

On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") its final standard on revenue from contracts with customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.

The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity identifies the contract(s) with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to the performance obligations in the contract and recognizes revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers that are within the scope of other topics in the FASB Accounting Standards Codification ("ASC"). Certain of ASU 2014-09's provisions also apply to transfers of nonfinancial assets, including in-substance nonfinancial assets that are not an output of an entity's ordinary activities (i.e., property, plant and equipment; real estate; or intangible assets). Existing accounting guidance applicable to these transfers has been amended or superseded. ASU 2014-09 also requires significantly expanded disclosures about revenue recognition. ASU 2014-09 is effective for us on January 1, 2017. We are currently assessing the potential impact of the adoption of ASU 2014-09 on our condensed consolidated financial statements.

On April 10, 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU 2014-08"), which amends the definition of discontinued operations in ASC 205-20 and requires entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued operations criteria. The new guidance eliminates the previous criteria that the operations and cash flows of the component that have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction. The new guidance also eliminates the previous criteria that the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. Instead, ASU 2014-08 requires discontinued operations treatment for disposals of a component or group of components that represents a strategic shift that has or will have a major impact on an entity's operations or financial results. ASU 2014-08 requires entities to reclassify assets and liabilities of a discontinued operation for all comparative periods presented in the statement of financial position. In addition, ASU 2014-08 requires that an entity disclose in its statement of cash flows, in all periods presented, either: (1) operating and investing cash flows or (2) depreciation and amortization, capital expenditures and significant operating and investing non-cash items related to the discontinued cooperation.

ASU 2014-08 is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014.

We do not expect the adoption of ASU 2014-08 to have a material impact on our condensed consolidated financial statements.

On July 18, 2013, the FASB issued ASU 2013-11, Presentation of a Liability for an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists ("ASU 2013-11"), which provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss ("NOL") carryforward, a similar tax loss or a tax credit carryforward exists.

The FASB's objective in issuing ASU 2013-11 was to eliminate diversity in practice resulting from a lack of guidance on this topic in current GAAP. ASU 2013-11 requires that an entity present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for an NOL carryforward, a similar tax loss or a tax credit unless certain conditions exist. ASU 2013-11 was effective for us beginning January 1, 2014. The adoption of ASU 2013-11 did not have an impact on our consolidated financial statements, as we already applied the methodology prescribed by ASU 2013-11.

On March 4, 2013, the FASB issued ASU 2013-05, Foreign Currency Matters (Topic 830) - Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity ("ASU 2013-05"), which indicates that the entire amount of a cumulative translation 38-------------------------------------------------------------------------------- Table of Contents adjustment ("CTA") related to an entity's investment in a foreign entity should be released when there has been either: (a) a sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in a foreign entity; (b) the loss of a controlling financial interest in an investment in a foreign entity (i.e., the foreign entity is deconsolidated); or (c) the step acquisition of a foreign entity (i.e., when the accounting for an entity has changed from applying the equity method for an investment in a foreign entity to consolidating the foreign entity). ASU 2013-05 does not change the requirement to release a pro rata portion of the CTA of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity. ASU 2013-05 became effective for us on January 1, 2014. The adoption of ASU 2013-05 did not have a material impact on our consolidated financial statements.

[ Back To TMCnet.com's Homepage ]