Emulex (ELX) 10-Q 2014 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 29, 2013

OR

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File No. 001-31353

EMULEX CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	51-0300558
(State or other jurisdiction of incorporation or organization)	(I.R.S Employer Identification No.)
3333 Susan Street Costa Mesa, California	92626
(Address of principal executive offices)	(Zip Code)

(714) 662-5600

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x	Accelerated filer  o	Non-accelerated filer  o	Smaller reporting company  o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of January 24, 2014, the registrant had 80,862,790 shares of common stock outstanding.

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CAUTIONARY STATEMENT RELATED TO FORWARD LOOKING STATEMENTS

Certain statements contained in this Form 10-Q may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We may also make forward-looking statements in other reports filed with the Securities and Exchange Commission, in materials delivered to stockholders and in press releases. In addition, our representatives may from time to time make oral forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Words such as “anticipates,” “in the opinion,” “believes,” “intends,” “expects,” “may,” “will,” “should,” “could,” “plans,” “forecasts,” “estimates,” “predicts,” “projects,” “potential,” “continue,” and similar expressions may be intended to identify forward-looking statements.

Actual future results could differ materially from those described in the forward-looking statements as a result of a variety of factors, including those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, “Legal Proceedings” in Part II, Item 1, and “Risk Factors” in Part II, Item 1A of this Form 10-Q included elsewhere herein. We expressly disclaim any obligation or undertaking to release publicly any updates or changes to these forward-looking statements that may be made to reflect any future events or circumstances. We wish to caution readers that a number of important factors could cause actual results to differ materially from those in the forward-looking statements. These factors include the possibility that all or a substantial portion of the cost savings targeted by us will not be realized at all or on a timely basis even though we expect to incur charges relating to the cost saving initiative and that the share repurchases implemented by us may not be completed in whole or in part or within the expected timeframe. The assumptions on which the cost savings, share repurchase and capital return goals and expectations are based necessarily involve judgments with respect to, among other things, economic, competitive and financial market conditions and the impact of the cost savings initiative on our customers, all of which are difficult or impossible to predict and many of which are beyond the Company’s control. Furthermore, our proposed changes to the membership of our board of directors may not have the desired effect in helping us achieve and implement our business and strategic goals. These factors also include the possibility that we may not realize the anticipated benefits from the acquisition of Endace Limited (Endace) on a timely basis or at all, and may be unable to integrate the technology, operations and personnel of Endace into our existing operations in a timely and efficient manner. In addition, intellectual property claims, with or without merit, that could result in costly litigation, cause product shipment delays, require us to indemnify customers, or require us to enter into royalty or licensing agreements, which may or may not be available. Furthermore, we have in the past obtained, and may be required in the future to obtain, licenses of technology owned by other parties. We cannot be certain that the necessary licenses will be available or that they can be obtained on commercially reasonable terms. If we were to fail to obtain such royalty or licensing agreements in a timely manner and on reasonable terms, our business, results of operations and financial condition could be materially adversely affected. Ongoing lawsuits, such as the action brought by Broadcom Corporation (Broadcom) described elsewhere in this Form 10-Q, present inherent risks, any of which could have a material adverse effect on our business, financial condition, or results of operations. Such potential risks include continuing expenses of litigation, loss of patent rights, monetary damages, injunctions against the sale of products incorporating the technology in question, counterclaims, attorneys’ fees, incremental costs associated with product or component redesigns, liabilities to customers under reimbursement agreements or contractual indemnification provisions, and diversion of management’s attention from other business matters. With respect to the continuing Broadcom litigation, such potential risks also include the adequacy of any sunset period to make design changes, the ability to implement any design changes, the availability of customer resources to complete any re-qualification or re-testing that may be needed, the ability to maintain favorable working relationships with Emulex suppliers of serializer/deserializer (SerDes) modules, and the ability to obtain a settlement which does not put us at a competitive disadvantage. In addition, the fact that the economy generally, and the network connectivity and visibility market segments specifically, have been in a state of uncertainty makes it difficult to determine if past experience is a good guide to the future and makes it impossible to determine if markets will grow or shrink in the short term. Continued weakness in domestic and worldwide macro-economic conditions, related disruptions in world credit and equity markets, and the resulting economic uncertainty for our customers, as well as the overall network connectivity and visibility markets, has and could continue to adversely affect our revenues and results of operations. As a result of these uncertainties, we are unable to predict our future results with any accuracy. Other factors affecting these forward-looking statements include but are not limited to the following: faster than anticipated declines in the storage networking market, slower than expected growth of the converged networking market or the failure of our Original Equipment Manufacturer (OEM) customers to successfully incorporate our products into their systems; our dependence on a limited number of customers and the effects of the loss of, decrease in or delays of orders by any such customers, or the failure of such customers to make timely payments; the emergence of new or stronger competitors as a result of consolidation movements in the market; the timing and market acceptance of our products or our OEM customers’ new or enhanced products; costs associated with entry into new areas of the network connectivity and visibility markets; the variability in the level of our backlog and the variable and seasonal procurement patterns of our customers; any inadequacy of our intellectual property protection and the costs of actual or potential third-party claims of infringement and any related indemnity obligations or adverse judgments; the effect of any actual or potential unsolicited offers to acquire us; proxy contests or the activities of activist investors; impairment charges, including but not limited to goodwill and intangible assets; changes in tax rates or legislation; the effects of acquisitions; the effects of terrorist activities, natural disasters, and any resulting disruption in our supply chain or customer purchasing patterns or any

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other resulting economic or political instability; the highly competitive nature of the markets for our products as well as pricing pressures that may result from such competitive conditions; the effect of rapid migration of customers towards newer, lower cost product platforms; transitions from board or box level to application specific integrated circuit (ASIC) solutions for selected applications; a shift in unit product mix from higher-end to lower-end or mezzanine card products; a faster than anticipated decrease in the average unit selling prices or an increase in the manufactured cost of our products; delays in product development; our reliance on third-party suppliers and subcontractors for components and assembly; our ability to attract and retain key technical personnel; our ability to benefit from our research and development activities as well as government grants related thereto; our dependence on international sales and internationally produced products; changes in accounting standards; and any resulting regulatory changes on our business. These and other factors could cause actual results to differ materially from those in the forward-looking statements and are discussed elsewhere in this Form 10-Q, in our other filings with the Securities and Exchange Commission or in materials incorporated therein by reference.

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EMULEX CORPORATION AND SUBSIDIARIES

INDEX

	PAGE
Part I. FINANCIAL INFORMATION	5
Item 1. Financial Statements (unaudited)	5
Condensed Consolidated Balance Sheets as of December 29, 2013 and June 30, 2013	5
Condensed Consolidated Statements of Operations for the Three and Six Months Ended December  29, 2013 and December 30, 2012	6
Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended December 29, 2013 and December 30, 2012	7
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December  29, 2013 and December 30, 2012	8
Notes to Condensed Consolidated Financial Statements	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3. Quantitative and Qualitative Disclosures about Market Risk	37
Item 4. Controls and Procedures	37
Part II. OTHER INFORMATION	39
Item 1. Legal Proceedings	39
Item 1A. Risk Factors	39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 6. Exhibits	52
Signatures	54

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EMULEX CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited, in thousands, except share data)

	December 29, 2013			June 30, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	198,679		$	105,637
Accounts receivable, net of allowance for doubtful accounts of $1,138 and $1,293 at December 29, 2013 and June 30, 2013, respectively	87,177			82,363
Inventories	24,051			23,897
Prepaid income taxes and income tax receivable	2,473			10,166
Prepaid expenses and other current assets	17,110			14,113
Deferred income taxes	3,137			3,137
Total current assets	332,627			239,313
Property and equipment, net of accumulated depreciation and amortization of $151,578 and $145,942 at December 29, 2013 and June 30, 2013, respectively	62,477			62,415
Goodwill	248,519			248,519
Intangible assets, net	123,692			139,298
Other assets	23,090			21,164
Total assets	$	790,405		$	710,709
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	30,354			27,725
Accrued and other current liabilities	46,201			43,861
Total current liabilities	76,555			71,586
Convertible senior notes	143,667			—
Other liabilities	5,602			4,924
Deferred income taxes	17,048			17,048
Accrued taxes	29,526			29,526
Total liabilities	272,398			123,084
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized (150,000 shares designated as Series A Junior Participating Preferred Stock); none issued and outstanding	—			—
Common stock, $0.10 par value; 240,000,000 shares authorized; 110,230,264 and 108,896,648 issued at December 29, 2013 and June 30, 2013, respectively	11,023			10,890
Additional paid-in capital	1,308,795			1,279,839
Accumulated deficit	(480,022		)	(472,354		)
Accumulated comprehensive loss	(2,261		)	(2,370		)
Treasury stock, at cost; 29,374,603 and 17,592,322 shares at December 29, 2013 and June 30, 2013, respectively	(319,528		)	(228,380		)
Total stockholders’ equity	518,007			587,625
Total liabilities and equity	$	790,405		$	710,709

See accompanying notes to condensed consolidated financial statements.

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EMULEX CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited, in thousands, except per share data)

	Three Months Ended						Six Months Ended
	December 29, 2013			December 30, 2012			December 29, 2013			December 30, 2012
Net revenues	$	122,996		$	122,145		$	237,828		$	241,412
Cost of sales:
Cost of goods sold	42,109			44,472			81,800			88,623
Amortization of core and developed technology intangible assets	6,239			5,149			12,399			10,297
Patent litigation damages, injunction related royalties and technology license fees	2,358			958			3,855			1,950
Total cost of sales	50,706			50,579			98,054			100,870
Gross profit	72,290			71,566			139,774			140,542
Operating expenses:
Engineering and development	42,020			40,113			82,431			78,583
Selling and marketing	19,849			14,769			38,941			28,506
General and administrative	10,407			10,987			20,036			19,495
Amortization of other intangible assets	1,603			1,365			3,207			2,888
Total operating expenses	73,879			67,234			144,615			129,472
Operating (loss) income	(1,589		)	4,332			(4,841		)	11,070
Non-operating income (expense), net:
Interest income	16			8			20			8
Interest expense	(1,148		)	2			(1,150		)	(4		)
Other income (expense), net	(135		)	(27		)	17			(363		)
Total non-operating income (expense), net	(1,267		)	(17		)	(1,113		)	(359		)
(Loss) income before income taxes	(2,856		)	4,315			(5,954		)	10,711
Income tax provision (benefit)	1,171			(1,268		)	1,714			4,471
Net (loss) income	$	(4,027	)	$	5,583		$	(7,668	)	$	6,240
Net (loss) income per share:
Basic	$	(0.05	)	$	0.06		$	(0.09	)	$	0.07
Diluted	$	(0.05	)	$	0.06		$	(0.09	)	$	0.07
Number of shares used in per share computations:
Basic	86,881			90,063			89,162			89,705
Diluted	86,881			91,816			89,162			91,637

See accompanying notes to condensed consolidated financial statements.

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EMULEX CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive (Loss) Income

(unaudited, in thousands)

	Three Months Ended						Six Months Ended
	December 29, 2013			December 30, 2012			December 29, 2013			December 30, 2012
Net (loss) income	$	(4,027	)	$	5,583		$	(7,668	)	$	6,240
Other comprehensive (loss) income:
Foreign currency translation adjustments	230			(222		)	109			209
Comprehensive (loss) income	$	(3,797	)	$	5,361		$	(7,559	)	$	6,449

See accompanying notes to condensed consolidated financial statements.

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EMULEX CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)

	Six Months Ended
	December 29, 2013			December 30, 2012
Cash flows from operating activities:
Net (loss) income	$	(7,668	)	$	6,240
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment	9,603			8,771
Share-based compensation expense	8,316			10,929
Amortization of intangible assets	15,606			13,185
Provision for losses on accounts receivable	(155		)	(297		)
Accretion of debt discount on convertible senior notes and amortization of debt issuance costs	765			—
Accrued interest income, net	—			(63		)
(Gain) loss on sale or disposal of property and equipment	(25		)	75
Deferred income taxes	—			(452		)
Excess tax benefit from share-based compensation	—			(27		)
Foreign currency adjustments	244			110
Changes in assets and liabilities:
Accounts receivable	(4,659		)	(771		)
Inventories	(154		)	(2,816		)
Prepaid expenses, prepaid income taxes and other assets	6,886			(10,860		)
Accounts payable, accrued liabilities, and other liabilities	4,775			(38,051		)
Accrued taxes	—			2,544
Net cash provided by (used in) operating activities	33,534			(11,483		)
Cash flows from investing activities:
Net proceeds from sale of property and equipment	30			8
Purchases of property and equipment	(10,036		)	(6,968		)
Purchases of investments	—			(14,030		)
Maturities of investments	—			40,731
Net cash (used in) provided by investing activities	(10,006		)	19,741
Cash flows from financing activities:
Issuance of Convertible Senior Notes	175,000			—
Repurchase of common shares and accelerated share repurchase forward contract	(100,000		)	—
Debt issuance costs	(5,224		)	—
Change in restricted cash	24			—
Payroll tax withholdings on behalf of employees for restricted stock	(3,069		)	(3,151		)
Proceeds from issuance of common stock under stock plans	2,620			2,609
Excess tax benefit from share-based compensation expense	—			27
Net cash provided by (used in) financing activities	69,351			(515		)
Effect of exchange rates on cash and cash equivalents	163			161
Net increase in cash and cash equivalents	93,042			7,904
Cash and cash equivalents at beginning of period	105,637			201,048
Cash and cash equivalents at end of period	$	198,679		$	208,952

See accompanying notes to condensed consolidated financial statements.

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EMULEX CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

1. Basis of Presentation

In the opinion of the management of Emulex Corporation (Emulex or the Company), the accompanying unaudited condensed consolidated financial statements contain adjustments, which are normal recurring accruals necessary to present fairly the Company’s consolidated financial position, results of operations, comprehensive (loss) income, and cash flows. Interim results for the three and six months ended December 29, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending June 29, 2014. The accompanying condensed consolidated interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013. The preparation of the condensed consolidated financial statements requires the use of estimates and actual results could differ materially from management’s estimates.

The accompanying consolidated financial statements include the accounts of Emulex and its wholly-owned subsidiaries. Material intercompany transactions and balances have been eliminated in consolidation.

The Company has a 52 or 53-week fiscal year that ends on the Sunday nearest to June 30. Accordingly, every fifth or sixth fiscal year will be a 53-week fiscal year. Fiscal 2014 is a 52-week fiscal year. The last 53-week fiscal year was fiscal 2011.

Supplemental Cash Flow Information

	Six Months Ended
	December 29, 2013		December 30, 2012
	(in thousands)
Cash paid during the period for:
Interest	$	2	$	4
Income taxes	2,803		3,200
Non-cash activities:
Purchases of property and equipment not paid, net	203		275
Accrued payroll tax withholdings for shares issued to employees	43		—
Release of In-Process Research & Development (IPRD) to Developed Technology	8,070		—

2. Business Combination

Acquisition of Endace Limited

On February 26, 2013, the Company acquired 89.6% of the outstanding common stock and all of the outstanding stock options of Endace for cash consideration of approximately $110.4 million. As of April 25, 2013, Emulex acquired the outstanding non-controlling interest for approximately $12.0 million and obtained ownership of 100% of Endace.

3. Fair Value of Financial Instruments

Instruments Measured at Fair Value on a Recurring Basis

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable. A description of the three levels of inputs is as follows:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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Financial instruments measured at fair value on a recurring basis are as follows:

	December 29, 2013
	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Cash and Cash Equivalents
	(in thousands)
Cash	$	168,679	$	—	$	—	$	168,679	$	168,679
Level 1:
Money market funds	30,000		—		—		30,000		30,000
Level 2:
None	—		—		—		—		—
Level 3:
None	—		—		—		—		—
	$	198,679	$	—	$	—	$	198,679	$	198,679
	June 30, 2013
	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Cash and Cash Equivalents
	(in thousands)
Cash	$	75,637	$	—	$	—	$	75,637	$	75,637
Level 1:
Money market funds	30,000		—		—		30,000		30,000
Level 2:
None	—		—		—		—		—
Level 3:
None	—		—		—		—		—
	$	105,637	$	—	$	—	$	105,637	$	105,637

There were no transfers between Level 1, Level 2 or Level 3 securities during the six months ended December 29, 2013.

Assets and Liabilities Recorded at Fair Value on a Non-recurring Basis

The Company measures the fair value of its assets acquired and liabilities assumed in a business combination, and goodwill and other long lived assets when they are held for sale or determined to be impaired. There were no such non-recurring measurements during the second quarter of fiscal 2014.

Financial instruments not measured at fair value - see Note 9 for the fair value disclosures over the convertible senior notes.

4. Inventories

Inventories are summarized as follows:

	December 29, 2013		June 30, 2013
	(in thousands)
Raw materials	$	6,601	$	6,585
Finished goods	17,450		17,312
	$	24,051	$	23,897

5. Goodwill and Intangible Assets, net

Goodwill was approximately $248.5 million at December 29, 2013 and June 30, 2013.

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Intangible assets, net, are as follows (in thousands):

	December 29, 2013							June 30, 2013
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Amortizable intangible assets:
Core technology and patents	$	77,345	$	(73,652	)	$	3,693	$	77,345	$	(71,132	)	$	6,213
Developed technology	249,170		(140,334		)	108,836		241,100		(127,934		)	$	113,166
Customer relationships	4,900		(2,643		)	2,257		4,900		(2,197		)	$	2,703
Tradenames	8,439		(5,351		)	3,088		8,439		(5,179		)	$	3,260
Other	287		(199		)	88		837		(681		)	$	156
Total amortizable intangible assets:	340,141		(222,179		)	117,962		332,621		(207,123		)	$	125,498
In-process research and development	5,730		—			5,730		13,800		—			13,800
Total intangible assets, net:	$	345,871	$	(222,179	)	$	123,692	$	346,421	$	(207,123	)	$	139,298

The amortizable intangible assets are being amortized on a straight-line basis over expected useful lives ranging from approximately one to twelve years. Aggregate amortization expense for intangible assets for the three months ended December 29, 2013 and December 30, 2012, was approximately $7.8 million and $6.5 million, respectively. Aggregate amortization expense for intangible assets during the six months ended December 29, 2013 and December 30, 2012, was approximately $15.6 million and $13.2 million, respectively.

The following table presents the estimated future aggregate amortization expense of intangible assets as of December 29, 2013 (in thousands):

Remainder of 2014	$	15,646
2015	27,285
2016	26,142
2017	9,615
2018	6,218
Thereafter	33,056
	$	117,962

6. Accrued and Other Current Liabilities

Components of accrued and other current liabilities are as follows:

	December 29, 2013		June 30, 2013
	(in thousands)
Payroll and related costs	$	18,839	$	22,267
Warranty liability	2,430		2,660
Accrued rebates	5,190		4,162
Deferred revenues	5,646		5,363
Restructuring	7,450		—
Other	6,646		9,409
	$	46,201	$	43,861

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The Company provides a warranty of between one to five years on its products. The Company records a provision for estimated warranty related costs at the time of sale based on historical product return rates and the Company’s estimates of future costs of fulfilling its warranty obligations. Changes to the warranty liability during six months ended December 29, 2013 were:

	(in thousands)
Balance at beginning of period	$	2,660
Accrual for warranties issued	658
Changes to pre-existing warranties (including changes in estimates)	(383		)
Settlements made (in cash or in kind)	(505		)
Balance at end of period	$	2,430

7. Restructuring

During the second quarter of fiscal 2014, the Company initiated a restructuring plan designed to streamline business operations and achieve operating expense reductions. The restructuring actions include approximately 15% workforce reductions, the consolidation of certain engineering facilities, and the closure of the Company's Bolton, Massachusetts facility. All restructuring actions impacted the Connectivity segment. The Company expects to incur an additional approximately $0.7 million in restructuring costs related to retention bonuses in the second half of fiscal 2014. The expected completion date of the restructuring plan is at the end of fiscal 2014. A summary of the restructuring and other related charges, the balance of which is included within Accrued and Other Current Liabilities on the Company's Condensed Consolidated Balance Sheets, consisted of the following:

	One-time employee termination benefits		Contract termination costs		Total
	(in thousands)
Charges	$	7,029	$	421	$	7,450
Payments	—		—		—
Balance at December 29, 2013	$	7,029	$	421	$	7,450

A summary of restructuring costs, by functional line item in the condensed consolidated statements of operations for both the three and six months ended December 29, 2013, is as follows:

	(in thousands)
Cost of goods sold	$	277
Engineering and development	5,259
Selling and marketing	668
General and administrative	1,246
	$	7,450

8. Commitments and Contingencies

Litigation

Broadcom Patent Infringement Litigation

On September 14, 2009, Broadcom Corporation (Broadcom) filed a patent infringement lawsuit against the Company in the United States District Court in the Central District of California (District Court). The original complaint alleged infringement by the Company of ten Broadcom patents covering certain data and storage networking technologies. On January 11, 2010, the District Court set a trial date of September 20, 2011. On February 23, 2010, Broadcom filed a first amended complaint adding allegations of infringement for one additional Broadcom patent. The first amended complaint sought unspecified damages and injunctive relief. On March 25, 2010, the Company filed its answer and affirmative defenses to the first amended complaint alleging that it believed that the Broadcom patents at issue were invalid or not infringed, or both. In addition, the Company asserted counterclaims for declaratory judgment of invalidity and non-infringement against each of the Broadcom patents at issue, and sought award of attorney’s fees, costs and expenses.

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On May 26, 2010, Broadcom filed a separate patent infringement lawsuit again the Company in the District Court. The 2010 lawsuit alleged infringement of a Broadcom patent covering certain data and storage networking technologies by certain Emulex products. Broadcom sought a judgment for damages, injunctive relief, and an award of attorneys’ fees and costs.

On June 30, 2010, the District Court consolidated the 2009 and 2010 patent cases into a single case. On October 14, 2010, the District Court issued an order on the parties’ joint stipulation dismissing three patents from the case. On November 1, 2010, the District Court issued an order allowing Broadcom to make infringement assertions against additional Emulex products. In a District Court ruling dated December 17, 2010, the District Court provided interpretations of certain terms contained in the claims of the patents being asserted by Broadcom. In February and May 2011, the District Court issued separate orders on the parties’ joint stipulations collectively dismissing two patents from the case (leaving seven patents in the case). The District Court heard the parties’ respective motions for summary judgment and subsequently issued a ruling on August 3, 2011 barring Broadcom’s claim for infringement on one patent, leaving six patents in the case. On August 25, 2011, the Company met with a mediator and representatives of Broadcom concerning potential settlement of the case. On September 2, 2011, the parties submitted a joint summary of the mediation proceedings in which they stated that the mediation proceedings continued for a full day, but the parties were unable to reach a settlement agreement.

After a nearly three week trial that ended October 6, 2011, the jury reached a partial verdict involving two out of the six patents. The District Court determined that one of the patents (U.S. Patent 7,058,150) [the ‘150 patent] had been infringed by Emulex, and the jury rendered an advisory verdict on October 12, 2011 to the District Court that it is not invalid, and awarded approximately $0.4 million in damages with respect to that patent. The jury reached a unanimous verdict of non-infringement on another patent relating to Emulex Fibre Channel switch products. A mistrial was declared concerning the remaining four patents (U.S. Patent 7,471,691) [the ‘691 patent] and (U.S. Patent 6,424,194; 7,486,124; and 7,724,057) [collectively, the ‘194 Patent family], for which no unanimous verdict was reached. On December 15, 2011, the District Court issued judgments as a matter of law (JMOL) that the two patents, on which the jury had rendered advisory verdicts, were not invalid. On December 16, 2011, the District Court issued an additional JMOL that the ‘691 Patent had been infringed by Emulex. The ‘150 Patent, particularly Claim 8 considered at the trial, pertains to the use of multiple lanes of phase interpolators, and products that utilize clock and data recovery (CDR) circuits in SerDes modules on an application specific integrated circuit (ASIC). The ‘691 Patent, particularly Claim 7 considered at the trial, pertains to Fibre Channel arbitrated loop switch crossbars and scoreboards, and products that utilize specialized ASICs used in storage arrays and pass-through modules. The Company filed an appeal for both the ‘150 Patent and ‘691 Patent infringement findings with the U.S. Court of Appeals for the Federal Court (Appeals Court), who affirmed the jury’s and District Court’s findings.

On March 16, 2012, the District Court issued a decision concerning injunctive relief for the ‘150 and ‘691 patents. The decision provided, in part, for a sunset period of 18 months relating to the ‘150 patent, starting on October 12, 2011. The decision further provided for a sunset period of 18 months relating to the ‘691 patent, starting on December 16, 2011. The affected products for the ‘150 patent include the BE2, BE3, XE201, and SOC 442 ASICs, and products containing them, and products not colorably different from them. The affected products for the ‘691 patent include the SOC 320, SOC 422, and SOC 442 ASICs, products containing them, and products not colorably different from them. The sunset period allows the Company to sell the affected products to existing customers for specific customer devices, subject to limitations relating to when the products had been qualified and when certain firm orders had been placed. The decision further provided for the Company to pay a royalty of nine percent on all sales of such products made during the sunset period, and also provided that foreign sales (outside the U.S.) are beyond the scope of the suit. On April 3, 2012, the District Court issued a permanent injunction (2012 Permanent Injunction) which, with respect to both the ‘150 and ‘691 patents, further describe the prohibited activities, contain sunset provision terms including royalty rates and computations, limit the territory to allow sales of products that are manufactured outside the U.S. to customers located outside the U.S., permit design around efforts including modifications and design, development, and testing to eliminate infringement, and permit service and technical support for certain products.

On May 30, 2012, the District Court issued an order requiring the parties to submit the Appendix to the 2012 Permanent Injunction, and excluded from the sunset provision any customer who is a distributor and not an OEM, with distributor exceptions for needs of an end user affecting health of the public, public safety, and governmental agencies engaged in the national defense. The May 30, 2012, order provided that, not later than 90 days from the date of that order, Broadcom may move the District Court for exclusion of certain device/customer product combinations from the Appendix. An Appendix was filed by Emulex and Broadcom with the District Court under seal on June 10, 2012. The current Permanent Injunction permits major OEMs to obtain continued supply beyond the sunset period, providing them time to re-qualify products resulting from the design around efforts.

On July 3, 2012, Broadcom and the Company entered into a Patent License and Release Agreement (Settlement Agreement) pursuant to which both parties agreed to settle and release certain claims related to the patent infringement litigation in exchange for a lump sum payment of approximately $58.0 million. The Settlement Agreement provided for certain amendments to the 2012 Permanent Injunction, and dismissals of certain allegations of the lawsuit, including portions of the scheduled re-trial. The Company also received a worldwide limited license to the ‘691 patent, the ‘150 patent, the ‘194 patent

13

and related families for certain fields of use including Fibre Channel applications. The fields of use licensed to Emulex are related, in part, to the Emulex XE201 (Lancer) ASICs, that are capable of Fibre Channel and Ethernet, 16Gbps Fibre Channel HBAs, Fibre Channel SOCs and other Fibre Channel products. On July 18, 2012, pursuant to the Settlement Agreement, the District Court issued an amended Permanent Injunction with an amended appendix, and approved a stipulation to dismiss certain allegations in the lawsuit. The amended Permanent Injunction provides for a sunset provision under which the injunction was stayed until April 11, 2013, subject to limitations. The current Permanent Injunction permits certain major OEMs to obtain continued supply beyond the sunset period, providing them time to re-qualify products resulting from the design around efforts.

During the first quarter of fiscal 2013, the Company made a payment of approximately $58.0 million to Broadcom pursuant to the Settlement Agreement, approximately $36.8 million of which was expensed in fiscal 2012. The remainder of approximately $21.2 million was recorded as prepaid license fees and is being amortized to cost of goods sold over the ten year license term in proportion to the estimated future revenues of such licensed technology. As of December 29, 2013, the unamortized prepaid license fee was approximately $15.1 million, of which approximately $3.9 million was recorded in prepaid expenses and other current assets and approximately $11.2 million was recorded in other assets. The Company recognized amortization expense related to such prepaid license fees of approximately $1.0 million and $2.0 million during both the three and six months ended December 29, 2013 and December 30, 2012, respectively.

While the Company has contractual commitments from its suppliers concerning the defense and indemnification of certain Broadcom claims relating to certain technology provided by such suppliers, it cannot be certain that such defense and indemnification obligations will be honored by such suppliers. This lawsuit continues to present risks with respect to U.S. sales of certain Ethernet products that could have a material adverse effect on the Company’s business, financial condition, or results of operations, including loss of patent rights, monetary damages, potential reimbursement of customer indemnification liabilities or royalty obligations, and injunction against the sale of accused products. The Company continues to present a vigorous defense against this on-going lawsuit, as well as the previous infringement verdicts, damages and judgments. Through December 29, 2013, the Company has incurred approximately $15.6 million of mitigation, product redesign and appeal related expenses, of which approximately $0.9 million and $3.4 million were recorded during the three and six months ended December 29, 2013, respectively. The Company expects to incur incremental mitigation, product redesign, appeal related expenses during the remainder of fiscal 2014 in the range of $2 million to $4 million. In addition, engineering and development costs will include expenses for activities to redesign, design around, modify, design, develop, test and requalify certain of the affected products, and to implement the end of life processes in the U.S. for certain other affected products. Sales and marketing costs are likely to include expenses for customer support, pre-production samples, education and training, and other miscellaneous costs. General and administrative costs will include expenses for the Company’s appeal of the previous verdicts and judgments. In addition, the Company has agreed to participate in certain customer royalty obligations arising under license agreements with Broadcom with respect to the infringing products. Through December 29, 2013, the Company has recorded approximately $2.7 million in cost of sales related to such customer obligations, of which approximately $1.3 million and $1.8 million were recorded in cost of sales for the three and six months ended December 29, 2013, respectively. The Company may incur additional amounts related to these obligations in the range of $1 million to $4 million during the remainder of fiscal 2014, all of which will reduce gross margins in the periods accrued.

On December 17, 2013, the District Court announced that the jury retrial related to the ‘194 patent family, all of which pertain to circuitry used to deserialize signals, shall proceed during September 9 - 16, 2014. The Company is currently unable to determine whether any further loss will occur related to the ongoing portion of this litigation or to estimate the range of any such further loss.

In addition to the ongoing litigation discussed above, the Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of the open matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

Commitments and Contingencies

As of December 29, 2013, the Company has approximately $42.7 million of liabilities for uncertain tax positions for which reasonable reliable estimate of the period of payment cannot be made. See Note 12.

Emulex provides letters of credit or bank guarantees in the normal course of business as required by certain vendors. As of December 29, 2013, there were approximately $0.7 million in outstanding letters of credit and bank guarantees of which approximately $0.2 million were secured by restricted cash deposits that have been classified within prepaid expenses and other current assets in the accompanying balance sheet. Approximately $0.5 million of outstanding letters of credit and bank guarantees are not secured.

In addition, the Company provides limited indemnification in selected circumstances within its various customer contracts whereby the Company indemnifies the parties to whom it sells its products with respect to the Company’s product

14

infringement of certain intellectual property, and in some limited cases against bodily injury or damage to real or tangible personal property caused by a defective Company product. It is not possible to predict the maximum potential amount of future payments under these or similar agreements, due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. As of December 29, 2013, the Company has not incurred any significant costs related to contractual indemnification of its customers.

9. Convertible Senior Notes

In November 2013, the Company issued $175.0 million aggregate principal amount of 1.75% Convertible Senior Notes due November 15, 2018 ("2018 Notes") in a private placement offering at a price equal to 100% of the principal amount thereof. Interest is payable semi-annually in arrears on May 15 and November 15 of each year, commencing May 15, 2014. The Company may be required to pay additional interest upon occurrence in certain events as outlined in the indenture governing the 2018 Notes. The 2018 Notes are unsecured and rank senior to the Company's future indebtedness that is expressly subordinated to the 2018 Notes, equal with existing and future indebtedness that are not so subordinated and junior to any future secured indebtedness, all existing and future debt and other liabilities of the Company's subsidiaries. As of December 29, 2013, the remaining term of the 2018 Notes is 4.9 years.

The 2018 Notes are convertible, subject to certain conditions, into shares of the Company's common stock at an initial conversion price of approximately $10.30 per share, or 97.13 shares of the Company's common stock per $1,000 in principal amount of the 2018 Notes. The conversion rate is subject to adjustment for certain events as outlined in the indenture governing the 2018 Notes. On or prior to August 15, 2018, holders may convert their 2018 Notes at their option under the following circumstances: (1) during any fiscal quarter after December 29, 2013, if the closing price of the Company's common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of 2018 Notes was less than 98% of the product of the last reported sale price of the Company's common stock and the applicable conversion rate on such date; or (3) upon the occurrence of certain corporate transactions or specified distributions described in the indenture. Upon conversion, the principal amount of the 2018 Notes will be paid in cash and the conversion spread will be paid in shares or cash at the Company’s election. As of December 29, 2013, the “if-converted” value of the 2018 Notes did not exceed its principal amount and none of the conditions allowing holders of the 2018 Notes to convert had been met.

The Company may not redeem the 2018 Notes prior to maturity. However, in the event of a fundamental change, as defined in the indenture, the holders of the 2018 Notes have the option to require the Company to repurchase all or a portion of their 2018 Notes at a purchase price equal to 100% of the principal amount of the 2018 Notes, plus accrued and unpaid interest. Holders who convert their 2018 Notes in connection with a make-whole fundamental change, as defined in the indenture, may be entitled to an increase in the conversion rate.

The Company evaluated the terms of the embedded stock conversion option, and concluded that the conversion option is indexed to the Company's stock. Accordingly, the conversion option is not accounted for separately as a derivative.

At the date of issuance, the Company separated the 2018 Notes into its liability and equity components. The liability component was determined by measuring the fair value of a similar instrument excluding the conversion feature. The equity component, which reflects the value of the conversion feature at issuance, was recognized as the difference between the proceeds from the issuance of the 2018 Notes and the fair value of the liability component, and recorded as additional paid-in capital. The excess of the principal amount of the liability component over its carrying amount of approximately $32.0 million is being amortized to interest expense over the term of the 2018 Notes, using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions of equity classification.

The Company recorded total issuance costs of approximately $5.2 million, which have been allocated on a pro-rata basis to the debt and equity components, consistent with the allocation of the 2018 Notes. The debt issuance costs attributable to the liability component of approximately $4.3 million were recorded in other assets and are being amortized over the term of the 2018 Notes. The debt issuance costs attributable to the equity component of approximately $0.9 million were netted against the equity component of the 2018 Notes and recorded as a reduction to additional paid-in capital. Debt issuance costs, net of amortization, were approximately $4.2 million as of December 29, 2013.

The carrying values of the liability and equity components of the 2018 Notes consisted of the following as of December 29, 2013:

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	(in thousands)
Liability component:
Principal amount	$	175,000
Less: Unamortized debt discount	(31,333		)
Net carrying amount	143,667
Equity component	$	31,063

The total fair value of the 2018 Notes at December 29, 2013 was $169.9 million, which was estimated based on recent market transaction prices, a Level 2 fair value measurement (Note 3).

The following table sets forth total interest expense recognized related to the 2018 Notes during the three and six months ended December 29, 2013:

	(in thousands)
Contractual coupon interest expense	$	383
Amortization of debt issuance costs	79
Accretion of debt discount	686
Total	$	1,148
Effective interest rate	6.61		%

10. Share Repurchase Programs

In November 2013, the Company's Board of Directors approved a $200.0 million share repurchase program that superseded the existing share repurchase program authorized in August 2008. The share repurchases are authorized to be completed through the combination of individually negotiated transactions, accelerated share buybacks, and open market purchases.

On November 13, 2013, the Company entered into an accelerated share buyback agreement ("ASB") with Goldman, Sachs & Co. (Goldman Sachs) to repurchase an aggregate of approximately $44.3 million of outstanding common stock. The ASB is expected to be completed by May 2014. Under the ASB, the Company paid approximately $44.3 million to Goldman Sachs on November 18, 2013, and Goldman Sachs delivered to the Company approximately 4.6 million shares of common stock, reflecting 80% of the $44.3 million paid. For accounting purposes, the ASB is considered a treasury stock purchase for the initial shares delivered, and a forward contract indexed to the Company's common stock, for the shares to be delivered under the ASB. The forward contract is not required to be separately accounted for as a derivative. The Company accounted for the 4.6 million shares delivered as treasury stock, which reduced the outstanding common shares used to calculate basic and diluted EPS. The 20% holdback, approximately $8.9 million, was recorded in additional paid-in capital, which will be reclassified to treasury stock as the remaining shares are delivered. Upon final settlement of the ASB, the Company may receive additional shares or pay additional cash or shares (at the Company's option), based on the daily volume weighted average market price (VWAP) of the Company’s common stock over the course of a calculation period, less a discount, and is subject to certain adjustments under the ASB. Increases in the VWAP during the remaining ASB term will decrease the shares to be delivered to the Company by Goldman Sachs, or could result in cash or shares delivered by the Company to Goldman Sachs, while decreases in the daily VWAP during the remaining ASB term will increase the shares to be delivered to the Company by Goldman Sachs. Upon final settlement, outstanding shares will be adjusted to reflect the final shares delivered by the Company or Goldman Sachs, and amounts settled in cash by the Company, if any, will be recorded to treasury stock. The ASB is subject to customary termination and adjustment provisions following the occurrence of specified events, including major corporate transactions such as announcements of mergers and acquisitions.

During both the three and six months ended December 29, 2013, the Company repurchased approximately 11.8 million shares, at an average price of $7.74, for a total of approximately $91.1 million, recorded as treasury stock, which included the 4.6 million shares repurchased through the ASB for approximately $35.4 million and approximately 7.2 million shares through individually negotiated transactions for approximately $55.7 million.

As of December 29, 2013, approximately $100.0 million remains under the authorized repurchase program (exclusive of the remaining unsettled forward amount of the ASB).

11. Stock-Based Compensation

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The assumptions used to compute the fair value of stock option grants under the 2005 Equity Incentive Plan (Equity Incentive Plan) for the three and six months ended December 29, 2013 and December 30, 2012 were:

	Three Months Ended			Six months ended
	December 29, 2013	December 30, 2012	(1)	December 29, 2013	December 30, 2012
Expected volatility	38% - 42%	N/A		37% - 42%	46% - 48%
Weighted average expected volatility	40%	N/A		39%	47%
Expected dividends	—%	N/A		—%	—%
Expected term (in years)	3.83 - 5.83	N/A		3.83 - 5.83	3.77 - 5.77
Weighted average expected term (in years)	4.67	N/A		4.68	4.61
Risk-free rate	1.07% - 1.78%	N/A		1.07% - 2.04%	0.53% - 0.94%

(1) No options were granted during the three months ended December 31, 2012.

The assumptions used to compute the fair value of the compensatory element related to the shares to be purchased under the Emulex Corporation Employee Stock Purchase Plan (Purchase Plan) for the three and six months ended December 29, 2013 and December 30, 2012 were:

	Three Months Ended		Six months ended
	December 29, 2013	December 30, 2012	December 29, 2013	December 30, 2012
Expected volatility	30%	45%	30%	45%
Expected dividends	—%	—%	—%	—%
Expected term (in years)	0.49	0.49	0.49	0.49
Risk-free rate	0.08%	0.16%	0.08%	0.16%

A summary of stock-based compensation expense, by functional line item in the condensed consolidated statements of operations is as follows:

	Three Months Ended				Six months ended
	December 29, 2013		December 30, 2012		December 29, 2013		December 30, 2012
	(in thousands)
Cost of goods sold	$	147	$	181	$	236	$	496
Engineering and development	1,132		2,214		3,036		4,912
Sales and marketing	874		941		2,076		1,686
General and administrative	1,591		2,039		2,968		3,835
	$	3,744	$	5,375	$	8,316	$	10,929

A summary of stock option activity for the six months ended December 29, 2013 is as follows:

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
					(in years)	(in millions)
Options outstanding at June 30, 2013	4,220,262		$	12.28	2.47	$	0.6
Options granted	148,324		$	7.71
Options exercised	(65,586	)	$	4.83
Options expired	(833,142	)	$	19.13
Options forfeited	(45,875	)	$	7.66
Options outstanding at December 29, 2013	3,423,983		$	10.62	2.45	$	0.5
Options vested and expected to vest at December 29, 2013	3,392,376		$	10.65	2.41	$	0.5
Options exercisable at December 29, 2013	2,886,304		$	11.22	1.96	$	0.4

A summary of outstanding and unvested stock awards activity for six months ended December 29, 2013 is as follows:

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	Number of Awards		Weighted Average Grant Date Fair Value
Awards outstanding at June 30, 2013	3,413,522		$	7.74
Awards granted	1,019,294		$	7.86
Awards vested	(1,215,420	)	$	8.14
Awards canceled / forfeited	(398,952	)	$	7.73
Awards outstanding at December 29, 2013	2,818,444		$	7.54
Awards vested and expected to vest at December 29, 2013	2,589,881

The Company also grants stock awards that will be settled in cash upon vesting (Cash-Settled Unit Awards), and accordingly, are liability classified and remeasured at each reporting date until the awards are settled. The Cash-Settled Unit Awards vest 30%, 30%, and 40% on the first, second and third anniversaries of the date of grant, respectively. Some of these awards are also tied to the achievement of certain performance goals established by the Board of Directors. As of December 29, 2013, the liability related to Cash-Settled Unit Awards was approximately $1.4 million.

A summary of Cash-Settled Unit Award activity for the six months ended December 29, 2013 is as follows:

	Number of Awards		Weighted Average Grant Date Fair Value
Awards outstanding at June 30, 2013	552,723		$	7.41
Awards granted	4,242		$	7.74
Awards vested	(106,862	)	$	7.74
Awards canceled / forfeited	(20,711	)	$	7.47
Awards outstanding at December 29, 2013	429,392		$	7.33
Awards vested and expected to vest at December 29, 2013	394,295

As of December 29, 2013, there was approximately $13.5 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans. Such cost is expected to be recognized over a weighted-average period of approximately 1.3 years.

12. Income Taxes

The Company has provided for income taxes in fiscal 2014 interim periods based on the estimated effective income tax rate for the complete fiscal year using the dual rate method. Accordingly, the ordinary U.S. loss and related tax benefit has been excluded from the overall effective tax rate computation. For fiscal 2013 interim periods, the Company provided for income taxes based on the year-to-date actual effective income tax rate as of the end of each interim period. The income tax provision is computed on the pretax income of the consolidated entities located within each taxing jurisdiction based on legislation enacted as of the balance sheet date. Deferred tax assets and liabilities are determined based on the future tax consequences associated with temporary differences between income and expenses reported for accounting and tax purposes. A valuation allowance for deferred tax assets is recorded to the extent that the Company cannot determine that the ultimate realization of the net deferred tax assets is more likely than not.

Realization of deferred tax assets is principally dependent upon the achievement of future taxable income, the estimation of which requires significant management judgment. The Company’s judgment regarding future profitability may change due to many factors, including future market conditions and the Company’s ability to successfully execute its business plans or tax planning strategies. These changes, if any, may require material adjustments to these deferred tax asset balances. Due to uncertainties surrounding the realization of the Company’s U.S. federal and state deferred tax assets, the Company previously recorded a full valuation allowance against these deferred tax assets. On a quarterly basis, the Company reassesses the need for these valuation allowances based on operating results and its assessment of the likelihood of future taxable income and developments in the relevant tax jurisdictions. The Company continues to maintain a full valuation allowance as of December 29, 2013 against U.S. federal and state deferred tax assets.

As of December 29, 2013, the liability for income taxes associated with uncertain tax positions was approximately $42.7 million for which a reasonably reliable estimate for the period of payment cannot be made. If fully recognized, approximately $29.5 million of such liability would impact the Company’s effective tax rate. Absent any resolution of the on-going audit by

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the Internal Revenue Service (IRS) discussed below, the Company does not expect that the liability for unrecognized tax benefits will change significantly within the next 12 months.

The Company’s federal income tax returns for fiscal years 2008 to 2012 and California income tax returns for fiscal years 2008 to 2012 are open as the statutes of limitations have not yet expired or have been extended. The Company’s federal income tax returns for fiscal years 2008 and 2009 are currently under examination by the IRS. Additionally, the IRS is examining an amended return filed for fiscal year 2007. The Company’s California income tax returns for fiscal years 2008 and 2009 are currently under examination by the California Franchise Tax Board. The Company is also currently under audit by various state and international taxing authorities.

During the quarter ended December 29, 2013, the Company received an IRS Notice of Proposed Adjustment (NOPA) related to Code Section 199 deductions claimed by the Company in fiscal year 2008. Subsequent to quarter end, the Company received a NOPA related to the amount of "buy-in-payments" made by one of its international subsidiaries to the Company in connection with the cost-share agreement entered into by the Company and its international subsidiary in fiscal year 2008. The incremental tax liability asserted in these NOPAs is approximately $70.0 million, excluding interest and penalties. The Company disagrees with the IRS' proposed adjustments and the basis for its positions, and plans to vigorously contest these issues. While the Company strives to resolve open matters with each tax authority at the lowest administrative level, it may decide to challenge the proposed adjustments by exercising its right to administratively appeal to the IRS Appeals Office.

The Company has previously accrued for what it believes are adequate amounts of tax and related interest, if any, that may result from these state and federal examinations. Such accruals are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations with tax authorities, identification of new issues, and issuance of new regulations or case law. If the ultimate resolution of these audits are substantially different from the Company’s estimate of any potential associated liabilities, the resulting audit adjustments could have a material adverse effect on Emulex’s tax provision, net income/(loss) and cash flows.

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13. Net (Loss) Income Per Share

The following table sets forth the computation of basic and diluted net (loss) income per share:

	Three Months Ended						Six Months Ended
	December 29, 2013			December 30, 2012			December 29, 2013			December 30, 2012
	(in thousands, except per share data)
Numerator
Net (loss) income	$	(4,027	)	$	5,583		$	(7,668	)	$	6,240
Less: Undistributed earnings allocated to participating securities	—			(3		)	—			(3		)
Undistributed earnings allocated to the Company’s common stockholders for basic net (loss) income per share	$	(4,027	)	$	5,580		$	(7,668	)	$	6,237
Add: Adjustment for interest expense on convertible senior notes, net of tax	—			—			—			—
Undistributed earnings allocated to the Company’s common stockholders for diluted net (loss) income per share	(4,027		)	5,580			(7,668		)	6,237
Denominator:
Denominator for basic net (loss) income per share - weighted average shares outstanding	86,881			90,063			89,162			89,705
Effect of dilutive securities:
Dilutive options outstanding, unvested stock units, and ESPP	—			1,753			—			1,932
Dilutive common shares from the conversion spread of convertible senior notes	—			—			—			—
Dilutive common shares from forward contract of the accelerated share buyback (ASB)	—			—			—			—
Denominator for diluted net (loss) income per share - adjusted weighted average shares outstanding	86,881			91,816			89,162			91,637
Basic net (loss) income per share	$	(0.05	)	$	0.06		$	(0.09	)	$	0.07
Diluted net (loss) income per share	$	(0.05	)	$	0.06		$	(0.09	)	$	0.07
Antidilutive options and unvested stock excluded from the computations	5,281			4,373			5,623			4,294

The antidilutive stock options and unvested stock were excluded from the computation of diluted net income per share due to the assumed proceeds from the award’s exercise or vesting being greater than the average market price of the common shares or due to the Company incurring a net loss in the periods presented.

As the principal amount of the 2018 Notes (Note 9) will be settled in cash upon conversion, only the conversion spread relating to the 2018 Notes will be included in the calculation of diluted net income per common share. As such, the 2018 Notes will have no impact on diluted net income per common share until the price of the Company's common stock exceeds the conversion price (initially $10.30, subject to adjustments) of the 2018 Notes. When the market price of the Company's stock exceeds the conversion price, the effect of the additional shares that may be issued upon conversion of the 2018 Notes will be included in the diluted net income per common share calculation. During the three and six month periods ended December 29, 2013, there were no anti-dilutive shares resulting from the 2018 Notes as the price of the Company's common stock did not exceed the conversion price. The forward contract component of the ASB (Note 10) was not in a dilutive position as of December 29, 2013 and accordingly, there were no antidilutive shares resulting from the ASB during the three and six month periods ended December 29, 2013.

14. Operating Segment Information

Emulex has two reportable business segments, Connectivity (formerly referred to as Networking) and Visibility. The Visibility segment was formed as a result of the acquisition of Endace on February 26, 2013. The Connectivity segment

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includes the operating results of Network Connectivity Products (NCP) and Storage Connectivity and Other Products (SCOP). The Visibility segment includes the operating results of Network Visibility Products (NVP) resulting from the Endace acquisition.

The chief operating decision maker measures the performance of each of these segments based on adjusted operating results. The operating results of each segment are adjusted for certain expenses and reflect an additional way of viewing aspects of the Company's operations, factors and trends. However, these measures should be considered as a supplement to, and not as a substitute for, or superior to, the corresponding measures calculated in accordance with accounting principles generally accepted in the United States.

	Three Months Ended						Six Months Ended
	December 29, 2013			December 30, 2012			December 29, 2013			December 30, 2012
	(in thousands)
Net revenues:
Connectivity	$	113,348		$	122,145		$	218,083		$	241,412
Visibility	9,648			—			19,745			—
Consolidated net revenues	$	122,996		$	122,145		$	237,828		$	241,412
Adjusted operating (loss) income:
Connectivity	22,143			20,221			36,860			40,658
Visibility	(1,488		)	—			(2,732		)	—
Subtotal	20,655			20,221			34,128			40,658
Reconciling items:
Stock-based compensation	(3,744		)	(5,375		)	(8,316		)	(10,929		)
Amortization of intangibles	(7,842		)	(6,514		)	(15,606		)	(13,185		)
Patent litigation damages, license fees and royalties	(2,358		)	(958		)	(3,855		)	(1,950		)
Mitigation expenses related to the Broadcom patents	(930		)	(982		)	(3,449		)	(1,464		)
Restructuring activities	(7,450		)	—			(7,450		)	—
Other	80			(2,060		)	(293		)	(2,060		)
Reconciling items	(22,244		)	(15,889		)	(38,969		)	(29,588		)
Operating (loss) income	(1,589		)	4,332			(4,841		)	11,070
							December 29, 2013			June 30, 2013
							(in thousands)
Total assets:
Connectivity							$	634,973		$	549,443
Visibility							155,432			161,266
							$	790,405		$	710,709
Goodwill:
Connectivity							$	177,290		$	177,290
Visibility							71,229			71,229
							$	248,519		$	248,519

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

Emulex is a leader in network connectivity, monitoring and management solutions for global networks that support enterprise, cloud, government and telecommunications. During fiscal 2013, Emulex acquired 100% of the outstanding common stock of Endace Limited (Endace), a leading supplier of network visibility infrastructure products. Prior to the acquisition of Endace, Emulex operated within a single business segment. With the acquisition of Endace, Emulex formed the Visibility operating segment, which includes Network Visibility Products.

Emulex’s products enable end-to-end application visibility, optimization and acceleration in the data center. The Company’s Input/Output (I/O) connectivity products, including its line of ultra high-performance Ethernet and Fibre Channel-based connectivity products, have been designed into server and storage solutions from leading original equipment manufacturers (OEMs), including Cisco Systems, Inc. (Cisco), Dell Inc. (Dell), EMC Corporation (EMC), Fujitsu Ltd. (Fujitsu), Hewlett-Packard Company (Hewlett-Packard), Hitachi Data Systems (HDS), Huawei Technologies Company Ltd. (Huawei), International Business Machines Corporation (IBM), Network Appliance, Inc. (NetApp) and Oracle Corporation (Oracle), and can be found in the data centers of nearly all of the Fortune 1000. Emulex’s monitoring and management solutions, including its portfolio of network visibility and recording products, provide organizations with complete network performance management at speeds up to 100Gb Ethernet (100GbE).

We rely almost exclusively on OEMs and sales through distribution channels for the majority of our revenue. Our significant OEM customers include the world’s leading server and storage providers, including Cisco, Dell, EMC, Fujitsu, Hewlett-Packard, HDS, Hitachi Limited (Hitachi), Huawei, Intel Corporation (Intel), IBM, Lenovo, Micron Technology, Inc. (Micron), NEC Corporation (NEC), NetApp, Oracle, and Unisys Corporation (Unisys). Our significant distributors include ASI Computer Technologies, Inc. (ASI), Avnet, Inc. (Avnet), Digital China Technology Limited, Info X Distribution, LLC (Info X), Ingram Micro Inc. (Ingram Micro), SYNNEX Corporation (SYNNEX), and Tech Data Corporation (Tech Data). The market for networking infrastructure solutions is concentrated among large OEMs, and as such, a significant portion of our revenues are generated from sales to a limited number of customers.

As of December 29, 2013, we had a total of 1,176 employees.

Our corporate headquarters are located at 3333 Susan Street, Costa Mesa, California 92626. Our periodic and current reports filed with, or furnished to, the Securities and Exchange Commission pursuant to the requirements of the Securities and Exchange Act of 1934 are available free of charge through our website (www.emulex.com) as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission. The information on our website is not incorporated in this quarterly report on Form 10-Q. References contained herein to “Emulex,” the “Company,” the “Registrant,” “we,” “our,” and “us” refer to Emulex Corporation and its subsidiaries.

Business Operating Segments

With our acquisition of Endace, our network connectivity, monitoring and management solutions are now broken into two business operating segments consisting of three product lines. Beginning with the first quarter of fiscal 2014, our Connectivity Segment (formerly referred to as the Networking segment), which consists of legacy Emulex products, includes only two product lines - Network Connectivity Products (NCP) and Storage Connectivity and Other Products (SCOP). We believe that this new product line reporting is more consistent with how third party analysts view our addressable networking segment markets, and will provide a more transparent view of our business. Our Visibility Segment consists of our Network Visibility Products (NVP) that were acquired through the Endace acquisition.

Connectivity Segment Products:

NCP includes industry standard Fibre Channel and Ethernet-based solutions that provide server I/O and target storage array connectivity to create networks for mission-critical enterprise and cloud data centers. These products enable servers to reliably and efficiently connect to Local Area Networks (LANs), Storage Area Networks (SANs), and Network Attached Storage (NAS) by offloading data communication processing tasks from the server as information is delivered and sent to the network. Our NCP use industry standard protocols including Fibre Channel Protocol (FCP), Internet Protocol (IP), Transmission Control Protocol (TCP)/IP, internet Small Computer System Interface (iSCSI), Fibre Channel over Ethernet (FCoE), overlay networking standards including Network Virtualization using Generic Routing Encapsulation (NVGRE) and Virtual Extensible Local Area Network (VXLAN) and Remote Direct Memory Access (RDMA) over Converged Ethernet (RoCE). RoCE bring many of the same low-latency capabilities typically associated with InfiniBand (IB) to Ethernet networks. NVGRE and VXLAN support overlay networks, which is a computer network which is built on the top of another network. Our Ethernet-based products include OneConnect® Ethernet Adapters and Converged Network Adapters (CNAs) and Local Area Network (LAN) on Motherboard (LOM) application specific integrated circuits, and custom form factor solutions for OEM blade servers. These Ethernet-based products enable higher virtual machine (VM) densities, secure hybrid clouds with

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Virtual Network Fabrics, leverage a RoCE-based low latency architecture to deliver application acceleration, and provide an open application performance interface (API) that integrates with next generation software-defined networking (SDN) solutions. Our Fibre Channel-based products include LightPulse® Host Bus Adapters (HBAs), Fibre Channel application specific integrated circuits (ASICs) and custom form factor solutions for OEM blade servers.

SCOP includes Emulex InSpeed®, switch-on-a-chip (SOC) and backend connectivity, bridge, and router products, Pilot™ Integrated Baseboard Management Controllers (iBMCs), certain legacy products and other products and services. Many of these products are deployed inside storage arrays, tape libraries, and other storage appliances, connecting storage controllers to storage capacity, delivering improved performance, reliability, and connectivity. Such products use industry standard protocols including Fibre Channel, Serial Attached Small Computer Interface (SAS), and Serial Advanced Technology Attachment (SATA), and support the broadest range of Hard Disk Drive (HDD) and Solid State Disk (SSD) technologies. Our iBMC solutions revolutionized the industry for enterprise servers by integrating the BMC, super I/O, graphics controller and Remote Keyboard, Video, Mouse and Storage (KVMS) functionality into a single ASIC, providing significant cost savings to data center managers. Like a standard BMC, when embedded in a server system or appliance, the iBMC simplifies the management of the remote server systems and appliances, whether physical or virtual servers, thereby reducing operational costs.

Visibility Segment Products:

NVP consists entirely of the recently acquired Endace® family of network visibility products that address Networking Recording Market (NRM) for high speed networks. The EndaceProbe™ Intelligent Network Recorder (INR) captures, indexes and stores network traffic history in order to help organizations troubleshoot problems and respond to network security breaches. EndaceVision™ Network Visibility Software is a browser-based network traffic search engine that provides users with a unique ‘window’ into high speed networks. Through EndaceVision, users can search and receive packets of interest from anywhere across a globally distributed network of Endace systems through a single, browser-based user interface. The EndaceODE™ Open Application Platform is designed specifically to host packet-processing applications in managed data center environments. These flexible and scalable systems are used extensively by organizations that demand the very highest levels of packet capture accuracy and processing performance of their hosting platforms. EndaceAccess™ Network Visibility Head-End systems give organizations access to 40GbE and 100GbE network segments that they need to measure, monitor and protect their networks with industry standard 10Gp per/second capable monitoring and security tools. EndaceFlow™ NetFlow Generator Appliances are designed to specifically offload the work from network elements and deliver 100% accurate NetFlow in the right format to the tools that need to consume it. Underpinning all of the Endace family of network visibility and recording products are the EndaceDAG™ Data Capture Cards that are integrated into the EndaceProbe INR appliances and sold as stand-alone components for use in a wide range of monitoring and security systems.

For additional information about our operating segments, please see Note 14 in the accompanying notes to condensed consolidated financial statements under the caption “Operating Segment Information” in Part I, Item 1 of this Form 10-Q.

Business Combination

On February 26, 2013, the Company acquired 89.6% of the outstanding common stock and all of the outstanding stock options of Endace for cash consideration of approximately $110.4 million. As of April 25, 2013, we acquired the outstanding non-controlling interest for approximately $12.0 million and obtained ownership of 100% of Endace. Our consolidated financial statements include the results of operations for Endace commencing as of the acquisition date.

Endace is a New Zealand based company that was publicly traded on London AIM Stock Exchange as of February 26, 2013, and subsequently delisted effective March 27, 2013. Endace provides network visibility infrastructures including network monitoring appliances, network analytics software and ultra-high speed network access switching. Emulex’s software-defined convergence architecture and Endace’s network visibility infrastructure are expected to provide customers with new and innovative ways to solve the challenges of network complexity and ensure application-level performance at speeds of 10Gb and beyond. The ability of Endace’s network visibility technology to record, visualize and monitor network traffic provides customers with the ability to dynamically optimize application delivery across the infrastructure. The combination of Emulex’s and Endace’s technology is expected to provide customers the solutions to connect, monitor and manage high-performance networks.

See Note 2, "Business Combinations," in the notes to consolidated financial statements in Part IV, Item 15(a) of the Annual Report for the year ended June 30, 2013 on Form 10-K.

Product Redesign Activities and Potential Royalty Obligations

Broadcom Corporation (Broadcom) filed a consolidated patent infringement suit against us during fiscal 2010. After a nearly three week trial that ended October 6, 2011, the jury reached a partial verdict involving two out of the six patents. The

23

District Court determined that one of the patents (U.S. Patent 7,058,150) [the ‘150 patent] had been infringed by us, and the jury rendered an advisory verdict on October 12, 2011 to the District Court that it is not invalid, and awarded approximately $0.4 million in damages with respect to that patent. The jury reached a unanimous verdict of non-infringement on another patent relating to Emulex Fibre Channel switch products. A mistrial was declared concerning the remaining four patents for which no unanimous verdict was reached. On December 15, 2011, the District Court issued judgments as a matter of law (JMOL) that the two patents, on which the jury had rendered advisory verdicts, were not invalid. On December 16, 2011, the District Court issued an additional JMOL that one of the patents (U.S. Patent 7,471,691) [the ‘691 patent] had been infringed by us. On March 16, 2012, the District Court issued a decision concerning injunctive relief for the ‘150 and ‘691 patents. The decision provided, in part, for a sunset period of 18 months relating to the ‘150 patent, starting on October 12, 2011. The decision further provided for a sunset period of 18 months relating to the ‘691 patent, starting on December 16, 2011. The sunset period allowed us to sell the affected products to existing customers for specific customer devices, subject to limitations relating to when the products had been qualified and when certain firm orders had been placed. On April 3, 2012, the District Court issued a permanent injunction (2012 Permanent Injunction) which, with respect to both the ‘150 and ‘691 patents, further describe the prohibited activities, contain sunset provision terms including royalty rates and computations, limit the territory to allow sales of products that are manufactured outside the U.S. to customers located outside the U.S., permits design around efforts including modifications and design, development, and testing to eliminate infringement, and permits service and technical support for certain products.

Through December 29, 2013, we incurred approximately $15.6 million in mitigation, product redesign and appeal related expenses of which approximately $0.9 million and $3.4 million were recorded during the three and six months ended December 29, 2013, respectively. We expect to incur incremental mitigation, product redesign, appeal related expenses during the remainder of fiscal 2014 in the range of $2 million to $4 million. In addition, engineering and development costs will include expenses for activities to redesign, design around, modify, design, develop, test and requalify certain of our affected products, and to implement our end of life processes in the U.S. for certain other affected products. Sales and marketing costs are likely to include expenses for customer support, pre-production samples, education and training, and other miscellaneous costs. General and administrative costs will include expenses for our appeal of the previous verdicts and judgments. In addition, we have agreed to participate in certain customer royalty obligations arising under their licensing agreements with Broadcom related to certain Emulex infringing products. Through December 29, 2013, Emulex has recorded approximately $2.7 million in cost of sales related to such customer obligations, of which approximately $1.3 million and $1.8 million were recorded in cost of sales for the three and six months ended December 29, 2013. We may incur additional amounts related to these obligations in the range of $1 million to $4 million during the remainder of fiscal 2014, all of which would reduce gross margins in the periods accrued.

See Note 8 in the accompanying notes to condensed consolidated financial statements under the caption “Litigation” in Part I, Item 1 of this Form 10-Q.

Results of Operations

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements included elsewhere herein.

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	Percentage of Net Revenues
	Three Months Ended				Six Months Ended
	December 29, 2013		December 30, 2012		December 29, 2013		December 30, 2012
Net revenues	100	%	100	%	100	%	100	%
Cost of sales:
Cost of goods sold	34	%	36	%	34	%	37	%
Amortization of core and developed technology intangible assets	5	%	4	%	5	%	4	%
Patent litigation damages, injunction related royalties and technology license fees	2	%	1	%	2	%	1	%
Total cost of sales	41	%	41	%	41	%	42	%
Gross profit	59	%	59	%	59	%	58	%
Operating expenses:
Engineering and development	34	%	33	%	35	%	33	%
Selling and marketing	16	%	12	%	16	%	12	%
General and administrative	9	%	9	%	8	%	8	%
Amortization of other intangible assets	1	%	1	%	2	%	1	%
Total operating expenses	60	%	55	%	61	%	54	%
Operating (loss) income	(1	)%	4	%	(2	)%	4	%
Non-operating income (expense), net:
Interest income	—	%	—	%	—	%	—	%
Interest expense	(1	)%	—	%	—	%	—	%
Other income (expense), net	—	%	—	%	—	%	—	%
Total non-operating income (expense), net	(1	)%	—	%	—	%	—	%
(Loss) income before income taxes	(2	)%	4	%	(2	)%	4	%
Income tax provision (benefit)	1	%	(1	)%	1	%	2	%
Net (loss) income	(3	)%	5	%	(3	)%	2	%

Three months ended December 29, 2013, compared to three months ended December 30, 2012

Net Revenues. Net revenues for the three months ended December 29, 2013, increased slightly by approximately $0.9 million, or 1%, to approximately $123.0 million, compared to approximately $122.1 million for the three months ended December 30, 2012.

Net Revenues by Operating Segment and Product Line

Net revenues by operating segment and product line were as follows:

Net Revenues by Operating Segment and Product Line
	Three Months Ended   December 29, 2013		Percentage of Net Revenues		Three Months Ended   December 30, 2012		Percentage of Net Revenues		Increase/ (Decrease)			Percentage Change
Connectivity Segment:
Network Connectivity Products	$	87,205	71	%	$	96,132	79	%	$	(8,927	)	(9	)%
Storage Connectivity and Other Products	26,143		21	%	26,013		21	%	130			—	%
Total Connectivity Segment	113,348		92	%	122,145		100	%	(8,797		)	(7	)%
Visibility Segment:
Network Visibility Products	9,648		8	%	—		—	%	9,648			N/A
Total Net Revenues	$	122,996	100	%	$	122,145	100	%	$	851		1	%

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Connectivity segment revenues decreased by approximately 7% for the three months ended December 29, 2013 compared to the three months ended December 30, 2012, primarily due to continuing weakness in the server and storage technology markets resulting from continuing concern over the global macroeconomic climate as well as restrictions under the 2012 Permanent Injunction for certain products that have impeded our ability to sell such products in the U.S. to certain customers, including distributors, white box manufacturers and web giants.

NCP primarily consists of standup HBAs, mezzanine cards, I/O ASICs, LOMs, and UCNAs. Fibre Channel based products account for a majority of our NCP revenues, ranging from 70-80% of total NCP revenues. For the three months ended December 29, 2013, Fibre Channel based products decreased by approximately 15% primarily due to a decrease in units shipped of approximately 11% combined with a decrease in average selling price of approximately 5%. The decrease in Fibre Channel based products revenues was partially offset by the increase in Ethernet based products revenues. The increase in Ethernet based products revenues was primarily due to an increase in units shipped of approximately 30%, partially offset by a decrease in average selling price of approximately 10%.

SCOP primarily consists of InSpeed®, SOC, backend connectivity, bridge, router products, and Pilot™ iBMCs. Our SCOP revenues for the three months ended December 29, 2013 were consistent with the three months ended December 30, 2012. Notwithstanding the comparable revenues year over year, we expect our SCOP revenues to modestly decline during fiscal 2014, primarily related to a decline in revenues from bridging products.

The Visibility segment resulted from our acquisition of Endace on February 26, 2013 and consists solely of NVP. NVP revenues were approximately $9.6 million for the three months ended December 29, 2013 compared to no revenues for the three months ended December 30, 2012, and include network visibility and intelligent network recording products. Revenues from NVP systems, DAG cards, and service and support accounted for approximately 48%, 26% and 24%, respectively, of total NVP revenues for the three months ended December 29, 2013.

Net Revenues by Major Customers

In addition to direct sales, some of our larger OEM customers purchase or market products indirectly through distributors, resellers or other third parties. If these indirect sales are purchases of customer-specific models, we are able to track these sales. However, if these indirect sales are purchases of our standard models, we are not able to distinguish them by OEM customer. Customers whose direct net revenues, or total direct and indirect net revenues (including customer-specific models purchased or marketed indirectly through distributors, resellers and other third parties), exceeded 10% of our net revenues were as follows:

Net Revenues by Major Customers
	Direct Revenues				Total Direct and Indirect Revenues (2)
	Three Months Ended   December 29, 2013		Three Months Ended   December 30, 2012		Three Months Ended   December 29, 2013		Three Months Ended   December 30, 2012
Net revenue percentage (1)
OEM:
EMC	—		—		11	%	11	%
Hewlett-Packard	16	%	19	%	21	%	22	%
Hon Hai Precision Industry Co., Ltd. (Foxconn Technology Group) (3)	11	%	11	%	—		—
IBM	30	%	35	%	35	%	38	%

(1) Amounts less than 10% are not presented.

(2) Customer-specific models purchased or marketed indirectly through distributors, resellers, and other third parties are included with the OEM’s revenues in these columns rather than as revenue for the distributors, resellers or other third parties.

(3) Hon Hai Precision Industry Co., Ltd. is a contract manufacturer that performed manufacturing for some of our OEM customers.

Direct sales to our top five customers accounted for approximately 66% of total net revenues for the three months ended December 29, 2013, compared to approximately 74% for the three months ended December 30, 2012. Direct and indirect sales to our top five customers accounted for approximately 77% of total net revenues for the three months ended December 29, 2013, compared to approximately 83% for the three months ended December 30, 2012. Our net revenues from customers can be significantly impacted by changes to our customers’ business and their business models.

Net Revenues by Sales Channel

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Net revenues by sales channel were as follows:

Net Revenues by Sales Channel
(in thousands)	Three Months Ended   December 29, 2013		Percentage of Net Revenues		Three Months Ended   December 30, 2012		Percentage of Net Revenues		Increase/ (Decrease)			Percentage Change
OEM	$	102,235	83	%	$	110,174	90	%	$	(7,939	)	(7	)%
Distributions	16,424		13	%	11,896		10	%	$	4,528		38	%
End-users and Other	4,337		4	%	75		—		$	4,262		NM
Total net revenues	$	122,996	100	%	$	122,145	100	%	$	851		1	%

NM - not meaningful

The decrease in OEM net revenues for the three months ended December 29, 2013 compared to the three months ended December 30, 2012 reflected a decrease of approximately 10% in NCP revenues. The increase in distribution and end-users and other net revenues for the three months ended December 29, 2013 compared to the three months ended December 30, 2012 was primarily due to NVP net revenues generated through distribution partners and end-users related to our acquisition of Endace. We believe that a majority of our net revenues are driven by product certifications and qualifications with our OEM customers, which take products directly and indirectly through distribution and contract manufacturers. We view product certifications and qualifications as an important indicator of future revenue opportunities and growth for the Company. However, product certifications and qualifications do not necessarily ensure continued market acceptance of our products by our OEM customers. It is also very difficult to determine the future impact, if any, of product certifications and qualifications on our revenues.

Net Revenues by Geographic Territory

Our net revenues by geographic territory based on billed-to location were as follows:

Net Revenues by Geographic Territory
(in thousands)	Three Months Ended   December 29, 2013		Percentage of Net Revenues		Three Months Ended   December 30, 2012		Percentage of Net Revenues		Increase/(Decrease)			Percentage Change
Asia Pacific	$	71,169	58	%	$	73,610	60	%	$	(2,441	)	(3	)%
United States	34,012		28	%	31,151		26	%	2,861			9	%
Europe, Middle East, and Africa	17,176		14	%	15,941		13	%	1,235			8	%
Rest of the world	639		NM		1,443		1	%	(804		)	NM
Total net revenues	$	122,996	100	%	$	122,145	100	%	$	851		1	%

NM - not meaningful

The increases in United States (US) and Europe, Middle East, and Africa (EMEA) net revenues were primarily due to NVP net revenues generated from US and EMEA related to our acquisition of Endace. Although Asia Pacific net revenues decreased compared to the same period in the prior year, we expect our OEM customers will continue to migrate towards using contract manufacturers that are predominately located in Asia Pacific. However, since we sell to OEMs and distributors who ultimately resell our products to their customers, the geographic mix of our net revenues may not be reflective of the geographic mix of end-user demand or installations.

Gross Profit. Gross profit consists of net revenues less cost of sales. Our gross profit by segment was as follows (in thousands):

	Gross Profit
	Three Months Ended   December 29, 2013		Gross Profit Margin		Three Months Ended   December 30, 2012		Gross Profit Margin		Increase/(Decrease)			Percentage Change
Connectivity	$	66,261	58	%	$	71,566	59	%	$	(5,305	)	(1	)%
Visibility	6,029		62	%	—		—	%	6,029			NM
Total Gross Profit	$	72,290	59	%	$	71,566	59	%	$	724		—	%

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Cost of sales includes the cost of producing, supporting, and managing our supply of finished products. Approximately $0.1 million and $0.2 million of share-based compensation expense was included in the three months ended December 29, 2013 and December 30, 2012, respectively. Approximately $6.2 million and $5.1 million of amortization of technology intangible assets was included in cost of sales for the three months ended December 29, 2013 and December 30, 2012, respectively. Of these amounts, approximately $1.1 million of amortization of technology intangible assets for the three months ended December 29, 2013 related to Endace. Our consolidated gross margin percentage for the three months ended December 29, 2013 remained consistent with the three months ended December 30, 2012 due to favorable product mix that was offset by an increase in royalty expense of approximately $1.3 million related to the amended 2012 Permanent Injunction. We will continue to recognize amortization expenses for technology intangible assets over their remaining useful lives, patent license fees related to the Settlement Agreement over the remaining patent license term (which expires on July 1, 2020) and royalty expenses and other costs related to the amended 2012 Permanent Injunction and certain customer licensing agreements with Broadcom related to the amended 2012 Permanent Injunction. We expect our consolidated and Connectivity gross margin percentage to trend downward as the portion of our revenues generated from lower margin products increases in the future, and to the extent we commit to make additional reimbursements to customers for payments made under their licensing agreement with Broadcom. See Product Redesign Activities and Potential Royalty Obligations in this Part I, Item 2.

Engineering and Development. Engineering and development expenses consist primarily of salaries and related expenses for personnel engaged in the design, development and support of our products. These expenses also include third-party fees paid to consultants, prototype development expenses, and computer service costs related to supporting computer tools used in the design process. Engineering and development expenses were as follows (in thousands):

Engineering and Development
Three Months Ended   December 29, 2013		Percentage of Net Revenues		Three Months Ended   December 30, 2012		Percentage of Net Revenues		Increase/(Decrease)		Percentage Change
$	42,020	34	%	$	40,113	33	%	$	1,907	1	%

Engineering and development expenses increased from approximately $40.1 million during the three months ended December 30, 2012 to approximately $42.0 million for the three months ended December 29, 2013. Approximately $1.1 million and $2.2 million of share-based compensation expense was included in engineering and development costs for the three months ended December 29, 2013 and December 30, 2012, respectively. During the three months ended December 29, 2013, we recorded approximately $5.3 million in severance and contract termination costs. Product redesign expenses increased approximately $0.2 million related to our mitigation activities for the 2012 Permanent Injunction. The increase in engineering and development costs was partially offset by a decrease in new product development costs of approximately $1.9 million. We plan to continue to invest in engineering and development costs. In addition, due to the 2012 Permanent Injunction, we expect to continue to incur incremental engineering and development expenses to redesign our impacted products through fiscal 2014.

Selling and Marketing. Selling and marketing expenses consist primarily of salaries, commissions, and related expenses for personnel engaged in the marketing and sales of our products, as well as samples, trade shows, product literature, promotional support costs, and other advertising related costs. Sales and marketing expenses were as follows (in thousands):

Selling and Marketing
Three Months Ended   December 29, 2013		Percentage of Net Revenues		Three Months Ended   December 30, 2012		Percentage of Net Revenues		Increase/(Decrease)		Percentage Change
$	19,849	16	%	$	14,769	12	%	$	5,080	4	%

Selling and marketing expenses for the three months ended December 29, 2013 compared to the three months ended December 30, 2012 increased by approximately $5.1 million, or 34%. Approximately $0.9 million of share-based compensation expense was included in selling and marketing costs for both the three months ended December 29, 2013 and December 30, 2012. Selling and marketing headcount increased from 158 at December 30, 2012 to 213 at December 29, 2013. Approximately $3.1 million of salary and related expenses and 77 of the increase in selling and marketing headcount were associated with the Endace acquisition. Advertising expenses also increased approximately $1.5 million and severance costs were approximately $0.7 million at December 29, 2013.

General and Administrative. Ongoing general and administrative expenses consist primarily of salaries and related expenses for executives, financial accounting support, human resources, administrative services, professional fees, and other corporate expenses. General and administrative expenses were as follows (in thousands):

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General and Administrative
Three Months Ended   December 29, 2013		Percentage of Net Revenues		Three Months Ended   December 30, 2012		Percentage of Net Revenues		Increase/(Decrease)			Percentage Change
$	10,407	9	%	$	10,987	9	%	$	(580	)	—	%

General and administrative expenses for the three months ended December 29, 2013 compared to the three months ended December 30, 2012 decreased by approximately $0.6 million, or 5%. Approximately $1.6 million and $2.0 million of share-based compensation expense was included in general and administrative costs for the three months ended December 29, 2013 and December 30, 2012, respectively. General and administrative expenses decreased due to approximately $2.1 million of legal and accounting fees related to the acquisition of Endace incurred in the prior year. The decrease was partially offset by an increase of approximately $1.6 million in salary and related expenses primarily due to severance costs of approximately $1.2 million and additional headcount related to the Endace acquisition. Approximately $0.5 million of the increase in salary and related expenses was associated with the Endace acquisition.

Amortization of Other Intangible Assets. Amortization of other intangible assets consists of amortization of intangible assets such as patents, customer relationships, and tradenames with estimable lives. Amortization expense was as follows (in thousands):

Amortization of intangible assets
Three Months Ended   December 29, 2013		Percentage of Net Revenues		Three Months Ended   December 30, 2012		Percentage of Net Revenues		Increase/(Decrease)		Percentage Change
$	1,603	1	%	$	1,365	1	%	$	238	—	%

Amortization of other intangible assets for the three months ended December 29, 2013 compared to the three months ended December 30, 2012 increased by approximately $0.2 million, or 17%. The increase was primarily due to the amortization of other intangible assets associated with assets acquired from Endace of approximately $0.3 million.

Non-operating Income (Expense), net. Non-operating income (expense), net, consists primarily of interest income, interest expense, and other non-operating income and expense items. Our non-operating income (expense), net, was as follows (in thousands):

Non-Operating Income (Expense), net
Three Months Ended   December 29, 2013			Percentage of Net Revenues		Three Months Ended   December 30, 2012			Percentage of Net Revenues		(Increase)/Decrease			Percentage Change
$	(1,267	)	(1	)%	$	(17	)	—	%	$	(1,250	)	(1	)%

Our non-operating expense, net, for the three months ended December 29, 2013 increased by approximately $1.3 million, compared to the three months ended December 30, 2012. The net increase was primarily due to interest expense and amortization of issuance costs and debt discount of approximately $1.1 million recorded for the three months ended December 29, 2013 related to the 2018 Notes issued in November 2013. See Note 9 in Part I, Item 1 of this Form 10-Q.

Income Tax Provision (Benefit). Income tax provision (benefit) was as follows (in thousands):

Income Tax Provision (Benefit)
Three Months Ended   December 29, 2013		Percentage of Net Revenues		Three Months Ended   December 30, 2012			Percentage of Net Revenues		Increase/(Decrease)		Percentage Change
$	1,171	1	%	$	(1,268	)	(1	)%	$	2,439	2	%

Income tax expense for the three months ended December 29, 2013 was approximately $1.2 million, for an effective rate of 41%, compared to income tax benefit of approximately $1.3 million during the three months ended December 30, 2012, for an effective rate of 29%. The change in our effective tax expense rate between years was primarily due to the use of an annualized effective tax rate for the three months ended December 29, 2013 compared to the use of an actual year-to-date effective tax rate for the three months ended December 30, 2012. In addition, since we generate the majority of our earnings in countries other than the U.S. our tax expense and effective tax rates also fluctuate due to changes in the mix of our earnings in our U.S. and various international jurisdictions.

Six months ended December 29, 2013, compared to six months ended December 30, 2012

Net Revenues. Net revenues for the six months ended December 29, 2013, decreased by approximately $3.6 million, or 1%, to approximately $237.8 million, compared to approximately $241.4 million for the six months ended December 30, 2012.

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Net Revenues by Operating Segment and Product Line

Net revenues by operating segment and product line were as follows:

Net Revenues by Operating Segment and Product Line
	Six Months Ended   December 29, 2013		Percentage of Net Revenues		Six Months Ended   December 30, 2012		Percentage of Net Revenues		Increase/ (Decrease)			Percentage Change
Connectivity Segment:
Network Connectivity Products	$	165,185	70	%	$	192,865	80	%	$	(27,680	)	(14	)%
Storage Connectivity and Other Products	52,898		22	%	48,547		20	%	4,351			9	%
Total Connectivity Segment	218,083		92	%	241,412		100	%	(23,329		)	(10	)%
Visibility Segment:
Network Visibility Products	19,745		8	%	—		—	%	19,745			N/A
Total Net Revenues	$	237,828	100	%	$	241,412	100	%	$	(3,584	)	(1	)%

Connectivity segment revenues decreased by approximately 10% for the six months ended December 29, 2013 compared to the six months ended December 30, 2012, primarily due to continuing weakness in the server and storage technology markets resulting from continuing concern over the global macroeconomic climate as well as restrictions under the 2012 Permanent Injunction for certain products that have impeded our ability to sell such products in the U.S. to certain customers, including distributors, white box manufacturers and web giants.

Fibre Channel based products account for a majority of our NCP revenues, ranging from 70-80% of total NCP revenues. For the six months ended December 29, 2013, Fibre Channel based products decreased by approximately 18%, primarily due to a decrease in units shipped of approximately 11% combined with a decrease in average selling price of approximately 8%. Ethernet based products revenues were consistent with the same period in the prior year. The comparable revenues in Ethernet based products revenue was primarily due to an increase in average selling price of approximately 16%, offset by an decrease in units shipped of approximately 14%.

Our SCOP revenues increased by approximately $4.4 million, or 9%, for the six months ended December 29, 2013 compared to the six months ended December 30, 2012, primarily due to an increase of approximately 9% in bridging products revenue as a result of an increase in average selling price of approximately 5% combined with an increase in units shipped of approximately 4%.

NVP revenues were approximately $19.7 million for the six months ended December 29, 2013 compared to no revenues for the six months ended December 30, 2012, and include network visibility and intelligent network recording products. Revenues from NVP systems, DAG cards, and service and support accounted for approximately 49%, 26% and 21%, respectively, of total NVP revenues for the six months ended December 29, 2013.

Net Revenues by Major Customers

Customers whose direct net revenues, or total direct and indirect net revenues (including customer-specific models purchased or marketed indirectly through distributors, resellers and other third parties), exceeded 10% of our net revenues were as follows:

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Net Revenues by Major Customers
	Direct Revenues				Total Direct and Indirect Revenues (2)
	Six Months Ended   December 29, 2013		Six Months Ended   December 30, 2012		Six Months Ended   December 29, 2013		Six Months Ended   December 30, 2012
Net revenue percentage (1)
OEM:
EMC	—		—		11	%	10	%
Hewlett-Packard	17	%	21	%	22	%	24	%
Hon Hai Precision Industry Co., Ltd. (Foxconn Technology Group) (3)	12	%	10	%	—		—
IBM	29	%	34	%	34	%	38	%

(1) Amounts less than 10% are not presented.

(2) Customer-specific models purchased or marketed indirectly through distributors, resellers, and other third parties are included with the OEM’s revenues in these columns rather than as revenue for the distributors, resellers or other third parties.

(3) Hon Hai Precision Industry Co., Ltd. is a contract manufacturer that performed manufacturing for some of our OEM customers.

Direct sales to our top five customers accounted for approximately 66% of total net revenues for the six months ended December 29, 2013, compared to approximately 74% for the six months ended December 30, 2012. Direct and indirect sales to our top five customers accounted for approximately 77% of total net revenues for the six months ended December 29, 2013, compared to approximately 83% for the six months ended December 30, 2012. Our net revenues from customers can be significantly impacted by changes to our customers’ business and their business models.

Net Revenues by Sales Channel

Net revenues by sales channel were as follows:

Net Revenues by Sales Channel
(in thousands)	Six Months Ended   December 29, 2013		Percentage of Net Revenues		Six Months Ended   December 30, 2012		Percentage of Net Revenues		Increase/ (Decrease)			Percentage Change
OEM	$	199,759	84	%	$	219,213	91	%	$	(19,454	)	(9	)%
Distributions	27,942		12	%	22,089		9	%	$	5,853		27	%
End-users and Other	10,127		4	%	110		—		$	10,017		NM
Total net revenues	$	237,828	100	%	$	241,412	100	%	$	(3,584	)	(1	)%

NM - not meaningful

The decrease in OEM net revenues for the six months ended December 29, 2013 compared to the six months ended December 30, 2012 reflected decreases of approximately 14% in NCP revenues. The increase in distribution and end-users and other net revenues for the six months ended December 29, 2013 compared to the six months ended December 30, 2012 was primarily due to NVP net revenues generated through distribution partners and end-users related to our acquisition of Endace.

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Net Revenues by Geographic Territory

Our net revenues by geographic territory based on billed-to location were as follows:

Net Revenues by Geographic Territory
(in thousands)	Six Months Ended   December 29, 2013		Percentage of Net Revenues		Six Months Ended   December 30, 2012		Percentage of Net Revenues		Increase/(Decrease)			Percentage Change
Asia Pacific	$	138,553	58	%	$	150,482	62	%	$	(11,929	)	(8	)%
United States	62,758		26	%	58,125		24	%	4,633			8	%
Europe, Middle East, and Africa	35,036		15	%	30,832		13	%	4,204			14	%
Rest of the world	1,481		1	%	1,973		1	%	(492		)	(25	)%
Total net revenues	$	237,828	100	%	$	241,412	100	%	$	(3,584	)	(1	)%

The increases in United States (US) and Europe, Middle East, and Africa (EMEA) net revenues were primarily due to NVP net revenues generated from US and EMEA related to our acquisition of Endace. Although Asia Pacific net revenues decreased compared to the same period in the prior year, we expect our OEM customers will continue to migrate towards using contract manufacturers that are predominately located in Asia Pacific. However, since we sell to OEMs and distributors who ultimately resell our products to their customers, the geographic mix of our net revenues may not be reflective of the geographic mix of end-user demand or installations.

Gross Profit. Gross profit consists of net revenues less cost of sales. Our gross profit by segment was as follows (in thousands):

	Gross Profit
	Six Months Ended   December 29, 2013		Gross Profit Margin		Six Months Ended   December 30, 2012		Gross Profit Margin		Increase/(Decrease)			Percentage Change
Connectivity	$	128,256	59	%	$	140,542	58	%	$	(12,286	)	1	%
Visibility	11,518		58	%	—		—	%	11,518			NM
Total Gross Profit	$	139,774	59	%	$	140,542	58	%	$	(768	)	1	%

Approximately $0.2 million and $0.5 million of share-based compensation expense was included in the six months ended December 29, 2013 and December 30, 2012, respectively. Approximately $12.4 million and $10.3 million of amortization of technology intangible assets was included in cost of sales for the six months ended December 29, 2013 and December 30, 2012, respectively. Of these amounts, approximately $2.1 million of amortization of technology intangible assets for the six months ended December 29, 2013 related to Endace. Our consolidated and Connectivity gross margin percentage for the six months ended December 29, 2013 was comparable to the six months ended December 30, 2012 due to favorable product mix that was offset by an increase in royalty expense of approximately $1.8 million related to the amended 2012 Permanent Injunction.

Engineering and Development. Engineering and development expenses were as follows (in thousands):

Engineering and Development
Six Months Ended   December 29, 2013		Percentage of Net Revenues		Six Months Ended   December 30, 2012		Percentage of Net Revenues		Increase/(Decrease)		Percentage Change
$	82,431	35	%	$	78,583	33	%	$	3,848	2	%

Engineering and development expenses increased from approximately $78.6 million during the six months ended December 30, 2012 to approximately $82.4 million for the six months ended December 29, 2013. Approximately $3.0 million and $4.9 million of share-based compensation expense was included in engineering and development costs for the six months ended December 29, 2013 and December 30, 2012, respectively. During the six months ended December 29, 2013, we recorded approximately $5.3 million of severance and contract termination costs. Product redesign expenses increased approximately $1.8 million related to our mitigation activities for the 2012 Permanent Injunction. The increase in engineering and development costs was partially offset by a decrease of approximately $1.5 million in new product development.

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Selling and Marketing. Sales and marketing expenses were as follows (in thousands):

Selling and Marketing
Six Months Ended   December 29, 2013		Percentage of Net Revenues		Six Months Ended   December 30, 2012		Percentage of Net Revenues		Increase/(Decrease)		Percentage Change
$	38,941	16	%	$	28,506	12	%	$	10,435	4	%

Selling and marketing expenses for the six months ended December 29, 2013 compared to the six months ended December 30, 2012 increased approximately $10.4 million, or 37%. Approximately $2.1 million and $1.7 million of share-based compensation expense was included in selling and marketing costs for the six months ended December 29, 2013 and December 30, 2012, respectively. Selling and marketing headcount increased from 158 at December 30, 2012 to 213 at December 29, 2013. Approximately $5.8 million of salary and related expenses and 77 of the increase in selling and marketing headcount were associated with the Endace acquisition. Performance-based compensation and advertising expense increased approximately $2.2 million and approximately $2.0 million, respectively, over the prior year period. Severance costs were approximately $0.7 million at December 29, 2013.

General and Administrative. General and administrative expenses were as follows (in thousands):

General and Administrative
Six Months Ended   December 29, 2013		Percentage of Net Revenues		Six Months Ended   December 30, 2012		Percentage of Net Revenues		Increase/(Decrease)		Percentage Change
$	20,036	8	%	$	19,495	8	%	$	541	—	%

General and administrative expenses for the six months ended December 29, 2013 remained consistent with the six months ended December 30, 2012. Approximately $3.0 million and $3.8 million of share-based compensation expense was included in general and administrative costs for the six months ended December 29, 2013 and December 30, 2012, respectively. Salary and related expenses increased approximately $2.6 million primarily due to severance costs of approximately $1.2 million and additional headcount related to the Endace acquisition. Approximately $1.0 million of salary and related expenses was associated with the Endace acquisition. Additionally, facilities expense increased approximately $1.6 million. This was partially offset by a decrease of approximately $1.8 million in legal and accounting fees related to the acquisition of Endace in the prior year and a decrease of approximately $0.6 million in legal costs related to our mitigation activities for the 2012 Permanent Injunction.

Amortization of Other Intangible Assets. Amortization expense was as follows (in thousands):

Amortization of intangible assets
Six Months Ended   December 29, 2013		Percentage of Net Revenues		Six Months Ended   December 30, 2012		Percentage of Net Revenues		Increase/(Decrease)		Percentage Change
$	3,207	2	%	$	2,888	1	%	$	319	1	%

Amortization of other intangible assets for the six months ended December 29, 2013 compared to the six months ended December 30, 2012 increased by approximately $0.3 million, or 11%. Approximately $0.6 million of the increase was due to amortization of other intangible assets associated with assets acquired from Endace. This was partially offset by a lower unamortized intangible assets balance at the beginning of the current six month period as a result of certain intangible assets being fully amortized in fiscal 2013.

Non-operating Income (Expense), net. Non-operating income (expense), net, was as follows (in thousands):

Non-Operating Income (Expense), net
Six Months Ended   December 29, 2013			Percentage of Net Revenues		Six Months Ended   December 30, 2012			Percentage of Net Revenues		(Increase)/Decrease			Percentage Change
$	(1,113	)	—	%	$	(359	)	—	%	$	(754	)	—	%

Our non-operating expense, net, for the six months ended December 29, 2013 increased by approximately $0.8 million, compared to the six months ended December 30, 2012. The net increase was primarily due interest expense and amortization of issuance costs and debt discount of approximately $1.1 million related to the 2018 Notes issued in November 2013. See Note 9 in Part I, Item 1 of this Form 10-Q.

Income Tax Provision (Benefit). Income tax provision (benefit) was as follows (in thousands):

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Income Tax Provision (Benefit)
Six Months Ended   December 29, 2013		Percentage of Net Revenues		Six Months Ended   December 30, 2012		Percentage of Net Revenues		Increase/(Decrease)			Percentage Change
$	1,714	1	%	$	4,471	2	%	$	(2,757	)	(1	)%

Income tax expense for the six months ended December 29, 2013 was approximately $1.7 million, for an effective rate of 29%, compared to approximately $4.5 million during the six months ended December 30, 2012, for an effective rate of 42%. The change in our effective tax expense rate between years was primarily due to tax expense of $2.3 million recognized in the first half of fiscal 2012 to adjust our U.S. valuation allowance to reduce the amount of deferred tax assets estimated to be recoverable in available carryback periods, and to a lesser extent, tax benefits recognized on Endace tax losses in fiscal 2014 and the use of an annualized effective tax rate for the six months ended December 29, 2013 compared to the use of an actual year-to-date effective tax rate for the six months ended December 30, 2012. In addition, since we generate the majority of our earnings in countries other than the U.S. our tax expense and effective tax rates also fluctuate due to changes in the mix of our earnings in our U.S. and various international jurisdictions.

We expect to continue to generate the majority of our earnings in countries other than the U.S. in the future, including India, Ireland, Isle of Man, and New Zealand where such earnings are generally subject to lower tax rates than the U.S. We have made no provision for U.S. income taxes or foreign withholding taxes on the earnings of our foreign subsidiaries as these amounts are intended to be indefinitely reinvested in operations outside of the U.S. As a result, we expect to recognize both a tax expense for fiscal 2014 and an annual effective tax benefit rate for fiscal 2014 of 13%, prior to discrete items, primarily due to U.S. tax losses recorded without tax benefits and the mix of earnings in international versus U.S. tax jurisdictions. As estimates and judgments are used to project the mix of earning in our various tax jurisdictions, our forecasted fiscal 2014 tax rate could vary significantly if the current planning or assumptions change. We also do not forecast discrete events, such as a settlement of tax audits with governmental authorities or changes in tax laws, due to their inherent uncertainty. Such discrete events could also materially impact our tax expense. As the tax rate is driven by various factors, it is not possible to estimate our future tax rate with a high degree of certainty.

Critical Accounting Policies

The preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States requires estimation and judgment that affect the reported amounts of net revenues, expenses, assets and liabilities. We regularly evaluate our estimates and assumptions related to our critical accounting policies including revenue recognition, sales related reserves, allowances for doubtful accounts, returns, inventory reserves, goodwill and purchased intangible asset valuations, deferred tax asset valuation allowances, uncertain tax positions, tax contingencies, stock-based compensation expense, litigation and other loss contingencies. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. Changes in judgments and uncertainties relating to these estimates could potentially result in materially different results under different assumptions and conditions. If these estimates differ significantly from actual results, the impact of our consolidated financial statements and future results of operations may be material. For a description of our critical accounting policies, please refer to “Critical Accounting Policies” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our fiscal 2013 Form 10-K. There have been no material changes in any of our critical accounting policies during the three months ended December 29, 2013.

Recently Adopted and Recently Issued Accounting Standards

None.

Liquidity and Capital Resources

Our principal sources of liquidity consist of our existing cash balances and investments, as well as funds expected to be generated from operations. At December 29, 2013, we had approximately $256.1 million in working capital and approximately $198.7 million in cash and cash equivalents as compared to approximately $167.7 million in working capital and approximately $105.6 million in cash and cash equivalents at June 30, 2013. We have historically maintained an investment portfolio of various security holdings, types, and maturities that meet credit quality standards in accordance with our investment guidelines. We limit our exposure to any one issuer or type of investment with the exception of U.S. Government issued or U.S. Government sponsored entity securities. Our investments portfolio balance was zero at December 29, 2013. We did not hold any auction rate securities or direct investments in mortgage-backed securities as of December 29, 2013.

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Our cash balances and investments are held in numerous locations throughout the world. As of December 29, 2013, our international subsidiaries held approximately 14% of our total cash, cash equivalents and investment securities, which will be used to repay obligations to U.S. affiliate entities that arise in the normal course of business and would not result in incremental U.S. tax liabilities when paid.

Cash Flow

The following table summarizes our cash flows:

	Six Months Ended
	December 29, 2013			December 30, 2012
	(in thousands)
Net cash provided by (used in) provided by:
Operating activities	$	33,534		$	(11,483	)
Investing activities	(10,006		)	19,741
Financing activities	69,351			(515		)
Effect of foreign currency translation on cash and cash equivalents	163			161
(Decrease) increase in cash and cash equivalents	$	93,042		$	7,904

Operating Activities

Cash provided by operating activities was approximately $33.5 million during the six months ended December 29, 2013 compared to cash used in operating activities of approximately $11.5 million during the six months ended December 30, 2012. The increase in cash flows from operating activities was primarily due to a payment of approximately $58.0 million related to the Settlement Agreement entered into with Broadcom on July 3, 2012. See Note 8 in Part I, Item 1 of this Form 10-Q. The current period cash provided by operating activities resulted from net loss of approximately $7.7 million, non-cash adjustments for amortization of intangible assets of approximately $15.6 million, depreciation and amortization of approximately $9.6 million and share-based compensation expense of approximately $8.3 million, and the timing of net working capital requirements. The current period cash provided by operating activities also benefited from higher tax refunds received by approximately $2.0 million in comparison to the six months ended December 30, 2012.

Investing Activities

Cash used in investing activities was approximately $10.0 million during the six months ended December 29, 2013 compared to cash provided by investing activities of approximately $19.7 million during the six months ended December 30, 2012. The current period usage of cash was primarily related to purchases of property and equipment of approximately $10.0 million. We currently expect a similar level of investment in property and equipment in the future to support our strategic objectives, although the timing may be impacted by certain project timelines and other factors. The prior period cash provided by investing activities benefited by approximately $40.7 million in maturities of investments. In the current period, there were no such investing type activities as prior investment balances were utilized for the Endace acquisition. See Note 2 in Part I, Item 1 of this Form 10-Q.

Financing Activities

Cash provided by financing activities was approximately $69.4 million during the six months ended December 29, 2013 compared to cash used of approximately $0.5 million during the six months ended December 30, 2012. During the six months ended December 29, 2013, we issued a total of approximately $175.0 million aggregate principal amount of 1.75% Convertible Senior Notes due November 2018. We also repurchased approximately 11.8 million of the Company's common shares and entered into an accelerated share repurchase forward contract for an aggregate of approximately $100.0 million. In connection with the Convertible Senior Notes, we incurred approximately $5.2 million of issuance costs.

Capital Resources and Prospective Needs

In November 2013, we issued a total of $175.0 million aggregate principal amount of 1.75% Convertible Senior Notes due November 2018 (2018 Notes). Interest is payable semi-annually in arrears on May 15 and November 15 of each year, commencing on May 15, 2014. The initial conversion rate is approximately 97.13 per share of our common stock per $1,000 principal amounts of the 2018 Notes. The initial conversion price is approximately $10.30 per share of our common stock. See Note 9 in Part I, Item 1 on this Form 10-Q. We used a portion of the net proceeds from the offering to repurchase approximately $91.1 million of our common stock at a price per share equal to $7.74. See Note 10 in Part I, Item 1 on this Form 10-Q. We intend to use the remaining net proceeds from the offering for additional share repurchases. In November 2013,

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our Board of Directors approved a $200.0 million share repurchase program. At December 29, 2013, we have the authority to repurchase an additional approximately $100.0 million pursuant to this authorization.

We plan to continue our cost savings program which has included simplifying our product portfolio, discontinuing additional lower return on investment programs, pursuing some consolidation opportunities and identifying further efficiencies which will accordingly impact our strategic investment in research and development, sales and marketing, capital equipment, and facilities. We may also consider internal and external investment opportunities in order to achieve our growth and market leadership goals, including licensing and product development alignment agreements with our suppliers, customers, and other third parties. We believe that our existing cash and cash equivalents, and anticipated cash flows from operating activities will be sufficient to support our working capital needs, capital expenditure requirements and stock repurchasing expenditures for at least the next 12 months and the foreseeable future based on currently known trends.

We have disclosed outstanding legal proceedings in Note 8 in the accompanying notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q, including the consolidated patent infringement lawsuit filed by Broadcom against us. This lawsuit continues to present risks that could have a material adverse effect on our business, financial condition, or results of operations, including loss of patent rights, monetary damages, and injunction against the sale of accused products. We continue to present a vigorous post-trial defense against this on-going lawsuit, and have appealed the trial verdict. On July 3, 2012, we entered into a Settlement Agreement pursuant to which both parties agreed to settle and release certain claims related to the patent infringement litigation. The Settlement Agreement provided for certain amendments to the April 3, 2012 Permanent Injunction, and dismissals of certain allegations of the lawsuit, including portions of the scheduled re-trial. We also received a worldwide limited license to the ‘691 patent, the ‘150 patent, the ‘194 patent and related families for certain fields of use including Fibre Channel applications.

We expect to incur incremental mitigation, product redesign, and appeal related expenses during the remainder of fiscal 2014 in the range of $2 million to $4 million. In addition, we continue to evaluate certain customer royalty obligations arising under their licensing agreements with Broadcom that could result in additional costs of $1 million to $4 million during the remainder of fiscal 2014. Such costs would reduce gross margins in the periods accrued. See “Product Redesign Activities and Potential Royalty Obligations” in Part I, Item 2 of this Form 10-Q. Also see “Third party claims of intellectual property infringement could adversely affect our business” and “We are dependent on sole source and limited source third party suppliers and EMS providers for our products” in Part II, Item 1A - Risk Factors, of this Form 10-Q for a description of certain risks relating to the litigation with Broadcom that could impact our liquidity and prospective capital needs.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As of December 29, 2013, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

We issue letters of credit or bank guarantees in the normal course of business as required by certain vendors. As of December 29, 2013, we had approximately $0.7 million in outstanding letters of credit and bank guarantees of which approximately $0.2 million were secured by restricted cash deposits that have been classified within prepaid expenses and other current assets in the accompanying balance sheet. Approximately $0.5 million of outstanding letters of credit and bank guarantees are not secured.

Contractual Obligations and Commercial Commitments

The following summarizes our contractual obligations as of December 29, 2013, and the effect such obligations are expected to have on our liquidity in future periods. The estimated payments reflected in this table are based on management’s estimates and assumptions about these obligations. Because these estimates and assumptions are necessarily subjective, the actual cash outflows in future periods will vary, possibly materially, from those reflected in the table.

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	Payments Due by Period (in thousands)
	Total		Remaining 2014		2015		2016		2017		2018		Thereafter
Debt (1)	$	175,000	$	—	$	—	$	—	$	—	$	—	$	175,000
Debt interest (2)	15,314		1,531		3,063		3,063		3,063		3,063		1,531
Leases (3)	20,301		3,507		5,832		4,784		2,951		2,220		1,007
Purchase commitments (4)	36,022		36,022		—		—		—		—		—
Other commitments (5)	12,018		6,891		3,621		1,506		—		—		—
Total (6)(7)	$	258,655	$	47,951	$	12,516	$	9,353	$	6,014	$	5,283	$	177,538

(1) See Note 9 in the accompanying notes to condensed consolidated financial statements included in Part I, Item 1 on this Form 10-Q for further information.

(2) Includes only the cash payable component of interest expense in our 2018 Notes.

(3) Lease payments include common area maintenance (CAM) charges.

(4) Purchase commitments represent an estimate of all open purchase orders and contractual obligations in the ordinary course of business for which we have not received the goods or services as of December 29, 2013. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.

(5) Other commitments consist primarily of commitments for software license fees of approximately $6.8 million.

(6) Excludes approximately $42.7 million of liabilities for uncertain tax positions for which we cannot make a reasonably reliable estimate of the period of payment. See Note 12 in the accompanying notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.

(7) The expected timing of payments for the obligations discussed above is estimated based on current information. Timing of payment and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations. Amounts disclosed as contingent or milestone based obligations depend on the achievement of the milestones or the occurrence of the contingent events and can vary significantly.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We do not believe our cash and cash equivalents are subject to significant interest rate risk due to their short terms to maturity. As of December 29, 2013, the carrying value of our cash and cash equivalents approximated fair value. As of December 29, 2013, the balance of our investment portfolio was zero as the securities reached maturity and the proceeds were not reinvested in other securities. The 2018 Notes issued in November 2018 have a fixed interest rate.

Exchange Rate Risk

We consider our direct exposure to foreign exchange rate fluctuations to generally be minimal. Currently, the majority of our sales to customers and arrangements with third-party manufacturers provide for pricing and payment in U.S. dollars (USD), and, therefore, are not subject to exchange rate fluctuations. However, increases in the value of the USD relative to other currencies could make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the USD relative to other currencies could result in our suppliers raising their prices to continue doing business with us. We are also exposed to foreign exchange rate fluctuations for a portion of our expenses that are denominated in currencies other than the USD, primarily with respect to our operations in India and New Zealand, for which we do not maintain an active hedging program. As a result, fluctuations in foreign exchange rates have affected, and could continue to affect, our business and results of operations.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

On February 26, 2013, we acquired Endace Limited (Endace) and, as a result, we continue to integrate the processes, systems and controls relating to Endace into our existing system of internal control over financial reporting in accordance with our integration plans. Except for the processes, systems and controls relating to the integration of Endace, there have not been

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any changes in our internal control over financial reporting during the second quarter ended December 29, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth under Note 8 in the notes to the condensed consolidated financial statements under the caption “Litigation” included in Part I, Item 1 of this Form 10-Q is incorporated herein by reference.

Item 1A. Risk Factors

Our operating results are difficult to forecast resulting in significant fluctuations from quarter to quarter.

Our recently announced restructuring plans may not yield the targeted cost savings on a timely basis or at all even though we expect to incur charges relating to such cost savings initiatives. In addition, our share repurchase program may not be completed within the expected timeframe. The assumptions on which our cost savings initiatives, share repurchase and capital return goals are based necessarily involve judgments with respect to, among other things, economic, competitive and financial market conditions and the impact of the cost savings initiative on our customers, all of which are difficult or impossible to predict and many of which are beyond the Company’s control.

Our revenues and results of operations have historically varied on a quarterly basis and may vary significantly in the future. Accordingly, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful, and you should not rely on such comparisons as indications of our future performance. We may be unable to maintain our current levels of growth or profitability in the future. Our revenues and results of operations are difficult to forecast and could be adversely affected in any given quarter by many factors, including, but not limited to:

• Changes in the size, mix, timing and terms of OEM or other customer orders;

• Changes in the sales and deployment cycles for our products or desired inventory levels for our products;

• Acquisitions or strategic investments by our customers, competitors or us;

• Timing and market acceptance of new or enhanced product introductions, including the next generation of server platforms based on the Intel® XEON® family and chipsets used by us, our OEM customers or competitors;

• Market share losses or difficulty in gaining incremental market share;

• Reduced demand from our customers if there is a shortage of, or difficulties in, acquiring components or other products, such as microprocessors, disk drives, switches, and optical modules, used in conjunction with the deployment of systems containing our products;

• Seasonality;

• Changes in general social and macroeconomic conditions, including but not limited to natural disasters, terrorism, public health crises, slower than expected market growth, reduced economic activity, delayed economic recovery, loss of consumer confidence, increased energy costs, adverse business conditions and liquidity concerns, concerns about inflation or deflation, recession, and reduced business profits and capital spending, with resulting changes in customer technology budgeting and spending;

• Fluctuations in product development, procurement, resource utilization and other operating expenses;

• Inability to realize anticipated efficiencies resulting from increased revenues;

• Difficulties controlling costs, including operating expenses, as revenues increase;

• Inability of our electronics manufacturing service providers (EMS) or suppliers to produce and distribute our products in a timely fashion;

• Difficulties with updates, changes or additions to our information technology systems; and

• Breaches of our network security, including viruses.

Order deferrals and cancellations by our customers, declining average sales prices, changes in the mix of products sold, shortages of materials, delays in the introduction of new products and longer than anticipated sales cycles for our products have adversely affected our business, financial condition and results of operations in the past. Despite these factors, we, along with our EMS providers, maintain significant finished goods, work-in-progress and raw materials inventory to meet estimated order forecasts. If our customers purchase less than their forecasted orders or cancel or delay existing purchase orders, there will be higher levels of inventory that face a greater risk of obsolescence. If our customers choose to purchase products in excess of the forecasted amounts or in a different product mix, we could experience inadequate inventory or manufacturing capacity to meet such demand.

As a result of these and other unexpected factors or developments, future operating results may fall below the expectations of investors or market analysts, which would have a material adverse effect on our stock price.

We may fail to realize the anticipated benefits from our acquisition of Endace Limited, future acquisitions, and strategic investments.

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Our recent acquisition of Endace Limited (Endace) involves numerous risks and uncertainties that could have a material adverse effect on our business and operating results or cause expectations to be inaccurate with respect to our Visibility operating segment, or our consolidated operations. Our future performance will depend in part on our ability to realize the anticipated benefits from acquisitions and strategic investments, including Endace, and whether we can successfully integrate, operate or partner these businesses with our existing operations in an effective and efficient manner. Integrating our operations with acquired businesses is a complex, time-consuming and expensive process and involves a number of risks and uncertainties. In addition, in order to position ourselves to take advantage of growth opportunities, we have made, and may continue to make, other strategic acquisitions that involve significant risks and uncertainties. The risks and uncertainties relating to acquisitions and/or strategic investments include, but are not limited to:

• The difficulty in integrating any newly acquired businesses and operations in an efficient and effective manner;

• The risk of diverting our resources and the attention of our senior management from the operations of our existing business;

• Additional demands on management related to the increase in the size and scope of our company following the acquisition;

• Complexities in creating and maintaining uniform standards, controls, procedures, and policies;

• Difficulties in combining corporate cultures;

• Difficulties in the assimilation and retention of key employees;

• The risks of potential disputes concerning indemnities and other obligations that could result in substantial costs;

• Unknown defects of an acquired company’s products or assets that may not be identified due to the inherent limitations involved in the due diligence process of an acquisition;

• Costs and expenses associated with any undisclosed or potential liabilities of acquired businesses;

• Delays, difficulties or unexpected costs in the integration, assimilation, implementation or modification of platforms, business information systems, functions, technologies and infrastructure to support the combined business, as well as maintaining uniform standards, controls (including internal accounting controls), procedures and policies;

• The challenges in achieving strategic objectives, cost savings and other benefits expected from any acquisitions;

• The risk that the financial returns on acquisitions will not support the expenditures incurred to acquire such businesses or the capital expenditures needed to develop such businesses;

• The risks of entering markets in which we have less experience;

• The risk that markets do not evolve as anticipated and the technologies acquired do not prove to be those needed to be successful in those markets; and

• Difficulties in maintaining relationships with present and potential customers, distributors and suppliers of the acquired business.

Furthermore, to complete future acquisitions or strategic investments, we may need to issue equity securities, incur debt, assume contingent liabilities or have amortization expenses and write-downs of acquired assets, which could cause our earnings per share to decline.

Third party claims of intellectual property infringement could adversely affect our business.

On occasion, we receive communications from third parties alleging patent infringement, and there is always the chance that third parties may assert infringement claims against us. As we enter into technology markets where we have not participated before, where there are entrenched incumbents, and where our entrance into the market is disruptive, such incumbents may assert infringement claims in order to deter our competition. Any such claims, with or without merit, could result in costly litigation, cause product shipment delays, result in temporary restraining orders or injunctions concerning the sale of products in certain countries, require the redesign of products to design around asserted claims, require us to indemnify or reimburse our customers, or require us to enter into royalty or licensing agreements, which may or may not be available on commercially reasonable terms. Any such claims, with or without merit, may also cause customers to be deterred from purchasing products from us. We have obtained contractual commitments from our suppliers concerning the defense and indemnification of claims relating to certain technology provided by such suppliers, but we cannot be certain that such defense and indemnification obligations will be honored by such suppliers. Furthermore, we have in the past obtained, and may be required in the future to obtain, licenses of technology owned by other parties. We cannot be certain that the necessary licenses will be available or that they can be obtained on commercially reasonable terms. We have participated in technology standardization activities which provide for licenses being available on reasonable and non-discriminatory terms, but we cannot be certain that such licenses will actually and promptly be made available to us. If we were to fail to obtain such royalty or licensing agreements in a timely manner and on reasonable terms, our business, results of operations, and financial condition could be materially adversely affected.

Broadcom Corporation (Broadcom) filed a consolidated patent infringement suit against us during fiscal 2010. After a nearly three week trial that ended October 6, 2011, the jury reached a partial verdict involving two out of the six patents. The

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Court determined that one of the patents (U.S. Patent 7,058,150) [the ‘150 patent] had been infringed by us, and the jury rendered an advisory verdict on October 12, 2011 to the District Court that it is not invalid, and awarded approximately $0.4 million in damages with respect to that patent. The jury reached a unanimous verdict of non-infringement on another patent relating to Emulex Fibre Channel switch products. A mistrial was declared concerning the remaining four patents for which no unanimous verdict was reached. On December 15, 2011, the District Court issued judgments as a matter of law (JMOL) that the two patents, on which the jury had rendered advisory verdicts were not invalid. On December 16, 2011 the District Court issued an additional JMOL that one of the patents (U.S. Patent 7,471,691) [the‘691 patent] had been infringed by us. See Note 8, “Commitments and Contingencies,” in the notes to the condensed consolidated financial statements under the caption “Litigation” in Part I, Item 1 of this Form 10-Q. Also see “We are dependent on sole source and limited source third party suppliers and EMS providers for our products” elsewhere in this Item 1A - Risk Factors.

Specific risks related to the on-going Broadcom infringement litigation and Settlement Agreement include:

• Design changes (sometimes referred to as design-arounds) that may be used as alternatives for the patents for which there have been findings of infringement or for which infringement may be found, may present unforeseen technical problems for implementation, result in significant internal design costs, as well as third party non-recurring engineering costs, or may not adequately address infringement findings;

• Total costs related to our product redesign activities may exceed our current expectations;

• Our suppliers, on whom we rely for SerDes changes for chip spins, may require more time than what is available under any sunset periods to complete redesigns which would restrict our ability to continue to sell products after the expiration of the sunset periods until redesigned products are available;

• Any sunset periods may not be long enough to permit us, our suppliers, our OEM customers and end users to implement, test, qualify, and certify replacement products containing design changes that eliminate the patent infringement;

• There may be technical resource and equipment availability shortages impeding our ASIC component suppliers from completing chip spins, and our OEM customers and end users from completing testing of redesigned products;

• Our sales and support for products sold outside the United States may be affected by injunction, although such sales were previously found to be outside the scope of the suit;

• Our continuing support and sales for products previously provided to customers and end users may be affected by injunction, although technical support is not prohibited by the 2012 Permanent Injunction for products subject to the jury verdict award of damages, or permitted under the sunset period;

• The 2012 Permanent Injunction may cause our customers to exclude us from new product opportunities;

• Our customers may approach us and request or demand reimbursements of expenses incurred by them related to the requalification of our products, their obligations to Broadcom under licensing agreements related to appendices of the amended 2012 Permanent Injunction, or other amounts under the indemnification provisions of our supply agreements;

• Royalties or other payments associated with the 2012 Permanent Injunction may make our costs too high to meet market pricing requirements set by our customers;

• Our July 3, 2012 Settlement Agreement with Broadcom requires us to maintain certain records, as well as provide certain written notices and reports, and such activities may cause additional costs and limitations for us not borne by our competitors;

• The terms of any future settlements, beyond the July 3, 2012 Settlement Agreement, that we may reach in the suit brought by Broadcom may be less favorable to us than were settlements in other patent litigation involving companies;

• Broadcom may not assert the patents against our competitors, thus leaving us with a competitive disadvantage relative to future business that may not be borne by our competitors;

• Broadcom may be unwilling to settle the remaining lawsuit with us, beyond the July 3, 2012 Settlement Agreement, and a permanent injunction may be issued and remain in place for the life of the patents in the lawsuit;

• The interpretation of the provisions of the 2012 Permanent Injunction may be unfavorable to us, resulting in part because of the complexity of the business practices used by our customers, including a large quantity of different customer product models, customer platforms, and design configurations, and the complexity of the supply chains, support implementations, and product distribution networks used by our customers, each of which may result in the need for further hearings before the Court;

• Our supply to customers in the United States may continue to be disrupted by the 2012 Permanent Injunction affecting our Ethernet based products that include our BE2 or BE3 chips (collectively referred to as the affected products);

• Our total net revenues may be reduced by our inability to sell the affected products in the United States after any injunction;

• The content of the 2012 Permanent Injunction, and its Appendix, may be modified by the Court in ways that are unfavorable to us;

• The Court may amend the Appendix to the 2012 Permanent Injunction to exclude certain device/customer product combinations;

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• The re-trial may result in significant additional defense costs, and the outcome for such a re-trial is uncertain, but may include a further injunction and may result in further product redesign activities;

• Broadcom could file additional lawsuits against us, asserting additional claims from the same patents involved in the lawsuit, or additional patents, or file other proceedings with commissions such as the International Trade Commission; and

• Any appeals we make with respect to the determinations made by the jury or the Court may not be successful; any requests for stay of any permanent injunction may be denied; and royalties we pay pending an appeal may not be promptly reimbursed to us even if we are successful with any appeal.

Ongoing lawsuits, such as the action brought by Broadcom, present inherent risks, including continuing expenses of litigation; risk of loss of patent rights and/or monetary damages; risk of injunction against the sale of products incorporating the technology in question, including substantial costs and difficulties in implementing design changes and the associated customer re-qualification thereof or maintaining favorable working relationships with our suppliers of SerDes modules; counterclaims, attorneys’ fees, potential liabilities to customers under reimbursement agreements or contractual indemnification provisions, and diversion of management’s attention from other business matters. Such lawsuits and the related risks thereof could have a material adverse effect on our business, financial condition, or results of operations.

We may need additional capital in the future and such additional financing may not be available on favorable terms.

In November 2013, we issued $175.0 million aggregate principal amount of 1.75% convertible senior notes due November 15, 2018, in a private placement offering. See Note 9 “Convertible Senior Notes,” in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q. We may be forced to raise additional funds for our financial obligations through public or private debt or equity financings, which may not be available on favorable terms, if at all. If such financings were not available on favorable terms, our business results of operations and financial condition could be materially adversely affected.

Unsolicited takeover proposals, governance change proposals, and proxy contests may be disruptive to our business.

We received an unsolicited takeover proposal in the past from Broadcom (and related proposals to change our governance and board of directors) that resulted in a proxy contest, and there can be no assurance a third party, such as a competitor or activist investor, will not make an unsolicited takeover proposal, propose to change our governance or board of directors, or make other proposals concerning takeovers in the future. The review and consideration of any takeover proposal or proposal to change our governance or board of directors may be a significant distraction for our management and employees and could require the expenditure of significant time and resources by us.

Moreover, any unsolicited takeover proposal, proxy contest or actions by an activist investor may create uncertainty for our employees and this uncertainty may adversely affect our ability to retain key employees and to hire new talent. Any such takeover proposal, proxy contest or actions by an activist investor may also create uncertainty for our customers, suppliers and other business partners, which may cause them to terminate, or not to renew or enter into, arrangements with us. The uncertainty arising from unsolicited takeover proposals, proxy contests, or actions by an activist investor, and any related costly and time-consuming litigation may disrupt our business, which could result in an adverse effect on our operating results. Management and employee distraction related to any such takeover proposal, proxy contest or actions by an activist investor also may adversely impact our ability to optimally conduct our business and pursue our strategic objectives.

We have entered into Key Employee Retention Agreements with two of our current executive officers, and adopted a Change in Control Retention Plan, in which currently an additional 26 key employees participate. The participants of these retention arrangements may be entitled to severance payments and benefits, based on a period of between twelve months and two years, upon a termination of their employment by us without cause or by them for good reason in connection with a change of control of our company (each as defined in the applicable agreement or plan). These retention arrangements may not be adequate to allow us to retain critical employees during a time when a change in control is being proposed or is imminent.

The current macroeconomic environment continues to result in a reduction in information technology spending.

The demand for our network connectivity and visibility products has been driven by the demand for high performance networking products and solutions that support enterprise computing applications, including on-line transaction processing, data mining, data warehousing, multimedia, networking and monitoring and internet applications. The current weakness in domestic and worldwide economic conditions and related disruptions in world credit and equity markets, as well as the European debt crisis, have resulted in a global downturn in spending on information technology. If the continuing weakness and uncertainty in the global economy result in significant reductions in the demand for our products, solutions, and applications, it will adversely affect our business, results of operations, and financial condition in the near term and possibly beyond. The adverse effects of any sustained reductions in information technology spending on our operating results may be

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exacerbated by our research and development investments, strategic investments and merger and acquisition activity, as well as customer service and support, which we may need to continue despite any such reductions in demand.

Our business is highly competitive.

The markets for our products are highly competitive and are characterized by rapid technological advances, price erosion, frequent new product introductions, and evolving industry standards. Our current and potential competition consists of major domestic and international companies, some of which have substantially greater financial, technical, marketing, and distribution resources than we have. We currently compete against QLogic, Brocade and PMC Sierra, for our Fibre Channel (FC) products. For Ethernet products, we compete against the leading integrated circuits (IC) vendors including Intel, Broadcom, QLogic and Mellanox. Our competitors for combined Ethernet and FC products include Brocade and QLogic. For our visibility and recording infrastructure products, we compete against Napatech, SolarFlare, NetScout, Solera Networks, EMC NetWitness, Riverbed, Niksun, Network Instruments, WildPackets and Fluke Networks.

We expect that our markets will continue to attract new competition. Additional companies, including but not limited to our suppliers, strategic partners, Original Equipment Manufacturer (OEM) customers and emerging companies, may enter the markets in which we compete and new or stronger competitors may emerge as a result of consolidation in the marketplace. Additionally, our existing competitors continue to introduce products with improved price/performance characteristics, and we may have to do the same to remain competitive. Furthermore, competitors may introduce new products to the market before we do, and thus obtain a time-to-market advantage over us. Increased competition could result in increased price competition, reduced revenues, lower profit margins or loss of market share, any of which could have a material adverse effect on our business, results of operations, and financial condition.

A significant portion of our business depends upon the continued growth of the networking market.

The size of our potential market is largely dependent on the overall demand for network connectivity and visibility products and in particular, upon the broadening acceptance of our converged network and network recording technologies. We believe that our investment in multi-protocol solutions that address the high performance needs of the converged networking market, as well as our investments in network performance management solutions, provide the greatest opportunity for our future revenue growth and profitability. However, the market for converged networking products may not gain broader acceptance and customers may choose alternative technologies that we are not investing in, or products supplied by other companies. Interest continues for other storage networking technologies such as Internet Small Computer Systems Interface (iSCSI) and iSCSI Extensions for RDMA (iSER), which may satisfy some Input/Output (I/O) connectivity requirements through standard Ethernet adapters and software at little or no incremental cost to end users. These software only iSCSI solutions compete with our Network Connectivity Products, particularly in the low end of the market. We have also launched Converged Network Adapters (CNAs) using Fibre Channel over Ethernet (FCoE) or iSCSI protocols which may be used by the same customers impacting our network product revenues more than we anticipate.

In addition, the market for FC products may shrink as more storage subsystems adopt SAS based connectivity for external and direct attached storage devices. Furthermore, FCoE may not be adopted at the rate or extent that we anticipate, and adoption of FCoE is largely dependent on third-party vendors and end users. While the usage of FCoE has increased since its first specifications were completed in 2009, continued adoption of FCoE is dependent on continued collaboration and cooperation among information technology solutions providers. Since our products are sold as parts of integrated systems, demand for our products is driven by the demand for such integrated systems, including other companies’ complementary products. A lack of demand for these integrated systems or a lack of complementary products required for these integrated systems to be deployed could have a material adverse effect on our business, results of operations, and financial condition. If the converged networking market does not grow, grows more slowly than we anticipate, declines, or attracts more competitors than we expect, or if our products do not achieve continued market acceptance, our business, results of operations, and financial condition could be materially adversely affected.

A significant portion of our revenue is generated from sales to a limited number of customers, none of which are subject to exclusive or long-term contracts.

We rely almost exclusively on OEMs and sales through distribution channels for our revenue. For the six months ended December 29, 2013, we derived approximately 84% of our net revenues from sales to OEM customers, approximately 12% from sales through distribution, and approximately 4% from sales to end-users and other channels. Furthermore, as some of our sales through distribution channels consist of OEM products, OEM customers effectively generated approximately 89% of our revenue for the six months ended December 29, 2013. Moreover, direct and indirect sales to our top five customers (including customer-specific models purchased or marketed indirectly through distributors, resellers and other third parties) accounted for approximately 77% of our net revenues for the six months ended December 29, 2013. If we are unable to retain our current OEM and distributor customers, recruit additional or replacement customers, or timely collect amounts due from our

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customers, or if demand from our customers is reduced due to difficulties in their ability to acquire components or other products such as microprocessors, disk drives, switches and optical modules used in conjunction with our products or in the deployments of their products, our business, results of operations, and financial condition could be materially adversely affected.

As is common in the technology industry, our agreements with OEMs and distributors are typically non-exclusive, have no volume commitments, and often may be terminated by either party without cause. It is increasingly commonplace for our OEM and distributor customers to utilize or carry competing product lines. If we were to lose business from one or more significant OEM or distributor customers to a competitor, our business, results of operations, and financial condition could be materially adversely affected. In addition, our OEMs may elect to change their business practices in ways that affect the timing of our revenues, which may materially adversely affect our business, results of operations, and financial condition.

Although we continue to expand our base of customers, we believe our revenues in the future will still be derived from a limited number of customers. As a result, to the extent that sales to any of our significant customers do not increase in accordance with our expectations or are reduced or delayed, or if we are unable to collect our accounts receivables from our customers, our business, results of operations, and financial condition could be materially adversely affected.

Our industry is subject to rapid technological change.

The markets for our products are characterized by rapidly changing technology, evolving industry standards, and the frequent introduction of new products and enhancements. Our future success depends in large part on our ability to enhance our existing products and to introduce new products on a timely basis to meet changes in customer preferences and evolving industry standards. Currently, new and proposed technologies such as 32 Gb/s Fibre Channel solutions; FCoE; 40GbE and 100GbE solutions; Remote Direct Memory Access (RDMA) over Converged Ethernet (RoCE) and low latency Ethernet Solutions; PCI Express Advanced Switching; 10G base T; 6 Gb/s and 12 Gb/s SAS; and Solid State Drives (SSDs) are in development by many companies and their ultimate acceptance and deployment in the market is uncertain. While we are developing some of these technologies, we cannot be sure that the technologies we chose to develop will achieve market acceptance, or that technologies that we chose not to develop will be available for purchase or license from third parties or will be immaterial to our business.

These developments or enhancements, such as the migration of our next generation products from 40nm to 28nm or lower geometry process technologies, may be late, may have technical problems, may fail to meet customer or market specifications and may not be competitive with other products using alternative technologies that offer comparable performance and functionality. We may be unable to successfully develop additional next generation products, new products or product enhancements. Our next generation products or any new products or product enhancements may not be accepted in new or existing markets. Our business will suffer if we fail to continue to develop and introduce new products or product enhancements in a timely manner or on a cost-effective basis.

Furthermore, if our products are not available in time for the qualification cycle at an OEM, we may be forced to wait for the next qualification cycle or may miss the market window. In addition, new products and enhancements developed by us may not be backwards compatible to existing equipment already installed in the market. If we are unable, for technological or other reasons, to develop new products, enhance or sell existing products, or consume raw materials in a timely and cost effective manner in response to technological and market changes, our business, results of operations, and financial condition may be materially adversely affected.

We may be unsuccessful in our expansion into new segments of the network connectivity and visibility markets, and the costs associated with our expansion may be greater than anticipated.

To remain a significant supplier of networking technologies, we will need to continue to expand the range of products and solutions offered to current and new customers. Expansion into other areas of the connectivity and visibility markets, whether by acquisition or through internal growth, and the resulting increases in expenditures to support these new areas may be greater than anticipated. If we fail to successfully expand into new areas of the storage, server and network recording technology markets with products that we do not currently offer, or effectively address new market opportunities, we may lose market share and revenue opportunities to our competitors. Any such loss of opportunities or any failure by us to effectively manage the costs associated with expanding into new markets may have an adverse effect on our business and financial condition.

Further, although most of our revenues have historically been derived from products based on FC technology, we expect that a significant portion of the future growth of our business will be driven through our offerings of converged networking solutions. We believe that our FC products and converged networking solutions will, at least initially, have similar customers and other marketing requirements that should produce certain synergies and cost savings as we expand our converged network solutions business. However, if the expansion of our converged networking solutions business does not produce the synergies

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and cost savings with our core FC business that we anticipate, our marketing and other business expenses relating to our converged network solutions business could be greater than anticipated and our financial condition could be adversely affected.

The timing of migration by our customers toward emerging technologies and newer product platforms varies. Any failure of our OEM customers to keep up with rapid technological change and to successfully market and sell systems that incorporate new technologies could adversely affect our business.

A significant portion of our revenues depend upon the ability and willingness of our OEM customers to commit significant resources to develop, promote, and deliver products that incorporate our technology. In addition, if our customers’ products are not commercially successful, it would have a materially adverse effect on our business, results of operations, and financial condition.

As our customers migrate from one platform to the enhanced price/performance of the next platform, we may experience reduced revenue, gross profit, or gross margin levels associated with lower average selling prices or higher relative product costs associated with improved performance. While we regularly compare forecasted demand for our products against inventory on hand and open purchase commitments, to the extent that customers migrate more quickly than anticipated, the corresponding reduction in demand for older product platforms may result in excess or obsolete inventory and related charges which could potentially have a material adverse effect on our financial condition and results of operations.

Our customers may elect to substitute low-end adapter card solutions and chip only options for use in high-end environments or applications.

We supply FC and Ethernet I/O solutions that target separate high-end, midrange and small to medium sized end users. Historically, the majority of our revenues have come from our high-end enterprise server and storage solutions. If customers elect to utilize midrange HBA and CNAs in higher-end environments or applications, or migrate to chip only solutions faster than we anticipate, our business, results of operations and financial condition could be negatively affected.

Advancement of storage device capacity technology may not allow for additional revenue growth.

Storage device density continues to improve rapidly and at some point in the future, the industry may experience a period where the advancement in technology may increase storage device capacity to a level that may equal or exceed the need for digital data storage requirements. This would result in a situation where the number of units of storage devices required in the marketplace may level out or even decrease. To the extent that growth in storage device unit demand slows or decreases, our business, financial condition and results of operations may be materially adversely affected.

Our average unit selling prices may decrease at a faster rate than we are able to realize cost reductions in our products.

We continue to experience downward pressure on the average unit selling prices of our products. Furthermore, we may provide pricing discounts to customers based upon volume purchase criteria, and achievement of such discounts may reduce our average unit selling prices. To the extent that growth in unit demand fails to offset decreases in average unit selling prices, our revenues and financial performance could materially decline. Although we have historically achieved offsetting cost reductions, our gross margins and financial performance could be materially adversely affected to the extent that average unit selling prices of our products decrease without a corresponding decrease in the costs of such products. Our gross margins could also be adversely affected by a shift in the mix of product sales to lower gross margin products. Furthermore, as our products are manufactured internationally, cost reductions would be more difficult to achieve if the value of the U.S. dollar were to deteriorate. Moreover, if the manufactured cost of our products were to increase due to inflation or other factors and we are unable to pass along such increase in our costs to our customers, our gross margins and financial performance could be materially adversely affected.

Our international business activities subject us to increased business risks.

For the six months ended December 29, 2013, sales in Asia Pacific accounted for approximately 58% of our total net revenues, sales in the United States accounted for approximately 26% of our total net revenues, and sales in Europe, Middle East, Africa and the rest of the world accounted for approximately 16% of our total net revenues based on billed-to address. We expect that our sales will continue to increase outside of the United States as our customers are migrating towards using contract manufacturers located internationally, predominantly in Asia Pacific. However, because we sell to OEMs and distributors who ultimately resell our products to their customers, the geographic mix of our sales based on billed-to address may not be reflective of the geographic mix of end-user demand or installations. Since the majority of our sales are currently denominated in U.S. dollars, if the value of the U.S. dollar increases relative to foreign currencies, our products could become less competitive in international markets.

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In addition, as we continue to expand our international operations and with our recent acquisition of Endace, an increasing amount of our expenses are incurred in currencies other than U.S. dollars, including the India Rupee and the New Zealand Dollar. Therefore, we are required from time to time to convert currencies to meet our expense obligations for such international operations.

Although we generally purchase our inventory in U.S. dollars, our suppliers also are increasingly located outside of the U.S., and a significant portion of our products are produced at our EMS providers’ production facilities in China, Thailand and New Zealand.

As a result, we are subject to numerous risks inherent in international operations. Our international business activities could be affected, limited or disrupted by a variety of factors, including, but not limited to:

• Fluctuations in freight costs and potential disruptions in the transportation infrastructure for our products and components;

• Longer accounts receivable payment cycles;

• Increased travel, infrastructure, accounting, and legal compliance costs associated with multiple international locations;

• Difficulty in locating, hiring and retaining personnel with requisite skill sets and knowledge;

• Difficulty maintaining management oversight and control of remote locations;

• Changes in the value of local currencies relative to the U.S. dollar and other functional currencies;

• Costs and risks of localizing products for international countries;

• Import and export restrictions;

• Limitations on the amount and nature of foreign investment, including restrictions on the structure and/or permissible forms of investment;

• Imposition of or changes in governmental controls, taxes, tariffs, trade restrictions, and regulatory requirements to our current or future operations;

• Potential restrictions on transferring funds between countries and difficulties associated with repatriating cash generated or held outside of the U.S. in a tax-efficient manner;

• Taxation in multiple jurisdictions;

• Bureaucratic intrusions and delays, government corruption, political instability, war, and/or terrorism; and

• General economic and social conditions within international countries.

All of these factors could harm future sales of our products to international customers or production of our products outside of the United States, and have a material adverse effect on our business, results of operations, and financial condition.

We may experience delays in our product development cycle and the introduction of new products.

We have experienced delays in product development in the past and may experience similar delays in the future. Such delays may result from numerous factors, which include, but are not limited to:

• Difficulties in hiring and retaining necessary employees and independent contractors;

• Difficulties in reallocating engineering resources and other resource limitations;

• Unanticipated or lengthy redevelopment efforts to make design changes resulting from unintentional intellectual product infringement and related injunctions;

• Unanticipated engineering or manufacturing complexity, including complexity arising from third party suppliers of intellectual property such as foundries of our ASICs;

• Undetected errors or failures in our products;

• Changing OEM product specifications;

• Delays in the acceptance or shipment of products by OEM customers; and

• Changing market or competitive product requirements.

We expect to continue to engage in product development alignment activities with customers, companies we have investments in or receivables from, and other third parties. These product development alignment activities can magnify several risks for us, including the loss of control over development activities and the timing of product availability. Accordingly, we face increased risk that such product development alignment activities will result in products that are not commercially successful or that are not available in a timely fashion.

Given the short product life cycles in the markets for our products and the relatively long product development cycles, any delay or unanticipated difficulty associated with new product introductions or product enhancements could have a material adverse effect on our business, results of operations, and financial condition.

We are dependent on sole source and limited source third party suppliers and EMS providers for our products.

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We rely on third party suppliers for components and the manufacture of our products. A number of these components and products are only available from a single or limited number of suppliers. We also purchase certain components and products from single or limited suppliers and EMS providers to drive volume discounts. As a result, we have experienced delays or difficulty in securing components and finished goods in the past, as well as additional costs related to such issues. Delays or difficulty in securing components or finished goods at reasonable cost may be caused by numerous factors including, but not limited to:

• Natural disasters, such as the significant flooding in Thailand in October 2011;

• Discontinued production by a supplier;

• Required long-term purchase commitments;

• Undetected errors, failures or production quality issues, including projected failures that may constitute epidemic failure rates specified in agreements with our customers or that may require us to make concessions or accommodations for continuing customer relationships;

• Timeliness of product delivery;

• Increases in manufacturing costs due to lower volumes or more complex manufacturing process;

• Sole sourcing of components made by a small number of suppliers, including the inability to obtain components and finished goods at reasonable cost from such sources and suppliers;

• Market shortages;

• Changes in business strategies of our suppliers and EMS providers;

• Financial stability and viability of our suppliers and EMS providers;

• Inability or unwillingness of our suppliers or EMS providers to continue their business with us;

• Environmental, tax or legislative changes in the location where our products are produced or delivered;

• Disruption in shipping channels;

• Labor shortages or labor strikes at our suppliers or EMS providers;

• Intellectual property controversies; and

• Difficulties associated with international operations.

We utilize third-party EMS providers located inside and outside the United States to manufacture and test the majority of our products. These EMS providers also procure and manage most of the components used in our board and system level products. As a result of our reliance on third-party EMS providers, we may not be able to directly control product delivery schedules and the quality of our products which could have a material adverse effect on our business, results of operations, and financial condition. If our EMS providers are unable to respond in a timely fashion to changes in customer demand, we may be unable to produce enough products to respond to sudden increases in demand, resulting in lost revenues. Alternatively, in the case of order cancellations or decreases in demand, we may be liable for excess or obsolete inventory or cancellation charges resulting from contractual purchase commitments that we have with our EMS providers. We regularly provide rolling forecasts of our requirements to our EMS providers for planning purposes, pursuant to our agreements, a portion of which is binding upon us. Additionally, we are committed to accept delivery on the forecasted terms for a portion of the rolling forecast. Cancellations of orders or changes to the forecasts provided to any of our EMS providers may result in cancellation costs payable by us. In the past, we have been required to take delivery of materials from our EMS providers that were in excess of our requirements, and we have previously recognized charges and expenses related to such excess material. We expect that we will continue to incur such costs in the future.

We also purchase ASICs and field-programmable gate arrays (FPGAs) from sole source suppliers, including LSI Corporation, Marvell Technology Group Ltd., Intel Corporation, Renesas Electronics America Inc., Toshiba Corporation, Altera Corporation, and Xilinx Inc., who in turn rely on a limited number of suppliers and foundries to manufacture the ASICs and FPGAs. This creates risks in assuring the availability of such ASICs and FPGAs. While we have multiple ASIC suppliers, we sole source each of our ASICs and FPGAs, and we use the same supplier for more than one of our ASICs and FPGAs. The inability of the Company or our EMS providers to obtain these ASICs and FPGAs in sufficient quantities or in the desired time periods could delay the production and delivery of our products which, in turn, could result in lost revenue due to customer cancellations and have a material adverse effect on our business, results of operations, and financial condition.

The use of third party ASIC suppliers may also create risks relating to intellectual property controversies including the possible need to redesign ASICs provided changes by such ASIC component supplier in response to such controversies. For example, on September 14, 2009, Broadcom Corporation filed two separate patent infringement lawsuits against the Company in the U.S. District Court in the Central District of California that were subsequently amended and consolidated. The consolidated lawsuit includes claims related to the use of multiple lanes of phase interpolators, clock and data recovery (CDR) circuits and other circuitry used to deserialize signals in SerDes modules included within an ASIC supplied by third party ASIC suppliers. See Note 8, “Commitments and Contingencies,” in the notes to the condensed consolidated financial statements under the caption “Litigation” in Part I, Item 1 of this Form 10-Q. Also see “Third party claims of intellectual property infringement could adversely affect our business” elsewhere in this Item 1A - Risk Factors.

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Our intellectual property protections may be inadequate.

We believe that our continued success depends primarily on continuing innovation, marketing, and technical expertise, as well as the quality of product support and customer relations. At the same time, our success is partially dependent on the proprietary technology contained in our products. We currently rely on a combination of patents, copyrights, trademarks, trade secret laws, and contractual provisions to establish and protect our intellectual property rights in our products.

We cannot be certain that the steps we take to protect our intellectual property will adequately protect our proprietary rights, that others will not independently develop or otherwise acquire equivalent or superior technology, or that we can maintain such technology as trade secrets. In addition, the laws of some of the countries in which our products are or may be developed, manufactured, or sold may not protect our products and intellectual property rights to the same extent as the laws of the United States, or at all. Furthermore, we enter into various development projects and arrangements with other companies. In some cases, these arrangements allow for the sharing or use of our intellectual property. Our failure to protect our intellectual property rights could have a material adverse effect on our business, results of operations, and financial condition. We attempt to mitigate this risk by obtaining indemnification from others, where possible.

Certain of our software (as well as that of our customers) may be derived from “open source” software that is generally made available to the public by its authors and/or other third parties. Such open source software is often made available to us

under licenses, such as the GNU General Public License, which impose certain obligations on us in the event we were to distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public, or license such derivative works under a particular type of license, rather than the forms of licenses customarily used to protect our intellectual property. In the event the copyright holder of any open source software were to successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public and/or stop distribution of that work.

We may be unable to attract, motivate or retain key managerial and technical personnel.

Our success depends to a significant degree upon the performance and continued service of key managers, as well as engineers involved in the development of our storage networking technologies and technical support of our products and customers. Competition for such highly skilled employees is intense in the communities in which we operate, as well as our industry, and we cannot be certain that we will be successful in recruiting, training, and retaining such personnel. In addition, employees may leave us and subsequently compete against us, and we may incur costs relating to their departure. Also, many of these key managerial and technical personnel receive stock-based compensation incentives as part of our employee retention initiatives. The number of shares authorized under stock based plans may be insufficient and shareholders may not approve to increase the number of authorized shares. New regulations, volatility in the stock market, and other factors could diminish the value of our stock-based compensation incentives, putting us at a competitive disadvantage and forcing us to use more cash compensation. If we are unable to attract new managerial and technical employees, or are unable to retain and motivate our current key managerial and technical employees, or are forced to use more cash compensation to retain or replace key personnel, our business, results of operations, and financial condition could be materially adversely affected.

Our stock price is volatile, which has and may result in lawsuits against us and our officers and directors.

The stock market in general and the stock prices of technology companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of any specific public company. The market price of our common stock has fluctuated in the past and is likely to continue to fluctuate in the future. For example, the sales price of our common stock ranged from a low of $5.72 per share to a high of $8.99 per share for the trailing twelve months ended December 29, 2013. Factors that could have a significant impact on the market price of our stock include, but are not limited to, the following:

• Actual or alleged intellectual property infringement;

• Quarterly variations in customer demand and operating results;

• The gain or loss of significant customers or design wins;

• Pricing pressures;

• General conditions in the computer, storage, or communications markets;

• Events affecting other companies that investors deem to be comparable to us;

• Announcements of new products by us or our competitors;

• Offers to buy us or a competitor for a premium over recent trading prices;

• Changes in analysts’ earnings estimates;

• Changes in analyst recommendations, price targets, or other parameters that may not be related to earnings estimates;

• Rumors or dissemination of false information;

• Dilution resulting from conversion of outstanding convertible senior notes into shares of our common stock; and

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• Short selling of our common stock.

In addition, a takeover proposal by any third party to acquire the outstanding shares of our common stock may result in further volatility in the price of our common stock. If a takeover does not occur following announcement of a takeover proposal, for any reason, the market price of our common stock may decline.

In the past, companies, including us, that have experienced volatility in the market price of their stock have been subject to securities class action litigation. If we were to be the subject of similar litigation in the future, it could have a material adverse effect on our business, results of operations, and financial condition. Such litigation would also divert management’s attention from other business matters.

Our results of operations could vary as a result of the methods, estimates, and judgments that we use in applying our accounting policies.

The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on our results of operations. Such methods, estimates, and judgments are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time that lead us to change our methods, estimates, and judgments. Changes in those methods, estimates, and judgments could significantly affect our results of operations. See “Critical Accounting Policies” contained in Part II, Item 7 of our most recent Annual Report on Form 10-K.

The final determination of our income tax liability may be materially different from our income tax provisions and accruals.

We are subject to income taxes in both the United States and international jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions where the ultimate tax determination is uncertain. Additionally, our calculations of income taxes are based on our interpretations of applicable tax laws in the jurisdictions in which we file.

Our provision for income taxes is subject to volatility and could be adversely affected by numerous factors including:

• Earnings being lower than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher tax rates;

• Changes in the allocation of income and expenses related to cost sharing arrangements, including adjustments related to changes in our corporate structure, acquisitions or tax law changes;

• Tax effects of increases in nondeductible compensation;

• Changes in transfer pricing regulations;

• Changes in domestic and foreign tax laws including possible U.S. changes to the taxation of earnings of foreign subsidiaries, the deductibility of expenses attributable to foreign income and changes to foreign tax credit rules;

• Changes in accounting rules or principles, and changes in the valuation of deferred tax assets and liabilities;

• Unfavorable results from income tax audits; and

• Expiration or lapses of federal and state research credits.

We have adopted transfer-pricing procedures between our affiliated entities. Our procedures call for the licensing of intellectual property, the provision of services, and the sale of products from one affiliate to another at prices that we believe are equivalent to an arm’s length negotiated price. If the U.S. Internal Revenue Service (IRS) or the taxing authorities of any other jurisdiction were to successfully challenge our transfer pricing practices resulting in adjustments for prior or future tax years, we could become subject to higher taxes and our earnings would be adversely affected. Any redetermination of income allocations or modification of transfer pricing laws could result in an income tax assessment on the portion of income deemed to be derived from the U.S. or other taxing jurisdictions.

Although we believe our tax estimates are reasonable, there is no assurance that the final determination of our income tax liability will not be materially different than what is reflected in our income tax provisions and accruals. Significant judgment is required to determine the recognition and measurement of tax liabilities prescribed in the accounting guidance for uncertainty in income taxes. The accounting guidance for uncertainty in income taxes applies to all income tax positions, including the potential recovery of previously paid taxes, which, if settled unfavorably, could adversely impact our provision for income taxes. In addition, we are subject to the continuous examination of our income tax returns by the IRS and other foreign, state and local tax authorities. We are currently under audit by the IRS for fiscal years 2008 and 2009 and an amended return for fiscal 2007, and by the California Franchise Tax Board for fiscal years 2008 and 2009. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial condition.

We may not realize the full benefits of the New Zealand research and development grants.

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We are entitled to reimbursement of certain New Zealand based research and development costs through various grant programs offered by the New Zealand government that were assumed as part of our acquisition of Endace. The receipt and amount of funds under these programs are subject to our satisfaction of certain terms and conditions. As of December 29, 2013, Endace has received an aggregate of approximately $6.1 million grant reimbursements for research and development expenses and approximately $1.1 million in credits related to capital expenditures pursuant to these grants. If we do not to satisfy the terms and conditions of any of these grant programs, expenses incurred in respect of the relevant research and development projects may not be approved for reimbursement, we may be required to return amounts previously paid to us under such grant programs, and further grants may not be available to us in the future.

Our corporate offices, principal product development facilities, EMS providers, suppliers and customers are located in regions that are subject to earthquakes and other natural disasters.

Our California facilities, which include our corporate offices and principal product development facilities, are located near major earthquake faults. Any disruption in our business activities, personal injury, or damage to the facilities in excess of our currently insured amounts as a result of earthquakes or other such natural disasters, could have a material adverse effect on our business, results of operations, and financial condition. In addition, natural disasters such as hurricanes, tsunamis, flooding, and earthquakes, such as the flooding in Thailand in October 2011 and the earthquake off the coast of Japan and the resulting tsunami in March 2011, could disrupt manufacturing operations of our EMS providers, component suppliers and customers or the downstream suppliers that are located in such impacted areas, resulting in lost revenue opportunities in the near term and/or long term.

We currently do not carry earthquake or flood insurance. However, we do carry various other lines of insurance that may or may not be adequate to protect our business in the case of a natural disaster.

Our certificate of incorporation and the related provisions under Delaware law could adversely affect the performance of our stock.

Provisions of our certificate of incorporation and Delaware General Corporation Law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders. In addition, although we do not currently maintain a shareholders rights plan, we have maintained such a plan in the past and it is possible that we may adopt a shareholders rights plan in the future should general business, market or other conditions, opportunities and risks arise. The provisions of our certificate of incorporation, Delaware law, and any shareholders rights plan are generally intended to encourage potential acquirers to negotiate with us and allow our Board of Directors the opportunity to consider alternative proposals in the interest of maximizing shareholder value. However, such provisions may also discourage acquisition proposals or delay or prevent a change in control, which could harm our stock price.

We may be subject to theft or misuse of our electronic data, which could result in third-party claims and harm our business and results of operations.

We may experience attempts by others that try to gain unauthorized access through the Internet to our information technology systems, such as when they masquerade as authorized users or surreptitiously introduce software. These attempts, which might be the result of industrial or other espionage, or actions by hackers seeking to harm us, our products, or our end users. We seek to detect and investigate these security incidents and to prevent their recurrence, but in some cases we might be unaware of an incident or its magnitude and effects. The theft or unauthorized use or publication of our trade secrets and other confidential business information as a result of such cyber threats could adversely affect our competitive position and reduce marketplace acceptance of our products; the value of our investment in research and development and marketing could be reduced; and third parties might assert against us or our customers claims related to resulting losses of confidential or proprietary information or end-user data, or system reliability. Any such event could have a material adverse effect on our business, results of operations, and financial condition.

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Our system of internal controls may be inadequate.

We maintain a system of internal controls in order to ensure we are able to collect, process, summarize, and disclose the information required by the Securities and Exchange Commission within the time periods specified. Any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Due to these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Additionally, public companies in the United States are required to review their Internal Controls Over Financial Reporting (ICOFR) under the Sarbanes-Oxley Act of 2002. If our ICOFR are not adequate or fail to perform as anticipated, we may be required to restate our financial statements, receive an adverse audit opinion on the effectiveness of our internal controls, or take other actions that will divert significant financial and managerial resources, as well as subject us to fines or other government enforcement actions. Furthermore, the price of our stock could be adversely affected.

We may need additional capital in the future and such additional financing may not be available on favorable terms.

While we believe we have adequate working capital to meet our expected cash requirements for the next 12 months, we may need to raise additional funds through public or private debt or equity financings in the future for various purposes, including:

• Acquisitions of or strategic investments in complementary businesses or technologies;

• International expansion;

• Development of new products or services;

• Unanticipated competitive pressures; and

• Unexpected tax or litigation costs and settlements.

Any additional financing we may need may not be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of business opportunities, develop new products or services, or otherwise respond to unanticipated competitive pressures. In any such case, our business, results of operations, and financial condition could be materially adversely affected.

Changes in laws, regulations, and financial accounting standards may affect our reported results of operations.

As our common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, SEC and NYSE, have implemented requirements and regulations and continue developing additional regulations and requirements in response to corporate scandals and laws enacted by Congress, most notably the Sarbanes-Oxley Act of 2002. Our efforts to comply with these regulations have resulted in, and are likely to continue resulting in, increased general and administrative expenses and diversion of management time and attention from revenue-generating activities to compliance activities.

A change in accounting standards or practices and varying interpretations of existing accounting pronouncements, such as the increased use of fair value measures, proposed changes to revenue recognition, lease accounting, financial instruments and other accounting standards, and the potential requirement that U.S. registrants prepare financial statements in accordance with International Financial Reporting Standards (IFRS), could have a significant effect on our reported financial results or the way we conduct our business. Implementation of accounting regulations and related interpretations and policies, particularly those related to revenue and expense recognition, could cause us to defer revenue recognition or accelerate the timing of expense recognition, which would adversely affect our reported financial results, and could have an adverse effect on our stock price.

As new and modified laws, regulations, and standards are subject to varying interpretations due in part to their lack of specificity, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices.

Global warming issues may cause us to alter the way we conduct our business.

The general public is becoming more aware of global warming issues, and as a result, governments around the world are beginning to focus on addressing this issue. This may result in new environmental regulations that may unfavorably impact us, our suppliers, and our customers in how we conduct our business including the design, development, and manufacturing of our products. The cost of meeting these requirements may have an adverse impact on our results of operations and financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

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In November 2013, our Board of Directors authorized a plan to repurchase up to $200.0 million of our outstanding common stock. The plan superseded the existing share repurchase program authorized in August 2008. The share repurchases are authorized to be completed through the combination of individually negotiated transactions, accelerated share buybacks, and open market purchases.

On November 13, 2013, we entered into an accelerated share buyback agreement ("ASB") with Goldman Sachs to repurchase an aggregate of $44.3 million of our outstanding common stock. The total number of shares that we will repurchase under the ASB agreement will be determined based on the daily volume weighted average market price of our common stock over the course of a calculation period, less a discount, and is subject to certain adjustments under the ASB agreement. The share repurchase agreement is expected to be completed by May 2014. Under the ASB agreement, we paid approximately $44.3 million to Goldman Sachs on November 18, 2013, and Goldman Sachs delivered to us 4.6 million shares of common stock, representing shares delivered based on the November 18, 2013 stock market closing price per share for 80% of the $44.3 million. We will receive any remaining shares upon the completion of the ASB agreement through the use of the remaining 20% of the approximately $44.3 million paid to Goldman Sachs.

During the quarter ended December 29, 2013, we repurchased approximately 11.8 million shares of the common stock for an aggregate purchase price of approximately $91.1 million at an average purchase price of $7.74 per share. As of December 29, 2013, approximately $100.0 million of the authorized repurchase program remains, exclusive of the remaining unsettled forward amount of the ASB.

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs
September 30, 2013 - October 27, 2013	—	—		—	$	21,619,430
October 28, 2013 - November 24, 2013	11,782,281	7.74		11,782,281	$	100,000,000
November 25, 2013 - December 29, 2013	—	—		—	$	100,000,000
Total	11,782,281	$	7.74	11,782,281	$	100,000,000

Sales of Unregistered of Equity Securities

There were no sales of unregistered equity securities for the three months ended December 29, 2013. However, in November 2013, we issued a total of $175.0 million aggregate principal amount of 1.75% Convertible Senior Notes due November 2018 (2018 Notes). The 2018 Notes are convertible into shares of our common stock at an initial conversion rate of approximately 97.13 per share of our common stock per $1,000 principal amounts of the 2018 Notes. The initial conversion price is approximately $10.30 per share of our common stock. See Note 9 in Part I, Item 1 on this Form 10-Q.

Item 5. Other Information

On October 27, 2013, the Board of Directors approved Amended and Restated Bylaws of the Company (the “Amended Bylaws”). The Amended Bylaws amended Section 2.14(a) (Stockholder Business at Annual Meetings of the Stockholders) and Section 3.18(a) (Notice of Stockholder Nominees) of the Company’s Bylaws to provide that in order for a stockholder nomination for election to the Board of Directors or a stockholder notice of business to be brought before the 2013 annual meeting of stockholders (or any special meeting of stockholders held after October 28, 2013 and before February 14, 2014 at which directors are to be elected) to be timely, a stockholder’s notice of such nominee or other business must be received by the Company no later than November 11, 2013 and no earlier than October 11, 2013.

Item 6. Exhibits

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Exhibit 3.1	Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company’s 1997 Annual Report on Form 10-K).
Exhibit 3.2	Certificate of Amendment of Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2000).
Exhibit 3.3	Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 29, 2013).
Exhibit 3.4	Amended and Restated Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of Emulex Corporation, incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 16, 2009.
Exhibit 4.1	Indenture (including form of Note) with respect to Emulex Corporation's 1.75% Convertible Senior Notes due 2018, dated as of November 18, 2013, by and between Emulex Corporation and U.S. Bank, National Association (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on November 21, 2013).
Exhibit 10.1	Settlement Agreement, by and between Emulex Corporation and Elliott Associates, L.P., dated November 11, 2013 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on November 12, 2013).
Exhibit 10.2	Emulex Corporation Form of Lock-Up Agreement (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on November 12, 2013).
Exhibit 10.3	Letter, dated November 11, 2013, from Jeffrey W. Benck, President and Chief Executive Officer of Emulex Corporation) and James M. McCluney (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on November 12, 2013).
Exhibit 10.4	Master Confirmation, by Goldman Sachs & Co. to Emulex Corporation, dated November 13, 2013 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on November 21, 2013).
Exhibit 10.5	Supplemental Confirmation, by Goldman Sachs & Co. to Emulex Corporation, dated November 18, 2013 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on November 21, 2013).
Exhibit 31A	Certification of the Principal Executive Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to § 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31B	Certification of the Principal Financial Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to § 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

ITEMS 3 and 4 are Not Applicable and Have Been Omitted.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: January 31, 2014

EMULEX CORPORATION
By:	/s/ Jeffrey W. Benck
	Jeffrey W. Benck
	President and Chief Executive Officer
By:	/s/ Kyle B. Wescoat
	Kyle B. Wescoat
	Senior Vice President, Chief Financial Officer and Treasurer

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