# HARMONIC INC. (HLIT) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from HARMONIC INC.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/851310/000085131022000012/hlit-20211231.htm
Accession: 0000851310-22-000012
Filing date: 2022-02-28
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/HLIT/
All MD&A years: /company/HLIT/mda/
Next year: /company/HLIT/mda/fy2022/ (FY 2022)

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and the related notes. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and those listed under Item 1A, Risks Factors. For discussion of comparison of our results of operations and cash flows for the fiscal years ended December 31, 2020 and 2019, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 2,2021.

Business Overview

We are a leading global provider of (i) versatile and high performance video delivery software, products, system solutions and services that enable our customers to efficiently create, prepare, store, playout and deliver a full range of high-quality broadcast and streaming video services to consumer devices, including televisions, personal computers, laptops, tablets and smart phones and (ii) cable access solutions that enable cable operators to more efficiently and effectively deploy high-speed internet, for data, voice and video services to consumers’ homes.

We classify our total revenue in two categories, “Appliance and integration” and “SaaS and service.” The “Appliance and integration” revenue category includes hardware, licenses and professional services and is reflective of non-recurring revenue, while the “SaaS and service” category includes usage fees for our SaaS platform and support service revenue from our appliance-based customers and reflects our recurring revenue stream.

We conduct business in three geographic regions - the Americas, EMEA and APAC - and operate in two segments, Video and Cable Access. Our Video business sells video processing, production and playout solutions, and services worldwide to cable operators and satellite and telecommunications (“telco”) Pay-TV service providers, which we refer to collectively as “service providers,” as well as to broadcast and media companies, including streaming media companies. Our Video business infrastructure solutions are delivered either through shipment of our products, software licenses or as SaaS subscriptions. Our Cable Access business sells cable access solutions and related services, including our CableOS software-based cable access solution, primarily to cable operators globally.

Historically, our revenue has been dependent upon spending in the cable, satellite, telco, broadcast and media industries, including streaming media. Our customers’ spending patterns are dependent on a variety of factors, including but not limited to: economic conditions in the United States and international markets, including the impacts of the COVID-19 pandemic; access to financing; annual budget cycles of each of the industries we serve; impact of industry consolidations; and customers suspending or reducing spending in anticipation of new products or new standards, new industry trends and/or technology shifts. If our product portfolio and product development plans do not position us well to capture an increased portion of the spending in the markets in which we compete, our revenue may decline. As we attempt to further diversify our customer base in these markets, we may need to continue to build alliances with other equipment manufacturers, cloud service providers, content providers, resellers and system integrators, managed services providers and software developers; adapt our products for new applications; take orders at prices resulting in lower margins; and build internal expertise to handle the particular operational, payment, financing and/or contractual demands of our customers, which could result in higher operating costs for us.

The worldwide spread of COVID-19 has impacted our business, operations and financial performance. In our Cable Access segment, COVID-19 led to delays in certain deployments and new engagements with some cable operators, which generally occurred in the first half of fiscal 2020 when widespread public health responses were initially implemented, including travel bans and restrictions, social distancing requirements, and shelter-in-place orders. Similarly, in our Video segment, sales of video appliances and services fell during the first several months of the pandemic as transactions or shipments were delayed and we were unable to complete certain field deployment projects as customer facilities closed in the first half of 2020. In the second half of fiscal 2020, and throughout fiscal 2021, we experienced a rebound and increases in sales activities, transactions and deployments in both business segments, in part due to the loosening of certain COVID-19 restrictions, and customer adaptation to such restrictions. We expect that the COVID-19 pandemic will continue to have an impact on our results of operations.

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The extent to which our operations will be impacted by the pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including pandemic-related supply chain disruptions and the pricing and availability of certain materials and components, increased costs relating to securing timely and sufficient supply of key product components, new waves of infection in the countries and regions of the world in which we operate or conduct business, the impact of global vaccination efforts, and actions and policies of governments and businesses in response to future phases of the pandemic. As such, given the uncertainty around the duration and severity of the impact on market conditions and the business environment, we cannot reasonably estimate the full impacts of COVID-19 on our future results of operations. See “Risk Factors” in Item 1A of Part I of this Annual Report on Form 10-K for additional information.

We believe a material and growing portion of the opportunities for our Video business are linked to the industry and our customers (i) continuing to adopt streaming technologies to capture, process and deliver video content to consumers and, increasingly, utilizing public cloud solutions like our VOS SaaS platform to do so; (ii) transforming existing broadcast infrastructure workflows into more flexible, efficient and cost-effective operations running in public clouds; and (iii) for those customers maintaining on-premise video delivery infrastructure, continuing to upgrade and replace aging equipment with next-generation software-based appliances that significantly reduce operational complexity. Our Video business strategy is focused on continuing to develop and deliver products, solutions and services to enable and support these trends.

Our Cable Access strategy is focused on continuing to develop and deliver software-based cable access technologies, which we refer to as our CableOS solutions, to our cable operator customers. We believe our CableOS software-based cable access solutions are superior to hardware-based systems and deliver unprecedented scalability, agility and cost savings for our customers. Our CableOS solutions, which can be deployed based on a centralized, DAA or hybrid architecture, enable our customers to migrate to multi-gigabit broadband capacity and the fast deployment of DOCSIS 3.1 and/or FTTH data, video and voice services. We believe our CableOS solutions resolve space and power constraints in cable operator facilities, eliminate dependence on hardware upgrade cycles and significantly reduce total cost of ownership, and are helping us become a major player in the cable access market. In the meantime, we believe our Cable Access segment will continue to gain momentum in the marketplace as our customers adopt and deploy our virtualized DOCSIS 3.1 CMTS and FTHH solutions and distributed access architectures. We continue to make progress in the development of our CableOS solutions and in the growth of our CableOS business, with expanded commercial deployments, field trials, and customer engagements.

Critical Accounting Estimates

The preparation of consolidated financial statements and related disclosures, which are prepared in accordance with GAAP, requires Harmonic to make judgments, assumptions and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingencies and the reported amounts of revenue and expenses in the financial statements and accompanying notes. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions we believe to be reasonable under the circumstances. Material differences may result in the amount and timing of revenue and expenses if different judgments or different estimates were made. Refer to Note 2 of the Notes to our Consolidated Financial Statements for details of our accounting estimates.

We believe that the following critical accounting estimates involve a greater degree of judgement or complexity than our other accounting estimates. Accordingly, the critical accounting estimates that we believe have the most significant impact on Harmonic’s financial statements are set forth below:

•Revenue recognition;

•Valuation of inventories;

•Impairment of goodwill or long-lived assets; and

•Accounting for income taxes.

Revenue Recognition

We recognize revenue from contracts with customers using the following five steps:

a) Identify the contract(s) with a customer;

b) Identify the performance obligations in the contract;

c) Determine the transaction price;

d) Allocate the transaction price to the performance obligations in the contract; and

e) Recognize revenue when (or as) we satisfy a performance obligation.

Refer to Note 3, “Revenue,” of the Notes to our Consolidated Financial Statements for additional information about our revenue recognition policies, including critical judgments and estimates associated with our revenue recognition.

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Valuation of Inventories

We state inventories at the lower-of-cost (determined on first-in, first-out basis) or net realizable value. We write down the cost of excess or obsolete inventory to net realizable value based on future demand forecasts and historical consumption. If there were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, we could be required to record additional charges for excess and obsolete inventory and our gross margin could be adversely affected. Inventory management is of critical importance in order to balance the need to maintain strategic inventory levels to ensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and customer requirements.

Impairment of Goodwill and Long-lived Assets

In evaluating goodwill for impairment, we first assess qualitative factors such as the magnitude of the excess fair value over carrying value from the prior period’s impairment testing, other reporting unit specific operating results as well as new events and circumstances impacting the operations at the reporting unit level. If the result of a qualitative test indicates a potential for impairment of a reporting unit, a quantitative impairment test is performed to determine the fair value of the reporting unit and compare it with its carrying value. We determine the fair value of our reporting units using both income and market valuation approaches.

We evaluate the recoverability of intangible assets and other long-lived assets when indicators of impairment are present. When impairment indicators are present, we evaluate the recoverability of intangible assets and other long-lived assets on the basis of undiscounted cash flows expected to result from the use of each asset group and its eventual disposition. If the undiscounted expected future cash flows are less than the carrying amount of the asset, an impairment loss is recognized in order to write down the carrying value of the asset to its estimated fair value.

In the current year our annual qualitative assessment did not indicate that a more detailed quantitative analysis was necessary.

Accounting for Income Taxes

In preparing our consolidated financial statements, we estimate our income taxes for each of the jurisdictions in which we operate. This involves estimating our actual current tax expense and assessing temporary differences resulting from differing treatment of items, such as reserves and accruals, for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. We maintain valuation allowances for deferred tax assets when it is likely that all or a portion of a deferred tax asset will not be realized. In determining whether a valuation allowance is warranted, we take into account such factors as prior earnings history, expected future earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect the utilization of a deferred tax asset.

We are subject to examination of our income tax returns by various tax authorities on a periodic basis. We regularly assess the likelihood of adverse outcomes resulting from such examinations to determine the adequacy of our provision for income taxes. We apply the provisions of the applicable accounting guidance regarding accounting for uncertainty in income taxes, which requires application of a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits us to recognize a tax benefit measured at the largest amount of such tax benefit that, in our judgment, is more than fifty percent likely to be realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the period in which such determination is made.

We file annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our reserves for income taxes reflect the most likely outcome. We adjust these reserves, as well as the related interest and penalties, in light of changing facts and circumstances. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. Any changes in estimate, or settlement of any particular position, could have a material impact on our operating results, financial condition and cash flows.

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Results of Operations

Net Revenue

The following table presents the breakdown of net revenue by category and geographical region:

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(in thousands, except percentages)","2021","","2020","","2019","","2021 vs. 2020","","2020 vs. 2019"],["Appliance and integration","$","369,767","","","$","252,014","","","$","275,797","","","$","117,753","","47","%","","$","(23,783)","","(9)","%"],["as % of total net revenue","73","%","","67","%","","68","%"],["SaaS and service","137,382","","","126,817","","","127,077","","","10,565","","8","%","","(260)","","\u2014","%"],["as % of total net revenue","27","%","","33","%","","32","%"],["Total net revenue","$","507,149","","","$","378,831","","","$","402,874","","","$","128,318","","34","%","","$","(24,043)","","(6)","%"],["Americas","$","335,731","","","$","219,394","","","$","224,193","","","$","116,337","","53","%","","$","(4,799)","","(2)","%"],["as % of total net revenue","66","%","","58","%","","56","%"],["EMEA","126,427","","","117,126","","","117,477","","","9,301","","8","%","","(351)","","\u2014","%"],["as % of total net revenue","25","%","","31","%","","29","%"],["APAC","44,991","","","42,311","","","61,204","","","2,680","","6","%","","(18,893)","","(31)","%"],["as % of total net revenue","9","%","","11","%","","15","%"],["Total net revenue","$","507,149","","","$","378,831","","","$","402,874","","","$","128,318","","34","%","","$","(24,043)","","(6)","%"]]
[[/GREPCENT_TABLE]]

Appliance and integration net revenue increased in 2021, as compared to 2020, primarily due to an increase in our Cable Access segment net revenue primarily driven by the increased penetration of existing CableOS customers and addition of new CableOS customer deployments and an increase in our Video segment net revenue primarily reflecting the impact from the COVID-19 pandemic on 2020 results.

SaaS and service net revenue increased in 2021, as compared to 2020, primarily due to increasing usage from existing customers and activation of new SaaS customers.

Americas net revenue increased in 2021, as compared to 2020, primarily due to the impact from the COVID-19 pandemic on 2020 results in the region, increased penetration of existing CableOS customers and addition of new CableOS customer deployments.

EMEA and APAC net revenue increased in 2021, as compared to 2020, primarily due to the impact from the COVID-19 pandemic on 2020 results in the region.

Gross Profit

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(in thousands, except percentages)","2021","","2020","","2019","","2021 vs. 2020","","2020 vs. 2019"],["Gross profit","$","259,742","","$","194,997","","$","223,012","","$","64,745","33%","","$","(28,015)","(13)%"],["as % of total net revenue (\u201cgross margin\u201d)","51.2","%","","51.5","%","","55.4","%","","(0.3)","%","","","(3.9)","%"]]
[[/GREPCENT_TABLE]]

Our gross margins are dependent upon, among other factors, the proportion of software sales, product mix, supply chain impacts, customer mix, product introduction costs, price reductions granted to customers and achievement of cost reductions.

Our gross margin did not change significantly in 2021, as compared to 2020.

Research and Development Expenses

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(in thousands, except percentages)","2021","","2020","","2019","","2021 vs. 2020","","2020 vs. 2019"],["Research and development","$","102,231","","$","82,494","","$","84,614","","$","19,737","","24","%","","$","(2,120)","","(3)","%"],["as % of total net revenue","20","%","","22","%","","21","%"]]
[[/GREPCENT_TABLE]]

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Our research and development expenses consist primarily of employee salaries and related expenses, contractors and outside consultants, supplies and materials, equipment depreciation and facilities costs, all associated with the design and development of new products and enhancements of existing products. The research and development expenses are net of French R&D credits.

Research and development expenses increased in 2021, as compared to 2020, primarily due to higher employee compensation costs as a result of headcount increases and higher stock-based compensation expense related to performance-based RSUs.

Selling, General and Administrative Expenses

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(in thousands, except percentages)","2021","","2020","","2019","","2021 vs. 2020","","2020 vs. 2019"],["Selling, general and administrative","$","138,085","","$","119,611","","$","119,035","","$","18,474","","15","%","","$","576","","\u2014","%"],["as % of total net revenue","27","%","","32","%","","30","%"]]
[[/GREPCENT_TABLE]]

Selling, general and administrative expenses increased in 2021, as compared to 2020, primarily due to higher employee compensation costs as a result of headcount increases and higher stock-based compensation expense related to performance-based RSUs.

Amortization of Intangibles

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(in thousands, except percentages)","2021","","2020","","2019","","2021 vs. 2020","","2020 vs. 2019"],["Amortization of intangibles","$","507","","$","3,019","","$","3,139","","$","(2,512)","","(83)","%","","$","(120)","","(4)","%"]]
[[/GREPCENT_TABLE]]

The amortization of intangibles expense decreased in 2021, as compared to 2020, as intangible assets were fully amortized during the first quarter of fiscal 2021.

Restructuring and Related Charges

We have implemented several restructuring plans in the past few years. The goal of these plans is to bring operational expenses to appropriate levels relative to our net revenues, while simultaneously implementing extensive company-wide expense control programs. We account for our restructuring plans under the authoritative guidance for exit or disposal activities. The restructuring and related charges are included in “Cost of revenue” and “Operating expenses-restructuring and related charges” in the Consolidated Statements of Operations.

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(in thousands, except percentages)","2021","","2020","","2019","","2021 vs. 2020","","2020 vs. 2019"],["Cost of revenue","$","571","","","$","1,094","","","$","1,391","","","$","(523)","","(48)","%","","$","(297)","","(21)","%"],["Operating expenses-Restructuring and related charges","110","","","2,322","","","3,141","","","(2,212)","","(95)","%","","(819)","","(26)","%"],["Total restructuring and related charges","$","681","","","$","3,416","","","$","4,532","","","$","(2,735)","","(80)","%","","$","(1,116)","","(25)","%"]]
[[/GREPCENT_TABLE]]

Restructuring and related charges decreased in 2021, as compared to 2020, primarily due to higher severance and employee benefit costs incurred in conjunction with restructuring activities in fiscal 2020.

Refer to Note 10, “Restructuring and Related Charges,” of the Notes to our Consolidated Financial Statements for additional information.

Interest Expense, Net

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(in thousands, except percentages)","2021","","2020","","2019","","2021 vs. 2020","","2020 vs. 2019"],["Interest expense, net","$","(10,625)","","","$","(11,509)","","","$","(11,651)","","","$","884","","(8)","%","","$","142","","(1)","%"]]
[[/GREPCENT_TABLE]]

Interest expense, net decreased in 2021, as compared to 2020, primarily due to the repayment of the 2020 Notes in December 2020 upon their maturity.

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Loss on Convertible Debt Extinguishment

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(in thousands, except percentages)","2021","","2020","","2019","","2021 vs. 2020","","2020 vs. 2019"],["Loss on convertible debt extinguishment","$","\u2014","","","$","(1,362)","","","$","(5,695)","","","$","1,362","","(100)","%","","$","4,333","","(76)","%"]]
[[/GREPCENT_TABLE]]

The loss on convertible debt extinguishment of $1.4 million in 2020 includes $0.9 million loss related to the exchange of a portion of the 2020 Notes in June 2020 and the $0.5 million loss related to the settlement of the remaining 2020 Notes in December 2020. Refer to Note 11, “Convertible Notes and Other Debts,” of the Notes to our Consolidated Financial Statements for additional information.

Other Income (Expense), Net

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(in thousands, except percentages)","2021","","2020","","2019","","2021 vs. 2020","","2020 vs. 2019"],["Other income (expense), net","$","687","","","$","(897)","","","$","(2,333)","","","$","1,584","","(177)","%","","$","1,436","","(62)","%"]]
[[/GREPCENT_TABLE]]

Other income (expense), net is primarily comprised of foreign exchange gains and losses on cash, accounts receivable and intercompany balances denominated in currencies other than the functional currency of the reporting entity. Our foreign currency exposure is primarily driven by the fluctuations in the foreign currency exchanges rates of the Euro, British pound, Japanese yen and Israeli shekel. The change in other income (expense), net in 2021, as compared to 2020, was primarily due to the exchange rate fluctuation between Euro and the U.S. dollar in 2021.

Income Taxes

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(in thousands, except percentages)","2021","","2020","","2019","","2021 vs. 2020","","2020 vs. 2019"],["Provision for (benefit from) income taxes","$","(4,383)","","","$","3,054","","","$","(672)","","","$","(7,437)","","(244)","%","","$","3,726","","(554)","%"]]
[[/GREPCENT_TABLE]]

The change in provision for (benefit from) income taxes in 2021, as compared to 2020, was primarily due to the release of the valuation allowance on deferred tax assets in certain foreign jurisdictions of $8.6 million in recognition of their improved historical earnings and increasing future projected earnings.

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Segment Financial Results

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(in thousands, except percentages)","2021","","2020","","2019","","2021 vs. 2020","","2020 vs. 2019"],["Video"],["Revenue","$","288,507","","$","242,510","","$","278,028","","$","45,997","19","%","","$","(35,518)","(13)","%"],["as % of total revenue","57%","","64%","","69","%","","(7)%","","","(5)%"],["Gross profit","169,468","","132,092","","162,156","","37,376","28","%","","(30,064)","(19)","%"],["Gross margin %","59%","","54%","","58","%","","5%","","","(4)%"],["Operating income","28,460","","1,326","","15,837","","27,134","2,046","%","","(14,511)","(92)","%"],["Operating margin %","10","%","","1","%","","6","%","","9","%","","","(5)","%"],["Cable Access"],["Revenue","$","218,642","","$","136,321","","$","124,894","","$","82,321","60","%","","$","11,427","9","%"],["as % of total revenue","43%","","36%","","31","%","","7%","","","5%"],["Gross profit","93,191","","66,661","","68,596","","26,530","40","%","","(1,935)","(3)","%"],["Gross margin %","43%","","49%","","55","%","","(6)%","","","(6)%"],["Operating income (loss)","15,599","","11,651","","22,219","","3,948","34","%","","(10,568)","(48)","%"],["Operating margin %","7","%","","9","%","","18","%","","(2)%","","","(9)","%"],["Total"],["Revenue","$","507,149","","$","378,831","","$","402,922","","$","128,318","34","%","","$","(24,091)","(6)","%"],["Gross profit","262,659","","198,753","","230,752","","63,906","32","%","","(31,999)","(14)","%"],["Operating income","44,059","","12,977","","38,056","","31,082","240","%","","(25,079)","(66)","%"]]
[[/GREPCENT_TABLE]]

A reconciliation of our total segment operating income to income (loss) before income taxes is as follows:

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(in thousands)","2021","","2020","","2019"],["Total segment operating income","$","44,059","","","$","12,977","","","$","38,056"],["Amortization of non-cash warrants","\u2014","","","\u2014","","","(48)"],["Unallocated corporate expenses (1)","(681)","","","(3,416)","","","(4,532)"],["Stock-based compensation","(24,062)","","","(18,040)","","","(12,074)"],["Amortization of intangibles","(507)","","","(3,970)","","","(8,319)"],["Income (loss) from operations","18,809","","","(12,449)","","","13,083"],["Loss on convertible debt extinguishment","\u2014","","","(1,362)","","","(5,695)"],["Non-operating expense, net","(9,938)","","","(12,406)","","","(13,984)"],["Income (loss) before income taxes","$","8,871","","","$","(26,217)","","","$","(6,596)"]]
[[/GREPCENT_TABLE]]

(1) Together with amortization of intangibles and stock-based compensation, we do not allocate restructuring and related charges, and certain other non-recurring charges, to the operating income for each segment because our management does not include this information in the measurement of the performance of the operating segments.

Video

Our Video segment net revenue increased in 2021, as compared to 2020, primarily due to an increase of $40.9 million in Video appliance and integration revenue, reflecting the impact from the COVID-19 pandemic on 2020 results, and an increase of $5.1 million in Video SaaS and service revenue, reflecting increasing usage from existing customers and activation of new SaaS customers. Video segment operating margin increased in 2021, as compared to 2020, primarily due to the increase in revenue and related gross profit, partially offset by higher employee compensation costs as a result of headcount increases.

Cable Access

Our Cable Access segment net revenue increased in 2021, as compared to 2020, primarily due to the increased penetration of our existing CableOS customers and addition of new CableOS customer deployments in 2021. Cable Access segment operating margin decreased in 2021, as compared to 2020, primarily due to change in product mix, increased costs of supply chain related to increased pricing, freight and shipping, and higher employee compensation costs as a result of headcount increases, partially offset by revenue growth.

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Liquidity and Capital Resources

We expect to continue to generate net positive operating cash flow as we have done in the last three fiscal years. The cash we generate from our operations enables us to fund ongoing operations, our research and development projects for new products and technologies, and other business activities. We continually evaluate our cash needs and may decide it is best to raise additional capital or seek alternative financing sources to fund our operations, the growth of our business, to take advantage of unanticipated strategic opportunities, or to strengthen our financial position, including through drawdowns on existing or new debt facilities or new financing (debt and equity) funds. In the future, we may enter into other arrangements for potential investments in, or acquisitions of, complementary businesses, services or technologies, which could require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all. Conversely, we may also from time to time determine that it is in our best interests to voluntarily repay certain indebtedness early. We believe that our current sources of funds will provide us with adequate liquidity during the 12-month period following December 31, 2021, as well as in the long-term.

Material Cash Requirements

Our principal uses of cash will include repayments of debt and related interest, purchases of inventory, stock repurchases, payments for payroll, restructuring expenses, and other operating expenses related to the development and marketing of our products, purchases of property and equipment, facility leases, and other contractual obligations for the foreseeable future.

As of December 31, 2021, we had outstanding $171.2 million in aggregate principal amount of indebtedness, consisting of our 2022 Notes, 2024 Notes, and other debts, of which $42.7 million is scheduled to become due in the 12-month period following December 31, 2021. As of December 31, 2021, our total minimum lease payments are $45.5 million, of which $7.8 million is due in the 12-month period following December 31, 2021. For details regarding our indebtedness and lease obligations, refer to Note 11, “Convertible Notes and Other Debts”, and Note 4, “Leases”, respectively, of the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

On February 3, 2022, the Board of Directors authorized us to repurchase, from time to time, up to $100 million of our outstanding shares of common stock through February 2025, at such time and such prices as management may decide. The program does not obligate us to repurchase any specific number of shares and may be discontinued at any time.

Sources and Conditions of Liquidity

Our sources to fund our material cash requirements are predominantly from our sales of our products and services and, when applicable, proceeds from debt facilities and debt and equity offerings.

As of December 31, 2021, our principal sources of liquidity consisted of cash and cash equivalents of $133.4 million, net accounts receivable of $88.5 million, and our $25.0 million revolving credit facility with JPMorgan Chase Bank, N.A., described in further detail below.

On March 27, 2020, the “Coronavirus Aid, Relief, and Economic Security” Act that was signed into law in the United States. Under provisions of this law, we deferred remittance of $1.7 million in employer’s share of payroll taxes incurred from March 27, 2020 to December 31, 2020. During 2021, $0.8 million of the total deferred payroll taxes has been paid, and the remaining deferred amount will be paid before December 31, 2022.

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On December 19, 2019, we entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as lender, and Harmonic International GmbH, as co-borrower. The Credit Agreement provides for a secured revolving loan facility in an aggregate principal amount of up to $25.0 million, which may also be used for the issuance of letters of credit. Under the terms of the Credit Agreement, the principal amount of outstanding loans, plus the face amount of any outstanding letters of credit, at any time cannot exceed an amount equal to the lesser of (i) $25.0 million and (ii) the sum of 85% of our eligible receivables and 50% of our eligible inventory. During fiscal 2020, we amended the Credit Agreement to extend the maturity date to October 30, 2022 and amend the interest rates for the revolving loans. As amended, the revolving loans bear interest, at our election, at a floating rate per annum equal to either (1) 2.00% plus the greater of (i) 1 month LIBOR on any day plus 2.50% and (ii) the prime rate as reported in the Wall Street Journal from time to time or (2) 3.00% plus LIBOR for an interest period of one, two or three months. Interest on the revolving loans is payable monthly in arrears, in the case of prime rate loans, and at the end of the applicable interest period, in the case of LIBOR loans. We are also obligated to pay other customary closing fees, commitment fees and letter of credit fees for a credit facility of this size and type. Our obligations are required to be guaranteed by certain material domestic subsidiaries, and all such obligations, including the guarantees, are secured by substantially all of the assets of the Company and such guarantors and certain assets of Harmonic International GmbH. The Credit Agreement contains customary affirmative and negative covenants, including covenants limiting our ability to, among other things, incur debt, grant liens, undergo certain fundamental changes, make investments, make certain restricted payments, dispose of assets, enter into transactions with affiliates, and enter into burdensome agreements, in each case, subject to limitations and exceptions set forth in the Credit Agreement. We are also required to maintain compliance with an adjusted quick ratio, a minimum EBITDA covenant (tested quarterly) and a minimum liquidity covenant, in each case, determined in accordance with the terms of the Credit Agreement. There were no revolving borrowings under the Credit Agreement from the closing of the Credit Agreement through December 31, 2021. As of December 31, 2021, we were in compliance with the covenants under the Credit Agreement.

Our cash and cash equivalents of $133.4 million as of December 31, 2021 consisted of bank deposits held throughout the world, of which $91.8 million was held outside of the United States. At present, such foreign funds are considered to be indefinitely reinvested in foreign countries to the extent of indefinitely reinvested foreign earnings. In the event funds from foreign operations are needed to fund cash needs in the United States and if U.S. taxes have not already been previously accrued, we may be required to accrue and pay additional U.S. and foreign withholding taxes in order to repatriate these funds.

Summary of Cash Flows

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(in thousands)","2021","","2020","","2019"],["Net cash provided by operating activities","$","41,017","","","$","39,163","","","$","31,295"],["Net cash used in investing activities","(12,975)","","","(32,205)","","","(10,328)"],["Net cash provided by (used in) financing activities","7,939","","","(2,109)","","","6,305"],["Effect of exchange rate changes on cash, cash equivalents and restricted cash","(1,195)","","","738","","","(203)"],["Net increase in cash, cash equivalents and restricted cash","$","34,786","","","$","5,587","","","$","27,069"]]
[[/GREPCENT_TABLE]]

Operating Activities

Net cash provided by operating activities increased $1.9 million in 2021, as compared to 2020, primarily due to net income in 2021, as compared to net loss in 2020, offset by cash used for working capital in 2021.

We expect that cash provided by or used in operating activities may fluctuate in future periods as a result of a number of factors, including the impact of COVID-19 on demand for our offerings, fluctuations in our operating results, shipment linearity, accounts receivable collections performance, inventory and supply chain management, and the timing and amount of compensation and other payments.

Investing Activities

Net cash used in investing activities decreased $19.2 million in 2021, as compared to 2020, mainly due to purchases of assets relating to the leasehold improvements of the Company’s new headquarters completed in fiscal 2020.

Financing Activities

Net cash provided by (used in) financing activities increased $10.0 million in 2021 compared to 2020, primarily due to the repayment of the $8.0 million remaining principal of the 2020 Notes in December 2020.

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Off-Balance Sheet Arrangements

None as of December 31, 2021.

New Accounting Pronouncements

Refer to Note 2 of the accompanying Consolidated Financial Statements for a full description of recent accounting pronouncements, including the respective expected dates of adoption and estimated effects, if any, on results of operations and financial condition.

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