SILICON GRAPHICS INTERNATIONAL CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements included or incorporated by reference in this Form 10-Q other than statements of historical fact, are forward-looking statements. Investors can identify these and other forward-looking statements by the use of words such as "estimate," "may," "will," "could," "anticipate," "expect," "intend," "believe," "continue" or the negative of such terms, or other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements also include the assumptions underlying or relating to such statements.

Our actual results could differ materially from those projected in the forward-looking statements included herein as a result of a number of factors, risks and uncertainties, including, among others, changes in the anticipated amounts and timing of restructuring charges to be incurred and cost savings expected to be realized from our restructuring actions in Europe, our ability to successfully execute our strategies, the risks discussed in this Part I, Item 2 -"Management's Discussion and Analysis of Financial Condition and Results of Operations," the risk factors set forth in Part II, Item 1A- "Risk Factors" and elsewhere in this Form 10-Q, the risk factors set forth in our Annual Report on Form 10-K for the year ended June 29, 2012 filed with the Securities and Exchange Commission (the "SEC") on September 10, 2012 (our "Annual Report"), and the risks detailed from time to time in our future reports filed with the SEC.

The information included herein is as of the filing date of this Form 10-Q with the SEC and future events or circumstances could differ materially from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on these forward-looking statements. Unless required by law, we expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.

All subsequent written or oral forward-looking statements attributable to SGI or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Readers are urged to carefully review and consider the various disclosures made in this report and other documents we file from time to time with the SEC to advise interested parties of the risks and factors that may affect our business.

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto in Part I, Item 1 in this Form 10-Q and with our financial statements and notes thereto for the year ended June 29, 2012 contained in our Annual Report.

Overview We are a global leader in technical computing. We are focused on helping customers solve their most demanding business and technology challenges by delivering large-scale computing and storage, high-performance compute and storage, and data center solutions. We develop, market, and sell a broad line of low cost, mid-range and high-end computing servers and data storage as well as differentiating software. We sell data center infrastructure products purpose-built for large-scale data center deployments. In addition, we provide global customer support and professional services related to our products. We enable enterprises to meet their computing and storage requirements at a lower total cost of ownership and provide them greater flexibility and scalability. We are also a leading developer of enterprise class, high-performance features for the Linux operating system that provide our customers with a standard Linux operating environment combined with our differentiated yet un-intrusive Linux capabilities that are designed to improve performance, simplify system management, and provide a more robust development environment.

Management has implemented a strategic plan which will drive changes in three major areas. First, we are targeting our investments towards the vertical markets where we can provide the highest value to our customers and differentiate our offerings to gain both market share and margin. Second, we are investing and aligning with key partners in order to provide our customers with integrated solutions in Big Data, storage and scale-up computing. Third, management is focusing on initiatives to improve our operational performance and cost structure. We have ongoing efforts to reduce material and other manufacturing costs. We believe that this strategic plan will help create a strong foundation for our business results in the long-term.

Our revenue mix by geography shows that we continue to have strong international presence with 38% of total revenue from sales outside of the U.S. in both the three and six months ended December 28, 2012. In addition, our customer base continues to expand in various sectors, including the public, cloud and manufacturing sectors.

Results of Operations Summarized below are the results of our operations for the three and six months ended December 28, 2012 as compared to the three and six months ended December 30, 2011.

Financial Highlights 20-------------------------------------------------------------------------------- Table of Contents • Our total revenue for the three months ended December 28, 2012 was $171.2 million, a decrease of $24.0 million or 12%, from the comparable period in fiscal year 2012. In addition, revenue decreased $10.0 million or 3% in the six months ended December 28, 2012 from $374.1 million in the six months ended December 30, 2011. The decrease was due to lower revenue primarily from the decrease in sales in our product revenue in our APJ segment as well as decreased service revenue for all of our geographic segments. In addition, because the six months ended December 30, 2011 was comprised of 27 weeks compared to only 26 weeks for the six months ended December 28, 2012, we recognized revenue for one less week during the current period.

• Our overall gross margin increased by 1.1 percentage points from 26.7% in the three months ended December 30, 2011 to 27.8% in the three months ended December 28, 2012. The favorable change in the overall gross margin in the three months ended December 28, 2012 is due to favorable product margins shifts to higher gross margin which was slightly offset by a decrease in service gross margin. However, our overall gross margin decreased by 3.3 basis points from 28.0% in the six months ended December 28, 2011 to 24.7% in the six months ended December 30, 2012. The decrease for the six months ended December 28, 2012 was due to product mix as well as a result of a few significant low margin product deals that were recognized during the first quarter of fiscal 2013. Our service margins declined by 2.0 basis points and 4.6 basis points for both the three and six months ended December 28, 2012, respectively, largely as a result of lower support services revenue as our new products replace our installed base of older generation products which had higher margin support contracts. Typically our service revenue is recognized ratably over the respective service periods.

• Our research and development and selling, general and administrative expenses were $47.6 million in the three months ended December 28, 2012 compared to $54.2 million in the prior year comparable quarter. Our research and development and selling, general and administrative expenses was $95.3 million for six months ended December 28, 2012, a decrease of $13.7 million compared to $109.0 million for the six months ended December 30, 2011. A primary driver of this decline was the decrease in compensation and related expenses due to reductions in headcount. Total headcount as of December 28, 2012 was 1,442, which reflects a reduction of 121 employees from 1,563 as of December 30, 2011 due to restructuring actions in fiscal 2011 and 2012 and attrition. The savings from the headcount reductions more than offset the increases in salaries and wages due to merit increases. We have also been controlling our costs across all functions in order to streamline our operations and reduce operating expenses and have also benefited from lower charges for the amortization of intangible assets as these assets are nearing full amortization.

• We incurred restructuring expense of $2.9 million and $4.3 million in the three and six months ended December 28, 2012, respectively, as part of the fiscal 2012 restructuring action which is primarily focused on cost reductions in Europe.

• We recognized net income for the three months ended December 28, 2012 of $1.1 million compared to net loss of $2.3 million in the comparable quarter last year. Net loss for the six months ended December 28, 2012 was $7.6 million, compared to a net loss of $4.9 million for the six months ended December 30, 2011. The $3.4 million increase in our net income for the three months ended December 28, 2012 compared to the comparable quarter last year was mainly driven by the income tax benefit recorded as a result of reversals of unrecognized tax benefits as well as our decreased cost structure. The $2.7 million increase in net loss from the six months ended December 30, 2011 was mainly driven by the lower gross margins reflected during the first half of fiscal 2013 as we were unfavorably impacted by a few significant low margin deals and unfavorable product mix which was only partially offset by the income tax benefit and the decrease in our total operating expenses.

Revenue, cost of revenue, gross profit and gross margin Our revenue mix by geography shows that we continue to have a strong international presence with 38% of total revenue attributed to international sales in both the three and six months ended December 28, 2012, respectively. In addition, our customer base continues to expand in various sectors, including the public, cloud and manufacturing sectors.

21-------------------------------------------------------------------------------- Table of Contents The following table presents revenue by operating segment for the three and six months ended December 28, 2012 and December 30, 2011 (in thousands except percentages): Three Months Ended Change Six Months Ended Change December 28, 2012 December 30, 2011 $ % December 28, 2012 December 30, 2011 $ % Total revenue Americas $ 112,358 $ 109,721 $ 2,637 2% $ 235,743 $ 222,113 $ 13,630 6% APJ 27,735 56,873 (29,138 ) (51)% 72,169 96,979 (24,810 ) (26)% EMEA 31,133 28,620 2,513 9% 56,195 55,017 1,178 2% Total revenue $ 171,226 $ 195,214 $ (23,988 ) (12)% $ 364,107 $ 374,109 $ (10,002 ) (3)% Product revenue Americas $ 91,698 $ 88,429 $ 3,269 4% $ 193,340 $ 177,485 $ 15,855 9% APJ 12,605 34,090 (21,485 ) (63)% 39,426 55,891 (16,465 ) (29)% EMEA 23,737 20,524 3,213 16% 41,589 38,619 2,970 8% Total product revenue $ 128,040 $ 143,043 $ (15,003 ) (10)% $ 274,355 $ 271,995 $ 2,360 1% Service revenue Americas $ 20,660 $ 21,292 $ (632 ) (3)% $ 42,403 $ 44,628 $ (2,225 ) (5)% APJ 15,130 22,783 (7,653 ) (34)% 32,743 41,088 (8,345 ) (20)% EMEA 7,396 8,096 (700 ) (9)% 14,606 16,398 (1,792 ) (11)% Total service revenue $ 43,186 $ 52,171 $ (8,985 ) (17)% $ 89,752 $ 102,114 $ (12,362 ) (12)% Revenue. We derive revenue from the sale of products and services directly to end-users as well as through resellers and system integrators. Product revenue is derived from the sale of mid-range to high-end computing servers and data storage systems as well as software. We enter into sales contracts to deliver multiple products and/or services. In accordance with our revenue recognition policy, certain sales contracts are deferred and recognized over the service period. Service revenue is generated from the sale of standard maintenance contracts as well as custom maintenance contracts that are tailored to individual customers' needs. We recognize service revenue ratably over the service periods. Maintenance contracts are typically between one to three years in length and we actively pursue renewals of these contracts. We also generate professional services revenue related to implementation of and training on our products.

We continuously make revisions to our product offerings and improvements of our product's performance and data storage capacity. Accordingly, we are unable to directly compare our products from period to period, and are therefore unable to quantify the changes in pricing of our products from period to period. We believe that our on-going revisions to product offerings and product feature improvements help mitigate competitive pricing pressures by shifting the competitive landscape to differentiated value rather than price.

Segment Operating Performance Americas Revenue from our Americas segment increased $2.6 million or 2.4% to $112.4 million in the three months ended December 28, 2012 from $109.7 million in the three months ended December 30, 2011. The increase in Americas revenue was driven by higher product revenue partially offset by a decrease in service revenue. Product revenue increased by $3.3 million primarily due to the strength in sales of our scale-out compute solutions and third party products. This increase in product revenue was partially offset by a decrease in sales of our storage solutions as well as a decrease in service revenue of $0.6 million as our new products replace our installed base of older generation products with higher margin support contracts. The decrease in service revenue is primarily due to timing of when services were performed on consulting and product integration services. Our service revenue is typically recognized ratably over the respective service periods. The Americas segment represented 65.6% and 56.2% of the total revenue in the three months ended December 28, 2012 and December 30, 2011, respectively. The Americas segment represented a larger portion of total revenue during the three months ended December 28, 2012 primarily due to the significant decrease in the APJ segment.

Revenue from our Americas segment increased $13.6 million or 6.1% to $235.7 million in the six months ended December 28, 2012 from $222.1 million in the six months ended December 30, 2011. The increase in Americas revenue was 22-------------------------------------------------------------------------------- Table of Contents driven by higher product revenue partially offset by a decrease in service revenue. Product revenue increased by $15.9 million primarily due to the strength in sales of our scale-out compute solutions and third party products.

This increase in product revenue was partially offset by a decrease in sales of our scale-up compute and storage solutions as well as a decrease in service revenue of $2.2 million as our new products replace our installed base of older generation products with higher margin support contracts. The decrease in service revenue is primarily due to timing of when services were performed on consulting and product integration services. Our service revenue is typically recognized ratably over the respective service periods. Because the six months ended December 30, 2011 was comprised of 27 weeks compared to only 26 weeks for the six months ended December 28, 2012, we recognized revenue for one less week during the current period. The Americas segment represented 64.7% and 59.4% of the total revenue in the six months ended December 28, 2012 and December 30, 2011, respectively.

APJ Revenue from our APJ segment decreased $29.1 million or 51.2% to $27.7 million in the three months ended December 28, 2012 from $56.9 million in the three months ended December 30, 2011. The revenue decline in APJ is primarily driven by lower product revenue for our scale up products and our third party products which was driven by one significant deal in Japan. Our revenue for the three months ended December 28, 2012 is comprised of $12.6 million from product sales and $15.1 million from services compared to product and service revenue of $34.1 million and $22.8 million, respectively, for the three months ended December 30, 2011. The decrease in service revenue is primarily due to timing of when services were performed on consulting and product integration services as our new products replace our installed base of older generation products. During the three months ended December 30, 2011, we generated a large portion of revenue in Japan for professional services to assist our customers with the implementation of and training of new products. These types of services are typically non-recurring in nature as customers become more accustomed to our next generation products. The APJ segment represented 16.2% and 29.1% of the total revenue in the three months ended December 28, 2012 and December 30, 2011, respectively.

Revenue from our APJ segment decreased $24.8 million or 25.6% to $72.2 million in the six months ended December 28, 2012 from $97.0 million in the six months ended December 30, 2011. The revenue decline in APJ is primarily driven by lower product revenue for our scale up products as well as third party products which was driven by one significant deal in Japan. Our revenue for the six months ended December 28, 2012 is comprised of $39.4 million from product sales and $32.7 million from services compared to product and service revenue of $55.9 million and $41.1 million, respectively, for the six months ended December 30, 2011. The decrease in service revenue is attributable to the timing of professional services provided as discussed above and the fact that the six months ended December 30, 2011 was comprised of 27 weeks compared to only 26 weeks for the six months ended December 28, 2012, thus we recognized revenue for one less week during the current period. The APJ segment represented 19.8% and 25.9% of the total revenue in the six months ended December 28, 2012 and December 30, 2011, respectively.

EMEA Revenue from our EMEA segment increased $2.5 million or 8.8% to $31.1 million in the three months ended December 28, 2012 from $28.6 million in the three months ended December 30, 2011. The increase in revenue is primarily driven by higher product revenue for our storage and scale out products of $3.2 million offset by a slight decrease in service revenue of $0.7 million. The EMEA segment represented 18.2% and 14.7% of the total revenue in the three months ended December 28, 2012 and December 30, 2011, respectively.

Revenue from our EMEA segment increased $1.2 million or 2.1% to $56.2 million in the six months ended December 28, 2012 from $55.0 million in the six months ended December 30, 2011. The increase in revenue is primarily driven by higher products revenue for our storage and scale out products of $3.2 million offset by a decrease in service revenue of $1.8 million. The decrease in service revenue is primarily attributable to the fact that the six months ended December 30, 2011 was comprised of 27 weeks compared to only 26 weeks for the six months ended December 28, 2012, thus we recognized revenue for one less week during the current period. The EMEA segment represented 15.4% of the total revenue in both the three months ended December 28, 2012 and December 30, 2011, respectively.

23-------------------------------------------------------------------------------- Table of Contents Cost of revenue and gross profit Cost of revenue and gross profit for the three and six months ended December 28, 2012 and December 30, 2011 were as follows (in thousands except percentages): Three Months Ended Change Six Months Ended Change December 28, 2012 December 30, 2011 $ % December 28, 2012 December 30, 2011 $ % Cost of product revenue $ 97,350 $ 112,316 $ (14,966 ) (13)% $ 219,947 $ 212,084 $ 7,863 4% Cost of service revenue 26,312 30,715 (4,403 ) (14)% 54,386 57,204 (2,818 ) (5)% Total cost of revenue $ 123,662 $ 143,031 $ (19,369 ) (14)% $ 274,333 $ 269,288 $ 5,045 2% Product gross profit 30,690 30,727 (37 ) -% 54,408 59,911 (5,503 ) (9)% Service gross profit 16,874 21,456 (4,582 ) (21)% 35,366 44,910 (9,544 ) (21)% Total gross profit $ 47,564 $ 52,183 $ (4,619 ) (9)% $ 89,774 $ 104,821 $ (15,047 ) (14)% Product gross margin 24.0 % 21.5 % 19.8 % 22.0 % Service gross margin 39.1 % 41.1 % 39.4 % 44.0 % Total gross margin 27.8 % 26.7 % 24.7 % 28.0 % Cost of revenue consists of costs associated with direct material, labor, manufacturing overhead, shipment of products, inventory write downs and share-based compensation. Cost of revenue also includes personnel costs for providing maintenance and professional services. Our manufacturing overhead and professional services personnel costs are fixed or semi-variable. Our gross margins are impacted by changes in customer and product mix, pricing actions by our competitors and commodity prices that comprise a significant portion of cost of revenue from period to period. In addition, when certain sales contracts are deferred in accordance with our revenue recognition policy, the related cost of revenue is deferred and recognized upon recognition of revenue.

Our cost of revenue and gross profit are impacted by price changes, product configuration, revenue mix and product material costs. Our service cost of revenue and gross margin are impacted by timing of support service initiations and renewals, and incremental investments in our customer support infrastructure.

Overall gross profit decreased by $4.6 million to $47.6 million in the three months ended December 28, 2012 from $52.2 million in the three months ended December 30, 2011 primarily due to a decrease in revenue volume in APJ. However, our overall gross margin increased to 27.8% in the three months ended December 28, 2012 from 26.7% in the three months ended December 30, 2011. Our gross margin increased due to lower warranty and excess and obsolete charges, lower material costs, and more favorable product mix shifts due to higher gross margins. This increase was slightly offset by lower service margins.

Overall gross profit decreased by $15.0 million to $89.8 million in the six months ended December 28, 2012 from $104.8 million in the six months ended December 30, 2011. Overall gross margin decreased to 24.7% in the six months ended December 28, 2012 from 28.0% in the six months ended December 30, 2011.

Our gross margin decreased due to unfavorable product mix shifts primarily as a result of certain low margin deals that occurred in the first quarter of fiscal 2013 in Japan and EMEA, as well as lower service margins.

Product gross profit was flat at $30.7 million in both the three months ended December 28, 2012 and December 30, 2011. Product gross margin increased to 24.0% in the three months ended December 28, 2012 from 21.5% in the three months ended December 30, 2011. Product gross margin increased by 2.5 percentage point on lower product revenue of $15.0 million as a result of favorable product mix and higher margin products primarily in the Americas and EMEA compared to the three month period ended December 30, 2011. Service gross profit decreased $4.6 million or 21.4% to $16.9 million in the three months ended December 28, 2012 from $21.5 million in the three months ended December 30, 2011. Service gross margin decreased to 39.1% in the three months ended December 28, 2012 from 41.1% in the three months ended December 30, 2011 as a result of the lower revenue.

Although we have reduced our overall services costs as a result of our restructuring plans and costs savings initiatives, the decrease in these fixed costs was not able to offset the decline in revenue resulting in a lower service gross margin compared to the prior year.

24-------------------------------------------------------------------------------- Table of Contents Product gross profit decreased $5.5 million or 9.2% to $54.4 million in the six months ended December 28, 2012 from $59.9 million in the six months ended December 30, 2011. Product gross margin decreased to 19.8% in the six months ended December 28, 2012 from 22.0% in the six months ended December 30, 2011 as a result of unfavorable product mix shifts to lower margin products primarily in APJ and EMEA as a result of a few low margin product deals that occurred in the first quarter of fiscal 2012 compared to the six month period ended December 30, 2011. Service gross profit decreased $9.5 million or 21.3% to $35.4 million in the six months ended December 28, 2012 from $44.9 million in the six months ended December 30, 2011. Service gross margin decreased to 39.4% in the six months ended December 28, 2012 from 44.0% in the six months ended December 30, 2011 primarily as a result of two significant low margin deals that occurred in the first quarter of fiscal 2013.

Operating Expenses Operating expenses for the three and six months ended December 28, 2012 and December 30, 2011 were as follows (in thousands except percentages): Three Months Ended Change Six Months Ended Change December 28, 2012 December 30, 2011 $ % December 28, 2012 December 30, 2011 $ % Research and development $ 15,530 $ 16,255 $ (725 ) (4)% $ 29,499 $ 32,445 $ (2,946 ) (9)% Sales and marketing 19,664 23,100 (3,436 ) (15)% 39,235 44,898 (5,663 ) (13)% General and administrative 12,383 14,799 (2,416 ) (16)% 26,572 31,684 (5,112 ) (16)% Restructuring 2,867 (23 ) 2,890 (12,565)% 4,341 110 4,231 3,846% Total operating expense $ 50,444 $ 54,131 $ (3,687 ) (7)% $ 99,647 $ 109,137 $ (9,490 ) (9)% Research and development. Research and development expense consists primarily of personnel and related costs, contractor fees, new component testing and evaluation, test equipment, new product design and testing, other product development activities, share-based compensation, and facilities and information technology costs.

Research and development expense decreased $0.7 million or 4.5% to $15.5 million in the three months ended December 28, 2012 from $16.3 million in the three months ended December 30, 2011. The decrease in research and development expense is primarily due to a reduction of approximately $1.2 million in equipment and materials as we were ramping up for new product introductions that were introduced in fiscal 2012. As a result of decreased headcount, compensation and related expenses decreased by $0.3 million during the three months ended December 28, 2012 despite merit increases implemented during the quarter. These cost reductions were slightly offset by higher non-recurring engineering fees associated with future product introductions.

Research and development expense decreased $2.9 million or 9.1% to $29.5 million in the six months ended December 28, 2012 from $32.4 million in the six months ended December 30, 2011. The decrease in research and development expense is primarily due to a reduction in third party provider and non-recurring engineering costs of approximately $1.1 million and equipment and materials of $1.1 million as we were ramping up for new product introductions that were introduced in fiscal 2012. In addition, as a result of decreased headcount, compensation and related expenses decreased by $1.2 million during the six months ended December 28, 2012 despite merit increases implemented during the second quarter of fiscal 2013.

Sales and marketing. Sales and marketing expense consists primarily of salaries, bonuses and commissions paid to our sales and marketing employees, amortization of intangible assets, share-based compensation, and facilities and information technology costs. We also incur marketing expenses for activities such as trade shows, direct mail and advertising.

Sales and marketing expense decreased $3.4 million or 14.9% to $19.7 million in the three months ended December 28, 2012 from $23.1 million in the three months ended December 30, 2011. This decrease was primarily due to a decrease in our compensation and related expenses as well as lower commissions and bonus expense reflecting lower than expected achievement of sales commission targets and performance metrics compared to last year. For the three months ended December 28, 2012, we reduced our recruiting and hiring expenses by $0.1 million primarily due to cost control measures. In addition, we also benefited from a decrease in intangible amortization expense of $0.1 million as some of our intangible assets become fully amortized, resulting in lower intangible amortization expense.

Sales and marketing expense decreased $5.7 million or 12.6% to $39.2 million in the six months ended December 28, 2012 from $44.9 million in the six months ended December 30, 2011. This decrease was primarily due to a decrease in our compensation and related expenses as well as lower commissions and bonus expense reflecting achievement of sales commission targets and performance metrics. For the six months ended December 28, 2012, we reduced our recruiting and 25-------------------------------------------------------------------------------- Table of Contents marketing expenses by $0.2 million primarily due to cost control measures. In addition, we also benefited from a decrease in intangible amortization expense of $0.6 million as some of our intangible assets became fully amortized, resulting in lower intangible amortization expense.

General and administrative. General and administrative expense consists primarily of personnel costs, legal and professional service costs, depreciation, bad debt expense, share-based compensation, and facilities and information technology costs.

General and administrative expense decreased $2.4 million or 16.3% to $12.4 million in the three months ended December 28, 2012 from $14.8 million in the three months ended December 30, 2011. For the three months ended December 28, 2012, we reduced our professional fees, including legal related expenses and recruiting fees by approximately $1.1 million, facilities costs by $0.6 million primarily due to cost control measures. We have also benefited from lower compensation and related benefits as a result of the reduction of headcount, a gain on the sale of assets of $0.4 million and recovery of bad debts of $0.3 million. This is partially offset by an increase in share-based compensation expense of $0.2 million.

General and administrative expense decreased $5.1 million or 16.1% to $26.6 million in the six months ended December 28, 2012 from $31.7 million in the six months ended December 30, 2011. For the six months ended December 28, 2012, we have reduced our professional fees, including legal related expenses and recruiting fees by approximately $1.9 million, facilities costs by $1.0 million primarily due to cost control measures. For that period, we also reduced costs for travel related expenses by $0.2 million, purchases of small equipment by $0.2 million and also benefited from the recovery of bad debts of $0.3 million.

This is partially offset by an increase in share-based compensation expense of $0.4 million.

Restructuring. Total restructuring expense related to our restructuring action in fiscal 2012 was approximately $2.9 million and $4.3 million for the three and six months ended December 28, 2012, respectively and was $0.0 million and $0.1 million for the three and six months ended December 30, 2011 in fiscal 2011. As a result of the restructuring action, we expect to incur between $14.0 million to $17.0 million of restructuring expense, of which we expect to recognize a substantial portion in fiscal year 2013.

Total other income (expense), net Total other income (expense), net for the three and six months ended December 28, 2012 and December 30, 2011 were as follows (in thousands except percentages): Three Months Ended Change Six Months Ended Change December 28, 2012 December 30, 2011 $ % December 28, 2012 December 30, 2011 $ % Interest income (expense), net $ (112 ) $ 74 $ (186 ) (251)% $ (267 ) $ (24 ) $ (243 ) 1,013% Other income (expense), net 213 (285 ) 498 (175)% (894 ) (1,143 ) 249 (22)% Total other income (expense), net $ 101 $ (211 ) $ 312 (148)% $ (1,161 ) $ (1,167 ) $ 6 (1)% Interest income (expense), net. Interest income (expense), net primarily consists of interest earned on our interest-bearing investment accounts which include money market funds and U.S. treasury bills, as well as interest expense relating to our credit facility and to certain tax payments.

Other income (expense), net. Other income (expense), net during the three and six months ended December 28, 2012 consisted of foreign exchange gains (losses) as a result of the exchange rates primarily for the Euro, British Pound and Canadian dollar against the U.S. Dollar. In July 2012, we implemented a hedging strategy that is intended to mitigate the effect of exchange rate fluctuations on certain foreign currency balance sheet accounts and cash flows.

26-------------------------------------------------------------------------------- Table of Contents Income tax (benefit) provision Income tax (benefit) provision for the three and six months ended December 28, 2012 and December 30, 2011 were as follows (in thousands except percentages): Three Months Ended Change Six Months Ended Change December 28, 2012 December 30, 2011 $ % December 28, 2012 December 30, 2011 $ % Income tax (benefit ) provision $ (3,880 ) $ 97 $ (3,977 ) (4,100)% $ (3,455 ) $ (570 ) $ (2,885 ) 506% We recorded a tax benefit of $3.9 million and $3.5 million for the three and six months ended December 28, 2012. The net tax benefit was primarily comprised of the reversal of previously recorded unrecognized tax benefits in Canada and Israel, offset by tax liability computed based on the Company's foreign projected financial results for the year ending June 28, 2013, state tax, and tax and interest for unrecognized tax benefits. The reversal in Canada was the result of an abatement of interest granted by Canada Revenue Agency in connection with an ongoing audit, which we expect to conclude during fiscal 2013. The effective tax rate differed from the combined federal and net state statutory income tax rate for the three and six months ended December 28, 2012 primarily due to tax expense incurred by the Company's foreign subsidiaries with operating income, offset by the release of the unrecognized tax benefits due to lapse of statute of limitations, benefits from reversals of previously accrued taxes in foreign jurisdictions and benefit from utilization of net operating losses not previously recognized.

We recorded a tax expense of $0.1 million and a tax benefit of $0.6 million for the three and six months ended December 30, 2011, respectively. The net tax benefit was primarily comprised of tax liability computed based on the company's foreign projected financial results for the year ending June 28, 2012 offset by the reversals of unrecognized tax benefits including related interest. The effective tax rate differed from the combined federal and net state statutory income tax rate for the three and six months ended December 30, 2011 primarily due to tax expense incurred by our foreign subsidiaries with operating income, offset by the release of the unrecognized tax benefits due to lapse of statute of limitations, benefits from reversals of previously accrued taxes in foreign jurisdictions, and benefit from utilization of net operating losses not previously recognized.

As of December 28, 2012, we have provided a partial valuation allowance against our net deferred tax assets. Based on all available evidence, on a jurisdictional basis, including our historical operating results, and the uncertainty of predicting our future income, the valuation allowance reduces the majority of our deferred tax assets to an amount that is more likely than not to be realized. The amount of the valuation allowance is attributable to U.S. federal, state and certain foreign deferred tax assets primarily consisting of net operating loss carryovers, tax credit carryovers, accrued expenses, and other temporary differences. We continue to evaluate the realizability of deferred tax assets and related valuation allowance. If our assessment of the deferred tax assets or the corresponding valuation allowance were to change, we would record the related adjustment to income during the period in which management makes the determination.

27-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources We had $124.1 million of unrestricted cash and cash equivalents at December 28, 2012 and $104.9 million at June 29, 2012. As of December 28, 2012, $54.3 million of cash was held outside the United States. Historically, we have required capital principally to fund our working capital needs. If we invest any of our cash outside of non-interest-bearing operating accounts, it is our investment policy to invest in a manner that preserves capital, provides liquidity and maintains appropriate diversification and optimizes after-tax yield and return within our policy's framework and stipulated benchmarks. Adherence with our policy requires the assets to be liquid on and before their maturity dates. This liquidity requirement means that the holder of the assets must be able to pay us, upon our demand, the cash value of the assets invested.

At December 28, 2012, we had short-term and long-term restricted cash and cash equivalents of $4.2 million that are pledged as collateral for various guarantees issued to cover rent on leased facilities and equipment, to government authorities for value-added tax ("VAT") and other taxes, and certain vendors to support payments in advance of delivery of goods and services.

As described further below under the section titled "Contractual Obligations and Other Commitments", in December 2011, we entered into a five-year senior secured credit facility in the aggregate principal amount of $35.0 million, which was increased to $40.0 million on May 1, 2012. The credit facility is intended to be used primarily to fund working capital requirements, capital expenditures and operations to the extent that cash provided by operating activities is not sufficient to fund our cash needs. During the three months ended December 28, 2012, we made a $10.7 million payment to pay down the outstanding balance of the credit facility of $10.3 million and accrued interest of $0.4 million.

Accordingly, as of December 28, 2012, we had no outstanding balance owed on the credit facility. We had $2.0 million of outstanding letter of credit under this credit facility to back the Company's obligation to pay for goods or services to a supplier. As of December 28, 2012, the maximum amount available to be borrowed under the credit facility was approximately $38.0 million.

At December 28, 2012, we believe our current cash and cash equivalents, in conjunction with the funds that may be drawn down under our credit facility, will be sufficient to fund working capital requirements, capital expenditures, stock repurchase, and operations for at least the next twelve months. We have implemented processes to more effectively monitor our working capital. We have intensified our cash management processes related to monitoring, projecting and controlling procedures to operate our business and are more broadly requiring advance and milestone payments for certain large projects that would otherwise involve a significant lag between our payments to vendors for equipment and materials and the installation, acceptance, billing, and collection from the customer. We intend to retain any future earnings to support operations, to finance the growth and development of our business, and to fund our stock repurchase program. We do not anticipate paying any dividends in the foreseeable future. At the present time, we have no material commitments for capital expenditures.

The adequacy of these resources to meet our liquidity needs beyond the next twelve months will depend on our growth, operating results and capital expenditures required to meet our business needs. If we fail to generate cash from our operations on a timely basis, we may not have the cash resources required to run our business and we may need to seek additional sources of funds.

If we require additional capital resources to expand our business internally or to acquire complementary products, technologies and businesses at any time in the future, we may seek to sell additional equity or debt securities or obtain other debt financing. The sale of additional equity or debt securities could result in more dilution to our stockholders. Financing arrangements may not be available to us, or may not be available in amounts or on terms acceptable to us.

The following is a summary of cash activity (in thousands):

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