Emulex (ELX) 10-Q 2015 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 28, 2014

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 21, 2015, the registrant had 71,912,370 shares of common stock outstanding.

1

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. 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.

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, in our Annual Report on Form 10-K and included elsewhere herein. In addition to those factors, the factors listed below could cause actual results to differ materially from those in the forward-looking statements:

• faster than anticipated declines in the demand for storage networking and fiber channel and 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;

• the highly competitive nature of the markets for our products as well as pricing pressures that may result from such competitive conditions and the emergence of new or stronger competitors as a result of consolidation movements in the market;

• 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 our OEM customers to successfully incorporate our products into their systems;

• our reliance on a limited number of third-party suppliers and subcontractors for components and assembly, many of which are located outside of the United States;

• the effect on our margins of rapid migration of technology and product substitution by customers, including transitions from application specific integrated circuit (ASIC) solutions to boards for selected applications and higher-end to lower-end products, mezzanine card products or modular Local Area Network (LAN) on Motherboard (LOMs);

• the non-linearity and variability in the level of our revenue resulting from the variable and seasonal procurement patterns of our customers;

• the possibility that our goodwill could become impaired in the near term which would result in a non-cash charge and could adversely affect our reported GAAP operating results;

• any inadequacy of our intellectual property protection or our ability to obtain necessary licenses or other intellectual property rights on commercially reasonable terms;

• our ability to attract and retain key technical personnel;

• our ability to respond quickly to technological developments and to benefit from our research and development activities as well as government grants related thereto and delays in product development;

• intellectual property and other litigation against us, with or without merit, that could result in substantial attorneys’ fees and costs, cause product shipment delays, loss of patent rights, monetary damages, costs associated with product or component redesigns and require us to indemnify customers or enter into royalty or licensing agreements, which may or may not be available;

• our dependence on sales and product production outside of the United States so that our results could be affected by adverse economic, social, political and infrastructure conditions in those countries;

• that we may fail to realize the anticipated benefits from the acquisition of Endace Limited (Endace) on a timely basis or at all which could result in an impairment of assets or be unable to complete the integration of Endace’s technology into our existing operations in a timely and efficient manner;

• the effect of any actual or potential unsolicited offers to acquire us, proxy contests or the activities of activist investors;

• weakness in domestic and worldwide macro-economic conditions, currency exchange rate fluctuations or potential disruptions in world credit and equity markets; terrorist activities, natural disasters, or general economic or political instability and any resulting disruption in our supply chain or customer purchasing patterns; and

• changes in tax rates or legislation, accounting standards and other regulatory changes.

2

EMULEX CORPORATION AND SUBSIDIARIES

INDEX

	PAGE
Part I. FINANCIAL INFORMATION	4
Item 1. Financial Statements (unaudited)	4
Condensed Consolidated Balance Sheets as of December 28, 2014 and June 29, 2014	4
Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 28, 2014 and December 29, 2013	5
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended December 28, 2014 and December 29, 2013	6
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 28, 2014 and December 29, 2013	7
Notes to Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3. Quantitative and Qualitative Disclosures about Market Risk	33
Item 4. Controls and Procedures	33
Part II. OTHER INFORMATION	35
Item 1. Legal Proceedings	35
Item 1A. Risk Factors	35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 6. Exhibits	38
Signatures	39

3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EMULEX CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited, in thousands, except share data)

	December 28, 2014			June 29, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	184,722		$	158,439
Accounts receivable, net of allowance for doubtful accounts of $1,118 and $1,079 at December 28, 2014 and June 29, 2014, respectively	77,235			76,974
Inventories	23,822			25,831
Prepaid expenses and other current assets	17,109			20,029
Deferred income taxes	223			223
Total current assets	303,111			281,496
Property and equipment, net of accumulated depreciation and amortization of $159,446 and $157,780 at December 28, 2014 and June 29, 2014, respectively	58,604			59,908
Goodwill	248,519			248,519
Intangible assets, net	94,122			108,007
Other assets	18,030			19,993
Total assets	$	722,386		$	717,923
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	24,281			25,762
Accrued and other current liabilities	40,907			42,183
Total current liabilities	65,188			67,945
Convertible senior notes	149,374			146,478
Other liabilities	6,553			6,842
Deferred income taxes	12,543			15,550
Accrued taxes	26,462			26,462
Total liabilities	260,120			263,277
Commitments and contingencies (Note 7)
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; 111,966,462 and 110,976,299 issued; 71,740,801 and 70,931,827 outstanding at December 28, 2014 and June 29, 2014, respectively	11,197			11,098
Additional paid-in capital	1,331,708			1,325,677
Accumulated deficit	(498,283		)	(501,886		)
Accumulated comprehensive loss	(2,972		)	(1,863		)
Treasury stock, at cost; 40,225,661 and 40,044,472 shares at December 28, 2014 and June 29, 2014, respectively	(379,384		)	(378,380		)
Total stockholders’ equity	462,266			454,646
Total liabilities and equity	$	722,386		$	717,923

See accompanying notes to condensed consolidated financial statements.

4

EMULEX CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited, in thousands, except per share data)

	Three Months Ended						Six Months Ended
	December 28, 2014			December 29, 2013			December 28, 2014			December 29, 2013
Net revenues	$	111,087		$	122,996		$	214,896		$	237,828
Cost of sales:
Cost of goods sold	37,535			42,109			74,151			81,800
Amortization of core and developed technology intangible assets	6,355			6,239			12,709			12,399
Patent litigation settlement, damages and royalties	2,090			2,358			3,815			3,855
Total cost of sales	45,980			50,706			90,675			98,054
Gross profit	65,107			72,290			124,221			139,774
Operating expenses:
Engineering and development	33,680			42,020			67,320			82,431
Selling and marketing	16,090			19,849			32,742			38,941
General and administrative	6,456			10,407			13,545			20,036
Amortization of other intangible assets	576			1,603			1,176			3,207
Total operating expenses	56,802			73,879			114,783			144,615
Operating income (loss)	8,305			(1,589		)	9,438			(4,841		)
Non-operating (expense) income, net:
Interest income	2			16			3			20
Interest expense	(2,409		)	(1,148		)	(4,793		)	(1,150		)
Other (expense) income, net	(27		)	(135		)	(395		)	17
Total non-operating (expense) income, net	(2,434		)	(1,267		)	(5,185		)	(1,113		)
Income (loss) before income taxes	5,871			(2,856		)	4,253			(5,954		)
Income tax provision	1,549			1,171			650			1,714
Net income (loss)	$	4,322		$	(4,027	)	$	3,603		$	(7,668	)
Net income (loss) per share:
Basic	$	0.06		$	(0.05	)	$	0.05		$	(0.09	)
Diluted	$	0.06		$	(0.05	)	$	0.05		$	(0.09	)
Number of shares used in per share computations:
Basic	71,459			86,881			71,250			89,162
Diluted	73,122			86,881			72,920			89,162

See accompanying notes to condensed consolidated financial statements.

5

EMULEX CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited, in thousands)

	Three Months Ended						Six Months Ended
	December 28, 2014			December 29, 2013			December 28, 2014			December 29, 2013
Net income (loss)	$	4,322		$	(4,027	)	$	3,603		$	(7,668	)
Other comprehensive (loss) income:
Foreign currency translation adjustments	(616		)	230			(1,109		)	109
Comprehensive income (loss)	$	3,706		$	(3,797	)	$	2,494		$	(7,559	)

See accompanying notes to condensed consolidated financial statements.

6

EMULEX CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)

	Six Months Ended
	December 28, 2014			December 29, 2013
Cash flows from operating activities:
Net income (loss)	$	3,603		$	(7,668	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization of property and equipment	9,140			9,603
Share-based compensation expense	6,555			8,316
Amortization of intangible assets	13,885			15,606
Provision for losses on accounts receivable	39			(155		)
Accretion of debt discount on convertible senior notes and amortization of debt issuance costs	3,253			765
Gain on sale or disposal of property and equipment	(6		)	(25		)
Deferred income taxes	(3,007		)	—
Foreign currency adjustments	(234		)	244
Changes in assets and liabilities:
Accounts receivable	(300		)	(4,659		)
Inventories	2,030			(154		)
Prepaid expenses, prepaid income taxes and other assets	4,262			6,886
Accounts payable, accrued liabilities, and other liabilities	(2,328		)	4,775
Net cash provided by operating activities	36,892			33,534
Cash flows from investing activities:
Net proceeds from sale of property and equipment	—			30
Purchases of property and equipment	(9,183		)	(10,036		)
Net cash used in investing activities	(9,183		)	(10,006		)
Cash flows from financing activities:
Issuance of Convertible Senior Notes	—			175,000
Repurchase of common shares and accelerated share repurchase forward contract	(1,004		)	(100,000		)
Debt issuance costs	—			(5,224		)
Change in restricted cash	31			24
Payroll tax withholdings on behalf of employees for restricted stock	(1,500		)	(3,069		)
Proceeds from issuance of common stock under stock plans	1,633			2,620
Net cash (used in) provided by financing activities	(840		)	69,351
Effect of exchange rates on cash and cash equivalents	(586		)	163
Net increase in cash and cash equivalents	26,283			93,042
Cash and cash equivalents at beginning of period	158,439			105,637
Cash and cash equivalents at end of period	$	184,722		$	198,679

See accompanying notes to condensed consolidated financial statements.

7

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, including normal recurring accruals necessary to present fairly the Company’s consolidated financial position, results of operations, comprehensive income (loss), and cash flows. Interim results for the three and six months ended December 28, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending June 28, 2015. 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 29, 2014. 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 2015 is a 52-week fiscal year. The last 53-week fiscal year was fiscal 2011.

Supplemental Cash Flow Information

	Six Months Ended
	December 28, 2014		December 29, 2013
	(in thousands)
Cash paid during the period for:
Interest	$	1,540	$	2
Income taxes	2,559		2,803
Non-cash investing and financing activities:
Purchases of property and equipment not paid, net	858		203
Accrued payroll tax withholdings for shares issued to employees	—		43
Release of In-Process Research & Development (IPRD) to Developed Technology	—		8,070

Recently Issued Accounting Standards

On May 28, 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, "Revenue from Contracts with Customers" (ASU 2014-09). The Company is currently evaluating the impact on its financial statements of the new revenue recognition guidance, which will become effective for the Company beginning in fiscal 2018.

2. Fair Value Measurements

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.

8

Assets and Liabilities Measured at Fair Value on a recurring basis:

	December 28, 2014
	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Cash and Cash Equivalents
	(in thousands)
Cash	$	154,722	$	—	$	—	$	154,722	$	154,722
Level 1:
Money market funds	30,000		—		—		30,000		30,000
Level 2:
None	—		—		—		—		—
Level 3:
None	—		—		—		—		—
	$	184,722	$	—	$	—	$	184,722	$	184,722
	June 29, 2014
	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Cash and Cash Equivalents
	(in thousands)
Cash	$	128,439	$	—	$	—	$	128,439	$	128,439
Level 1:
Money market funds	30,000		—		—		30,000		30,000
Level 2:
None	—		—		—		—		—
Level 3:
None	—		—		—		—		—
	$	158,439	$	—	$	—	$	158,439	$	158,439

Assets and Liabilities Measured 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 2015.

Fair Value of Financial Instruments Not Measured at Fair Value

The total fair value of the Convertible Senior Notes at December 28, 2014 was $157.5 million, which was estimated based on recent market transaction prices, a Level 2 fair value measurement.

3. Inventories

Inventories are summarized as follows:

	December 28, 2014		June 29, 2014
	(in thousands)
Raw materials	$	9,143	$	7,797
Finished goods	14,679		18,034
	$	23,822	$	25,831

4. Goodwill and Intangible Assets, net

There was no activity in goodwill during the six months ended December 28, 2014.

The Company tests goodwill for impairment annually during the fourth fiscal quarter and at other times if events have occurred or circumstances exist that indicate the carrying value of goodwill may no longer be recoverable. Given the recent volatility of the Company's market capitalization, the inherent uncertainty in forecast and identification of triggering events, and the fact that the fair value of the Company's reporting units did not exceed their carrying value by a substantial margin

9

during the annual impairment test during the fourth fiscal quarter, it is possible that the Company's goodwill could become impaired in the near term.

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

	December 28, 2014							June 29, 2014
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Amortizable intangible assets:
Core technology and patents	$	77,345	$	(76,692	)	$	653	$	77,345	$	(76,172	)	$	1,173
Developed technology	254,900		(165,558		)	89,342		254,900		(152,850		)	$	102,050
Customer relationships	4,900		(3,535		)	1,365		4,900		(3,089		)	$	1,811
Tradenames	8,439		(5,696		)	2,743		8,439		(5,524		)	$	2,915
Other	287		(268		)	19		287		(229		)	$	58
Total intangible assets, net:	$	345,871	$	(251,749	)	$	94,122	$	345,871	$	(237,864	)	$	108,007

The amortizable intangible assets are being amortized on a straight-line basis over expected useful lives ranging from approximately one to thirteen years. Aggregate amortization expense for intangible assets for the three months ended December 28, 2014 and December 29, 2013, was approximately $6.9 million and $7.8 million, respectively. Aggregate amortization expense for intangible assets during the six months ended December 28, 2014 and December 29, 2013, was approximately $13.9 million and $15.6 million, respectively

The following table presents the estimated future aggregate amortization expense of intangible assets as of December 28, 2014 (in thousands):

Remainder of 2015	$	13,861
2016	26,603
2017	10,076
2018	6,678
2019	6,678
Thereafter	30,226
	$	94,122

5. Accrued and Other Current Liabilities

Components of accrued and other current liabilities are as follows:

	December 28, 2014		June 29, 2014
	(in thousands)
Payroll and related costs	$	18,776	$	16,369
Warranty liability	2,903		2,798
Accrued rebates	2,208		1,782
Sales allowances	1,791		1,778
Deferred revenues	4,681		4,749
Restructuring	6		3,236
Dismissal Agreement, patent litigation settlement, damages, and royalties payable to Broadcom Corporation (1)	5,028		4,970
Other	5,514		6,501
	$	40,907	$	42,183

(1) See Note 7.

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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 28, 2014 were:

	(in thousands)
Balance at beginning of period	$	2,798
Accrual for warranties issued	1,293
Changes to pre-existing warranties (including changes in estimates)	(835		)
Settlements made (in cash or in kind)	(353		)
Balance at end of period	$	2,903

6. Restructuring

Fourth Quarter of Fiscal 2014 Restructuring

During the fourth quarter of fiscal 2014, the Company recorded restructuring charges of approximately $1.1 million primarily consisting of severance due to workforce reductions. The severance related charges were substantially paid in cash by the end of the second quarter of fiscal 2015.

Second Quarter of Fiscal 2014 Restructuring

During the second quarter of fiscal 2014, the Company initiated a restructuring plan designed to streamline business operations and reduce operating expenses. The total restructuring charge was approximately $7.5 million during the three and six months ended December 29, 2013. The restructuring actions include a reduction in workforce of approximately 15%, the consolidation of certain engineering facilities, and the closure of the Company's Bolton, Massachusetts facility. All restructuring actions impacted the Connectivity segment. The restructuring plan was substantially completed by the end of the first quarter of fiscal 2015.

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)
Balance at June 29, 2014	$	3,236		$	—	$	3,236
Charges / adjustments	(853		)	—		(853		)
Payments	(2,377		)			(2,377		)
Balance at December 28, 2014	$	6		$	—	$	6

A summary of restructuring costs, by functional line item in the condensed consolidated statements of operations is as follows:

	Three Months Ended   December 28, 2014			Three Months Ended   December 29, 2013		Six Months Ended   December 28, 2014			Six Months Ended   December 29, 2013
	(in thousands)
Cost of goods sold	$	1		$	277	$	(5	)	$	277
Engineering and development	(48		)	5,259		(373		)	5,259
Selling and marketing	(419		)	668		(435		)	668
General and administrative	(14		)	1,246		(40		)	1,246
	$	(480	)	$	7,450	$	(853	)	$	7,450

7. Commitments and Contingencies

Litigation

Broadcom Patent Infringement Litigation

11

During fiscal 2010, Broadcom Corporation (Broadcom) filed a patent infringement lawsuit containing 300 claims against the Company alleging infringement of eleven patents. On April 3, 2012, United States District Court in the Central District of California (District Court) issued a permanent injunction (2012 Permanent Injunction) against further sale of products found to infringe U.S. Patent 7,058,150 (the ‘150 patent) and 7,471,691 (the ‘691 patent), but permitting sales of products manufactured outside the U.S. to customers located outside the U.S., design around efforts including modifications and design, development, and testing to eliminate infringement, and service and technical support for certain products. This injunction remains in place but the effects have been mitigated in a number of ways. First, with product redesigns. Second, with license agreements from Broadcom to our customers whose products were affected by the injunction. Third, Broadcom and the Company entered into a settlement agreement on July 3, 2012 which provided the Company with a worldwide limited license to the ‘691 patent, the ‘150 patent, and U.S. Patents 6,424,194; 7,486,124 and 7,724,057 [collectively, the ‘194 Patent family], for certain fields of use including Fibre Channel applications. Under this settlement agreement, the Company paid a lump sum of approximately $58.0 million in the first quarter of fiscal 2013. Fourth, the Company and Broadcom entered into a Dismissal and Standstill Agreement described below.

Approximately $36.8 million of the $58.0 million payment 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 28, 2014, the unamortized prepaid license fee was approximately $11.1 million, of which approximately $3.4 million was recorded in prepaid expenses and other current assets and approximately $7.7 million was recorded in other assets. The Company recognized amortization expense related to such prepaid license fees of approximately $0.9 million and $1.0 million during the three months ended December 28, 2014 and December 29, 2013, respectively, and approximately $1.9 million and $2.0 million during the six months ended December 28, 2014 and December 29, 2013, respectively.

Effective March 30, 2014, the Company and Broadcom entered into a Dismissal and Standstill Agreement (the "Dismissal Agreement") pursuant to which the Company and Broadcom agreed to dismiss, without prejudice, certain claims that had been scheduled for retrial in September 2014 and not to pursue certain other claims for one year. The claims subject to standstill relate to the SerDes Patents (defined below) based solely on the use, manufacture, sale or import of certain Emulex products that were named in the original lawsuit. SerDes Patents means U.S. Patent Nos. 6,424,194; 7,038,516; 7,125,169; 7,486,124; and 7,724,057, and any reissues, foreign counterparts, continuations, continuations-in-part, divisionals or reexaminations of such patents. The Dismissal Agreement does not prevent, after the expiration of the one year standstill, Broadcom from bringing an infringement claim seeking an injunction or damages with respect to infringement of the SerDes Patents relating to the Standstill Products. In the Dismissal Agreement, Emulex agreed to pay Broadcom, a non-refundable, non-cancelable dismissal and standstill fee for $5 million, of which approximately $3.8 million was included in Accrued and Other Current Liabilities as of December 28, 2014.

Through December 28, 2014, the Company has incurred approximately $21.9 million of mitigation, product redesign and appeal related expenses, of which approximately $0.9 million was recorded during the three months ended December 29, 2013, and approximately $0.2 million and $3.4 million during the six months ended December 28, 2014 and December 29, 2013, respectively. The Company expects to incur incremental mitigation and appeal related expenses during fiscal 2015 up to approximately $0.2 million, to be recorded within operating expenses. 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 28, 2014, the Company has recorded approximately $6.3 million in cost of sales related to such customer obligations, of which approximately $1.1 million and $1.3 million were recorded in cost of sales for the three months ended December 28, 2014 and December 29, 2013, respectively, and approximately $1.9 million and $1.8 million during the six months ended December 28, 2014 and December 29, 2013, respectively. The Company may incur additional amounts related to these obligations of approximately $4 million in future periods, all of which will reduce gross margins in the periods accrued.

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, and is pursuing certain claims for reimbursement against certain of its suppliers, it cannot be certain that such defense and indemnification obligations will be honored by such suppliers or that any related legal proceedings will result in any material reimbursement to the Company. 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.

Shareholder Lawsuits

On May 21, 2014, a derivative shareholder complaint was filed in the United States District Court in the Central District of California (Case No. 8:14-cv-0076-DOC-JCG) alleging damages incurred by Emulex and naming eight of the Company's eleven directors as defendants. The lawsuit alleges that Emulex was damaged by expenses for the repurchases of Emulex stock

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and by the implementation of cost reductions. An amended federal complaint was filed on July 14, 2014 in which the original plaintiff was dropped from the complaint and a different plaintiff was added. On August 15, 2014, the Company filed a motion to dismiss the complaint. On December 8, 2014, the Court granted Emulex's motion to dismiss in its entirety and granted plaintiff leave to amend its complaint by January 23, 2015. On January 20, 2015, plaintiff filed a notice of intent not to file an amended complaint, and indicated that it would be appealing the Court’s decision to the Ninth Circuit Court of Appeals. Management is unable to determine whether any loss will occur or to estimate the range of such loss, therefore, no amount of loss has been accrued.

On July 17, 2014, a derivative shareholder complaint was filed in the Superior Court of the State of California for the County of Orange (Case No. 30-2014-00734802-CU-SL-CXC) alleging damages incurred by Emulex and naming eight of the Company's eleven directors as defendants. The lawsuit alleges that Emulex was damaged by expenses for the repurchases of Emulex stock and by the implementation of cost reductions. On August 7, 2014, the parties filed a stipulation to stay the State Derivative Action pending the resolution of the motion to dismiss the Federal derivative action described in the preceding paragraph. Management is unable to determine whether any loss will occur or to estimate the range of such loss, therefore, no amount of loss has been accrued.

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.

Other Commitments and Contingencies

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 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 28, 2014, the Company has not incurred any significant costs related to contractual indemnification of its customers.

8. 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 ("Convertible Senior 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 if the Company fails to comply with the reporting covenants or if the Company fails to timely file periodic reports with the SEC as outlined in the indenture governing the Convertible Senior Notes. The Convertible Senior Notes are unsecured and rank senior to the Company's future indebtedness that is expressly subordinated to the Convertible Senior Notes, equal with existing and future indebtedness that are not so subordinated and effectively subordinated to any future secured indebtedness to the extent of the value of the assets securing that indebtedness and to all existing and future debt and other liabilities and guarantees of the Company's subsidiaries. As of December 28, 2014, the remaining term of the Convertible Senior Notes was 3.9 years.

The Convertible Senior Notes are convertible, subject to certain conditions, into 97.1322 shares of the Company's common stock per $1,000 Convertible Senior Note, which is equivalent to an initial conversion price of $10.30 per share of common stock. The conversion rate is subject to adjustment for certain events as outlined in the indenture governing the Convertible Senior Notes. On or prior to the business day preceding August 15, 2018, holders may convert their Convertible Senior 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 (whether or not consecutive) 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 Convertible Senior 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 Convertible Senior 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 28, 2014, the “if-converted” value of the Convertible Notes did not exceed its principal amount and none of the conditions allowing holders of the Convertible Senior Notes to convert had been met.

The Company may not redeem the Convertible Senior Notes prior to maturity. However, in the event of a Make-Whole Fundamental Change, the holders of the Convertible Senior Notes have the option to require the Company to repurchase all or a portion of their Convertible Senior Notes at a purchase price equal to 100% of the principal amount of the Convertible Senior Notes, plus accrued and unpaid interest. Holders who convert their Convertible Senior Notes in connection with a Make-Whole

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Fundamental Change, as defined in the indenture, may be entitled to an increase in the conversion rate pursuant to the Make-Whole Fundamental Change table in the indenture.

Based on the terms of the embedded stock conversion option, the conversion option was determined to be indexed to the Company's stock. Accordingly, the conversion option was not accounted for separately as a derivative.

At the date of issuance, the Company separated the Convertible Senior Notes into 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 Convertible Senior 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 Convertible Senior 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 $5.3 million, which have been allocated on a pro-rata basis to the debt and equity components, consistent with the allocation of the Convertible Senior 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 Convertible Senior Notes. The debt issuance costs attributable to the equity component of approximately $1.0 million were netted against the equity component of the Convertible Senior Notes and recorded as a reduction to additional paid-in capital. Debt issuance costs, net of amortization, were approximately $3.6 million as of December 28, 2014.

The carrying values of the liability and equity components of the Convertible Senior Notes consisted of the following as of December 28, 2014:

	(in thousands)
Liability component:
Principal amount	$	175,000
Less: Unamortized debt discount	(25,626		)
Net carrying amount	149,374
Equity component	$	31,043

The following table sets forth total interest expense recognized related to the Convertible Senior Notes during the three and six months ended December 28, 2014 and December 29, 2013:

	Three Months Ended   December 28, 2014			Three Months Ended   December 29, 2013			Six Months Ended   December 28, 2014			Six Months Ended   December 29, 2013
	(in thousands)
Contractual coupon interest expense	$	766		$	383		$	1,531		$	383
Amortization of debt issuance costs	181			79			357			79
Accretion of debt discount	1,459			686			2,896			686
Total	$	2,406		$	1,148		$	4,784		$	1,148
Effective interest rate	6.62		%	6.62		%	6.62		%	6.62		%

9. 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.

During the three and six months ended December 28, 2014, the Company repurchased approximately 0.2 million shares at an average price of $5.54 for a total of approximately $1.0 million.

As of December 28, 2014, approximately $49.0 million remains under the authorized repurchase program.

10. Stock-Based Compensation

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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 28, 2014		December 29, 2013		December 28, 2014		December 29, 2013
	(in thousands)
Cost of goods sold	$	72	$	147	$	188	$	236
Engineering and development	1,246		1,132		2,886		3,036
Sales and marketing	1,122		874		2,228		2,076
General and administrative	584		1,591		1,253		2,968
	$	3,024	$	3,744	$	6,555	$	8,316

A summary of stock option activity for the six months ended December 28, 2014 is as follows:

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
					(in years)	(in millions)
Options outstanding at June 29, 2014	2,811,919		$	9.95	2.47	$	0.2
Options granted	255,505		$	5.18
Options exercised	(11,887	)	$	1.92
Options expired	(575,242	)	$	13.09
Options forfeited	(37,495	)	$	6.89
Options outstanding at December 28, 2014	2,442,800		$	8.80	2.87	$	0.5
Options vested and expected to vest at December 28, 2014	2,363,499		$	8.91	2.78	$	0.4
Options exercisable at December 28, 2014	1,637,506		$	10.25	1.66	$	0.2

A summary of outstanding and unvested stock awards activity for six months ended December 28, 2014 is as follows:

	Number of Awards		Weighted Average Grant Date Fair Value
Awards outstanding at June 29, 2014	3,599,134		$	7.29
Awards granted	1,341,249		$	5.27
Awards vested	(875,731	)	$	7.14
Awards canceled / forfeited	(299,780	)	$	7.28
Awards outstanding at December 28, 2014	3,764,872		$	6.61
Awards vested and expected to vest at December 28, 2014	3,355,083

A summary of Cash-Settled Unit Award activity for the six months ended December 28, 2014 is as follows:

	Number of Awards		Weighted Average Grant Date Fair Value
Awards outstanding at June 29, 2014	322,870		$	7.25
Awards granted	1,110,427		$	5.26
Awards vested	(84,522	)	$	7.74
Awards canceled / forfeited	(71,680	)	$	6.94
Awards outstanding at December 28, 2014	1,277,095		$	5.51
Awards vested and expected to vest at December 28, 2014	1,105,935

As of December 28, 2014, the liability related to Cash-Settled Unit Awards was approximately $1.1 million.

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As of December 28, 2014, there was approximately $18.0 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 1.4 years.

11. Income Taxes

As of December 28, 2014, the total gross liability for income taxes associated with uncertain tax positions was approximately $40.2 million. If fully recognized, approximately $26.5 million of the $40.2 million would impact the Company’s effective tax rate. The Company cannot make a reasonably reliable estimate of the period of payment for this liability. Absent any resolution of the on-going audit by 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 2013 and California income tax returns for fiscal years 2008 to 2013 are open as the statutes of limitations have not yet expired or have been extended. The Company's federal income tax returns for fiscal 2010 to 2013 are currently under examination by the IRS. Additionally, 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. In foreign jurisdictions, with few exceptions, the Company is subject to examinations for all years subsequent to fiscal 2010. The Company does not expect any audits for these foreign jurisdictions to have a material effect on the results of operations or financial position.

The IRS completed its examination of the Company’s federal income tax returns for fiscal years 2008 and 2009 and the amended return filed for fiscal year 2007 and issued a 30-Day Letter in March 2014. In the 30-Day Letter, the IRS proposed adjustments related to the amount of "buy-in-payments" made by one of the 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 the 30-Day Letter is approximately $70.0 million, excluding interest and penalties. Upon the 30th day from the issuance of the 30-Day Letter from the IRS, the Company began accruing additional interest and will continue to do so until resolution. The Company responded to the 30-Day Letter in May 2014, disagreeing with the IRS' proposed adjustments and the basis for its positions, and administratively appealed to the IRS Appeals Office. The IRS has assigned the audit to the IRS Office of Appeals in Los Angeles, California.

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. The ultimate resolution of these examinations could be substantially different from the Company’s estimate of any potential associated liabilities, and any resulting adjustments could have a material adverse effect on Emulex’s tax provision, net income/(loss) and cash flows.

12. Net Income (Loss) Per Share

Net income (loss) per share was computed by dividing net income (loss) by the weighted average number of common shares outstanding for the three and six months ended December 28, 2014 and December 29, 2013:

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	Three Months Ended					Six Months Ended
	December 28, 2014		December 29, 2013			December 28, 2014			December 29, 2013
	(in thousands, except per share data)
Numerator
Net income (loss)	4,322		(4,027		)	3,603			(7,668		)
Less: Undistributed earnings allocated to participating securities	—		—			(1		)	—
Undistributed earnings allocated to the Company’s common stockholders for basic net income (loss) per share	$	4,322	$	(4,027	)	$	3,602		$	(7,668	)
Undistributed earnings allocated to the Company’s common stockholders for diluted net income (loss) per share	$	4,322	$	(4,027	)	$	3,602		$	(7,668	)
Denominator
Denominator for basic net income (loss) per share- weighted average shares outstanding	71,459		86,881			71,250			89,162
Effect of dilutive securities:
Dilutive options outstanding, unvested stock units, and ESPP	1,663		—			1,670			—
Denominator for diluted net income (loss) per share - adjusted weighted average shares outstanding	73,122		86,881			72,920			89,162
Basic net income (loss) per share	$	0.06	$	(0.05	)	$	0.05		$	(0.09	)
Diluted net income (loss) per share	$	0.06	$	(0.05	)	$	0.05		$	(0.09	)
Antidilutive options and unvested stock excluded from the computations	2,563		5,281			2,525			5,623
Average market price of common stock	$	5.36	$	7.44		$	5.40		$	7.61

The antidilutive stock options and unvested stock were excluded from the computation of diluted net income (loss) 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 net losses for the periods presented.

As the principal amount of the Convertible Senior Notes (Note 8) will be settled in cash upon conversion, only the conversion spread relating to the Convertible Senior Notes will be included in the calculation of diluted net income per common share. As such, the Convertible Senior 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 Convertible Senior 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 Convertible Senior Notes will be included in the diluted net income per common share calculation. During the three and six month period ended December 28, 2014, there were no anti-dilutive shares resulting from the Convertible Senior Notes as the price of the Company's common stock did not exceed the conversion price.

13. 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 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.

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	Three Months Ended						Six Months Ended
	December 28, 2014			December 29, 2013			December 28, 2014			December 29, 2013
	(in thousands)
Net revenues:
Connectivity	$	104,801		$	113,348		$	202,736		$	218,083
Visibility	6,286			9,648			12,160			19,745
Consolidated net revenues	$	111,087		$	122,996		$	214,896		$	237,828
Adjusted operating income (loss):
Connectivity	$	22,708		$	22,143		38,625			36,860
Visibility	(2,562		)	(1,488		)	(5,516		)	(2,732		)
Subtotal	20,146			20,655			33,109			34,128
Reconciling items:
Stock-based compensation	(3,024		)	(3,744		)	(6,555		)	(8,316		)
Amortization of intangibles	(6,931		)	(7,842		)	(13,885		)	(15,606		)
Patent litigation damages, license fees and royalties	(2,090		)	(2,358		)	(3,815		)	(3,855		)
Mitigation expenses related to the Broadcom patents	(8		)	(930		)	(182		)	(3,449		)
Restructuring activities	480			(7,450		)	853			(7,450		)
Other	(268		)	80			(87		)	(293		)
Reconciling items	(11,841		)	(22,244		)	(23,671		)	(38,969		)
Operating income (loss)	$	8,305		$	(1,589	)	9,438			(4,841		)
							December 28, 2014			June 29, 2014
							(in thousands)
Total assets:
Connectivity							$	537,457		$	568,709
Visibility							184,929			149,214
							$	722,386		$	717,923
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 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.

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 two product lines - Network Connectivity Products (NCP) and Storage Connectivity and Other Products (SCOP). We believe that this product line reporting is more consistent with how third party analysts view our addressable networking segment markets, and provides a more transparent view of our business. Our Visibility Segment consists of Network Visibility Products (NVP) 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 Virtual Network Fabrics, leverage a RoCE-based low latency architecture to deliver application acceleration, and provide an

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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 10Gb 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 13 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.

Product Redesign Activities and Potential Royalty Obligations

During fiscal 2010, Broadcom Corporation (Broadcom) filed a patent infringement lawsuit containing 300 claims against us alleging infringement of eleven patents. On April 3, 2012, United States District Court in the Central District of California (District Court) issued a permanent injunction (2012 Permanent Injunction) against further sale of products found to infringe U.S. Patent 7,058,150 (the ‘150 patent) and 7,471,691 (the ‘691 patent), but permitting sales of products manufactured outside the U.S. to customers located outside the U.S., design around efforts including modifications and design, development, and testing to eliminate infringement, and service and technical support for certain products. This injunction remains in place but the effects have been mitigated in a number of ways. First, with product redesigns. Second, with license agreements from Broadcom to our customers whose products were affected by the injunction. Third, Broadcom and Emulex entered into a settlement agreement on July 3, 2012 which provided us with a worldwide limited license to the ‘691 patent, the ‘150 patent, and U.S. Patents 6,424,194; 7,486,124 and 7,724,057 [collectively, the ‘194 Patent family], for certain fields of use including Fibre Channel applications.

Through December 28, 2014, we incurred approximately $21.9 million in mitigation, product redesign and appeal related expenses of which approximately $0.9 million was recorded during the three months ended December 29, 2013, and approximately $0.2 million and $3.4 million during the six months ended December 28, 2014 and December 29, 2013, respectively. We expect to incur incremental mitigation and appeal related expenses up to approximately $0.2 million, to be recorded within operating expenses, and expect the majority of such expenses to be incurred in fiscal 2015. 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 28, 2014, Emulex has recorded approximately $6.3 million in cost of sales related to such customer obligations, of which approximately $1.1 million and $1.3 million were recorded in cost of sales for the three months ended December 28, 2014 and December 29, 2013, respectively, and approximately $1.9 million and $1.8 million during the six months ended December 28, 2014 and December 29, 2013, respectively. We may incur

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additional amounts related to these obligations of approximately $4 million in future periods, all of which will reduce gross margins in the periods accrued.

Effective March 30, 2014, Emulex and Broadcom entered into a Dismissal and Standstill Agreement (the "Dismissal Agreement") pursuant to which Emulex and Broadcom entered into certain understandings with respect to the outstanding claims relating to arising out of the patent infringement suit. Pursuant to the terms of the Dismissal Agreement, we agreed to pay Broadcom a non-refundable, non-cancelable dismissal and standstill fee in the amount of $5 million, of which approximately $3.8 million was included in Accrued and Other Current Liabilities as of December 28, 2014.

While we have contractual commitments from our suppliers concerning the defense and indemnification of certain Broadcom claims relating to certain technology provided by such suppliers, and is pursuing certain claims for reimbursement against certain of our suppliers, it cannot be certain that such defense and indemnification obligations will be honored by such suppliers or that any related legal proceedings will result in any material reimbursement to us. This lawsuit continues to present risks with respect to U.S. sales of certain Ethernet products that could have a material adverse effect on our 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.

See Note 7 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.

	Percentage of Net Revenues
	Three Months Ended				Six Months Ended
	December 28, 2014		December 29, 2013		December 28, 2014		December 29, 2013
Net revenues	100	%	100	%	100	%	100	%
Cost of sales:
Cost of goods sold	34	%	34	%	34	%	34	%
Amortization of core and developed technology intangible assets	5	%	5	%	6	%	5	%
Patent litigation settlement, damages and royalties	2	%	2	%	2	%	2	%
Total cost of sales	41	%	41	%	42	%	41	%
Gross profit	59	%	59	%	58	%	59	%
Operating expenses:
Engineering and development	30	%	34	%	31	%	35	%
Selling and marketing	15	%	16	%	15	%	16	%
General and administrative	6	%	9	%	7	%	8	%
Amortization of other intangible assets	1	%	1	%	1	%	2	%
Total operating expenses	52	%	60	%	54	%	61	%
Operating income (loss)	7	%	(1	)%	4	%	(2	)%
Non-operating (expense) income, net:
Interest income	—	%	—	%	—	%	—	%
Interest expense	(2	)%	(1	)%	(2	)%	—	%
Other (expense) income, net	—	%	—	%	—	%	—	%
Total non-operating (expense) income, net	(2	)%	(1	)%	(2	)%	—	%
Income (loss) before income taxes	5	%	(2	)%	2	%	(2	)%
Income tax provision	1	%	1	%	—	%	1	%
Net income (loss)	4	%	(3	)%	2	%	(3	)%

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Three months ended December 28, 2014, compared to three months ended December 29, 2013

Net Revenues. Net revenues for the three months ended December 28, 2014, decreased by approximately $11.9 million, or 10%, to approximately $111.1 million, compared to approximately $123.0 million for the three months ended December 29, 2013.

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 28, 2014		Percentage of Net Revenues		Three Months Ended   December 29, 2013		Percentage of Net Revenues		Increase/ (Decrease)			Percentage Change
Connectivity Segment:
Network Connectivity Products	$	82,729	74	%	$	87,205	71	%	$	(4,476	)	(5	)%
Storage Connectivity and Other Products	22,072		20	%	26,143		21	%	(4,071		)	(16	)%
Total Connectivity Segment	104,801		94	%	113,348		92	%	(8,547		)	(8	)%
Visibility Segment:
Network Visibility Products	6,286		6	%	9,648		8	%	(3,362		)	(35	)%
Total Net Revenues	$	111,087	100	%	$	122,996	100	%	$	(11,909	)	(10	)%

Connectivity segment revenues decreased by approximately 8% for the three months ended December 28, 2014 compared to the three months ended December 29, 2013, primarily due to continuing weakness in the UNIX server and high-end storage markets.

Fibre Channel based products account for the majority, ranging from 70% - 80%, of our NCP revenues. For the three months ended December 28, 2014, Fibre Channel based product revenue decreased by approximately 3% primarily due to a decrease in units shipped of approximately 3%. The Ethernet based product revenues decreased by approximately 12% reflecting a decrease in average selling price of approximately 8% and a decrease in units shipped of approximately 5%.

SCOP revenues for the three months ended December 28, 2014 decreased by approximately $4.1 million, or 16%, compared to the three months ended December 29, 2013. The decrease was primarily due to a decrease in revenue from bridging products of approximately 30%.

The Visibility segment consists of NVP and resulted from our acquisition of Endace on February 26, 2013. NVP revenues decreased by approximately $3.4 million, or 35%, primarily due to lower sales in the United States.

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:

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Net Revenues by Major Customers
	Direct Revenues				Total Direct and Indirect Revenues (2)
	Three Months Ended   December 28, 2014		Three Months Ended   December 29, 2013		Three Months Ended   December 28, 2014		Three Months Ended   December 29, 2013
Net revenue percentage (1)
OEM:
EMC	—		—		—		11	%
Hewlett-Packard	12	%	16	%	23	%	21	%
Hon Hai Precision Industry Co., Ltd. (Foxconn Technology Group) (3)	14	%	11	%	—		—
IBM	30	%	30	%	25	%	35	%

(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 64% of total net revenues for the three months ended December 28, 2014 compared to 66% for the three months ended December 29, 2013. Direct and indirect sales to our top five customers accounted for approximately 71% of total net revenues for the three months ended December 28, 2014, compared to approximately 77% for the three months ended December 29, 2013. 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)	Three Months Ended   December 28, 2014		Percentage of Net Revenues		Three Months Ended   December 29, 2013		Percentage of Net Revenues		Increase/ (Decrease)			Percentage Change
OEM	$	93,019	84	%	$	102,235	83	%	$	(9,216	)	(9	)%
Distribution	15,070		13	%	16,424		13	%	$	(1,354	)	(8	)%
End-user and Other	2,998		3	%	4,337		4	%	$	(1,339	)	(31	)%
Total net revenues	$	111,087	100	%	$	122,996	100	%	$	(11,909	)	(10	)%

The decrease in OEM net revenues for the three months ended December 28, 2014 compared to the three months ended December 29, 2013 reflected a decrease of approximately 7% in NCP revenues and a decrease of approximately 15% in SCOP revenues. The decrease in distribution revenues for the three months ended December 28, 2014 compared to the three months ended December 29, 2013 was primarily due to a decrease of approximately 39% in NVP revenues generated through distributors. The decrease in end user and other revenues for the three months ended December 28, 2014 compared to the three months ended December 29, 2013 was primarily due to a decrease of approximately 30% in NVP revenues. We believe that the 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. Although we view product certifications and qualifications as an important indicator of future revenue opportunities and growth for the Company, they 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.

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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)	Three Months Ended   December 28, 2014		Percentage of Net Revenues		Three Months Ended   December 29, 2013		Percentage of Net Revenues		Increase/(Decrease)			Percentage Change
Asia Pacific	$	74,756	67	%	$	71,169	58	%	$	3,587		5	%
United States	18,887		17	%	34,012		28	%	(15,125		)	(44	)%
Europe, Middle East, and Africa	16,441		15	%	17,176		14	%	(735		)	(4	)%
Rest of the world	1,003		1	%	639		NM		364			57	%
Total net revenues	$	111,087	100	%	$	122,996	100	%	$	(11,909	)	(10	)%

The decrease in net revenues in United States was primarily due to a decrease of approximately 44% in NCP revenues. The increase in net revenues in Asia Pacific was primarily due to an increase of approximately 12% in NCP revenues. We expect Asia Pacific net revenues as a percentage of total revenues to increase as our OEM customers 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 28, 2014		Gross Profit Margin		Three Months Ended   December 29, 2013		Gross Profit Margin		Increase/(Decrease)			Percentage Change
Connectivity	$	62,468	60	%	$	66,261	58	%	$	(3,793	)	2	%
Visibility	2,639		42	%	6,029		62	%	(3,390		)	(20	)%
Total Gross Profit	$	65,107	59	%	$	72,290	59	%	$	(7,183	)	—	%

Cost of sales includes the costs of producing, supporting, and managing our supply of finished products. Approximately $0.1 million of share-based compensation expense was included in both the three months ended December 28, 2014 and December 29, 2013. Approximately $6.4 million and $6.2 million of amortization of technology intangible assets was included in cost of sales for the three months ended December 28, 2014 and December 29, 2013, respectively. Our gross margin percentage for the three months ended December 28, 2014 was consistent with the three months ended December 29, 2013 due to favorable product mix in the Connectivity segment and a decrease in royalty expense of approximately $0.2 million related to the amended 2012 Permanent Injunction, offset by unfavorable product mix in the Visibility segment. For the three month period ending December 28, 2014, the Visibility segment gross margin was further negatively impacted by an excess and obsolete inventory charge for older generation products and incremental amortization of core and developed technology intangible assets resulting from the release of In-Process Research and Development to developed technology primarily in the latter half of fiscal 2014. We expect our consolidated 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 any licensing agreement with Broadcom.

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 28, 2014		Percentage of Net Revenues		Three Months Ended   December 29, 2013		Percentage of Net Revenues		Increase/(Decrease)			Percentage Change
$	33,680	30	%	$	42,020	34	%	$	(8,340	)	(4	)%

Engineering and development expenses decreased by approximately $8.3 million, or 20%, for the three months ended December 28, 2014 compared to the three months ended December 29, 2013. Approximately $1.2 million and $1.1 million of

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share-based compensation expense was included in engineering and development costs for the three months ended December 28, 2014 and December 29, 2013, respectively. Salary and related expenses decreased by approximately $7.3 million due to a reduction in engineering and development headcount. In addition, fixed and training expenses both decreased by approximately $0.2 million compared to the prior year quarter primarily related to depreciation expense and cost reduction efforts.

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 28, 2014		Percentage of Net Revenues		Three Months Ended   December 29, 2013		Percentage of Net Revenues		Increase/(Decrease)			Percentage Change
$	16,090	15	%	$	19,849	16	%	$	(3,759	)	(1	)%

Selling and marketing expenses decreased by approximately $3.8 million, or 19%, for the three months ended December 28, 2014 compared to the three months ended December 29, 2013. Approximately $1.1 million and $0.9 million of share-based compensation expense was included in selling and marketing costs for the three months ended December 28, 2014 and December 29, 2013, respectively. The decrease in selling and marketing expenses was primarily due to a decrease in salary and related expenses of approximately $2.1 million as a result of a reduction in headcount, and a decrease in outside services and other expenses of approximately $0.6 million resulting from additional efforts to control costs.

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):

General and Administrative
Three Months Ended   December 28, 2014		Percentage of Net Revenues		Three Months Ended   December 29, 2013		Percentage of Net Revenues		Increase/(Decrease)			Percentage Change
$	6,456	6	%	$	10,407	9	%	$	(3,951	)	(3	)%

General and administrative expenses decreased by approximately $4.0 million, or 38%, for the three months ended December 28, 2014 compared to the three months ended December 29, 2013. Approximately $0.6 million and $1.6 million of share-based compensation expense was included in general and administrative costs for the three months ended December 28, 2014 and December 29, 2013, respectively. Salary and related expenses decreased by approximately $2.4 million due to a reduction in headcount.

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 28, 2014		Percentage of Net Revenues		Three Months Ended   December 29, 2013		Percentage of Net Revenues		Increase/(Decrease)			Percentage Change
$	576	1	%	$	1,603	1	%	$	(1,027	)	—	%

Amortization of other intangible assets for the three months ended December 28, 2014 decreased approximately $1.0 million compared to the three months ended December 29, 2013 due to a lower unamortized intangible assets balance at the beginning of the current three month period as a result of certain intangible assets being fully amortized in fiscal 2014. As noted elsewhere in this Form 10-Q, given the recent volatility of our market capitalization, the inherent uncertainty in forecast and identification of triggering events, and the fact that the fair value of our reporting units did not exceed their carrying value by a substantial margin during the annual impairment test during the fourth fiscal quarter, it is possible that our goodwill could become impaired in the near term which could result in a material charge.

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

Non-Operating (Expense) Income, net
Three Months Ended   December 28, 2014			Percentage of Net Revenues		Three Months Ended   December 29, 2013			Percentage of Net Revenues		(Increase)/Decrease			Percentage Change
$	(2,434	)	(2	)%	$	(1,267	)	(1	)%	$	(1,167	)	(1	)%

Our non-operating expense, net increased by approximately $1.2 million for the three months ended December 28, 2014 compared to the three months ended December 29, 2013. The net increase was primarily due to interest expense and amortization of issuance costs and debt discount of approximately $2.4 million in the three months ended December 28, 2014 compared to approximately $1.1 million in the three months ended December 29, 2013 related to the Convertible Senior Notes issued in November 2013 (see Note 8 "Convertible Senior Notes" to the Notes to Condensed Consolidated Financial Statements).

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

Income Tax Provision (Benefit)
Three Months Ended   December 28, 2014		Percentage of Net Revenues		Three Months Ended   December 29, 2013		Percentage of Net Revenues		Increase/(Decrease)		Percentage Change
$	1,549	1	%	$	1,171	1	%	$	378	—	%

Income tax expense for the three months ended December 28, 2014 was approximately $1.5 million, for an effective rate of 26% compared to approximately $1.2 million, for an effective tax rate of 41% for the three months ended December 29, 2013. We generate the majority of our taxable earnings in countries other than the U.S., so our tax expense and effective tax rates reflect the mix of our earnings and losses in the U.S. and various international jurisdictions, including India, Ireland, Isle of Man and New Zealand, as well as our valuation allowance recorded against our U.S. deferred tax assets. The current year tax provision was primarily driven by approximately $2.6 million related to the restructuring of our outstanding intercompany loans which was partially offset by approximately $0.7 million from taxable unrealized currency exchange losses resulting from outstanding intercompany loans. We may continue to recognize taxable income/loss on the unrealized foreign exchange gains/losses on our intercompany loans for tax reporting purposes in the future. 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 the U.S. We also do not forecast discrete events, such as a settlement of tax audits with governmental authorities, specifically our current IRS audit, or changes in tax laws, due to their inherent uncertainty and our inability to reliably predict the ultimate outcome at the current time.

Six months ended December 28, 2014, compared to six months ended December 29, 2013

Net Revenues. Net revenues for the six months ended December 28, 2014, decreased by approximately $22.9 million, or 10%, to approximately $214.9 million, compared to approximately $237.8 million for the six months ended December 29, 2013.

Net Revenues by Operating Segment and Product Line

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

Net Revenues by Operating Segment and Product Line
	Six Months Ended   December 28, 2014		Percentage of Net Revenues		Six Months Ended   December 29, 2013		Percentage of Net Revenues		Increase/ (Decrease)			Percentage Change
Connectivity Segment:
Network Connectivity Products	$	158,529	74	%	$	165,185	70	%	$	(6,656	)	(4	)%
Storage Connectivity and Other Products	44,207		20	%	52,898		22	%	(8,691		)	(16	)%
Total Connectivity Segment	202,736		94	%	218,083		92	%	(15,347		)	(7	)%
Visibility Segment:
Network Visibility Products	12,160		6	%	19,745		8	%	(7,585		)	(38	)%
Total Net Revenues	$	214,896	100	%	$	237,828	100	%	$	(22,932	)	(10	)%

Connectivity segment revenues decreased by approximately 7% for the six months ended December 28, 2014 compared to the six months ended December 29, 2013, primarily due to continuing weakness in the UNIX server and high-end storage markets.

Fibre Channel based products account for the majority, ranging from 70% - 80%, of our NCP revenues. For the six months ended December 28, 2014, Fibre Channel based product revenue decreased by approximately 3% reflecting a decrease in units shipped of approximately 4% partially offset by an increase in average selling price of approximately 1%. The Ethernet based product revenues decreased by approximately 6% reflecting a decrease in units shipped of approximately 4% and a decrease in average selling price of approximately 3%.

SCOP revenues for the six months ended December 28, 2014 decreased by approximately $8.7 million, or 16%, compared to the six months ended December 29, 2013. The decrease was primarily due to a decrease in revenue from bridging products of approximately 28%.

NVP revenues decreased by approximately $7.6 million, or 38%, due to lower sales in the United States and Europe, Middle East and Africa.

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:

Net Revenues by Major Customers
	Direct Revenues				Total Direct and Indirect Revenues (2)
	Six Months Ended   December 28, 2014		Six Months Ended   December 29, 2013		Six Months Ended   December 28, 2014		Six Months Ended   December 29, 2013
Net revenue percentage (1)
OEM:
EMC	—		—		—		11	%
Hewlett-Packard	14	%	17	%	24	%	22	%
Hon Hai Precision Industry Co., Ltd. (Foxconn Technology Group) (3)	15	%	12	%	—		—
IBM	27	%	29	%	27	%	34	%

(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.

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Direct sales to our top five customers accounted for approximately 64% of total net revenues for the six months ended December 28, 2014 compared to 65% for the six months ended December 29, 2013. Direct and indirect sales to our top five customers accounted for approximately 72% of total net revenues for the six months ended December 28, 2014, compared to approximately 78% for the six months ended December 29, 2013. 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 28, 2014		Percentage of Net Revenues		Six Months Ended   December 29, 2013		Percentage of Net Revenues		Increase/ (Decrease)			Percentage Change
OEM	$	178,804	83	%	$	199,759	84	%	$	(20,955	)	(10	)%
Distribution	29,625		14	%	27,942		12	%	$	1,683		6	%
End-user and Other	6,467		3	%	10,127		4	%	$	(3,660	)	(36	)%
Total net revenues	$	214,896	100	%	$	237,828	100	%	$	(22,932	)	(10	)%

The decrease in OEM net revenues for the six months ended December 28, 2014 compared to the six months ended December 29, 2013 reflected a decrease of approximately 8% in NCP revenues and a decrease of approximately 16% in SCOP revenues. The increase in distribution revenues for the six months ended December 28, 2014 compared to the six months ended December 29, 2013 was primarily due to an increase of approximately 31% in NCP revenues generated through distributors. The decrease in end user and other revenues for the six months ended December 28, 2014 compared to the six months ended December 29, 2013 was primarily due to a decrease of approximately 36% in NVP 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)	Six Months Ended   December 28, 2014		Percentage of Net Revenues		Six Months Ended   December 29, 2013		Percentage of Net Revenues		Increase/(Decrease)			Percentage Change
Asia Pacific	$	141,482	66	%	$	138,553	58	%	$	2,929		2	%
United States	40,581		19	%	62,758		26	%	(22,177		)	(35	)%
Europe, Middle East, and Africa	29,796		14	%	35,036		15	%	(5,240		)	(15	)%
Rest of the world	3,037		1	%	1,481		1	%	1,556			NM
Total net revenues	$	214,896	100	%	$	237,828	100	%	$	(22,932	)	(10	)%

The decrease in net revenues in United States was due to a decrease of approximately 34% in NCP revenue and 40% in NVP revenue. The decrease in net revenues in Europe, Middle East, and Africa was due to a decrease of approximately 42% in NVP revenue and 32% in SCOP revenue. Asia Pacific net revenues for the six months ended December 28, 2014 increased slightly compared to the six months ended December 29, 2013. We expect Asia Pacific net revenues as a percentage of total revenues to increase as our OEM customers 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.

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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 28, 2014		Gross Profit Margin		Six Months Ended   December 29, 2013		Gross Profit Margin		Increase/(Decrease)			Percentage Change
Connectivity	$	118,821	59	%	$	128,256	59	%	$	(9,435	)	—	%
Visibility	5,400		44	%	11,518		58	%	(6,118		)	(14	)%
Total Gross Profit	$	124,221	58	%	$	139,774	59	%	$	(15,553	)	(1	)%

Approximately $0.2 million of share-based compensation expense was included in both the six months ended December 28, 2014 and December 29, 2013. Approximately $12.7 million and $12.4 million of amortization of technology intangible assets was included in cost of sales for the six months ended December 28, 2014 and December 29, 2013, respectively. Our gross margin percentage decreased to 58% for the six months ended December 28, 2014 from 59% for the six months ended December 29, 2013 due to an unfavorable product mix in the Visibility segment. For the six month period ending December 28, 2014, the Visibility segment gross margin was further unfavorably impacted by an excess and obsolete inventory charge for older generation products and incremental amortization of core and developed technology intangible assets resulting from the release of In-Process Research and Development to developed technology primarily in the latter half of fiscal 2014. We expect our consolidated 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 any licensing agreement with Broadcom.

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

Engineering and Development
Six Months Ended   December 28, 2014	Percentage of Net Revenues		Six Months Ended   December 29, 2013		Percentage of Net Revenues		Increase/(Decrease)			Percentage Change
67,320	31	%	$	82,431	35	%	$	(15,111	)	(4	)%

Engineering and development expenses decreased by approximately $15.1 million, or 18%, for the six months ended December 28, 2014 compared to the six months ended December 29, 2013. Approximately $2.9 million and $3.0 million of share-based compensation expense was included in engineering and development costs for the six months ended December 28, 2014 and December 29, 2013, respectively. Salary and related expenses decreased by approximately $11.4 million due to a reduction in engineering and development headcount. New product development expense decreased by approximately $1.9 million compared to the prior year primarily related to our mitigation activities for the 2012 Permanent Injunction. In addition, fixed and training expenses decreased by approximately $0.5 million and $0.4 million, respectively, compared to the prior year primarily related to depreciation expense and cost reduction efforts.

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

Selling and Marketing
Six Months Ended   December 28, 2014		Percentage of Net Revenues		Six Months Ended   December 29, 2013		Percentage of Net Revenues		Increase/(Decrease)			Percentage Change
$	32,742	15	%	$	38,941	16	%	$	(6,199	)	(1	)%

Selling and marketing expenses decreased by approximately $6.2 million, or 16%, for the six months ended December 28, 2014 compared to the six months ended December 29, 2013. Approximately $2.2 million and $2.1 million of share-based compensation expense was included in selling and marketing costs for the six months ended December 28, 2014 and December 29, 2013, respectively. The decrease in selling and marketing expenses was primarily due to a decrease in salary and related expenses of approximately $3.5 million due to reduction in headcount, a decrease in variable compensation of approximately $1.3 million related to sales commissions, and a decrease in outside services and other expenses of approximately $0.9 million due to additional efforts to control costs.

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

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General and Administrative
Six Months Ended   December 28, 2014		Percentage of Net Revenues		Six Months Ended   December 29, 2013		Percentage of Net Revenues		Increase/(Decrease)			Percentage Change
$	13,545	7	%	$	20,036	8	%	$	(6,491	)	(1	)%

General and administrative expenses decreased by approximately $6.5 million, or 32%, for the six months ended December 28, 2014 compared to the six months ended December 29, 2013. Approximately $1.3 million and $3.0 million of share-based compensation expense was included in general and administrative costs for the six months ended December 28, 2014 and December 29, 2013, respectively. Salary and related expenses decreased by approximately $4.0 million due to a reduction in headcount. In addition, rent expense decreased by approximately $0.6 million primarily due to contract termination costs incurred in the prior year.

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

Amortization of intangible assets
Six Months Ended   December 28, 2014		Percentage of Net Revenues		Six Months Ended   December 29, 2013		Percentage of Net Revenues		Increase/(Decrease)			Percentage Change
$	1,176	1	%	$	3,207	2	%	$	(2,031	)	(1	)%

Amortization of other intangible assets for the six months ended December 28, 2014 decreased approximately $2.0 million compared to the six months ended December 29, 2013 due to 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 2014. As noted elsewhere in this Form 10-Q, given the recent volatility of our market capitalization, the inherent uncertainty in forecast and identification of triggering events, and the fact that the fair value of our reporting units did not exceed their carrying value by a substantial margin during the annual impairment test during the fourth fiscal quarter, it is possible that our goodwill could become impaired in the near term which could result in a material charge.

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

Non-Operating (Expense) Income, net
Six Months Ended   December 28, 2014			Percentage of Net Revenues		Six Months Ended   December 29, 2013			Percentage of Net Revenues		(Increase)/Decrease			Percentage Change
$	(5,185	)	(2	)%	$	(1,113	)	—	%	$	(4,072	)	(2	)%

Our non-operating expense, net increased by approximately $4.1 million for the six months ended December 28, 2014 compared to the six months ended December 29, 2013. The net increase was primarily due to interest expense and amortization of issuance costs and debt discount of approximately $4.8 million in the six months ended December 28, 2014 compared to approximately $1.1 million in the six months ended December 29, 2013 related to the Convertible Senior Notes issued in November 2013 (see Note 8 "Convertible Senior Notes" to the Notes to Condensed Consolidated Financial Statements).

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

Income Tax Provision (Benefit)
Six Months Ended   December 28, 2014		Percentage of Net Revenues		Six Months Ended   December 29, 2013		Percentage of Net Revenues		Increase/(Decrease)			Percentage Change
$	650	—	%	$	1,714	1	%	$	(1,064	)	(1	)%

Income tax expense for the six months ended December 28, 2014 was approximately $0.7 million, for an effective rate of 15% compared to approximately $1.7 million, for an effective tax rate of 29% for the six months ended December 29, 2013. We generate the majority of our taxable earnings in countries other than the U.S., so our tax expense and effective tax rates reflect the mix of our earnings and losses in the U.S. and various international jurisdictions, including India, Ireland, Isle of Man and New Zealand, as well as our valuation allowance recorded against our U.S. deferred tax assets. The current year tax provision was primarily driven by approximately $2.6 million related to the restructuring of our outstanding intercompany loans which was partially offset by approximately $2.4 million from taxable unrealized currency exchange losses resulting from outstanding intercompany loans. We may recognize taxable income/loss on the unrealized foreign exchange gains/losses on our intercompany loans for tax reporting purposes in the future. 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 the U.S. We also do not forecast discrete events, such as a settlement of tax audits with governmental authorities, specifically our current IRS audit, or changes in tax laws, due to their inherent uncertainty and our inability to reliably predict the ultimate outcome at the current time.

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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 inventory reserves, goodwill and purchased intangible asset valuations, uncertain tax positions, 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, our consolidated financial statements and future results of operations may be materially impacted. Specific to our goodwill and intangible asset valuations policy, the annual impairment test is performed during the fourth fiscal quarter. Given the recent volatility of our market capitalization, the inherent uncertainty in forecast and identification of triggering events, and the fact that the fair value of our reporting units did not exceed their carrying value by a substantial margin during the annual impairment test during the fourth fiscal quarter, it is possible that our goodwill could become impaired in the near term which could result in a material charge. 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 2014 Form 10-K. There have been no material changes in any of our critical accounting policies during the three months ended December 28, 2014.

Recently Adopted and Recently Issued Accounting Standards

See Note 1 in the accompanying notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for a description of the recently issued accounting standards.

Liquidity and Capital Resources

Our principal sources of liquidity consist of our existing cash and cash equivalents balances, as well as funds expected to be generated from operations. At December 28, 2014, we had approximately $237.9 million in working capital and approximately $184.7 million in cash and cash equivalents as compared to approximately $213.6 million in working capital and approximately $158.4 million in cash and cash equivalents at June 29, 2014.

Our cash and cash equivalents balances are held in numerous locations throughout the world. As of December 28, 2014, our international subsidiaries held approximately 36% of our total cash and cash equivalents, which will be primarily 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.

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Cash Flow

The following table summarizes our cash flows:

	Six Months Ended
	December 28, 2014			December 29, 2013
	(in thousands)
Net cash provided by (used in):
Operating activities	$	36,892		$	33,534
Investing activities	(9,183		)	(10,006		)
Financing activities	(840		)	69,351
Effect of foreign currency translation on cash and cash equivalents	(586		)	163
Increase in cash and cash equivalents	$	26,283		$	93,042

Operating Activities

Cash provided by operating activities was approximately $36.9 million during the six months ended December 28, 2014 compared to approximately $33.5 million during the six months ended December 29, 2013. The current period cash provided by operating activities resulted from net income of approximately $3.6 million, non-cash adjustments for amortization of intangible assets of approximately $13.9 million, depreciation and amortization of approximately $9.1 million and share-based compensation expense of approximately $6.6 million, and the timing of net working capital requirements.

Investing Activities

Cash used in investing activities was approximately $9.2 million during the six months ended December 28, 2014 compared to approximately $10.0 million during the six months ended December 29, 2013. The current period usage of cash was related to purchases of property and equipment. 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.

Financing Activities

Cash used in financing activities was approximately $0.8 million during the six months ended December 28, 2014 compared to cash provided by financing activities of approximately $69.4 million during the six months ended December 29, 2013. The usage of cash for the six months ended December 28, 2014 was primarily due to share repurchases of approximately $1.0 million and payroll tax withholdings on behalf of employees for restricted stock of approximately $1.5 million partially offset by proceeds from issuance of common stock under stock plans of approximately $1.6 million. 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 $175.0 million aggregate principal amount of 1.75% Convertible Senior Notes due November 2018 (Convertible Senior 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 shares of our common stock per $1,000 Convertible Senior Note. The initial conversion price is approximately $10.30 per share of our common stock. See Note 8 in Part I, Item 1 on this Form 10-Q. We used a portion of the net proceeds from the offering to repurchase approximately $151.1 million of our common stock at a price per share equal to $6.67 during fiscal 2014 and the first half of fiscal 2015. We intend to use the remaining net proceeds from the offering for additional share repurchases. In November 2013, our Board of Directors approved a $200.0 million share repurchase program. At December 28, 2014, we have the authority to repurchase an additional approximately $49.0 million pursuant to this authorization.

In November 2013, we announced a cost savings program designed to streamline business operations and achieve operating expense reductions. We plan to continue our cost savings program, which includes simplifying our product portfolio, discontinuing additional programs with lower returns on investment, pursuing 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,

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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 repurchases for at least the next 12 months and the foreseeable future based on currently forecasted trends. We may need to pursue additional financing if our business does not generate sufficient cash flow from operations to enable us to pay the principal amount of our Convertible Senior Notes or to fund other liquidity needs.

We have disclosed outstanding legal proceedings in Note 7 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. 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. Effective March 30, 2014, Emulex and Broadcom entered into a Dismissal Agreement pursuant to which Emulex and Broadcom entered into certain understandings with respect to the outstanding claims relating to and arising out of the patent infringement suit. Pursuant to the terms of the Dismissal Agreement, we agreed to pay Broadcom a non-refundable, non-cancelable dismissal and standstill fee in the amount of $5 million, of which approximately $3.8 million was included in Accrued and Other Current Liabilities as of December 28, 2014.

We expect to incur incremental mitigation and appeal related expenses up to $0.2 million to be recorded within operating expenses, and we expect the majority of such expenses to be incurred in fiscal 2015. In addition, we continue to evaluate certain customer royalty obligations arising under their licensing agreements with Broadcom that could result in additional costs of approximately $4 million in future periods. Such costs will 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.

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 28, 2014, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We do not believe our cash equivalents are subject to significant interest rate risk due to their short terms to maturity. As of December 28, 2014, the carrying value of our cash equivalents approximated fair value. The Convertible Senior Notes issued in November 2013 have a fixed interest rate of 1.75%.

Exchange Rate Risk

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.

In addition, we are also exposed to foreign exchange rate risk specific to our intercompany loans denominated in a currency other than the local tax reporting currency, which results in tax expense or benefit on the unrealized exchange gain or loss in the local jurisdiction. The potential effect on net income as of December 28, 2014 resulting from a hypothetical 10% adverse change in currency exchange rates is approximately $0.9 million of incremental tax expense. As a result, fluctuations in currency exchange rates have affected, and could continue to affect our business and results of operations.

Item 4. Controls and Procedures

Evaluation of Disclosure 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 the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of the end of the period

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covered by this Quarterly Report as a result of an unremediated material weakness related to the annual goodwill impairment test, as described in further detail below.

As described in Item 9A in our Annual Report on Form 10-K for the fiscal year ended June 29, 2014, we identified a material weakness in our internal control over financial reporting related to the annual goodwill impairment test. Specifically, our controls were not designed effectively, as management’s review controls over the third-party valuation analyses were not designed at a precise enough level to sufficiently address the reasonableness of: (i) certain assumptions estimated by management (ii) certain assumptions and calculations performed by the third-party valuation specialist and (iii) the allocation of net assets assigned to each reporting unit. 

As discussed in the Form 10-K, we are implementing a remediation plan to improve our internal control over financial reporting. This remediation plan for the annual goodwill impairment test includes: (i) more robust and critical review of internal assumptions and inputs, (ii) specific review procedures with defined precision levels over third-party valuation assumptions and calculations, and (iii) overall assessment of the valuation conclusions.  The material weakness will not be considered remediated until our controls are operational for a period of time, tested, and management concludes that these controls are designed and operating effectively. 

Changes in Internal Control over Financial Reporting

Other than the discussion above, there have been no changes in our internal control over financial reporting during the quarter ended December 28, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.   

Subsequent to the second quarter of fiscal 2015, the Company implemented its global enterprise resource planning system for a subsidiary. The Company will continue to monitor and test this system as part of management's annual evaluation of internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth under Note 7 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

The following risk factors are either new risk factors or have been modified since our most recent annual report. In addition to the other information set forth in this report, you should also consider the factors discussed in Part I, Item 1A. "Risk Factors” in our Annual Report on Form 10-K for the year ended June 29, 2014, which could materially affect our business, financial condition or future results. The risks described below and in our Annual Report on Form 10-K for the year ended June 29, 2014 are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

We may be required to recognize goodwill impairment in future periods.

We test goodwill for impairment annually during the fourth fiscal quarter and at other times if events have occurred or circumstances exist that indicate the carrying value of goodwill may no longer be recoverable. Given the recent volatility of our market capitalization, the inherent uncertainty in forecast and identification of triggering events, and the fact that the fair value of our reporting units did not exceed their carrying value by a substantial margin during the annual impairment test during the fourth fiscal quarter, it is possible that our goodwill could become impaired in the near term. Any such impairment would result in a non-cash charge and could have a material adverse effect our reported GAAP operating results.

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 28, 2014, we derived approximately 83% of our net revenues from sales to OEM customers and approximately 14% from sales through distribution. 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 28, 2014. 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 72% of our net revenues for the six months ended December 28, 2014. If we are unable to retain our current OEM and distributor customers, recruit additional or replacement customers, or timely collect amounts due from our 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 effect our business, results of operations, and financial condition. This includes transitioning to new inventory geographies or markets.

In January 2014, our largest customer announced the proposed sale of their x86-based server business to an overseas competitor. The sale was completed in October 2014. During the related transition period, we may be exposed to elevated levels of demand fluctuation, forecasting uncertainty and other business risk.

Although we continue to expand our base of customers, we believe our revenues in the future continue to 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 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, during the twelve month period ended December 28, 2014, the sales price of our common stock ranged from a low of $4.45 per share to a high of $7.74 per share.

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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 or experience unfavorable outcomes in any of our pending litigations, as discussed in Note 7 in the accompanying notes to our consolidated financial statements under the caption "Litigation" in Part I, Item 1 of this Form 10-Q, 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.

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

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.

During the three months ended December 28, 2014, we repurchased approximately 0.2 million shares of the common stock for an aggregate purchase price of approximately $1.0 million at an average purchase price of $5.54 per share. As of December 28, 2014, approximately $49.0 million of the authorized repurchase program remains.

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 29, 2014 - October 26, 2014	—	—		—	$	50,000,000
October 27, 2014 - November 23, 2014	181,189	5.54		181,189	$	48,996,384
November 24, 2014 - December 28, 2014	—	—		—	$	48,996,384
Total	181,189	$	5.54	181,189	$	48,996,384

Sales of Unregistered of Equity Securities

There were no sales of unregistered equity securities for the three months ended December 28, 2014. However, in November 2013, we issued an aggregate principal amount of $175.0 million in 1.75% Convertible Senior Notes due November 2018 (Convertible Senior Notes). The Convertible Senior Notes are convertible into shares of our common stock at an initial conversion rate of approximately 97.13 shares of our common stock per $1,000 Convertible Senior Note. The initial conversion price is approximately $10.30 per share of our common stock. See Note 8 in Part I, Item 1 on this Form 10-Q.

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Item 6. Exhibits

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 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, 4 and 5 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 29, 2015

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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