Harmonic Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 28, 2013. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted. Comparisons are with the corresponding 2012 periods. Results present the cable access HFC business as discontinued operations.
Business context
Harmonic designs and sells video infrastructure products and systems, including video processing, production and playout, and cable edge products, as well as support services. It sold its cable access HFC business to Aurora Networks on March 5, 2013 for $46.0 million cash.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | First six months 2013 | First six months 2012 |
|---|---|---|---|---|
| Net revenue | $117.1 | $122.1 | $218.8 | $238.5 |
| Gross profit / margin | $57.9 / 49% | $55.1 / 45% | $104.1 / 48% | $105.5 / 44% |
| Operating loss | $(4.6) | $(3.3) | $(19.5) | $(13.2) |
| Continuing-operations loss | $(3.4) | $(3.9) | $(12.9) | $(12.6) |
| Net income (loss) | $(3.8) | $0.02 | $2.6 | $(7.5) |
| Diluted EPS | $(0.03) | $0.00 | $0.02 | $(0.06) |
| Operating cash flow | Not separately presented | Not separately presented | $19.1 | $28.1 |
- Q2 product revenue was $96.8 million, down from $103.4 million; service revenue was $20.4 million, up from $18.7 million. Video processing revenue rose 5%, production and playout rose 3%, cable edge fell 44%, and service and support rose 9% year over year.
- For the first six months, total revenue fell 8%. Cable edge revenue declined 38%, video processing declined 6%, while production and playout increased 5% and service and support increased 11%.
- Management attributed higher gross margin primarily to product mix and, for cable edge in Q2, increased software-license sales. Operating expenses rose year over year in Q2, including higher SG&A costs.
- At June 28, cash and cash equivalents were $83.2 million and short-term investments were $78.5 million, totaling $161.7 million. Current assets were $332.2 million and current liabilities $95.3 million. Total liabilities were $157.5 million; the filing reports no borrowings under the bank credit line.
- Six-month investing cash flow was $60.1 million, including $43.6 million net proceeds from the business sale. Financing cash flow was $(92.6) million, principally reflecting $95.4 million of share repurchases. Cash declined by $13.5 million to $83.2 million.
- The $10 million bank line had $8.8 million available after standby letters of credit at June 28; the company reported covenant compliance and a 3.97:1 ratio versus a 1.75:1 minimum. The facility was due to mature August 23, 2013.
Material changes and unusual items
- The HFC sale generated a reported $14.8 million after-tax gain in the six-month period, included in discontinued operations. Discontinued operations contributed $15.5 million to six-month net income; continuing operations remained loss-making.
- Harmonic repurchased shares for $95.4 million in the first half, including a modified Dutch auction tender offer. A further $85 million increase to the repurchase authorization was approved on July 16; as of August 2, approximately $100 million was available for future purchases.
- Fiscal 2013 restructuring charges included approximately $0.9 million in continuing operations, covering severance and a Milpitas facility write-down. The HFC sale also resulted in restructuring charges recorded in discontinued operations.
- Revenue concentration remained significant: the ten largest customers represented 37% of Q2 revenue and 33% of first-half revenue. Comcast represented 11% and 10%, respectively.
Outlook, risks and contingencies
- The filing provides no specific numerical revenue or earnings guidance. Management stated that existing liquidity was expected to meet contemplated cash requirements for at least 12 months, including planned repurchases, while noting that investment-market conditions or other needs could require additional funding.
- Management expects international sales to remain a significant share of revenue. Q2 international revenue declined 6% year over year; U.S. revenue declined 2%. Management cited softness among U.S. pay-TV providers, customer interest in CCAP technology, and lower Asia-Pacific spending on production and playout products.
- Key business risks include customer capital-spending cycles and concentration, competition and pricing pressure, delayed adoption of new technologies such as HEVC and CCAP, reliance on limited suppliers and contract manufacturers, foreign-exchange exposure, and economic and geopolitical uncertainty.
- Avid Technology patent suits concerning Media Grid and Spectrum products, and a FastVDO patent suit concerning H.264-related products, seek injunctions and unspecified damages. The company said outcomes could not be predicted and could materially affect results if unfavorable.
- Gross unrecognized tax benefits were approximately $60.6 million at June 28, including interest and penalties; U.S. and Israeli tax audits were ongoing. The company also disclosed $21.0 million in non-cancelable supplier purchase commitments and $55.9 million in future minimum lease payments.
Investor verification points
- Check continuing-operations trends separately from the HFC disposal gain and discontinued-operation results.
- Assess whether cable edge demand and broader customer capital spending recover, and whether growth in processing, production and services can offset declines.
- Review cash deployment and remaining repurchase authorization against liquidity needs, and confirm the status and terms of the credit facility after its stated August 2013 maturity.
- Monitor outcomes of the Avid and FastVDO cases, tax audits and unrecognized tax benefits, and any changes in related reserves or exposure.
- Track customer concentration, supplier commitments, inventory levels and the effects of the HFC divestiture on ongoing revenue and cash generation.